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Posts Tagged ‘Debt Monetization’

Mario Draghi is a Lonely Man

January 10, 2014 6 comments

I just read an interesting piece by Nicolò Cavalli on the ECB and deflationary risks in the eurozone. The piece is in Italian, but here is a quick summary:

  • Persisting high unemployment, coupled with inflation well below the 2% target, put deflation at the top of the list of ECB priorities.
  • Mario Draghi was adamant that monetary policy will remain loose for the foreseeable horizon.
  • As we are in a liquidity trap, the effect of quantitative easing on economic activity has been limited (in the US, UK and EMU alike).
  • Then Nicolò quotes studies on quantitative easing in the UK, and notices that, like the Bank of England, the ECB faces additional difficulties, linked to the distributive effects of accommodating monetary policy:
    • Liquidity injections inflate asset prices, thus increasing financial wealth, and the value of large public companies.
    • Higher asset prices increase the opportunity costs of lending for financial institutions, that find it more convenient to invest on stock markets. This perpetuates the credit crunch.
    • Finally, low economic activity and asset price inflation depress investment, productivity and wages, thus feeding the vicious circle of deflation.

Nicolò concludes that debt monetization seems to be the only way out for the ECB. I agree, but I don’t want to focus on this. Read more

Spiraling

July 4, 2012 Leave a comment

Istat, the Italian statistical office, just released its Quarterly non-financial accounts for the General Government. As were to be expected, deficit is spiraling out of control (8% on the first quarter, against 7% in 2011), because of higher borrowing costs, and because the economy is doing very poorly.

Two days ago  they released the provisional  unemployment figures for May:  stable above 10% (youth unemployment is at 36.2%!).

It seems that we come full circle, robustly installed in a Recession-Deficit-Austerity-Recession-Deficit-and-so-on spiral.

Austerity works, right?  Why on earth, should Italy aim for a balanced budget in 2013? Is this required by current European rules? No(t yet). Is this reassuring markets? No. Is this boosting private expenditure? No. Is this killing the Italian economy? Yes.

Ah, and if at least we did something for those spreads…

Markets and Debt Monetization

June 14, 2012 3 comments

Countries like the United States, Japan or the United Kingdom can finance their debt at zero or negative real interest rates. This in spite of  debt levels higher than those of the euro area, and growth forecasts that are not necessarily better.  Meanwhile, the eurozone peripheral countries have to deal on a daily basis with the mood of markets, and to pay interests on debt at the limit of sustainability.

The reasons for this state of affairs are clear, and have been repeatedly mentioned.  Eurozone countries are forced to borrow in a currency that they do not issue: the euro is in effect a foreign currency. To quote Paul de Grauwe,

In a nutshell the difference in the nature of sovereign debt between members and non-members of a monetary union boils down to the following. Members of a monetary union issue debt in a currency over which they have no control. It follows that financial markets acquire the power to force default on these countries. This is not the case in countries that are no part of a monetary union, and have kept control over the currency in which they issue debt. These countries cannot easily be forced into default by financial markets.

In other words, peripheral eurozone countries are  in the same situation of Latin America in the eighties: they are  forced to pay high risk premia to markets fearing the risk of default, induced by the vicious circle austerity-recession-debt burden.
Read more…

A Question is Bothering Me…

January 5, 2012 1 comment

A few weeks ago, speaking before  the European Parliament, Mario Draghi stressed once again the ECB committal to provide the financial sector with all the liquidity it needs. read more

(Bad) Arguments Against Debt Monetization

November 21, 2011 3 comments

I think it is useful to list, and assess, the main arguments advanced against an enhanced role of the ECB as a lender/buyer of last resort. I can think of four of them: credibility, inflation, irrelevance, ineffectiveness.

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The EMU Problem is North vs. South. But not the Way Mrs Merkel Thinks

October 27, 2011 8 comments

For observers of EMU woes, it came as no surprise that Wednesday’s summit in Brussels ended in a low-key compromise that leaves the eurozone fragility untouched.

In part this is due to the decision making process in the EU, intrinsically incapable of reaching quick and bold decisions. But there are more substantial reasons that lie in the interpretation of the crisis, the “blame game”; a blame game that has no particular interest, were it not that understanding what went wrong should constitute a guide for designing a durable and effective solution.

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Germany’s Flawed View on the Eurozone

October 27, 2011 1 comment

I published an editorial (Euro : de quoi l’Allemagne a-t-elle peur ?) with André Grjebine on the French newspaper Le Monde:
We argue that the non-optimality of the EMU led to imbalances that go beyond the responsibility of individual countries, and hence that the solution should be symmetric. We also call for a real European Government.
An English version will follow.