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Macro Economics 101

Posted by on February 21, 2012
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There is a simple equation that can be used to comprehend macro economics.  Understanding this equation explains a great deal about how many of the economic issues we face today, including Greece’s, China’s, the EU’s, and even our own US economy have occurred.  That equation is (GDP – Debt / currency).  In a successful economy all three of these variables are kept in sync with each other.  Once these variables get out of balance, the economy suffers.  Acknowledging this equation also helps us to find the answers to fixing these issues. Let’s start by looking at how this equation has affected Greece.  After the Greeks joined the EU they assumed that since they were no longer responsible for their own currency this equation no longer applied to them.  Therefore, they became a non-productive (decreased GDP) entitlement society (increased debt).  The equation ratios became out of balance.  This problem became even worse when the EU responded to Greece’s debt by continuing to loan them more money thus putting the ratio even further out of balance.  The only way to ultimately fix Greece is through massive spending cuts combined with private industry growth to bring the debt and GDP back in line with each other.  Instead the EU just announced yet another round of loans.  They might just as well build a bonfire with this money because I can guarantee it won’t work. China faces their own economic issues because they have approached this equation from a different angle.  They have excessive GDP (almost 10% annually) as they seek out ways to keep all of their people employed.  The only way to sell all of the excess goods they are producing is by making them attractively priced.  They are doing this by manipulating the currency portion of the equation.  They continue printing money out of thin air thus forcing the devaluation of their currency but also causing domestic inflation.  It allows their products to sell in overseas markets, but their people aren’t any better off because of the inflation they have to deal with.  What they should be doing is curtailing excessive production and leaving their currency alone. The EU has been laser focused on stabilizing the currency portion of their equation, but until they get a handle on their debt by cutting entitlements they will never be able to get it to balance.  What many socialistic style European countries don’t get is that when you inhibit the profit motive through taxation you lose the efficiency and innovation that is required to sustain the sound GDP that is required to offset the increased debt associated with the entitlements these countries relish. France is a perfect example of this as their GDP has only averaged only around 1/2% per year since 1980.  What they should be doing is lowering taxes in order to raise their GDP while cutting entitlements to curtail debt to get things back in line. Finally we can apply this equation to the US.  As we linger in this prolonged recession our GDP is slowly being eroded away.  At the same time our debt is skyrocketing.  This has pushed our own equation out of balance.  What Obama has been attempting to do is offset poor GDP with even more debt which is the exact opposite of what is needed to get us back in balance.  The logical cure would be to lower our debt so that the GDP variable can catch back up.  However, Obama is growing ever more frustrated because his approached hasn’t worked, so now his next plan is to manipulate our currency through Quantitative Easing (printing money out of thin air).  Once this happens we will have all three variables out of sync.  He in essence is duplicating the mistakes that both China and Greece have already made and proven to not work.
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