Positive feedback loops, negative feedbback loops – isn’t all this stuff too speculative, too withdrawn from economic reality? Fruitless mental game with abstractions? Having nothing to do with current economic woes, like the eurozone crisis?
It looks like Financial Times columnist Martin Wolf and IMF specialists do not think so.
In his latest article “Fear and loathing in the eurozone” (FT, September 29, 2011) Martin Wolf writes: “A positive feedback loop between banks and weak sovereigns is emerging, with a potentially calamitous effect on the eurozone and the global economy”. He refers to the report of IMF on current eurozone situation. Without using the term positive feedback loop, the report describes perfectly how it evolves:
“Spillovers from high-spread euro area sovereigns have affected local banking systems…
As funding comes under pressure, credit shrinks and the private sector becomes more cautious, weakening economies and undermining both fiscal and financial solvency”.
Martin Wolf uses the term “positive feedback loop” correctly, despite the fact that he talks essentially about vicious circle. It is a mistake to describe the vicious circle as a “negative feedback loop”.
Negative, meaning unfortunate, yes, but in terms of dynamic systems vicious circle is a positive feedback loop (see my post “Stable and Unstable Types of Equilibria in the Mixed Economy”).
Here is what is going on in the eurozone:
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