Printing money could get euro zone out of fiscal hole

ClayDavis

Printing money could get euro zone out of fiscal hole
The Irish Times - Fri, May 07, 2010
OPINION: Having indebted countries borrow to lend to other indebted ones won’t save the European Monetary System from collapse but creating money to give to all the euro zone countries might, writes RICHARD DOUTHWAITE
THE GREEK bailout will not help the Greeks. Indeed, the budgetary cuts it envisages have already made matters worse. The main reason Standard and Poor’s rating agency gave last month when it downgraded that country’s bonds to junk status was that it feared the austerity package would reduce Greece’s ability to generate an income and thus pay off its debts.
According to the IMF, Greece’s public and private overseas debt amounts to 171 per cent of its national income. Once the €110 billion being lent by the IMF and other euro zone countries over the next three years has been drawn down, this debt-to-GDP ratio will be at least 223 per cent. It could be much higher in view of the drastic cuts.
A 223 per cent ratio means that even if Greece only has to pay the 5 per cent rate set for the money being made available under the rescue plan on all its debt, its overseas interest payments in 2013 would swallow up more than 10 per cent of its national income and 150 per cent of its current export income. When you realise that the country is already running a balance of payments deficit equal to about 10 per cent of its national income, such huge payments are clearly impossible.
So if the Greek rescue package cannot rescue the Greeks, who will it help? The answer is the European banks who ignored the country’s limited overseas earning capacity and lent it €143 billion.
Almost half of this, €59 billion, came from banks in France and €34 billion from their German counterparts. A Greek default would inevitably mean expensive bank bailouts for both countries’ taxpayers.
Another reason for the “bailout” is that, if Greece is left to collapse, the other over-indebted euro zone economies, Portugal, Ireland and Spain, would almost certainly collapse too. This would mean such a massive mark-down on the €1,600 billion the four countries owe to EU banks that the entire European banking system would implode.
Germany is exposed for about a quarter of this huge amount, France for 18 per cent and Britain 17 per cent, according to the Bank for International Settlements.
Essentially, then, the bailout is an attempt to buy time in which to rescue the EU itself. The Greeks are just a facet of a massive EU-wide over-indebtedness problem. Accordingly, ad hoc rescue efforts which involve euro zone members borrowing funds to lend to a fellow-member when the bond market has it in its sights are bound to fail.
A systemic approach which cuts the entire euro zone’s debt-to-GDP levels is required.
Economic growth cannot increase incomes reliably and quickly enough to deliver the desired result. The only possible remedy is inflation. This could be engineered by having the European Central Bank create money out of nothing to give to all the euro zone countries to spend.
Each government’s allocation would be based on its population. So, rather than some states having to make spending cuts, thus cutting their national incomes while increasing their national debt, it would be the other way around.
State spending and incomes would be increased while state debts were paid down. Private debts need to be paid down too so euro zone governments would give each individual, indebted or not, an equal share of some of the ECB money. Firms would not qualify. Recipients would be required to pay off as much of their debt as the payment allowed. We could do what we liked with anything left over. This tool should be used cautiously, reducing debts slowly over two or three years. As public and private loans were repaid, the institutions which had lent the money originally would want to lend it again. Ideally, they would do so to finance a rapid transition to renewable energy.
Inevitably, however, some of the new euro would be exchanged for foreign currencies. This would push the value of the euro down, restoring the competitiveness the zone has lost since a euro was worth less than a dollar. The zone’s exports would boom and imports would fall as they would become more expensive. The increased exports and lower imports would boost the zone’s manufacturers’ order books. Employment would rise. For some months, the effect on wages and prices would be limited as there’s a lot of unemployment and spare industrial capacity in most euro zone countries.
However, the extra demand would eventually cause a significant inflation. This would be good as, by raising wages, the inflation would make it easier for people to service their remaining debts.
Moreover, the normal objection to inflation would not apply because savers would have already been compensated for its effects by the money they had been given.
Businesses would also be helped because the inflation would lower their debt burden in real terms. In Ireland, banks would find that they had more deposits, fewer bad debts and needed less State support. The Government would have additional tax revenue, reduced social welfare costs and a lower interest bill because of its lower debt.
All in all, a very positive scenario but one which probably won’t happen because of a groundless fear that the inflation, once started, could not be controlled. Another irrational obstacle is the feeling that money cannot be created out of nothing and that, in any case, it would be somehow improper to create it only to give it away.
The proposal certainly takes us into terra incognita. However, as having heavily-indebted countries borrowing to be able to lend to other indebted ones makes no sense at all, can anyone think of a fairer, better way to stop the euro zone’s collapse?

