Wednesday, June 22, 2005

Sweden just cut its interest rate, from 2% to 1.5% and, given its independent status from the European Monetary Union, is probably more nimble than Europe (and Finland) in confronting the economic malaise that is taking hold of Europe.

Broadly speaking, what does this mean in layman’s language? Sweden is trying to reduce the cost of borrowing by reducing interest rates, thus hoping there will be more spending by consumers and businesses. Usually artificially induced economic activity can mean a rise in inflation. However, given that the prospects for economic growth are so low (due to high taxation and declining demographics), not only is there no danger of inflation, but there is a real danger of deflation: the reduction of all prices and wages. To put it even more broadly, Europe is getting collectively poorer, when compared to the rest of the world.

Finland, which is tied to the EMU, unfortunately can’t take the same kind of early independent action as Sweden, and will probably share with Europe the experience of sinking into greater national poverty. Most likely no one will notice, - or care - yet in a welfare state the stress lines will manifest themselves in all the familiar places: uneasing, and possibly increasing unemployment, more cuts in services, and longer waiting lines.

3 Comments:

Anonymous Dih said...

Not that it would be happening in you beloved USA, nah.

Inflation running rampant, Irak war failing (observe the oil and gas prices), a deficit too far. Probably the FED is now between a rock and hard place. Enjoy your 'free trade' capitalism at work.

2:33 PM  
Blogger Finnpundit said...

The latest economic statistics are actually very good indeed for the US. You have no reasoning behind your assertions whatsoever.

Your notions must be based on bitterness that the US, once again, seems poised to confound its worst critics.

11:43 PM  
Anonymous Dih said...

Yes economic statistic are quite ok. However if you dig deeper into them, you can see why you should be worried. It is just the current hedonistic CPI which doesn't really show the inflation, twin deficits and savings rate that trigger the alarm.

European economy is in many parts still worse off than the states.

Me bitter, nah. You bitter, couldn't be. :)

9:29 AM  

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