· Faced with deflationary prospects ·
There have been serious errors, which continue to persist, in interpreting and underestimating the current economic crisis. The true origins of the collapse of birthrates and the consequences of the increase of taxes on the GDP to absorb the costs of the ageing of the population were wrongly interpreted. The effects of the decisions made to compensate for these phenomena were underestimated, especially with the de-localization of production and consumer debt.
Then, the urgency to intervene and the criteria to follow in order to “deflate” the debt produced were not taken into enough consideration. Thus, the collapse of trust which led to the reduction of the value of the stock market and the debt crisis was not anticipated.
At this point, there are no longer many solutions. To deflate the total debt – public, banking, business and family – and bring it back to pre-crisis levels, that is, to around 40% less, it is possible, though not advisable, to cancel a part of the debt with a type of “preventive agreement,” where creditors are paid at 60%. It is possible, but it would be a hypothesis without a future, to invent some new bubble to compensate for debt with an increase in the value of real estate or goods. It could be considered – but we hope it is only a temptation – to tax the wealth of families, sacrificing however, a necessary resource for development and at the same time creating an injustice. One could also look for a way for rapid development, thanks to a growth in competition, which however in the global crisis is not easy to generate. There is no capital to invest, the banks are weak, the demographic problem penalizes demand and investments. In this context, besides, consumer debt is not even imaginable.
Western countries are expensive and to make them economical in a short period, one must intervene on the cost of labor. Protectionist interventions to sustain businesses that are not competitive however, would produce disadvantages for consumers and would reduce buying, already in decline. The single currency could be devaluated, but this would lead to an increase in the price of imported goods. Someone, to lower the debt, has also thought of inflation. But inflation does not happen if economic growth is at zero, salaries are at a standstill, the shadow of unemployment looms and even the price of raw goods is diminished.
One could say that the spiral of inflation will not occur as long as there is lack of faith in one’s currency. The problem is that today, one cannot have faith in any currency: all of them, including the euro and the dollar, are weak. Inflation will not take off also because liquidity does not circulate, but mostly because that created by the central banks has substituted that produced by the banking system to sustain debt growth.
The first problem today, then, is not inflation but deflation. Markets, in fact, are privileging liquidity. This is because in a deflationary regime, the value of currency increases while during inflation, it decreases. To advance the economy today without increasing public debt means correlating interest rates with the GDP. For public debt superior to 100% of GDP, it is evident that to obtain a growth of 1%, without increasing debt, means not having taxes superior to 1% and penalizing savings. The solution is in the hands of governments and central banks who must come up with a coordinated strategic action of re-industrialization, strengthening of credit institutions and support for employment. Above all, governments must restore citizen and market trust through a governance that is adapted to the times and which, more than just being technically competent, is also a leadership model. A governance which aims for the common good; as Benedict XVI expressed hope for during his recent visit to Venice.
St. Peter’s Square
March 20, 2019
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