Originally posted by jfj123
reply to post by Dbriefed

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Wow, there's a lot of real bored, neo-con sore losers huh??

They don't want a stimulus package and it looks like the republicans are deliberately trying to sabotage the package.

Just curious but whomever is not in favor of a stimulus package, what would you do to fix the country?

The Global Financial Crisis: What Caused it, Where it is heading?*

by

Ravi Batra

© November 15, 2008

Professor, Department of Economics

Southern Methodist University, Dallas, Texas 75275, USA



Two thousand eight was year extraordinaire. It started off in a rather nonchalant way, but ended with a bang. Its myriad and breathtaking events caught the world off guard, but please allow me to say, arrogant as it sounds, that they did not surprise me, including the epoch-making victory of Barack Obama in the US presidential election. I had anticipated them all in two books more than two years ago. The first, Greenspan’s Fraud, was written in 2005, and the second, The New Golden Age: The Coming Revolution against Political Corruption and Economic Chaos, was finished before October 2006. In fact, the title of the second work itself reveals that I had anticipated an Obama-like revolution in the United States.

It now appears vain to remind the people of my forecasts, but see what I had to endure after I made them. Both books had served to reinforce my reputation as a crack pot, who sought public attention with bogus claims and phony prophecies that occasionally came true. Greenspan’s Fraud was especially galling to my fellow economists, even some of my colleagues. Alan Greenspan was still the chairman of the Federal Reserve in the United States, and had been so for the past 18 years. Some people regard the Fed chairman, with his all-encompassing ability to influence interest rates globally, as the most powerful man in the world.

This is perhaps an exaggeration, but Greenspan, who had actually been in the limelight for over three decades, was more than just a Fed chairman. Investors around the world came to worship him in the 1990s, as share markets broke record after record in many nations. Best-selling author Bob Woodward, who achieved celebrity writing about the Watergate scandal, declared Greenspan as the Maestro in 2000 in a book with the same title. Others were equally euphoric about him. Some called him a rare genius, the best economist ever; even Queen Elizabeth chipped in and knighted him in 2002 as Sir Alan Greenspan. Here I was, a mere professor at Southern Methodist University, who had the temerity not just to criticize him but call his policies self-serving and fraudulent. My book’s title shocked the people, who in turn mocked me without reading my facts and arguments. But sometimes one has to bear insults to bring out the truth.

Where did I learn my economics? The question makes me nostalgic and takes me back into the 1960s, when I was a masters’ student at the Delhi School of Economics. There I studied under luminary professors such as K. N. Raj, Jagdish Bhagwati, Amartya Sen, and India’s current prime minister, Manmohan Singh. They were great teachers and taught me the fundamentals of modern economics.

However, there was one other teacher, whose theories were remarkably different and unknown. He was not even at the Delhi School. I met him in Lucknow, at the time a rather small town in India. He was Shri Prabhat Ranjan Sarkar, a wonderful man of vast knowledge in many different areas. He had written books on history, economics and philosophy among others. Two points stood out in his theories. First, the foundation of prosperity is people’s purchasing power; second, rising inequality eventually destroys any economy.

I left India for the United States in 1966 to do a Ph. D., but Sarkar’s ideas stayed with me and followed me wherever I went. I studied classical economics, Keynesian thought, and numerous other schools, but none focused on what Sarkar had stressed. Finally, I decided to write about his ideas and introduce them to the world, because few paid attention to the gems he had offered. I wrote a number of books based on his theories, starting in 1978, but here I want to emphasize how his ideas enabled me to see through the vacuity and deception of Greenspan’s policies.

The Wage-Productivity Gap

Greenspan focused on company profits and labor productivity as the main engines of economic growth and prosperity. He believed that high profits generate high employment and high wages lead to joblessness. I will now show how this view is myopic and the sole cause of most of the economic travails afflicting the world.

