The bail-out funds came with many covenants, fiscal consolidation being the major one. Fiscal consolidation aims to reduce the fiscal deficit i.e. reduce government spending on social security measures like pensions, healthcare education and unemployment benefits. Hence these countries had to cut down on jobs in government departments, increase the retirement age from 55 years to somewhere near 60 years, wage cuts and tax increases to augment government finances. The caveat for receiving further funds was on reducing the fiscal deficit. Subsequently these measures led to large scale protests and resentment among the general public.
e) USA - Post 2008 USA bailed out its ailing financial sector which included housing finance companies, banks, insurance companies and investment banks. Under Federal Reserve's (Fed) ( USA's Reserve Bank) blessings also several financial institutions were merged with their stronger counterparts. To spur up the economy the Fed came up with a monetary stimulus package called Quantitative Easing (QE) of about $600 billion and reduced the borrowing rate to Zero, this money was used to buy US Government Bonds which was used to bail out the financial companies and help the US Government to meet social security benefits , in layman terms the Fed printed $'s and gave them to the Government to splurge. This infusion of money didn't have the desired effect of increasing the growth rate or creating job opportunities. So in 2010-11 the Fed announced QE II of another $600 billion, this additional funds were used by banks to hoard or increase their cash reserves and speculate in commodity and forex markets, which led to increase in commodity prices without any tangible increase neither the growth rate nor the employment figures. This wasn't the last step which the Fed took, another measure called operation Twist i.e. replacing short term bonds with long term bonds in the Fed's Balance Sheet, this measure was introduced to reduce long term borrowing rates and propel infrastructure spending. But in 2012 the unemployment rate continues to remain above 8% and the number of people receiving unemployment benefits have remained the same.
f) China - China's biggest trading partner is the US, hence it was thought that post the QE measures the consumer spending in the US would increase on the contrary it has remained at 2007-08 levels and is slowing moving lower and with very little employment growth the signs look bad. So to prop-up domestic consumption to sustain its manufacturing base, China also undertook a monetary stimulus which led to a property bubble and the inflation rate inched above 5%. Mid 2011 China's Reserve Bank increased the borrowing rate and put curbs on real estate lending, this tightening coupled with the slowdown in exports has also slowed down the Chinese growth rate to mid 8% level.
g) India - Recent economic surveys and reports haven't been kind to India. We all know the story by now, policy paralysis, high inflation, huge subsidies, fiscal deficit, current account deficit, crippling infrastructure etc. Last year inflation was the major issue in India which was caused to rise in agricultural commodities, dairy and poultry products and supply chain constraints in manufacturing products. Few of our problems can be because of international issues but the majority have been our doing.
My last part of this series will be about how we can tackle this mess.
No comments:
Post a Comment