THE term “New Deal” represented the economic policy platform of US President Franklin Delano Roosevelt when he successfully ran for office in 1932 during the period of Great Depression in the US. The “New Deal” was essentially implemented as government policy measures to create employment through government expenditures and the establishment of institutions to stabilize the economy. It dealt with the support and relief to the many facets of the economy including industry, banking and finance, labor and agriculture. Some of the institutions that arose out of the “New Deal” platform include the Federal Relief Administration, the Social Security Act, The Fair Labor Standards Act, the National Housing Authority, the Securities and Exchange Commission, the Federal Deposit Insurance Corp. and the Tennessee Valley Authority.

The Tennessee Valley Authority is a good example of spending on infrastructure to pump prime the economy because the dams and power generating capacity provided irrigation to farmers and power to industry. Another highlight of the New Deal is how farmers were actually paid to limit or not to produce crops in order to support the prices of agricultural products.

The constraint of deficit spending

The “New Deal” Economic Platform necessarily warranted US government spending more than its revenues resulting in budgetary deficits that were financed by borrowings. The New Deal actually introduced the era of spending to the extent of incurring budgetary deficits as an economic policy tool to counteract recession and to foster economic growth. However, there is a dividing line between deficit spending as an economic policy tool and “spending beyond a country’s means” because of the political pressure from the voting population which leads to chronic budgetary deficits and creates sovereign debt servicing problems.

Unfortunately, the latter is what has occurred in the case of Greece and to a lesser extent Portugal and Ireland. In fact, budgetary deficit is a problem in many industrialized countries including the United States, Italy and Spain. The cumulative deficit incurred by countries eventually leads to concerns on their borrowings costs and eventually even to their capacity to service their borrowings. This is now the cause of the crisis in Europe sparked by the Greek sovereign debt service problem.

A ‘New Deal’ from the Forex surplus economies

Countries that are enjoying big surpluses in their balance of payments accounts are needed to invest in in the equities and debt of the European Union (EU) member-countries and their multilateral institutions. Forex surplus countries include more than the so called BRICKS (Brazil, Russia, India, China, South Africa) and the Middle East Oil Exporting Countries. Other countries including many Asean member-countries have been accumulating big foreign-currency reserves through net inflows in various entries in their balance of payments accounts.

To a significant extent, this accumulation of their foreign currency reserves was enabled by the “living beyond their means” of the countries of Europe suffering from chronic budgetary deficits. It is time now for the surplus countries to consider recycling some of the surplus back into Europe and even the United States. The investments, however, should be invested only based on financial considerations. The surplus countries actually do have the incentive to invest outside their respective borders because excessive foreign currency inflows cause inflationary pressures in the domestic economy.

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* Written by PDIC President Valentin A. Araneta for Free Enterprise and published in the Businessmirror on September 30, 2011. Mr. Araneta writes for the Free Enterprise column as a member and officer of the Financial Executives of the Philippines (Finex). Requests for his past articles may be coursed through ccd@pdic.gov.ph.