Uneconomical economy

 

Identify ways to stimulate economic growth under conditions of growing debt of public budgets is becoming a major issue , the answer to which is crucial for most central banks. High degree of integration of national economies significantly reduces the effectiveness of monetary control . The inability of a number of central banks to respond to the challenges , both internal and external. This is most clearly expressed on countering major issuers cash planet - the U.S. Federal Reserve ( Fed ) , the European Central Bank (ECB) and the People's Bank of China ( NBKNR ) . Desire to achieve maximum benefits for domestic producers leads to a " currency war ." In this confrontation , in addition to traditional methods of regulation of the macroeconomic environment , such as reducing the refinancing rate and increasing the money supply , there are new methods of struggle. Programs such as buying "toxic" assets . Their appearance is due to the impossibility of establishing refinancing rate below zero. At the moment, the refinancing rate is at its lowest historical values ​​( from 0% to 0.25% of the U.S. Federal Reserve and from 0 to 0.5 % ECB) .

 

 

1. The money supply INFLUENCE ON ECONOMIC GROWTH

 

1.1. Method One - monetary

 

From the general theory of modern monetarism is known that the correlation between the money factor ( mass of money in circulation ) and nominal GNP is detected closer than between investment and GDP . Dynamics of GDP immediately follows the dynamics of money. Monetarists point out that there is some relationship between the amount of money in circulation and the total volume of goods and services sold in the domestic economy . This relationship is expressed by the quantity theory of money :

formula 1.1.1

I. Fisher equation of exchange

M x V = P x Q,

where

M - the amount of money in circulation ,

V - velocity of money ,

P - the average price of goods and services ,

Q - quantity of goods and services produced within the national economy over a certain period of time (usually a year ) .

Thus the real volume of production determine the currently available economic factors of production ( setpoint) . Consequently, the change in the nominal GNP is due only to changes in prices . Thus, in accordance with a quantitative theory of money price level proportional to the amount of money in circulation. But if this is so, then change the price level will also be in a certain dependence on changes in money supply .

In this theory, there is a paradox - it does not apply to the main planetary issuer - the U.S. Federal Reserve . This is primarily due to the position of the dollar as the main reserve currency of the world. U.S. national debt is over 17.5 trillion dollars, which is significantly more than the amount of the annual U.S. budget .

Figure 1.1.1

 Dynamics of U.S. debt .

 

Holders of Treasury receipts are central banks of all major countries , thus increasing the money dollar supply leads to the export of U.S. inflation and reduce real U.S. debt denominated in dollars. Against the euro the dollar fell to 1.3831 per euro. Towards a common basket of six currencies of the partner countries to the U.S. dollar fell 79.25 points (Federal Reserve System, nov 2013 ) .

 

1.2. Method Two - Keynesian

 

Keynesians believe that the chain of causality in the money supply and nominal GNP is: a change in money supply causes a change in the level of interest rates, which in turn leads to a change in investment demand and through the multiplier effect - a change in nominal GNP.

Main theoretical equation , which is based on Keynesianism :

 

Y = C + G + I ± NX,

where

Y - nominal GNP ;

C - consumer spending ;

G - government spending on goods and services;

I - planned private investment;

NX - net exports

Increasing the money supply at a constant demand might lead the economy , among other things , the so-called " liquidity trap " : the interest rate may be reduced to a critical level , which would mean an exceptionally high liquidity preference . (Recall : a low interest rate indicates that the securities are too expensive , hence they abandon their purchase, hold savings in the form of money). If this continues to increase the money supply , the interest rate can not react to it , because below a certain level , it can not fall . Currently refinancing rate is at a minimum level in the history of the United States , ranging from 0% to 0.25 % per year.

  

Now the base rates in many developed countries are at historic lows. At the same time, in developing economies , they remain relatively high - because they can not reduce inflation. This gap allows investors to earn practically no risks they took out loans in developed countries , and then invest these funds in developing countries.

