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25 August 2010
Nicolas Michellod
It's been a while since my May 2009 post, whose title was: The consequences of printing money. What has changed since end of May 2009? Let's try to review the two main ingredients that are influencing our economy: Government debts are increasing. Based in Switzerland - in the heart of Europe (geographically I mean since Switzerland is neither part of the European Union nor the Euro zone) - I was in the first raw to follow the Greek crisis. The lack of fiscal discipline and the absence of economic growth in Greece have contributed to put pressure on the Euro zone but eventually a new bail-out plan (at least a guarantee to launch one if needed) has been decided with the agreement of the German government. This test has demonstrated that the Euro currency system works well in good times but represents a weakness for Euro zone countries when some of their members are in a difficult financial situation as it is the case now not only for Greece but also for Spain, Portugal and some others. Stimulus packages have still to prove they work. The US counts on stimulus packages to boost its economy. Many policymakers thought the stimulus package decided following the 2008 financial crisis would help the US economy to get back rapidly to growth, which it temporarily did but it appears now that the overall economic situation in the US is deteriorating again. If we look at the industrialized world right now we can make the following statement: 1) European countries (at least the majority of them) and the US have serious concerns with relation to their debt level. Some European countries have decided to cut public spending like the UK, Greece and Spain. So far, there is not a clear trend to implement massive tax increase. 2) The US still continues its Quantitative Easing (QE) strategy. The Fed purchases the US government debt contributing to printing more money. Right now it seems that the debt level is not a priority for the US government. This situation leads me to ask myself important questions for the future: If there is no or very slow growth for a while how will governments improve their financial situation without increasing taxes? If they increase taxes will it contribute to kill any potential economic growth that is already predicted to be anemic? Is it possible to see a major government failure in the next 5 years? Government's bail-outs of financial institutions have not solved the problem but just allowed them to gain some more time. But we should not forget that governments can print money but they cannot print jobs. There might be a no-exit path here unless governments address the chronic deficit and debt problems and together agree to restructure the international monetary system.

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