The economic crisis isn't anymore than a crisis of unreliable economic metrics.
Measurement concerning the economy is a task performed by prices, as well as measurement concerning temperature is the job of thermometric scales, measurement of distance is the role of the metric scale and the measure of time is done by seconds, minutes, hours.
The price system is the metric system of the economy.
It is usual to think about prices as just a means to express the relative values of goods and to facilitate the exchanging of them in the market.
But prices have an even more important function for the economic dynamics, a role seldom realized by economists and lesser by economic authorities.
Price levels are the measurement system the economic agents, for example, the industries and banks, rely on to decide whether invest in the making of more goods to sell or disinvest and reduce their production.
The economic agents, even individuals, need reliable information from the price system to know when it is time to expand or to retract their production.
The process is comparable to using the thermometer scale to know if it is time to give medicine against fever or to warm the patient.
For now, just think of what would be of the patient if the thermometer scale, the metrics of temperature, was unreliable.
The basic theory behind the fact that the price system is the metric system of the economy is the theory of the business cycle.
A certain amount of goods of all types, including services and everything that is made to be sold, is periodically made in an economy and a certain amount of consumption is done by people.
If the production is lower than the consumption, real prices rise.
If the production is higher than the consumption, real prices fall.
When consumption is higher than production, real prices are rising, and real inflation occurs.
When consumption is lower than production, real prices are falling, and real deflation occurs.
What then do the economic agents do in each of these situations? The economic agents need to adjust their production to consumption, so when they perceive inflation they move to increase production and when deflation is detected they decide to reduce production (if they don't they won't be able to pay their bills in the future.
).
So the price system tells the market how to adjust the level of production accordingly to the level of consumption.
This is a cyclic process, the business cycle, since a sound economy will alternate periods of slight expansion with periods of slight retraction, an alternation needed for the overall well-functioning of the economy.
But what happens when the price system is not reliable? It is very simple to understand: The economic agents lose their parameter to decide whether it is time to invest or disinvest and the whole economy goes into a mess.
And as the economic agents must take some decision, usually they cut investments as the most cautious move and the domino effect of investment reduction goes on.
This is exactly what happens in the 2008-2009 economic crisis.
Nevertheless, a big question remains? Why has the price system become unreliable? And the answer is:Our price system based on currencies manipulated by governments has always been unreliable, and time happens when the market realizes that nominal prices are not real prices and that there is a deep lack of reliable economic information.
Such realization generally starts when some big players (think of Fannie Mae, Freddie Mac, Lehman Brothers, etc.
) bankrupt if left alone showing that bad investment-disinvestment decisions have been taken and these bad decisions are ultimately due to beliefs in information from that unreliable price system.
ln that situation the first signs of the investors' disbelief concerning the price system is the fall of stock prices following a rush to sell stocks.
Obviously, the economic agents don't have the price system in mind when they decide not to invest, sell stocks and reduce production, but the background cause of their move is the unreal prices of the economy.
The greatest contradiction is that it is widely said nowadays that the economic crisis shows the failure of free markets and that the economy needs more governmental control.
This is indeed a big mistake, although it tastes very sweet in politicians' mouths.
The truth, however, is that our price system is unreliable because it is manipulated by governments.
For a price system to be reliable it is necessary a price system based on a reliable measure.
In the past we used weight of gold and silver to accomplish that reliability.
Today official currencies are used.
To use official money would not be a problem if the amount of money circulating throughout the economy was kept stable by who manages the money.
The business cycle would go on sound and inflation or deflation of prices would be real inflation and real deflation.
But that is not the case in our world.
Governments usually don't treat the monetary base with responsibility.
They manipulate extensively the amount of circulating money by printing new money or by tweaking government's interest rates.
Governments manipulate the monetary base ultimately to finance their expenses by printing money or borrowing money using higher interest rates.
They alter the monetary base continuously and create variations of prices not due to variations of production and consumption of the real economy.
In that setting nominal deflation or inflation of prices is fake deflation or fake inflation and instead of giving reliable information about the state of the economy the price system gives wrong information.
For some time, the economic agents believe in that wrong information and consequently take wrong decisions concerning investment or disinvestment.
But day arrives when some big players bankrupt and the markets realize that they are running blind.
Naturally the most cautious move then is to reduce investments and the economy may enter a depression.
This process caused by the unreliable price systems is what is going on today in the global economy.
The real lesson from this present economic crisis is not the need for more governmental intervention and regulation.
The lesson is 'don't let governments manipulate our prices' and continue to mess with the economy.
Global leaders, Mr.
Obama and colleagues, should not meet to discuss the next regulatory canon on the markets.
They should make a true critic examination of the primary guilt of governments in creating the economic crisis and from that they could commit themselves and persuade many countries to have reliable and not manipulated price systems.
Legislators too could pass laws forbidding the manipulation of the monetary base.
This seems to be a solution for the economic crisis and a way to save many people from poverty, hunger, diseases and all bad products of the global economic crisis.
It is first necessary for leaders, specialists and also the press to understand this logical genesis of the economic crisis for their efforts of fighting it to be effective.
Another solution, however, seems to be expressing prices in a more reliable measurement scale than the monetary scale.