The Indian economy in the context of the implementation of the Joe Biden Strategy to address the economic crisis

Table of contents

  1. Root causes of the crisis. The fading of the liberal economic model
  2. Modelling the results of the plans

Data source

1. Root causes of the crisis. The fading of the liberal economic model

By the 1970s, the natural development of the Bretton Woods model, which was laid down in 1944, had been depleted. Lending through relevant institutions (IMF and the World Bank), GATT compliance (later WTO) and other systemic institutions could no longer support growth in the US-administered part of the world economy. As a result, on August 15, 1971, the United States was forced to abandon the pegging of the dollar to gold, and the crisis of the 1970s began. It is not easy to assess this crisis, as statistical techniques have changed several times since then. Analysis of the Mikhail Khazin Foundation for Economic Research shows that the 1970s were a period of constant economic recession in the “Western” (that is, subject to the Bretton Woods model) system of division of labour, and at this time the third Decline in Capital Efficiency developed (in terms of the elaborated classification crisis processes of capitalism).

Based on the theory we formulated (see M. Khazin “Crisis of capital effectiveness”, 2020), in this situation there were two possible issues: either to extend Western system of division of labour, or to start ”extra-economic” (that is, by artificial, emission resources) stimulation of demand. Of these two variants, the second was chosen, historically known as “Reaganomics” (which, however, was prepared under President Carter of the United States) because in the 1970s the Soviet system of division of labor on the basis of the resources of the USSR was unshakeable.

The essence of the “Reaganomics” model was to stimulate private demand by refinancing household debt against ever-declining credit rates. In 1980, the US Federal Reserve’s discount rate was 18%, but by 2008 it had dropped to zero. Probably, the crisis would have happened earlier, but in the late 1980s the Soviet system of division of labor collapsed, giving the western (and since 1991 – world) economy about 10 years of respite (the so-called “Golden Age” of Clinton), due to the sharp increase in the number of consumers.

The 2008 crisis has shown that this resource has also dried up. For some time, the US Federal Reserve has been printing money, supplying the budget with it and filling gaps in the banking system, and this resource is still in use today, but it is close to exhaustion. You can read more about the situation in the above-mentioned book by M. Khazin, but this report examines the current situation in the global economy through the Indian economy glasses.

Anyway, the current situation does not seem to be favorable, the economic recession cannot be stopped, and the liberal economic model, structured according to the logic of “Reaganomics”, has already for more than 10 years been signalling its inability to ensure economic growth. The economic crisis continues and all the conditions are in place for it to enter a phase of extreme escalation. From a historical point of view, we are now somewhere between October 1929 and the spring of 1930, it is likely that an acute crisis has already begun. If demand is cut off financially, this transition (deflationary shock) will begin immediately, and the efficiency of the economy’s emissions stimulus is declining, necessitating a steady increase in the capacity of the printing press.

During the 2020-2021 pandemic, extensive quarantine measures were carried out in various countries. Large segments of the population did not work or worked remotely, causing a significant decline in production. In fact, the downturn masks a true crisis that should have begun later. However, the COVID-19 factor, which did not fit into the standard economic order, catalyzed the development of expected events. Quarantine actions simply triggered a structural crisis in the world economy, similar to the crisis of 1930-32, which led to the Great Depression. For these reasons, as we warned earlier, a rapid economic recovery cannot be expected.

Since liberal economic theory does not describe structural crises, the Bretton Woods institutions and associated policies – and there are no others in the world today, with the exception of Russia and China – have tried to create a sense of an inevitable return to the performance of the beginning of the year. Expectations of an early end to the recession and recovery failed – growth virtually ceased by the end of summer 2020. In the current situation, the world economy is returning to recession without recovering from previous shocks. This is fully consistent with our ideas, and the main advice that we can give our readers is to assume that there will be no economic growth in the coming years.

At the same time, Russian President V. Putin, in his speech at the Davos Forum in early 2021, explicitly stated that the mechanism for the development of modern capitalism had ceased to function.

The US real sector and the global financial elite, their position and interests during the crisis

The Bretton Woods financial and economic model has significantly changed the place and status of the US in the global economic system. While in 1944 the US accounted for at least 50% of world GDP, today the US share of production is less than 20%. At the same time, with a large number of countries, the US has serious trade deficits, while the vast majority of calculations are made in United States dollars. If the latter is the US-favorable consequence of this model, the first is the cost to the US of maintaining it.

Until 2008, the trade deficit was filled by a balance-of-payments surplus, because most of the world’s investment was in United States dollars, so the returns on those investments were automatically returned to the dollar system. But since 2008, total returns on investments in the world economy (more precisely, its real sector) have become negative, a serious crisis has started (the fourth Decline in Capital Efficiency according to the classification “Reminiscences of the future”). Until 2014, this situation was offset by net emissions, but then the global economic system’s liquidity problems began to soar.

In fact, in order to save the global dollar system, the share of American production in the world must be further reduced from its current 17-18% to a conditional 5%. But in this case, if something should happen to the global dollar system, America will not be able to feed its people, and there will be no money to import. That’s a fact that the American elite actually understands. It was for this reason that already since November 2014 (based on the results of the midterm elections on November 4 2020), it became clear that a part of the American elite, wishing to abandon the Bretton Woods system and regain the position of the American economy (“Make America Great Again”), has regained the right to vote.

