Tan Kin Lian's Blog: Governent debt and quantitative easing

Saturday, May 08, 2010

Governent debt and quantitative easing

Read this excellent article by Lucky Tan.

My comments
Europe now has to print money, i.e quantitative easing, to buy over the government debts in several countries. This will cause inflation but will lead to greater stability of the markts. It is dangerous to have government deficits funded through short term borrowings.

There are three ways for a government to fund its deficit
a. increase tax
b. print money
c. borrow

Many governments have borrowed money. It is not sustainable, as the burden falls on the future generations. The other two options have now to be considered.

14 comments:

JS LEE said...: Printing money ie inflation is a hidden tax across all income groups. Would it erode the middle class, increase disparity between rich & poor? Will power shift even more in favor of a few?; May 08, 2010 8:41 AM
JS LEE said...: Isn't printing money ie inflation, a hidden tax affecting all income groups? Would this erode the middle class, increase disparity between the rich & poor? Would power shift even more in favor of a few?; May 08, 2010 8:44 AM
Anonymous said...: I agree with JS Lee. I would also like to add that printing more money is similar to a default. The more money the EU print, the more the euro will turn into banana money (like the time during the Japanese occupation). The creditors will get back a useless currency which is tantamount to a default.; May 08, 2010 10:14 AM
Anonymous said...: It has always happened. More money means less purchasing power.

Why should they print more money? Because it is the easiest solution. The public will not know it until the paper money flows to them. And suddenly, they have more money to pay their installment and they say inflation is better than deflation. Inflation creates an illusion for the public to work harder, but commodities and the hard assets will become costly as well.; May 08, 2010 10:26 AM
Anonymous said...: Increase taxes is politically unpopular, hence, many governments are relunctant to implement it. There are 2 other ways to cut deficit i.e. cut spending and sell government assets (including land). Cut spending will lead to unemployment and economic growth will suffer. This is what happening in Greek. But to address the problem, someone or whole nation will have to suffer. Seems like there is no win-win solution. If politicians are not prepared to introduce tough measures, the problem will go on and eventually the country will go bankrupt.

CCL; May 08, 2010 11:40 AM
safer then safe said...: The news is so ambiguous.

"Unemployment Rate drops!"
"Companies report good results!"
"Banks resume lending"
"China lifts Asian economies"
"US economy grows "

Then...

"Greek debts mount"
"Double dip possible"
"The property bubble will burst"
"Stock indices fall worldwide"
"Prices are overvalued"

I do not know what to believe anymore!
I'll keep cash under my pillow..
all 500K of it.; May 08, 2010 2:50 PM
Anonymous said...: None of the choices now adopted by many Governments are hardly sensible, but really there is no other alternative.

This is the result of overspending by Governments to satisfy citizens visions of progress, but it comes with a heavy price. The burden falls on our children and future generations.

Will this kind of borrowing to fund progress be sustained? What happens when America ends up like Greece. It would be unimaginable. But it will happen. Sooner or later.; May 08, 2010 5:17 PM
Parka said...: All three solutions are just for the short term.

I hope these government should learn in the future not to carry so much debt to finance.; May 08, 2010 6:13 PM
Anonymous said...: The paper money system will not work. Economist needs to learn from history. The Chinese implemented it before as early as the tang dynasty. It failed because of the same problem, overprinting and debasing of the value.

It should be peg to gold. The price of gold was stable until they ended the Bretton Woods system.; May 08, 2010 10:25 PM
Anonymous said...: I think it's a concerted effort to destabilised the Euro by a cabal of Anglo American bankers, to maintain the Petrodollar hegemony.

The demise of the dollar
http://www.independent.co.uk/news/business/news/the-demise-of-the-dollar-1798175.html; May 09, 2010 6:13 AM
Anonymous said...: Sometimes, the most bitter medicine is the best remedy. May be a hard reset on a global scale is needed.

No bailout and let them default. And no govt bailout of any counter parties who are affected by the default. There will probably be cascading dominoes on a global scale, but this may be what is needed to get some sense and responsibility back into human society.; May 09, 2010 9:54 AM
Tan Kin Lian said...: Printing money is an indirect form of taxation. It is better than borrowing money using short term bonds.

If the lenders refuse to roll over the bonds, the country goes into a crisis, as what has happened in Greece.

It is better to have direct taxation to collect the revenue to pay for the government expenses, but failing that, printing money is the next alternative. It will lead to inflation, but hopefully, the rate of inflation can be controlled (as is the case of USA).

The government should be fiscally prudcent, but sometimes it cannot be avoided, e.g. if the country is in recession, tax revenue is down, and higher payments have to be made for unemployment and welfare benefits.; May 09, 2010 3:46 PM
Anonymous said...: Again the idea is that it should be run by competent people. If the government is not competent, then the people should call for a change.

If the bank is not profitable, it should go bankrupt and the business taken over by others who survived the crisis. Else there will be a recession every few years. They are only postponing and delaying the crisis.; May 09, 2010 4:02 PM
Anonymous said...: anon @ May 09, 2010 4:02 PM,

ya this sounds like what had been done by Japan and resulted their own lost decade; May 10, 2010 11:33 AM