How to Solve the European Economic Crisis: Challenging Orthodoxy and Creating New Policy Paradigms

Richard WoodOrthodoxies asserting central bank functional ‘independence’ is necessary, maintaining an independent money issuing authority is always desirable, are simply not valid in all the circumstances including, particular, that of a debt/depression scenario. Budget deficits do not increase public debt. Rather, it is the new bond financing of budget deficits that increases public debt. In a debt stressed conditions, the interest rates rise as well as risk premia increase. Bond financing of large budget deficits was the method adopted around the world as a reaction to global financial crisis. That approach contributed substantially to the upward spiral of the public debt. This debt spiral could have been largely avoided by financing those budget deficits via new money creation rather than via new bond financing. Consequently, new bond financing is not the only way, or best way, to finance on-going budget deficits in debt-ridden countries. ‘Fiscal austerity,’ which is now coming under increasing challenge, is an established ‘orthodoxy’ in Germany and some of other European countries, whereas it is considered an unproven ‘paradigm’ in many other countries. Austerity policies, by lowering tax revenues without cutting tax rates, create ‘unhealthy’ budget deficits: when austerity-based deficit reductions are achieved by actually raising tax rates the problems contributing to demand contractions are compounded. The view, recently expressed, that abandoning the fiscal austerity is now impossible is simply irrational, and wrong. Orthodoxy that asserts that austerity and massive unemployment can be relied upon, and are desired means, to reduce real wages+prices to improve profitability, competitiveness, is misconceived in countries suffering high debt, deficient demand, downward wage rigidity, already high unemployment. With the above mentioned orthodoxies of high questionable value and under challenge, new macroeconomic policy strategy, involving new paradigms, is urgently required to address the unfolding economic crisis, particularly as it is developing in Europe. (source: Richard Wood – EconoMonitor – 18/12/2012)

Link: http://www.amazon.com/How-Solve-European-Economic-Crisis/dp/1481023217

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