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February 16, 2009

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ms

I think there's a wait and see attitude right now. Everything seems so uncertain that everyone, both businesses and individuals, want to see how things play out before taking on debt and risk. That seems to be what you're saying as well?

Nathan Smith

Well, yeah, more or less. That is, (a) and (b) deal with uncertainty; (c) is something different. But I'm also trying to break down sources of uncertainty, to try to shed light on what policymakers might be able to do. If political risk is the problem, the most important thing would be for policymakers to create credible commitments to continuity in economic policy. Long-term deficit reduction is essential, because otherwise the fears will be that the government will either devalue its debts through deflation, or else raise taxes sharply. Investors are particularly vulnerable to the latter move, since sunk investments can easily be confiscated, directly or by all sort of indirect means.

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