Innovation - is a historically irrevocable change in the method of production of things.
J. Schumpeter


M.I. Tugan-Baranovsky

J.A. Schumpeter

N.D. Kondratiev

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Forecasts

IEE Forecast. Dollar, oil, steel, and the global innovational system will influence the world dynamics


Last years we could watch how a new economic policy was applied. That was a grandiose experiment. Genesis of macroeconomic fundamentals has formed up to the beginning of 90th and it supplied all countries with specific tools. These tools do not concede, but in many cases surpass power tools in force. As observations show, successful application of the new tools by the countries that are economic leaders has allowed to influence but for their national interests the world economic systems. In a way, this policy had such a powerful influence in the short-term and medium-term periods, that it could surpass even the innovative policy. Probably it happened, because the given new policy itself has presented a systemic innovation at the global level.

All began with aspiration to overcome the economic crisis and to achieve the competitive advantage. This could be achieved by manipulation with the help of monetary, and, in particular, of currency policy. Probably, nobody could predict the result. Now it is possible to consider it the case of economic competition where achievement of advantages is reached not so much by separate firms or their associations by introduction of innovations, etc., but by use of all the state financial power.

More on the details of this mechanism

They are simple. It is not a secret, that use of tools of the monetary offer can influence the dynamics of effective demand, final consumption by households and investments of firms. Not in a smaller degree the monetary offer influences the dynamics of savings, streams of international capitals, export and import operations, etc. 

So, for example, if with other things being equal the central bank of a country increases the monetary offer, it will cause reduction of money price of this country. And not only at the national markets, but also at international. In answer, households of the country will reduce savings. So, the part of their income, which was redistributed by them on consumption, will increase.

Downturn of the money price will encourage firms to invest more actively. The percentage costs will reduce because of the reduced money price. But the most important is, that the exporters of this country will get advantage because of a decreasing rate of exchange. It means that foreign economics will consume goods and services of the named economics more actively.

As the result, the three basic out of four institutional sectors in national economy (households, firms and foreign sector) will become more active if the monetary offer increases. Note, that active consumption is possible. It is possible if the central bank will strictly watch inflation and not permit its excess of value of a natural level by her; if markets are developed enough, not overruled by the state and react to the slightest changes of a conjuncture; if the economy is innovative enough, and has a little overproduction. Here the institutional development of the markets has the paramount value.

Let's consider an example with the US economy

When in the beginning of 2000th in economy of this country the crisis processes have started (it can hardly be called a crisis, for rates of the US economic growth at this period never fell below 0 %, however they have lowered below 2 % a year), the USA have carried out encouraging economic policy. It reduced a discount rate, and stimulated consumption with the help of budgetary-financial policy.

As a result of this policy, the internal consumption at the USA normalized. Thus, the decreased dollar exchange rate to euro provoked active "replacement" of commodity to foreign markets. Europe had no signs of crisis at that time.

However gradually gushed commodity from abroad has increased its offer in European markets. It has also lowered profitableness of local firms. This effect has amplified because currencies of many countries have been adhered to dollar and fell to euro, carried away by dollar. Having admitted too fast and big growth of euro rate, we believe, that Europe itself has aggravated situation, as its own exporters have reduced the incomes received from abroad.

We also believe, that the arisen negative reaction of the European economics was another consequence of inflexible ЕCB policy. ECB did not react to the external economic expansion in time.

We also assume, that the new phenomenon we speak about became unexpected in European economics. Till that time the main function of the central bank of any country was to maintain stability at the internal monetary market.

Money function protects national economic sovereignty. It is obvious, that it calls for a new judgment in conditions of economical globalization.

Here a new quality of competition in global economy has come to light. Which central bank can put a discount rate lower in crisis and thus which economics will hold on without inflation longer - that economics is stronger, and that bank becomes the winner in this unprecedented competition.

