Standpoint about the recurrent economic crises
- Scope of the thesis
- The new scale of the economy
- Why are recurrent the economic crises?
- Origin of the fiscal deficit
- The complementary paper of the State
- The best part for the private business and the worse part for the public economy
- Predominance of the State; a contradiction?
- Is the fiscal deficit negative for the economies?
- Fiscal deficit and quality of the economic growth
- Giving the bailout directly to the people
- The same mistake of the Great Depression
- The fiscal deficit is not responsible of the inflation
- True causes of the inflation
- There are not limits for the financial resources
- Stages of the growth
- Misconception on the financial austerity
- A way
1. Scope of the thesis
In this work, I want to demonstrate that:
a) The fiscal deficit is a consequence of two situations, essentially: a1) the augment of the population needs and/or a2) the corruption,
b) The reduction of the public spending for diminishing the fiscal deficit is not convenient because this strengthen the recession and the unemployment, and
c) The States (governments) do not have restrictions to expand their internal financial policy; the true problem is the lack or scarcity of international means of payment, international currencies like the U.S. dollar and now the Euro.
2. The new scale of the economy
If your normal weight is, for example, 70 kilos but you increase your weight 20 kilos in months or too few years, it is obvious that you must acquire new clothes: trousers, shirts, jackets, coats, etc, according to your new weight, because you have reached a new scale of volume. The solution cannot be to cut your shirts, to reduce your trousers, jackets, coats, etc. Well, the same happen in the economy. When this occurs, the traditional public spending already is not sufficient and it is necessary to increase the revenues. The problem is that that augment is not always accompanied by an increase in the public revenues and, therefore, appears the fiscal deficit or financial deficit; this is the difference between the level of revenues and the level of expenditure. In this moment, to realize those concepts is important because the austerity and the reduction of the public spending to avoid the fiscal deficit is the way selected by many governments to face the current economic crisis. The governments are acting like a person that has augmented its weight and reduce, cut their clothes, instead of acquiring new appropriate clothes according to its new weight.
3. Why are recurrent the economic crises?
The answer is: because the governments ---instead of to realize that the financial resources must be enhanced according to the new size of the economy--- in times of crises they do the contrary: they reduce the financial resources, the public spending and this cause a permanent damage to the economy.
4. Origin of the fiscal deficit
The historic experience demonstrates that the fiscal deficit has been present during too many years in many countries; for example, during the 19th and the 20th centuries, the phenomenon affected intensely the United States economy. In that period of time, the fiscal deficit surpassed 10 per cent of the Gross Domestic Growth, GDP, in four opportunities:
a) During the Civil War,
b) The First World War, (16% of the GDP) for the year 1919
c) The Second World War, (24% of the GDP) for 1945 and
d) After the financial crisis of the year 2008, (13% of the GDP) for the year 2009; this represents U.S. $ 1.4 trillion. It is important to remember that during the Great Depression of 1929 the fiscal deficit reached only 5% of the GDP.
These facts reveal that in periods of extraordinary economic needs the public finances have been affected also in an extraordinary form.
Nevertheless, we must highlight that the fiscal deficit is not only a problem of exception that comes up in moments of exception like wars or financial crisis. The fiscal deficit has been a permanent challenge for the majority of countries because it is a structural problem linked to an unavoidable situation: the population growth. If the size of the family augment the spending of the family also augment; the same happen in the nations.
In the last decades the world population has augmented in an important amount, especially in the developing countries. In the Industrial nations the population growth has been minor but the needs of the population have augmented because of the expansion of its consumption. This trend of expansion of consumption has been affected only by periods of recession like the Great Depression of 1929, after the terrorist’s attacks of September 11 2001 and most recently, after the financial crisis of the year 2008.
Moreover, other fact accentuates the fiscal deficit phenomenon: the corruption of the private sector; for example, the corruption in big activities that affects the entire society by its volume, like the financial sector, which, through bailouts, absorbs huge amounts of public financial resources. The bailouts of the years 2008 and 2009 in the United States are the best example.
The corruption is caused by the unlimited egoism of the human beings that want more and more money without considering its origin.
5. Thesis on the complementary paper of the State
The paper of the State in the economy has been cause for concern during centuries. Three positions may be distinguished in the matter: a) the non intervention of the State (Economic Liberalism) free market, b) the interventionist position (Communism), and c) synthesis of both positions (Socialism) mix economy.
