Austerity plan for Ireland was a mistake and counter-productive – ex IMF official

G Power

so, now the IMF admit austerity and the basis for our bailout was all wrong!!

those who said let them at it and it's what's needed surly can admit our silence and apathy done us no favours. our politicians would have never made such a move if they had really feared a backlash from us.

the interview is available below

https://soundcloud.com/morning-ireland/austerity-was-a-mistake-says

more interesting reading below

http://www.independent.ie/business/irish/austerity-plan-for-ireland-was-a-mistake-and-counterproductive-ex-imf-official-29189848.html

Austerity plan for Ireland was a mistake and counter-productive – ex IMF official

AILISH O’HORA – 11 APRIL 2013

A former International Monetary Fund (IMF) official has admitted that austerity alone as a way of solving Ireland’s economic crisis was a mistake and is counter-productive.

Ashoka Mody, former IMF chief of Mission to Ireland, also said that bondholders should have been burned as part of the process while a sovereign default would also have been manageable.

The professor's comments come as eurozone finance ministers are in Dublin for an informal meeting this weekend where it is understood longer repayment terms for our bailout loans will be discussed.

However, it is not yet known whether or not European paymaster Germany will ask for concessions for any new loan deal.

In an interview with RTE’s Morning Ireland, Mr Mody said there were three options at the time the IMF/EU/ECB essentially took over the reins at the Irish economy introducing €67.5bn in bailout loans– make bondholders pay some of the cost, extreme concessional official funding or lastly, austerity.

“The decision then was the entire reliance would be on austerity and clearly the experience, if experience was needed, has demonstrated that reliance on austerity is counter-productive,” he said in the interview.

“The risks of the programme succeeding were such that complete reliance on austerity was the wrong way to go,” he added.


Mr Mody said that burning bondholders, which could have saved billions of euro, was not considered because of a mindset, which remains, that felt it would cause uncertainty.

“There seemed to be a view, then and now that most of the bank debt was quasi sovereign debt and debts need to be repaid because if they are not repaid that will cause financial instability. That was the decision take at the time and that continues to be the view today.

He added that there was a perception that doing so would have had catastrophic results, which, he said, is not the case.

“My reading of history of sovereign defaults is that they can be well managed. And the notion that these defaults are extremely costly is historically not true.”

He also said that he believes long-term, something will have to give in terms of the further easing of loan terms beyond the current negotiations – partly because Europe is dragging itself down through the austerity prospects and growth projections for countries like Ireland and Portugal will become more difficult to meet as debt burdens increase.

For example, Ireland’s debt is due to peak at 120pc of GDP this year.

According to Mr Mody a clean break with debts would better as a decisive break would mean a quicker readjustment process meaning faster economic improvements.

However, he added that getting longer repayment terms on our debts is a necessary vent for now.

Although he sees further easing of loan repayment terms further down the line.

Finance Minister Michael Noonan is heading up discussions with Europe on a restructuring of our banking €64bn bank debt pile.

It is understood talks are ongoing that could result in a further seven year extensions on or bailout loan repayments on top of concessions around the Anglo Irish promissory note agreed earlier this year.

hatrickpatrick

Masochistic stockholm syndrome sufferers claiming we deserve to be punished for what "we" did in 3, 2, 1.......... :rolleyes:

aindriu80

They screwed up. Austerity didn't solve anything and the bond holders should have been burned.

G Power

and wait til we're greeted by the "ara sure we'll just leave them at it now so they can finally fix it all for us" crowd

hindsight's a bitch!!

G Power

aindriu80 wrote: »

They screwed up. Austerity didn't solve anything and the bond holders should have been burned.

austerity is only one small part of what the crazy bastards at the top have done to screw up the finances and living standards of each and every single one of us

lets hope saturdays march brings a large crowd together to place a bit of fear in the minds of those who clearly couldn't give a fcuk about us

Cody Pomeray

G Power wrote: »

so, now the IMF admit austerity and the basis for our bailout was all wrong!!

