Gutentag
1. Q: What is the relationship between credit and the health of the market system?
2. How can a variety of competing nations and individuals unilaterally work together to effectively prevent a new crisis?
3. How do international banking and monetary regulations influence the course of efforts to develop new guidelines?
Thes questions do not have to be answered, they are just there to give us an idea of what the chair would like to see us discuss.
Money---an item with no intrinsic value. Once backed by precious gold under the Bretton Woods treaty, now entirely founded upon trust. How can such an item pass off as currency if its value is variable and transient in nature; its value hinging on the whims of the economy. The Federal Republic of Germany for one cannot answer this question; however, Germany can vouch for the importance of money that a portable and manageable currency is much more efficient than the barter system.
Apart from our fiat currencies, credit is equally important to our economy as it facilitates domestic, national, and international trade. Credit, like money, is founded upon trust. By lending money, the lender assumes the buyer will return the borrowed money in full, and usually with a little more. If trust ceases to exist between the firms, the banks, the household, the world---nothing will be achieved. An analogy the delegation of Germany would like to present the chair with is that credit is as important to the economy as a krispy kream doughnut is to a fat kid. Lastly, most governments endeavor to satisfy similar economic goals: to use their resources as efficiently as possible, to maintain stable price levels for goods and services, to have full employment, and to stimulate growth. Only cooperation on the international level will allow the world to achieve these economic goals successful and efficiently. If we wish to prosper, synergy is necessary.
There is a lot of talk at previous G20 summits and BASEL I, II, and III about how we calculate our date.Currently, when most economists analyze the economy, they focus on several factors ceteris paribus; however, Germany actively advocates for world leaders to understand the ramifications of their policies not only on the domestic level, but on the international level. For example, the Gross Domestic Product is important, but Germany understands that all countries look at the GNP, NDP, Nominal GDP, and Real GDP as each is as important as the other.
The state of our global economy has deteriorated for a plethora of reasons. Many tariffs, while beneficial to the nation imposing them, inflate prices as domestic consumers must pay more for a foreign product. Many nations impose trade barriers in order to promote a cause or aid its domestic industry; however, the quotas and tariffs impede upon our ability to successfully and efficiently trade internationally. Many nations will increase their own quotas and tariffs on nations imposing trade barriers because they seek compensation, and this only slows down the proliferation of good international trade. And as Adam Smith is my savior, in times such as these, America should drop its embargo on Cuba! Just kidding, Adam Smith was a cowardly, old alcoholic and his free market capitalism shall be the death of us all, but America should still lift its embargo. In a time when disposable income is at an all time low, no such impediments should be levied as they are a hindrance to global trade. Finally, presidents, prime ministers, and centralized institutions should attempt to work with realized revenue rather than forecasted revenue as the budget always overestimates the revenue and underestimates the expenditures.
Another major problem we must face is unemployment. Unemployment is costly for many reasons. We measure the macroeconomic cost of unemployment by comparing the level of real GDP with the level it would be if the economy were at full employment. The difference is called the GDP gap. Unemployment also imposes social costs, both on the individual who is unemployed, and on the society at large. Social costs that often accompany unemployment are family problems, crime, illness, drug and alcohol abuse, and other difficulties.
The unemployment rate has been sugar coated by the world’s economists who have created a gold pleated fantasy that does not account for discouraged workers, retired people, people under sixteen, and people with mental or physical problems that prevent them from being employed or people who are in jail. These problems withstanding, structural, frictional and cyclical unemployment are all accounted for. Full employment is the level of employment or unemployment at which the economy is said to be fully employed. But that doesn’t mean there’s 100% employment or 0% unemployment. The economy is said to be at full employment when the cyclical unemployment rate is zero. However, with full employment, Unemployment is not zero. With full employment there is still structural and frictional unemployment (usually seasonal unemployment is accounted for in unemployment calculations).
Speaking of unemployment, the rampancy of inflation must also be curbed; what is unfortunate is that inflation has steadily been increasing over the course of the past few years, a rate above what is considered “healthy” by most economists (3%). If we keep sailing down this tumultuous path, we will be consumed by hyperinflation and poverty. Poverty because the most recent Lorez curve of income distribution has shown that the gap between those on the upper echelons of society and those on the bottom rung of society have increased drastically during of the recent economic downturn.
Because of unemployment, the globe is currently experiencing a demand-pull inflation; all the supplies, good, and products are abundant in nature, but the will to purchase those goods and products has faltered. Amidst this crisis, the average household tries to hoard all of their income in order to have a fund specifically designed to bail them out during hard times. This tightening of the flow of liquid assets has progressively increased the aggregate supply over the course of the past few years as the final products sit in a warehouse and are not bought by the public sector. All of this means we’re experiencing a demand shock, a shock America experience during the 1930s.
