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Differential diagnosis GDR

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Helsworth
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Post: #1
Differential diagnosis GDR

Ok I've got some experience out of my first/previous try of the GDR template. I learned what not to do and how a large GDP compared to the money supply can make life miserable, especially for statisticians and the regent (me).

Ok, lets start with plan A:
I increase the money supply---> that will make my currency cheaper, in turn causing the price of my exports to go down ergo being more competitive. Downside is that the GDR's exporters aren't famos for... really anything. I'll also have to reduce pensions a little, because pensions are indexed with the rate of inflation. So if I leave them the same and increase the money supply, pensioners will get the same money that now can buy less + an extra quantity of the same money, cause of the indexing.
Question! What are the possible down sides of shrinking consumption?
Domestic producers sell less, they have to drop their prices, correlated with a weaker currency they can have difficulties in paying for the raw/basic materials required for the manufacturing process.
NOTE: I'm only interested in manufacturing, agriculture, construction (energy/infrastructure), not the service part of the economy. So focus your theories on that.
Lets toss into the mix an income tax reform.
Negative income tax, causes increased spending from the lower income brackets. While causing more saving from the middle and upper classes. But seeing how this is a GDR template, there aren't so manny bourgeo or aristocratic pricks to spend or invest.
Next, flat income tax... It would be recommended, the tax itself is small. But unlike the negative income tax which can stimulate growth via consumption and a little bit of inflation, how can the flat income tax cause growth? Also when theorizing about this, correlate it with the currency depreciation via the increasing money supply.

Ok an finally lets talk about the nominal interest. The GDR has a very good savings rate, even with a decent interest rate. Now the velocity of money depends on the interest. The bigger it is the more money is created, because the more money one needs to pay off. So there's an interesting thing to consider here. No one likes to pay more on a credit they contracted. Inflation/Deflation also bring the interest up or down, depending on the strength of the currency. So actually money creation is accelerated at a lower speed (lower nominal interest) than at high speeds. Because less people want to travel in the 6th gear and more people want to trave in 2nd gear. More people going slower cover more distance than fewer people going faster? Well it depends on the actual number of people (borrowers) than speed (credit attractiveness).
Any theories? Can the GDR work as it is, or it can't and it needs to be reformed toward a market economy?


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This post was last modified: 07.02.2011 20:48 by Helsworth.

07.02.2011 18:33
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Lord Alexander
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Post: #2
RE: Differential diagnosis GDR

I applaud your decision to try GDR template again! It is the toughest and most interesting template in the game.

In my opinion you definitely should print more money. Even though the inflation is your enemy your Money supply is already much smaller than GDP and will never catch up with it by natural growth. And taking into consideration horrible national debt and noticeable budget deficit I agree with you that you have no choice other than decrease the pensions. Majority of your citizens are not pensioners so I believe that it will not harm your producers too much.

I never tried Flat Income Tax myself (it contradicts my ideology), but it probably should decrease over-bureaucratization - it will be good for any kind of economic activity. Also low GINI makes GDR an ideal place for this reform.

About the interest rate I think that it would be better to decrease it. Maybe I am wrong, but I have the impression that low interest rate stimulates the natural growth of money supply and you definitely need to use every method for increasing it. Also I always thought that high interest rate makes savings rate higher. Are you sure that it works in opposite way?

But the greatest question what you are planning to do with subsidies? If you start to decrease them you will meet skyrocketing unemployment and inflation. And if you will not decrease them you will be unable to balance your budget. If you want to protect your real sector you may want to not change them. Remember that more than half of your budget incomes are not growing with inflation (State income is not growing with inflation) so inflation will continue to be your direst enemy for a long time. You should compensate inflation by regular tax increases, but do not forget that right now the government is already extorting too much money from the economy, so do not choke it completely.

07.02.2011 22:32
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Helsworth
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Post: #3
RE: Differential diagnosis GDR

Thanks for your input Wink
Yes a high nominal interest rate encourages savings, because the interest on a credit is not attractive, you have to spend more to pay it up, ergo bigger money velocity. A lower money velocity means that credits are more affordable, and a larger number of people contract one. So the amount of money loaned + a mild/low interest creates more money (inflation), rather than a small amount of money loaned at a higher interest.
So if everyone whould take a credit when at an interest rate of say 10%, then you'd have bigger inflation than if everyone took a credit at say 4%.
Given the GDR's low GINI and planned economy I would imagine that salaries are pretty close. So a low flat income tax won't hurt anybody. I too am an adept of progressive taxation in real life, however if a balance can be struck between providing welfare and a low income tax, than I'm for flat tax.
For example flat 12% tax + decent welfare is better than 40% negative tax + decent welfare.


