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Growth and Decline of the Economies of Europe and the US Published by Bhaskar Sarkar, at Smashwords Cover art: Sarita Sharma Discover other titles by Bhaskar Sarkar at Smashwords.com Author Profile: http://www.smashwords.com/profile/view/Bhaskarsarkar1940 Copyright Author Bhaskar Sarkar 2012 Smashwords Edition License Notes This e-book is licensed for your personal enjoyment only. This e-book may not be re-sold or given away to other people. If you would like to share this book with another person, Please purchase an additional copy for each recipient. If you’re reading this book and did not purchase it, or it was not purchased for your use only, then please return to Smashwords.com and purchase your own copy. Thank you for respecting the hard work of this author. Dedication This book is dedicated to students and teachers of economics in the developed world. May God give them the wisdom to find an alternative to neo-liberal capitalism and save the world Contents Prologue Chapter 1: Economy and Wealth of Nations Chapter 2: Economic Growth and Decline of Europe Chapter 3: Economic Growth and Decline of United States Chapter 4: Impoverishing Nations Chapter 5: Impoverishing the People Chapter 6: Bonanza for the Rich Chapter 7: Causes for the Decline Chapter 8: Strategy for the Future Epilogue Bibliography About The Author Prologue “ You don’t need an economist or the Federal Reserve to tell the American people that the economy is in trouble because they have been experiencing it for years now We have to stop giving tax breaks to companies that are shipping jobs overseas and invest those tax breaks in companies that are investing in the US,”- Barack Obama, American Democrat President in waiting at a debate at University of Texas, Austin on Thursday 21 February 2008. About four years have passed since Barack Obama became the President of United States. But the world economic situation is still grim. The decline in the economies of the United States and much of Europe is not a figment of the imagination of the Author. Government debts are soaring. GDP growth is stagnating. Unemployment is stubbornly refusing to comedown. Poverty and inequality levels are rising. Goldman Sachs is now predicting that the largest developing economies namely Brazil, Russia, India and China also known as the BRIC will overtake G7, the seven largest economies of the developed world, in size of their economy. (Briefings; Time Magazine April 4, 2011). Fareed Zakaria, the well known author, TV anchor and correspondent has written the book, “The Post-American World”. On September 15, 2008, ahead of the collapse of the over 150 year old investment bank, Lehman Brothers, Alan Greenspan, the head of the Federal Reserve admitted that the US economy was facing its worst crisis in a century. A 2008 report by the Federal Reserve showed that household net wealth in the United States fell for the first time in five years in the fourth quarter of 2007, dropping $532.9 billion or 3.6 percent,. The collapse of real estate prices accounted for a third of the decline, while the decline in value of financial assets like stocks, bonds and mutual fund investments accounted for nearly half. By October 2008, with the stock market loosing 20% in one week, with stock prices hovering at about half their 2007 peaks, after 23 banks and some Fortune 500 companies having gone bankrupt, everyone was ready to admit that there was a crisis in the US economy. Today, in the second half of 2011, the economic situation in the United States and Western Europe is as grim if not grimmer. But it was not always so. The 1950s and 1960s was characterized by great economic prosperity in the United States. Economic growth was high and inflation was contained. Distribution of wealth was reasonably fair and the rich poor divide was not as much as it is today. There was a substantial and prosperous middle class. Then 1973 and the years that followed brought in a variety of fiscal problems. The US dollar weakened and the US had to leave the “Gold Standard”. There was an oil crisis in 1973 and energy crisis in 1979. There was increased accumulation of capital in the US. Unemployment began to rise. Inflation or stagflation was increasing. A number of theories concerning new economic systems began to develop. There was extensive debate between those who advocated “social democracy and central planning” and those recommending “liberating corporate and business power and re-establishing market freedoms”. By 1980, the pro corporate group had emerged the winner. The global economic system that they created would become known as “neo-liberalism”. The other day I was listening to a program on CNN on the US Economy. The anchor was very clear that when US government and politicians discussed the US economy, they tended to approach the problem from statistical approach rather than a peoples approach. Thus measures which benefit the super rich and the American companies or which projected a rosier statistical picture, rather than those which benefited the American people are usually given more weight age. No one seems to be clear as to why the