He's an ex IMF official, so it's not the IMF saying this (although it's still very relevant of course).

Also, he didn't say austerity was "all wrong". He said senior bondholders should have taken a hit, but doesn't indicate that austerity in general was wrong.

crusher000

How many analyists and experts warned off this at the time ? Answer loads but weren't listened too because the people that are in power are not there through greater knowledge or inteligence but in Irelands case most of them are there through in heritience.(daddy was a politician, uncle was one too). But some people think they're the only people for the job.

Austerity isn't what left us with a 20bn deficit each year, a fact that seems lost on the unwashed who've already jumped for glee in this thread at the thought of their misled opinions being espoused by someone from the, until now it seems, despised IMF.

What about the Irish bondholders? You saw the fuss that 15m missing from credit unions balance sheets caused, didn't you? Now what would 15b do...

Cody Pomeray

Rojomcdojo wrote: »

What about the Irish bondholders? You saw the fuss that 15m missing from credit unions balance sheets caused, didn't you? Now what would 15b do...

The last reliable figures suggest that Irish insurance and pensions only held about €1bn of government bonds, so bank bonds should be far lower.

This means they have already taken a hit, regardless.

Aside from them, I don't think there were any remaining domestic worries.

shanered

I wish politicians could've see this from the start, its like the IMF did a little research recently and figured out austerity was actually counter productive and that defaults can't be managed.
It has always been well known.
Its just like that the Irish people for the most part just take what's thrown at us. We are great at moaning but when it comes to action we aren't so good.
To me its been obvious to me clear that it was an intention, whether it be the IMF or EU to have us bankrupted into an unpayable debt which would be attached to our nation as a sovereign debt, which will be paid of by our natural resources and working population.
Privatisation of services such as this property/water charge are here to stay.

washman3

Just further proof that our bunch of failed school teachers did'nt have a single clue what was happening at the time, and more worryingly, they still dont.:mad:

G Power

washman3 wrote: »

Just further proof that our bunch of failed school teachers did'nt have a single clue what was happening at the time, and more worryingly, they still dont.:mad:

maybe they do know what they're at and our continued silence on the matter tells them it's game on as usual

washman3

G Power wrote: »

maybe they do know what they're at and our continued silence on the matter tells them it's game on as usual

Think you've hit the nail on the head.!! we must remember that every single bit of advice they received was from vested interests. when our minister for finance has invested his money in German government bonds, well, it says it all really.;)

oscarBravo

washman3 wrote: »

when our minister for finance has invested his money in German government bonds, well, it says it all really.;)

What does it say?

Cookie_Monster

when some actual austerity is implemented instead of snippets around the edge then we might be able to say if it work or not, until then the above piece can be safely ignored.

Scofflaw

Has everybody already forgotten that the IMF said at the time that bondholders should be burned? That the view of the ECB was that it would generate panic, that the Irish government sided with the ECB, and that Geithner slapped the IMF down?

And that while panic seems unlikely now, and we have some mechanisms in place for dealing with collapses even if we're still arguing over exactly how they're to be used, the situation at the time was completely different in both those respects?

cordially,
Scofflaw

Manic Moran

At the risk of pointing out the obvious, the title of the thread bears little relation to the text, and I wonder how many people have actually read the article. I don't see anywhere in there that the man believes austerity to have been in error, but that austerity should have been combined with other methods.

crusher000

I think what he referred to was the level of austerity.My view is that austerity is being forced upon the people that can afford it less. Our top billionaires in the country have seen their total wealth increase from 50 billion to 65 billion in the last 4 years. When most of us are cutting back on our day to day spending we see the wealth of 5% of the population increase.

Sand

Scofflaw wrote: »

Has everybody already forgotten that the IMF said at the time that bondholders should be burned? That the view of the ECB was that it would generate panic, that the Irish government sided with the ECB, and that Geithner slapped the IMF down?

All that says is the correct course of action wasn't palatable or conceivable to some, and the Irish government failed to represent Ireland's interest - indeed, couldn't even recognize Ireland's interest when it was pointed out to them.

