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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

ECB’S STARK SAYS DEBT CRISIS SPREADING TO ‘CORE’ COUNTRIES

Posted by WARREN MOSLER on November 21st, 2011

Seems the logical consequence of hair cutting Greek debt and announcing it may happen to other member nations?

That said, would not surprise me to soon be hearing hints of something like:
‘ECB bond buying not necessarily inflationary if combined with austerity’ coming out of Germany,
triggering a massive ‘relief rally’ that will last until the reality of the austerity part sinks (syncs) in,
as the 10th plague infects the German bonds markets.

*ECB’S STARK SAYS DEBT CRISIS SPREADING TO ‘CORE’ COUNTRIES
*ECB’S STARK SAYS DEBT TOLERANCE IN EUROPE IS DECLINING
*ECB’S STARK SAYS INVESTORS ARE REASSESSING SOVEREIGN DEBT

27 Responses to “ECB’S STARK SAYS DEBT CRISIS SPREADING TO ‘CORE’ COUNTRIES”

  1. Matt Says:

    I have a question.
    Do treasury long term securities express inflation expectations. (I am not talking about TIPS)

    They reflect expectations about future FED policy.

    1.Sometimes they do reflect inflation expectations, sometimes they don’t.?
    2. They never do?

    Reply

    WARREN MOSLER Reply:

    they express anticipated fed rate settings, which means they anticipate the fed’s reaction function.
    so if inflation is feared, along with that would be fear of the fed hiking to fight the inflation, for example

    Reply

    Kristjan Reply:

    @WARREN MOSLER,
    What you are saying is that if Fed announced that rates would be zero forever, then real interest rates on treasuries would be negative in inflationary environment?(in case markets take Fed’s announcment seriously of course) It seems that there is no point of having treasuries at that point at all.

    Reply

    WARREN MOSLER Reply:

    agreed

    Ralph Musgrave Reply:

    @Kristjan,

    Milton Friedman advocated a system under which govt issues no interest paying bonds (like Treasuries). See para starting “Under the proposal…”, p.250 here:

    http://nb.vse.cz/~BARTONP/mae911/friedman.pdf

    WARREN MOSLER Reply:

    Monetary operations was never his strong suite

  2. roger erickson Says:

    Eurobonds should be more palatable to Germany than ECB buying individual bonds, and should get Germany closer to their goal of having a common emu-Treasury.

    Yet you have to seriously doubt whether Euro-politics is really ready for common infrastructure.

    Too many things chasing coherent operations so far. You can’t achieve a tunable system without installing all the inter-dependency channels. So far, local euro-politics are NOT mediating intelligent inter-dependency options. Hate to say it, but they’re just not ready, and are building infrastructure without preparing themselves to use it!

    You can tell that simply by the level of political discussion.

    Reply

    Zaid Reply:

    @roger erickson,

    They’re moving so slowly on policy that there won’t be enough time to create an EMU-Treasury before people on the streets take matters into their own hands.

    Reply

    roger erickson Reply:

    @Zaid, Exactly!

    Reply

  3. Alex The Great Says:

    Nothing to do with inflation or deflation. The true question is if you want to live in a debt driven system run by a non-democratic banking cartel that e slaves people or a true democracy with real money. Germany is clearly the heroic actor in this case and we true Americans support Germany – those Americans that did make our money stealing 401k investments and then hiding it In the Caribbean to avoid taxes and so avoiding support of their own country = disgusting.

    This is NOT some ivory tower economic argument but one of corrupt corporate capitalism known as fascism vs. democratic capitalism.

    Reply

  4. Kaiser Says:

    Warren, ANOther,

    why have Hungary asked for the IMf to bail them out again? They have their own currency….

    http://www.independent.ie/business/european/hungary-asks-imfeu-for-financial-help-as-lsquoprecautionaryrsquo-measure-2940840.html

    Any thoughts?

    Kaiser

    Reply

    WARREN MOSLER Reply:

    they need euro to support their currency to get into the eu?

    Reply

    Kaiser Reply:

    @WARREN MOSLER,

    They are already in the EU but not the Euro. They may peg their currency to the EUro. I have no idea.

    Perhaps someone with MMT framework expertise can look at it further. it May be obvious.

