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Chapter 8 Who Directs Economic Activities (4)
In 1999, the euro was born as a new currency.Since then, in terms of price stability, stimulation of trade and investment, financial market integration, and the internationalization of the euro, the euro has fulfilled its mission beautifully, and even exceeded its mission.

"My name is the only thing I leave to my son!" Napoleon famously said, but what he left behind was the idea of ​​the "United States of Europe".This dream was completely shattered at the Battle of Waterloo in June 1815.After World War II, Germany and France, which had tried to unify Europe by force, began to explore ways to move from economic union to political union.From the European Coal and Steel Pool, the European Economic Community to the European Union, Europe has been on this path.The introduction of the euro has truly realized this great dream.

On the road to the dream, it is accompanied by the joint efforts of EU countries on fiscal policy.

Before the introduction of the euro, the European Union passed the "European Economic and Monetary Union Treaty" (also known as the "Majou") in December 1991, requiring that the government fiscal deficit of countries joining the euro zone should not exceed 12% of GDP, and the balance of government debt Cannot exceed 3% of GDP. During his visit to China in 60, then Deputy Minister of Finance of Germany, McCall Weiser said: "These two figures are not conjured by magic, nor can we say that there is any scientific calculation method. These two figures are long-term The results of the discussions.” After discussions and consultations with relevant countries, the EU finally decided to adopt the two fiscal convergence standards of 2003% and 3%.

Why do EU countries adopt certain fiscal policies to support the euro?Because fiscal policy can adjust the aggregate demand for money.Financial policy in finance refers to the guiding principles of financial work stipulated by the state according to the tasks of political, economic and social development in a certain period of time.Increasing government spending can stimulate aggregate demand, thereby increasing national income; otherwise, it can depress aggregate demand and reduce national income.

Fiscal policy is constantly developing with the transformation of social production mode.In slave society and feudal society, due to self-sufficient natural economic constraints, it is impossible for the state to organize large-scale social and economic life.The fiscal policies of the slave-owners and landlords mainly serve the political function of consolidating their dominance.During the stage of capital accumulation and the period of capitalism formation, rulers generally implement predatory fiscal policies to accelerate the process of capital accumulation.

Early capitalist countries generally implemented fiscal policies that simplified administration, lightened taxes, and balanced budgets, in order to facilitate the development of free capitalism.During the period of state monopoly capitalism, the contradiction between the socialization of production and capitalist private ownership became increasingly intensified, and the economic functions of the government were gradually strengthened. Fiscal policy not only served the realization of the political functions of the state, but also became an important tool for the government to intervene and regulate social and economic life.

In the 20s, with the emergence of Keynesianism, fiscal policy gradually became an important means of regulating the economy and rescuing the economic crisis: in the period of economic depression, an expansionary fiscal policy was implemented to stimulate total social demand and accelerate economic recovery; in the period of economic prosperity, A contractionary fiscal policy is implemented to reduce the total demand of the society and delay the coming of the economic crisis. When the world financial crisis broke out in 30, the U.S. government announced the launch of a 2008 billion rescue plan; the Chinese government announced an increase of 7000 trillion in investment to stimulate economic growth, etc., all of which are concrete manifestations of government fiscal policies.

Fiscal policy is an integral part of the country's overall economic policy, and its means mainly include taxation, budget, national debt, purchasing expenditure, and fiscal transfer payments.The financial policies of modern countries are constantly adjusted according to the different needs of political and economic development.

How Monetary Policy Affects Demand and Supply
After understanding monetary policy, the next question is: How does monetary policy affect the aggregate demand and aggregate supply of the objective economic operation?From this we have to come into contact with the concept of monetary policy transmission mechanism.

The famous economist Vicksell is the founder of the Swedish school. The monetary economic theory he put forward in the early 20th century, that is, the theory of cumulative process (cumulative process), broke through for the first time the "money economy" commonly held by economists before. The veil theory combined money with the real economy and had a huge impact on the theoretical development of economists including Keynes.

