Run, don’t walk, to the Peter Boone/Simon Johnson Bloomberg piece, As European Austerity Ends, So Could the Euro.
While most are clamoring for more money printing by the ECB to monetize bad sovereign debt which has no demand, the Global Macro Monitor has been clear and consistent in its view: There is a huge difference between money printing in the U.S., Japan, and U.K. to goose the economy versus money printing ala Bulgaria 1996 to buy sovereign debt for which there is no demand.
Boone and Johnson are one of the few we have seen that understand this point. They write,
Is there any hope for the euro dream?
One potential way forward would be to create a European- level fiscal union that assumes all national debt, much like what Alexander Hamilton did as first U.S. secretary of the Treasury. That isn’t going to happen in modern Europe. Why would German taxpayers and savers agree to pay for the good times previously enjoyed in Greece, Italy or Spain? Who could even ask them to do so?
As a result, all eyes are turning to the European Central Bank, because some in the euro policy elite still hope loose monetary policy and higher inflation rates will provide an escape hatch. But addressing fiscal issues through monetary means generally doesn’t work, and it does nothing to improve the competitiveness of the struggling euro-area periphery.
There’s more,
The ECB will also lobby for austerity, which would reduce the amount of credit it needs to create. But democratically chosen governments will simply refuse to comply. The central bank will jettison its inflation-fighting credentials, and instead pray that the monetary issuance needed to keep troubled nations afloat isn’t too large and that inflation expectations don’t start to increase.
And here’s where they really nail it,
But here’s the problem: Pursuing such a monetary policy is a recipe for a dangerous loss of confidence in the euro system.
Money demand will be destabilized, in our opinion, when/if the ECB engages in an explicit and full blown monetization of sovereign debt for which the markets have loss confidence. In fact, in some ways it already has if bank deposits can be defined as money.
How much demand is there currently for Greek, Spanish, or Italian euro bank deposits? During the height of crisis in Q4 2011, it appeared demand for even German and French euro deposits was about to collapse.
Risky times, indeed.
(click here if charts are not observable)
