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Banks, currency, deficit

by on 24/05/2015

1. The annual World economic growth in the last 20 years with some exceptions was between 3-4 % (only negative year of 2% was 2008). It means the world economy almost doubled in these years, viz…
This increase created demand also for increased financial liquidity that was supplied by US$, and the result is the US deficit.
2. The Euro partly replaced US$ as world currency with some recent setback. I believe the Euro crisis is nearing to its end and and most probably Euro will be back in the near future. Yet, the European economy is a long term stagnating economy, due to demographic and political problems. So the Euro will never really have the capacity to compete US$ and endanger its position.
3. China with its increased self confidence, probably will start to shift its policy from exporting and net lending economy towards more balanced economy, with increased local consumption level. (This trend is already happening). If this process will be cleverly done, this process will be done with creating a stronger and internationally recognized freely convertible currency. The Chinese Yuan will be appreciated in real terms against the US$, Yen and the Euro (the alternative is inflation). This process, even if marginally damaging exports will only strengthen the position of China in the world economy.
4. As to unprecedented world economic growth, the modern economy is based on debts expecting to generate returns as interest and equity investment expecting high yields. This can be secured only while the economy is growing. Otherwise an economic crisis is inevitable. Yet if there will be no major technological breakthrough in the fields of energy, basic raw materials, accumulated environmental unbalances, this resources have their limits, and when reached their price jump is inevitable. The world economy will have to react to these commodity price increases caused by limited resources with slow down. This is why to try to solve the problem of low economic growth with encouraging increased consumption, like in US is a very short term short sighted policy.

5. While the western banks loans were consumers credit the Chinese banks loaned mainly to investment projects. At 2008 crisis it became clear which bank system has done better. To be a Chinese leader i wouldn’t run to western style banking system, leaving to the bankers full autonomy how to manage the depositors money. Yet banking system based on decisions of local politicians is also not a good solution. Maybe there is place to create a system, where the depositors have a say as to the credit policy of the banks? At the end of the day the depositors are the local population, and if the banks would be forced to act in harmony with them, the local politics would become also more democratically oriented.

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