Economic Theory.
OK so the world economy is going through a tough time at the moment and people always ask me what can we do, I'm glad they asked.
First of all lets look at what has happened.
Credit Crunch
Definition: a period of time when credit has suddenly become costly or difficult to obtain, the current credit crunch was caused by the sub prime mortgage
crisis in the USA.
Many US mortgages taken out from 2000 onwards were classed as sub prime, that is to say that no downpayment or deposit was paid by the borrowers
oftens households with little or no tangible financial assets.
When house prices in the US began to decline in 2006-07, mortgage defaults increased, and securities
reliant on subprime mortgages, widely held by banks and financial institutions, lost most of their value.
This resulted in a large fall in the capital held by these institutions, leading to a lack of confidence, to lend or give credit.
Recession
Definition: A recession or downward financial trend can be defined as a downturn in economic activity.
The consequences commonly include increased unemployment, decreased consumer and business spending, and declining stock market and currency prices.
Recessions are typically shorter than the periods of economic expansion that they follow, but the effects can be quite severe even if brief.
The following effects are typical during times of recession,
- Increase in personal debt.
- Falling housing prices.
- Increased job losses due to business failures.
- Weakened currency prices.
- Credit facilities reduced.
- Reduced interest rates.
Free market or Keynes.
Advocates of the free market approach would argue that governments should do nothing to try and correct the markets.
They believe that the markets are self regulating and will naturally find a position of equilibrium, without any government macroeconomic intervention.
Unfortunatley this model does not account for the misery suffered by millions of people during a recession who lose their jobs and subsequently their homes.
In a pure free market model there would be no minimum wage and no control over pricing within the market. Therefore businesses can pay whatever level of wages
they feel the market dictates and the same with the price of goods.
Keynesian economists however would argue that governments should spend their way out of a recession.
In this model it is argued that the market should be controlled by government and in the case of recession the flow of money in the market should be redirected
into the hands of the citizens.
This is achieved by governments investing in infrastructure projects such as building new roads, new schools and new hospitals for example.
By creating this economic stimulus more people are returned to work, on the new projects, therefore more people have more cash which they are able to spend
in the marketplace, boosting sales of goods and services, thus creating more employment opportunities and so on.
The Solution.
I propose that we use a combination of the Keynesian model coupled with a new Tobian approach.
Using the Keynesian route governments will invest in the traditional market stimulating activities as highlighted above, increasing government spending
and decreasing taxation on citizens, thus freeing up the flow of cash in the market.
Following the Tobian methodology, we as citizens go out into the market and spend a minimum of $10, £10, €10 on fruit each week, take it home and enjoy it.
This must be an additional amount on top of what you would normally buy.
The advantages of this approach are obvious,
- Increased spending in the market, good for greengrocers, passed on to distributors and to farmers and growers in various countries, so the stimulus is international.
- Healthier less obese citizens, who therefore become more productive in the workplace, again stimulating business growth.
- Enhanced opportunities for fruit to travel.
So there we have it, a method of kick starting a sluggish world economy, using the revolutionary Keynesian - Tobian fiscal stimulation approach.