The coming weeks are of vital importance for the European, and the world , economy. I was in Brussels last week and the sense of urgency was palpable. The French Prime Minister, Francois Fillon spoke of our being on the edge of a volcano that could blow up the EU, and our contract between the generations, unless it was capped.

As the European Commission said last Thursday we need to break the vicious triangle between doubts over

.the sustainability of debt of some countries

.the stability of the banking system and

.growth prospects of developed countries

Unless we find a reasonably convincing way of resolving these doubts, and of breaking the vicious triangle, whereby each doubt aggravates the other, we are in real difficulty.

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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 »