Here\’s how to solve the eurozone crisis

As Ambrose points out:

The three main gauges – M1, M2, and M3 – have each begun to decline in absolute terms after slowing sharply over the Autumn.

The broad M3 measure tracked closely by the European Central Bank as an early warning indicator shrank last month by €59bn to €9.78 trillion, a sign that Europe\’s long-feared credit squeeze is underway as banks retrench to meet tougher capital requirements.

The ECB is allowing to happen what the Fed allowed to happen in the US in 1930-32.

This is fixable though. What we need to do is get 100 copies of this book.

A Monetary History of the United States, 1867-1960
Milton Friedman & Anna Jacobson Schwartz

We then collect the 100 top Euro- politicians/ECB bankers/German deflationists etc and we sit them down with said book. Under armed guard. With a gallows or two in the corner. And we insist that they read and understand the book. At the end of the first day we start to ask questions.

\”So, who still believes that austerity is the way to solve a liquidity crisis?\”

The first hand or two that goes up, we hang them then instruct the others to return to study of the book.

Repeat and rinse until finally someone stands up and agrees that actually, the central bank printing money is the way that you deal with a falling money supply and a liquidity crisis.

We might have to keep going until we get a majority of our 100 to agree: we might get down to three sensible people and 97 corpses, you never know.

But I am finding it very difficult indeed to think of any other way that we\’re going to get this very basic point across.

We are not, have not been for months in fact, in a political crisis and we\’re not even in a debt crisis any more. This is a monetary crisis, one that can be solved, simply and quickly, by monetary means. But only if we actually go and use those monetary means at our disposal. And yes, bastard stupid ignorant politicians who stand in the way of this solution, gallows are too kind for them.


24 thoughts on “Here\’s how to solve the eurozone crisis”

  1. I basically agree with this but still no one has told me why anyone for whom money can be printed shouldn’t go and get themselves in absolutely deepshit quantities of debt every few weeks. Having solved the problem, from whom can we expect fiscal discipline therafter? The correct answer is “no one”. Countries with sovereign currencies and printing presses are showing no indication of slowing down the accumulation of government debt, there will be still less incentive to do this inside the euro.

  2. So Much For Subtlety

    First we should get the people who designed the euro together and hang anyone who still thinks it was a good idea.

    The Northern Europeans are about to pay a big price for German Reunification.

  3. I’m with JamesV – letting the ECB ‘print’ money to buy euro denominated debt is the only way to stave of catastrophic collapse right now. But what about the future? Printing money is a drug – once you’ve done a bit, a little bit more doesn’t seem so bad etc etc.

    So if you are going to cross the Rubicon it makes sense to have a cast iron road map as to when you’re going back across the bridge, and then blowing it up too.

    But the trouble is even if you say ‘We’ll print X trillion euro, and thats it. After that you’re all on your own again, so you better use the time this give you to sort your economies out’ no-one will believe you. They’ll just go on as before, with perhaps a little window dressing, working on the assumption that if the ECB printed them out of trouble last time, they’ll do it again next time as well. In fact the more disastrous the potential crash, the more likely they are to print, so countries might as well just steam full ahead.

    In my view printing money without a sea change in attitude in ALL western countries with regards to spending (ie moving to living within their tax revenues, and having zero borrowing) will on defer the ultimate collapse, not prevent it.

  4. “This is a monetary crisis, one that can be solved, simply and quickly, by monetary means.”

    Right, so we crank up the presses and run them until they burn out.

    Then what?

  5. Just one more fix right?. And then they’ll go cold turkey right?. Just one more mega-spunk of funny money and then the world’s dickhead guberments will annouce 40 to 50 % expenditure cuts to once more live within their means. Yeah, and my real name is Hertz Van Rentalz.

    The real interest rate is already negative and what you are proposing might well be the straw that camelbacks interest rates to begin rising. Those who put their sweated income into bonds etc want more than funny money. Not just pensioners but all savers/investers are already being ripped off and the desperate brigade(from individual to national level) will have to try to tap already tapped out sources to cover inflation driven cost rises. This has been tried so many times before in history. If it worked Zimbabwe would be a prosperous paradise.

