Now that Milton Friedman is officially dead again (for a couple of decades), are you a Keynesian or a Marxist?
Markets do fail. The system is not sustainable without government intervention, and is depended on growth. Greeks are out of the markets. Portuguese, Italians and Spanish are close too. Now you know it for sure. Even though that you will forget it.
A market driven economy (we have no alternatives) is not sustainable without intervention, i.e. without changing levels of government spending and taxation (fiscal policy) in order to drive the economy to its productive potential. Production is always depended on productivity and productivity is based mainly on accumulated capital, on skilled labour force and on technologies. Effective use of the above factors, for a given social, economic and financial infrastructure, leads EACH economy to its trend path. Any deviations from these “smooth” increases in output, from year to year, are anomalies that all of us are partly responsible for.
For political reasons we have historically tried to integrate the non-integratable E.U.. Once Germans decided to act as a normal nation (after 65 years), with economic criteria and by being primarily interested in their own welfare, a second euro-global crisis started.
In an "ideal" world, prices and wages would be fully flexible and the system would adjust to equilibrium automatically (i.e. full employment output). So easy. Wishful thinking. Prices and wages are sticky (downwards) and there are plenty of reasons for being that way. The main one is that redistribution between economic agents (all of us) would not be "fair", at least in the short run. In the long run of course we are all dead.
Markets (i.e. all of us) exaggerate on both sides. We over invest on recovery and under invest on recessions. Thus, as long as the private sector does not invest, given the phase of the business cycle, governments must do so.
Budget deficits have to increase enormously, accumulating further public debt, in their effort to create a “sustainable” growth. Once the government has made it, once the system grows –in production terms always- by its own (i.e. through private investment), government spending must be decreased and taxation should be increased. The countries that act like it, they face no default issues and the default risk is minimized (subject to growth always).
Countries that had been running budget deficits for years are in trouble. Some years ago by doing this they had been increasing the public debt in exchange of inflation. Markets were not worried back then, as long as the global GDP had been growing. But reality comes back and makes this group of countries not to be able to follow an expansionary fiscal policy to boost the economy now that they have to, stating that they will be the last to get out from the crisis. A situation like that increases interest rates and without any political support and limited global growth it is in the nature of things eventually to go out of hand.
Markets are always the first to know. And by adding the fact that the 2008 financial crisis was resolved mainly with public money, we do conclude easily that the first financial crisis was transferred (or trasformed)eventually to the current euro debt crisis.
Olivier Blanchard, the chief economist at the International Monetary Fund (IMF), has announced his intention to support a changing inflationary target. He supports that inflation target of Central Banks must increase to 4% (from 2%). Central banks must coordinate in doing so in order not to put pressure on exchange rates and add an extra source of volatility to the system.
The new proposed inflationary target is identical with saying: "The crisis in not a euro debt crisis, but a global debt crisis". And why this is so? An increased target simply means two things. 1) Central banks of western world need to pursue a further expansionary monetary policy (in simple words: print some extra billions) and 2) redistribute income from lenders to borrowers (to heavily debted countries) given that unexpected inflation does so. Thus, the crisis is a western world global crisis.
The remaining question is simple:
Now that Milton Friedman is officially dead for a couple of decades, are you a Keynesian or a Marxist? The answer is: A neoclassical one! If wages and prices were not sticky downwards, and if western world had not accumulated such a public debt things would be smoother. At lower production levels of course or not?
Of course countries like Germany has no reason ever to eliminate public debt as long as their real interest rates are negative (i.e. on average nominal rates are lower than their inflation). Thus, they are better off by borrowing. Confused? Read it again or wait and something very close to it will be repeated at least two or three times in your lifetime. It is in the nature of "things".
Jose Garcia y Mas, The Ghost is Back Again! / Die Auferstehung…,Oil on canvas, 135 x 100 cm, 2008.
http://www.artbreak.com/work/show/115170-the-ghost-is-back-again-die-auferstehung-2008-jos-garca-y-ms