Scofflaw

Sand wrote: »

All that says is the correct course of action wasn't palatable or conceivable to some, and the Irish government failed to represent Ireland's interest - indeed, couldn't even recognize Ireland's interest when it was pointed out to them.

An argument that works only if one believes that there is one, single, and obvious course of action - something which is dangerous in itself.

The ECB and the Irish government may have been right about caution and contagion, or they may not, but at the time it was a realistic concern even if they were wrong.

cordially,
Scofflaw

Cody Pomeray

Scofflaw wrote: »

And that while panic seems unlikely now, and we have some mechanisms in place for dealing with collapses

like what?

Scofflaw

Cody Pomeray wrote: »

like what?

The ESM, for example, which didn't exist at that point. I appreciate that exactly what it can be used for is still evolving, but at the time we had only the recently created EFSF, which was a stopgap. It wasn't even certain then that bailout loans were legal.

In addition, the eurogroup has grown more coherent, the ECB has grown more adventurous, and the constitutional issues in the various Member States have largely been determined one way or the other.

Some of these developments are, of course, unwelcome in themselves - a retreat to intergovernmentalism isn't progressive, eurogroup cohesion risks creating a serious internal divide in the EU, the ECB is potentially endangering its own credibility, and the ongoing dominance of Germany as the biggest lender-of-last-resort nation is corrosive on solidarity (except with the pro-austerity northern group for whom it forms the linchpin).

cordially,
Scofflaw

Sand

Scofflaw wrote: »

An argument that works only if one believes that there is one, single, and obvious course of action - something which is dangerous in itself.

Yes, but people did believe there was one, single and obvious course of action. And they were wrong. The "TINA TINA" mantra was employed by the government and its supporters at that time to attempt to drown out anyone who proposed burning bondholders, portraying them as dangerous, destabilizing maniacs. Alternatives weren't investigated and found difficult, they weren't investigated at all.

Now, far, far too late the concept of burning bondholders (let alone looting pension funds and depositors) is respectable and necessary.

Cody Pomeray

Scofflaw wrote: »

The ESM, for example

I was hoping you weren't going to say this.

We're talking here about "mechanisms in place for dealing with collapses". The ESM cannot deal with recaps or resolutions.

I appreciate that exactly what it can be used for is still evolving

Not sure if it's evolving, many people would say it is devolving. Dijsselbloem included, as far as anyone can understand the guy.

Direct ESM bailouts have been vetoed. I don't see anything that suggests it's back on the table, and now we have the Cyprus template which would seem to replace it.

In addition, the eurogroup has grown more coherent

Again this is nothing to do with "mechanisms in place", but they probably have become more effective as an organization.

Anyway, this is all irrelevant to mechanisms in place for dealing with collapses. Lets see what the EC proposals on bank resolution are before we can point to any institutional mechanisms

It is pretty amazing we still don't have a European resolution framework.

Scofflaw

Cody Pomeray wrote: »

I was hoping you weren't going to say this.

We're talking here about "mechanisms in place for dealing with collapses". The ESM cannot deal with recaps or resolutions.

Not sure if it's evolving, many people would say it is devolving. Dijsselbloem included, as far as anyone can understand the guy.

Direct ESM bailouts have been vetoed. I don't see anything that suggests it's back on the table, and now we have the Cyprus template which would seem to replace it.


Again this is nothing to do with "mechanisms in place", but they probably have become more effective as an organization.

Anyway, this is all irrelevant to mechanisms in place for dealing with collapses. Lets see what the EC proposals on bank resolution are before we can point to any institutional mechanisms

It is pretty amazing we still don't have a European resolution framework.

I wasn't really talking about bank resolution specifically, although in that specific light, you're quite correct.

cordially,
Scofflaw

Scofflaw

Sand wrote: »

Yes, but people did believe there was one, single and obvious course of action. And they were wrong. The "TINA TINA" mantra was employed by the government and its supporters at that time to attempt to drown out anyone who proposed burning bondholders, portraying them as dangerous, destabilizing maniacs. Alternatives weren't investigated and found difficult, they weren't investigated at all.

