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Q&A: What is the current status of the global economic crisis?

بسم الله الرحمن الرحيم

Question and Answer :
The Global Economic Crisis

Question: Where does the global economic crisis currently stand, which began in the USA and engulfed Europe and then the world?


To shed light on this subject, we will mention the following:

1. The collapse of the real estate market in the US spread across the world resulting in the collapse of many banks, which lead to unprecedented government intervention to halt global economic collapse. The result however, was what is now called the Great Recession, the worst since the Great Depression in 1929. The global financial crisis brought to light the fact that the boom of the preceding decade was in reality driven by debt; and after five years the world’s largest economies continue in their failure to resolve this.

2. United action was attempted by the world’s largest economies in order to coordinate a resolution to the crisis. This was argued on the basis that the global economy is interlinked due to the effects of globalisation. Thus, a collective and global approach would be in the world’s best interests. This unified approach did not last long as economic nationalism – where each country fights for its own survival spread, where each nation expected other nations to fund a global reserve. Various meetings and conferences of the G20 agreed different types of bailout funds to help grieved economies, how this was to be funded led to most of the bailouts to never move forward from the paper they were written on. This was due to the concept of economic nationalism of the super-powers. “The Economist” highlighted in 2010, “But the re-emergence of a spectre from the darkest period of modern history requires a different response, even serious. Economic nationalism that strives to save jobs and capital at home turned the economic crisis into a political one and threatened the world with depression. If it is not buried again forthwith, the consequences will be dire.”

3. Stark exchanges between the Germans and the Americans have taken place on the best route for the future of the global economy. Angela Merkel, along with the majority of the other countries suggested that the unsustainable growth model of the US, fuelled by the cheap credit and debit/loans, from the governments’ perspective using funds as stimulus for growth is obsolete. The European approach has manifested in the need to control the national deficit through austerity measures. Austerity measures are typically taken if there is a threat that a government cannot honour its debt liabilities. This is a very specific objective and different to economic growth. With the threat to the credit ratings of most of the world’s largest economies, many have resorted to austerity i.e. reducing the government deficit to please the financial markets. The problem with the austerity approach is that such a policy is not actually geared towards growth, which would create jobs and income for society, and accordingly lead to overall economic growth, but towards cutting the government debt.

4. The US approach of seeking to stimulate the growth has fared no better. This is because stimulus requires increasing government spending using funds borrowed primarily from abroad in the case of the US from countries such as China, or funds simply created by central banks literally by entering digits into a computer. Any stimulus was always a high-octane boost and a temporary measure. They are designed to kick-start stalled economies, not to fuel sustained economic growth. The growth that has been achieved is really the inflated results of stimulus measures achieving their intended effect to be temporary. Hence stimulus just props up government and service industry jobs which die off when the stimulus ends, leaving an economy in much the state it was when the stimulus started.

5. Western governments also resorted to Quantitative Easing (QE), a new development which was an electronic method of printing money. This unconventional policy was used by central banks (governments) to stimulate the national economy when conventional policy had failed. Accordingly, central banks started to implement the so-called Quantitative Easing (QE) through buying financial assets, such as bonds in order to inject a pre-determined quantity of money into the economy. This is achieved by purchasing financial assets from banks with new electronically created money. This action increased the reserves of banks. However, the global economy at the start of 2013 is not better than it was at the start of 2012. Rather the great recession has eaten away some of the States that tried to avoid falling into the recession. Reports have emerged as soon as 2013 began about the possibility of Britain going into a triple dip recession, due to its debt burden going into the trillions Thus, the QE approach ended up in reality with no effective result. After 5 years of economic crisis, the global economy is still reeling and with unemployment constantly increasing social chaos has already begun in Europe. All attempts to solve the crisis have not dealt with debt fuelled growth, whilst debt caused the problem more debt was thrown at it, Western governments attempted to treat the patient with the disease itself

6. Finally, there are three possibilities that may eventually lead to economic recovery; we mention them from the least to the best:

First: The first is the double-dip recession turns into a depression, prices hit rock bottom and this leads to property, loans and commodity prices being seen as cheap and this kick starts economic growth as such assets are then purchased. This is a weak possibility because the Capitalist economy is primarily based on loans and interest (riba) that results from them. The decline of loans prices (riba) do not live long as long as capitalist economy continues.

Second: The second possibility is China bails out the West. China’s vast trade and financial surpluses are causally linked to the unsustainably large debts of the US, UK and a swathe of the Eurozone. It would be in their interests to bail out the West. This would also mean the Western world will have to accept Chinese global leadership. Here the issue is not whether the West will accept such a bailout but rather will China pursue such a policy.

Third: The Khilafah State shines on the world, and the Islamic economic system starts to be implemented. Then, not only will the Muslims benefit, but rather all the world that will deal with it. This would make such global crises disappear or bring it under control.

02 Rabi’ I 1434