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A note on competing economic theories on the 2007-2008+ financial crisis: The case for (hidden) stagflation

Colignatus, Thomas (2008): A note on competing economic theories on the 2007-2008+ financial crisis: The case for (hidden) stagflation.

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Abstract

The financial crisis that erupted in 2007, continues in 2008 and likely continues longer, is in need for explanation by economic theory. The monetary authorities and financial regulators provide us with piecemeal engineering on the fly but there is a lack of overview. The lack of convincing theory and strategy becomes especially worrying when we see the crisis affecting the real economy. People and economic activities that already suffer are not well-represented in national statistics, which provides newspapers with a rosy picture as if the current crisis only affects the financial sector and not the real economy. When the crisis starts to bite those who are in the statistics then the financial crisis will become recognized for the economic crisis that it is, but apparently with little guidance from economic theory on how to solve it. The time honoured solution is to have the poor and powerless work harder and earn less to solve the problems of the rich and powerful. But economic theory can do better. The paper compares various competing economic theories and suggests that economists study a particular theory that apparently hasn’t had sufficient attention yet. The current financial crisis finds a fundamental cause in stagflation. This stagflation originally was open but was later hidden by financial deregulation and innovation. By tackling stagflation the financial crisis would become manageable. A suggestion on how to tackle stagflation is provided by Colignatus (2005), "Definition & Reality in the General Theory of Political Economy", Dutch University Press

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