    Reply

    Walter Reply:

    @Kaiser,
    Hungary has its own currency, but I fear a lot of their debts are in foreign currency (CHF and EUR), especially in the private sector. Many foreign banks were active and lent (esp mortgages) in CHF and EUR.

    Sergei Reply:

    @Kaiser,

    “Perhaps someone with MMT framework expertise can look at it further. it May be obvious.”

    You do not need MMT framework for that because the answer is sheer stupidity. Hungarian central bank has fx reserves of about EUR 40bn. No IMF will give Hungarian government that much. So instead of going to the IMF the government should have brought certain changes to the law on central bank into the parliament.

    Adam (ak) Reply:

    @Kaiser,

    They have had pretty bad experience with inflation in Hungary during the communist reforms era in the late 1980ies that’s why they will sell their soul to devil rather than “print money”. The same happened in Poland.

    This is the reason all these questions about dollarization and capital flight as the ultimate frontier to MMT-based policies (which I dare to ask time to time) need to be answered rather than ignored.

    A clear explanation to the inflationary spiral and stagflation which gripped the West in the late 1970ies is also badly needed. These questions will resurface time to time. The phenomenon of stagflation was used as an excuse to set the clock 50 years back. The hyperinflationary experience of the transition from the command system was used in Central Europe as an excuse to implement even more orthodox policies based on “sound finance” than in the West “proper”. Does the austerity work? Of course not. Only for a few years when the private debt bubble keeps growing. When it bursts we have precisely the conditions which Hungary is experiencing now.

    The alternative theory (I consider MMT as a serious contender) must offer very clear answers to what went wrong when the money was “printed” in excess creating an “inflationary overhang” due to “forced saving” in a command system (with no working market clearing mechanism) – or what happened in Germany in the early 1920ies when saving propensity was zero and budget deficits were extremely high. For some reason the MV=PQ formula worked well under these conditions.

    The best analysis of the Hungarian “market socialism” experiments I have seen so far has been provided by W. Brus and K. Laski in “From Marx to the Market” but that book was written before the final collapse of communism (in 1988). Unfortunately the path chosen then in Central Europe did not lead to 10% GDP growth p.a. (as in China). People think that 20% unemployment is better than 10% inflation (at least are brainwashed to believe in this).

    It is not true that I disagree with the analysis of inflation provided by Warren or Bill Mitchell. We simply need more detailed and deepened analysis of what happened during these periods in the places I mentioned otherwise I will always hear the word “Weimar” or “Zimbabwe” when I present the principles of MMT to anyone.

    Reply

    Anders Reply:

    @Adam (ak), you haven’t mentioned the observation Warren regularly makes, that 1970s stagflation was accompanied by wage indexation clauses, and strong union power which ensured that when certain producers pushed up prices in a bid to increase their gross operating surplus as a % of NGDP, this increase was passed back around again in a wage spiral feedback loop.

    Also – whenever someone mentions “printing” in relation to hyperinflationary episodes, they usually refer to both the fiscal stimulus and the monetary stimulus. It’s important to split these apart. MMT would say that a large budget deficit in the context of strong private spending and a constrained supply side (as was the case in the Weimar and Zimbabwe) is sufficient to cause accelerating inflation, almost irrespective of monetary policy. The fact that the customary mechanism of bond sales as a reserve drain seems to have broken down in those episodes seems like an after-effect, rather than a cause.

    Reply

    WARREN MOSLER Reply:

    More like business had pricing power so the path of least resistance was to compensate well and pass it on to consumers

    But more important was the Saudi price hiking that ended after the 1978 deregulation of nat gas resulted in the positive supply shock that massively dropped the demand for crude

    Gary Reply:

    @Kaiser,

    Eastern European countries have very open economies and are very dependent on imports (especially energy imports).
    Most of them also have large segments of population in debt in foreign currency. Hungarians were (I think) the only ones that had legislation to convert that debt to their currency. I am not really sure how it ended. Remember reading that Austrian banks were shocked, but then quieted down – presumably there was something in it for them.
    Most Eastern European countries (except maybe Czechs) have little faith in their currencies. They are not really using their currencies as prescribed by MMT. They are afraid of budget deficits, afraid of what rating agencies or European institutions would say. They have high unemployment, but that is not their priority.