Now, far, far too late the concept of burning bondholders (let alone looting pension funds and depositors) is respectable and necessary.

Well, no, it's not suddenly "respectable and necessary" - it was what the IMF suggested at the time. Nor is what Mody is saying in general an official position:

The IMF pointed out that Mr Mody had retired from the IMF “and his views do not represent the fund’s position”.

http://www.irishtimes.com/business/economy/ireland/imf-distances-itself-from-comments-against-austerity-1.1358319

cordially,
Scofflaw

Cookie_Monster

crusher000 wrote: »

I think what he referred to was the level of austerity.My view is that austerity is being forced upon the people that can afford it less. Our top billionaires in the country have seen their total wealth increase from 50 billion to 65 billion in the last 4 years. When most of us are cutting back on our day to day spending we see the wealth of 5% of the population increase.

Well as these are the people that rely on services and handouts the least of course austerity is going to affect them least and affect the people at the bottom more. They also pay a vastly higher proportion of taxes as has been shown time and time again so burdening them with more for the sake of it is both pointless and immoral.
Austerity should mainly be about reducing costs, raising taxes only allows more money to be spent in the same tired old ways with no changes to spend. Being forced to reduce spend leads to more efficiencies, fraud reduction, and the eventual stripping of all the ridiculous additional benefits built up in SW and the various departments and quangos.
Things like reducing rent allowance reduces spend and will reduce the cost of rent across the board for everyone by removing the artificial floor thus benefiting all.

RATM

crusher000 wrote: »

How many analyists and experts warned off this at the time ? Answer loads but weren't listened too because the people that are in power are not there through greater knowledge or inteligence but in Irelands case most of them are there through in heritience.(daddy was a politician, uncle was one too). But some people think they're the only people for the job.

That's what I find (almost) funny at this stage. If you piped up about burning the bondholders then you were slapped down and labelled an 'economic illiterate'.

Seems to me like Sinn Fein were the only ones with a sense of economic literacy, FF/FG/Lab certainly didn't have it.

Pete_Cavan

G Power wrote: »

so, now the IMF admit austerity and the basis for our bailout was all wrong!!

He didnt say that. Lets look at larger sections of what he said in the interview;

“There were three choices. Choice one was to bring in the bondholders and they would bare some of the cost of the sovereign distress, either the bank bondholders or the sovereign bondholders. A second choice was to offer extremely concessional official financing. And a third choice was to impost austerity. And the decision then was that the entire reliance would be on austerity. And clearly the experience, if experience was needed, has demonstrated that reliance on austerity is counterproductive. And since there is no view currently on how much burden of this crisis should be borne by the private bondholders, we are left with only one choice and that choice is to increasingly make the official financing easier and more concessional. And that’s basically what we’re seeing. We’re seeing a belated recognition of the fact that the constrains imposed by only austerity was untenable.”

So he is said that "complete reliance on austerity was the wrong way to go” and that "the constrains imposed by only austerity was untenable”. He did not say that austerity was entirely wrong, just that "complete reliance on it", and it alone, was "untenable”. He also says that the conditions imposed were too harsh and therefore need to be eased and concessions given - "we are left with only one choice and that choice is to increasingly make the official financing easier and more concessional". We have seen this, most recently with the deal to postpone bailout loan repayments by an average of seven years. Burning bondholders, however, would not have eliminated the budget deficit so would not have removed the need for austerity. The need for a bailout came about because our cost of borrowing money became too high, burning bondholders would have increased this cost (that happening is never disputed, only for how long is) so the need for external financing would still have existed. Therefore, what he said does not indicate that he thinks the basis for our bailout was all wrong either.

