»The Daily Reckoning by Bill Borner

A Political Crisis
26 NOVEMBER 2011

- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
Another week has gone by in which markets have fallen, risk aversion has increased, and the financial press is full of information about the Eurozone debt crisis. In the last few months, not a week has gone by in which the Eurozone debt crisis has not made headlines or had an impact on the financial markets. Most of the news has been about what Germany will do, what France will do, what the Greek or Italian government will do, and what the ECB will do.

In America, the debt crisis continues. In August, it started with a near default due to the Republicans and Democrats being unable to reach a comprehensive deal on cutting the deficit and raising the debt ceiling. More recently, a super-committee designed to find savings in the budget failed due to lack of agreement. There's no doubt we can expect further political wrangling leading to more debt problems.

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In India, we have corruption, and lots of it. Politicians use unnecessary subsidies to buy votes. The 2G spectrum scandal cost the state 1.76 lakh crore rupees in lost revenue. The Congress led government is unable to put through many economic reforms due to its weakness in government. The list of corruption scandals is pretty long.

In general, when we are confronted with an economic problem, we try and think of an economic solution. For example, with the Eurozone debt crisis, the economic solution is simple. Indebted countries need to reduce their deficits in a sustainable manner such that they don't collapse, and lenders need to take losses on their debt holdings.

With the debt crisis in America, the solution is even simpler. They need to reduce their debts by reducing spending and raising taxes, and agree between themselves to not default or shut the government down. In the case of corruption in India, it is very simple what needs to be done. Elected officials and others need to follow the rules and be accountable for their actions.

Thus, the solutions to many of the problems facing countries and economies today are simple and straightforward. The biggest difficulty is implementation. Economic problems turn into a crisis due to lack of implementation of correct policies. We may know what needs to be done, but getting it done is a huge challenge.

Of course, implementation is not easy, especially given so many players involved and their competing interest. But that's the job of politicians. Their full time job is to sort these problems out, come to a compromise when needed, and act in the best interests of the country they represent. As always, this is easier said than done.

The crisis we face in the global economy today is a political crisis and not an economic one. The solution to the Eurozone debt crisis will be countries agreeing on a suitable path of action. The solution to the American debt crisis will be the two political parties agreeing to cooperate. And finally, the solution to the corruption in India must come from lawmakers themselves.

The fact that the global is political rather than economic is both a blessing and a curse. On the one hand, the solutions are simple and all that is needed is for people to agree. On the other hand, getting people to agree to collectively do the right thing is an extremely difficult task, one with the potential to have dire consequences.

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