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IMF chief economist Gita Gopinath Xinhua News Agency/PA Images

'There has been an intellectual rethinking on the whole issue of government borrowing'

Why austerity is out and public spending is back on the menu for economists.

WE’RE GETTING USED to remarkable press conferences lately.

The last two months have been filled with them and yet the one delivered by finance minister Paschal Donohoe in Government Buildings this week — in which he detailed the catastrophic scale and speed of the impact that COVID-19 is having on our economy — must be among the most stark.

Whatever its make-up, the incoming government will have to grapple with the second major crisis in Irish and global capitalism in just a decade.

In the wake of the crash of the late 2010s and the recession that followed, austerity and public deficit reduction were central to the responses of policymakers not just in Ireland but globally – even in relatively sound economies like Germany.

But the tectonic plates of economic orthodoxy seem to have shifted somewhat since then. Even the International Monetary Fund appears to be moving away from old ideas.

How did we get here?

The Great Lockdown

IMF chief economist Gita Gopinath (in another extraordinary press conference earlier this month) likened the latest crisis to the Great Depression of the 1930s and explained that the output losses caused by ‘the Great Lockdown’ would cause “a deep recession”, that will scar the global economy.

However, what really caught the eye was Gopinath’s advice to policymakers:

Once the recovery has happened and we are past the pandemic phase, for advanced economies, it would be essential to undertake a broad-based stimulus.

“This would be even more effective if it were coordinated across all the advanced economies,” she said

This would, of course, require governments to borrow heavily, increasing fiscal deficits in the process.

But Gopinath’s advice to politicians? ‘Don’t sweat it.’

“As long as interest rates remain very low as we’ve seen and we get the recovery we’ve projected, then the combination should help in bringing debt levels down slowly over time.”

Austerity budgets

Surely there’s been some mistake?

Is this really the same IMF that, along with the European Commission and the European Central Bank, formed the Troika, synonymous on these shores with austerity budgets and swingeing cuts?

If so, why the seemingly sudden change of tack?

For two reasons says Professor Alan Barrett, chief executive of the state-funded Economic and Social Research Institute (ESRI). Firstly, there is one major difference between our current state of affairs and the last crash.

“The last crisis was all about the buildup of (public) debt so that when people like the IMF, were then coming in to sort of give advice and assistance, what they were looking at was unsustainable levels of debt.

“It was very difficult, in their view, to solve the difficulties that began with debt by issuing more debt. So I think that’s the first element of this.”

The second element, Barrett says, is that there has been an “intellectual rethinking on the whole issue of government borrowing,” in recent years.

“One of the things we always worried about on public debt was if the interest rate on the debt was bigger than the growth rate of the economy, it meant that over time the debt could become unsustainable.

But in more recent years with interest rates so low, there’s a sort of a sense that maybe the amount of public debt that countries can actually carry is bigger than we previously thought.

One of the “thought leaders” in this area, Barrett says, is French economist Olivier Blanchard.

Blanchard, an MIT academic who served as IMF chief economist from 2008 to 2015, admitted as long ago as 2013 that the fund, in economist Paul Krugman’s words, “massively understated the damage that spending cuts inflict on a weak economy”.

Cuts coupled with “debt alarmism” on both sides of the Atlantic, even in Germany, “slowed the recovery” in Krugman’s view.

Ciarán Nugent, an economist with the trade union-funded Nevin Economic Research Institute (NERI), agrees.

Even before the COVID-19 crisis, he says, Germany — the economic powerhouse of Europe — was “technically in a recession… as a function of not having the freedom to invest (and borrow)”.

Nugent believes that globally, “the writing has been on the wall for some time” for the old ways of thinking about public debt and spending.

Green investments

What policy options might be available to governments in light of this new thinking?

Because a lot of people have lost their jobs and a lot of people will have lost confidence, there’ll be a need for the public authorities to maintain spending in order to supplement the loss of private expenditure.”

