The European central bank is trapped
lynalden.com
lynalden.com
The only reason to pay back debt is to prevent inflation from destroying the money through a different mechanism. But when inflation is under control, which it has been for 39 of the past 40 years, debt should not be paid back.
Expecting to pay off government and central bank debt is like expecting all the money to be returned to the bank by the end of a game of monopoly.
It means that Italy could afford to roll-over its debt only due to European Central Bank suppressing for years yields on Italian bonds. But now market yields go up as ECB is set to raise rates and withdraw QT.
If Italy were to pay market rate on its debt it would bankrupt its budget. Most of Italy's revenues would go toward coupon payments of debt leaving very little for pensions, infrastructure, healthcare etc.
So it is not about not repaying debt but about Italy's inability to roll it over in the markets.
Single currency and single central bank in eurozone implies policy fragmentation - ECB has to address different issues at the same time. High inflation in the North and stalled growth with high yields in the South.
So as long as its unsustainable it's "absolutely fine" by you? As long as its someone else paying for you, i guess its fine to fuck them over huh?
Future generations are the ones getting fucked over, because they are the ones who will have to pay for the subsidies you're wanting for your pet project.
It's clear you haven't got a clue of the actual long term effects of your proposed policies. I recommend you read Basic Economics by Thomas Sowell, if only to understand that the policies you propose will have consequences.
I have, that's when i realized he had nothing useful to say.
Interests rates do not need to increase very much at all at this point, so that 100% of tax revenues would be needed just to cover the interest owed by governments. At this point (actually before) the currency is effectively dead and hyperinflation is inevitable, unless:
1) there is a draconian cut to government spending to match tax revenue, or 2) the current system is abandoned to one that is backed by hard assets (which would include a severe cut in spending but could also include a taper)
1. is politically infeasible, so we will default to 2. after a significant amount of economic pain. The US Dollar and most western fiat currencies are dead and are already long in the tooth by historic standards.
Which will then build up more pressure until something finally goes wrong and your economy implodes. The consequences aren't just social that the government can deal with. Look at the 1930s. There's a real chance that a poor economy for an extended period is going to change your democracy, if you remain a democracy at all.
The ECB can only buy the debt by creating more money and increasing inflation. It might be hidden for a while, but just because we don't know how to measure it doesn't mean it won't eventually show up in an unexpected place (or managing it will depress the economy long-term).
Russia defaulted in the late 1990s and a few years later people were lending again (at higher rates). Greece had many well-publicized problems in the earl 2010s, and yet in 2019 their bonds had negative yields:
* https://apnews.com/article/067eda5047d740f9a15692dea5944326
Also, your "banks aren't households" argument, while deeply flawed, is useful to explain some very introductory concepts to people who don't understand rhe basics of how a central bank operates but has absolutely nothing useful to say about the very real dilemma central banks are facing.
b) go on with our lives. The ECB has other issues that it should be criticized about -- mainly it is unsurprisingly a political tool and not having the economic growth, wealth, and stability of the EU members as its priority.
They are issuing fixed coupon, fixed term credit obligations. What do you want to call it? A bicycle?
There happens to be a word for this particular scenario where someone lends you money and you create a contract to pay it back. It's called debt.
The entire finance world isn't reworking itself around your misunderstanding of the issue.
I guess kind of like how mortgages aren't seen as bad even though they're debt. Fairly safe debt, sure. But still debt.
I don't know if a new word would help but you've misunderstood anyway.
2) Confusing yearly numbers like GDP to long-term Debt. Debt/GDP are just a ratio, we don't know what the upper limit it or does it even matter.
3) An inflationary era also means higher tax receipts. https://rollcall.com/2022/05/09/tax-revenue-boom-fuels-steep... which can easily cover any extra interest you may have to pay
The EU and Eurozone's lack of "fiscal union" is unique, but not really that relevant. The Central Bank there is going to crater the credit market, just like the Central Bank in the US is going to do.
They are the biggest financial whales and they
1) stopped buying
2) now have trillions to sell, and are going to sell at a massive scale that's unheard of, to whom? good question, can the market absorb this much? At what price if the market literally isn't big enough for this amount of selling pressure? and its still too small of a scale for what they are actually trying to do
3) are going to let some bonds mature, and not let the paid back money get into circulation again, so there is just less of it for everyone else
(note: sometimes they say they are only going to do 3) and not 2), very confusing)
It doesn't matter that the EU one has a bunch of member-state debt, while the US Central Bank largely ignores municipal bonds and while having a bunch of national govt bonds (treasuries) on its balance sheet. They both hold corporate bonds now, and mortgage backed securities. Neither own stocks (although the US one bought some bond ETFs, which are stocks of funds that only own some bonds).
They both stopped buying, are letting things mature, and also directly selling.
Its going to be bad for everyone partially because its only an attempt to control inflation. Case in point being that energy costs will remain high either way. They're aiming to destroy optimism and re-range asset prices, where the yield of those assets are a higher ratio to their price. (aka stock prices more closely matching their profit or revenue growth or dividend payouts, bonds yielding higher)
The Eurozone doesn't have this setup as monetary policy is bloc-wide whereas fiscal policy is national.
With these levers working at different scopes this problem will always exist. And it's not the first time either. Remember Grexit? Same thing then.
We either need a United States of Europe with fiscal transfer between countries or the euro should be scrapped so we can go back to lira, marks and drachma.