economies are not reviving. The debate in the Congress is limited to reducing deficit and perpetuating the “Bush Tax Cuts” and increasing stimulus to create employment and increase tax on the rich. The debate in the academic world does not seem to cover any new ideas. Every one seems to recommend more of neo-liberal capitalism and globalization with minor differences. This book seeks to examine some historical facts regarding the rise of the economic power of Western Europe and the United States and the causes of the decline of the economic power. It is also an appeal to the professional economists and academicians to halt the march of neo-liberal capitalism and globalization unleashed by President Ronald Regan in 1981 and followed by all his successors to date with disastrous results for the US and the developed world. These economic doctrines, which impoverish the majority of the people of the developed world while benefiting the American companies and the super rich, are economic policies which will finally end peace and prosperity in the US, Britain, Europe, and this world. The fact that the British Economy is at a 60 year low is no coincidence. British Prime Minister Mrs. Margaret Thatcher, a contemporary and confidante of Ronald Regan, introduced the same economic liberalization in UK at about the same time. The book is also an appeal to the professional economists and academicians to re- examine the forgotten economic theory of “Mercantilism” and see if it can revive the fortunes of the United States and the developed world. It is also an appeal to the economists of the developed world to find an alternative to neo-liberal capitalism and globalization which are impoverishing the governments and ordinary people of the developed world. The Author Back to Contents Chapter 1: Economy and Wealth of Nations “I would like to read what John McCain has to say about honor. Both my husband and I have been laid off and we cannot afford to buy his book to find out” - Zulia Zulich, Rancho Cucamonga, California, US, In Box, Time Magazine, September 29, 2008 Before we discuss the rise and fall of the economies of the developed world and how the economies can be revived, it may be appropriate to spend a few minutes to define the meaning of the economy of a nation and its wealth. Is the economy of a nation a set of impersonal statistics like GDP, GDP growth, per capita GDP, consumer confidence or Dow Jones index? Or does the economy and wealth of a nation mean the ability of the government to spend money to wage war and to provide aid to other countries or protect greedy investors and bailout the private sector banks and financial institutions which are on the verge of collapse? Or does it mean the prosperity of the limited companies and business houses of the nation, their assets and profitability or the wealth and prosperity of the super rich or the upper class of the world that are getting wealthier by the minute? Or does it mean the wealth, well being and prosperity of majority of the people of the nation? If the economies of nations mean the ability of the national governments of the developed nations to spend, the economies are perhaps fine. Governments can borrow or print as much money as they want. The developed countries have been doing just that since 2000 and funding wars in Iraq and Afghanistan and providing assistance to favored countries like Israel, Pakistan, Ethiopia, and Georgia to name a few and running up huge trade and budget deficits. These Governments can also spend trillions of dollars of taxpayer’s money to bail out banks and investment banks which are going bust because of their greedy and unsound credit and investment policies which the governments failed to regulate. If the economy means the prosperity of nations multinational companies and the super rich, then they are doing better. They have been able to stash over a trillion dollar of profit offshore at tax havens to avoid paying their legitimate share of taxes. There is no doubt that a few Wall Street icons, over 100 year old Fortune 500 companies, may have collapsed. But that has happened before in 1979, 1982/83, 1988, 2000/03 and 2008. The super rich are doing fine. The world had 1210 billionaires in 2011, an increase of about 200 over 2010. Of the 1210, 713 were from United States and Europe and 330 is Asia. But if by the economy of nations we mean the economic condition of majority of the people, it is bad and getting worse by the day every year since 2000. Unemployment is increasing and is at unprecedented levels in Western Europe. Poverty is increasing. Savings of many thrifty and prudent citizens have disappeared with the collapsing financial giants. Most sixty plus citizens of the developed world are resigned to defer retirement as much of their retirement plans have gone sour and are resigned to a life of penury after retirement. Economy An economy is defined as the total of all human activity including producing, exchanging, distributing, and consuming goods and services inside an economic system. The economy of a country consists of all economic activity in its economic system. An economy may also be described as a social