TheFinancialCrisisandGrowth

Thursday,08September201116:27FaisalArab EmailPrintPDF

Globalheadlinescontinuetochurnoutnewsofeconomicmeltdown.WiththeUSdebtdowngradeandthe possibilitiesofdefaultsintheEurozonebycountriessuchasGreeceandSpainitappearstheeconomiccrisis of2008isstillwithus.Theissueoftryingtoincreaseeconomicgrowthcontinuestobethemainstrategyin endingthiscrisis.Isgrowththecorrectmeasureforeconomicsuccess? WhatisGrowthandhowisitMeasured? Growth within a capitalist economy is calculated by measuring the amount that Gross Domestic Product (GDP) has increased over the period of a year with checks done every three months also known as every quarter.Thefollowingisagraphshowinggrowthoverthelastthreeyearsasapercentage:

fig1:Growthoverthelast3yearswithintheUK(http://www.tradingeconomics.com/unitedkingdom/gdp growth)

IsGrowthaGoodMeasureforaSuccessfulEconomy? GDP is a measurement that does not capture many positive aspects of the economy. So for example the creationofopensourcesoftwaresuchasthelinuxoperatingsystem,thecreationofthejavaprogramming language, a friend that changes a tyre on a car for free, house cleaning done for free, governmental administrativetasksallcreatevaluewithinasocietybutarenotpartofGDP. GDPlooksatthevalueaddedregardlessofthecosttosocietysoforexampleanaturaldisastercandestroy townsaswasseenwith hurricaneKatrina.The building workassociatedwithit however wasconsidered a positiveadditionto GDP. Theriots thathave happenedwithinLondonhave createdmuchdestructionand devastation; the building work associated with this will be considered an addition to GDP. Crime has an industry around it providing individuals with locks, alarms, increased police presence all adds to GDP. The negativeeffectofalcoholandcigarettescauseahugeburdenonthehealthserviceandyetthesaleofthe alcoholandcigarettesandtheworkcreatedwithinhospitalsasaresultoftheseproductsalladdtoGDP. GDP does not measure wealth distribution accurately. It takes into consideration the total amount earned withinsocietybyindividualsandcompanies.Occupationswiththehighestearningsin2010intheUKwere 'Health professionals' (median pay of fulltime employees of 1,067 a week); followed by 'Corporate managers' (757); and 'Science and technology professionals' (704). The lowest paid of all fulltime employees were those in 'Sales occupations', at 287 a week according to government national statistics (Office Of National Statistics, 2010). This disparity in wages highlights that the standard of living of people variessignificantly.AlsothewealthcreatorswithinsocietyaretopcompanieswithintheFTSE100(Financial TimesStockExchange).TheseincludeenergycompaniessuchasBHPBiliton(mining),RoyalDutchShell(oil), investmentbankHSBCandtelecomsproviderVodafone.ThesetopcompaniesarebutafewwithintheUK butaddtoGDPquiteextensivelydistortingtheGDPfigureofearningsacrossallcompanies. TheCapitalistEconomicModel Interestbaseddebtisamajorpartofacapitalisteconomy.Inordertomakemoney,moneyisrequired.Soa propertyinvestorwouldborrowmoneyfromabankinordertofacilitatepurchasingahouseandrenovating itinordertosellitandmakeaprofit.Aslongasthevalueofthepropertyisgreaterthenthevalueofthe loan the property developer would be in profit after paying off the loan and so the cycle continues. The buyingandsellingofpropertybytakingloanswouldmeanthatthepriceofthepropertywouldalwayshave toberisinginorderforthepropertyinvestortobeabletopayofftheirloanandmakeaprofit.Therewould comeatimehoweverwhenthevalueofapropertyistoomuchandcannotbesold,abubbleiscreated.If toomanypropertiescannotbesoldthensupplyisgreaterthendemandandthepropertywouldcomedown inpriceuntilthedemandisgreaterthenthesupply.Thisisknownasapropertypricecrash,whichiswhat wasseenrecentlyinthecrisisof2008.Thistypeofbubbleisassociatedwithaneconomybasedoninterest based loans as short term profits are required in order to control interest based debt. Short term profit causesissueswiththeenvironmentalso.TherecentgrowththathasbeenhighlightedinBrazilhasbeena major factor in the deforestation of the Amazon. Deforestation within Brazil can be attributed to land clearing for pastureland by commercial and speculative interests, misguided government policies,

