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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:

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Copyright Author Bhaskar Sarkar 2012

Smashwords Edition License Notes

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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.