Fiscal policy & free market

The fiscal policy is that component of the political intrusion in the real market that caused and will cause many turmoils. The main reason of a bad fiscal management is a political refusal to undertake only those measures that are beneficial for the economy. Let me explain.

The things are more simpler. The public budget has four sources of finance: taxation, borrowings, selling public assets and printing money. First two are more used. Taxation has an immediate effect and borrowings have a delayed effect.

Also, it has two main categories of expenditures: investments and consumption. Only investment expenditures could create value added. For example, a current investment in infrastructure could be a good basis for future economic developments.

Therefore, if incomes are bigger than outcomes, this is a surplus. In the reverse situation, there is a deficit. The efficiency of the public budget depends on the real rate of return for expenditures. More current expenditures without a good return, less money for tomorrow and more debt.

Well, in nowadays the government didn’t cut sufficiently consumption expenditures and it is struggling with a sharply increase in debts. The focus of politicians is on short term - just only before the next elections. And, of course, a balance between current revenues from taxation and social benefits/ salaries for public sector is political very hard to be attained because that could mean a loss in the electors votes.

An increase in taxation, even temporary, is the worst decision that could be taken ever. Why?

Firstly, because it is a pro-cyclical measure and it will increase the public deficits and the rate of unemployment. Secondly, the debt burden will being more expensive.

The good news is, in the current political conditions, only a big failure could determine a real reform. If this will be the case, the benefits on long term will be greater then costs.

PS: Why political decisions are fair? The answer is in the previous article.

An apparent paradox

The paradox is: as a form of communities leadership there is the decision of majority (the dictatorship of majority), and on the other hand, the average IQ of the majority is usually below to the entire population.

The intelligence is the only one that could creates value added and innovation. It is clear that the majority cannot produce enough resources so that they can maintain their current living standards.

The intelligence is grouped in businesses which create enough value added to give them a big power to negotiate, even with states.

There is an apparent paradox - between the dictatorship of the stupid majority and the smart minority - because few political decisions are really in favor of the majority. So this is the normality, the steady state of the society.

In other words, a large mass with a lower rate of IQ cannot govern a smart minority as long as it is dependent on the value added created by that minority, and politicians can only favor the interests of the minority.

In any society most of the benefits from political decisions are direct related with the average IQ of the majority.

The danger

Nowadays, some economists think that the increase in inflation will be the trend for the next period. Therefore, the monetary mass which is in people’s possession will increase substantially together with interest rates (both for borrowers and lenders) and all prices. The result is a lower standard of living.

The real facts are: all interest rates have fallen to a historic low, the quantity of money which belongs to the population has been decreasing in the last few years and there is a constant pressure on prices to decrease. This pressure is coming from a lower level of demand for all goods and services. The trend is clearing the way for deflation.

Many Central Banks tried to raise the monetary mass by the Q.E., i.e. by buying a lot of bonds before their due dates or by printing money, without any result in the markets. Large quantities of money were transferred from the state to a few persons (individuals or companies), most of the time without anything real in return.

Currently, all this new money is now in the markets and it is feeding ‘bubbles’ on commodities like gold. Asset prices have also been decreasing.

The danger comes from the possibility of transfer of property rights from people to Q.E.’s beneficiaries at a deflated prices.

Every political decision should have a cost-benefit analysis. If this is the case, all costs will have to be met by the general population because all new and existing money is public money. The short term credit for these decisions will go to the current politicians because social benefits will not follow the path of public revenues, which would have been the normal situation, i.e. all public deficits being financed by borrowings. Benefits for the long term will go to those who lent money to the state because they will gain the power to influence political decision making.

I entitled the article “The danger” because I suppose that the main role of public government is to represent the interests of majority. If this is not true, this article could be a true economic forecast for medium and long term period.

The Greek referendum: would have been right?

In the recent days all leaders of the world gathered at G20 summit in Cannes in order to take only those decisions which are more suitable for the current financial crisis.

The Greek's behavior is the main problem of this summit. I believe that the Greek’s application to the EU was fraudulent. Fraud is not a basis for long term relations. Now the public Greek debt has been increasing without any efficiency, i.e. all expenditure was for social benefits and nothing for investments.

In this world in which the human feelings are the foundation for the value of money, the main principle is that the society is impossible to continue to exist without ethics and morality. Another important thing is relate to the rights. Everywhere rights are followed by obligations. Without obligations, rights never exist.

The Greek Government did not organise a referendum when it used fraud by any means to gain more rights in the EU. Now, they do not want to assume their obligations. There is a misunderstanding of reality and a misuse of rights.

The ethics and morality are not present in the Greek's behavior. The proposal for a referendum in order to decide if they will accept or not the consequences of their actions is not fair.

International political pressure is normal in this conditions and it is just a step for rectify this type of wrong behavior.