WASHINGTON – Online prices, commodities, drop in corporate earnings, lay-offs and wage reductions, less spending on consumer goods and over-supply of consumer goods are only part of vicious cycle that traditionally leads to deflation. This anomaly is predictable result of wrong economic policies of current governments.
Facing the severe consequences of Global Financial Crisis central banks introduced programs of Quantitative Easing, which was aimed predominantly to increase demand for consumer goods. Unfortunately as some economists claimed bankers and policy makers failed to diagnose the insolvency crisis.
The current situation must worsen due to the provision of huge quantities of liquidity to the financial system suffering from insolvency debtors. Such policy could only further destabilise the system.
The economists who correctly pointed at the error of diagnosis of the GFC are reminding now that there are only four types of solutions, which can be introduced as a combined instrument or separately.
- Inflation and debasement of currency that will make possible repayment of the national currency debt at a large discount.
- Restructuring the debt through negotiation with the creditors. It is possible solution and the most preferable because the creditors will agree for some returns from borrowed money.
- Voluntary or non-voluntary partial default. The example for such a solution can be the Brady bonds introduced to resolve financial crisis in Argentina in 2001.
- Recapitalisation. This instrument is available only to the countries which have capital in the accounting sense.
There are no other solutions for policy makers and the next stages of Quantitive Easing will weaken economy further and make life extremely expensive for larger section of population.