Banks and real businesses in a money drought

If you open an economic schoolbook for beginners you will find there one of the basic principles of the economy - when government spends too much, the business can not spend enough. The logic is simple - when the government borrows too much money from creditors (markets), less money remain for the real economy, as generally the quantity of money is limited.

In a desperate effort to fight the government debt crisis EU-governments extracted almost all possible finances from markets and even used non-existing artificial finances by starting a money-print. Even so the indebted governments are not yet saved. At the same time the rest of economy is left with no money and this can lead to an entire business crash.

At current moment exactly this classical schoolbook case is happening in bank sector. With all money constantly going to governments the banks can not find resources to finance their general activities. The interest rates are rising and this creates losses. If the situation continues to worsen, much banks will go bankrupt. But even if this is avoided, the main problem are not the banks, but their customers - companies and individuals. With banks in difficulty of finding money, there will be no credits for the real economy. The same economy we all rely on for taking us out of crisis.

It is not a complex financial problem that requires genius ideas for decision. It is a simple case studied at 1st year in universities. The more government spends, the less economy spends. So if we like to go out of crisis we must not only make some austerity measures to lower the deficits to 3%. It will be good if we cut much more in spending and make the government intervention in economy much lower. It is not a question on balancing the government budget. It is a general question how much we will decide to go for growth (private spending and investment) and how much will be for the less productive public sector. Even in the budget is with 0 deficit, the growth will be weak if we continue to give the government to spend 40-50% of GDP.

Dobri
April 25th 2012

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