In the countries dominated by the Economic Liberalism (free market philosophy), the governments has exerted a complementary role to the private economy and participated in the economic activities only in those areas that the private business did not have interest or capacity to participate; this is known like the complementary paper of the State thesis. This was the model followed by the North American economy until the Great Depression of 1929 but, as a consequence of that phenomenon, the North American economic policy experimented important changes and began a new period of most intervention of the State in the economy control (New Deal) of President Roosevelt. However, it is necessary to highlight that in that time the U.S. government did not exert neither currently exert an entrepreneurial role directly, but a role of control and only participate directly in some public services. For example, while in other countries of free market policies, like the United Kingdom and Canada, the medicine is in the hands of the State, in the United States the medicine is a private business.
The participation of the State in the economy ---for substituting or complementing the action of the private economy--- accelerated the apparition of the fiscal deficit because of the governments have assumed new economics responsibilities.
In the last decades, in parallel it has appeared a new phenomenon that subtracts financial resources to the States: the privatization of important public enterprises and public services.
6. The best part for the private business and the worse part for the public economy
In the systems of free market, the private sector keeps in their hands the best business. In the recent times, a new philosophical conception did let to strengthen the position of the private sector; the new conception is the privatization of the most profitable activities of the public sector, especially in the developing countries. A wave of privatizations occurred in Latin America in the 90s years and now, because of the Eurozone financial crisis, a similar situation is happening in Europe.
In the free market systems, the private business develops the most part of the economic activities. In those systems, the governments exert directly too few economic entrepreneurial activities. It is necessary to underline, moreover, that the participation of the private sector in some public services has grown in the last years and, on the contrary, the participation of the governments has diminished. A clear example of this situation is what occurs with the public mail of the United States, one of the first institutions created in this country, which has reduced its importance and scope of action because of the privatization experimented by the sector. Now, the private enterprises, has substituted in good part the U.S. mail. This phenomenon of privatization has been promoted, worldwide, by institutions like the International Monetary Fund and the World Bank since the decade of the 90s years.
The privatization of profitable public services has reduced the government’s receipts and this has contributed to enhance the fiscal deficit.
7. Predominance of the State; a contradiction?
In the regimes of free market the private sector realize, certainly, the entrepreneurial activities but the States, the governments, are who really decide the economic policy and make the control of the economy; so that the governments have the last word, and the true control of the economy in last instance.
Is this a contradiction?
The answer is no; in the regimes of free market there is a clear distinction between the economic action of the State and the entrepreneurial activity that is reserved exclusively to the private sector of the economy; in change, in the Communist regimes the State exert not only the economic political control but the complete entrepreneurial activity (Cuba, for example); an exception is China, that has maintained the Communist political institutions and have let the development of a private economic entrepreneurial activity. In the Socialist regimes the State exert a partial entrepreneurial activity.
In all the economic systems, (free market, communism, mix economy) the real control of the economy is in the hands of the State, because the State is who do the laws, and this includes the economics laws. Moreover, the State (governments) is who has the administrative control of the economy: it means the economic policy in all the areas: monetary, fiscal, financial, productive and commercial, even in the free market regimes; so that the State (governments) is the true and most important economic actor in all the societies.
8. Is the fiscal deficit negative for the economies?
A consistent and permanent increase in the volume of their economies is the fact that has occurred in many countries along the time; therefore, the fiscal deficit has appeared in those countries. The fiscal deficit is a phenomenon of growth.
Economists and politicians ---in base to traditional concepts--- assure that the deficit is something negative for the economies and says that the most important is to reach the balance between spending and income: for example, the European countries that adopted the Euro, in the 90s years approved the Maastricht Convergence Criteria and the Stability Growth Pact, that limit the annual budget deficit to a maximum of 3 percent of the Gross Domestic Product, GDP and the national debts to a maximum of 60 percent of the GDP of the countries. The majority of the European Union countries have not reached those goals. But, on 17 August 2011, Germany and France requested to the rest of the Eurozone members to carry out the commitments. However, Germany neither France has achieved the goals; France, for example, had a fiscal deficit over 7% of its GDP during the years 2009 and 2010, according to the European Commission Eurostat.