One way to do this, he says, is to spend money on infrastructure.

Barrett explains, “People are already talking about using this as an opportunity to introduce green investments. So would it be a good time now to sort of retrofit every house in Ireland and have a housing programme, but a very sort of green housing programme, and public transport investments?”

Nugent thinks so.

When it comes to green investments, he thinks, “a publicly funded retro-fitting (housing) programme targeting, first of all, the social housing stock after that, the public building stock, schools, hospitals, whatever else and exploiting opportunities in those areas,” could help kickstart the recovery.

He believes this would create “middle income” jobs in trades like carpentry and help put people back to work, stimulating demand in the economy. By making the housing stock more energy-efficient, it would also help Ireland meet its climate targets, he says.

These issues will have to be kicked around in the political arena first, not just in Ireland, but in Europe as well.

There is also the small matter of the tempestuous debate at EU level over how the funds will be raised, how they will be deployed and how the burden should be shared between relatively strong northern economies like Germany and the Netherlands and their stricken southern cousins, Italy and Spain.

Although there was a small glimmer of hope this week when leaders agreed to release €540 billion in recovery funds through existing mechanisms, “The Europeans, in a sense, haven’t got their act together,” Barrett says.

But for Nugent, the need for new thinking about how to get the economy back on track is clear, particularly for young people.

“The labour market never recovered for young people from 2008. The danger would be (repeating the same policy choices from the last crisis) and, in the process of doing that, failing to address it properly.”

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    Mute michal heba
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    Apr 26th 2020, 7:04 AM

    It’s affecting USA and Germany this time, so now we need to change the rules… Before it only affected smal countries like Ireland that owed to Germany…

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    Mute Paul Power
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    Apr 26th 2020, 7:18 AM

    @michal heba: your 100% right with that comment !

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    Mute Peter Hughes
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    Apr 26th 2020, 7:39 AM

    @michal heba: The thing is Last time as you put it our government was warned about the massive housing bubble and how it would all end in tears and continued the corrupt greed fest regardless all voted for by us….and you expect other countries to then foot the bill for that?….if it was the other way round trust me you would be saying why should we pay for a self inflicted wound of shocking governance?…this time there was nothing anyone could have done to stop this from happening….big difference.

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    Mute Shamey
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    Apr 26th 2020, 8:23 AM

    @Peter Hughes: not really voted for by us….just the banks handing out money willy nilly to the masses (knowing that at the end of the day, they’d get their money back), who’d say no to money on a plate as it were. The only ones left high and dry were carpenters, sub contractors and taxpayers etc.

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    Mute NotMyIreland
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    Apr 26th 2020, 8:33 AM

    @michal heba: And the last one which started with sub prime mortgages in the USA, didn’t affect the USA?

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    Mute michal heba
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    Apr 26th 2020, 8:38 AM

    @Peter Hughes: we have been told not to burn senior bond holders(Germany). they have invested in to Irish banks and risked their money. When everything collapsed they wanted money back and they got it.

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    Mute Thomas Harrington
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    Apr 26th 2020, 8:45 AM

    @michal heba: boom there you go! Spot in

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    Mute Seanboy
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    Apr 26th 2020, 9:57 AM

    @Peter Hughes: the money Irish banks lent recklessly had been lent to them recklessly. Why were only the Irish people punished, why was the burden not shared by all involved in the recklessness.

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    Mute Simon Dottcom
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    Apr 26th 2020, 10:13 AM

    @Thomas Harrington: I presume you mean “spot on”

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    Mute john doe
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    Apr 26th 2020, 1:00 PM

    @Peter Hughes: the cause of the crisis while not irrelevant is not the discussion, the discussion is that Policies of austerity were not helpful and had we borrowed to fund large infrastructural projects, to stimulate our economy as the parties of the left were ridiculed for suggesting we would have come out of recession in 5 years instead of the ten it took.
    This was exactly the financial approach promoted by gerry addams and sinn fein at the time and they were told it was “shinnernomics”

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    Mute Adam Hernes
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    Apr 26th 2020, 1:10 PM

    @michal heba: No. These is an overall consensus that the people payd for the banking debth. Bailing out banks and big corporations won’t fly this time. The political class knows that they will have fascists governments in half of European countries by the end of the year with new austerity. People will not take it again. Politicians think only amount their buts.

