Transcript | 8. lecture: And what is next? Summary and starting points - University for modern Slovakia

The global financial crisis fully erupted in September 2008 when the U.S. government allowed the investment bank Lehman Brothers to fall. Financial flows in the banks in developed countries froze and, consequently, the financial crisis spilled over into the economic crisis and world economy in 2009 dropped for the first time in decades.

The reaction of governments and central banks was exactly in line with Keynesian theory. Into banks, but also into the economy huge amounts of money were poured directly to prevent their collapse and to replace, exactly according to Keynes's recommendations, the lack of private demand with the demand from the government.

The result was very controversial. On the one hand, preventing the collapse of banks succeeded and the recession was shortened in principle for one year. On the other hand, the enormous debts rose (especially public) in developed countries and the crisis has spilled over from the economic and financial into the debt one. No one dares to guarantee the sustainability of such development. If the crisis is treated with monetary and fiscal expansion, i.e. exactly with what was its reason, the logical question is - can it work? It seems that in the short term yes, so we shall see what happens next. Lord Keynes used to respond to the concerns about long-term consequences of his recipes with sally - "in the long run we are all dead." He was right, he is dead already, however, we are here and we need to deal with this insanity, which was left behind the application of his theory and his recommendations.

So - we shall see. In principle, such as are different views on what caused today's crisis, different as well are opinions on what to do, as well as opinions on what will be further development.

Let's rely on the politicians who make decisions about how the world runs and who behave in accordance with Keynesian prescriptions. Their faith in the success of further pushing of money into the economy lies in the hope that economies will start to grow relatively highly and thus they would manage to clear the accumulated debt and deficits. Or they rely maybe (albeit they do not speak about it) that the debts will be erased inflation. If so, then they befog and conceal, because Keynesian economists argue in favour of continued pouring money into the economy that they want to prevent deflation.

Economists, who are closer to the Austrian school, are worried that hyperinflation is waiting for us, and that it cannot go on forever this way. The continued pouring money into the economy creates more and more bubbles, distortions and imbalances that sooner or later break out into other global crises.

The fundamental problem in the world economy is the future of the dollar. The dollar is still the world's number one reserve currency and U.S. Federal Reserve relies heavily on it in its expansionary monetary policy. Lots of cheap dollars then lead to the growth of the capital market, but also to the rise in commodity prices, particularly oil and food. Inflation is growing, central banks should intervene, and the standard response is to increase interest rates. But that is a threat to economic growth and capital market threat. In the euro area, European Central Bank came to extremely precarious situation. On the one hand, inflation is growing, which would require lifting the rates, on the other hand, any increase in the interest increases the risk of collapse of the PIGS countries (Portugal, Ireland, Greece and Spain).

If the distrust in the dollar exceeds the critical level and all those who now hold the bulk of dollar reserves (China, Japan, Arab oil exporters) will begin getting rid of dollars, a nice mêlée may follow. Distrust to the U.S. dollar yet increases in the U.S. itself. In Utah, gold and silver have been approved already as the official currency along with the dollar, and similar measures are also underway in thirteen other states. Influence of conservative Tea party is growing rapidly, which is sharply critical of current monetary and fiscal policy in the USA.

So how shall it all end? I do not really dare to make forecasts and predictions. The reputation of economics as a science and the economists as the experts has suffered in the recent years, as probably no other profession. And their predictions suggest that it will not be better so soon. It is astonishing that the world-renowned economists, professors, and graduates of prestigious universities around the world may be so fundamentally diverge in their assumptions and projections. While one scare by hyperinflation, others warn us against deflation.

At the beginning of this project, in the first lectures for the University for Modern Slovakia, I confessed on the fact that I am much closer to the Austrian school, than Keynesian school. Probably also because I think it is much more consistent with common sense and its conclusions have also the ethical dimension.

Thus, to summarize, in the principle it is answering quite simple question: Who pays the bill?

The bill for irresponsible policy of indebtedness, of living beyond their means, and at the expense of the future. The bill for the absence of reforms, the bill for the convenience, for failure to obey the simple rules already known to our grandparents. For example, the " No work - no cake" or " A penny saved is a penny earned" or " A lie has no legs" and so forth. But the failure to comply with some simple economic principles such as the relationship between savings and investments, or unacceptable tolerance, even support for moral hazard, or disregard for the principle that free market and competition without bankruptcy are neither market nor competition. Institutions that helped governments to implement such policies were the banks - central and commercial. And those commercial earn significantly for it, and showed an admirable ability to create new and new financial products that had no added value, only masked the above policies and earned significantly. And then, when it snapped, they rescued themselves and were saved with the help of the politicians for taxpayer money.

If we really want to solve the problem and not just push it in front of ourselves, we have to return to the above simple but very important principles and rules. Otherwise, it certainly will not turn well.