Another reason why the world is experiencing such poor economic times is because of the laisser-faire attitudes of crony-capitalism directly lead to the recent housing market crash in America. The American government only made their situation worse when, in a situation similar to allowing high security criminals to serve as their own guards, they sent behemoth bailouts to certain business and firms without requesting transparency. Allowing the same corrupt businesses that eroded the American economy to spearhead the efforts to save it is indicative of the archaic elite-class economics that the conservative American government has often neglectfully implemented. And although The Federal Republic of Germany admits that the unilaterally controlled Chinese government has the highest GDP growth rate today; an elementary theory makes it clear that a private sector is necessary in order to maximize economic growth.
While many European nations are in fiscal shamble, certain countries, like the Federal Republic of Germany, have emerged from the economic meltdown successfully. Since the end of WWII and the establishment of the Martial Plan, Germany has been fiscally responsible and reliable, due to this Germany urges that the nations of the world consider Germany’s actions when dealing with the economy. We know that government intervention diminishes the freedom of the private sector, but it is a necessary “evil” as some might call it. Also, government programs are not focused on the enslavement of the private sector but the rejuvenation of it through their policies.
To solve our problems, we must and will use most opulent natural recourse, individuals. At a staggering 6.5 billion, the world has an overabundance of human capital; what we are not as blessed with are environment creating entrepreneurs. Most entrepreneurs begin as needy sole proprietors, but they are taxed twice by the government because of restrictive legislation across the industrialized world. Most sole proprietors are taxed on their profits and then taxed again on their income, discouraging many entrepreneurs from opening their business. As the G20, we cannot just stop at entrepreneurial aid, we must make sure sole proprietorships, partnerships, and corporations make an economic profit. While the governing bodies of our organization can create jobs in the private sector, unilateral action by such aforementioned bodies is often viewed with mistrust and seen as a hostile takeover of the once free market. Never-the-less, nearly all of our governments spend billions of dollars in subsidies, healthcare, and other programs designed to bring aid to the poor, unfortunate, or incompetent.
In order to pay for those programs, a comprehensive policy regarding taxes should be implemented. Progressive tax should be instituted by all nations in the G20. Nearly 5% of the world controls 95% of or more of all wealth in most given countries at any given time. If taxes are regressive or flat, then the world's centralized systems cannot hope to flourish as their most profitable gold mines are left untouched.
National governments must focus on producing products that will provide the producing nation with a comparative advantage rather than an absolute advantage; as long as tariffs remain low, most if not all nations participating will benefit. By computing the marginal costs and opportunity costs, Germany believes that the world can bounce back from the verge of total economic system's failure. While preventing a crisis is impossible, there is always a statistical probability of a crisis occurring, a multitude of safeguards must be adopted. Transparencies must be requested by the government, oversight committees must be created, and a body created for the sole purpose of scrutinizing the global economy’s fluctuation must be implemented. There are an infinite amount of ways in which the global community could mitigate the effects of an economic crisis, but cooperation is key and some nations have not been willing to collaborate; they have chosen to compromise our economies for their own selfish desires.
The world once believed in Say’s law, that supply created demand, but the Great Depression has shown us that this did not hold true. Since the global condition of the world currently parallels that of the United-States during the Great Depression, the taxing and spending policies of that economic Dark Age should be actively used. Even though the economy does readjust itself in the long run and returns to equilibrium, we personally need to speed the rate of recovery. The ramifications of the demand shock were mitigated through the use of successful fiscal policies.
The Keynesian model is extremely helpful as we can study the tax multiplier and spending multiplier. The way The Federal Reserve creates money out of thin air through the required reserve ration and the money multiplier, while not truly synthesizing money out of thin air the expansionary fiscal policies increase the likelihood of predicting how successful our policies will be. Furthermore, by taking the multiplier effects into consideration, the world will be able to multilaterally decide on which number is the magic number. For now, the world must and has to actively use expansionary fiscal policies for the sole purpose of increasing our real GDP. However, fiscal policies are not without their negative consequences, they are inflationary and that is why the world must use certain monetary policies in order to counteract the inflationary nature of the fiscal policies.
And in regards of our domestic policies. Right now, our current regulations have shown themselves to be inefficient and extremely detrimental. We need to revamp our entire system. We do not have to build an entirely new and alien infrastructure, but the foundations must be adamant enough to withstand such crisis without faltering. While some may argue that such radical changes are unnecessary, the radicalism of our actions is directly proportional to the urgency of the issue at hand. And, yes, debt is bad, some but some debt is necessary.
As the American Alexander Hamilton said, “some debt is good”; however, he did not mean that inconceivable amounts of irreparable debt are beneficial. As displayed by the recent economic downturn, overwhelming debt is not a commodity. Deficit spending, while popular in the Reagan/Thatcher Era, has proven itself to be unsuccessful in the long run as the money rarely ever trickles down to those who truly need it.
This entire crisis came about because the private sector had too much leeway. The governments of the world, especially America’s, did not keep a tight leash on the private sector. Having the ability to do anything, the private sector has ruined the economy. While it may seem as if Germany is solely blaming the private sector for this crisis, Germany realizes a conglomeration of factors lead to this crisis, but the private sector was mostly to blame. Germany has intervened many times over the course of this crisis and Germany has emerged as an economic powerhouse from this economic downturn. Germany’s model of intervention must be adopted and followed by the world.
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Originally Posted by Omega