Why is Ashoka Mody suddenly considered infallible? He may now claim that not burning private and sovereign bondholders was a mistake but their are many more who would disagree with that. If everything that Mody says is now considered to be 100% correct, was this not the case when he was chief of the IMF mission for Ireland who agreed our bailout? Should we also consider him to have been right then (as he so indisputably is now!) with the information that was available at the time?

Lets look at an interview with Mody from July 2010. When asked "Ireland took swift action to return the budget to solvency. But has it been worth it, given the severe downturn of the economy?", he replied;

If the government had failed to take action, the budget deficit would have been much larger and the borrowing requirements would have started going up even faster. That would have put the country in a difficult position over the medium term. Because the consolidation had to occur during a recession, it has inevitably dampened short-term growth prospects. But that needs to be traded off with the longer term confidence-building that is very much a goal of this consolidation process. To the extent that the Irish authorities can now legitimately claim broader policy credibility, some of that confidence-building is already occurring, offsetting, in part, the short-term contractionary effects on the economy.

He acknowledges the need to take action on the budget deficit, otherwise "borrowing requirements would have started going up even faster". This, coupled with the recession, "inevitably dampened short-term growth prospects" but that needs to be "traded off with the longer term confidence-building that is very much a goal of this consolidation process". He didnt think austerity and the basis for our bailout was all wrong then, and that is still the case.

Podgerz

What a week for the Sinn Fein Ard Fheis, First new of Poor Maggie, now their anti austerity policies were correct, the beer will b ehit id imagine

Medu

Podgerz wrote: »

What a week for the Sinn Fein Ard Fheis, First new of Poor Maggie, now their anti austerity policies were correct, the beer will b ehit id imagine

How is it that the opposition have the correct economical position in nearly every country over the past few years? The truth is that both austerity and stimulus do similar things in different ways. Austerity takes money directly, while stimulus has been funded by the printing of money(USA/Japan) which is causing the value of the currency to fall in value which means people get poorer.

Countries that had weak fundamentals build on property booms (US/UK/Ireland/Spain) are all struggling regardless of whether they stimulated or imposed austerity.

Scofflaw

RATM wrote: »

That's what I find (almost) funny at this stage. If you piped up about burning the bondholders then you were slapped down and labelled an 'economic illiterate'.

Seems to me like Sinn Fein were the only ones with a sense of economic literacy, FF/FG/Lab certainly didn't have it.

Well, Sinn Fein agreed with the IMF, at least, whereas the other parties agreed with the ECB. It's a funny old world.

amused,
Scofflaw

todolist

The solution to Ireland's problems is exit the German Euro.Restore the Irish punt pegged to our neighbour,Great Britain.

Scofflaw

Medu wrote: »

How is it that the opposition have the correct economical position in nearly every country over the past few years? The truth is that both austerity and stimulus do similar things in different ways. Austerity takes money directly, while stimulus has been funded by the printing of money(USA/Japan) which is causing the value of the currency to fall in value which means people get poorer.

Countries that had weak fundamentals build on property booms (US/UK/Ireland/Spain) are all struggling regardless of whether they stimulated or imposed austerity.

Oppositions can always be acclaimed for having the "correct position" because they can simply make a statement without having to bother about implementation or consequences. If sufficiently short on detail, almost any statement of position can be regarded as agreeing with almost any other broad statement.

In this case, I rather doubt Sinn Fein and an ex-IMF man really have the same position, but if we gloss over any detail in those positions, as well as the detail that the man is ex IMF, and the IMF have disclaimed his statement, then we can claim, as people are, that "the IMF have admitted Sinn Fein was correct".

cordially,
Scofflaw

Scofflaw

todolist wrote: »

The solution to Ireland's problems is exit the German Euro.Restore the Irish punt pegged to our neighbour,Great Britain.

Aren't we lucky there's such a simple and obvious solution?

cordially,
Scofflaw

KyussBishop

Medu wrote: »

How is it that the opposition have the correct economical position in nearly every country over the past few years? The truth is that both austerity and stimulus do similar things in different ways. Austerity takes money directly, while stimulus has been funded by the printing of money(USA/Japan) which is causing the value of the currency to fall in value which means people get poorer.

