Irresponsible debt policies and theories
- Gerardo E. Martínez-Solanas
- Category: Toma nota.../Take note...
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Peoples who have enjoyed undeserved and artificial prosperity based on the irresponsible growth of public debt, now reject the austerity measures needed to balance its current accounts. There are many economists who are preaching greater budget expenditures to generate more wealth, overcome the recession and reduce unemployment, without taking into account that the rising debt sooner or later we all have to pay for it.
Monetary policy is the secret ingredient to bringing down public debt
Goals: Restore competitiveness only through domestic deflation, not devaluation, and reduce debt only through austerity
Sept. 30.─ Politicians across the rich world are quarrelling over how to deal with public debt. Yet the most important actors in the drama may be unelected central bankers, according to a study by the International Monetary Fund, published in its latest economic outlook. The IMF looked at 26 episodes since 1875 when debt topped 100% of GDP, to determine how those ratios got back down.
Growth, spending cuts and tax increases did their bit, but the make-or-break factor was monetary policy.
Low or falling nominal interest rates and inflation were crucial to reducing the debt-to-GDP ratio. When interest rates were high and deflation rife, consolidation failed.
This is mildly positive news for America and Britain, whose central banks are determined to keep monetary policy easy as austerity bites. But it suggests a bleak future for countries locked into the monetary straitjacket of the euro, in the absence of easier monetary policy by the European Central Bank.
Britain emerged from the first world war with debt at 140% of GDP and prices more than double their pre-war level, but it was determined to pay off its debt and return the pound to its pre-war value against gold. This required excruciatingly tight fiscal and monetary policy. The primary budget balance (which excludes interest) rose to a surplus of 7% of GDP. The Bank of England raised interest rates to 7%, and deflation meant that real interest rates were even higher. The results were awful ...
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