If Governments Do Not Do More, An Economic Depression Will Occur.

Economist Willem Buiter is sounding the alarm. The global economy is heading for depression due to the restrained approach to the corona crisis. “It’s depressing how politicians let us down.” Taboos have to give way, even if they cause the inflation specter to rear its head again.’ If you are interested visit this site dog bite lawyers. 

Europe urgently needs to support its weaker economies.

‘Governments must support the demand. Some countries have already done something, such as credit guarantees to prevent companies from going bankrupt. But it remains insufficient. Certainly in the eurozone, the promised budgetary stimulus with barely 1 percent of gross domestic product (GDP) is very poor. A hard-hit country like Italy needs a stimulus of at least 5 percent of GDP, while it doesn’t have the space for it. That is why Europe urgently needs to support its weaker economies, through the European Central Bank (ECB) or the European emergency fund ESM. It’s depressing how politics is letting us down.’

How much does that loss of time weigh?

Buiter: ‘Every day lost is one too many as economic demand evaporates due to the lockdown, with companies and families seeing their incomes disappear. Every day lost is a loss of production and demand.’

The stimulus further increases government debt. Are we testing the limits, or do debts no longer play a role now that interest rates are at historic lows and inflation is hard to find?

Buiter: ‘The central banks have to finance the budget deficits by buying up the new government debt securities with money they create out of thin air ( ‘monetizing debt, ed. ). Some countries have fiscal space, such as Germany and the Netherlands, many others do not. You have to help them, either through the ESM fund, which has to get considerably more resources or by letting the ECB buy up debt.’

This would break the taboo that a central bank may not finance governments directly.

Buiter: ‘The ECB has already done this indirectly in recent years through its purchase program for existing debt securities. Now there will be a clearer question of monetization of debt. We will have to live with that. Europe will have to rewrite its treaties or interpret the texts flexibly.’

We must resign ourselves to a return to high inflation. That’s a small price to pay compared to the alternative of depression.

“We must also resign ourselves to a return of high inflation, one that is higher than we want. Against a strong demand stimulus, there is a lack of measures to strengthen the supply side, an imbalance that pushes up the price level. By the end of the year, we are likely to see an inflation spike. We don’t have to worry about that right away. These are exceptional times and circumstances. Inflation is a small price compared to the alternative of depression.’

Central banks have pulled out all the stops, cutting interest rates where possible and promising to buy almost unlimited debt. How much impact will that still have after their far-reaching easing in recent years?

Buiter: ‘Their action is important because it stabilizes the markets. More importantly, they have the fiscal authorities ( governments, ed. ) To give the message that there is no limit to monetary support, no limit on debt. A kind of free helicopter money from the central banks. That is positive news.’

The lightning-fast crash on the stock markets once again put stress on the financial system. Did that surprise you? Is there a danger of a new financial crisis?

Buiter: ‘The violent reaction is not surprising. We have an economic disaster that could turn into a financial disaster if governments don’t do everything they can to prevent the financial markets from imploding. Due to the magnitude of the crisis, banks will come under pressure, through bad credit or losses on the bonds in their portfolios. The central banks must therefore stand by and help the banks in their task to keep the companies afloat. This is a crisis in the real economy that could spill over into the financial system.’

What traces can this crisis leave in the long term?

Buiter: ‘I fear the nationalist and anti-globalist reflexes of the policymakers. It makes sense to diversify the international supply chains of companies. But that is different from pure economic nationalism with the aim of reducing dependence on Asia – China in particular – and producing as much as possible itself. That is inefficient and unnecessarily expensive. Moreover, not only the supply line with China is disrupted, but also domestic lines if people can no longer work.’