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Ecb Chief Trichet Says Governments Have Reached Borrowing Limit

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http://www.guardian.co.uk/business/2009/ju...deficit-warning

European Central Bank president Jean-Claude Trichet warned today that governments that have borrowed billions to fight the economic crisis had no room for more debt and would have to start bringing down budget deficits.

Trichet said the large injection of funds in an effort to stimulate European economies had been the right response, but said there was a need to get public finances back under control as soon as possible. "There is a moment where you can't spend any more and you can't accumulate any more debt. I think we are at that moment," Trichet told Europe 1 radio.

"We are in exceptional circumstances," he said, adding that financial markets and consumers had to be convinced that budgets would return to normal.

The ECB has slashed interest rates to shore up a battered economy, though a rate of 1% is higher than in the United States or Britain and was cut more slowly.

Although the eurozone was not at the core of the freezing up of financial markets in the autumn of 2007, its banks held vast amounts of toxic assets and countries such as Germany, which was heavily dependent on exports, have plunged into recession as world trade collapsed.

But Trichet said there was now wide agreement that the bloc's economy would be showing clear signs of recovery by 2010 if the appropriate action was taken.

"In that hypothesis, we will have growth coming back again and so we have to begin the operation that consists of moving progressively towards balance," he said, referring to budget deficits.

Trichet said the unprecedented actions taken by central banks had restored confidence to money markets that were almost crippled by the shock of the Lehman Brothers collapse last year.

"As far as risk, risk premiums on money markets, the functioning of the money markets is concerned, we have returned to a situation I would qualify as 'pre-Lehmans'," he said.

Trichet also repeated calls for an overhaul of the rules underpinning the global economy. He said the global crisis had revealed the fragility of the financial system, which had encouraged short-term decisions and reinforced cyclical swings and he said it should be strengthened "in an extremely significant manner". "We would not be forgiven for starting again with the same degree of fragility."

He welcomed the recent steps agreed by European Union leaders to tighten financial supervision. "Some might say we should go much faster but I think one has to be realistic and practical."

Trichet said that as head of the ECB he would be able to lead a new European Systemic Risk Board that would monitor risks to stability but he declined to comment on whether he would actually chair the body. Britain and national banking and insurance regulators in the EU oppose the ECB chairing the new board.

The saviour of the world won't like this.

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The saviour of the world won't like this.

I don't think JCT's comments are aimed at the UK in particular.

They are aimed at Eurozone countries like Italy and Belgium, with public debt/GDP ratios close to 100%.

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I don't think JCT's comments are aimed at the UK in particular.

They are aimed at Eurozone countries like Italy and Belgium, with public debt/GDP ratios close to 100%.

I know it's not aimed at us but it doesn't sit easy with the current govt policy of spend spend spend funded by a massive growth in debt.

However if there are secret plans to move to the Euro, then our debt levels will be a huge problem.

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yes but. but . but Brown say he's investing so all we need is more quango's and we will soon be out this recession and i like traffic wardens then BBC say i do.

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Guest DissipatedYouthIsValuable

Backing all money with a debt obligation is ludicrous.

Human suffering for an unhinged monetary system.

We're stupid monkeys.

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It amazes me how there can be a widespread consensus that the public finances are in a parlous state but the leap from that to us being unable to fund our budget deficits through debt issuance seems to be impossible for most people to make. If the UK were an individual it would have 'soon to be bankrupt' written all over it.

IMHO the IMF and interest rates north of 10% beckon.

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It amazes me how there can be a widespread consensus that the public finances are in a parlous state but the leap from that to us being unable to fund our budget deficits through debt issuance seems to be impossible for most people to make. If the UK were an individual it would have 'soon to be bankrupt' written all over it.

IMHO the IMF and interest rates north of 10% beckon.

Your opinion is a bit thick to be honest. Care to pluck another number out of thin air? Interest rates will be low for a long time.

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Your opinion is a bit thick to be honest. Care to pluck another number out of thin air? Interest rates will be low for a long time.

Any predictions on interest rates are a bit of a wild guess from here. I wont make one.

But I am more optimistic than most about the way the UK is dealing with the crisis. Given that we had one of the worst problems with our housing boom, and the withdrawal of money market credit, the UK has performed pretty well.

What do you need in a credit crunch, where the basic problem is that those with money are hoarding it? You have to devalue that money to persuade those same people to part with it, and get the velocity of money moving again. The choice here is to either print money, or confiscate it. Printing is by far the best choice. It is also non-inflationary in the particular conditions described.

When you have a massive fall in aggregate demand due to loss of confidence by the consumer, what do you do? The government has to make up the shortfall by providing more demand itself for goods and services. The government has done a bit of this, but not enough in my opinion. What it has done has helped. As for Trichet and King asking for spending cuts? Perhaps they would like a dose of unemployment, and see how they like it.

