**The Myth Of The Hawkish ECB **
Thursday, April 02, 2009
stefanmikarlsson.blogspot.com/20 … h-ecb.html
Dying of Money: Lessons of the Great German and American Inflations
by Jens O. Parsson
I reckon the Irish government policies are reinforcing deflation in this country, by creating zombie banks just like Japan did, they are allowing the fiction of high valuations on property to continue, as a result the Irish banks lending is curtailed by the overvalued assets and they have less to lend. The sensible policy would be to guarantee savings and throw the banks to the markets who would buy them up cheap, be able to write down the loans and eventually begin the reflation policy again with foreign capital. Of course it would mean that existing bank shareholders, boards of directors, managers and pension funds, bond and securities holders get wiped out, but, on the flipside Irish taxpayers and their children do not get burdened with toxic debt for a generation, and the government can divert scarce resources such as capital to something productive, the administration also don’t have to cut into the public sector as deeply as they will eventually be forced to do if they follow current policies.
The second aspect of government policy is current spending is not being balanced, there is no reserve fund for social welfare and pensions (The banks are getting it), so the shortfall is made up by increased taxation and borrowing, this might work in the very short term, but it reinforces the next slide down as people get sick of paying high taxation and those that can leave do, when the other countries economies pick up.
Continuing rising taxation also makes economic calculation impossible for entrepreneurs, and marginal businesses do not invest any further as the rewards are removed. The higher taxation also drives the black economy and it becomes profitable to trade in cash only or barter, further forcing the government to raise taxation and borrowing which now has greater interest rates due to larger payments and market pricing of higher risk of default.
Since we are in the ECB the government can’t impose movement of capital controls easily like they did in the 70s nor can they print punts, they are then faced with the problem that people move their money where they reckon it will get the highest reward, so if say Dutch banks offer a better rate of return, people will move their money there and out of the Irish economy.
Would we in the circumstances be better following the trail led by New Zealand as a way forward?
Economy of New Zealand