network where goods and services are provided or exchanged according to demand and supply between participants by barter or on payment with currency accepted within the network. A given economy is the end result of a process that involves its technological developments, history, social organizations as well as its geography, endowment of natural resources and ecology. An economic system is composed of people and institutions. It is governed by rules, and relationships between the people and the institutions. Laws regarding sale, lease or mortgaging property are example of rules. The organizations like central governments, state governments, central banks, banks, stock exchanges, courts, corporations etc are examples of institutions. Relationships include the relations between the employee and employer, banks and their creditors and debtors, corporations and governments and the vender and the consumer etc. The people of the country may be divided into classes. Adam Smith divided the population into owners of resources (labour, land and capital) and labour. Another way of dividing the population could be by income. Thus we have the rich, the middle class and the poor. One percent of the worlds wealthiest have 40 percent of the world’s wealth. Another way of dividing the population is to classify them as the privileged and under privileged. The wealthy are naturally privileged. The privileged also include politicians, senior officers of public and private institutions and well educated professionals. The poor are naturally under privileged. The under privileged also include ethnic and religious minorities, immigrants, refugees etc. Institutions can be public or private. Public institutions are created by governments to provide essential services, maintain law and order and to protect the country from external threat. Public institutions like hospitals or schools are set up and run with public money or taxes paid by the taxpayers. They may charge fees for services provided and partly or fully fund their activities. Private institutions like manufacturing units, banks, hospitals, and hotels on the other hand are set up by owners of resources. Their primary focus is to generate more and more profit and wealth for the owners and share holders. Wealth of Nations What constitutes wealth of nations? Unfortunately, there is no universally accepted definition of wealth of nations. To a lay man, individual wealth consists of money (cash), valuable possessions like gold, gems and jewelry, land and buildings, and stocks, shares, bonds, debt and other modern investments. In case of nations, wealth is more difficult to define. Some may include the wealth of its people, its institutions, foreign exchange reserves etc. Some may like to add its natural and manpower resources. Some may restrict it to the wealth of its central government. The wealth of nations or individuals is constantly changing. However, it is interesting to note the various nuances of wealth. Cash or Legal Tender The first and foremost part of the wealth of a nation is its cash. All countries have printed or issued a certain amount of currency and coins. Most of it is held within the country but some of it may be held outside the country as foreign exchange reserves. The total money in any economy is held at different places. Cash is that amount of currency that is physically available with individuals and institutions and not deposited in any bank. In developing countries like India where parts of rural population do not have access to banks, cash constitutes a larger percentage of the total currency in the economy. Cash is used for day to day expenditure. Cash is also used for smuggling, trading in narcotics, bribing, funding political parties etc. Cash is also used in transactions to avoid paying VAT and other taxes. Money is also held with central banks of countries. Money is held with banks in the form of savings or demand (current) deposits. This money can be withdrawn from the bank at short notice. Money is also held as Term Deposits or fixed deposits where the money is locked in for a specified period. Money is essential for survival. It enables us to buy goods and services that we need or that we want. When we have more money than what we need and want, we have an investable surplus. Thus capital is formed. This capital can remain deposited in banks or be used for producing goods and services or for speculation. When it is used for producing goods and services, we generate employment and profits. When capital is used gainfully for speculation, it does not generate employment but more capital. When there is more capital than what can be invested in goods and services we have a serious problem. When we have too much money chasing too few goods and services, we have inflation. When we have too much money chasing too few speculative or investment opportunities in stocks, shares, debt, property, commodities etc, we have bubbles. When these bubbles burst, there is a financial meltdown. A dollar currency note or coin remains a dollar over the years. But its purchasing power is always changing. Most of the time, the purchasing power of money within a country