Richard Douthwaite is an economist and the author of The Ecology of Money

Free money sounds great and all but aside from the hit to the value of savings are there any other downsides to this course of action? And isn't the ECB's core mission maintaining price stability, which this would be the opposite of.

ei.sdraob

Yeh printing money worked out great for the UK...
their trade deficit got worse desite a 30% devaluation
inflation is over twice the BOE target and climbing rapidly (probably due to uncertainty about the elections)
and last few days the pound was dropping faster than the euro :eek:


printing money will only make the euro loose more credibility, it was steadily climbing for years to being the 2nd largest reserve currency

the solutions to euro's problem is simple, eject Greece
despite the bailout the markets still think it will default


i posted these before, to illustrate that QE has been a failure

ei.sdraob

forgot to mention

printing money wont help US and EU much since parts of the debt is inflation linked, apparently

Highly Salami

ei.sdraob wrote: »

forgot to mention

printing money wont help US and EU much since parts of the debt is inflation linked, apparently

Only a small part, the West, especially Ireland, is in a hole and we need 'out of the box' solutions.

Économiste Monétaire

TIPS (inflation indexed bonds) account for about 7% of total US marketable debt.

ei.sdraob

Highly Salami wrote: »

Only a small part, the West, especially Ireland, is in a hole and we need 'out of the box' solutions.

printing money is not an "out of the box" solution, and is very dangerous

then again i wouldnt be surprised if its undertaken

seems people/governments are not willing to cutback so the alternative is to devalue the currency, either way we are gonna get "poorer" (tho arguably we already are alot "poorer" than we thought, it just hasnt sunk in yet)

Économiste Monétaire wrote: »

TIPS (inflation indexed bonds) account for about 7% of total US marketable debt.

thanks

Wouldn't their Medicare etc obligations have to rise with inflation...

similarly in Europe

silverharp

the best worst solution is for the Greeks to go for a partial debt default. Printing money is not the answer as the bond market will deflate (prices will drop) faster then the central bank can print.



just for fun, this makes me laugh

this is an extract fro Mark Fabers newsletter , take it at face value.


A friend of ours recently sent us the
following comment from Dr. G. Gono, chairman of the Reserve Bank
of Zimbabwe (no hoax):

"As Monetary Authorities, we have been humbled and have taken heart in
the realization that some leading Central Banks, including those in the
USA and the UK, are now not just talking of, but also actually
implementing flexible and pragmatic central bank support programmes
where these are deemed necessary in their National interests.
...That is precisely the path that we began over 4 years ago in pursuit
of our national interest and we have not wavered on that critical path
despite the untold misunderstanding, vilification, and demonization
we have endured from across the political divide.
...Here in Zimbabwe we had our near-bank failures a few years ago and
we responded by providing the affected Banks with the Troubled Bank
Fund (TBF) for which we were heavily criticized even by some multilateral
institutions who today are silent when the Central Banks of UK
and USA are going the same way and doing the same thing under very
similar circumstances thereby continuing the unfortunate hypocrisy that
what's good for goose is not good for the gander.
...As Monetary Authorities, we commend those of our peers, the world
over, who have now seen the light on the need for the adoption of flexible
and practical interventions and support to key sectors of the economy
when faced with unusual circumstances."

Highly Salami

Reagan/Thatcher used inflation to jump start an anaemic economy in the very early 80's with great success.

ei.sdraob

Highly Salami wrote: »

Reagan/Thatcher used inflation to jump start an anaemic economy in the very early 80's with great success.

werent inflation and interest rates in double digits then? and didnt UK hit it lucky with North Sea oil?

imagine the carnage in Ireland if rates go into double digits :eek:

silverharp

Reagan/Thatcher used inflation to jump start an anaemic economy in the very early 80's with great success.

I'll watch with amusement when paddy tries to pay his mortgage as interest rates head towards 8%

Économiste Monétaire

ei.sdraob wrote: »

thanks

Wouldn't their Medicare etc obligations have to rise with inflation...

similarly in Europe

Indeed. There's a cost of living adjustment (COLA) in social security payments too. That's non-discretionary spending, though, which is an extra burden on-top-of interest payments. I think the UK has a higher % of inflation-indexed GILTS than the US.

sceptre

Ignoring the practicalities or lack of, the Germans won't allow it. Increasing the money supply always causes inflation, the Germans remember wheelbarrows of cash during the Weimar Republic and the ECB has low inflation at the top of its list as the OP said.