Buildup of excess liquidity has only a temporary effect , since increase the money supply at a constant level of production increases and inflationary pressures in the long run leads to a sharp rise in inflation . Prolonged use of emission lever main financial institutions in the major economies undermines the foundation of the future sustainable development of the world economy . There is a serious threat to the entire planetary financial system, because violated the most fundamental principles of monetary control . Becoming increasingly apparent need for the emergence of supranational financial institution regulation, establish common rules and standards of monetary control . Increasing the level of inflation at a constant level of the key rate depreciates the real assets of the Central Bank . Supersoft holding monetary policy increases the debt burden on the economy. The paradox is that the current low cost of borrowing due to the artificial creation of excess liquidity through quantitative easing program . Same source of funding is an increase in government borrowing. This mechanism is extremely dangerous, as to keep interest rates low for the previous issue of new bonds requires . Sooner or later, further borrowing will become impossible because of the huge debts burdened previous and as a result , bloated debt. Great risk that the reduction of the measures to support liquidity in the financial market rates increase significantly . This point can be a trigger to start a deflationary spiral for the global economy .

2 . MAIN AREAS OF MONETARY REGULATION IN THE global economic slowdown

 

2.1. Policies to stimulate the economy through quantitative easing programs

 

Fed in September 2012 launched the third program of "quantitative easing » (QE3) to buy up "toxic" securities. The mechanism of buying securities involves the creation of bank reserves at the Fed accounts for the amount that corresponds to the value of these securities . That is, the money will be made just as much need for the acquisition of assets. QE3 would extend the " Operation Twist " (buying long-term Treasury bonds in exchange for the sale of short-term ) .

The situation is paradoxical - The U.S. government itself at borrows money through the Fed. Mechanism is extremely simple :

1) The Government allocates Treasury bonds on the open market ;

2) the Fed buys these Treasuries by issuing cash ( includes printing press );

3) The money is sent to the quantitative easing program .

Fed extends new money is not evenly throughout the economy. Money fall into the largest U.S. banks , which have amassed huge portfolios of mortgage-backed securities . They are happy to change this trash legitimate banknotes Fed . Further , it is believed that they get money into the economy , increase purchasing power of society, transformed into investments , create new jobs . However , it's actually not the case. Banks categorically unwilling to start a new life - an honest and useful to society. Received from the Fed money they send back to where the maximum profit possible - namely, the commodity and financial markets in the sphere of speculation. In the real economy will get the crumbs. New jobs are not even enough to absorb new labor force growth in the labor market .

Those cynical looks adopted by the U.S. Senate in 2011, a bill to impose sanctions on countries that manipulate exchange rates - a measure aimed specifically against China. Central banks of the U.S. , UK and Japan printed record amounts of money supply , either openly pursuing the goal of reducing their own currencies , or getting favorable depreciation as a side effect. Countries fight for competitive advantage , to soften the post-crisis economic problems.

Increasing the money supply , the Fed is forcing China to print new yuan to maintain the dollar peg . China now imports from the United States through the inflation mechanism peg , whereas previously exported to the U.S. deflation. With the launch of the program price in China has been steadily creeping up and the Bank of China had to choose : either inflation or economic growth. China announced the fight against inflation a top priority in the monetary policy. Were raised reserve requirements for commercial banks in China . Measure and worked in December inflation in China slowed to a 15-month low and producer price growth was the lowest in 2 years. For 2013 it was about 2.5% , and in 2014 the Centre for Development Studies of the State Council expects average annual inflation at 2.3 %. This leaves the government more room to support growth . The economic slowdown in China occurred gradually throughout 2013. In the first quarter GDP grew 7.7 % in the second , 7.6 % , 7.1% in the third and the fourth , less than 7.5 %.

New Japanese Prime Minister Shinzo Abe announced the goal to start a state program to stimulate the economy in the 2013-2014 year. The Bank of Japan plans to issue for this purpose up to 100 trillion yen ( $ 1 trillion ) . The purpose of this action is to reduce the rate of the national currency by increasing the money yennoy mass. Bank of Japan also plans to increase the rate of inflation with the forecast 1.01 % to 2% in the planned year.

