The situation in Euro is rapidly changing, and its aftermath has been spread to creditors including Netherland or Germany. During a past year, anti-disparity demos have gained momentum, and a part of the “haves” proposed tax increase on themselves.
These have been accelerated by today’s balanced contraction by the tide of the time everyone is going to decrease deficits. It’s like the Prisoner’s Dilemma triggered by the financial crisis. |
| I mentioned such a thing on some articles when Euro problem was being called Greece Crisis. Then, two years have passed, and my anxiety seems to be actualized. |
| <A funny tale of borrowers and lenders> |
Economic indices are mirrors of societies. They help us to observe and think what to do, but they often tend to walk alone.
For example, what do you think about “GDP”? It’s one of basic indices, and it means a total of added values generated during a certain period. It indicates “How much has the economy earned?”, and it’s often regarded as "How much wealthy are we?"... but it’s not correct strictly.
Then, I suppose an economy between A and B. Someday, A produced goods worth of 10,000yen for B, and B produced worth of 15,000yen for A. This trade can be realized?
If B can sell his products to A in exchange of 15,000 yen, B can buy all A produced with money he got. Still, A’s products for sale is only worth of 10,000 yen, so he cannot buy all B produced.
For such a case, our predecessors developed “Credits”. If B grants a credit of 5,000 yen to A, he can sell all he produced. Regarding as countries, A’s GDP is 10,000 yen and B’s is 15,000 yen. A is trade deficits and B is surplus.
Looking at just GDP, B is 1.5 times as wealthy as A… but is it really wealthy? |
| <GDP and Domestic Demand> |
For more conceptual explanation, in below, DD is domestic demand, EX is exports, and IM is imports…
a)GDP=GDE → GDP=DD+(EX-IM) … A is 10,000 yen and B is 15,000 yen
b)Aggregate supply = Aggregate demand → GDP+IM=DD+EX… Both A and B are 25,000 yen
c)Domestic supply = DD → (GDP-EX)+IM=DD… A is 15,000 yen and B is 10,000 yen.
B can get no more than goods of 10,000 yen and a bond of 5,000 yen although A can get goods of 15,000 yen in spite of his earnings of 10,000 yen. If it sounds funny, you could understand an uncertainness of GDP as an index of measure for wealth, couldn’t you?
Of course, real economy is more complicated. If you save your fund overage, the bank will lend it to others. If the borrower expends more than his earnings, it will become your surplus. Still, no one will care such a thing, and if there is any money left in hand, it will make us feel happy.
Moreover, you may say “Finally, lenders have powers of life or death over borrowers”. However, borrowers can choose not to borrow as well as lenders. |
| <A quantity adjustment economy> |
That means any country’s overage are borrowed by others being fund shortage. If creditors stop lending or debtors stop borrowing, surplus of creditors will disappear as well as deficits of debtors.
Figure 1 is a graph of each country’s current account balance. Our country’s surplus had increased in 1980s, and then, NIEs and ASEAN had also increased in 90s. In this process, U.S. had provided markets to Asia with capital inflow as demand of dollars as reserves.
After that, in 2000s, China’s surplus had increased extremely, and oil-producing nations had also by soaring resource. As its result, the imbalance had more expanded, and it was financed by "financial innovation" like home equity or structured bonds. |
Figure 2 is a correlation coefficient between GDP and domestic demand. It had fallen in according to the expansion of imbalance, especially in 2000s. On figure 3, GDP growth and current account balance are plotted, but they have no correlation.
In short, surplus cannot always ensure economic growth, and economic growth measured by GDP cannot ensure wealth. In this country, external balance had been balanced in 60s and reduced in late 80s, but we were feeling wealthy rather in those days.
In spite of that, could you say surplus is essential for wealth? |
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