Is Obama correct about competitive austerity?

President Obama
President Obama

George Soros agrees with him – are we in for a big depression if the Chinese don’t act

Must the world be forced to engage in “competitive austerity” as President Obama calls it?

David Cameron is forcing the UK to take its medicine quickly and painfully if necessary – as a result the markets have backed these policies and given us the reassurance of a safe credit rating

What is the alternative? If the markets do not have faith in the leadership or policies of the country, they will  withdraw their funds and will often actively bet against a country – Greece, Ireland and Spain are the current targets

Germany leads this austere approach, but does it from a position of strength. It has been using the weaker Euro to increase its exports and the country’s balance of payments is very strong.

They have past history with the Weimar republic with its rampant inflation and worthless currency that encouraged Hitler to take power. This past fills german economists and politicians with dread and their attitude is that the pain of austerity as countries reduce their debts is the only way out of this mess

Obama, whose opinion is backed by Ben Bernanke (Chairman of Federal Reserve) and George Soros, feels their is another way- a more balanced spending by the countries with the biggest economies with a rebalancing of exchange rates to allow the weaker countries to benefit from market forces

This needs China in particular to agree not to manipulate its own currency – the alternative will lead to protectionism, which was one of the major factors of the great world depression of the thirties

It is not as easy as Obama suggests – look at Japan in the nineties. Despite zero interest rates, they are a society of savers and not spenders and their economy has effectively been stagnant for the last twenty years

However if USA continues to print money the way it is doing, their economy is so massive that unless the chinese allow the dollar to fall in value against the Yuan, USA will end up having no alternative other than to default on its debts, and the catastrophe of depression that many have been predicting will  be upon us – this will lead to civil insurrection around the world, with the rise of dictatorships to keep the peace, and I fear this will eventually probably lead to more global military conflict.

So what is the answer – it is obvious, but is it achievable?

Compromise, agreement  and cooperation! – if the world’s leaders started to act in cooperation rather than just talk a good game, the world has a chance.

There is enough money out there for everyone, but those with it have to be prepared to share it in a more controlled economic fashion- the americans in the past called the tune and did not always share, so you can understand the parochial approach of the Chinese, Russians, Indians and now Brazilians.

However if USA and Europe, who are the buying engine of the world are allowed to enter a further recession, the developing world will also suffer badly.

So this means the Chinese perhaps using its reserves to invest in some of the european countries with cash rather than simply buying some of the european goods – direct action is called for to stop european countries collapsing

Will this alternative lead to inflation ? Yes almost certainly but, in my opinion, inflation can be cured more easily than a world depression

I am watching the American and Chinese posturing with fear and dread – our future is in the hands of these leaders

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