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This post was last modified: 08.02.2011 05:19 by Helsworth.

07.02.2011 23:03
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RichardAWilson
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Post: #4
RE: Differential diagnosis GDR

1. I’ve reduced income taxes and capital taxes. + (Flat Income Tax)

* These growth-oriented reductions should revive the economy and lead to sustained private-sector job creation. Manufacturing and industrial-production should have been stimulated, leading to a reduction in trade and capital deficits. The implementation of the Flat-Tax should increase capital-formation, stock-values and real-estate values.

2. I’ve increased the MS, devalued the Mark and reduced the IR.

* This should lead to short-term price-inflation. However, this short-term consumer price-inflation won’t be a problem as it will be accompanied by an offsetting increase in inflation-adjusted GDP, wages, salaries, industrial-production and trade. As long as the inflation-adjusted economy is growing, moderate consumer-price inflation isn’t a problem. It is when this inflation is correlated with stagnation, (ergo: Stagflation), that it becomes a problem.

09.02.2011 07:17
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Helsworth
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Post: #5
RE: Differential diagnosis GDR

You got pretty good results. Although I'm not sure that you can count on private sector-job creation, because the legal private sector in the GDR consisted of self employed people or freelancers, but still it could benefit the farmers who had prive plots and the GDR's barter economy.


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09.02.2011 08:46
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RichardAWilson
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Post: #6
RE: Differential diagnosis GDR

Thank you.Cool

* I’m assuming that the GDR can transition to a market-based economy. As such, I’m assuming private-businesses and ventures will be permitted.

* In following with those assumptions, I’m going to continue with across-the-board tax reductions as a means of stimulating the economy.

* The state sector will be complimenting the private-sector. The revenue earned from state companies and businesses will finance those tax reductions.

* Nonetheless, I’m going to maintain generous subsidies for those state companies and businesses as a means of accommodating the transition from a planned-economy to a market-based one.

* As an avid defender of free-markets, I would love to eliminate subsidies. However, I do not subscribe to the International Monetary Fund’s ideologies. I believe that those Eastern-European countries should have been allowed to maintain those subsidies as a means of cushioning the transition and transformation. Social-instabilities can bring down the market-system. Allowing millions of jobs to vanish from the state sector, w/o a corresponding creation of jobs in the private-sector, can be dangerous.Hmm I might be a free-marketer. That doesn't mean I'm blind.Tongue

This post was last modified: 10.02.2011 20:41 by RichardAWilson.

10.02.2011 20:35
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Helsworth
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Post: #7
RE: Differential diagnosis GDR

It will take some time till the public sector will complement the private sector, right know the opposite is true.
I think that the real transition will be done via task options and not budget changes. I mean, the budget can make the private sector boom once it is allowed, but till then, your state enterprises need to become efficient.
I will use fiscal stimulus also, so I'm hopping that my growth will outweigh the total debt and deficit...
I see you've got a lot of economy related tasks, that should really give you an advantage.


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This post was last modified: 10.02.2011 20:54 by Helsworth.

10.02.2011 20:53
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RichardAWilson
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Post: #8
RE: Differential diagnosis GDR

As you’re a formidable contender, this challenge will be quite interesting. (TASK) I have instituted profit-sharing, as I’m an advocate of profit-sharing in the manufacturing and production industries. Studies have shown (in steel, automotive, petrochemicals, machines, precision-instruments and consumer electronics) that profit-sharing can increase labor-productivity and efficiency by such a sufficient degree that it’ll often lead to an increase in a corporation’s bottom-line.

11.02.2011 07:37
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Helsworth
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Post: #9
RE: Differential diagnosis GDR

Well you're breathing down my neck, and you're one year behind. It will be tough to compete with you, but all the more fun Big Grin


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11.02.2011 09:54
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RichardAWilson
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Post: #10
RE: Differential diagnosis GDR

Our economies are running neck-n-neck. Daumenhoch
One more injection of stimulus (growth-oriented tax reductions + MS) and I’m going to be fighting inflation and fiscal-deficits. Across-the-board slash and burn…..

14.02.2011 05:38
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