ECB and Inflation

[Valmy]

Euro fiscal policy = bad.

Spare me your fancy mumbo jumbo Minkey and give it to me straight.

[Admiral Yi]

Euro fiscal policy = bad.

Bad fiscal policy turned a financial crisis into a governmental solvency crisis?

[The Minsky Moment]

There was no general government solvency crisis in the Eurozone.

[Admiral Yi]

I need another hint Joan.

[The Minsky Moment]

OK
The Great Recession lowered tax revenues, and caused cyclically related spending to spike (e.g. unemployment insurance).  This happens in every business cycle, which is why economists usually refer to cyclically adjusted deficits.

However, the Eurozone mandarins either panicked or were deliberate obtuse and treated the cyclical impact as deficits as a structural problem requiring immediate action and pushed austerity.  That made the underlying problem worse.

We know that the Eurozone underperformed in growth during the Great Recession and aftermath.  The tough question is to what extent that is due to the fiscal austerity and what extent due to monetary tightness. 

[Admiral Yi]

I see.  So the really clever thing for the Greeks to do would have been to raise debt/GDP even further?  Say, to 200% of GDP?  Or infinity plus 2?

[The Minsky Moment]

Greece is what, 1% of the Eurozone?  Greece is not the issue.  Nor is Cyprus, or Estonia, or Slovenia.

Greece should have never been admitted in the first place - they weren't close to the criteria.  But having let them in, their Eurozone partners should have accepted the reality of sunk costs and bailed them out for real.  Instead they did a half ass bailout that has let the problem fester for a few more years.  But it's not up to me to tell them how to run their railroad, unless there are global impacts.  Germany, France, Italy, Spain, Netherlands - that is where the high impact was/is.

[Admiral Yi]

OK, not Greece.  Italy and Spain should have piled on more debt, is that what you are saying?

[crazy canuck]

OK, not Greece.  Italy and Spain should have piled on more debt, is that what you are saying?

Question,

Is not invoking austerity measures during an economic downturn the same as piling on debt? 

[The Minsky Moment]

OK, not Greece.  Italy and Spain should have piled on more debt, is that what you are saying?

They did pile on more debt.  Both countries had their debt-to-GDP ratios rise.  Austerity in the teeth of the a recession is counter-productive. 

It is plain as day in the data.  Both countries were recovering slowly in 2011, then they passed their austerity budgets and plunged back into negative growth.

[Admiral Yi]

They did pile on more debt.  Both countries had their debt-to-GDP ratios rise.  Austerity in the teeth of the a recession is counter-productive. 

It is plain as day in the data.  Both countries were recovering slowly in 2011, then they passed their austerity budgets and plunged back into negative growth.

Pile on even more debt than they did under so-called austerity.  That's what your recommendation is, no?  Death to austerity, run deficits of 9-14%?

Who was going to lend them that money Joan?

[Admiral Yi]

Question,

Is not invoking austerity measures during an economic downturn the same as piling on debt?

Almost definitionally.  The greater your annual deficit, the more your debt will increase.  Not cutting your deficit ("austerity") means more debt.

[Razgovory]

Question,

Is not invoking austerity measures during an economic downturn the same as piling on debt?

Almost definitionally.  The greater your annual deficit, the more your debt will increase.  Not cutting your deficit ("austerity") means more debt.

What if "austerity", does not cut your deficit?

[The Minsky Moment]

Question,

Is not invoking austerity measures during an economic downturn the same as piling on debt?

Almost definitionally.  The greater your annual deficit, the more your debt will increase.  Not cutting your deficit ("austerity") means more debt.

CC's post doesn't contain the word "deficit", so the use of the word "definitionally" is extremely improper.

If austerity measures tank your economy, receipts go down and non-discretionary outlays go up.  Hence deficits can go up. 

And since debt doesn't really matter per se, but rather debt/GDP, the problem is compounded because GDP is going down.

[Admiral Yi]

What if "austerity", does not cut your deficit?

I give up.