ECB : There are no alternatives

European Central Bank executive member Lorenzo Bini Smaghi outlined the fiscal and monetary constraints facing EU states at the Group of 30 conference in Rabat. In it he warns of a US of future crisis, and perhaps controversially denounces Keynesianism as inappropriate. European states can’t rely on inflation to reduce their debts, fiscal austerity is the only course available to them, but Americans may be deluding themselves that they will be able to impose an ‘inflation tax’ on investors in US debt. Modern investors are too sophisticated Smaghi thinks.

On Keynes –

In the aftermath of the Lehman failure, governments around the world seemed to rediscover Keynes. They injected huge amounts of borrowed money – public funds – to stabilise the economy after the shock of the Lehman failure. These policies worked, and averted a global depression. The success of those policies has led governments – encouraged by international organisations – to continue using expansionary fiscal policies to try pulling the economy out of the recession and getting it back to the pre-crisis level.

The strategy is based on a model which may turn out to be inappropriate in the current conjuncture. Let me discuss some of the underlying assumptions of the model. First, the initial fiscal impulse was successful in avoiding a depression because it helped to coordinate agents’ expectations, in the Keynesian or Knightian way of reducing uncertainty, thereby avoiding a vicious circle of recession and deflation. The direct impact on domestic demand may have been more modest, as shown in countries where the size of the fiscal stimulus was more contained but nevertheless fared equally well. Second, potential growth might have been severely affected by the crisis. As a result, the pre-crisis level of output, achieved in a bubble economy, would not represent a sustainable objective over the policy-relevant horizon. Third, the level achieved by the public debt in many countries may have impaired the effectiveness of further expansionary fiscal policy.

To sum up, while the fiscal expansion was successful immediately after the Lehman crisis, it may not be sustainable over time and may have to be corrected rapidly. Financial markets seem to be giving increasing attention to this hypothesis. And they have started to test it.

On fiscal consolidation –

Let me conclude. What we are currently experiencing is a crisis of public finances in advanced economies. It started with Greece, and the euro, because of the specific institutional framework which prevents Greece and the other euro area countries from using the inflation tax to overcome their budgetary problems. This will force euro area countries to address their fiscal positions earlier. It’s not easy. But it will be done, because it can be done and it has to be done in any case. And, last but not least, because there are no alternatives.

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  • “They injected huge amounts of borrowed money – public funds – to stabilise the economy after the shock of the Lehman failure.” …… Now just hold on a cotton-pickin’ moment there, bubba. They injected/credited huge amounts of invented out of nothing money – Quantitative Easy funds – which they then say are public funds and national debt to be repaid, to perpetuate the myth that they are in control as they manipulate and play with peoples’ lives and economies ……. and keep themselves in clover and deep in Lush Slush Funding.

    “Let me conclude. What we are currently experiencing is a crisis of public finances in advanced economies.” …… Err, you might like to consider that what you are facing, Signore Lorenzo Bini Smaghi, is a crisis of greater public knowledge and the outing of the systemic and callous and shameless exploitation of the population and planetary resources by officious elites just like the ECB who rely on their continued ignorance and thoughtless compliance for their survival.

    “ECB : There are no alternatives” …… Oh please, you cannot be serious. There are always countless alternatives which are never explored by the feeble minded Signore.

  • http://www.wordle.net/show/wrdl/2108289/AIRage_against_the_Corrupting_Machine_ ….. Just testing the extent of your host servering facilities, Mick, which if there was a preview button, would provide an answer before submission.

    And some basic format tagging, [the last blog format had an impressive range, which was a simple pleasure to use, and also helped to inject greater clarity of message in posts] would raise the game of posters and also provide some education in the art of exact communication, which is always a good thing.

  • Oops….. Ok what I thought/hoped was going to happen there was that the Wordle would have appeared with the text as shown above, below it. Obviously, as the image is not there, has the experiment failed. 🙂

    And my thanks to articles for their post on 29 May 2010 at 11:53 pm …. http://sluggerotoole.com/2010/05/28/friday-thread-improving-sluggers-comments/ ….. for the info on the feature.

  • Glencoppagagh

    Keynesean remedies are inappropriate because most countries entered the crisis with excessive structural deficits. It only works if states remember to curb public expenditure when the economy is growing. Most of them find it easier to cave in to public sector demands. People may point out that the RoI (I think) had a surplus but it simply wasn’t as large as it should have been.

  • IAM YUE

    Richard KOO + The lessons to be learnt from Japan;

    http://url.ie/6bw9

  • Mack

    An interesting talk IAM YUE. I think his thesis is that the Japanese government could borrow at low interest rates because no one else would. Does this apply to the UK with inflation approaching 5%? Or in the Eurozone where interest rates on PIIGs debts has risen significantly (Greek debt shooting past 20% at one point)?

