Last years we could watch how a new economic policy was applied. That was a grandiose experiment. Genesis of macroeconomic fundamentals has formed up to the beginning of 90th and it supplied all countries with specific tools. These tools do not concede, but in many cases surpass power tools in force. As observations show, successful application of the new tools by the countries that are economic leaders has allowed to influence but for their national interests the world economic systems. In a way, this policy had such a powerful influence in the short-term and medium-term periods, that it could surpass even the innovative policy. Probably it happened, because the given new policy itself has presented a systemic innovation at the global level.
All began with aspiration to overcome the economic crisis and to achieve the competitive advantage. This could be achieved by manipulation with the help of monetary, and, in particular, of currency policy. Probably, nobody could predict the result. Now it is possible to consider it the case of economic competition where achievement of advantages is reached not so much by separate firms or their associations by introduction of innovations, etc., but by use of all the state financial power.
More on the details of this mechanism
They are simple. It is not a secret, that use of tools of the monetary offer can influence the dynamics of effective demand, final consumption by households and investments of firms. Not in a smaller degree the monetary offer influences the dynamics of savings, streams of international capitals, export and import operations, etc.
So, for example, if with other things being equal the central bank of a country increases the monetary offer, it will cause reduction of money price of this country. And not only at the national markets, but also at international. In answer, households of the country will reduce savings. So, the part of their income, which was redistributed by them on consumption, will increase.
Downturn of the money price will encourage firms to invest more actively. The percentage costs will reduce because of the reduced money price. But the most important is, that the exporters of this country will get advantage because of a decreasing rate of exchange. It means that foreign economics will consume goods and services of the named economics more actively.
As the result, the three basic out of four institutional sectors in national economy (households, firms and foreign sector) will become more active if the monetary offer increases. Note, that active consumption is possible. It is possible if the central bank will strictly watch inflation and not permit its excess of value of a natural level by her; if markets are developed enough, not overruled by the state and react to the slightest changes of a conjuncture; if the economy is innovative enough, and has a little overproduction. Here the institutional development of the markets has the paramount value.
Let's consider an example with the US economy
When in the beginning of 2000th in economy of this country the crisis processes have started (it can hardly be called a crisis, for rates of the US economic growth at this period never fell below 0 %, however they have lowered below 2 % a year), the USA have carried out encouraging economic policy. It reduced a discount rate, and stimulated consumption with the help of budgetary-financial policy.
As a result of this policy, the internal consumption at the USA normalized. Thus, the decreased dollar exchange rate to euro provoked active "replacement" of commodity to foreign markets. Europe had no signs of crisis at that time.
However gradually gushed commodity from abroad has increased its offer in European markets. It has also lowered profitableness of local firms. This effect has amplified because currencies of many countries have been adhered to dollar and fell to euro, carried away by dollar. Having admitted too fast and big growth of euro rate, we believe, that Europe itself has aggravated situation, as its own exporters have reduced the incomes received from abroad.
We also believe, that the arisen negative reaction of the European economics was another consequence of inflexible ÅCB policy. ECB did not react to the external economic expansion in time.
We also assume, that the new phenomenon we speak about became unexpected in European economics. Till that time the main function of the central bank of any country was to maintain stability at the internal monetary market.
Money function protects national economic sovereignty. It is obvious, that it calls for a new judgment in conditions of economical globalization.
Here a new quality of competition in global economy has come to light. Which central bank can put a discount rate lower in crisis and thus which economics will hold on without inflation longer - that economics is stronger, and that bank becomes the winner in this unprecedented competition.
Deterioration of financial conditions of firms arises in losing countries. Without applying of encouraging economic policy, this inevitably causes growth of unemployment. Reaction as supervisions show, is this: as soon as unemployment exceeds threshold value of a natural level, it narrows the central bank corridor of opportunities to encourage economics, for in most of such cases risks of inflation grow.
If unemployment exceeds the natural level, the encouraging monetary policy can warm up not only economics, but also extremist moods of groups of people. Therefore, when process of a discount rate downturn has started in the USA, then ECB and, accordingly, a dollar exchange rate, had not much time for taking anticipatory measures. And, having missed the opportunity, the rate of unemployment already made 8-12 % in an economic zone of euro. It fully conformed to logic of the mechanism, which we consider here.
The discount rate has reached its bottom - 1 %, that was much less than ECB discount rate, which did not fall below 2 %. Having made active economics, FRS in the same way, on a smooth trajectory though also a little bit greater rates, than reduced, has started to lift a discount rate to the former level. Now we just observe this process at the medium stage of a rise.
Even now we already may draw some conclusion
1. Positive results for the winner
- The US economics was included into an active growth phase. Its rates "have left" the dangerous 2 % boundary and are at a level about 3,5 %. According to some optimistic forecasts US rates of economic growth can exceed a 3,7 % in the current year.
- Internal consumption has increased in the country.
- Unemployment reduced, and business activity increased.
- The country became one of the most attractive regions to investors in economic. The investment of the capitals, which were not finding profitable application in other regions, has sharply increased here.
- Economic growth and increased discount rate should play a positive role in national currency strengthening.
2. Negative results for the winner
- Sharp growth of deficiencies: accounts of current operations of the balance of payments and the state budget.
- Growth of traditional capitals for movement of capitals and the balance of payments. It increases accumulation of the traditional capitals.
- Accumulation of traditional capitals attracts growth of demand for the traditional resources (oil, steel, etc.). That inevitably causes growth of their prices and raises risks to level the advantage, gained with such difficult work.
- Reduction of national savings raises risks of future stagnation.
- Growth of reduction risks for long-term profitableness.
- Some decrease in probability of global innovation because of inflow and accumulation of traditional capitals. Decrease of savings.
- Creation of favorable conditions to the third countries for leading positions.
- Strengthening of "bull moods" in the markets of traditional resources… as the result of strengthened rates of economic growth in the third countries. Risks of advantage loss for the winner strengthen too.
The region which has lost "competition" has following results:
- Growth of rates of unemployment, and the deficiency of the state budget.
- Decrease in rates of economic growth below critical 2 %, which makes impossible fulfilling of the governmental employment programs in these conditions successfully.
- Increase in probable deflationary processes causes depreciation of capitals. After the crisis and deflationary periods there is a constant probability of increase in rates of economic growth in medium-term prospect.In any case advantage belongs to the economy, which was the first to start systemic innovative process.
The process has the following laws:
- It never arises in traditional economy, but goes alongside.
- It can arise, where: the traditional economy can sustain a great financial loading; there is developed military and industrial complex; there is a strong scientific school; there is a modern national innovative system.
I.P. Makarenko
IEE
2005-03-16
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