Take Your Time


Prices, Business Cycles and Policies

Political authorities in both advanced and developing economies seems to be in trouble these days. Advanced economies, typically US and Japan are struggling in their low growth rates. Expansionary monetary and fiscal policies gave them a pile of sovereign debt and extremely low interest rate but would not bring sustainable growth. If admitting the huge quake cut the supply chains and braked production in major industries temporarily, we see the great influence from the great depression still exist. The unemployment rate in these countries would not drop quickly and growth rate would not be well above the potential growth rates in this and next quarters. The situation in Europe is much worse than quake-hit country. To avoid next financial crises, ECB and EU countries are utilizing what they can and will do. The "imbalance" or the gap from "equilibrium" in these economies are dangerously huge. If we slide our glance at developing countries, typically China and India, we notice their authorities' major concern is inflation while keeping the economy growing.
I want to set my first notion that the major "enemy" of the global economy is financial crises which is made by unsustainable growth. Last financial crises was led by "euphoria" in open market. Most market including stock, commodity and derivative backed by "sub-prime loan" experienced serge in the euphoria before the burst. And the burst caused the flood of suspicion which freeze up from stock market to inter-bank call market. Unlike quake which killed more than 15 thousand, this freeze killed nobody physically but killed possibly 10-100 millions jobs. "Over liquidity" or too much money supplied from advanced economy where greedy investors seek the way to make money taking advantage of extremely low interest rate by which money authorities try to keep to float the economies is an idea of the key figure. If it's true that the interest rate in advanced economies are too low to keep the global economy in the sustainable state, we should adjust it while advanced countries endures low or even minus growth rate. This adjustment would be good for developing economies. Reasonably high interest rate would make markets calm down and the high inflation in developing countries caused by global commodity markets would be normal. But this story is just a story. I want to make sure and formalize it.