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Thursday, February 05, 2009


buiter's warning to submerging markets

on fiscal expansion in the current-account-deficit, low-tax, high-spending economies of the united kingdom and united states:

The only element of a classical emerging market crisis that is missing from the US and UK experiences since August 2007 is the ’sudden stop’ - the cessation of capital inflows to both the private and public sectors. ... A large fiscal stimulus from a government without fiscal credibility could be the trigger for a ’sudden stop’.

So just don’t do it. Focus fiscal resources on getting the credit mechanism and other key parts of the financial intermediation process going again.

the tail risk is absolutely icelandic.

UPDATE: yves:

Buiter makes a compelling case that lack of credibility has real costs, and uses it to bolster his argument that the US and UK should not go on the kind of whole hog spending spree that most orthodox ecconomists are demanding right now. He thinks a currency collapse, a scenario that most would dismiss as impossible for the dollar, is in fact probable at higher deficit levels in part because creditors and investors know the US and UK lack the discipline to trim the sails soon enough. ...

But the most important aspect of the post is not the policy implications, but the fact that a Serious Economist has finally said that the lack of scruples in America and Britain has gone beyond the tipping point, and is going to exact high societal costs. The parasites are eating the host. I hope someone out there is taking notice.

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