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This you describe is the deflationary cycle that perdured in the US between 1930 and 1934, during the fisherman's term. By some reason elected leaders think this can't happen today. There are certainly huge differences from then to now, a modern currency system, "free" international trade, high economic inter-dependence. Problem is: the deflationary pressure can mount to such extremes that may destroy all these features. I hope it will never come to that.

by Luis de Sousa (luis[dot]de[dot]sousa[at]protonmail[dot]ch) on Sun Dec 18th, 2011 at 02:41:16 PM EST
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Precisely. The only substantial flaw with the cap on the structural deficit is the fact that they will almost certainly define the full employment point in a NAIRU sense and so will massively understate the structural GDP at "full employment" by massively understating what full employment really is.

But the only way to square the 3% structural plus cyclical deficit cap at the sub-sovereign level is for some system of providing grants from the economic sovereign level to the sub-sovereign level, eg, the EU issues grants to the members in proportion to population equal to 25% of the excess of the EU wide output gap over 5% of EU GDP.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Mon Dec 19th, 2011 at 02:22:38 PM EST
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