    Also I think there were or are restrictions in Japan that supported that structure. E.g. Maybe (can’t remember specifically what they were), a lack of foreign banks that might use Japanese deposits as colleteral for overseas debt and a willingness from Japanese people to save at low interest rates (in a deflationary environment).

    And Japan isn’t out of the woods yet. Nouriel Roubini gives a balanced assesment of the Keynesian stimulus and debt cutting approaches – reasoning, pros and cons. You still have to able to service and pay-off the debt at the end. He highlights Japan as an example of where much of the stimulus was wasted on unproductive projects. Japanese still have a collasal debt-to-gdp ratio, declining population and deflation after 20 years! For much of the last 20 years Western economists lectured the Japanese on where they were going wrong.

    Interesting article on options for Spain – Argentina or Finland? The Scandavian countries had their own large scale property busts in the early 1990s.

    http://fistfulofeuros.net/afoe/economics-and-demography/whither-spain-%E2%80%93-towards-finland-or-argentina

  • Mack

    An analysis of Koo’s presentation

    http://globaleconomicanalysis.blogspot.com/2010/04/richard-koo-on-why-this-recession-is.html

    The real lesson is no matter how much money you throw around, economies cannot recover until noncollectable debts are written off. That is why you have “zero interest rates and still nothing’s happening.”

    The moment fiscal stimulus stops economies are virtually guaranteed to relapse until the core problem is resolved. The problem is Asset Bubbles, Malinvestments, and debts that cannot possibly be collected.

    Bailing out the banks did nothing to fix these problems. Consumers are still saddled in debt, in underwater mortgages, with no job. Moreover, there is no driver for jobs given rampant overcapacity in nearly every sector.

    and

    Over 10 years ago, the advice from Greenspan and the Fed for Japan was to write off the debts so that a recovery could begin. Ironically this is one of the few things Greenspan ever got right and Koo cannot even see it staring smack in the face of debt to the tune of 200% of GDP.

    Richard Koo’s presentation –

    http://www.businessinsider.com/richard-koo-recession-2010-4#-1

    It does strike me that they merely shifting debt from the private sector to the public sector, delaying fixing the problem, in the hope that something will come up??

  • John East Belfast

    amanfrommars

    I am with you on this QE not being Keynsian economics.

    One of my principal understandings of Keynes was you might have something at the end to show for it.
    Did they build roads, schools, bridges – no they said they didnt have time for “non shovel ready projects” – instead they printed money and injected it into the financial system in the hope that it would enable it to increase lending. I would love to know where it has all gone – shoring up bank balance sheets and repatriated to China and the Middle East more like ?

    We have sod all to show for that £150billion though.

  • Hi, JEB,

    There is a tale that the bust banks have an arrangement with the Federal Reserve not to give out the funds they have received/been credited with, ….. for of course, it is all just electronic transactions/clicks of the mouse for credit transfers nowadays, which just move numbers around the world, representing sums of artificial money which can be made real if needed whenever someone has a worthwhile new idea, ….. but rather receive interest payments on the QE funds from the Fed, ie more QE invented funds to enrich bankers…… which is another scam “earning” hundreds of millions and going to the same crooks and dodgy bankers who host the scam and print the paper currency and treasury notes, which are all essentially worthless IOUs nowadays, backed by nothing of any real value.

    Nothing has been changed, so there is bound to be an even bigger collapse shortly, because as you say yourself …… “I would love to know where it has all gone – shoring up bank balance sheets and repatriated to China and the Middle East more like ?”

    In fact, things are considerably worse than before, because now more and more are realising they are being held to ransom and enslaved by the Banking System which can invent money from nothing for itself whenever it feels like it. And you can also surely imagine that there must be some in government who also know that it is a scam and they just go along with it and do nothing. Gordon Brown even infamously spouting that he had saved the [world] banks because of his actions, whenever he has obviously done sweet FA except deceive? What a delusional fool that does make him.

    This gives more information too …..

    Posted by AmanfromMars on 5/31/2010 1:08:28 AM

    “You may wish to explain how all this would work in a little more detail. Some of our readers may not understand what FLR [sic] means. Others may not understand the use of the word “backwards.” ”

    The series of five short YouTube videos ….. “Where does money come from” …. with Part 1 being found here, http://www.youtube.com/watch?v=b7Jxx7bFsjI&feature=related …. explains the global banking and ignorant man’s pitiful, pitiless enslavement to magically conjured up artificial indebtedness scam very clearly.

