Azerbaijan, Baku, Dec. 18 / Trend /
Emeritus professor of economics at the Université Paris-Dauphine and Former President of the Mont Pelerin Society advocating free market economic policies and the political values of an open society Pascal Salin for Trend .
It seems that the worst period of the financial and economic crisis is over. Short-term rates of growth are positive in many countries and "experts" consider that they ought to be positive in most countries next year. But unemployment remains high: Its rate of growth has been particularly high in the US where there is more flexibility in the economy than in most other countries. However, this may also mean that one can expect a more rapid decrease in unemployment in the US, as it has been the case in the past.
Now, it is certainly impossible to define a precise point in time at which the crisis is ending and the recovery takes place. To be sure, statisticians are measuring the rate of growth of the GNP and one might be tempted to say that the recovery takes place whenever it shifts from a negative to a positive value. However, this is not sufficient. In fact, as we have already underlined in previous statements, one important characteristic of the crisis is the fact that the crisis does not imply only a global change in the economy, but also structural changes. The crisis did happen because there had been an excessive creation of money and debt in the past and an excessive development not only of financial activities, but also of capital-intensive activities (such as car production) or housing, which relative prices had increased too much before collapsing during the crisis. From this point of view, the crisis has to be interpreted as a period of adjustment in the structure of production and in the structure of prices. This is the reason why it is very difficult to assess whether the crisis has fully come to an end or no. In fact, no one can pretend to know what ought to be the "normal" structure of production and the "normal" structure of relative prices. Only the market "knows", which means that individuals are acting on all markets over the world, and reacting at any time to new information coming to them, specially under the form of price signals.
The world economy can thus be seen as a sort of cybernetic system in which people continuously adjust to signals through processes of trials and errors. The price signals had been distorted during the period of excessive expansionary monetary policy and excessive creation of debt and the crisis suppress these distorsions little by little. Now, a given producer has difficulties in getting a clear view of his own future, just because there are these big changes in relative prices. It implies that an external observer is comfronted to a really impossible task if ever he tries to forecast the future for the whole world economy. I am personally surprised to read, for instance, that the rate of growth of the GNP will be 1.3 % in the US and 0.4 % in Europe. In reality no one knows.
Therefore, another attitude ought to be accepted, namely a more modest attitude. It consists in recognizing the limits of information and adopting another approach of these problems. In this situation of great uncertainty, we can rely, however, on a relatively correct idea, namely that the best way to overcome this problem of information is to let markets play the cybernetic process we already mentioned. After all, a given producer has to care about his own market and he is the best qualified to get progressively an evaluation of the way this market is changing. To him, knowing that the rate of growth of the GNP may be one figure or the other is perhaps a useless information, just because growth is not homothetic in all activities. This also means that, if one lets markets free to adjust, the crisis ought to come to an end in a relatively short period of time (one to two years according to past experience) because it is the most powerful way to get use of the information dispersed among billions of people all over the world.
Unhappily, in most countries markets are not free to play this role in adjustment, because of economic policies which are wrongly designed and create the risk of a longer period of adjustment. It is the case with monetary policies which are, once more, too expansionary. Central banks have decided very low interest rates and money creation is important (in particular in the US).
However, it is true that, for the time being, interest rates on markets have not fully followed the decrease in central banks interest rates. By the way, this implies that banks are making huge profits, which may not be interpreted as a proof that their balance-sheets have been cleaned of all "toxic assets" and that the financial crisis is over. Anyhow, there is a risk that, if ever these expansionary monetary policies last for too long, new distorsions be introduced into the structure of prices and production, with, possibly, a new crisis some years ahead. Similarly, the huge increase in public deficits - wrongly inspired by debatable Keynesian principles - creates new distorsions in productive structures, makes more difficult the financing of investment in other activities, and finally implies an increase in taxes to reimburse the public debt. The best recovery policy would be not to make so-called "recovery policies". But, unhappily, politicians - and the public opinion - are not ready to accept such a recommendation
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