when a severe crisis hits the core of banking sys-
tems, causing major problems to balance sheets
and leading to bankruptcies, it takes the economy
3 to 4 years to regain its normal growth rate —
which will still remain below pre-crisis levels.
Moreover, we will see more profound changes in
the structure of the economic growth system.
Trends towards new forms of growth are emerg-
ing in the US, and this phenomenon will also
affect the global economy.
Do you believe that the US policy of causing
fund outflows is correct? Aren’t there any
inflationary risks?
Yes. The US Federal Reserve has launched two
rounds of quantitative easing. These two rounds
are very different from each other, and quite often
lead to confusing references in the Press. The
first round, which began in 2008, following the
Lehman Brothers collapse, increased monetary
supply in the economy, i.e. raised the Federal
Reserve’s budget from $900 million to $2.3 billion.
We are talking about a double or triple budget
here. Under normal conditions, this might have
been considered inflationary, but what really hap-
pened was that, all this money, all this liquidity
was designed to allay any fears that there was not
enough money. In fact, if you look at many of the
US commercial banks, you will see that they still
hold large quantities of the money issued back
then by the Fed. Usually, commercial banks hold
almost $2 billion as reserves, but today this figure
has risen to €1 trillion, and this is why we don’t
see any inflationary pressures. The second round
of quantitative easing, which started almost a
month ago, is much different. In the former case,
the Fed tried to open many markets. So, it
extended loans to McDonald’s, the Bank of
America and many other organizations, financial
or otherwise, because the credit market was not
functioning properly. This time, the Fed is
attempting something else. They simply say: We
will inject more funds in the economy, by pur-
chasing Treasury bonds.
Does this mean that they are trying to boost
supply, instead of demand?
They are trying to boost supply. But it is still
unclear whether this will cause inflationary pres-
sures, since some are claiming that without this
liquidity banks may be even more inactive and
unable to lend, and this would lead to deflation. In
my opinion, this second round constitutes a strat-
egy for preventing or mitigating the risk, in order
to ensure that there is enough liquidity for banks
to be able to lend, and keep on lending, so as to
finance the beginning of a recovery.
Trade with Greece
84
So, if I get this right, having recently read
one of your articles, do you believe that a
low inflation rate is not necessarily bad?
I believe that an inflation rate of 1.5% to 2.5%
is the most reasonable rate we could
achieve. There are many reasons why this
rate should not be equal to zero. A good
question is “why shouldn’t we have zero
inflation?” I would like to know what the
prices will be, not only today and tomorrow,
but also ten years later, in order to be able to
plan my retirement. But there are many rea-
sons for shunning a zero inflation rate. So, a
1% or 2% inflation rate is not necessarily
harmful; it may, as a matter of fact, be desir-
able. History has taught us that deflation is a
very dangerous scenario, when prices start
to fall. During the Great Depression, the
worst period in recent American history, one
of the most disastrous occurrences was
deflation. Deflation was essential to that cri-
sis, because by reducing prices it increases
the indebtedness of businesses. Therefore,
you must sell a much larger number of prod-
ucts to repay your loans. So, when deflation
occurs, businesses cannot repay their loans,
because prices are very low. When the loans
are not repaid, the banking sector starts to
suffer and —in case there are many non-per-
forming loans— banks start to experience
balance sheet problems. Consequently, the
banks are unable to lend, in which case the
companies are forced to sell their products at
very low prices, because they do not have
enough revenues to repay their loans or
cover their payroll. When they start selling at
lower prices, deflation occurs. Deflation
imposes burdens on the rest of the economy,
and thus we are led to a vicious spiral.