keeps reducing due to rise in prices of goods and services or inflation. To compensate for the rise in the cost of goods and services, incomes have to be increased. When money is used for purchasing goods and services from outside the country, an exchange rate comes into play to convert the currencies of the importer and exporter countries. The purchasing power of a currency may increase in a foreign country if the currency of the foreign country is devalued. The converse is also true. Exchange rate of currencies is one of the reasons for the so called wealth of developed nations. One US dollar is equal to about 55 Indian Rupee or 6.39 Chinese Yuan. The exchange rates are constantly changing. There is no mathematical logic behind these figures. The exchange rate is supposed to be determined by demand and supply. However, in many countries like India and China, the exchange rate is totally or partially fixed by the government to suit its trading requirements. To illustrate the point let us compare the GDP of United States and China. The GDP of the United States in 2010 was about 14.6 trillion dollars US. The GDP of China in 2010 was 5.87 trillion dollar US. Thus if China changed its conversion rate from 6.39 Yuan per dollar to 2 Yuan per dollar, it would immediately become the largest economy in the world. Gold, Precious Metals and Stones The second part of the wealth of a nation is gold and precious stones and precious metals. Their value tends to constantly rise over the years. In 1971 the price of one oz of gold was US $40. In September 2011 it rose to over US $ 1900, an over 47 times increase in 40 years. The prices of gems and other precious metals have also been increasing though the increase is not uniform or comparable with gold. Land and Property The third part of wealth comprises of land and property. Price of land has been increasing all over the world. There may be short term fall in prices of land after financial meltdowns but the prices rebound within 10-15 years. In rare cases, specific portions of land may see a reduction in value due to ecological degradation or political unrest. However, the cost of the building itself usually reduces due to aging or due to damage in natural disasters. Stocks, shares and other financial instruments The fourth part of wealth is stocks, shares and other financial instrument. Their value is always fluctuating and unreal. They have a face value, a book value and a market value. It is this so called market value that is used to calculate the value of ones holding of stocks, shares and other financial instrument at any given time. The market value changes by the minute. When the markets crashed in 2008, the total value of the stocks reportedly fell by about 35 trillion US dollars. Stocks, bonds and other financial investment instruments can become junk or valueless if the company or bank collapses or is declared bankrupt. It will thus be seen that wealth represented by stocks, shares and other financial instruments are unreal. The “market capitalization” figure or the value of all stock of companies listed in a stock exchange is a meaningless figure. The sum can never be realized because stocks and shares are converted to real money only when they are sold and any large sale reduces the price. Other Resources Some like to include natural resources like deposits of coal, crude oil, natural gas, metals, precious metal and gems, hydro-electric power generation potential etc into the wealth of nations. Some would want to include manpower resources or technological excellence in wealth of nations. Some may want to include tourist earning potential into wealth of nations. But the value of these resources is difficult to quantify and best ignored while assessing the wealth of a nation. Holders of the Wealth of Nations Wealth of nations are held by four entities, the Central Government, Governments of its states/counties/provinces, its institutions, and its people. Central Governments The wealth of Central Governments consist of money collected as taxes, its reserves of domestic money and precious metal held with its central bank, money given as loan to foreign governments, money invested in bonds of foreign countries and foreign exchange reserves. The financial state of the central governments of developed countries is poor. Their government debts are huge and range from about 70 to 200 percent of GDP. Governments of States /Counties/Province The wealth of Governments of States/Counties/Province consist of lands and property in its possession, money collected in taxes and money received as grant from the central government and deposited in banks or state treasuries. Finances of most of these governments are usually in dire state. Institutions The wealth of the institutions consists of the cash, properties and investments. The first two are real. The value of investments, as we have seen, keeps changing with time. People The people of a nation also hold a part of its wealth. The people may be further divided into the privileged class, the middle class and the poor and under privileged. In most countries the wealth of the top one percent of the population is equal to