I’m just doing a drop of thinking out loud here. Feel free to correct me if I make any mistakes.
Deflation = Recession = BAD. This is where Ireland is now, and thousands of Irish families are falling into an ever increasing spiral of debt.
Inflation = OK.
Too much inflation = BAD.
Am I right so far?
OK. Supposing I am, I will continue my musings.
Inflation can be controlled by interest rates. Too much inflation – raise interest rates – brakes are applied to the economy.
Raising interest rated during deflation is a disaster. It sucks more money out of the economy and makes matters far worse.
Am I doing all right? I know this isn’t David McWilliams stuff, but I’m doing my best.
Ireland is still in recession. Germany, France and a couple of others are beginning to experience inflation. So what happens next?
Do they raise interest rates to help Germany and France, and thereby force Ireland further into recession leading to debt default?
Or do they keep interest rates low to help Ireland and allow inflation to cause problems fro the Big Boys?
I think we know the answer to that one.
Of course another way to control recession or inflation is to revalue a local currency, but that is out of the question, as there is only one currency.
So the bottom line is that one of the following three is royally fucked -
- The Euro
Answers on a postcard please.