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    Mute Vin
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    Apr 26th 2020, 1:19 PM

    @NotMyIreland: it was “sub prime” lending practices worldwide, the USA just popped first. I don’t know the breakdown of private mortgages vs developers here. But either way people borrowed what they couldn’t pay back with the infamous anglo being the worst. I believe their customers were mostly commercial

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    Mute Mark V
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    Apr 26th 2020, 6:07 PM

    @Peter Hughes: You seem to have forgotten that a lot of that debt was unsecured bonds. The EU forced Ireland to guarantee these so German, Dutch and other major EU nations didn’t have to prop up their banks, insurance companies and pension funds.

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    Mute Niall O'Sullivan
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    Apr 27th 2020, 8:10 AM

    @michal heba: We could have left some of the banks go to the wall until Brian Lenihan nationalised the debt. This turned it into a potential sovereign default and meant the taxpayers owed the money instead of the bank. Also inflation is low now and we aren’t really seeing risk of an overheated economy and runaway inflation so the rules are much looser.

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    Mute Karllye kripton
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    Apr 26th 2020, 8:00 AM

    Only when the last tree is cut down or when the last animal is killed for food only then will people release that we can’t eat money and it really is worth less than the paper it’s printed on

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    Mute patrick boland
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    Apr 26th 2020, 9:02 AM

    @Karllye kripton: that is so like the Cree Indian proverb. ‘Only when the last tree has died and the last river been poisoned and the last fish been caught will we realise we cannot eat money’.

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    Mute Karllye kripton
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    Apr 26th 2020, 10:13 AM

    @patrick boland: I probably got it form there I probably read it somewhere along the line and that’s what came to mind

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    Mute Arthur O'Neill
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    Apr 26th 2020, 8:13 AM

    Why do governments borrow? A sovereign state should print money. Sure the currency will initially devalue but over time the increased taxes placed on the citizens will replenish the pot. So surely governments should avoid borrowing from private Banks where the debt is loaded with interest.

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    Mute King B
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    Apr 26th 2020, 8:21 AM

    @Arthur O’Neill: see Germany after ww1 for reference.

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    Mute Gerard Carthy
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    Apr 26th 2020, 8:41 AM

    @Arthur O’Neill: Toure right of course, the EVB could creat 2 trillion in non repayable or payable on 100 years funds with no coupon and just let states spend it on infrastructure, energy housing. Also investing 20% of it in Africa, like Xhina was doing, would be strategically smart.
    There is no risk here of inflation, never mind hyper inflation, the economy oils bog enough to absorb it.
    The only issue is ideological politicians in Germany who have spent the last two decades telling their voters that debt is evil.

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    Mute Arthur O'Neill
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    Apr 26th 2020, 8:42 AM

    @King B: Thats an extreme example.

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    Mute Mickety Dee
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    Apr 26th 2020, 8:44 AM

    @Gerard Carthy: a ton of extra cash chasing the same limited resources. How can that not lead to inflation?

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    Mute Fintan O'flaois
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    Apr 26th 2020, 8:47 AM

    @Arthur O’Neill: Because ultimately you end up like Zimbabwe or Venezuela.

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    Mute Arthur O'Neill
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    Apr 26th 2020, 9:20 AM

    @Fintan O’flaois: if misused by dictatorships yes. Used correctly no different to borrowing. Printing by the state vs borrowing from private banks – both scenarios give a cash injection to the economy, which will be redacted over time.

