The current economic situation is challenging because it is bringing up issues that are outside the range of experience of either the present, or the most recent previous,  generation of politicians.

One would have to back to the 1930s to find politicians who actually had real life experience of the sort of problems we face today.

In the 1930s, there was

1.) a collapse of confidence, in and between, banks, which paralysed the economy.

2.) There was a gold standard (currencies had a fixed exchange rate with gold and the supply of gold was limited) which, like the euro, precluded countries using the standard from devaluing or printing money as ways on inflating debts away and thus making savers pay for the mistakes of debtors.

3.) There was also a slowdown in the rate at which people spent money (“velocity” is the economic term for this), and that meant there was less bang for each buck that was printed.

All these things are happening today, 80 years later. Read the rest of this entry »

The financial crisis affecting banks and Governments is no more than a symptom of a deeper problem. That problem is a loss in relative competitiveness of both Europe and North America vis a vis the emerging economies of China, India, Brazil and others over the past twenty years. The loss of competitiveness was accompanied by an unwillingness to face up to long term problems like the eventual cost of ageing societies, and the ephemeral nature of some of the innovations of the so called “new economy”.

The boom- driven expansion of credit was like an anaesthetic that concealed an underlying loss in competitiveness from us until 2008. Now that the anaesthetic has been withdrawn, after such a long time, the pain is acute. The human cost is all too real.

The answer to this for all European countries is, I believe, to work to increase what economists would call the total factor productivity of our economy, the productivity of the way in which we use all our resources, public and private, capital and labour, tangible and intangible. We need a new way of thinking , an enhanced orientation towards finding ways to earn a living from meeting the needs of the rest of the world . Read the rest of this entry »