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Overt money financing of fiscal deficits


This column finds that current monetary and fiscal policies are misplaced and are largely impotent. It is argued that greater coordination between monetary and fiscal policy could provide substantial policy synergies needed to stimulate economic growth without increasing public debt. Practical policy options are reviewed.

Current austerity and quantitative easing policies are proving ineffective in the new era of historically low interest rates, high public debt, deleveraging, credit and liquidity crises, and recession/depression.

Recovery is failing to take hold with sufficient force, and some countries are sliding deeper into depression. Deflationary tendencies remain strong and unemployment is entrenched.


Many economies are entrapped in austerity straitjackets. While effective in certain circumstances – for example, when the economy is growing strongly or can rely on external growth – austerity fails to achieve its own objectives if applied during recession/depression. In such circumstances, austerity is counter-productive: fiscal revenues contract, budget deficits increase, and public debts are pushed upward. Austerity aggravates recession or depression. Aggregate demand and output are dragged down, unemployment rises, and where price rigidities prevail real incomes fall. Prosperity is denied, confidence collapses, and wealth is ruined.

As Nouriel Roubini has recently pointed out, fiscal austerity policies have been excessively front-loaded in the periphery to seriously damaging effect. (See, ‘Crisis Revisited: Appropriate Fiscal Policy in the Aftermath,’ Roubini Global Economics, July 16, 2013).

Many European authorities still obstinately refuse to recognize the danger of crude austerity. As well, they fail to acknowledge that the austerity policies they believe might be rational for one country are not rational if all countries in the region undertake them simultaneously. In such circumstances, the magnitudes of national fiscal multipliers actually multiply.

- See more at: http://www.economonitor.com/blog/2013/07/overt-money-financing-of-fiscal-deficits-including-navigation-through-article-123-of-the-lisbon-treaty/#sthash.8zhk8JNW.dpuf

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