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    Mute Fintan O'flaois
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    Apr 26th 2020, 9:34 AM

    @Arthur O’Neill: Irresponsible monitory policy is not exclusive to dictatorships, however, in democracies sane voices then to prevail before the “money printers” destroy the economy. The benefits of controlling money supply and maintaining modest inflationary targets are well established – countries that do it tend to prosper, countries that don’t tend to struggle.
    Milton Friedman advocated what you’re suggesting on the proviso that the excess money supply would be retired at a time of fiscal surplus, so the net supply of money would remain in balance over time. Unfortunately, I just can’t imagine our government retiring money supply at a time of surplus, so we’d end up in an inflationary bubble, a la Zimbabwe and Venezuela.

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    Mute Cormac O' Keeffe
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    Apr 26th 2020, 9:41 AM

    @Arthur O’Neill: you don’t have to look to dictatorships for examples of governments placing too much emphasis on growing an economy in nominal terms and not enough on inflation. It was a curse in almost every advanced economy in the 70s and 80s. Germany in many ways showed the benefits of controlling inflation and how it could be done. Imagine the panic buying of toilet roll if we had hyperinflation :-)

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    Mute Bilbo Baggins
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    Apr 26th 2020, 10:17 AM

    @Arthur O’Neill: But only one increases the actual amount of money in the economy. Printing money in general leads to negative inflationary and devaluing effects. Hyperinflation is not just based on the responsibility of those in power but the world economic view of the value and stability of a currency, if you just keep printing your own it is of less value to people. So it devalues making everything purchased abroad more expensive. Putting you back in the same place as you began. That’s normal circumstances. But now is different. Money will need to be printed by everybody.

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    Mute Aidan Murray
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    Apr 26th 2020, 11:53 AM

    @Arthur O’Neill: I think this is a potential solution … but not with countries acting unilaterally. If all the major central banks agree to act simultaneously and print x amount per person in every country, then there will be no currency devaluation but there will be money across the world to resuscitate the worldwide economy.

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    Mute Sean Salmon
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    Apr 26th 2020, 12:05 PM

    @Arthur O’Neill: that is what the ECB are doing along with America and other major countries. This will sooner or later feed high inflation high interest rates major defaults by poorest countries and the collapse of the world’s financial system. Sorry to bring bad news but economically expanding money supply in a contracting economy is suicide unsustainable and for the sake of a short term illusion of dealing with a problem is ultimately going to compound an already bad situation

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    Mute lambda sensor
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    Apr 26th 2020, 10:11 AM

    None of this is new. We simply ignored it in Europe last time at the behest of Germany and NL. The US, in contrast, spent their way out of the last crash and their economy soared. Europe’s never really recovered.

    Keynesian economics was followed in the US whereas austerity economics (a new and untested form) was followed in the EU. The results are clear. EU GPD in 2008 was 19.1Tr, US was 14.7. In 2018 EU was 18.7Tr and the US was 20.5Tr (stats from world bank).

    The reason there is a rethink on this is because austerity economics didn’t work. This was widely called out at the time but ignored. Most European countries had austerity forced on them as part of getting access to Troika or EU money.

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    Mute Karllye kripton
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    Apr 26th 2020, 10:17 AM

    @lambda sensor: https://youtu.be/jsV_YXq-1×4

    Very good I highly recommend watching

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    Mute Lisa Saputo
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    Apr 26th 2020, 9:38 AM

    We all could have told these intellectuals that boosting the economy works better than strangling it if they had asked.

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    Mute Sean Fahey
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    Apr 26th 2020, 12:00 PM

    @Lisa Saputo: So you would have told the intellectuals not to cut costs when we’re bankrupt in the midst of a financial crisis where we couldn’t borrow our way out of trouble and had to go cap in hand to the IMF who imposed restrictions so we could afford to keep the lights on?

    And once you were done with the intellectuals, what would you have told the civil servants when the wages aren’t lodged to their accounts?