    Revolutions and wars have been many times started for less, and been heralded, just and right ….. “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” …. Henry Ford …… and in past times, many a severed head on a pike less deserved of its fate in revenge and popular natural justice doled out by the mob, which is what I imagine is the crooked dealers’ greatest fear with the sharing of core knowledge and greater wisdom …… No Place to Hide from the Raw Law and Merciless Punishment of the Naked Jungle.

    http://thedailybell.com/1084/Euro-Crisis-to-Set-One-World-Currency.html

    And now that such information is shared here on Slugger, which we can maybe not unreasonably assume will be read by, or referenced to, Northern Ireland leaders, what do you think they will do about the situation, which has them trying to find hundreds of millions of savings in cuts to services and jobs, whenever money is so easily invented and moved around at the click of mice, meaning there should never be any shortage of funds for anything …… unless one wants to enslave populations with the cynical manipulation of human perception and manufactured indebtedness to fancy paper notes/ IOUs?

  • Mack

    Mars –

    what do you think they will do about the situation, which has them trying to find hundreds of millions of savings in cuts to services and jobs, whenever money is so easily invented and moved around at the click of mice, meaning there should never be any shortage of funds for anything

    Well, they could consult with Gideon Gono to see how well that approach worked for him during his tenure as Zimbabwean finance minister.

    Creating new money at a faster rate that the creation of underlying goods & services results in inflation (more money chasing the same amount of stuff). Investors in government bonds are also reasonably well aware that states can resort to financing deficit through monetisation / money printing. Normally when that happens they sell up – forcing down bond prices, and up yields (the interest rate the government has to pay). If the state keeps going eventually no investors will purchase the bonds at all and the only way to finance any sort of spending is through the printing of new money – which leads inexorably to hyperinflation.

    Or – there is no need for cuts but each pound will become worth progressively less. Workers may be getting large nominal pay rises but they’ll be much, much poorer. The government may be spending much more on infrastructure – but they’ll not be able to afford any new imports – what they’ll be able to deliver will be much, much less. Just ask Gideon Gono..

  • “Creating new money at a faster rate that the creation of underlying goods & services results in inflation (more money chasing the same amount of stuff). Investors in government bonds are also reasonably well aware that states can resort to financing deficit through monetisation / money printing. Normally when that happens they sell up – forcing down bond prices, and up yields (the interest rate the government has to pay). If the state keeps going eventually no investors will purchase the bonds at all and the only way to finance any sort of spending is through the printing of new money – which leads inexorably to hyperinflation.” …. Mack says: 31 May 2010 at 6:34 pm

    If government bonds are state IOUs, which are therefore debts, you are proposing that there be always be a shortage of cash/money/credit just so that debts can be sold/bonds can be purchased by investors rather than having funds to spend/distribute? How very bizarre and perverse …which the system is of course, because of such contrived madness, which is so designed to server artificial and excessive wealth a few for global manipulation of …. well, practically anything and everything in a capitalist society.

    Just because something is, does not mean that it has to be, for most early systems were cynically designed to server an old royal type elite.

  • Mack

    Not quite – there’s certainly been no shortage of credit in recent years, and adding to money supply as credit goes bad is not neccessarily inflationary (not least because a large portion of it won’t be lent out). But increasing the money supply just to fund government spending is the road to perdition..

    Of course, if you wanted to generate inflation – so as to reduce the burden of your debts (rather than fund services) – that’s one way to go about it..

  • Unfortunately, no shortage of credit in recent years translates accurately into a vast supply of debt, which is perversely used to control and subdue the natives.

    Increasing the money supply to the population, which is something which the recent bailout of banking was supposed to do, but which the bankers have screwed up again monumentally, would get money flowing with consumer spend, which is the power of currency, and the banks would then have the money credited to population back into their system to lend out again. The problem of course, is that they expect not only the money returned, but also a pound of flesh too/interest and profit, which is arbitrary extra charges and money for nothing, for just distributing the free money they have been supplied with to give out so that the population can purchase/build/invent whatever is needed, and as the population don’t print or invent money for free the way that the banks and its system does, does it create the debt mountain which is then used to virtually enslave the masses.

    If rather than the default collective thinking being that everyone is born with nothing, it be changed, as it can so easily be, to one in which everyone is born rich, then will universal wealth free everyone to think about what they can provide for the future which is new and better than before and allow for easy provision of all that is needed for all. ……… but it will mean that wealth controllers will lose all of their subversive power, although that is no bad thing.

  • Alias

    “Increasing the money supply to the population, which is something which the recent bailout of banking was supposed to do…”

    Not in Ireland. The taxpayers’ money that was given to Anglo is not intended to get that bank lending to the business again in order to boost the economy. That is now a non-lending bank. It was intended to bail-out the eurosystem banks to recklessly lent their money to it, thereby protecting the eurosystem at the direct expense of the national interest.

    So the government was telling blatant lies to its own citizens when it told that they were giving their money to these banks in order to get them lending again and to protect the national interest.