    Really Tim if you are handing out hangings for economic bad deeds, advocating this one should earn you a place in the line. As a kindness Murph can go ahead of you so you can watch him get his before your own turn arrives.

  6. “The real interest rate is already negative”

    The real interest rate is roughly 6% for the Italian government.

    “they’ll do it again next time as well”

    The ECB only needs to set a *credible target* to cap the yield to move prices. It can adjust the yield cap according to, say, the primary surplus, and make it punitive enough that the Italian people will feel the pain.

  7. JustAnotherTaxpayer:

    You pay me “real” money–or better still real goods- and I’ll give you 80% interest–out of my Monopoly set.

  8. “The real interest rate is roughly 6% for the Italian government.”

    Not it absolutely blimmin isn’t. The nominal interest rate is 6%, but inflation hit 3.4% this month, so that makes Italian REAL interest rates 2.6%, almost all of which is actually a risk premium compared with German Bunds.

    Oh and that inflation rate is rising VERY fast – that’s going to look really quite good value for the Italian govt really quite soon.

  9. Tim, I thought you believed in free markets and the rule of law. Quite apart from the fact that this will not solve the underlying problems, as others have pointed out above, do the EU treaties allow the massive money printing you advocate? And for that money to be used to bail out failed governments? No? Then any such effort by the ECB would need to wait until a new treaty has been ratified by all 27 EU member states.

  10. No-one’s pretending that there isn’t a cost to printing money. But the alternative is that the euro messily disintegrates. Pain later to prevent collapse today.

    The people on this thread also need to remember that profligate lending by German (and French) banks supported the German export boom in the peripheral economies. Money printing is needed to prevent these banks collapsing.

    Yes, Club Med need to trim their spending. But Germany and the Netherlands really can’t hold on to their trade surpluses, which have largely been built on the back of Club Med debt. The surplus economies are as much to blame for this crisis as the deficit ones, and they need to change their ways too if the Eurozone is to survive. While the “Club Med Bad, Austere Germans Good” myth continues, the Eurozone has zero chance of surviving.

    Jim – trust me, you really don’t want zero government zero borrowing. Government borrowing is an important source of low-risk investments for pensions and the like. If those dry up, investors are forced towards riskier assets. Hence the ridiculous situation that the Aussie govt found itself in a few years ago, when it was running a fiscal surplus but was persuaded by finance representatives to issue debt it didn’t need because the markets needed risk-free liquidity.

  11. “Hence the ridiculous situation that the Aussie govt found itself in a few years ago, when it was running a fiscal surplus but was persuaded by finance representatives to issue debt it didn’t need because the markets needed risk-free liquidity.”

    But that’s insane: that’s a complete money roundabout. Why tax people in order to pay interest on debt to provide returns to pensions?

  12. The Pedant-General

    Government borrowing can usefully be thought of as a giant savings scheme. People are in effect taxed to provide returns on part of their own pensions, which is additional saving, sort of. Yes, it’s a money roundabout – but then that’s what the entire financial system is anyway. Equally, people who put money into National Savings are taxed to pay their own returns.

    But you’ve missed the real reason why the Aussie government issued debt it didn’t need. Markets rely on good quality government debt to provide essential liquidity. If AAA-rated governments stopped issuing debt the markets would be in big trouble, because there really isn’t a private-sector alternative that can offer the sort of highly-liquid, low-risk investment opportunities that a currency-issuing AAA-rated government can. That’s why despite the US having over $15tn debt UST’s are trading at negative interest rates. They are still the world’s safest liquid asset.

  13. PEDANTRY FAIL, Mr Pedant-General. The real interest rate is the nominal interest rate minus EXPECTED inflation, not the CURRENT inflation rate.

    I re-checked. The bond markets expect deflation in Italy. So their real interest rates are higher than their nominal rates.

    But GOD FORBID the ECB print money because inflation is “rising fast”. You fucking idiot. Go and read Friedman, like Tim said. Just READ FRIEDMAN. And then come back.

