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Andrew Lilico

Andrew Lilico: A Rogoff-Stiglitz redux

There are always a few "interesting" folk out there who want to propose that when - as has happened recently in Ireland, Greece, Portugal, and Spain - investors cease to want to lend a country money, all it needs to do is to issue more debt and everything will be fine.  Because they believe that nothing can go wrong, and there's no problem even if investors cease to want to lend a country money, in advance of the point at which investors run out of patience (e.g. the UK) there's no need to control the accumulation of debt so as to avoid the risk of an investor strike.

Here's what then-Economic Counsellor and Director of Research at the IMF, Kenneth Rogoff, had to say about that in a famous open letter (an official letter, published on the IMF website) to Joseph Stiglitz in 2002:

Governments typically come to the IMF for financial assistance when they are having trouble finding buyers for their debt and when the value of their money is falling. The Stiglitzian prescription is to raise the profile of fiscal deficits, that is, to issue more debt and to print more money. You seem to believe that if a distressed government issues more currency, its citizens will suddenly think it more valuable. You seem to believe that when investors are no longer willing to hold a government's debt, all that needs to be done is to increase the supply and it will sell like hot cakes. We at the IMF—no, make that we on the Planet Earth—have considerable experience suggesting otherwise. We earthlings have found that when a country in fiscal distress tries to escape by printing more money, inflation rises, often uncontrollably. Uncontrolled inflation strangles growth, hurting the entire populace but, especially the indigent. The laws of economics may be different in your part of the gamma quadrant, but around here we find that when an almost bankrupt government fails to credibly constrain the time profile of its fiscal deficits, things generally get worse instead of better.

As they say on Twitter "<< Wot he said".


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