First of all, Wicksell divides the interest rate into two types: one is the money rate, that is, the market rate that exists in the real financial market; the other is the natural rate, that is, "the rate at which the demand for loan capital coincides with the supply of savings." Interest rate, which is roughly equivalent to the interest rate of the expected rate of return of the newly formed capital.” Wicksell believes that if the two interest rates are consistent, the investment of the entire economy is equal to savings, and the currency is neutral and does not affect the economy.Because when the two interest rates are equal, it is the ideal equilibrium state of the currency, and this equilibrium state of the currency guarantees the equilibrium of the economic state.In real life, however, these two rates of interest often diverge, either because the money rate varies without changing the natural rate, or because the natural rate changes without the money rate changing accordingly.Wicksell believes that in reality the latter situation is more common.

The improvement of production technology and the increase in the demand for physical capital will make the natural rate of interest rise, while the money rate of interest will remain unchanged and fail to follow the rise, thus causing a divergence between the two.If the market interest rate is lower than the natural interest rate, it will lead to an increase in investment, which will increase the prices of raw materials, land, and labor, thereby increasing the monetary income of raw material producers, land owners, and employees.Because the market interest rate is low at this time, this part of the income is diverted to consumption instead of saving. As a result, the demand for consumer goods increases, thereby increasing the price of consumer goods.After the price of consumer goods rises, the price of capital goods also rises. In this way, a cycle of "low market interest rate→increase in investment→increase in money income→increase in price of consumer goods→increase in price of capital goods→increase in investment→increase in market interest rate"is formed.This cycle continues until the market rate of interest equals the natural rate of interest.Conversely, if the market interest rate is higher than the natural interest rate, it will lead to a reverse economic process until it finally converges to a position where the two interest rates are equal.This is the famous "Wicksell's cumulative process theory."

This is the earliest theory of monetary policy transmission mechanism.The monetary policy transmission mechanism is the transmission path and mechanism through which the central bank uses monetary policy tools to influence intermediary indicators, and then finally achieves the established policy goals.

There are generally three basic links in the transmission path of monetary policy, and the sequence is: [-]. From the central bank to commercial banks and other financial institutions and financial markets.The central bank’s monetary policy tool operation first affects the reserves, financing costs, credit capabilities and behaviors of commercial banks and other financial institutions, as well as the status of money supply and demand in the financial market; second, financial institutions such as commercial banks and financial institutions All kinds of economic actors from the market to enterprises, residents and other non-financial sectors.Commercial banks and other financial institutions adjust their behavior according to the central bank's policy operations, thereby affecting the consumption, savings, investment and other economic activities of various economic actors; third, from non-financial sector economic actors to social economic variables, Including total expenditure, total output, prices, employment, etc.

In addition, the financial market also plays an extremely important role in the entire currency transmission process.First, the central bank mainly implements monetary policy tools through the market, and commercial banks and other financial institutions learn about the central bank’s monetary policy regulation intentions through the market; The adjustment of capital supply further affects investment and consumption behavior; finally, changes in social economic variables also affect the behavior of the central bank and financial institutions through market feedback information.

On the basis of Wicksell's "accumulation process theory", the Keynesian school concluded that the transmission mechanism of monetary policy is: the increase and decrease of money supply affect the interest rate, the change of interest rate affects investment through the marginal benefit of capital, and the increase of investment The main link in this transmission mechanism is the interest rate.

Different from the Keynesians, the Monetary School believes that interest rates do not play an important role in the monetary transmission mechanism. They believe that changes in the money supply directly affect expenditures, and then expenditures affect investment, and finally affect total income.Monetarists believe that in the short run, changes in the money supply will lead to changes in output, but in the long run, only the price level will be affected.

Since my country has not implemented interest rate marketization, my country's central bank can directly control interest rates, and now the central bank is also adopting methods of continuously raising interest rates to curb economic overheating. It can be seen that my country still agrees with the monetary policy transmission mechanism of the Keynesian school, with interest rates as the The main link to regulate the economy.