    Hungarians probably felt that they cannot borrow foreign currency for low enough rates. At least that is what Lithuanians were afraid of when they considered asking IMF for help (luckily for them, they have not done it yet)

    Reply

    Kaiser Reply:

    @Gary,

    Thanks Folks,

    So basically lots of Debt in Euro and Swiss Franc is their biggest issue….

    Default!

    Kaiser

    Reply

    Adam (ak) Reply:

    @Kaiser,

    A bank run and flight from the Hungarian bonds is happening already. I would say that this looks like a financial death spiral to me. What makes things even worse is the confusion of the Hungarian politicians and economists. Exactly like in Russia in 1998 – they have learned nothing. But the real problem is indeed the foreign debt denominated in foreign currency.

    “Hungary is a warning sign,” said Neil Shearing from Capital Economics. “It is the country where the risks are most acute in the region, so this is where you would expect to trouble to start. We fear this may spread to Ukraine and the Balkans. Eastern Europe has enormous external financing needs for the banking system. They won’t be able to roll over debts if there is a credit freeze in Western Europe.” Mr Shearing said Hungary has to raise external finance equal to 18pc of GDP over the next year. The figures are 14pc for Croatia, and 13pc for Bulgaria.

    Eastern Europe is dependent on eurozone lenders and their subsidiaries for about 80pc of its banking system. This leaves the region vulnerable to a credit crunch as foreign groups slash loan books – by €2 trillion over 18 months, according to a Deutsche Bank study – to meet the EU’s requirement for 9pc core tier 1 capital.

    Western regulators have already begun to lean on their banks to cut loan books abroad to head off a squeeze at home. Austria’s central bank has ordered Erste Bank, Raiffeisen and Unicredit Austria to restrict lending in Eastern Europe to what they can raise in local deposits, perhaps a move by Vienna to safeguard its own AAA rating amid the EMU storm. Austria’s exposure to Eastern Europe is near $270bn (£173bn), or 70pc of GDP. Its banks make up 40pc of lending in Croatia, 30pc in Romania and 25pc in Hungary. ”

    http://www.telegraph.co.uk/finance/financialcrisis/8905478/Hungary-turns-to-IMF-as-stress-mounts-in-Eastern-Europe.html


    Obviously there is more, much more…

    Even Polish Minister of Finance goes full throttle MMT (just for a short while) – I have always known he would say this …

    http://news.ph.msn.com/business/article.aspx?cp-documentid=5562359

    “We have a hideous choice … either a massive intervention from the ECB or a catastrophe.”

    If the eurozone were to break up, “we would lose a huge part of our economic output. There is a danger of a historic economic disaster — like the Great Depression in the 1930s — that would lead to war in Europe”

    MamMoTh Reply:

    Adam, what do you think Hungary should have learnt from Russia?

    Neil Wilson Reply:

    @Kaiser,

    Same reason that the UK asked the IMF to bail them out in 1976.

    The government doesn’t know what it is doing.

    Sovereignty is no guarantee of competent governance. And neither is an independent central bank…

    Reply

    Kristjan Reply:

    @Kaiser,
    They have private sector foreign currency debt and they don’t want forint to tank because of that. And they don’t understand their monetary system. They basically converted private pension plan into state pension because they thought they lacked financial resources(what they can create at will). The reason for those auctions to fail might have been market expectations for high interest rates(from central bank and they probably didn’t sell under certain price), markets know the situation there. You don’t want to hold overvalued currency unless they pay you high interest for It.

    Reply

  5. Adam (ak) Says:

    This:
    http://www.creditwritedowns.com/2009/11/russia-sovereign-debt-defaults-and-fiat-currency.html

    Reply

  6. Alex The Greak Says:

    Anyone, including corporations with debt should be wiped out through a debt holiday…all debt goes to ZERO.

    Anyone or all corporate directors will more than $100 million in debt shall be executed in public, these scum are anti-America and anti-Christian.

    Anyone with zero debt should be rewarded by exchanging there US Dollars for gold coins at a rate of $100 per once of gold provided from the Fort Knox.

    Reply

    roger erickson Reply:

    @Alex The Greak, So they can eat the gold? Please don’t confuse novice readers who might otherwise gain more insight from the comments here.

    Reply

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