lundi 27 février 2012
vendredi 12 août 2011
lundi 5 juillet 2010
Objective: Economic Growth
By G. J. Weill 05.07.2010
Austerity: how to kill economic growth.
Those days the new fashion policy in Europe is Austerity. England, France and Germany launched the new summer style: reduce spending and increase taxes in order to reduce deficits.
The goal is to persuade investors that there is no sustainability problem in Europe. The main objective is to show European lenders that the European members are able to pay back their debts. This noble ambition could be a great idea in a growing economic context in order to fight inflation and to guarantee a stable economy. But some politicians of the European countries forgot that Europe is only starting to recover from the Crisis.
To implement an austerity economic policy in Europe at this moment is like denying water to firemen. It is imprudent as it is counterproductive.
The European council fought so hard to get the 500-bilion-euro-crisis fund. This was more than enough. There is no sustainability problem in Europe. The members of the EU still borrow money at a very low cost on the markets. So why do European leaders have to launch such a counterproductive economic policy?
The advocates of such policy are telling everyone that it is a necessary move to reestablish confidence in the market. In order to do so governments cut the expenses and want to raise taxes. Georges Soros thinks that this kind of policy could kill the European currency and even the “European project”[1]. Obviously his statement is made in order to increase the European public awareness of the dangerous aspect of austerity policies.
The crisis is not over. The unemployment rate in the developed countries[2] is still very high (8.6%[3]). and the GDP rate was negative in Europe in 2009 (-4.7%[4]) . The most amazing thing is that inflation is very low in Europe (1%) so why should the European leaders implement such policy?
The IS-LM model showed that thanks to a strong budgetary policy (low tax and high public expenses) the economy is strengthened. Instead of cutting the public budgets, Europe should spend more in order to facilitate the economic growth and development. Instead of doing so, the governments are cutting expenses and try to implement an austerity fiscal policy. The second part of the model is about the monetary policy. The interest rate has to be low in order to give the opportunity for entrepreneurs to launch new projects. Actually the interest rates in Europe (and in the rest of the world) are low.
Unclear policy
The main problem with the EU economic policy is its lack of transparency. The monetary policy is administered by the European Central Bank. The main goal of Mr. Trichet, the Chairman, is to prevent inflationary pressure. His prerogatives are not purely for economic growth but rather the prevention of inflation. The budgetary policy is run by each European government and focuses only on the economic growth. This dissociation between the two main tools of the economic policy (i.e. monetary policy and economic policy) leads to a lack of effectiveness. Instead of working together to implement efficient economic policies the ECB and the European governments don’t team up to achieve the same goals.
The main goal has to be Economic Growth. Implementing an austerity policy , will lead to what happened in the 1990’s in Japan. It is what the economists called “the lost decade”. After a strong economic growth, Japan experienced an economic crisis in the beginning of the 1990’s.The government s reaction was to implement an austerity economic policy (increase of the interest rates).The debt burden was too heavy on the companies and the crisis worsened.
Instead of austerity and being afraid of hypothetical inflation, European government s and the ECB should concentrate their efforts to implement efficient economic policies to decrease unemployment and increase economic growth.
samedi 26 juin 2010
The US Debt is not that big
According the US debt clock, the US National debt is about $ 13 trillion. When you read certain popular newspapers you can be scared by this huge amount of money. I don’t know why (actually I do), but certain journalists or TV shows like to scare the American people. They say that America is almost bankrupt; they claim that the debt per American citizen is more than $42.000. But they forget to say that the United States of America produces for more than 14 trillion dollar every year, that the GDP per worker is more than $100.000.
And you know what; all these numbers don’t mean anything. Because each time you bring a new figure you have people to bring other ones and this game never ends.
Actually the amount of money America borrowed is not that important. It sounds weird but the fact is that people are more than happy to lend money to the most powerful nation of the world. China is still very happy to lend money to the USA. The American bonds are the least risky, so banks, big companies, countries and individuals are glad that America needs money. Clearly, finding money is not an issue for the USA. People actually need the American bonds to make not risky and guaranteed investments (and even more in a crisis situation like today).
So the main question is not how much the USA borrow but what they do with this money. The biggest issue is to know where the money goes. Are the investments efficient or just a waste of money? If the US government borrow money to make new infrastructures, help industry, support agriculture, create innovation, these interventions can be useful for the economy. It is a basic (Keynesian) Economic Policy that can improve the current economic situation. But if the money is wasted in non profitable projects, the USA could suffer from these bad investments. Borrowed and well invested money can help to create jobs for individuals and wealth for the American nation. During the New Deal, F.D.R. implemented such economic policies and managed to save America from the Great Depression.
The American debt started to be a big concern in America after the current administration wanted to implement the new Health Care program. The main problem was the tremendous price of the program and people worried about how the US will pay. Health care reform will cost about $1 trillion over the next 10 years[1]. Just to compare the total cost of the Afghanistan and Iraq wars is about $1 trillion since 2001. I do not judge the legitimacy or the necessity of these wars but I personally think that the Health Care reform is a great investment in the best asset of the Unites States: The American People.
We should be more focus on what the USA do with the money they borrow that how much debts they issue.