Highly Salami

sceptre wrote: »

the Germans remember wheelbarrows of cash during the Weimar Republic .

That was nearly a century ago! They should get over it already!Inflation in the early 80s was managed by Reagan and co.

sceptre

Highly Salami wrote: »

That was nearly a century ago! They should get over it already!Inflation in the early 80s was managed by Reagan and co.

Inflation in the early 80s in the US was eventually managed by the Fed slowing the growth in money supply and raising interest rates. To about 22% as it happens. It caused a two year recession on the way but the pertinent point is that what they did to manage inflation was precisely the opposite of the proposal on the table (increasing the money supply). While the Germans may be paranoid about inflation, a 20% ECB base rate would topple every government in the eurozone. That's the history you're proposing as a way out?

ei.sdraob

sceptre wrote: »

Inflation in the early 80s in the US was eventually managed by the Fed slowing the growth in money supply and raising interest rates. To about 22% as it happens. It caused a two year recession on the way but the pertinent point is that what they did to manage inflation was precisely the opposite of the proposal on the table (increasing the money supply). While the Germans may be paranoid about inflation, a 20% ECB base rate would topple every government in the eurozone. That's the history you're proposing as a way out?

Also wasnt the inflation triggered by a move off the gold standard altogether and the oil shocks?

i dont have any debt so it doesn't bother me, but having a mortgage with double digit inflation and rates would be hell for alot of people


the problem with euro now is lack of confidence seeing how the Greece situation was handled (or not), switching to a high inflation policy might break the camels back altogether

Highly Salami

ei.sdraob wrote: »

Also wasnt the inflation triggered by a move off the gold standard altogether and the oil shocks?

</p>
The gold standard was abondoned when Nixon was president (1971 I think), also the oil price is quite high now too.

Highly Salami

sceptre wrote: »

a 20% ECB base rate would topple every government in the eurozone.

I dont agree, I think mass unemployment and austerity measures are more likely to topple governments.

ei.sdraob

Highly Salami wrote: »

I dont agree, I think mass unemployment and austerity measures are more likely to topple governments.

your thesis is based on assumption that employment rises with inflation?

northwest100

If you were in debt, do you think spending more money would solve your problem?

Printing money will solve a debt problem?
This is disney land economics.

northwest100

short video on inflation/printing money

It uses Zimbabwe as example and shows people are now forced to buy items using gold.

The only hard currency that will prevail in the future is gold.

SeanW

Before ~1971 and really 1933, it was feasable for a person to save about 10% of their income in a bank account, and live on the interest for retirement. Now it isn't because with inflation (i.e. you have to risk your nest egg on the stock markets to stay ahead of inflation) - and this is just one of the things we've lost because of our currencies being delinked from gold - you a have a large scale transfer of wealth from savers to government and to a lesser extent borrowers.

Inflation scenarios rarely end well. The Germans are paranoid about inflation because they know what happened almost immediately after the Weimar inflation and I daresay the Germans, no less than anyone else, don't want to risk a repeat of that!

I contend that it is fundamentally immoral to steal wealth from savers en-masse the way inflation does, I'm not sure it ever makes any economic sense either.

What does make sense for cool heads to reason over national budgets and for all of us to live within our (unfortunately falling) means. This will do more to protect the Eurozone than most anything else.

ei.sdraob

from a post on thepropertypin on same subject

http://video.google.com/videoplay?docid=-6484061137769305763#

effects of inflation

No positive social or economic effect
Increases the level of prices
Distorts relative prices
Creates risk and uncertainty
Income diffusion effect – early comers gain at the expense of late comers
Benefits inflators (inflators=recipients of the inflation tax)
Hurts fixed income groups
Hurts existing creditors
Hurts all holders of money [through] Inflation Tax
Increases the consumption-investment ratio
Lowers national savings
Reduces economic growth & standards of living
Creates illusion of increased business profits
Consumes capital
Imposes “menu costs”
Imposes “shoeleather costs”
Causes a bracket creep
Creates Malinvestments
Causes Business Cycles
Causes currency debasement = currency devaluation
Causes more expensive imports
Strengthens industrial cartelization (predominantly for inputs/resources)
Causes speculation and bubbles

hinault

Printing money is not a viable solution.

Ultimately it's a palliative solution (we can't cure disease but we can ease the pain of the disease).

johnnyskeleton

sceptre wrote: »

Inflation in the early 80s in the US was eventually managed by the Fed slowing the growth in money supply and raising interest rates. To about 22% as it happens. It caused a two year recession on the way but the pertinent point is that what they did to manage inflation was precisely the opposite of the proposal on the table (increasing the money supply). While the Germans may be paranoid about inflation, a 20% ECB base rate would topple every government in the eurozone. That's the history you're proposing as a way out?