As a consequence of the requirements of Germany and France, on September 2 2011, Spain approved a reform in its Constitution to limit the fiscal deficit; a special law would establish the deficit in maximum 0.4 of the Gross Domestic Product (GDP). This fact has provoked the reactions of a part of the society ---not only in Spain but in the rest of Europe--- because many sectors consider unfair the reduction of the public spending, especially in the social services. Those sectors assure that the governments make a big act of injustice when give bailouts to the banks but deny resources to the basic services and reduce the level of public employment. This has happened in the United States and in nations of Europe like England, Italy, Spain, Portugal, Iceland, Greece and in other regions of the world, like Latin America in the 90s years; but, moreover, it is happening currently in one unsuspected country, Israel, where big protests against the economic policy of the government occurred in the past August and September 2011.
The riots in England ---too in August 2011--- have been attributed to protests for the reduction of the public spending. Serious conflicts occurred in Greece some weeks ago and in Spain, Portugal, Iceland and Italy the resistance is everyday most; for example, on 6 September 2011, the Italian syndicates promoted a general strike that affected the majority of the economic activities in that country.
So far, the winners in the European financial crisis have been France and Germany, which private banks accumulate the most debts of the other members of the Eurozone, but these banks might become in the losers if a default occurs in countries like Greece, Portugal, Spain and Italy.
On 1st September 2011, during his visit to the German Prime Minister, Angela Merkel, the Prime Minister of Portugal, Pedro Passos Coelho, recognized that his country has made enormous sacrifices in matter of austerity and said that German entrepreneurs are interested in the privatization of public enterprises and public services in Portugal. The privatization is one of the most wished businesses for the private bankers. Regarding this, it is important to remember that in the 90s years, in Latin America occurred a similar situation, which provoked recession, unemployment and an economic crisis of such magnitude that determined the born of leftists governments in 9 countries of that Continent: Argentina, Brazil, Uruguay, Bolivia, Ecuador, Venezuela, Nicaragua, Peru, Dominica and the strengthen of the leftist parties in Mexico.
The policies of free market and privatization were not successful in Latin America and for that reason the majority of the population of that Continent refuse those policies. Now, the international financial system is imposing that way to Europe; which will be the result?
9. Fiscal deficit and quality of the economic growth
The fiscal deficit is not something bad. In the previous paragraphs we have assured that the fiscal deficit is a consequence of the economic growth. But the true problem is the quality of the growth, the ethic dimension of the economic growth. For example, an economic growth based in parasites economics activities like casinos and games, the real state speculation, the public bureaucracy increase without justification; an economic growth based in the sacrifice of the poor’s and the benefit of the billionaires, through high tax for the formers and privileged tax for the later, it is obviously something completely different to an economic growth based in the agriculture, the industry, the preservation of the environment and a fair tributary system.
If the fiscal deficit origin is, for example, an increase in the population purchasing- capacity and, in consequence, a higher demand of public services then the deficit has a positive explanation because it means that the economy is growing more; but, on the contrary, if the deficit origin is the corruption, the external debt or the bailout of broken banks the situation is different. The economic crisis of the year 2008 had its origin in a situation like the previously described: the appropriation of the resources of the clients by the big banks of the United States and Europe and the consequent rescue of the banks by the governments.
10. Giving the bailout directly to the people
“…One of the factors that provoked the Great Depression was the incapacity of President Hebert Hoover’s government (1929-1933) to restitute and enhance the purchasing-capacity of the population. Hoover thought that giving public resources to the financial institutions was a way to give benefits to the population; but the reality demonstrated something completely different: it is not sufficient to give public resources to the financial institutions, because of a simple reason: this do not guarantee that those resources will be transferred to the population; the solution is giving money directly to the people…” Pablo Rafael González. Apreciación Crítica de la Política Monetaria, el Bolívar Oro. Monte Ávila Editores Latinoamericana, Caracas, 2007, page 31. Spanish edition.
11. The same mistake of the Great Depression
During the crisis 2008, the governments of the United States and Europe made the same mistake of the Great Depression of 1929: to give billons of money in bailout to the banks, but that money stood in the hands of the bankers and did not give benefits to the population; that is one of the causes of the current economic crisis 2011. The unemployment has augmented, the real economy and the consumption did not grow appropriately, the people have losed their homes and the banks stay in the same precarious conditions.
12. The fiscal deficit is not responsible of the inflation
If a deficit exist it mean that a need exist; in other words, it mean that the economy requires more money. This fact, per se, is not bad; on the contrary, it reveals the economic movement. Bad is the contrary, the monetary stagnation, because this put in evidence the economic paralysis.
Source: International Monetary Fund World Economic Outlook, Database, April 2010.
The structural budget balance refers to the general government cyclically adjusted balance adjusted
for non structural elements beyond the economic cycle.
