MACRO ECONOMIC 202 For the Uninformed who dont know, but parrot their Favorite Politician, such as Sarah Palin, I am not the only one who is writing about this. These are problems that I have written about for years. The effects of a common currency and monetary policy are spread around very unevenly in Europe, creating a boom in certain countries, mainly Germany, and a sad bust in others. This disparity is the very predictable result of a Currency Union without Fiscal Union. And trying to fix the Eurozone Fiscal Structure after the fact is comparable to trying to fix the engine of an airplane while flying at 30,000 feet. The exact same can be said of the Countries whose Trade is based on the US Dollar; and it would be even WORSE if there were Countries whose Trade was based on Gold! At least additional Euros and US Dollars can be PRINTED! There are two major problems associated with an extended period of ultra-low inflation or deflation in the Eurozone. First, peripheral countries will have a much harder time servicing and retiring their debts without the extra boost to nominal GDP that positive inflation provides. Even if you are working on lowering the absolute amount of your debt, it is impossible to improve your debt-to-GDP ratio when GDP is falling and your debts are growing. Moreover, outright deflation works to crush debtors (and debtor nations) by increasing the real weight of the debt and triggering the destructive debt-deflation cycle described in Irving Fishers Debt Deflation Theory of Great Depressions (1933). The second major problem is that currency appreciation always accompanies deflation – all else being constant – so that affected economies also become less competitive in terms of exports at the very moment that a positive trade balance is most important. The rapidly weakening inflation we are seeing in Europe is a very big deal, because deflation can become a Chronic, CRUSHING Condition, making it even harder to deal with excessive debt, undercapitalized banks, and runaway fiscal deficits in major countries like Spain, Italy, and France. Over Time The Masses Begin To Expect Falling Rather Than Rising Prices, And These EXPECTATIONS Can Be Very Difficult To Reverse Without Credible, Decisive, And Powerful Action From The Central Bank.
Posted on: Mon, 25 Nov 2013 15:10:57 +0000
Trending Topics
Recently Viewed Topics
© 2015