What was the inflation rate when interest rates were 22%?

An interesting point is which will be higher inflation or interest rates - if inflation then it does ease the debt burden but if interest rates then it actually makes the debt burden worse.

Also, inflation is a killer for small businesses (i.e. those firms which governments always pretend to be acting in their interests) which have a delay between work done and payment. If inflation is 10%, by the time you get paid this year for the work done last year, it is worth 9% less in real terms that the price you agreed to do the work for.

johnnyskeleton

northwest100 wrote: »

It uses Zimbabwe as example and shows people are now forced to buy items using gold.

The only hard currency that will prevail in the future is gold.

I don't agree. Gold is traded in that video not as a currency but as a good. They panhandle/dig for gold then trade it on for food with someone who collects all the gold in exchange for food brought in from e.g. South Africa, then sells on the gold in SA or internationally at a huge profit.

It would be no different with, say, diamonds in DR Congo, or ivory in Kenya.

Gold's value, much the same as a dollar's value, is not in its intrinisic worth but in the value which we all agree to set it at.

ei.sdraob

There are rumors now of an eurozone €600 billion QE (money printing) :eek:

SkepticOne

ei.sdraob wrote: »

the problem with euro now is lack of confidence seeing how the Greece situation was handled (or not), switching to a high inflation policy might break the camels back altogether

How should the Greece situation have been handled?

northwest100

Gold's value, much the same as a dollar's value, is not in its intrinisic worth but in the value which we all agree to set it at.

I agree the Dollar isnt worth anything in reality, it's still used as a reserve currency but that will end in the near future as it becomes weaker due to large deficits the country are running.

Gold may increase and decrease in value but it will never be worthless, that's the difference for me.

For decades america were able to give developing nations worthless dollars for real wealth such as oil, gas, coal, copper...natural resources actually worth something.

here's a 60 second video about the problem with the dollar.

https://www.youtube.com/watch?v=9fv1DqIen28

DidierMc

I fully support the printing of new money. The euro needs to be devalued and the savings of the rich eroded.

silverharp

DidierMc wrote: »

I fully support the printing of new money. The euro needs to be devalued and the savings of the rich eroded.

might as well shoot them then eh?

Flamed Diving

northwest100 wrote: »

I agree the Dollar isnt worth anything in reality, it's still used as a reserve currency but that will end in the near future as it becomes weaker due to large deficits the country are running.

Gold may increase and decrease in value but it will never be worthless, that's the difference for me.

For decades america were able to give developing nations worthless dollars for real wealth such as oil, gas, coal, copper...natural resources actually worth something.

here's a 60 second video about the problem with the dollar.

https://www.youtube.com/watch?v=9fv1DqIen28

WRT to the opening statement of that video. What exactly did Bernanke mean, in your own words?

murphaph

DidierMc wrote: »

I fully support the printing of new money. The euro needs to be devalued and the savings of the rich eroded.

What about the savings of the poor? They'll feel it much more than the rich who will be in a position to buy real goods with their paper wealth before QE kicks in.

silverharp

murphaph wrote: »

What about the savings of the poor? They'll feel it much more than the rich who will be in a position to buy real goods with their paper wealth before QE kicks in.

I think his argument is that once the rich are suffering thats ok. You are right though.

Économiste Monétaire

silverharp wrote: »

I think his argument is that once the rich are suffering thats ok. You are right though.

https://www.youtube.com/watch?v=okHGCz6xxiw

DidierMc

silverharp wrote: »

might as well shoot them then eh?

Yes anyone who supports devaluation of the euro automatically also supports gulags, collective farms and gas chambers.

Flamed Diving

silverharp wrote: »

I think his argument is that once the rich are suffering thats ok. You are right though.

He is very right. As you know, lower-income groups display huge sensitivity in their basic consumption when you take away some of their income. Whereas removing, say, 20% of the wealthy's income would scarcely affect their consumption.

So when you devalue, the effect is to reduce the savings of the rich, but also the consumption of the poor.

DidierMc

murphaph wrote: »

What about the savings of the poor? They'll feel it much more than the rich who will be in a position to buy real goods with their paper wealth before QE kicks in.

