HARVARD ECONOMIST WARNS THAT ECONOMIC CRISIS IS FAR FROM OVER IN BOTH THE US OR EUROPE

 

 photo: Reuters

Although there are many signs that tell that the economy in the U.S. has somewhat stabilized, a Harvard economist warns that the crisis is far from over, and that destabilizing forces could easily turn the tide again.

What is at stake mainly is the fact that banks and financial institutions, including the Federal banking system in the U.S. are flooding the markets with money, and keeping the interest rates artificially low, even though inflationary forces are still at play.

Central banks, in both Europe and the U.S. are keeping interest rates low to help get out of the crises, but this does not afford any of them security.  And that is because all the money that is being printed is in actuality fueling even higher deficits.  

Although the practice has long been employed to recover from economic downturns before, such as after the great war, in those times the central banks were not as independent as they have become, and now they are at risk of losing that independence again because of the efforts that they are made to do on behalf of the struggling governments.

And that, again, means higher inflation.  

It is true that the measure are needed to spur growth. Growth must be achieved if there is to be any hope for resolution of the economic crisis.  But there are other alternatives that could be more effective and comport less long term risk.  

One of them is writing off part of the debt.  But that is unpopular because the only way that is done is by reducing interest rates so low, that they are much lower than the inflation rate, thereby automatically reducing the debt.  But that also means that depositor's savings shrink, and that is a form of redistribution that does not benefit the public, but is beneficial only to the borrowers and the government.  

In many ways, this is already what is at play in the U.S. Most people who have had deposits have seen interest revenue shrink to near zero.  Whereas some argue that the benefit is spread among the population via lesser interest payments on borrowed money, it is a device primarily employed to stimulate borrowing and reduce govt debt, but it still effectively reduces the value of the savers' deposits because the interest they receive is lower than the effective rate of inflation.  

Eventually however, inflation will be impossible to contain due to the large amounts of money that are being printed and put in the market.  When that happens, it will become even clearer that the depositors will have lost more than just the interest income.  

Another problem is that banks have not come clean on the level of debt they still hold. And the debt is only getting bigger in some cases, such as Spain, because they are tied to assets whose value is collapsing, such as real estate.

The U.S. too has a large debt load, owed mostly to China.  But keeping interest rates near zero reduces the money the creditors are owed.  And that in effect is a little like defaulting.  In many ways the U.S. does not need to default at all.  And China has no choice but to keep buying U.S. debt so that it does not have to value its currency at its true value, and the U.S. can continue on its debt buying course as long as there is someone willing to buy its treasuries.  

The only question is then how long will it be before inflation rises and forces those interest rates up.  

Partial source: Spiegel Online 4.11.13