Understanding the Euro crisis

The key to understanding the crisis in Europe (and around the world) is to go back to the classroom.

When economics professors start their lectures they often draw on the blackboard (or used to) an x-shaped graph with an x and y-axis.  One of the lines represents the real or physical aspect of the economy and the other represents the financial.

This is an important distinction which is mostly forgotten when we leave the classroom.

If we want to understand what is happening in Europe we must look at both sides of the graph.

On the financial side I think the way in which we create money is a Ponzi scheme which collapses from time to time.  We are probably dealing with a financial collapse which is made worse by what is happening in the physical world.

Since the depression of the 1930s the people of this world have used up a lot of resources.  There may be lots of resources left but we have used the most accessible.  What is left will require a lot more energy and work to extract.   This has to have a major impact on the economy.

To deal with the financial crisis we can regroup and continue until the next crisis or we could try to figure out a new way of creating money.

To deal with the resource crisis we may have to reevaluate our commitment to economic growth.

Considering the psychological and political difficulties in changing the way we create money or dropping a commitment to economic growth one starts to think we may be better not to try to understand the crisis.  But that too might pose some problems.


If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

One Response

  1. This note displays little knowledge of the problem. Ponzi scheme indeed….

    The question is th’optimsal currency area’. It is now too large. why?

    Two competing theories.

    1. You nedd a single government for the entire are, with a single fiscal policy.

    2. The different countried in the EZ have different rates of productivity and competitivenes, and the Euro is under valued for Germany and over valued for the rest.

    I prefer thelatter explanation. Fiscal unions and banking unions won’t solve the problem.

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