the wealth of the bottom 40 to 60 percent of the population. This inequality in the distribution of wealth is not destabilizing as long as the poor and under privileged have enough money to meet their basic needs of food, shelter and education that enable them to live in their traditional life styles. Measuring Economy How do we measure the size of an economy? Do we measure it by its GDP, by the level of Public Debt, by the exchange rate of its currency, the current account deficit, the trade deficit, stock market performance, industrial output, agricultural output, the number of billionaires they have, the real income of the people, the unemployment levels, the poverty levels or levels of economic disparity. The assessment will naturally depend on the yardstick used. The most common method used is to measure the countries GDP in US dollars (PPP). The figures are calculated annually by World Bank and a few other organizations. The measurement by GDP has serious shortcoming which we will discuss in Chapter 4. Measuring Wealth of Nations Measuring the wealth of nations is equally problematic. Most countries do not declare the total currency that is in circulation in the economy. The gold and foreign currency reserves of countries may be in public domain but there is no way of knowing the quantity and value of gold, silver, gems and jewelry held by the people of a nation. Comparing wealth of nations involves use of currency conversion rates which are often manipulated to suit the requirements of the governments, World Bank or IMF. Conclusion It is the author’s opinion that much of the economic crisis that seems to engulf the United States and Europe is because we are so much taken in by economic theories and so busy manipulating economic policies and activities to suit different interest groups that we seem to forget the basics. Some thoughts which the learned readers may like to ponder on are: Real wealth consists of money (currency and coins), land, gold, silver, gems etc. Like matter, real wealth cannot be destroyed. It only moves from one individual, institution or country to another. Unreal wealth in the form of shares, bonds, derivatives and other financial instruments, on the other hand, can loose its value overnight during stock market crashes and financial meltdowns. Demand at any given time is finite. If one American consumes one kg of meat a day, the total monthly requirement for a population of 300 million will not exceed 9 billion kg. If more is available in the market, some of it will remain unsold. The same is true for all goods and services. When there is more capital in an economy than what can be used to purchase or invest in goods and services we have a serious problem. When we have too much money chasing too few goods and services, we have inflation. When we have too much money chasing too few speculative or investment opportunities in stocks, shares, debt, property etc, we have bubbles. When these bubbles burst, there is a financial meltdown. Excessive liquidity or money supply is a greater threat to the stability and wellbeing of mankind than nuclear weapons, pandemics and terrorism because it puts necessities of life, particularly food and housing beyond the reach of the poor and the underprivileged. These people constitute 60 to 80 percent of the population of countries. This is bound to lead to social unrest in the long run. The value of wealth of nations, institutions and individuals are constantly changing. If you do not know how to hold on to real wealth, it will move to some other country, institution or individual. Back to Contents Chapter 2: Economic Growth and Decline of Europe It is generally accepted that at the beginning of the 18 th Century, the level of prosperity in the nations of Asia and Europe was more or less the same. But by 1950, the situation had completely changed. Per capita income of the people of Western Europe was 20 to 30 times that of countries of Asia and Africa. It is thus natural for intellectuals, economists and even the people of the developed world to claim that these countries became wealthy due to their superior innovativeness and economic policies which enabled them make more effective use of resources namely land, labour and capital and pull economically ahead of the rest of the world. However, as we shall see in this chapter, this claim is largely unsubstantiated. Economic History of Europe The decline of feudalism in Europe leading up to the French Revolution had a profound effect on the European economy. Isolated feudal estates were replaced by centralized nations as the focus of power. Technological changes in shipping and the growth of urban centers led to a rapid increase in international trade. Growth of specialized education in Europe in the 12 th Century gave rise to economic theories and brought in concepts of national economies and state intervention into trade and economic policies. The new economic policies had a profound effect on the prosperity and economic power of Europe. The Elizabethan System England was the first European nation to begin a large scale and integrated approach to trade. This was during the reign of Queen Elizabeth I (1558–1603). The concept of national balance of trade first appeared in an article, “Discourse of the Common Wealth of this Realm of England,” in 1549. The article stated that "We must always take heed that we buy no more from strangers (other countries) than we sell them, for so should we impoverish ourselves and enrich them.” New markets had to be developed to sell more. The economic theory also required cheaper imports. This prompted the court of Queen Elizabeth to develop a naval and merchant fleet capable of challenging the Spanish stranglehold on trade with North, Central and South America. Queen Elizabeth enacted the Trade and Navigation Acts in Parliament and ordered the British navy to protect and promote of English shipping. Mercantilism [...]