Deterioration of financial conditions of firms arises in losing countries. Without applying of encouraging economic policy, this inevitably causes growth of unemployment. Reaction as supervisions show, is this: as soon as unemployment exceeds threshold value of a natural level, it narrows the central bank corridor of opportunities to encourage economics, for in most of such cases risks of inflation grow.

If unemployment exceeds the natural level, the encouraging monetary policy can warm up not only economics, but also extremist moods of groups of people. Therefore, when process of a discount rate downturn has started in the USA, then ECB and, accordingly, a dollar exchange rate, had not much time for taking anticipatory measures. And, having missed the opportunity, the rate of unemployment already made 8-12 % in an economic zone of euro. It fully conformed to logic of the mechanism, which we consider here.

The discount rate has reached its bottom - 1 %, that was much less than ECB discount rate, which did not fall below 2 %. Having made active economics, FRS in the same way, on a smooth trajectory though also a little bit greater rates, than reduced, has started to lift a discount rate to the former level. Now we just observe this process at the medium stage of a rise.

Even now we already may draw some conclusion

1. Positive results for the winner

- The US economics was included into an active growth phase. Its rates "have left" the dangerous 2 % boundary and are at a level about 3,5 %. According to some optimistic forecasts US rates of economic growth can exceed a 3,7 % in the current year.
- Internal consumption has increased in the country.
- Unemployment reduced, and business activity increased.
- The country became one of the most attractive regions to investors in economic. The investment of the capitals, which were not finding profitable application in other regions, has sharply increased here.
- Economic growth and increased discount rate should play a positive role in national currency strengthening.

2. Negative results for the winner

- Sharp growth of deficiencies: accounts of current operations of the balance of payments and the state budget.
- Growth of traditional capitals for movement of capitals and the balance of payments. It increases accumulation of the traditional capitals.
- Accumulation of traditional capitals attracts growth of demand for the traditional resources (oil, steel, etc.). That inevitably causes growth of their prices and raises risks to level the advantage, gained with such difficult work.
- Reduction of national savings raises risks of future stagnation.
- Growth of reduction risks for long-term profitableness.
- Some decrease in probability of global innovation because of inflow and accumulation of traditional capitals. Decrease of savings.
- Creation of favorable conditions to the third countries for leading positions.
- Strengthening of "bull moods" in the markets of traditional resources… as the result of strengthened rates of economic growth in the third countries. Risks of advantage loss for the winner strengthen too.

The region which has lost "competition" has following results:

- Growth of rates of unemployment, and the deficiency of the state budget.
- Decrease in rates of economic growth below critical 2 %, which makes impossible fulfilling of the governmental employment programs in these conditions successfully.
- Increase in probable deflationary processes causes depreciation of capitals. After the crisis and deflationary periods there is a constant probability of increase in rates of economic growth in medium-term prospect.In any case advantage belongs to the economy, which was the first to start systemic innovative process.
The process has the following laws:
- It never arises in traditional economy, but goes alongside.
- It can arise, where: the traditional economy can sustain a great financial loading; there is developed military and industrial complex; there is a strong scientific school; there is a modern national innovative system.

I.P. Makarenko 

IEE

2005-03-16

Posted on the website: 2005-03-18

Comments on this article:

2008-10-09:
Прогноз ИЭЭ #6 (69). Мировая экономика получит импульс экономической активности в начале 2009
 среду 08.10.08 семь центробанков мира одновременно понизили учетные ставки на 0,5%
2007-02-06:
The forecast of the IEE #3 (59). Economic dynamics in Ukraine for 2007
In 2007 on the forecast for Ukraine following risks will be imposed
2007-01-18:
The forecast of the IEE #2 (58). Currency tendencies for 2007

Summing up 2006 it is already possible to speak, that for US dollar it was one of the best periods. We shall recollect even the end 2004 beginning of 2005 when its rate has sharply gone downwards in relation to practically all leading world currencies

2006-04-26:
The forecast of the IEE #8 (47).

