Is Another World Wide Depression Knocking our Door?

INTRUDUCTION: The present symptoms in the world market make us recall the beginning of the great depression of early thirties wherein markets were full of the gluts of commodities but customers were not available to purchase the commodities despite the prices were going down. The total demand in markets had lagged behind the total supply. It was Lord Keynes to point out that the lack of effective demand had been the sole factor causing initiation of that great depression. The lack of effective demand was taken as resulted on account of investment lagging behind saving. The investment was lagging behind saving because the inactive portion of total saving was not being compensated through autonomous investment based on deficit financing. The problem was solved by adopting deficit financing and pump priming as suggested by Keynes.

THE PRESENT PROBLEM: The present situation in the world market also points towards the lack of effective demand. But, this time the reason is not being taken as the lack of investment or, in other words, the uncompensated inactive portion of saving. The budget deficits in all the developing and the developed economies are not only being enormously increased but are also regarded as rapidly outpacing the inactive saving. All the same, the producers are not finding adequate effective demand and threatening entry of another great depression is being suspected in the world. There are three factors most responsible for making the deficit financing ineffective in controlling the present depressive trend in the world market, as discussed below.

(I) In latter seventies a group of prudent economists had warned the developing world that inequalities of income distribution were going on increasing with the advancement on development path. They had opined that this would create a strong barrier on the path of economic development and economic growth. Their warning was neglected on account of two reasons. Firstly, the policy makers had a wrong notion in their mind that the slowly rising inequalities would create a sound group of rich investors to feed the future development based on heavy investment plans. Secondly, the policy makers were either under the influence of the rich group that was grabbing the fruits from distribution inequalities, or some of the policy makers belonged to the fruit grabbing rich group. Therefore, some from the high income group started to rapidly become richer but their number went on decreasing side by side. The growth rate of their income remained considerably higher than the growth rate if national income on account of rising inequality of income distribution. The remaining of the riches, lagging behind in the fast race of rapidly becoming richer, were thereby slang down to the following middle income group to add to the number of persons in middle income group. On the other hand, the poverty alleviation programmes helped a considerable number of persons from the low income group shift to middle income group. Thus the mass of middle income group went on rapidly increasing in number and thereby the middle income group became a dominant consumer group. The middle income group has become so wide and so dominant that today the word ‘market’ means the market of consumption items pertaining to the consumption of middle income group, unless it is otherwise specified. The rich minority heavily invested in the production of commodities pertaining to the consumption of the vast middle income group. But, the disposable income of this group increased with a lower rate than the growth rate of the production of their consumption items because of the rising inequality of income distribution and a high degree competition among producers to squeeze the purchasing power of this market dominating group. That is why we are coming across slackness especially in the market of the consumers’ goods pertaining to the consumption of middle income group.

(II) In the days of the thirties when the world was suffering from great depression, great many portion of total inactive saving was completely inactive and a small portion was used in speculation that was but limited mostly to commodity speculation only. As per the ‘Liquidity Preference Theory’ given by Keynes, the liquidity engaged in speculation was responsible for high interest rate. Therefore, a check on speculation was suggested so that, firstly, the prevailing interest rate may go down fast to become lower than the ‘Marginal Efficiency of Capital’ so as to induce the productive (i.e. induced) investment and, secondly, the liquidity (purchasing power) used fore speculation may be, to whatever extent, diverted to consumption expenditure so as to add to the falling short effective demand in the commodity market. If we look at the present scenario, only a small portion of total inactive saving is completely inactive and a multiple times of this, is the deficit financing being practiced almost throughout the world. Moreover, the amount of deficit financing may also be exceeding the total sum of the completely inactive saving and the saving used for commodity speculation. But, the great many portion of the inactive saving today being stated as converted into active saving is being used for non-commodity speculation like shares and debentures. The sum total of the completely inactive saving, the saving utilized in commodity speculation and the saving utilized in non-commodity speculation makes the total bulk of inactive saving. I don’t think that the total deficit finance, whatever the big bulk, has so far out paced the above stated total bulk of inactive saving throughout the world. Thus, the present situation, in this way, is not much more different from that resulting in the great depression of early thirties. The actual inactive saving is not being compensated by deficit financing whereby a depressive pressure is liable to emerge similarly as during the early thirties.

(III) The commercial banks and many of other financial institutions are always interested in financing trade and commerce rather than consumers because of the obvious fact that consumer loans are not only lesser safe but the interest rate also is generally lower on consumer loans, especially in developing countries. Therefore, the actual financing to trade and commerce remained more than its desirable level and consumer credit remained below its desirable level for considerably a long period in the past. This caused a rapid extension of markets going on whereby the middle man profit went on increasing to make the commodities costlier without raising the producer’s profit. The increasing prices ultimately caused a decreasing total demand in the markets. The producers are having no way but to allure customers by launching various sale enhancement schemes. These schemes are though being proved fruitful up to some extent, so far, but on the cost of decreasing profit rate. Today’s producer has much concern with the rate of profit (marginal efficiency of capital in the words of Keynes) instead of the total profit. Therefore, if the state of affairs remains persisting, the producers will have to cut production in the near future. This will become a green signal for the entrance of a real depression in the world market and this will harm the world economy not less than the great depression of early thirties.

SUGGESTION: To solve the problem of the endangering slackness so as to block the way of threatening entrance of suspected world wide depression, first of all the big investors should be made ineffective in the priority fixation and plan formulation. Thereafter, the growth of their properties should be curbed. The government investment (autonomous investment) should be directed from creating extra overheads (to attract new induced-investment) towards creation of external economies for the existing producers of general consumption goods. The expenditure of middle income group on education, insurance, medical treatment, telecommunication, entertainment etc. engulfs a considerable part of their income whereby their expenditure on physical goods of consumption falls short, especially, in the developing economies. Therefore, the government should make its welfare expenditure to concentrate on providing these services to the middle income group at a considerably reduced cost. The gulf between the incomes of the general mass and the rich minority should be immediately alleviated by taking strong measures to rapidly lessen the inequalities of income distribution. The consumer loans should be made quite liberal and financing to trade and commerce should be discouraged. The governments should take the drastic and acrid step to strictly curb or even suspend the speculative activities, at least for time being, until the depressive threat vanishes. The instruments of the monetary policy and the fiscal policy should be used in a way that share of consumption expenditure of the rich minority and share of income of the general mass may increase rapidly. These efforts should go on being honestly made until the purchasing power in the hands of general mass starts being commensurate to the supply of general consumption goods in the market.

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