11 April 2009

The ONLY way towards Recovery

After some massive layoff of workers around the world, especially in the manufacturing, banking, automobile sector, the pain of economy seems unstopable. This could continue for weeks or months - hopefully not years.

As a "cure", governments around the world had come out with some brilliant ideas - though effectiveness still waiting - to combat the crisis. From bank bailouts, numerous stimulate programs, lowering interest rate, to share market stabilization/rescue plan. However, does this really works?

Let's take a look at the basic fundamentals of real economy. What I'm saying here is the Demand-Supply. Please do not forget, economy indicator like Gross Domestic Product (GDP) measures the national income and output. Take note: Output.

What we are preventing now is the contraction or decresing GDP. For your information, U.S and EU consumes > 50% of world's GDP growth. Since U.S and EU are facing wealth destruction problems, how are we going to prevent GDP contractions? Instead, we should ask ourself the following questions:

1. Are U.S and EU consuming less? --- YES
2. Are we keeps on producing to maintain the GDP growth, at least? --- YES
3. Then, who is going to consume the products that we are producing?

To answer the questions, or in other words, to offset the declining purchasing power of U.S and EU, we must have a substitute(s) here. The candidate should be having a huge domestic consumption power, enjoying wealth creation, and, still having the growth engine.

Potential candidates: Brazil, Russia, India, China
Best candidate : China

Undoubtedly, China is in the best position to withstand the current crisis, due to its strong fiscal position and healthy banking system. However, the domestic consumption of China still very much lesser if compare to U.S. So, China should find ways to spur their domestic consumption in order to consume outputs produced around the world. Instead of as an exporting country, China should became an importing country. If not, we could not solve the equation: Demand = Supply.

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