In political relations between Yushchenko and Timoshenko eccentric events must happen to May 2006 (the Forecast on Hlebnikov Part 3)

2006-04-08:
Forecast IEE #7 (46). Europe: simultaneous growth of risks and sociopolitical pressure
The increase in the discount rate by the European central bank (ЕCB) in 2006 will cause a growth in the risks in the economies of incorporated Europe
2006-04-07:
The forecast of IEE #6 (45). Exchange risks of the world in 2006
afraid, that in the second half of 2006 the dollar exchange rate in the world exchange markets can fall to 30 % - 45 % in relation to ...
2005-05-10:
IEE Forecast [16]. Ukraine will not avoid crisis, if not to take precautions and not to start innovative processes
After year 2006, the economy of Ukraine will step in a phase of its first serious economic crisis
2005-04-27:
IEE Forecast (15). American economy will absorb the world capitals like a powerful pump in 2005
Even today we may predict the result of a FRS experiment on driving of the American economy from " a soft patch " at the beginning of 2000
2005-04-25:
IEE Forecast. If there are no innovative priorities, the habitation market will become a risky point of the fund for business and investors.

The real estate sector is a small drop, and but for economy it reflects the bitter history of Ukraine, and (without exaggeration) all the CIS history.

2005-04-05:
IEE Forecast (13). Investments outside of systemic innovations go "nowhere": on the lot of oil and dollar
World prices for oil and dollar exchange rate will be "the valve of constant pressure " for economic growth
2005-03-23:
IEE forecast and comment (II). If the discount rate will raise, dollar will strengthen
Though practically nobody doubts a possible FRS decision to raise a discount rate by 0,25 %, the world of analysts of the currency market has stopped waiting
2005-03-22:
IEE forecast and comments. On a sudden problem of " canceling of the obligatory sale of 50 % currency proceeds"
Political risks in management of economy do not weaken in Ukraine. That can provoke an economic crisis even in a short-term prospect (after 2006)
2005-03-18:
IEE Forecast. Dollar, oil, steel, and the global innovational system will influence the world dynamics
Factors, which will influence economic dynamics in the nearest future
2005-03-01:
IEE Forecast. Ukrainian economy is most likely to remain excessively dependant on tools of economic policy in 2005
Most likely, innovative processes, capable to bring Ukraine forward at any commodity or technological sphere will not start in
2005-02-25:
IEE Forecast. The World Economics Will Run a Fever For Some More Time
According to leading economist's opinion, continuous decrease of long-term rates in the world's most developed countries is one of the greatest puzzles in the financial world today. The problem is important for the USA, and other national economics
2005-02-23:
IEE Forecast. The World Economics Will Run a Fever For Some More Time
The world economics will run a fever for some period (5-10 years). It will suffer decreased production effectiveness, raised consumption of oil in China, price fluctuations for fuel. After that, we will experience an unprecedented and grand innovational project. The project will change the quality of all the world economics, absorb all the free capital, and increase long-term yield.
2005-02-15:
IEE Forecast: Growth of a dollar exchange rate can cause growth of the external economic risks for Ukraine
As to the internal factors, which compensate specified risks, it is necessary to carry significant potential of economic growth to them due to activization of internal consumption. It is a question of activization of the factors removing restrictions on ways of incomes growth of people, of fine and average business.
2005-02-07:
IEE Forecast. In economic there can be a slow economic growth with the crisis periods
The deficiency growth of the account of current operations in the USA is connected first of all with smooth and deep downturn of a discount rate.
2005-02-01:
IEE Forecast: on a dollar exchange rate, OPEC conference, and session of FRS board, Bush's speech and meeting of G7.
Events of this week will leave the trace in 2005 World discussions
2005-01-19:
IEE Forecast
The committee for Federal Reserve System (FRS) in the USA (FOMC) will raise a discount rate for 0,25 % having brought it up to the value of 2,50 % at the next session, which will take place on February 1-2, 2005.
2004-12-30:
IEE. In the coming year the price for gold will continue to grow
Gold already would seem ceased to carry out function of money, again in the price because of the monetary markets dynamics.