Question:
Where
does the global economic crisis currently stand, which began in the USA and
engulfed Europe and then the world?
Answer:
To
shed light on this subject, we will mention the following:
1.
The collapse of the real estate market
in the US spread across the world resulting in the collapse of many banks,
which lead to unprecedented government intervention to halt global economic
collapse. The result however, was what is now called the great recession, the
worst since the great depression of 1929. The global financial crisis brought
to light the fact that the boom of the preceding decade was in reality driven
by debt and after five years the world's largest economies continue in their
failure to resolve this.
2. United
action has been attempted by the world's largest economies in order to coordinate
a resolution to the crisis. This was argued on the basis that the global
economy is interlinked due to the effects of globalisation and a collective,
global approach would be in the world's best interests. This unified approach
did not last long as economic nationalism - were each country fights for its
own survival spread as each nation expected other nations to fund a global
reserve. Various meetings and conferences of the G20 agreed different types of
bailout fund to help grieved economies, how this was to be funded led to most
of the bailouts to never move forward from the paper they were written on. The
economist highlighted
in 2010: "But the
re-emergence of a specter from the darkest period of modern history argues for
a different, indeed strident, response. Economic nationalism—the urge to keep
jobs and capital at home—is both turning the economic crisis into a political
one and threatening the world with depression. If it is not buried again
forthwith, the consequences will be dire."
3. Stark exchanges between the Germans and
the Americans have taken place on the best route for the future of the global
economy. Angela Merkel along with the majority of the other countries suggested
the unsustainable growth model of the US with its cheap credit and debt fuelled
growth, from the government's perspective using stimulus funds was obsolete.
The need to control national deficit levels through austerity measures has been
the European approach. Austerity measures are typically taken if there is a
threat that a government cannot honor its debt liabilities. This is a very
specific objective and different to economic growth. With the threat to the
credit ratings of most of the world's largest economies many have resorted to
austerity i.e. reducing the government deficit to please the financial markets.
The problem with the austerity approach is such a policy in reality is not
geared towards growth, which would create jobs and income for society and thus
lead to overall economic growth but towards cutting the government debt.
4. The US approach of pursuing stimulus has
fared no better. Stimulus entails increasing government spending using money
that is borrowed primarily from abroad in the case of the US from countries
such as China, or simply created by central banks literally by entering digits
into a computer. Any stimulus was always a high-octane boost and a temporary
measure. They are designed to kick-start stalled economies, not to fuel sustained
economic growth. The growth that has been achieved is really the inflated
results of stimulus measures achieving their intended effect to be temporary.
Hence stimulus just props up government and service industry jobs which die off
when the stimulus ends, leaving an economy in much the state it was when the
stimulus started.
5. Western governments also resorted to
Quantitative Easing (QE), a new development which was an electronic method of
printing money. This unconventional policy was used by central banks to
stimulate the national economy when conventional policy had failed. A central
bank implements Quantitative Easing (QE) by buying financial assets to inject a
pre-determined quantity of money into the economy. This is achieved by
purchasing financial assets from banks with new electronically created money.
This action increases the reserves of banks. At the start of 2013 the global
economy is no better then the start of 2012 and many are on the verge of going
into recession again. Reports continue to emerge since the beginning of 2013 of
the possibility of the UK going into a triple dip recession. The UK like much of the world's
trillion dollar economies continues to suffer from the effects of the global
financial crisis. Thus QE in reality has had no impact as the banking industry
has not used this new money to issue new loans and mortgages. QE has effectively
become a bank bailout.
After
5 years of economic crisis, the global economy is still reeling and with
unemployment constantly increasing social chaos has already begun in Europe.
All attempts to solve the crisis have not dealt with debt fuelled growth, whilst
debt caused the problem more debt was thrown at it, Western governments
attempted to treat the patient with the disease itself.
Finally
there are three possibilities that may eventually lead to economic recovery, we
mention in descending order:
§ The
first is the double dip recession turns into a depression, prices hit rock
bottom and this leads to property, loans and commodity prices being seen as
cheap and this kick starts economic growth as such assets are then purchased.
§ The
second possibility is China bails out the West. China's vast trade and
financial surpluses are causally linked to the unsustainably large debts of the
US, UK and a swathe of the Euro zone. It would be in their interests to bail
out the West. This would also mean the Western world will have to accept
Chinese global leadership. Here the issue is not whether the West will accept
such a bailout but rather will China pursue such a policy.
§ The
third, the Khilafah State shines on the world, and the Islamic economic system
starts to be implemented. Then, not only will the Muslims benefit, but rather
the whole world that will deal with the Khilafah. This would make the global
crises disappear or bring it under control.
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