Printing money is not the right solution to get us out of the crisis. It will
be a temporary ILLUSSION. Printing money to pay goverment deficits , public debt
etc etc will create inflation and thus devaluation of the currency in the
medium/long term. If printing money was the solution, why dont goverments also
print money to capitalise their Banks or give millions of paper money to all
their citizens to pay back their debt??
The solution to the crisis is the increase in wealth/capital/job creation through real productivity , expansion of the economy , foreigh capital injections in the economy (exports, tourism etc ) etc etc etc
Consider the following example …
Cy Fantasy Island is a newly inhabited island by 1000 persons. On their first day on the Island the wise men of the Tribe decide to organise the country. Elections take place, the goverment is formed. A Central bank is created. 100 persons are employed by the goverment. The goverment must find ways to pay the goverment employees. They come up with a Briliant idea. PRINT paper money to pay goverment employees .
Solution needed to be found for the 900 remaining persons who are still unemployeed. A politician comes up with another briliant idea. The goverment will built a factory that will produce cars, employ all 900 unemployeed persons .
The goverment needs to import plant and machinery from Germany for the car factory.The cost of the machinery is Euro 10m. The new currency of the country is not accepted by the foreigh factory and payment needs to be made in Euros. The goverment makes a LOAN of Euro 10m from a foreign Banking institution that opened a Branch on the Island.
The current structure of the New Economy is as follows:
-Goverment foreign debt euro 10m.Foreign debt denominated in local currency 10M Cyprus Pounds.
-Goverment employees, Central goverment 100.
- Goverment eployees through the Car factory 900.
-Unemployment in the Economy : 0%
-The currency of the Island is Cypound and its value is fixed at a rate of 1:1 with the Euro.
Factory production begins. The goverment needs car orders/sales and advertises a 10% discount on first 1000 units to be produced. Selling price for each car is Cypound 20,000 plus VAT of 20%. All citizens of the country apply and get approval for a Loan from a Foreign Bank Branch and place an order at the factory. 50% prepayment on the car price was paid.
Production for the 1000 cars begins and will take 12 months. During these 12 months there was prosperity on the Island, everyone had a job, the goverment had income to pay its employees etc etc
At the end of the first year everyone got their brand new shiny car. Everyone was happy….
Year 2 begins. No more orders for cars are placed . Everyone on the Island has a car they do need a second car. No orders are placed from abroad as the car selling prices can not compete with similar japanese or even european cars. Production slows, stocks accumulate. Every week factory employees are fired. The factory is making losses.
Unemployment increases every week.
The goverment takes 2 measures. (a) Prints more Cypound to pay goverment employees . b) The currency is devalued by 50% compared to the Euro and the Japanese Yen in order for local car selling prices to be attractive.Some new orders are placed from abroad.
The factory is still making losses. Only 100 workers are still working in the factory.
The structure of the economy at the end of Year 2.
-central goverment employees 100.
-goverment employees through the factory 100.
-unemployement rate 80%
- Goverment debt in euros 10m .
The factory continuous to make losses and closes. There is no demand for the Cypound. The goverment is paying unemployment benefits and does not have any income from Vat as noone buys cars anymore.
The government decides to print more Cypouds and gives to all the 1000 citizens as unemployment benefits etc. The citizens repay back their local curency car loans.
The 10 million euro Loan of the goverment/factory needs to be repaid in EUROS . The bank is not accepting the Cypound as a repayment currency as they can not “sell” the Cypound no one needs it and noone is ready to pay anything for it. The government can not repay back the Euro Loan. The government is bankrupt.
The creditors/foreign bank get an international court order and take ownership of the Island.
Structure of the economy at the end of year 3.
- unemployment rate 100%
- everyone has a new car but no money to buy petrol.
-The government is bankrupt.
everyone including the “wise men ” of the Tribe blame the Bank for loosing the ownership of their Island.
