Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19
Gold Price Gann Angle Update - 10th July 19
Crude Oil Prices and the 2019 Hurricane Season - 10th July 19
Can Gold Recover from Friday’s Strong Payrolls Hit? - 10th July 19
Netflix’s Worst Nightmare Has Come True - 10th July 19
LIMITLESS - Improving Cognitive Function and Fighting Brain Ageing Right Now! - 10th July 19
US Dollar Strength Will Drive Markets Higher - 10th July 19
Government-Pumped Student Loan Bubble Sets Up Next Financial Crisis - 10th July 19
Stock Market SPX 3000 Dream is Pushed Away: Pullback of 5-10% is Coming - 10th July 19
July 2019 GBPUSD Market Update and Outlook - 10th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Why Estonia Is Beating the Eurozone Economy

Economics / Economic Theory Oct 23, 2012 - 11:35 AM GMT

By: Frank_Shostak

Economics

Best Financial Markets Analysis ArticleAgainst the background of a severe economic crisis in the eurozone, one is surprised to find a member of the euro area that is actually showing good economic performance. This member is Estonia. In terms of so-called real gross domestic product (GDP) the average yearly rate of growth in Estonia stood at 8.4 percent in 2011 against overall eurozone performance of 1.5 percent. So far in 2012 the average yearly growth stood at 2.8 percent in Estonia versus -0.2 percent in the eurozone.


Figure 1

Also note that the unemployment rate in Estonia displays a visible decline: it fell to 5.9 percent in August from 7.6 percent in January. In contrast, the unemployment rate in the eurozone climbed to lofty levels in August. After closing at 10.8 percent in January, the eurozone unemployment rate shot up to 11.4 percent in August.

Figure 2

A severe cleansing, i.e., the removal of various nonproductive activities is a key factor behind the success story of Estonia. Between Q3 2009 and Q1 2011 the average yearly rate of growth of government outlays stood at -7.4 percent. In short government outlays were cut sharply. Note that this purged various false activities that emerged on the back of previous loose government spending. Additionally, Estonia's government debt as a percentage of GDP is only 6 percent versus Germany's 81 percent and Greece's 165 percent.

Figure 3

Another important factor that revitalized the Estonian economy is a fall in money supply during the period May 2008 to November 2009, i.e., money supply declined for 19 months. Note that the average of the yearly rate of growth of our monetary measure (AMS) during this period stood at minus 7.9 percent. A fall in money supply arrested the transfer of real wealth from wealth-generating activities to non-wealth-generating activities. This amounts to the strengthening of wealth generators and to a weakening of non-wealth-generating activities. Because of a time lag, the effect of this decline in money supply is still in the system, i.e., it continues to benefit economic fundamentals.

Figure 4

Since Q2 2011 the government has reversed its stance and embarked on massive spending. The average of the yearly rate of growth between Q2 2011 and Q2 2012 stood at a positive figure of 11 percent. (Contrast this with the -7.4 percent during Q3 2009 to Q1 2011.) Furthermore, the yearly rate of growth of money supply has been displaying strong growth. The average of the yearly rate of growth between December 2009 and August 2012 stood at 8 percent. (Contrast this with the figure of -7.9 percent during May 2008 to November 2009.)

Figure 5

Rather than persisting with the cleansing process, the government and the central bank have chosen to reverse the stance, thereby arresting the process of healing the economy. Temporarily the reversal of the stance is probably going to "work." It will give rise to new bubble activities and will strengthen the old bubble activities. In terms of real GDP, it is quite likely that we are going to see a visible strengthening ahead in its growth momentum. At some stage, however, the weakening of wealth generators is going to be felt and the Estonian economy is going to suffer because of the reversal in its fiscal and monetary stance.

Figure 6

Summary and Conclusions

The Estonian case shows that a policy that removes bubble activities lays the foundation for healthy economic growth.

Any attempt to alter tighter fiscal and monetary policies brings back false, nonproductive activities and leads to an economic impoverishment.

It is not possible to generate something out of nothing.

Any attempt to do so results in an economic disaster.

Frank Shostak is an adjunct scholar of the Mises Institute and a frequent contributor to Mises.org. He is chief economist of M.F. Global. Send him mail. See Frank Shostak's article archives. Comment on the blog.

© 2011 Copyright Frank Shostak - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules