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Analyst Suggests EU Print Money to 'End' Euro-region Debt-Related Worries

donsutherland1

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From CNBC:

The European Central Bank could easily appease the fears of default which have plagued markets regarding by creating money and giving it to its members, Mosler [Warren Mosler, founder and principal of broker/dealer AVM] said.

The ECB, "if it wants to credit any nation, it can," he added. "The ECB could make a distribution of, say, 10 percent of GDP to each member. The ECB can just credit the accounts of the member nations based on how many people they have. That would reduce all debt ratios this year by 10 percent."


Mosler also argued that because the newly-printed money would be distributed to EU member states, it would be non-inflationary.

The economics literature argues against Mosler's analysis. Several points are relevant.

1. The newly-created money would only have a non-inflationary effect if expectations were irrelevant and the money stayed out of circulation.

2. Information about the printing and expectations would have an impact through price and foreign exchange channels. Most prominently, there would be a de facto devaluation of the Euro. Through the exchange rate channel, import prices could rise, pushing up domestic inflation.

3. Dollarization--the increased use of foreign currencies as a transactions medium--could increase in the Euro region. That would defeat the basic purpose of a common area currency and erode the ECB's ability to conduct monetary policy.

4. The precedent that would be established could spill over with respect to other heavily-indebted countries. For example, markets would be concerned that the U.S. might resort to the printing press down the road to deal with its own looming fiscal imbalances. Such spillovers, far from easing concerns over debt, could actually narrow the window of opportunity that exists for the U.S. and major European nations to address their fiscal imbalances.
 

Gipper

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Is there ANY chance this is a joke? Don't we have enough problems with the yen and yuan doing this, even when they don't need it?

The funny thing is that this could actually work for them if the U.S. doesn't alter their plans. If anything, instead of having America just give them money outright or loans, they could just agree to buy European non-perishables with the understanding that it's really a mercy gift of sorts. Maybe set quota tariffs on this kind of bargaining to prevent it going overboard, but allowing for trade just enough so that the dollar can receive some symbiotic strengthening in the meantime while we contract monetary policy for a while. This way, we can get some products out of the deal that are almost as cheap while burning up some of our own currency in the meantime.

It's better than doing nothing. The last thing the world needs to see right now is a Euro devaluation. The OPEC cartel would be drooling like coyotes.
 

Kushinator

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Don,

From what I have been hearing, the question is not if the ECB will begin a quantitative easing like policy, but when.
 

donsutherland1

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Don,

From what I have been hearing, the question is not if the ECB will begin a quantitative easing like policy, but when.
QE is certainly possible, especially if liquidity challenges increase. I don't believe will use QE to try to lower its debt ratios via an accounting maneuver as the analyst had recommended.
 

oldreliable67

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QE is certainly possible, especially if liquidity challenges increase. I don't believe will use QE to try to lower its debt ratios via an accounting maneuver as the analyst had recommended.
When push comes to shove, QE will be used. Given current conditions, it seems only a matter of time. Personally, I expect this to begin in a significantly shorter interval than it did in the US. The ECB has the US experience to learn from, and while the US experience is still ongoing, thus no final judgement can be rendered as yet, it is correctly seen, especially from afar, as a success in averting a possibly much, much, deeper downturn.
 

donsutherland1

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When push comes to shove, QE will be used. Given current conditions, it seems only a matter of time. Personally, I expect this to begin in a significantly shorter interval than it did in the US. The ECB has the US experience to learn from, and while the US experience is still ongoing, thus no final judgement can be rendered as yet, it is correctly seen, especially from afar, as a success in averting a possibly much, much, deeper downturn.
I agree that QE is more likely than not. Having said that, I don't believe the ECB will use QE in the fashion suggested by the analyst.
 
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