  14. I slightly disagree with Tim. This IS a political crisis, because if it wasn’t for a lot of unbelievably stupid politicians putting their own interests ahead of economic common sense the liquidity problem could have been fixed a long time ago. I agree that the political structure of the Eurozone is not the most urgent problem. But the behaviour of its politicians is. Shoot the lot of them.

  15. Frances,

    As I understand it governments (including Aus) insist that pensions and insurance companies investment part of their portfolio in
    safe* government bonds or other AAA rated investments?

    This has been made harder by governments monopolising long term infrastructure projects like roads and power generation, reducing the availability of AAA investments.

    If governments aren’t issuing bonds then pension and insurance funds can’t meet their regulated investments.

    *perhaps safe should have been in scary-quotes?

  16. SimonF

    Quite so. Enforced saving in government schemes in the guise of keeping down the risk for the punters and (quite by accident, of course) ensuring a ready market for government debt.

    But the market liquidity issue is true as well.

    Jim, do you understand now why zero government borrowing is neither possible nor desirable? It has nothing to do with government spending requirements. Markets actually don’t want AAA governments to issue less debt. Actually they want them to issue more, at the moment, because AAA-rated government debt is becoming scarce and expensive. They just don’t want governments to behave in any way that might jeopardise the AAA rating.

  17. JustAnotherTaxpayer

    “Actually they want them to issue more, at the moment, because AAA-rated government debt is becoming scarce and expensive”

    This almost sounds like MMT flow-of-funds rubbish.

    If the capital markets wanted to invest £100bn in new real investment projects rather than £100bn in gilts the government – and the people – would be better off. So the government does not “want” to be in an equilibrium where it has to borrow £100bn every year.

    The question is how is we can move to a different equilibrium. Raising gilt prices always helps. Raising inflation expectations would help too.

  18. JustAnotherTaxpayer

    The global shortage of AAA-rated collateral has been recently pointed out by Izabella Kaminska at FT Alphaville, actually.

    Earlier this year she also correctly recognised that downgrading the US’s credit rating would make stuff all difference to the yields on USTs because there really isn’t an alternative risk-free liquid asset available in such quantities. The US currently has over $15tn in debt and USTs are trading at negative interest rates.

    And financial markets’ representatives really did lobby the Aussie government to issue debt when it was running a surplus, not because they wanted new investment but so that there was more liquidity in AUD-denominated risk-free investments. In fact the shortage of AUD-denominated AAA-rated collateral is an ongoing issue, as Kaminska’s post notes.

    You don’t need to go to the weird fringe of economics to explain the markets’ attitude to government debt. You just need to remember that markets really don’t care what government spends its money on as long as its debt remains good quality.

  19. JustAnotherTaxpayer

    “really did lobby the Aussie government to issue debt when it was running a surplus”

    I entirely agree that it is desirable to have a deep and liquid bond market, but the size of the Aus bond market is around 20% of GDP; ours is already about 90%, 70% if you discount the portion the BOE bought back.

    What is dangerous is saying that gilt prices are high
    yields are low, therefore it is good that we are issuing lots more gilts, and efforts to issue fewer gilts are bad.

    Low gilt yields and high gilt issuance are both symptoms of the depressed economy. We should *not* want to stay in this equilibrium. That markets *want* lots of risk-free investments is a *bad thing*. They should want to make lots of risky investments.

    Indeed, if we can move to an equilibrium where we have to start tightening monetary policy that itself will effectively mean more gilt issuance, because the BOE can start selling off the QE portfolio.

  20. Justanothertaxpayer

    Ah, but now you are moving on to value judgements about “good” and “bad” investment practices. I might counter that by saying that having lots of liquidity in a depressed market is a “good” thing and therefore we need lots of gilts, because although we would prefer investors to choose riskier investments, if they don’t want to they won’t and there is not much we can do to force them to. Restricting risk-free investments in the hopes of forcing investors to take more risk is a dangerous strategy.

    The original point was about zero government borrowing, which I pointed out is neither possible nor desirable while governments have rules requiring pension funds, banks and other financial institutions to invest in government debt. Nor is it desirable while markets rely on governments to provide risk-free liquidity. A liquidity crunch is just about the most dangerous situation for the financial system and the last thing the world needs while its economy is in trouble.

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