Beware of the Currency Illusion: A Booster of Inflation
Chinese people often say a word in their lives: "If you can't figure it out, you will be poor."This is also the simple "financial management" concept of Chinese people.But sometimes the calculations come and go, and the money gets less and less. What's going on?
Financial experts say that people sometimes fall into a financial blind spot where "too calculating" results in calculations.For example, Xiao Wang and Xiao Li spent 40 yuan to buy a house respectively, and then sold them one after another. When Xiao Li sold the house, there was a 25% depreciation rate at that time—goods and services were reduced by 25% on average, so Xiao Li Li sold for 30.8 yuan, 23% less than the purchase price.When Xiao Wang sold the house, the price rose by 25%. As a result, the house sold for 49.2 yuan, which was 23% higher than the purchase price.Most people think that Xiao Wang is doing better than Xiao Li, but in fact, Xiao Li is the one who makes money. Taking into account inflation, the purchasing power of his money has increased by 20%.Why can't most people see this?Because most people have the "money illusion" in their minds.

Through this example, it is not difficult for us to know that the "money illusion" is really a typical manifestation of people "not knowing the true face of currency, only because they are in currency".

The term "monetary illusion" was proposed by the American economist Irving Fisher in 1928 and refers to the inflationary effect of monetary policy.It refers to a psychological illusion that people only respond to the nominal value of a currency and ignore changes in its actual purchasing power.

When inflation first occurs, individuals cannot know the extent of inflation or price rise, and can only judge by the prices of a few commodities in the local area that they come into contact with.Under such circumstances, personal price information is incomplete, and individuals can only focus on their own monetary income, which is prone to "money illusion".For example, when workers negotiate wages with companies, they may regard the increase in nominal wages promised by the company as an increase in real wages.In fact, because inflation has already occurred, real wages have not actually risen, which means that the actual purchasing power you get has not risen, or even declined.In this way, the business obtains additional profits through the illusion of money.

The effects of the money illusion are multifaceted.

From the perspective of the enterprise, the extra profit obtained by the enterprise is often actually an illusion.The interest costs and depreciation deducted by the company when calculating the net profit are all measured at historical costs, while the income includes the inflation factor, which gives people the illusion that the company's profitability is accelerating.If investors do not take into account that the earnings of listed companies may be affected by inflation, they will be stimulated to increase their investment in stocks.This will cause investment to heat up and promote inflation.

So macro policy should consciously maintain the monetary illusion.Generally, the role of monetary policy has two aspects: one is the output effect, and the other is the price effect.While the money supply is growing, investment is heating up, and the first thing that happens is that the price of means of production rises first.If an expansionary monetary policy ends up trading inflation for output growth, we say that this policy has a temporary "money illusion".The result of doing so is more serious, because once the monetary illusion disappears, full-blown inflation will break out.

So when will the money illusion disappear?It is generally believed that the monetary illusion is only serious in the formation stage of inflation, and once inflation is generalized and generally realized by the public, the monetary illusion will gradually disappear.

From the "money illusion", people have been enlightened that paying attention to currency should not only focus on whether the price of commodities has fallen or risen, and whether the money spent has been more or less, but should use their brains to study the purchasing power of "money", "money" These aspects of the potential value of "money".In this way, from the perspective of personal financial management, we can really plan carefully and spend as much money as possible.From a macro perspective, only by realizing the currency illusion as soon as possible, keeping a clear head, and restraining the scale of investment in a timely manner can we prevent the occurrence of comprehensive inflation and protect the economy.

In addition, the influence of currency illusion on the exchange rate is also worthy of attention.At this point, it is necessary to emphasize the difference between the nominal exchange rate and the effective exchange rate.For example, although the renminbi is appreciating against the U.S. dollar, for the "basket of currencies", the sharp depreciation of the U.S. dollar against the euro and the yen makes the effective exchange rate of the renminbi actually depreciate slightly.A calculation by the International Monetary Fund shows that in July 2006, the real effective exchange rate of RMB depreciated by 7% compared with the same period last year.It is the best reflection of the monetary illusion.Such "currency illusions" may distort the country's monetary policy and reduce the benefits of monetary policy to the economy and social welfare.Regarding the appreciation of the RMB since 1.6, there is a representative view that there is still a large amount of unemployment and surplus labor in China, and the practice of appreciating the nominal exchange rate will not only fail to reduce the trade surplus, but will generally damage the interests of laborers. detrimental to national welfare.

All in all, the currency illusion is widespread during the period of inflation, and it will affect people to make wrong judgments. Therefore, we need to have a clearer understanding of it.

(End of this chapter)