The jewel in the crown of the economic policy was a bit of an accident though, namely Sterling devaluation. The pound fell like a stone last year, and that has really boosted our exporters, and helped those industries competing with importers. We trade so much internationally as a nation, that this sort of stimulus always gets our economy going again. Recent rises in the pound have eroded this advantage, and we are now in danger of losing the gift that it gave us. The solution to this is quite a simple one, just keep on printing money to keep the value of the pound low.

Whilst we still have this fear of economic collapse, printing money is a very benign policy when faced with a deflationary spiral as we are. It encourages those with money to go and spend it rather than hoard it. The risk is of course, that we get a sea change in inflationary expectations. If people were to start to have inflationary expectations, and instead of hoarding it, take whatever action they can to spend the money they have, inflation can strike very quickly. The policy makers must be on the guard for this, and take the appropriate actions. That includes reducing government expenditure, sharply and quickly. And reducing the money supply, using the reverse policy of QE.

If the current inflationary policy is working, we will see the indicators of this in the gilts market. If interest rates start to rise, then inflationary expectations will be rising. As interest rates rise, the Bank of England should slow down and cease its printing. Shortly after we should see inflation beginning to emerge in the economy. This too could be benign if it is used to devalue the real value of peoples debts, combined with a reduction in overall lending in the economy. Lets hope they have learned their lesson, and dont use any recovery to start levering up and lending to all and sundry again.

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Any predictions on interest rates are a bit of a wild guess from here. I wont make one.

But I am more optimistic than most about the way the UK is dealing with the crisis. Given that we had one of the worst problems with our housing boom, and the withdrawal of money market credit, the UK has performed pretty well.

What do you need in a credit crunch, where the basic problem is that those with money are hoarding it? You have to devalue that money to persuade those same people to part with it, and get the velocity of money moving again. The choice here is to either print money, or confiscate it. Printing is by far the best choice. It is also non-inflationary in the particular conditions described.

When you have a massive fall in aggregate demand due to loss of confidence by the consumer, what do you do? The government has to make up the shortfall by providing more demand itself for goods and services. The government has done a bit of this, but not enough in my opinion. What it has done has helped. As for Trichet and King asking for spending cuts? Perhaps they would like a dose of unemployment, and see how they like it.

The jewel in the crown of the economic policy was a bit of an accident though, namely Sterling devaluation. The pound fell like a stone last year, and that has really boosted our exporters, and helped those industries competing with importers. We trade so much internationally as a nation, that this sort of stimulus always gets our economy going again. Recent rises in the pound have eroded this advantage, and we are now in danger of losing the gift that it gave us. The solution to this is quite a simple one, just keep on printing money to keep the value of the pound low.

Whilst we still have this fear of economic collapse, printing money is a very benign policy when faced with a deflationary spiral as we are. It encourages those with money to go and spend it rather than hoard it. The risk is of course, that we get a sea change in inflationary expectations. If people were to start to have inflationary expectations, and instead of hoarding it, take whatever action they can to spend the money they have, inflation can strike very quickly. The policy makers must be on the guard for this, and take the appropriate actions. That includes reducing government expenditure, sharply and quickly. And reducing the money supply, using the reverse policy of QE.

If the current inflationary policy is working, we will see the indicators of this in the gilts market. If interest rates start to rise, then inflationary expectations will be rising. As interest rates rise, the Bank of England should slow down and cease its printing. Shortly after we should see inflation beginning to emerge in the economy. This too could be benign if it is used to devalue the real value of peoples debts, combined with a reduction in overall lending in the economy. Lets hope they have learned their lesson, and dont use any recovery to start levering up and lending to all and sundry again.

The problem with printing money is that we are likely to be constrained by the bond market, which may refuse to buy our debt if they perceive that we are attempting to inflate our way out of our debt obligations. Printing/inflation is not necessarily a free ride.

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So deficits will need to be tackled, and governmental spending / stimulus reined in, before even one quarter of positive growth has been stimulated. I really thought they'd push everything a great deal further before capitulating.

GULP!

Edited by gruffydd

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The problem with printing money is that we are likely to be constrained by the bond market, which may refuse to buy our debt if they perceive that we are attempting to inflate our way out of our debt obligations. Printing/inflation is not necessarily a free ride.

Yup, the reality of the situation is that there is no such thing as a free lunch. Will our creditors be happy to keep investing in our debt, while we print away the value of it? It could make rolling over debt very expensive in the future - worrying, considering how much we have! :unsure:

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Whilst we still have this fear of economic collapse, printing money is a very benign policy when faced with a deflationary spiral as we are. It encourages those with money to go and spend it rather than hoard it. The risk is of course, that we get a sea change in inflationary expectations. If people were to start to have inflationary expectations, and instead of hoarding it, take whatever action they can to spend the money they have, inflation can strike very quickly. The policy makers must be on the guard for this, and take the appropriate actions. That includes reducing government expenditure, sharply and quickly. And reducing the money supply, using the reverse policy of QE.

No, printing money is stimulating commodity prices. Inflation expectations are increasing. Sterling is weaker than before, but where is the demand for UK goods when the rest of the western world is mired in recession as well?

Edited by gruffydd

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