Levels of Deficit Essential to Sustainable Robustness by Country in Europe

This paper first proves theoretically and empirically the following two facts based on the endogenous model and its data-sets (see below) as one unity.  This paper second presents how to improve the two facts using seven endogenous parameters.  The first is: true cause of deflation comes from extreme deficit.  The second fact: deficit by year weakens sustainable robustness of an economy.  The growth rate of output and the rate of return in endogenous equilibrium stay at an extremely low level.  The methodology here measures ‘the cost of capital’ as the rate of return less the growth rate of output in endogenous equilibrium, and by sector (the total economy, the government sector, and the private sector).  The endogenous rate of inflation or deflation and the valuation ratio are a base for the above facts-analysis.  The mechanics of related hyperbola equations and their graphs strengthens the methodology and interpretations, and helps numerically execute steady policies by year in the long run.

Some of Euro countries suffer from both cash flow deficits by year to cope with the fixed Euro currency and from economic difficulties inevitable at the developed stage.  When the debt is relatively small, the country is able to solve these problems by improving seven endogenous parameters and mechanics of hyperbola equations.  When the debt is relatively large, the country must boldly choose the priority to improve a few endogenous parameters; taking into consideration the trends of the ‘real’ cost of capital (after deducting the endogenous inflation/deflation rate).  Question: what is evaluated by ten year debt market yield; Nominal or real rate of return and/or Nominal or real cost of capital?  Without decreasing deficits and debts, policy-makers cannot control deflation.  Also, without improving the real assets, policy-makers cannot recover from bad times.  The first requirement is people’s understanding of the essential of deficit that determines the level of sustainable robustness by country.  The answer to the above Question may settle people’s uneasy doubt towards right direction.

For data, this paper uses 61 country data-sets of KEWT 5.11, 1990-2009 by sector (government and private).  The author takes the EU countries, adding the US, China, and Japan.  Selected ratios by sector used in endogenous equilibrium are: the rate of return, the growth rate of output, the cost of capital, the endogenous rate of inflation/deflation, the real cost of capital, the valuation ratio using the cost of capital, and ten year debt market yield by country.  The levels of endogenous equilibrium are measured by the speed years by sector.  Speed levels are inherently connected with the above selected ratios.  This paper will present a preliminary step to discuss essential polices for full-employment by country.