DEMAND AND SUPPLY

Another important issue to be considered and resolved within the framework of the National Economic Model is the idea that supply creates its own demand, which is a false statement. In a growing economy, it is impossible to secure the volume of consumption (demand) that will satisfy the growth in supply through the proceeds gained from factors of production. Each time it is necessary to cover this consumption gap by growth in money supply.

Thus, countries in situation of economic growth will also see growing gap in demand. This deficit in demand within a few years will become an insolvable problem for a growing economy. This is somewhat similar to the destruction of a body due to underdevelopment of the bone structure, which should support the body while it is growing.

In the early 90’s of the last century, when we expressed this point of view on deflation, the world had not lived through deflation yet. Then we predicted that within the next decade, the global economy would face a serious market problem, and in particular, if the management of rapid-growing economies failed to apply mechanism of money supply adjustment, deflation would become inevitable.

If you remember, in the mid-90’s Japan run into deflation for the first time. Nominal interest rates went down almost to zero, while the real ones remained positive. The decrease in purchasing power of households and pessimistic expectations about the future resulted in significant reduction in their expenditures. In addition, that, in turn, led to decrease in prices and increase in stocks. This process was accompanied by lay-offs of workers. Up to now, the Japanese economy has not been able to recover from that. Furthermore, the economy of Japan, which is currently oriented at exports to the USA, experiences serious problems with its gold and currency reserves of USD 800 billion.
On the other hand, in a number of our television conversations in 2003 we predicted that the German economy would experience recession that year and consequently increase in unemployment. We said that Germany would have to depart from the Maastricht criteria, increase the state expenditures, and even raise more debt.

After a while, our predictions began to come true. In 2003, Germany suffered economic recession, and then followed by increase in unemployment. Today Germany experiences the highest rate of unemployment over the last 73 years. The number of unemployed exceeds 5 million people. In addition, the German external debt increased up to USD 40 billion which entailed serious discussions within EU related to the conformity of the German economy to the Maastricht criteria.
We anticipate that the European Union, within which this economic practice has been implemented, and as we have already noted earlier on a repeated basis, will face disintegration no later than in 15 years.

The German economy had been fast growing. After transition from DM to EURO its growing economy was not supported by required money supply, since the right to issue  money was no longer with the Bundesbank in Berlin, it was transferred to the European Central Bank in Frankfurt.
The lack of demand is not the only reason for economic deflation. Sometimes economy, even despite money oversupply in the market, can suffer deflation, since imbalance in distribution of income is also one of the main reasons for deflation to occur and develop.

If income of a major part of society falls below a certain level, it means that this part of society has lost its consuming power. Even if there is excess money available in the market, the economy fails to come out of deflation, if the consuming capacity is not retrieved to those consumer groups. In other words, it is not possible to find a way out by mere decrease in the interest rates with the purpose of increasing consumption.

The example of the USA confirms what was said before. The Federal Reserve System has maintained for quite bit of a time the interest rates at 1% to overcome deflation. However, it only partially succeeded in this policy, since in the US most people have economic difficulties.

Moreover, the US in its attempt to bring the interest rates to zero was not able to effect the above-mentioned policy for long, as the US authorities were afraid of uncontrolled return of their own unsecured money from outside the country.

If we take Turkey as an example, we will see that the situation here does not differ much. Increase in prices for factors of production causes the growth in production costs; on the other hand, through the interest-rate policy the capital available for consumption is withdrawn from the market. As a result, the demand is seriously limited. Under such economic conditions, the calculation of the wholesale and consumer prices inflation in technical terms is also incorrect. If there is a high rate of inflation in the economy with simultaneous decrease in demand, the currently used method for calculation of inflation indices is incorrect.

Let us assume you grow wheat. Due to low demand, the wheat price goes down by 30%. However, if the prices for fertilizers and fuel oil that you use to grow your wheat have gone up by 35%, then pursuant to the existing method of calculating inflation, the inflation will be equal to 2.5%, while in reality for a farmer it will be 65%.

Thus, in order to avoid the current situation in our country it is necessary, on the one hand, to carry out the financial policy that reduces production costs and, on the other hand, the monetary policy that is capable of stimulating consumption.

We have also serious imbalance in distribution of income. In addition, this is one of major reasons for deflation.

Today, all over the world people prefer making money by means of money, but not by means of production. The daily turnover of the global financial market averages USD 2 trillion, whereas the annual volume of the world international trade amounts to mere USD 6.5 trillion. The concentration of money in such manner in certain hands hampers creation of necessary demand in the market. The capitalist system fails to solve this problem by means of the economic policy based on interest rates.
The problem of deflation cannot be solved merely by means of any single program. It is necessary to simultaneously carry out an appropriate monetary, financial policy in combination with the corresponding model of foreign trade and welfare state.

In all my certainty, I assert that the problem of deflation can be solved only by those countries that have abandoned the capitalist system and are implementing the National Economic Model.
As it is evident from the foregoing, there is no problem in meeting limited human needs. The economic problem is to implement projects that will open way to the use of available infinite resources by entire society.

If we accept the concept of infinite resources, then under the National Economic Model the main question is evaluation of these resources and securing fair use of these resources by each society member.

According to our theses, this can be effected within the framework of the National Economic Model by a responsible human being, who will place the resources at the service of the entire humankind.
The National Economic Model is a model, which examines not specific aspects of the problems, but the problems in their entirety; it proposes a solution to all issues and does not leave any issue unresolved.

In the history of economics, there was no other well-known comprehensive thesis like the National Economic Model. In accordance with our theses, all economic problems are interrelated. In addition, in solving any problem, it is necessary to settle not just one aspect of it, but all the aspects connected to the problem. Only the “overall solution model”, systematized within the National Economic Model, is the way out for the world economy.