Dan Seiver: World Economy May Recover Next Year

Currently, the US economy has entered recession. So will the great depression like in the 1930s re-appear again in US? Will Keynesianism win and rise again announcing the failure of Liberalism? US finance study professor Dan Seiver provided his thoughts. Dan Seiver thinks that the US will not go into depression. Next year US and the world economy should start to recover. Also, more government control does not simply mean that Keynesianism is coming back. More government control is not to kill the goose and get the golden egg. A well watched market system will still bring good results such as long term growth, creativity and income growth to the economy.

Although whether will and when the US economy enter into recession is announced by the US National Bureau of Economic Research. But professor Dan Seiver thinks that although US has entered recession in 2008 and the recession will last till 2009 with the world economy dragged along into recession, but US economy will not go into depression and in 2009 should see US and the world economy starting to recover.

The Old Economic Theory Needs Re-Thinking
On the financial crisis which arises from the US, professor Dan Seiver thinks that people needs to re-think about the implemented policies and those theories that supported the policies. He points out that a free-market capitalism with supervision down to the lowest is not working anymore. It has been proven again that a financial market without supervision is dangerous. What needs to be replaced is to have a more structured supervision financial market and at the same time increase the transparency of the financial market by not having hidden debts outside the balance sheets. He thinks that there is the need to build a trading center to handle derivative products such as CDS. Professor Dan Seiver says that US and other countries once tend towards capitalism with a more free market but now turn towards more government supervision. But he does not think that this means the coming back of Keynesianism and the failure of capitalism. Instead, it take a hybrid approach towards a market with supervision.

Professor Dan Seiver believes that more government control is not to kill the goose and get the golden egg. A well watched market system will still bring good results such as long term growth, creativity and income growth to the economy. Too much control however will end up in a failed economy like the former Soviet Union.

Professor Dan Seiver points out that almost the whole of the US financial system suffered damage in the crisis and needs repair. The current crisis has brought some changes to the financial system of US and the world such as lesser use of leveraging, more transparency in accounting, financial derivative products will be used to hedge against risks and more stricter control towards financial institutions.

People have accused Greenspan when heading the FEDs injected too much liquidity into the market and caused the housing market bubble. But what the current US government are doing now seems to be going the same old way as Greenspan's. However, professor Dan Seiver does not think that this will cause long term damage to the economy. Greenspan including Bernake policies caused the housing market bubble to go out of control, but what needs to be done now is to provide liquidity in order to help banks in trouble. Professor Dan Seiver thinks that in the future, before the excess liquidity causes inflation, they should be taken back. But the US government's deficit and financial situation are now worst then before. If this continues, it will affect those who are US dollar holders.

On China
China has a high savings rate and foreign reserves with most of them denominated in US dollar. So how does the China government increase the effectiveness of such high savings rate and foreign reserves? Professor Dan Seiver suggests that the China government cannot simply dump all its US dollar dominated assets because doing so will cause the US dollar based assets to depreciate not benefiting anyone. Instead, it could diversify its assets in order to avoid having the US dollar depreciating too much. Also, the China government needs to think about how to use the foreign reserves in its own economy.

Professor Dan Seiver says that China economy will slow down due to its major export market going into recession. The best policy is to increase infrastructure buildup investments to stimulate the China economy including replacement energy and clean energy. Other then that, increase investments on research especially research on environment related will have good returns.