 

2.2. Austerity policies by cutting goszatrat

 

In recent years the main issue in the global economy remains spelling placement of commas in the sentence : " Spending can not save ." In recent years, becoming more and more supporters of measures to stimulate the economy , albeit at the expense of growth of debt in the future. A similar trend is due to the super soft monetary policy of several major issuers of money , which leads to an artificial Accrued excess liquidity in the financial markets .

The last bastion of austerity measures until recently remained Eurozone trying to reduce exorbitant burdened national economies of the peripheral countries debt load exceeding the total annual volume of production in these countries. In this context, the decision of the European Central Bank (ECB) to lower the refinancing rate by 25 basis points to 0.5 % per annum should be seen as the first step to stimulate economic growth .

For this there are a number of prerequisites , the main of which reduce the budget deficit troubled Eurozone countries and the need for further economic growth out of the debt crisis.

Reducing the ECB refinancing rate for commercial banks should give additional impetus retsesionnoy economy by increasing the money supply. This mechanism has proven effective as an example the U.S. is experiencing the biggest economic crisis since the Great Depression. Compared to the U.S. rate in the euro area remain high, which can be considered as an additional reserve, which U.S. Federal Reserve ( Fed ) has not already .

After two years of recession and stagnation caused by the debt crisis , which forced almost all states take strong measures of budget savings on the continent begins the ascent , although it is not very fast .

According to the forecasts of the European Commission , the combined GDP of the 28 countries of the EU will increase in 2014 by 1.4 percent , and in 18 Eurozone countries - by 1.1 percent . " It is too early to celebrate victory , but multiplying signs that the European economy has reached a turning point ," - said in Brussels, Commissioner for Finance Olli Rehn (Olli Rehn).

 

3 . EVALUATION CRITERIA OF EFFECTIVENESS OF MONETARY POLICY

In the context of the confrontation between two mutually exclusive models to overcome economic crises ( "German" and "American" ) discussion on the effectiveness of monetary acquired even greater relevance . In times of the greatest threats to the national economy regulators often resort to methods contrary to the interests of the global economy , protectionism practiced in the most risky of its manifestations.

In assessing the effectiveness of central banks in different countries there are certain objective distortion caused by inhomogeneity of the medium of their functioning. This heterogeneity is caused as a significant imbalance of the world economy , and national peculiarities countries. Not all financial institutions have the same tools to perform their assigned functions . While some countries are able to use " unconventional " methods of monetary control to achieve priority goals , the others have to solve the problems of traditional.

The main criterion for the effectiveness of the central bank is its ability to respond to challenges facing the national economy . In different countries and groups of countries, these challenges are different, and the successes and failures in priority areas should be evaluated in a double size .

As a result the indicator used in the calculation of the deviation index for 2013 to the average value for a number of years (10 years) , calculated by the formula:

O = ( Pn / ( ( n1 + n2 + ... + Pn ) / n) -1) x100

where:

About - deviation of the current index to the annual average for a number of years , expressed as a percentage

n1 - the figure for the first year

n2 - the figure for the second year

n- number of years ( the period under review in years)

Pn - the current value of the index ( 2013. )

This approach allows us to consider the dynamics of the priority tasks and give the most objective assessment of the monetary authorities . Object of comparison are the four main interrelated macroeconomic indicators: growth in gross domestic product (GDP ) growth rate of consumer prices , the ratio of total public debt to GDP , expressed in percent, and the unemployment rate .

 

Notes

 

  1. Official site of the European Central Bank; Internet-resource http://www.ecb.int/home/html/index.en.html
  2. Fisher S., Dornbush R., Shmalenzy R., 1993.

3.      G.M. Keynes Obshchaja the theory of employment, percent and money 1936

  1. Data of official site FRS of the USA http://www.federalreserve.gov
  2. Duguzhev I.B. clause « Franklin: war and the world », Magazine « Days of a science », Publishing house «Prague», the Czech Republic, 2012.