Tuesday, August 2, 2011

Different Solutions to Fiscal Crisis

A readers asked if I could explain the four different responses to a financial / fiscal crisis.
  • Devalue
  • Default
  • Inflate
  • Deflate
See: solutions to financial crisis

Essentially countries in the Euro have been trying to solve their fiscal crisis through deflation (i.e. austerity policies / cutting government spending). In the case of Greece, only when deflating the economy has proved to be a complete failure are they having to realise default is the only viable option left.

The problem for the Euro members is that they are trying to solve the fiscal crisis through deflation alone.

In the case of Iceland, the crisis was accompanied by a substantial devaluation. The UK and US have also seen a devaluation in exchange rate which has made deflation more palatable.

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1 comment:

David said...

'Essentially countries in the Euro have been trying to solve their fiscal crisis through deflation (i.e. austerity policies / cutting government spending'

The where are the loans going from the ECB/IMF/EU going? Certainly not to keep the schools and hospitals going !

Yes the 'x' domestic economy may deflate but their respective banking executives can still achieve $m bonuses for naked short selling Euro bonds.

x = Portugal, Italy, Ireland, Greece Spain.