Source: International Monetary Fund World Economic Outlook, Database, April 2010.
The monetarists assures that the fiscal deficit is responsible of many bad things, among them, the inflation, because for financing the deficit the governments issue money without support; in opinion of the monetarists, this fact put in the hands of the people unlimited resources that promote the inflation. This argument in part is true but in part is not true. An increase of money in hands of the people might be cause of the inflation but, also, might be a stimulus for the supply of goods and services augment. In this case, the monetary growth does not exert an important inflationary effect. But, on the contrary, if the production of goods and services do not grow, then the inflation might augment in an important scale.
So that the fiscal deficit is not the cause of the inflation; the following statistic analysis demonstrates the veracity of this appreciation.
The tables demonstrate that the most important developed nations have a chronic fiscal deficit but, on the contrary, a chronic small inflation; this put in evidence that the fiscal deficit is not the cause of the inflation.
In this case a significant situation deserve to be mentioned: for the year 2009, the United States reached its most figure of fiscal deficit of the decade; notwithstanding, that same year it registered its minor figure of inflation of the decade, -0.324 percent, like you can verify in the previous tables. This confirms that the fiscal deficit is not the cause of the inflation.
13. True causes of the inflation
The balance between supply and demand of goods and services is not the main cause of the inflation, like assures the traditional economic theory. In the book Apreciación Crítica de la Política Monetaria, el Bolivar Oro, Monte Ávila Editores Latinoamericana, Caracas, 2007, page 138, Spanish edition, I wrote that other factors have a higher impact over the prices augment; they are:
a) The economic agents unlimited desire of richness, because they want more and more benefits, without limits; in the developed nations this ambition is controlled by the governments, but in the developing countries, by lack of efficient official control, the speculation is the principal cause of the prices augment,
b) Devaluation of the currencies,
c) Usury: exaggerated increase of the interest rates,
d) The price increase of essential inputs like energy (food, water, petroleum, electricity),
e) Tributary pressure by the taxes increase,
f) And, in last instance, the unbalance between the supply and demand of goods and services.
All these facts reveal that the cause of the inflation is located in the side of the costs and much less in the side of the supply and demand. So that to speak about inflation in the economic theory strict sense ---like unbalance between supply and demand--- is not something exact in the world economic reality; the most appropriate is to talk about speculation, which is the principal cause of the prices increase in the majority of the cases, worldwide.
14. There are not limits for the financial resources
There are not limits in financial matter because of a simple reason: money is only metal and paper without intrinsic value http://pablorafaelgonzalez.blogspot.com hence the States (governments) do not have none restrictions to issue the internal means of payment (money in national currency) that their economies require. The true problem for the countries is the lack or scarcity of international means of payment, U.S. dollars and, now, the Euro.
15. Stages of the growth
I learned from the big philosopher Confucius that a bird cannot ascend permanently; well, the same happen in the economy; she cannot rise permanently. There are periods of fast growing, periods of slow growing and periods of stagnation; this correspond to the essence of nature.
16. Misconception on the financial austerity
In periods of stagnation, the politician leaders think that the solution is to save money and to diminish the public spending; that is the solution that they are applying in this moment in the United States and Europe; but that is a big mistake because the reduction of the public spending provokes the strengthening of the recession. To be aware of this standpoint would let a better comprehension of the recurrent economic crises causes.
17. A way
The solution is to increase the public spending and the private consumption by mean of the monetary base growth; this will not generate inflation neither hyperinflation; on the contrary, the monetary base expansion will bring economic recovery: more employment, more production and more consumption.
The unique limitation for reaching the objectives of economic recovery is the availability of natural resources; but a balanced economic program might find, in temporary form, at short term, the right way in this sense. The projections at long term are different, because the natural resources scarcity will be more intense in the future. Only a reduction in the population growth rhythm, the preservation of the environment and technological advances for diminishing the rhythm of natural resources consumption at mid and long term might guarantee the future of the next generations. To feed more than 10,000 millions of human beings will be a very difficult task very soon.
The fiscal deficit is a consequence, essentially, of three facts: a) the population needs augment b) the corruption and c) the misconception on the financial austerity.
The solution for the fiscal deficit is:
- To realize that money is only metal and paper without intrinsic value;
- Understanding that there are not limit for issuing money according to the economies needs;
- To be aware that the unique limitation is the availability of natural resources because man cannot substitute the Mother Nature and create natural resources but man can issue money without limits.