The BSE Sensex Shed 700 points today and its now 49 Rs to a Dollar- Its surely is a sinking feeling, Gloomy outlook and bloodbath on Dalal Street today, will it be more value depreciation? Can confidence and trust alone help overcome solvency issues? especially when funds from Europe are making their way into the American banking system. European and specifically its banks needs recapitalization more than anyone else now. Countries must learn from Germany which has a large trade surplus and can afford to export capital.
This week, it was the turn of Italy to be downgraded after rising credit risks, shaky asset markets and weakened growth coupled with gloomy outlook. The developments this week has all the making of a terrible horror sequel to what happened in 2008 but this time around, the victims are developed nations. We have heard of two polarized arguments about fiscal policy during such debt driven crisis.
- Austerity doesn’t work
- You don’t get out of debt by taking on more debt
And if I can add a third one “ You don’t print currency to tide over 1 & 2” Greece is a clear example of basing their policies on ignoring argument #1.
Then there are countries like the US and the UK where policy is based on accepting argument #2
Unfortunately for Greece, It neither has the ability to depreciate its currency nor bank on its prowess to export into a slowly recovering global economy. Greece today finds itself in a position that leaves debt restructuring probably the only option for any hope of revival.
Meanwhile, I only hope that the European union and the Eurozone countries come forward together and help bailout Greece before the diehard adherents of the post Keynesian school of modern monetary theory profess their new science of macroeconomics by asking for a abolishment of the Euro as they have always advocated that the Eurozone can not be a fair play ground for a common currency.
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