The decision for own currency is not as easy and straight forward decisionas many might think . All parameters need to be carefully examined and especially the very basic principle of economics “demand ” needs to be seriously considered ….
Savvas Ttantis 1/5/2013
The solution to the crisis is the increase in wealth/capital/job creation through real productivity , expansion of the economy , foreigh capital injections in the economy (exports, tourism etc ) etc etc etc
Consider the following example …
Cy Fantasy Island is a newly inhabited island by 1000 persons. On their first day on the Island the wise men of the Tribe decide to organise the country. Elections take place, the goverment is formed. A Central bank is created. 100 persons are employed by the goverment. The goverment must find ways to pay the goverment employees. They come up with a Briliant idea. PRINT paper money to pay goverment employees .
Solution needed to be found for the 900 remaining persons who are still unemployeed. A politician comes up with another briliant idea. The goverment will built a factory that will produce cars, employ all 900 unemployeed persons .
The goverment needs to import plant and machinery from Germany for the car factory.The cost of the machinery is Euro 10m. The new currency of the country is not accepted by the foreigh factory and payment needs to be made in Euros. The goverment makes a LOAN of Euro 10m from a foreign Banking institution that opened a Branch on the Island.
The current structure of the New Economy is as follows:
-Goverment foreign debt euro 10m.Foreign debt denominated in local currency 10M Cyprus Pounds.
-Goverment employees, Central goverment 100.
- Goverment eployees through the Car factory 900.
-Unemployment in the Economy : 0%
-The currency of the Island is Cypound and its value is fixed at a rate of 1:1 with the Euro.
Factory production begins. The goverment needs car orders/sales and advertises a 10% discount on first 1000 units to be produced. Selling price for each car is Cypound 20,000 plus VAT of 20%. All citizens of the country apply and get approval for a Loan from a Foreign Bank Branch and place an order at the factory. 50% prepayment on the car price was paid.
Production for the 1000 cars begins and will take 12 months. During these 12 months there was prosperity on the Island, everyone had a job, the goverment had income to pay its employees etc etc
At the end of the first year everyone got their brand new shiny car. Everyone was happy….
Year 2 begins. No more orders for cars are placed . Everyone on the Island has a car they do need a second car. No orders are placed from abroad as the car selling prices can not compete with similar japanese or even european cars. Production slows, stocks accumulate. Every week factory employees are fired. The factory is making losses.
Unemployment increases every week.
The goverment takes 2 measures. (a) Prints more Cypound to pay goverment employees . b) The currency is devalued by 50% compared to the Euro and the Japanese Yen in order for local car selling prices to be attractive.Some new orders are placed from abroad.
The factory is still making losses. Only 100 workers are still working in the factory.
The structure of the economy at the end of Year 2.
-central goverment employees 100.
-goverment employees through the factory 100.
-unemployement rate 80%
- Goverment debt in euros 10m .
The factory continuous to make losses and closes. There is no demand for the Cypound. The goverment is paying unemployment benefits and does not have any income from Vat as noone buys cars anymore.
The government decides to print more Cypouds and gives to all the 1000 citizens as unemployment benefits etc. The citizens repay back their local curency car loans.
The 10 million euro Loan of the goverment/factory needs to be repaid in EUROS . The bank is not accepting the Cypound as a repayment currency as they can not “sell” the Cypound no one needs it and noone is ready to pay anything for it. The government can not repay back the Euro Loan. The government is bankrupt.
The creditors/foreign bank get an international court order and take ownership of the Island.
Structure of the economy at the end of year 3.
- unemployment rate 100%
- everyone has a new car but no money to buy petrol.
-The government is bankrupt.
everyone including the “wise men ” of the Tribe blame the Bank for loosing the ownership of their Island.
The decision for own currency is not as easy and straight forward decisionas many might think . All parameters need to be carefully examined and especially the very basic principle of economics “demand ” needs to be seriously considered ….
Savvas Ttantis 1/5/2013
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