Figure 6. The German DEBT/GDP ratio projected forward. Here the growth in the GDP was assumed 3.7% -- the 2011 rate -- and the starting DEBT/GDP ratio is assumed 81.7% -- the rate at the end of 2011. These results are for the recursion model: "The Recursive Problem -- II" presented subsequently. The line is at the paradoxical 7% value -- where rates are suggested to lead to "unsustaniable" run-away debt condition.
(2/2/2012)
At present, the ECB is following the US Federal Reserve strategy and is “printing money.” The basic goal of this procedure is to make funds available to primarily private banks, in order to keep borrowing costs down. We are doing the same thing (QE I and QE II), as the Fed buys up existing Treasury debt. The Fed has kept interest rates on 10-year bonds near or below 2% for the bulk of the past year.
One might ask why the US hasn’t seen inflation rear its ugly head? We actually have had inflation occurring although slowly: what did you pay at the grocery store a year ago for 1 lb of steak, for example? Now what do you pay for that same 1 lb of steak? But there is another mechanism at work. Americans are taking extra money and putting it into savings, thus avoiding the rush to purchase consumer goods. Hence, costs are still down somewhat because demand still hasn’t started up.
So far the Fed has kept its target of maintaining inflation at or near 2% (we’re actually less now). As a further incentive to keep interest rates lower (particularly in lieu of the European credit situation) the Fed is considering a QE III. The focus of the suggested QE III will be to help alleviate the problems in the subprime mortgage security sector.
The general consensus is that “capitalism” now exists in several forms [Financial Times 2/1/2012]:
- “economic Darwinism” – Anglo-American Model
- “state capitalism” – China
- “Euro-capitalism” – Europe
- “democratic development capitalism” – India & Brazil
- “small-state entrepreneurial capitalism” – Singapore, Gulf States, & Israel
The global debate is not on whether or not to implement “capitalism,” but in what form. Rothkopf (above reference) suggests that the US is too “free-market,” allowing rogue elements to implement a “survival-of-the-fittest” approach, rather than a more balanced “socially responsible” form. Everyone does agree, however, that “capitalism” in general is the optimum form to come out of history.
