Having followed the ongoing public debate on Ireland’s massive debt crisis, I welcomed Michael Casey’s recent opinion piece “Increasing money supply can halt deflationary cycle” published in the Irish Times (14/4/11). His proposal that greater monetary autonomy could be exercised by the Irish Central Bank makes an important new contribution to that debate.
Other economic commentators have framed possible responses to Ireland’s debt crisis in very narrow terms, advocating either a rigorous adherence to austerity programmes or unilateral default on our debt.
Those who promote austerity however have not been fully honest about the risks of this approach. They include the possibility that the Irish economy could enter into a spiral of deflation, economic stagnation and experience a sharp increase in overall levels of unemployment. Given the fragile state of the global economy, these negative trends could prove very difficult to reverse.
Those who support a unilateral default on our debts and taking a chance with the international money markets are being less than honest about the economic and financial difficulties that Ireland will face in such circumstances.
Michael Casey’s helpful contribution to this debate has been to remind us of the unique position of central banks which he points out can “create new money by the stroke of a pen”. Casey proposes that the Irish Central Bank should be permitted to print new money and lend it to the cash-strapped Government in order to relieve current pressure on it. This sets him apart from many other economic commentators who appear to view governments as almost completely dependent on private bond markets to access critical money supplies.
Casey points out that over the years, the Central Bank has occasionally lent money to the government of the day to part-finance its fiscal deficit, and that the central banks of other countries have engaged in similar action. He envisages circumstances in which the Central Bank might lend €3 billion a year, for example, to the Government over the next four years, on a strictly emergency basis. He argues that this would prevent recession becoming entrenched, reduce unemployment and emigration, avoid punitive interest charges and protect the most vulnerable in our society.
While Casey concedes that printing money might cause price inflation later on, he questions whether that would be such a bad thing, given Ireland’s present circumstances. He suggests that it might encourage consumer spending and would also inflate away some of the real burden of our present debt. He reminds us that other countries have done this in extreme situations.
Given Casey’s impeccable economic credentials as former chief economist with the Central Bank and board member of the International Monetary Fund, surely his proposal should be given serious consideration by national and European policy-makers?
Casey is not alone in advocating a more flexible approach on the part of central banks to monetary policy. A pioneering community of economists in the University of Missouri, Kansas have elaborated a new macroeconomic model known as Modern Monetary Theory, which challenges some of the basic assumptions of conventional monetary theory. It advocates a more activist role for governments and central banks in overall economic development and the promotion of full employment.
These economists will be amongst the keynote speakers at a conference in Croke Park on May 9th entitled “Lessons from the Crisis : Money, Taxes and Saving in a Changing World” co-hosted by Tasc (Think Tank for Action on Social Change) and Smart Taxes (Fiscal Policy for Sustainability network). Richard Douthwaite, an Irish economist who has written about the possibilities for the European Central Bank to use its monetary policy to engage in ‘deficit easing’ in order to tackle the debt crisis in the Eurozone, will be another speaker at the conference.
Those interested in attending can register at email@example.com.
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mer O’Siochru is a qualified architect and valuation surveyor. She was a founder of Feasta and served on its executive committee for many years. She is director of EOS Future Design which designs and develops sustainable systems and settlements. She also manages the Feasta-led Smart Tax Network which is funded by the Department of the Environment, Heritage and Local Government to develop tax policies in areas related to the environment. She lives in Dublin.