Monetary policy as a skimpy spare tire

April 23, 2012

Central bankers have said repeatedly since the start of the global financial crisis that monetary policy can only do so much to heal a broken economy. Agustín Carstens, president of Mexico’s central bank, chose an interesting analogy at an IMF event this weekend to describe the adjustment needed in countries with very high debt levels:

In relatively modern cars the spare tire is (pretty small). Basically that spare tire should be enough to take you to the next gas station. But if you want to drive your car (a very long distance) it’s likely you will never get there.

So today I think what central banks have done is that the tire was gone, they used the spare tire, the spare tire is this big, and you can go just a few miles to the next gas station and you repair the car. So, if they (the fiscal authorities) don’t do that then they will be left on the road.

Somebody call AAA.

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