A plethora of articles have already been generated discussing the possible outcomes of the new budget package that George Osborne, the U.K.’s finance minister, will soon reveal this week during his annual update on the state of the nation. Austerity measures have already been tried with minimal success, but will a combination of tax cuts and incentives deliver the economic growth that everyone longs for?
Similar debates have raged on both sides of the Atlantic as to how to stimulate growth and return to something vaguely resembling previous prosperous times. Austerity proponents are on one side of the issue demanding that deficits be reduced before growth can have a chance. Keynesians argue from the opposite side that the public sector must step with stimulus to bridge the “gap” in economic activity in the private sector during a business cycle downturn.
Both approaches have been tried in various parts of the developed world without producing the desired outcomes. Albert Einstein once defined insanity as the “doing the same thing over and over again and expecting different results.” Japan has been in a stuck place for two decades. Europe has followed the U.S. example and papered over their present problems, hoping that economic activity will pick up if confidence returns. Fiscal stimulus and low interest and tax rates in the United States have done little to generate a stable recovery, but there are positive signs.
Are we witnessing a newer version of economic “insanity”? Economists are agreed that growth is the only solution for our present economic malaise, but none of the “old tricks” seem up to the task. In the meantime, developing markets of the world have been on fire, and Gold, the asset with no visible income stream, has appreciated radically over the past decade as central bankers expanded their respective money supplies. Anyone transferring currencies or trading binary options is fully aware of the dilution effect on a currency’s value when its purchasing power is reduced.
The major issue is that the old “rules” will not work anymore in Western countries. The world economy is so interconnected these days that independent actions taken in a single country cannot operate in a vacuum to produce domestic prosperity. Four decades of outsourcing from the West to emerging markets forced these new markets to re-invent themselves. For some reason, Western countries have plodded along in the same way as before, refusing to believe that they must re-invent themselves to have any chance of competing in this new era of globalization.
Government officials in the U.K. will get an opportunity to see if they have learned this simple lesson. Retraining and restructuring are required. Everyone must share in the burden, and, as one economist recently suggested, the West must learn to make things again before any real growth can be achieved. At this writing, most believe the new budget will address the high tax rate that applies to 1% of the population, coupled with a variety of programs to help the low and middle-income classes. Britain is barely eking out 1% GDP growth. Deficits are declining moderately, but personal incomes are dropping, while inflation has actually declined a few percentage points. The Pound, as a result, has been within a tight trading range for the past twenty months. More dilution and inflation will lead to a weaker currency.
Einstein also said to make everything as simple as possible, but not simpler. Let’s hope the new plan is creative and simple, without being as one critic espoused, “nothing more than a modest rearrangement of the fiscal furniture.”
This has been a guest post provided by Tom Cleveland of Forex Traders. ForexTraders.com is an online forex portal geared towards the beginner trader with a new expansion covering binary options.