Wednesday, April 22, 2009

>Flash Economics (ECONOMIC RESEARCH)


The economic policies being implemented during the crisis are "extraordinary":

* huge fiscal deficits;
* extremely rapid monetary creation (central bank money);

The question being asked by governments and central banks, for both kinds of policies, is how to end them (exit strategies), in order to prevent their perverse effects in the medium term. As long as private economic agents deleverage, it is normal for governments to run up more debt. The fiscal deficits must be reduced when private spending picks up again, and the question in this respect is whether the fiscal deficits are reversible or irreversible.

As far as monetary policies are concerned, central banks must be able to destroy the excess liquidity created when the economies pick up again. This may come up against two problems: central banks’ refusal to take the risk of causing a relapse in the economies after a severe recession; and the fact that asset price bubbles appear before economies pick up, and central banks do not dare to burst these bubbles.

To see full report: EXIT STRATEGIES