Economic Crisis looming large

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President Joe Biden tried to soothe Americans’ worries about the strength of the economy on Thursday, after new data showed it had contracted for two quarters in a row.

Biden and top White House officials touted several positive facts about the U.S. economy, including that employers are still hiring, unemployment is at 50-year lows and manufacturers are still investing.

“That doesn’t sound like a recession to me,” Biden told reporters.

The commerce department announced Thursday that gross domestic product (GDP) – a broad measure of the price of goods and services – decreased at an annualized rate of 0.9% in the second quarter after falling at an annualized rate of 1.6% in the first three months.

Last week, Dinesh Gunawardena took oath as the Prime Minister of Sri Lanka. A staunch ally and loyalist of the former Rajapaksa ‘ruling family’, Gunawardena is the third person to occupy the position in the last three months. Sri Lanka, a nation of about 22 million people – both greater Delhi and Mumbai average about 20 million people each – has been going through severe economic turmoil since the beginning of the year. The cause of that has been severe economic mismanagement by the nation’s leaders, and the practice of ‘voodoo economics to solve a nation’s problems.

Voodoo Economics is a phrase used to describe, in a derogatory manner, a policy that combines tax cuts (or a decrease in tax revenues) with an increase in public spending, in the hope that the tax cuts will spur more consumption and investment. It rarely does, as the last three decades have borne testament. The super-rich take their tax saved capital and park it in offshore tax havens letting it multiply for them, rather than spurring more growth.

After wreaking havoc in its northern provinces, the Rajapaksa family set about trying to rebuild an economy torn apart by decades of civil war. At the same time, they wanted to buy popularity amongst the elite, and the large middle class. The government undertook a simultaneous expansion of debt, and a cutting of taxes to bolster the economy. Much of the credit came from China helping build international convention centres, airports, stadia, and ports. But the problem with debt is twofold – the first is that you have to pay it back, and the second is that until you pay it back, you have to pay interest on the principal.
Debt is a double-edged sword. If used wisely and well, it can help you grow and even achieve your dreams. Look at millions of people across the world who buy a home using debt. They are gaining something, they would have never been able to achieve without debt. On the other hand, there are millions of people across the world, who are struggling with credit card debt that fuelled their consumption. Debt allowed them to acquire a certain kind of lifestyle very rapidly. But the inability to repay the amount in full, on time, means that many have entered the realm of compounded interest – interest payments on unpaid or partly paid interest payments – spirally deeper into debt. The same is the case with companies. There are those who have managed their debt well and have grown., and those who have not. And of course, nations face the same crisis.

Hyper-inflation, shortages of everything, unemployment and public disturbances – Sri Lanka is seeing them all, as an angry and frightened population steps out of the comfort of their homes to try and make sense of the mess. Had there been no Covid lockdowns, or disruptions due to the Ukraine war, maybe the country would have pulled on for a couple of more years before the chickens came home to roost. But now, with the rest of the world, they are staring at economic trouble. And, there seems to be no short-term fix for this. It is going to be a long, hard haul to normalcy. India and other countries are helping, but there Is only so much anyone can do – given that most countries in the world are facing some for of economic turmoil or there other.

The UN’s Global Crisis Response Group (GCRG) has looked at the impact of both COVID and the Ukraine war on the world and says that the world is looking at a cost-of-living crisis. The cost of everyday life has gone up on every parameter. You are seeing this across the world, as the price of everything rises – from the cost of fuel to the cost of money.

At the core of the unease across populations of the world is the increase in cost of living, and the inability of income to keep pace with expenses. India is no exception to this. The price of fuel is on the rise, as are the price of basics. As the price of goods increases, inflation rises, and governments try and curb inflation by raising interest rates. And this is a pattern you see across the world, as central banks and finance ministries try to prevent inflation from gaining ground. But the net effect of this is stagnating growth. And without growth there is no easy way out of breaking out of an economic downturn. The next 18-24 months are going to be tough, and it would be interesting to see what governments across the world will do to mitigate the impending economic crisis. While curbing inflation is vital, so is ensuring that people have money to feed their families. Or else, public disturbances because of rising prices are going to be a normal occurrence.

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