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Allowing for a process as frictionless as possible is all that is required from governments, as it will accelerate the profitable reallocation of resources, ensuring a solid and sustainable recovery. The conventional wisdom sees the recession as the stage of the business cycle where all the misfortune takes place: lay-offs, bankruptcies, debt defaults, among others. Depressions are inherent to the market economy, Keynesian economists contend.
Governments are supposedly responsible for restoring "economic stability". This is where monetary policy and fiscal policy should intervene and guarantee economy activity do not recede. Considering the theoretical background explained above, one can already sense how deficit spending may in fact only worsen the predicament, as we will attempt to demonstrate below. If governments are only able to employ resources previously appropriated from the private sector via taxation or borrowing it is simply not possible to invest without divesting from somewhere else in the economy.
Public investment necessarily entails private divestiture. Consequently, the much sought after "increase in aggregate demand" is nothing but a misconceived notion, as Eggers [1] explains:.
But if aggregate demand is irrelevant to action and has no meaning in an analysis of the functioning of a market system, there can be no standard for determining that it falls short of some ideal, and there can be no such thing as unemployment caused specifically by this shortfall. Entrepreneurship and profits have no place in Keynes' economic theory. As the title of his notorious work denotes, his main concern is employment.
Thus, it is of little significance, according to Keynes, if public investment is in fact productive and resources are efficiently utilized. What matters first and foremost is whether people are employed. As Egger succinctly clarified, it is essential to understand that "all unemployment is caused by mispricing, and none by insufficient aggregate demand". Profits arise from the differential between revenue and costs.
Entrepreneurs are concerned with the differentials in relative prices and not with an increase or fall in the general level of prices. Any attempt to expand the money supply by means of extra Central Bank liquidity will only aggravate the distortions, preventing companies from adjusting their businesses and correcting the aforementioned mispricing. The result is typical of well-intentioned efforts to solve problems that do not exist: the problems that do exist are made worse [2] ". Additionally, government expenditure and investment contributions to society are at the very least highly questionable, since there is no rational way for governments to base their investment decisions.
Moreover, the whole process tends to be excessively politicized [3]. Lacking the profit-motive, government employment of resources is inefficient by definition. The only viable contracyclical policy is to refrain from monetary expansion at the outset. All other attempts will only attenuate the crisis, attacking symptoms but not the root cause of economic cycles. Notwithstanding, once the artificial boom has been engendered and the recession arrived, let us leave the market entrepreneurs, consumers, producers, savers, investors, etc.
Before the crisis several European Union countries were already in breach of the Maastricht Treaty clauses, showing worrying budget deficit and debt ratios. Nevertheless, in order to avoid the collapse of the world economy the consensus pushed for heavy monetary and fiscal artillery. Under the title of European Economic Recovery Plan [4] , EU member countries were encouraged to expand its budgets, incurring deficits on the short term, so as to prevent "aggregate demand" from falling, but always conditioned to structure reforms and actions aiming at long term fiscal solvency.
On mondays we usually go to our favourite mall. Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss in declining markets. Add to cart. As the title of his notorious work denotes, his main concern is employment. Deborah Fajardo Manabat.
In other words, spend now and deal with deficits later. The majority complied. The sovereign debt crisis that Europe now faces, was intensified, and, perhaps, even accelerated by the fiscal stimulus packages adopted by several EU countries. Through desperate policies and lacking a reliable yardstick whether such measures would be effective, the majority embarked on a very short term spending spree, worsening an already dire fiscal situation.
The theoretical basis supporting fiscal expansion on the short term and fiscal consolidation on the longer term was that the Keynes' multiplier would soon take effect, resulting in higher economic growth, thus higher tax receipts, automatically lowering the budget deficits ratios to more sustainable levels over time.
However, at some point, the long term must arrive. And it has indeed arrived.
Unexpectedly for politicians the fiscal stimuli were not only useless and harmful, in the sense of ameliorating the economy, but also precipitated the chaos in the EU public finances. What will happen cannot be known, since the decisions will be political and not based on economics.
Will the Euro be inflated to save spendthrift countries? Will governments be obliged to balance its budgets?
Will they accept the demands? Or will they leave the monetary union and devalue its new national currency? It is in fact impossible to guess. We must bear in mind, though, that the crisis is far from over. Now it is Greece's turn, and as it appears, Portugal too. How much and for how long they will purchase is yet unknown.
What is certain is that we shall still face a few storms. Curiously, a few weeks ago many commentators still spoke of "contagion risk". Well, indebted and running continuous deficits, they all were. There was nothing more to contaminate. Debt is the disease. It was a mere question of time for the financial markets to deal with each country. Let us not forget the USA, which too belong to this domino.
Let us not forget the charade the debt ceiling deal was. One cannot claim the deal has in fact solved the problem. The can has been kicked one more time.
What is indeed close to its fateful end is the viability of the welfare state. Not that it has ever been viable. Previously he has worked in a financial consultancy. This is my bitcoin investment strategy.
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