Fiscal Consolidation Should no Longer Delay

by HImfr Ivy - Date: 2010-11-17 - Word Count: 929 Share This!

British Chancellor of the Exchequer George Osborne today announced fiscal consolidation policy, shocked the world. Osborne argued that Britain is stand on the edge - If you want to avoid a serious crisis of confidence, in addition no other way.

Such as Greece and other countries, non-sufficient until the outbreak of the crisis is not only forced the introduction of such adjustment policies, by contrast, consider what the UK can be described as thorough, decisive shot. GDP share of public debt the UK (64.6%) in fact is not the highest, even it is anxious, indicating that other countries should better be on pins and needles.

However, fiscal consolidation that strong medicine is immediately recalled the Great Depression. Then-Finance Minister of Andhra Andrew Mellen has advocated the workers, farmers, securities and real estate debt liquidation, "the pus squeezed out." British Finance Minister Philip year Snowdon (Philip Snowden) - a thin little face, but also rigorously enforce the financial contraction, as if the British economy is to mold according to his own re-carved one out like.

Given this history, some think, a large number of heavyweight is now in unison Keynesian critics warned that we will repeat the last century 30's bad fiscal policy mistakes, will suffer all possible causes of the disaster. However, this interpretation of the Great Depression version, though very popular, but it is wrong.

First, these critics Mo Xuehao history. Hoover was in power the United States (Herbert Hoover) President, the initial reaction to the Depression was not stressed the tight finances. Instead, Hoover and some other people who have a fully modern, Keynesian ideas, that only the introduction of large-scale public employment programs, can the economy out of the mire.

In addition, today's Keynesian did not see the reason why care so much about the Great Depression, a balanced budget, there are difficulties in the back. Hoover then have turned to financial constraints the Government is to deal with from the capital and foreign exchange market pressures, that is, Latin America and Central Europe from the economic crisis caused by the reaction, which is precisely the main problem lies in the public finances.

Starting from September 1931, the market began to tense up to the United States, there has been massive capital outflows from the United States, the phenomenon of banks - that is out of dollars. The Great Depression, inability to absorb the capital market makes a huge amount of government debt (in fact, even what can not absorb all the debt). Result, fiscal consolidation has become the only way to restore confidence.

1931 Britain has the logic to act accordingly. Snowden worry about any debt the British Government will try without success, may lead to "national bankruptcy." Year in September, the British Government on the public debt, and whether to tighten fiscal concerns, leading to panic-type sell-off of sterling. British Government does not defend the fixed exchange rate backs against the wall, but the recommendation of the Bank of England to abandon the gold standard, so that depreciation of sterling.

Great Depression version of the traditional Keynesian interpretation of the third problem is that budget balance method in that it did play a role. It is to appease the market, the British abandoned the gold standard of monetary policy from the previous fetters, the stability of monetary policy makes it possible. The country no longer have to worry about deflation, a fixed exchange rate pass through to domestic.

But it is equally important, the United Kingdom put aside the gold standard, it is also a considerable extent, balance the budget. As a result, it has been able to more flexibility to manage its monetary policy. Balanced budget makes strong recovery in the UK, to ensure that the British economy in 30 years in the last century is far better than 20 years.

Finally, the Great Depression that is basically to tighten fiscal policy and the "financial orthodoxy," those who forget the product of a fixed exchange rate regime is the greater sinner, it makes the poor around the transmission of monetary policy, causing deflation.

The main problem today is that built up after 2007 the capital market failure (and the resulting government debt issues), it has been so serious that the level of the Great Depression? Right now, all government debt has not yet appeared on the universal disgust, some countries in the capital markets are relatively good, they can also raise funds to pay for the external deficit.

Debate on the financial operation of the space will soon become just another fact of debate, that the past can easily obtain financing in the future if the country still has this ability. We are still in the final stages of government debt bubble, the bubble is the initial stage of the financial crisis to the U.S. debt market funds have "to seek safe haven" to heap up. Once the bubble burst, the debtor will not only impact on vulnerable - the equivalent of trigger another crisis in the subprime mortgage crisis, but also to the impact of strong creditor.

Depression is a major striking phenomenon is that the market in every possible way to the U.S. for a sudden panic among the straw. Late summer 1931, the U.S. dollar together with the French franc, the firm into the international system of currency. This lesson illustrates the shocking, the government and its finances would become overnight how precarious, without an appropriate fiscal policy will be how much the stability of monetary policy, a stumbling block!

Greek crisis of spring 2010 the British woke up. Britain's response should lead other industrialized economies - particularly the United States, to control the vulnerability of their long-term finances.

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