Harvard’s Reinhart: Central Banks ‘Bending Over Backwards’ to Help Debt Crises

Friday, 12 Apr 2013 08:39 AM

By John Morgan

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Governments in Europe and the United States are incapable of reducing their debts, so central banks are stepping forward to reduce the global financial crisis themselves, according to Harvard economist Carmen Reinhart.

The disturbing end result, Reinhart predicts, is that consumers themselves will end up paying for the central banks’ solution.

“No central bank will admit it is keeping rates low to help governments out of their debt crises,” she tells Spiegel. “But, in fact, they are bending over backwards to help governments to finance their debts.”

Editor's Note:
 
Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

Reinhart says governments must grapple with debt overhangs one way or the other, because high debt impedes growth and paralyzes credit.

“One way to cope with this is to write off part of the debt. … But we are in an environment where politicians are very reluctant to do write-offs. So what happens is that money is transferred from savers to borrowers via negative interest rates.”

Reinhart notes that for governments to escape huge debts, they have no choice but to pursue austerity and high inflation, the latter of which is “effectively a subtle form of taxation.”

“No doubt, pensions are screwed,” Reinhart tells Spiegel. “Governments have a lot of leverage on what kinds of assets pension funds hold.

“Pension funds, domestic banks and insurance companies are the most captive audiences, because governments can just change the rules of the game.”

According to a draft document by the Cyprus’ international creditors, the cost of bailing out the country has reached $30 billion, with the crisis-hit country having to take on itself the largest share of the measures needed to avoid bankruptcy, according to The Associated Press.

The draft document shows the country will have to come up with $17 billion, which is more than that agreed upon.

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

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