The poor rely on either wages or welfare, they don't have vast amounts of capital in banks or in gold. As long as this increases to match inflation I don't see the problem.

ei.sdraob

DidierMc wrote: »

Yes anyone who supports devaluation of the euro automatically also supports gulags, collective farms and gas chambers.

now now you should read your own past posts

Flamed Diving

DidierMc wrote: »

The poor rely on either wages or welfare, they don't have vast amounts of capital in banks or in gold. As long as this increases to match inflation I don't see the problem.

Wages are very sticky. More so than prices. So for a time, are you comfortable with greatly decreasing the ability of the lower-income families to purchase goods?

DidierMc

silverharp wrote: »

I think his argument is that once the rich are suffering thats ok. You are right though.

Poor people don't have significant amounts of money in the bank, they wouldn't be poor if they did now would they? As long as wages and welfare match inflation then it's a positive thing.

DidierMc

Flamed Diving wrote: »

Wages are very sticky. More so than prices. So for a time, are you comfortable with greatly decreasing the ability of the lower-income families to purchase goods?

Actually inflation is a great chance to redistribute wealth to waged people and take away from capitalists.

Flamed Diving

DidierMc wrote: »

Actually inflation is a great chance to redistribute wealth to waged people and take away from capitalists.

No, it reduces the real wage. Now, for ten points, who earns wages?

DidierMc

Économiste Monétaire wrote: »

https://www.youtube.com/watch?v=okHGCz6xxiw

It that where the old hag explains to us how the poor are better off if all the wealth is concentrated in the hands of a small elite?

DidierMc

Flamed Diving wrote: »

No, it reduces the real wage. Now, for ten points, who earns wages?

No it reduces the value of a unit of currency. However if wages are increased to match inflation then what is the problem?

Flamed Diving

DidierMc wrote: »

No it reduces the value of a unit of currency. However if wages are increased to match inflation then what is the problem?

How would wages be unilaterally increased, within the law?

How would you know where to say when? (hint: inflation won't just stop for you)

How would you ensure that your unilateral wage increases would not actually create more inflation?

I have more, but leave it there.

silverharp

DidierMc wrote: »

No it reduces the value of a unit of currency. However if wages are increased to match inflation then what is the problem?

it doesnt happen though. Anyone on an annuity loses out, most workers in the private sector will be playing catch up. In case you havnt noticed there is a global labour arbitrage out there. All that will happen is that non govermental worker's salaries will stagnate meanwhile their mortgage rate will go into double digits and their cost fo living will go up.
The rich will be ok as they have a higher % of their wealth in assets which will tend to lose less value against inflation.

ardmacha

The feckless don't save anything, but borrow at the least opportunity. Inflation works for them. The responsible grafters in the middle do save and will lose out. The wealthy have stocks and shares rather than deposits and will do fine.

That said while rapid inflation is undesireable, the present situation is unusual and could do with some reassessment of policy. I might like having a postive rate of interest on my bank deposit but I would not like my bank to go bellyup.

northwest100

Flamed Diving wrote:

WRT to the opening statement of that video. What exactly did Bernanke mean, in your own words?

He studied the Great Depression of 1930 and believes the Federal Reserve were too tight with credit.
He believes printing dollars will solve the current financial problems.

It's no secret he's willing to inflate the dollar and further reduce interest rates in order to bail out failed financial institutions so they continue paying themselves christmas bonuses for wrecking the country's economy.

He believes peasents who actually work hard should pay these bank bonsues through taxes.

Foreign investors today are increasingly reluctant to buy US government treasuries because they believe the US will eventually default.

The short video is trying to explain the US are no longer a productive country, they simply consume and spend too much at the expense of more productive nations and people.

https://www.youtube.com/watch?v=SzmYI_4XCbM

northwest100

I thought you might like these Peter Schiff analogies, Flamed Diving.

https://www.youtube.com/watch?v=vweLBpE4mso

As a result of his confusion, Ben Bernanke wants to cure the disease by killing the patient. The best analogy is to a heroin addict continuously shooting-up to avoid the unpleasant reality of withdrawal. He may "succeed" but only by dying. In economic parlance, hyper-inflation is the monetary equivalent of a drug overdose, and Dr. Ben (Kevorkian) Bernake seems dead set on administering it.

Bernanke Confuses Depression Cure with Disease - Peter Schiff, 2005

ei.sdraob

if printing money is such a great thing how about they give everyone their own printing press whatcouldpossiblygowrong

Flamed Diving

Analogies tend to be simplistic, which is exactly the point of them. Despite that, they seem rather too simplistic, and as a consequence, sometimes miss the point completely. Economics just can't be boiled down to farmyard stories, then again, the video was just taking clips, so maybe the context was lost.