Dec 28, 2011 (LBO) – Sri Lanka should be prepared for a slow external environment with stimulus by deficit spending having failed in advanced economies and China and India also losing momentum, an international economist said. Both Hayek and fellow Austrian economist Ludwig von Mises had seen at firsthand what money printing, deficit spending and aggressive nationalism based linguistic majoritarianism had done to Eastern Europe in general and Germany in particular.
Standard Austrian theory says low interest rates by central banks will lead to excess credit, leading to mal-investment which will eventually result in an economic collapse amid a credit contraction.
Continued printing with no breaks will result in currency depreciation and an inflationary blow off which can even lead to the abandonment of the central bank fiat paper currency in question also known as hyperinflation.
Following a balance of payments crisis in 2009 Sri Lanka actively reduced deficits allowing the economy to rebound strongly. But the deficit and monetary policy is still too loose to effectively maintain the island’s peg with the US dollar.
“The Hayekian diagnosis for the crisis is pretty much on the b