Dr. Susmit Kumar
According to Paul Krugman, the economy is in the early stages of a third depression, and it will probably look more like the Long Depression of the 19th Century that followed the Panic of 1873 than the much more severe 1930’s Great Depression. According to him, the cost – to the world economy and, above all, to the millions of lives blighted by the absence of jobs – will nonetheless be immense.

What we are witnessing is not the early stages of third depression. Instead it is the initial stages of economic collapse like 1990s Russian economy, as predicted in my book The Modernization of Islam. I wrote its chapter “The Collapse of the American Economy” in the early 2007. It is worth noting that Russian GDP decreased by 45 percent during 1990s.

Federal Reserve is running out of ammunition as it has slashed the rates to almost zero. Due to the two irresponsible Republican governments, Reagan and Bush Jr., which maxed out the credit worthiness of the federal government, the US administration does not have any more option to spend money on stimulus. Consumer spending accounts for two-thirds of U.S. economy. Due to heavy job losses during eight years of Bush administration and then Great Recession, consumer purchasing power has drastically diminished.

The US budget deficit is going to be in trillions of dollars for at least a decade. Its trade deficit is also going to be above at least $400 billion for next several years as consumer goods manufactured domestically will not be profitable at all for retailers like Walmart and Home Depot. Therefore at one point, the US dollar has to give in.

Any substantial depreciation of the dollar will result in a corresponding increase in consumer goods prices and cause inflation. Now the US produces only 75 percent of the merchandise they consume – down from 90 percent a decade ago.

As I have written in my other articles, one of the main reasons of the present economic downturn is Wall Street. Under the pressure of Wall Street pundits, every CEO has to show profits each quarter otherwise he will lose his job. First this led to the consolidation of firms, i.e. mergers; then lean and thin firms (i.e. lay-offs inside the firms) and finally shifting of job overseas. But in this process, they have forgotten about the purchasing power of the consumer. The jobs, shifted overseas, were the source of the purchasing power of the consumers. Therefore ideally one needs to put emphasis on the purchasing power of consumer and not the profit only. Also the Wall Street will never allow and also not allow the creation of these jobs to return to the U.S.

In the coming years, some portion of the country may have to face an economic situation similar to the 1990s Russia after the collapse of the U.S.S.R. But unlike Russia it has the latest technology and top scientific talent with a hard working population. These conditions will allow it to emerge much more powerfully than the 2000 Russia; but its living standards will not be the same as before the 2008 recession began.

There is a major difference between the 1930s Great Depression and the coming Great Depression. During the 1930s Great Depression, the Keynesian stimulus, i.e. generating employment by government spending, worked. The 1930s Great Depression ended only after the country entered the Second World War, i.e. when the country started churning out arms and armaments on massive scale. In fact a few years after the end of the 1930s Great Depression, the living standard in the country started to improve in comparison to the pre-depression period. But right now the Keynesian stimulus alone is not going to solve the problem because the country is completely dependent on the import of the consumer items.

In the end there will be no option but to restart the manufacturing and service sector units within the country because the country cannot sustain huge amounts of negative Balance of Payments (BOP) for long although inflation will go through the roof and the living standard will go down drastically. The sooner this step is taken the better.

Susmit Kumar is the author of The Modernization of Islam and the Creation of a Multipolar World Order. Read more of him on www.susmitkumar.net

Copyright The author 2011