Is it a financial crisis? Maybe not, it is rather a crisis of sound leadership

The budget preparation and submission for the parliament approval is a test on the political influence. George Osborne, the Chancellor of the Exchequer of the UK passed the challenge on Wednesday, however, José Sócrates the Prime Minister of Portugal resigned after the parliament’s rejection of the austerity plan.

A burden of rising debts and a threat of insolvency force Europe to undertake budget deficit reduction measures and perhaps most importantly, to seek for the effective means to stimulate the recovery of the economy. As practice shows the political intentions to achieve the financial balance by increasing tax burden for corporations and individuals as well as the political commitments to protect and satisfy the essential needs of the increased socially vulnerable community, weaken states incomes and financial reserves. Consequently, that kind of policy deepens recession. In fact, political concentration on the solutions to ease the barriers of trade and production, to support business competitiveness and even small changes in tax reduction are welcomed by entrepreneurs and investors.

According to Osborne’s unveiled budget, politicians committed to reduce the costs of public sector and social support. Instead, they obliged themselves to create 21 new enterprise zones and apply specific measures to support businesses and high value manufacturing within those zones. At the same time presented similar public cost-cutting measures by Sócrates were opposed. Thus, political uncertainty, high yields on Portuguese bonds and a threat of insolvency, will foster Portugal to seek a bail out from EU and the IMF.

So, is it a financial crisis Portugal has to tackle? I do not think so. It is rather a crisis of leadership. If the budget was presented not as a plan of changed taxes and budget allocation in percentage terms but as an action plan of the development strategy it would be easier to gain political credibility and achieve support by the majority.

The outcomes of G-7’s intervention to support Japan’s recovery

G-7 agreed on selling the yen on Thursday night to prevent the Japanese currency from appreciation and help its domestic economy to recover after the natural disaster. The solidarity of the U.S., Japan, U.K., Canada, France, Germany and Italy and the nation’s prompt response to the critical situation is respectful, however let’s view the scenarios and outcomes of such intervention.


After the sharp decline of Japanese stock markets Japan threw trillions of yen into the markets to keep financial markets functioning. These monetary actions treated as financial stability measures are based on businesses self-support expectations. While Japan’s production is competitive and exchange rate is favorable to sell produced goods in foreign markets, it is likely that export industries will keep operating and even increase their production. Those desirable outcomes are well understood as one of the most important things for Japan is to master the rise of unemployment and place people those lost their jobs during the disaster.

On the other hand, additional sales of yen by G-7 central banks should support the devaluation of yen. However, what are the long term implications of this policy?

During a couple of years we saw the financial crises in US, Europe and now in Japan. The reasons of financial instability are different but one thing is common to all crisis management - monetary policy actions are just a short term relief. The increase of money supply which is used to keep financial stability and boost recovery most likely will have negative implications in the future. Uncontrollable money spread in to the markets may not reach those who really need financial support and directly contribute to the recovery. Moreover, excessive money amount in the markets boost inflation.

Thus, from my point of view, the G-7’s purchase of Japan’s government bonds and Japanese targeted subsidies to restore the outcomes of disasters would be a better decision.

Could the eternal engines be created?

Uncontrollable disasters sweep created wealth momentary and remind about the humans’ vulnerability against the nature powers. Destructive earthquake, tsunami and the explosion of nuclear power reactors in Japan weakened Japanese stock markets and coursed self-acting decline in global markets.

According to the direct damages, the companies those infrastructure were destroyed and production suspended as well as insurance companies may have a long lasting exposure to Japan. However, shares of rebuilding companies and producers of alternative energy resources may keep accelerating.

Beside the material losses in Japan, the explosion of the nuclear power reactors rise global concerns regarding the benefits of their efficiency versus risks due to radiation. Thus, after the Japan’s disaster the most attention may be shifted to better utilization of the nature powers such as wind, solar, water and thermal heat for generating practically eternal engines.

The rationality of current financial systems

Money is equivalent of value and its main purpose is facilitating swaps of products or services. Thus, does it mean that the value of produced goods or provided services fluctuates by itself according to the volatility in the foreign exchange markets? From my point of view, intrinsic value does not change however, the demand may be affected substantially. In short term, there are measures to hedge market risks but do we have foundations to keep stability of currency?

Today’s financial systems are more sophisticated and money possesses more functions. The one is very important – it is used as a device for future value creation. So, could the interest of producers to growth their businesses as well as sustain price stability and financial intermediates goals to multiply existing capital be harmonized?

Moreover, how much the same amount of money could be multiplied? Theoretically, as much as it is not restricted, in reality the amount of money is as much as it was issued. Thus, is an uninterrupted growth of financial wealth available and isn't sustainable growth losing its meaning in the current financial systems?

The same misunderstanding may be applied to the financial decisions that are made according to the market expectations. What is a rationality of managing market expectations rather than cash flows?

I think that markets fail to reflect real value and money is losing its main purpose - being an equivalent measure of worth.

Is the quantity more appreciable that quality?

The next year leadership transition in China is discussed alongside a 5 year government priorities. Inflation is the main task to manage, however further rapid, 7% average annual economic growth and attempts to increase domestic consumption make the primary goal hardly achievable.

Pledges to keep economy growth are common for all politicians. Has anybody promised differently and is the quantity more appreciable that quality?

It is certainly true that inflation caused by imported goods could be reduced by developing effective domestic industries. However, despite of efforts to ease dependence on imports in China, the structural inflation will come into force. The government have set a 16 % growth target for M2 in their plans to stimulate local consumption. So, that even higher inflation and greater social dissatisfaction may be expected.

On the other side the statement to improve the distribution of the benefits gathered from growth evokes curiosity. What are the preferences of capital allocation?