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    Mute Joe Griffin
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    Apr 26th 2020, 11:00 AM

    It’s called Keynesianism after the famous economist. But unfortunately those who stand to make the most out of our current austerity driven system haven’t allowed this approach. And I include political power as well as wealth in this. It’s much easier to control the population if you kep a good proportion poor and frightened of fighting for their rights. Austerity has always been about political control not about economies.

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    Mute Patrick
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    Apr 26th 2020, 10:36 AM

    I remember reading that when America went into recession in previous decades,the president of the day started massive infrastructure projects which were cheaper to do but kept the country ticking along.
    Austerity was not the way as some countries were in trouble even before this pandemic.
    What will EU countries debts look like after this and I wonder will some debt forgiveness happen or at the very least drop the interest payments?

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    Mute Cormac O' Keeffe
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    Apr 26th 2020, 9:47 AM

    Also, the real economic failing that becomes apparent at these times is the lack of preparedness of governments like ours did to their reluctance to adequately follow counter cyclical economic policies. We had a government boasting about the fastest growing economy in Europe for half a decade and we had virtually no surplus and very little rainy day fund available. The fiscal advisory council were largely ignored and it kind of shows that due to the desire to be re-elected politicians can really be trusted with fiscal policy as well as monetary policy.

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    Mute john doe
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    Apr 26th 2020, 12:52 PM

    Interesting that the article backs up the economic approach begged for by people like Paul Murphy, Gerry Addams and Yanis Varoufakis during the last fiscal crisis. All of whom promoted borrowing to fund large infrastructural projects instead of austerity.
    Their suggestions were ridiculed by our government (still our government) at the time and a lot of posters on here now rubbing their chins in agreement to this article.

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    Mute Cormac O' Keeffe
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    Apr 26th 2020, 9:07 AM

    One of the greatest achievements in economics in the last five decades has been the intellectual and practical triumph of delegating monetary authority to independent and conservative central banks. It needs to be tweaked in a number of ways, most importantly increasing inflation targets in times of crisis and taking a longer term average measure of inflation. However, going back to the situation where governments print money would lead to the time inconsistency problem again and would be a disaster. As people have said, there’s a very good reason why Germans fear inflation. Also, during hyperinflation it is the poorest and most vulnerable in society that suffer the most so there’s a welfare benefit to low inflation that shouldn’t be taken for granted.

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    Mute PV Nevin
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    Apr 26th 2020, 10:44 PM

    @Cormac O’ Keeffe:
    The Thatcherite revolution has brought humanity to a precipice. Yet there was no other way for our ruling class to go. Ably assisted by the top 10%. Logical for them. Death and want for the other 90%.

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    Mute FIE
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    Apr 26th 2020, 10:26 AM

    shes a fine half..not meaning to be sexist or anything

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    Mute Jack Inman
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    Apr 26th 2020, 12:49 PM

    Reading the arm chair economists on here is highly entertaining….especially the bit where everyone blames Germany.

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    Mute Sharp Elsi Mate
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    Apr 26th 2020, 3:09 PM

    Hard to believe she is 48 lads, she looks after herself

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    Mute PV Nevin
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    Apr 26th 2020, 10:40 PM

    Since the last financial crash the wealth of the top 10% has increased, by no small amount. Repeat, increased.

    That states have intervened in the pandemic to cover some costs of the working class, and the IMF is advocating a Keynesian investment policy, indicates nothing less than the mortal fear of the capitalist ruling class.
    Think about it.

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    Mute Roberto González
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    Apr 27th 2020, 12:37 AM

    To all the people saying Germany, Venezuela, runaway inflation, blah blah etc. How can printing money in a deflationary environment cause runaway inflation? This has to be done in the short term to stimulate demand. The money supply can be reduced again in the future. Its like giving a patient adrenaline. Not ideal for your system but needs must n all that. It’s either this or borrowing and Austerity. And I don’t think the proletariat will take that again.

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