Excerpt below was written by Kenneth Rogoff, the then Economic Counsellor and Director of Research at the IMF, to Joseph Stiglitz who was Chief Economist at the World Bank between 1997 and 2000.

“Governments typically come to the IMF for financial assistance when they are having trouble finding buyers for their debt and when the value of their money is falling. The Stiglitzian prescription is to raise the profile of fiscal deficits, that is, to issue more debt and to print more money. You seem to believe that if a distressed government issues more currency, its citizens will suddenly think it more valuable. You seem to believe that when investors are no longer willing to hold a government’s debt, all that needs to be done is to increase the supply and it will sell like hot cakes. We at the IMF—no, make that we on the Planet Earth—have considerable experience suggesting otherwise. We earthlings have found that when a country in fiscal distress tries to escape by printing more money, inflation rises, often uncontrollably. Uncontrolled inflation strangles growth, hurting the entire populace but, especially the indigent. The laws of economics may be different in your part of the gamma quadrant, but around here we find that when an almost bankrupt government fails to credibly constrain the time profile of its fiscal deficits, things generally get worse instead of better.”

This entry was posted on Monday, March 9th, 2009 at 3:21 pm and is filed under Archived. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.