Irving Fisher

“You cannot solve a debt crisis by creating more debt.” As Martin Wolf reminds us, this disarmingly simple statement has been of profound importance in shaping public attitudes to the economic crisis. The failure to make a compelling political argument against this proposition has been crucial in limiting the feasible scale of the fiscal response to the crisis.

Whether one looks at the US, the UK or the eurozone, an aversion to “more debt” has become a dominant political theme, as it did in the 1930s. Richard Koo, a leading student of the debt crisis in Japan, has even argued recently that it is impossible to respond adequately to a balance sheet recession in a democracy because the public dislike of “more debt” becomes so profound. Read more >>

The battle to avoid deflation in the developed world could prove to be a long one, with twists and turns which could last for many years. In July, the core CPI data in the eurozone were somewhat firmer than expected, as were the core PPI data in the US. This has led some economists to suggest that underlying price pressures are beginning to rise again, and that the deflation scare is over. Would that that were true. Some interesting new evidence from the IMF suggests that while outright deflation might be avoided, at least for a time, the developed economies could soon get stuck in a kind of limbo land, with inflation remaining unhealthily close to zero for a very long period. Read more >>