... benefits to Europe and America The development of financial institutions of the kind prevalent in Europe and later in the United States was not seen in the feudal or tribal nations of Asia, Africa and the Americas Neither was there any industrial revolution outside Europe and the United states till the 20th Century These countries fell behind the Europeans in economic and consequently military power They... to colonize the world Europe Colonizes the World (1750 – 1950) European colonies were the product of the European Age of Exploration starting in the 15th century The initial motivation behind spreading out to the unknown parts of the world was trade The growth of the Ottoman Empire and the fall of Constantinople to it in 1453, cut off over land trading routes with Asia Europeans were thus forced to... exploited the resources and people of their colonies to the hilt In India, the British forced the farmers of Bengal and Bihar to cultivate Indigo instead of rice It did not matter that many starved and there was a famine in 1942 What mattered was that the British companies made handsome profits It is also said that the British cut off the thumbs of the Muslin weavers of Bengal because the cloth manufactured... wealth of the nations of Western Europe is not solely or even primarily due to innovation and enterprise Europe colonized most of the world from the 17th to the 20th Century Spain plundered all the Inca and Maya gold and silver and ruled much of Mexico, Central and Latin America Britain, France, Germany, Holland, Italy and Portugal colonized most of Asia and Africa and took complete control of trade and. .. purely a result of innovation and enterprise Much of it is due to barbaric acts and practices which would not be acceptable in today’s world History cannot be reversed Open minded economists must clearly understand that Europe has developed at the cost of their colonies They plundered the riches of the kings and people of the countries they colonized They exploited the mineral resources of the colonies... birth The enslavement of Africans and shipping them to South American colonies of the Portuguese and Spanish empires started in 1502 The Portuguese bought slaves from African rulers and merchants They also carried out expeditions to capture and enslave Africans They then either sold them to other European colonizers to make money or used the slaves for running plantations in their own colonies The Spanish... budget The European countries fought wars amongst themselves that were largely paid for by the money coming in from the colonies Nevertheless, the slave trade, sugar cane and banana plantations of the West Indies (Caribbean Islands), rubber plantations of Malaya, and coffee and coco plantations in Africa and South America produced huge profits for the European countries European powers exploited the resources... Portugal led the way in exploring along the coast of Africa in search for a maritime route to India They established the first direct European diplomatic contacts with Indian states in 1511, China in 1513 and Japan in 1542 They were followed by Spain near the close of the 15th century France, England and the Netherlands followed the Portuguese and Spanish trade routes into the Atlantic, Indian and the Pacific... royalties They enslaved millions of people They have a head start But things are changing The developed economies, without colonies and slaves to support their economies, are no longer competitive and are on the decline The leading developing countries like Brazil, Russia, India, China and South Africa and the Asian Tiger Economies are catching up Back to Contents Chapter 3: Economic Growth and Decline of. .. Expedition you are appointed to command is to be directed against the hostile tribes of the Six Nations of Indians, with their associates and adherents The immediate objects are the total destruction and devastation of their settlements, and the capture of as many prisoners of every age and sex as possible It will be essential to ruin their crops now in the ground and prevent their planting more I would recommend, . the rise of the economic power of Western Europe and the United States and the causes of the decline of the economic power. It is also an appeal to the. companies and business houses of the nation, their assets and profitability or the wealth and prosperity of the super rich or the upper class of the world