Let me start with a universally acceptable statement. A healthy economy requires that there is a balance between supply and demand. Here supply means the production of goods and services offered to entire society, and demand means society’s demand for such things. Thus, economic balance requires that



Supply = Demand



Without this balance, there is either high unemployment or high inflation. The main source of supply is labor productivity, whereas the main source of demand is the real wage, or people’s purchasing power in Sarkar’s nomenclature. When productivity rises, production or supply goes up and when the real wage increases, consumer spending, and hence investment spending, go up. Because of this investment and new technology, productivity grows over time, which means supply rises over the years. Therefore, demand must also grow proportionately to maintain the economic balance, implying that the real wage must rise in proportion to productivity. However, Greenspan loved to see the rise in productivity but hated the rise in the real wage. He even wanted to abolish the minimum wage, and always argued against its rise, although relentless price increases in the United States had all but demolished its purchasing power. In this respect, the maestro had a lot of company, including the support of President George W. Bush and economic establishment. As a result, the U.S. minimum wage, which peaked at $10 per hour in 1969 in terms of 2008 prices, is now less than $7. Incidentally, the unemployment rate in 1969 was just 3.5 percent, among the lowest in US history.

If the real wage fails to grow as fast as productivity, then over time, a wage-productivity gap develops and



Supply > Demand



Then how do you maintain the indispensable economic balance? This is where the special genius of Greenspan, along with that of conventional economics, came into play. This is where liberal and conservative economists alike, some of them Nobel Laureates, preached their gospel and in the process failed the world.

There is another way through which demand can be raised—new debt. It is an artificial way, and cannot be used forever, but it can postpone the problem for a long time, while the potential economic imbalance builds and cumulates. From 1981 on, U.S. budget deficits, with Greenspan and company advising President Reagan, grew apace. Economists called it fiscal policy, but in reality it was a debt-creating policy. This is how the supply-demand balance was maintained in the presence of the rising wage gap. Thus, for a while, economic balance occurs when



Productivity growth = growth of the real wage plus debt

and

new debt = supply – demand



The Profit and Stock-Market Bubbles

Once productivity outpaces the real wage and debt fills the supply-demand gap, company profits skyrocket, because the entire fruit of rising productivity goes to capital income. However, these are debt-supported profits, because without this debt goods will be unsold and profits will fail to materialize. With rocketing profits come rocketing share prices, so everybody becomes happy and begins to dance. This is how Greenspan won the world’s adulation, and no one looked at the magical role played by debt.

Once federal debt began to sore in the United States from 1981 on, it took barely a year, before the Dow Jones Index (the Dow in short) began to rise. The Dow ended the year around 800, but climbed above 2,000 by mid-1987. It had taken the ballyhooed index about 100 hundred years to go past 1,000, but the next 1,000 came in merely two years. A grateful Reagan appointed Greenspan as the Fed chairman in August 1987, but two months later the maestro had to face the music of his own handiwork. The debt-built stock market bubble, founded by that debt-built profit bubble, crashed in the month of October. Greenspan had no idea of how the rising wage gap generates the supply-demand gap. Instead of focusing on wages, he turned to the other way of creating debt. He flooded the world with money and trimmed the interest rate to lure consumers into borrowing. New debt was now created with the help of fiscal policy as well as what economists like to call monetary policy. However, such euphemisms only mask the truth, which is that these policies solve the problem only by generating new debt.

With increasing use of computers and the Internet, productivity began to rise faster than before, while government policies restrained wage growth. So the wage gap continued to rise and actually accelerated. Not surprisingly, new debt played an even larger role during the 1990s. The government did not borrow as much as before, but the public did more than its share. The mushrooming U.S. trade deficit also made a contribution in this regard, because the rest of the world bought American government bonds with its trade surplus that resulted in its dollar hoard. Consequently, American interest rates remained low for a long time and lulled Greenspan and the fawning world into believing that his policies were actually responsible for the surface prosperity.

So the debt-and-stock-market party that had been derailed by the 1987 crash returned with a gusto. This time the world got drunk on the dot.com boom that took share markets to stratosphere, with the Dow crossing 10,000 in 1999. Still no one realized the crucial role played by new debt...

Originally posted by dodadoom
reply to post by FiatLux

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Sorry for trackin' mud all over, that is an excellent idea!
The sooner we can get this over with, the better for all of us.
We need a major reset.
One that doesn't revolve on credit! The banking "way" has
dominated and controlled this system by it's very nature.
Time to pull the rug and let the big dumb dominos fall. Hard.

Originally posted by dodadoom
reply to post by FiatLux

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Thank you for the reply. Just wondering how come more
sheeples don't realize the whole banking ponzi scheme
for what it is. Seems like some are waking up but we
continue to bad mouth each other.
Seems like the left and right will always still fight!
Meanwhile we keep giving money to the continually failing banks.
Just like in the manifesto plan.