We have a fantastic opportunity, it can be an example to open our economic future. No need to issue economic theories or silly to analyze carefully our history books, our eyes have only to pay attention to a single place: Japan. The last two decades of sluggish growth and slight deflation of the rising sun have been viewed with caution and surprise by our politicians without thinking that this could happen to us soon.
Japan yet still suffers the consequences of the explosion of a massive speculative bubble in real estate and the stock market that has left private agents, banks, businesses and households over-indebted. The Nikkei rose tenfold in a few years to reach 40 000 points in early. The Nikkei today tends around 8000 points and was never approached such heights again. The explosion of the housing bubble was just as intense. In the early 90's, land in Tokyo was valued at a price higher than that of all the United States. Today, prices are still well below what they could be at the pinnacle of excitement.
The result was terrible. Major banks and businesses and a very large number of households found themselves overburdened with assets worth more not much. The objective was clear to all private economic: to reduce debt. That's what they have done for 20 years. The consequence of this debt was not long in coming: terrible economic slowdown and deflation. The state has to stop the movement of heavily indebted to boost activity and end deflation. The result today is a debt that exceeds 170% of GDP and which will, according to some estimates, exceed 200% in some years.
It is understood, the deleveraging process has not actually occurred. The debt was somehow transferred from private to public. Two reasons, one simple, the other slightly more complex, explained:
- A deleveraging process necessarily implies a fall in private consumption and the private investment. To avoid too heavy a fall of national income, the state must spend more than it earns.
- A deleveraging process involves an overall decrease in the money supply. A decrease in the money means less money in their bank accounts. And when there is less money in bank accounts, we tend to spend less. The other effect that arises is deflation, that is to say a price drop. Deflation is terrible for several reasons:
- For companies expenses are often inflexible salary, rent ... If sale prices are falling, the situation can quickly become even more difficult to manage
- The amount of debt and financing costs to repay it does not change. Thus, as revenues fell with falling prices, the accumulated debt becomes relatively more important and more difficult to repay. As Irving Fisher had noticed there are more than 60 years "paradoxically, the more agents are deleveraging, more debt burden on their shoulders is important"
It is therefore the role of government in times of debt and economic crisis to spend more than they win and do everything to prevent deflation. Now, what are the only ways for the state to limit the economic slowdown and to fight against deflation? As we shall see, the only real tool for the state's public debt, its remaining weapons is rapidly ineffective.
To understand this fact, we must try to understand a little how the monetary systems of industrialized countries.
Today money is created by central banks. This coin set is not allocated to the expenses of the state but paid to private banks or used to repurchase those same securities private banks. This money is then lent by banks to other banks, businesses, households or states. Then through the money multiplier, 1000 € central bank may become even € 10 000 € 20 000 bank deposit. The money multiplier depends on the willingness of banks to lend and borrow economic agents. If banks stop lending, the multiplier can be transformed into monetary divider bank deposits and some just disappear and 20,000 euros of deposits may again start the 1000 €.
Thus, first, the state has no other choice, now that debt if it wants to spend more than it receives from the tax since it can not use money created by the central bank to finance its expenditures.
Second, we show that the only real weapon of governments to fight against deflation in times of private debt is government debt. Two weapons held by central banks are often put forward to fight against inflation: lower interest rates and money creation. If the central bank moved money newly created lower rates, banks are more encouraged to borrow from the central bank. This rate cut will affect the rates offered to businesses or households who will have more interest This will speed up borrowing the money multiplier.
But if the cause of our current problems is, as we have found a state debt of agents, how to adjust it by pushing economic actors into debt again? Through this, we can only postpone the disaster a little further.
Since 1987, every economic downturn, the United States respond by lowering rates and sprinkling money markets. The result was a debt overall (government debt, financial institutions, businesses and households) of over 350% against 150% of GDP in 1975, a financial sector that has literally collapsed on itself this year and a government that must go into debt up to 12% of GDP this year to address this situation. We can estimate that the violence of the crisis shows that private agents have now reached their debt limit.
Our central banks are happily returned to the same pattern. This is not a solution when private agents reducing their debt. How to make banks lend to enable the money created to move and operate the money multiplier if private agents do not go into debt? You understood, the only solution is the government debt that it can go into debt to gargantuan levels and fund maturing debt by issuing new debt.
It was understood: the state debt is not a choice but a necessity to avoid a total blast. It is for this reason that the Japanese government has debt levels are so important and for this reason that our states will do well. An alternative exists and that is a monetary revolution as the proposed Maurice Allais and Irving Fisher. Yet in the present state of our monetary institutions, we have no other choice.
Identifying the fundamental problem seems to escape many analysts. It very simple. In most economics textbooks is that the seemingly innocuous phrase "credits are deposits . This phrase implies, however, two extremely serious facts "without new credit, no new deposit" and "mortgage repayments undo deposits. Repayment of private debt is impossible for the reason that it would eliminate the necessary tool for any market economy: the currency.
Japan tried to stimulate investment and credit to households cuts key rate to 0% and a policy of increasing the monetary base. But these attempts have had limited effect. Japan had a considerable advantage that we will not in future years. The world has experienced tremendous growth during the past 20 years, with Japan being one of the only industrialized country to experience such a crisis. She was thus able to cope with weak domestic demand to focus on exports, which contributed greatly to the health of the Japanese economy during the past 15 years. Secondly, it was one of the only countries to finance such deficits and could easily find funds with low interest rates. In our current context, the vast majority of OECD countries seeking to finance public deficits very heavy in the coming years. The states are likely to have far greater difficulty in finding low rates.
Our situation is perilous, whatever is said. We live in a monetary system that has actually never been carefully considered. When Bretton Woods collapsed in 1971, we switched overnight to a floating exchange rate regime. The system has stood up and showed good signs of stability. Yet it has never really thought about it. This system is considered as immutable is really a pure accident of history. We're just used to it.
For what reason this system, the result of historical contingency should be infallible and could not possibly lead us to an abyss? The great pyramid of monetized debt has seriously weakened. States are busy plastering the heavily into debt but who knows if his fall was not inevitable?
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