inappropriateWorldBankprojects,andcommercialexploitationofforestresources.Allthisislinkedtoshort termprofitstofacilitateinterestbasedloansandtomakegreedymenrich. Ifwelookatsuchtypeofthinkingatanationallevel,itcancausewidespreadmisery.Agovernmentneeds moneytorunitsinstitutionssuchashospitals,schooling,benefits,housing,roads,andinfrastructureandso on.Inordertopayforalltheexpenditure,revenuesneedtobegenerated.Oneformofincomeistaxation. Howevertaxationdoesnotalwaysequalgovernmentexpenditureandsothegovernmentneedsotherforms ofrevenue.Thissecondformofincomeisinmostcasesborrowingmoneyi.e.debt.Thisloanisknownasa governmentbondorGILTwithintheUKorTBillswithintheUSAandareauctionedbythegovernment.So thegovernmentborrowsthismoneyintheformofbondsandusesittopayoffitsexpenditure.Aslongasits economyisgrowingmorethentherepaymentsofthisloanthentheycankeepborrowingandpayingback theloanwiththeproceedsfromtaxation.Withoutgrowth,theseloanscannotbepaidoffmeaningthatthe government goes into arrears. This is known as the fiscal deficit. If the economy of a government is not growing,thenthedeficitgetsbiggeruntilthegovernmentdefaultsandthereforebecomesuncreditworthy. Thisisaproblembecauseifagovernment defaults,gettingloansbecomes difficultasthegovernmentare seen as risky to lend to. This means that the government would have to pay a higher level of interest to create demand for their debt. A good example of this is the USA, which has a fiscal debt of 14.46 trillion dollarsandagrowthratecurrentlyof1.9%.Thisdebtisgrowingevermoreasitpaysgovernmentsthathold itsdebt.

fig2:PiechartshowingwhoAmericaowesmoneyto TheUSAwantstodecreasethisdeficitby4trilliondollar.Withagrowththatisnearnonexistentwherewill thismoneycomefrom?Theansweristaxationandalsofromanincreaseininterestratestoreduceinflation andreductioninpublicspending.Buthowcanagovernmenttaxpeoplewhodon'thavemoneybecausethey don'thaveajob?Andhowcantheyincreaseinterestrateswhenthiswillstiflegrowthandpotentiallycause anotherrecession?

Decreasingpublicexpenditureisdonebyreducingtheamountofmoneygiventothevariousgovernmental departmentssuchasareductiontotheNHSspending,areductionincouncilexpenditureandsoon.Agood exampleofthisisareductionwithintheUKofupto50%onyoungpeopleservices.Thisreductionincludes lessmoneyfordrugeducation,whichhasbeenamajorfactortothereductionofdrugmisuse.Withoutthese typeprogramstheyouthwillpotentiallygobacktothedrugswhichwilleffectthesocietythattheylivein whetheritbethemstealing,muggingorprostitutingtoservetheirdrugaddiction. Growthwillneedtobekickstartedalsosointerestrateswillneedtostaylowtoencourageborrowingand thereforebusinessgrowthandthereforeeconomicgrowth.Lowinterestrateshoweverleadstoinflationand inflationaddsinsulttoinjury.Soinflationincludedwithnojobsandacountrydecreasingspendingonpublic servicesleadstoalifestandarddecrease. Allthishappensbecauseoftheinterestbasedloansrequiredtopayoffpublicexpenditure.Iftheincomeofa countryisnotgreatertheninterestbasedloanrepaymentsthenacountryisintrouble.Astimeprogresses expenditure increases meaning that the loans have to increase as well so growth will have to increase to facilitatethis.Thismeansthatgrowthneedstobeconstant.Butinaworldwhereresourcesarefinitegrowth isinfactunsustainable.Thismeansthatinterestbaseddebteconomiesareboundtofailandcauseissuesto thepeoplethatliveinthem.Soisthereanalternativetothis? AlternativeEconomy Islam's economic system does not allow interest on loans and uses the gold and silver standard as an exchangemethodforservicesandproducts.Theremovalofinterestfromtheeconomicsystemandtaxation onsavingsencouragespeopletokeepmoneyintheeconomyandinvestedinbusinesses.Investmentwithin businessisdoneasapartnershipwherethepartnersshareinprofitandloss.Thenoninterestbasedmoney lentwithinabusinesspartnershipispositivebecause 1.Theneedforshorttermprofitsisnotrequiredasthereisnotabiginterestbasedloantopayoffleadingto sustainablegrowth. 2.Theeconomicbubblesthathavebeencreatedasaresultofshorttermprofitsduetointerestbasedloans willbeaverted.SotheIslamiceconomicsystemwillremovetheeconomicbubbleeffect. 3.Thepartnersbothhaveaninterestinthebusinessbeingsuccessfulsotheywillbothtryandmakeitwork. Taxation within the Islamic economic system is done on wealth rather than income. This means that individualswillhavemoredisposableincome.Thisdisposableincomecanbespentonluxurieswhichitself willencouragegrowthwithintheluxuriesindustry. Financialinstrumentssuchascreditdebtobligations(CDO),futures,optionsandthestockexchangesystem are not permitted. This means that the Islamic economy will not be affected by the dangerous explosive effectsthesefinancialinstruments.

 This is just an aspect of the Islamic economic system and its beauty. This can only be implemented totally within an Islamic caliphate system. Only when this is created will the true might of the Islamic economic systembeshown.