At the same time, in the process of implementing the Reaganomics program (which is one of the varieties of the Bretton Woods model) in the United States, as well as in other countries, the share of the financial sector has increased enormously, primarily in terms of redistribution of total profits to its own benefit.

All of this was due to the gradual decline of the real sector, particularly in the United States. This is understandable, because emissions are the main source of profit. But the scale of what is happening is impressive. If the real sector’s share of GDP had remained at the level of the early 1980s, its volume would have been markedly higher (fig. 1).

Fig. 1

Until recently, the system in the US was that the issuing money would be given to the banks, expecting them to invest in the real sector, but the banks did not do so, realizing that such investments are unprofitable. They invest in financial speculation. There is currently no solution to get banks to invest in the real sector. It is possible to create State institutions for this purpose, but, firstly, these institutions have yet to be organized; secondly, there is always a risk of corruption.

For this reason, during the quarantine period, the household’s money was paid directly from the budget and it is not yet possible to find an easy way out. The number of job openings in the United States has reached a level that is much higher than the historical average, and labor statistics are contradictory.

Thus, the model is no longer working, so you can print any amount of money, and the economy will still fall. However, financial institutions will grow, especially given that it is the financial sector that is used to sterilize excess money (emissions to sustain private demand have not been cancelled since 1981, fig. 2 and fig. 3).

Fig. 2
Fig. 3

Now the Fed is printing money because the financial system is in short supply of dollars. As a result, despite the continuing decline in production, the Dow Jones index rose to the level of early 2020. Reaching such values is the threshold of a crisis.

In this situation, two basic economic scenarios implicitly worded as early as the end of 2014 (for example, on 5 March 2014, at the Dartmouth Conference in Dayton, Ohio, by M. Khazin) took on a clear form. The first scenario is in line with the interests of the financial sector and is supported by the Democratic Party. Its rationale is that the US is saving the world’s dollar system at any cost, in fact, sacrificing the real sector of their economy. Second, they save the real sector of the American economy at the cost of destroying the Global Dollar System. We’ll call it the first “Biden Plan,” and the second “Trump Plan,” which is currently postponed for at least a few years due to Biden’s victory in the US presidential election.

Note that the colossal injection of liquidity carried out in the spring-summer of this year, and partly still ongoing, is carried out precisely within the framework of the “Trump plan.” This is because most of the securities that the Fed buys from the market are real-sector, not financial-sector securities.

At the same time, in recent months, the Biden administration has increasingly shifted to the direction of the “Trump plan,” which is related to the huge growth of industrial (at least 25% at the end of 2021) and consumer inflation.

2. Modelling the results of the plans

The performance projections presented here are developed on special computer models. They model the economy of a state, which, like any other economy, is a complex system of intercommunicating objects that is constantly changing over time. Modeling is carried out taking into account the external economic environment of a particular state.

Statistical models based on past statistics or on random sampling. The problem, however, is that any extrapolation of statistical data, as well as the use of random values, always lead to significant errors. This limits the applicability of such methods for forecasting socio-economic processes and preparing management decisions. The use of past statistics for economic management is essentially the same as driving in the rear-view mirror instead of looking forward. In the same way it is not allowed to use traditional sets of scripts: “pessimistic”, “optimistic” and “most likely”. Scenarios can be any number, it depends on the chosen way of management.

For example, the International Monetary Fund publishes twice a year survey “World Economic Outlook”, as well as the most general macroeconomic indicators for individual countries: annual changes in GDP, inflation rates, etc. over several years (fig. 4).

Fig. 4

It is clear that such a long-time horizon does not allow for as smooth a performance as the IMF forecast. This indicates that the IMF projections are based on extrapolations of past statistics, regression equations and expert estimates. In particular, the IMF surveys refer to the impact of oil prices changes on the dynamics of GDP of the countries of the world, while the reverse, no less noticeable effect of the countries’ economies on oil prices is also taking place, but this fact is not considered. In addition, very few aggregates are published, indicating a lack of detail in the object of modelling.

Our deterministic models are based on algorithms that reflect relationships within the real economy. At the same time, current management rules may not only stimulate economic development but also hinder it. Therefore, one of the main objectives of the modelling is to test the economic mechanism for adequacy, as well as to identify time intervals at which the economic mechanism does not lead to crises.

In modelling practice, linear methods (linear programming, game theory, factor analysis, optimization techniques, etc.) are often used. However, the more detailed the models, the less the linear methods show the real picture. In real life, linear associations are almost non-existent. If the model contains constant parameters, such models are always destroyed at long intervals. Therefore, the constants in the model need to be replaced by variables.

We use a non-linear modelling method. It makes it possible to take into account, for example, changing constraints, as well as, in general, any changes in social, production and other structures that constantly occur in the object of the modelling. Some internal connections are disappearing, others are emerging, so we can only talk about the specific structure of the model at a certain point in time. Then the structure of the model will change, meaning that another model will appear. Structural changes depend not only on the original description of the object, but also to a large extent on the displayed economic mechanism.

The projection results for India for 2021-2023, corresponding to the implementation of the Biden strategy, were derived from models with the required properties (dynamic, deterministic and non-linear models).

The forecast took into account the response to the COVID-19 pandemic, where many workers stayed at home, working remotely or not at all. These measures were taken at the end of Q1 2021, and then quarantine restrictions gradually eased. As a result, workers were returning to production step by step and output gradually recovered, but against a low base level. The forecast showed the following result.

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