Economics is not a religion
When you read financial articles from American newspapers you often surprise how bad is the intervention of the government in the Economy. When you read financial articles from Europe you are amazed how people complain that the state does not do enough for them.
In fact these opinions come from different cultures and are a consequence of the historic development of the Economy. Nevertheless, today these views became a new kind of beliefs. People don’t think that the governmental intervention is bad, they believe so. They can’t explain why but they hate when the government take part in the Economic System. On the contrary, in Europe people expect the states to do their best to make the Economy growing.
Everyone seems to forget that Economics is not about beliefs! The main goal of Economic policies is to make the Economy working. Economics is not a religion. If I am liberal and a solution offered by the free market is efficient I should obviously accept it and vice versa.
In order to fight the new obscurantist Economists who base their thoughts on given ideology I will try to describe good and bad aspects of different common beliefs.
jeudi 13 mai 2010
Don’t break the thermometer just cure the sick damn guy!
Gabriel J. Weill
12.05.10
Some people lost everything in the Global Meltdown. Clearly the political power understood how weak it is next to such financial hurricane. Obviously all the world governments tried to minimize the consequences of the economic crisis. Western countries did their best to implement economic policies to reduce the economic disaster.
When the politicians saw how big the crisis was they tried to understand what did not work and what needed to be fixed. But like in every catastrophe, even politicians understand how weak they are. The politicians need to find responsible body to endorse the responsibility of the “misfortune”. Finding responsible bodies is not part of a recovery process. Even if some people need to be punished the priority is to fix the system.
The economic crisis is born of speculation madness. Speculators initiated irresponsible processes in order to make huge profits by disconnecting transactions from real value of the assets. They played with very risky assets with the only goal to make bigger and bigger profits. Besides speculators politicians want to blame rating agencies.
Rating agencies assess the financial strength of companies and governmental entities particularly their ability to meet payments on their bonds and other debt. Today the crisis is very different compared to what it was in 2007. Today, the question is not about toxic assets or junk bonds but about the sustainability of sovereign debts of countries. The Rating Agencies do not only rate companies and assets, but also governmental debts. Here is the problem, when politicians want to blame these agencies for having launched the economic crisis they serve as judge, jury and executioner. They want to legislate against the body who is actually judging the government’s ability to pay back its debts. Politicians blame the rating agencies for not warning investors on time. What they claim may be true but this still doesn’t gives the governments the permission to say anything against the rating agencies.
A rating agency is a thermometer which describes the symptoms of a sick economy. By accusing the rating agencies, the politicians just want to satisfy an angry electorate. They are not curing the already weakened economy.
[1] The ECB is in charge of the European monetary policy and does not take care of the European economic policy.
mercredi 28 avril 2010
Main Street cannot pay for Wall Street.
In today’s increasingly complicated and complex financial market, Goldman Sachs represents a perfect example of the excesses of Wall Street. Goldman Sach’s actions reinforce that which has come about since the beginning of the latest recession; Wall Street has no problem selling dirty financial products even to their own clients.
When Toyota sells a car that is faulty, it becomes their legal and moral responsibility to take care of the problem. Main Street is very exposed to these kinds of issues and they pay damages if they don’t take care of it. The car industry is a great example to show how companies deal with the problem they create.
With the recent crisis Wall Street almost collapsed. It is common knowledge that the subprime mortgage crisis has been the greatest challenge to the financial markets since the Great Depression. The subprimes were part of a global financial system which was growing for years. Everyone took advantage of it. Subprime loans enabled millions of people to achieve the American Dream: owning their own home. For years everyone took advantage of this economic expansion.
Attempting to place blame on one single individual or company for this crisis is irrelevant as everyone took advantage of the subprimes when the economy was flourishing. These financial products only became an issue due to their collapse and the resultant economic crisis. Goldman Sachs is suspected in selling, what is known in Sales Trader’s jargon as, “Shitty Deals” to their customers. These “Shitty deals” helped Goldman to make $3.7 billion from 2007. In the middle of the crisis, when everyone knew that subprimes were junk financial products, Goldman is accused of having sold to their customers these precise junk products. They are also suspected of having speculated against their customers to take advantage of the trend.
Goldman Sachs is one of the most respectable institutions in the financial world. It is one of the biggest investment banks in the world. If the capitol committee can show that the firm intentionally sold junk financial projects it only re-emphasizes the fundamental need for reforms in Wall Street.
In a market economy the market is supposed to be auto-regulated. The market is supposed to create a kind of harmony in the economic relations between the economic agents. But clearly the financial agents didn’t help to facilitate growth, rather, on the contrary, they only profited from the crisis. It is not acceptable that when Goldman Sachs clients are losing money because of the crisis that the firm should be making huge profits. They sold extremely risky products to their customers and made enormous profits by speculating against them, which flies in face of their slogan: "Our Client's Interests Always Come First.”
It is time that the financial institutions take responsibilities for their actions. Like any other business, the products a company sells should be a good quality product, and if the product fails the company should be liable, to the extent allowed by the law. So too should be the case in the financial markets, if a company knowingly sells a junk financial product, they should be held responsible for the outcomes. The Goldman Sachs case clearly shows the need for an increase in financial regulations. For if not, the consequences for Main Street are too dangerous; Wall Street cannot be a threat against businesses. Wall Street has to work for Main Street and not the contrary.
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