Any fall in value from money creation, is usually generated indirectly through inflation, the occurance of which depends upon resource bottlenecks (since supply shortages are what leads to inflation), with the most important resource being labour (reaching a supply shortage at the point of full employment).

A general rule of thumb, is that money creation is ok so long as it goes towards increasing economic activity (which is possible up to the point of full employment), because that is increasing the size of the 'economic pie' (leading to money chasing an increased number of goods, thus avoiding inflation, instead of chasing the same amount of goods, leading to inflation), and so long as you aren't slamming money against resource bottlenecks.

With money creation, it's all about what you do with the money; money creation by itself isn't inflationary, and so long as it is not hitting against resource bottlenecks, it will increase the 'economic pie', thus avoiding significant inflation (there will be some inflation, due to inefficiences in parts of the economy playing catch-up, but that is generally self-correcting over time, with full-employment being the point where you must stop spending, to avoid further inflation).

murphaph

KyussBishop wrote: »

Any fall in value from money creation, is usually generated indirectly through inflation, the occurance of which depends upon resource bottlenecks (since supply shortages are what leads to inflation), with the most important resource being labour (reaching a supply shortage at the point of full employment).

A general rule of thumb, is that money creation is ok so long as it goes towards increasing economic activity (which is possible up to the point of full employment), because that is increasing the size of the 'economic pie' (leading to money chasing an increased number of goods, thus avoiding inflation, instead of chasing the same amount of goods, leading to inflation), and so long as you aren't slamming money against resource bottlenecks.

With money creation, it's all about what you do with the money; money creation by itself isn't inflationary, and so long as it is not hitting against resource bottlenecks, it will increase the 'economic pie', thus avoiding significant inflation (there will be some inflation, due to inefficiences in parts of the economy playing catch-up, but that is generally self-correcting over time, with full-employment being the point where you must stop spending, to avoid further inflation).

Have you got a practical example of this? A real world one.

johnnyskeleton

RATM wrote: »

That's what I find (almost) funny at this stage. If you piped up about burning the bondholders then you were slapped down and labelled an 'economic illiterate'.

Seems to me like Sinn Fein were the only ones with a sense of economic literacy, FF/FG/Lab certainly didn't have it.

How short people's memories are! Labour were the only party to vote against the bank guarantee. SF and FG gave it guarded support:

http://www.labour.ie/blog/2011/02/05/how-they-voted/

By the time it came to Nama, they were all opposing it but it was getting a little late at that stage.

KyussBishop

murphaph wrote: »

Have you got a practical example of this? A real world one.

Yes, Lincoln used Greenbacks during the Civil War in the US, and in the run up to WWII Germany used 'Mefo bills' as a hidden balance sheet currency, to secretly fund rearmament in violation of the Treaty of Versailles, the island of Guernsey currently funds itself in this general way, Australia and New Zealand also have a brief history of using this method of funding.

The rest, the causes of price inflation, are well established by most economic theory, as being a function of supply vs demand; so for example, if one country destroys or confiscates part of another countries industry (as happened with Germany at the end of WWI), then that is going to lead to a reduction in supply, and will cause inflation if the same amount of money keeps chasing that newly-limited supply of goods (as happened in Germany, and was further exacerbated by them being forced to pay reparations in foreign currency).

ardmacha

As I said before the EU should print holiday vouchers worth €1000, valid one year, and give one to everyone. Even given free choice in the matter EU citizens will choose to visit Cyprus, Portugal, etc rather than Germany and money will start flowing, hotels will service their debts etc.

Scofflaw

murphaph wrote: »

Any fall in value from money creation, is usually generated indirectly through inflation, the occurance of which depends upon resource bottlenecks (since supply shortages are what leads to inflation), with the most important resource being labour (reaching a supply shortage at the point of full employment).