So basically, if fiscal transfers are needed at some point to rebalance debt, we will get to that point and the EU will compromise again. Is there risk in this approach? absolutely, but it's pragmatic and based on a democratic process (the public opinions of all member states) rather than dogmatic based on some red/blue ideology/political split where compromise is unreachable, as in the US.
In other words, even if the article is right, I don't necessarily see the trap; it's a trap now, based on current compromises. Those are (thankfully) elastic, as it's been demonstrated many times in recent history.
Secondly, Central banking is NOT democratic.
When last did you vote for your country's central banking head?
When were members of that bank's monetary policy committee subjected to public scrutiny? Most people have no clue who they are, what their background is, and whether they are to be trusted tinkering with our money or assets.
Who influences the dovish/hawkish make up of that group and, as a result, the bank's policy response?
You? I don't think so.
This was very apparent in the head of the ECB Christine Lagarde’s recent interview.
She was asked, “how will you get the balance sheet down?” while being shown the ECB balance sheet on a screen.
She answered, “It will come. It will come. In due course, it will come.”
The interviewer paused, confused, and then asked, “…how?”
And she answered, “In due course, it will come.” And then smiled.
She offered no answer, no description, no clarification, and had rather awkward expressions throughout the exchange.
This is because, like most central banks, there is no plan. It won’t come. Sovereign debt will be monetized to whatever extent it needs to be, or it’ll collapse.President “Bobby”: In the garden.
Chance the Gardner: Yes. In the garden, growth has it seasons. First comes spring and summer, but then we have fall and winter. And then we get spring and summer again.
Not sabotaging. People need to save a lot to be able to retire properly afterwards. State pensions are often not remotely enough on their own.
The behaviour on the savers' side is perfectly rational in that scenario.
Um, yes? That’s how the fractional reserve system works to solve the problem. And then the problem is solved.
Debts are simply leverage on top of the base money supply. Banks are the source and sink of this credit money. When banks don’t think a business or person can repay a loan, they don’t extend credit.
Also, when people or businesses default, the bank makes less loans to avoid becoming overleveraged.
Gradual inflation isn’t nearly as much of an issue as a recession or a depression. It only hurts lenders who have locked in an interest rate, or “savers” who simply put money in a bank (which is the racket… helping the banking system create the money supply).
The REAL issue is that bank underwriters have to GUESS whether a business will do well over 10-15 years. The banks are the source and sink of the vast majority of our money (the M2 credit money that the author talks about, vastly exceeding the M1 fiat currency).
Now, if each community had its own currency and paid a UBI in it (monetary policy) and charged tolls and taxes in it (fiscal policy) then the community itself would be the source and sink of the money. Instead of bank underwriters guesising, PEOPLE would simply exercise their own choices as to which business to buy goods from. This is a far better way to pick winners and losers AND helps those who need the money the most. Banks don’t lend you when you NEED the money, only do it on predatory terms that get you further into debt.
The real problem is not having an alternative to the banking system. Crypto COULD power such an alternative but this is what would need to happen: https://intercoin.org/proposal.pdf
Something like a SIMS game for economics.
Doesn't appear to simulate an economy very well, but its a nice idea.
That is, the dollar has been strengthening for an extended amount of time versus other industrialized nations' currencies, and it continues to. Just look up some multi-year currency charts.
So it seems to me that tells us that at least the Fed is being more aggressive at countering inflation than almost any other central bank.
It seems to me to put US government policy beyond most reasonable criticism, even if imperfect, it must be better than everyone else's.
But the pundits seem split between moaning about how especially terrible the Fed is and about how terrible all central banks are.
I don't think people realize how good the US has it, and what we have to lose.
When people start complaining about criticism, especially "compared to others", is when I start to worry. Its apples and oranges. Yes, the US has it good. But there are so many things shockingly bad and there is no momentum to improve things.
When the rioting starts I sincerely hope people who don't like criticism start fixing things instead of electing a non-idiot fascist to tell them they are better than the rest.
But we know, it's not necessary to make sense, only to feel bad about the US. Just in case this thing, this time, will be its ultimate downfall.
How bad would it be, not to feel bad enough about the US, in its last days? Think of what we would lose!
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In MMT fantasy land they surely can. But in the real world it ain't that easy...
> "the currency and Japanese financial markets are in the process of losing any sort of fundamental-based valuation anchor." - Deutsche Bank's George Saravelos in yesterday's report..
Japan is on verge of systemic collapse. Just watch USDJPY and JGB recently...
Macro economists models aren't predictive, and as such, they are scientifically as useful as the book of Râ.
Also we are not doing enough to support ukraine, after 100 days of hand wrangling we decided to supply missile systems
Southern europe isn't california. The mediterranean isn't the pacific ocean.
Now Im in Hong Kong, where as you know the people have little say and slogans like "5 demands not one less" is not met with fear like in France, but with police aggression. But, we have a balanced budget. We had a record tax revenue this year if you can believe it. All problems are simpler when you have a surplus, even at the individual level.
So I'm happy but people here envy France where the street can clawback what's hers even at credit...
ECB is more like this than Hong Kong’s budget https://en.m.wikipedia.org/wiki/Linked_exchange_rate_system_...
https://tradingeconomics.com/hong-kong/households-debt-to-gd....
vs.
https://tradingeconomics.com/france/households-debt-to-gdp#:....
Willingly chose tyrany?
Uncle Rukus, is thar you?
Citation or example ? You can have a balanced budget and positive interest rates.
A net increase in savings in the private sector is incompatible with a balanced budget of the public sector. Remember, balanced budget means you spend everything you earn for both the government and the private sector.
No they don't.