The blackboard and the economic crisis

This week’s edition of The Economist has a series of articles focusing on the European financial crisis.

If we want to understand what is happening in Europe and the rest of the world I suggest we need to start by going back to the blackboard.

When my economics professors stood in front of the blackboard most of them drew a graph with two lines in the form of an x.  The macroeconomic professors usually labelled  one as representing the economy in financial terms and the other as representing the economy in  real or physical terms.  This is an important distinction which tends to be forgotten when we analyze problems away from the blackboard.  It is to easier to look at an economy in terms of its currency.

It is important to note that these two lines intersect so that what happens on one side will influence what happens on the other side.

So we need to ask if the current European crisis and if the crisis in the rest of the world is really a financial crisis or is it a crisis  on the physical side, in the resource base, which is showing up in financial terms.

There are some people who believe we are using  up resources at a rate which is  beyond sustainability.  If this is the case it is no wonder the people of this planet are dealing with a multitude of economic problems.

The Economist is pushing for policies which its  writers believe will restore growth.  It may be that instead we need to look for policies to manage negative growth.  The problem with policies to create more growth is that they will probably lead to even more using up of resources and will thus bring forward an even worse economic crash.

“Anti-American” bank safety issues.

There were a couple of bank safety issues in reports on today’s Huffington Post.

One suggests fears of the impact of the European debt crisis on American banks are overblown with only two banks exposed.  I am a skeptic.  Anytime a bank loses money the loss is likely to reduce the money supply which makes the exchange of goods and services more difficult.  It is hard to see that a major bank crisis in Europe would not be felt in North America.

The other item quotes the chief executive of JP Morgan Chase as saying new international capital requirements for banks are anti-American.

Once again I am skeptical.   In this case anti-American probably means anti-the short-term interests of the large banks. (His bank was one of the two named as being exposed to the European debt crisis.)

In normal circumstances the lower the reserves kept by banks the more they can loan out and the greater their profits.  Reserves are required to protect the bank against heavy defaults on money loaned and the prevent a run on the bank.

Considering the current state of the world economy we should be asking if reserves are high enough.

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