A general rule of thumb, is that money creation is ok so long as it goes towards increasing economic activity (which is possible up to the point of full employment), because that is increasing the size of the 'economic pie' (leading to money chasing an increased number of goods, thus avoiding inflation, instead of chasing the same amount of goods, leading to inflation), and so long as you aren't slamming money against resource bottlenecks.

With money creation, it's all about what you do with the money; money creation by itself isn't inflationary, and so long as it is not hitting against resource bottlenecks, it will increase the 'economic pie', thus avoiding significant inflation (there will be some inflation, due to inefficiences in parts of the economy playing catch-up, but that is generally self-correcting over time, with full-employment being the point where you must stop spending, to avoid further inflation).

Have you got a practical example of this? A real world one.

It's a generally accepted principle, surely? If the only thing to buy is apples, and the economy consists of 100 apples, say, and €100 of money, then apples are €1 each. If you print an extra €10, but still have only 100 apples, the price is €1.10 per apple - inflation.

But if you print €10 into the economy, and someone uses that €10 to produce an extra 10 apples, the price remains at €1/apple and there is no inflation.

Back in the real world, when the availability of credit (which is how money is created) is low, and represents a limiting factor on business growth, then creating more money/credit shouldn't lead to inflation but to growth. That's what's called running a loose monetary policy, and generally associated with low interest rates to encourage borrowing. That's what we have at the moment, for the reasons Kyuss gives. QE (quantitative easing) would be the next step up, which is a large overt injection of money by the central bank or banks.

cordially,
Scofflaw

KyussBishop

Scofflaw wrote: »

murphaph wrote:

Have you got a practical example of this? A real world one.

It's a generally accepted principle, surely? If the only thing to buy is apples, and the economy consists of 100 apples, say, and €100 of money, then apples are €1 each. If you print an extra €10, but still have only 100 apples, the price is €1.10 per apple - inflation.

But if you print €10 into the economy, and someone uses that €10 to produce an extra 10 apples, the price remains at €1/apple and there is no inflation.

Back in the real world, when the availability of credit (which is how money is created) is low, and represents a limiting factor on business growth, then creating more money/credit shouldn't lead to inflation but to growth. That's what's called running a loose monetary policy, and generally associated with low interest rates to encourage borrowing. That's what we have at the moment, for the reasons Kyuss gives. QE (quantitative easing) would be the next step up, which is a large overt injection of money by the central bank or banks.

cordially,
Scofflaw

Indeed, and expansion of money through credit i.e. private debt, is far too risky at the moment, because the level of private debt in the economy is already far too high, which is suppressing aggregate demand through debt-deflaton; business taking on more credit at this time, would (for a lot of consumer-oriented business) likely just lead to them falling into even more debt, due to the difficulty with attracting demand.

So, what if we could expand/create money without credit/debt? That would solve all of these problems.
We can do that by having government use money creation, to fund public spending (limited by inflation targets), which pumps money into the economy and lets government take it out again at their leisure, using taxes.

Where banks adds money to the economy through loans, government adds money through spending, and where banks take money back out at an inflexible/fixed rate through debt/interest repayments, government takes money back out as slowly as desired through taxes.


The concept of this is not taught widely within economics, so it attracts a lot of understandable skepticism, but I think I'm drawing closer to cracking a good explanation of it, that makes sense to people

hatrickpatrick

Medu wrote: »

How is it that the opposition have the correct economical position in nearly every country over the past few years? The truth is that both austerity and stimulus do similar things in different ways. Austerity takes money directly, while stimulus has been funded by the printing of money(USA/Japan) which is causing the value of the currency to fall in value which means people get poorer.

Countries that had weak fundamentals build on property booms (US/UK/Ireland/Spain) are all struggling regardless of whether they stimulated or imposed austerity.

It's all about confidence. Devaluing the currency doesn't cause as obvious a loss of wealth as literally reducing the amount of money people have, which causes a shock-like contraction in consumer spending and confidence.

Economics, remember, is not about maths but about mass psychology, and in that regard, removing so much money from people who were already freaked out about the future was never going to lead to anything but further recession.