A friend of mine (who I may try to coerce to post along side me) has challenged me to find articles on current events and opine on them. I hope this is a good start to our series.
The article I chose is from November 17, 2011. Despite the fact that it was my birthday, which throws me back to feelings of euphoria and strawberry shortcake, I can’t help but feel that it is a wee bit dated for today’s discussion.
News/rumors/telepathic thoughts from Europe have been triggering the markets left, right, up and down. Any news is old news as I watch the headlines crowd my Bloomberg terminal. You want to look for news from yesterday? You’ll have to dig through 257 articles, and surely there are at minimum two newly elected technocrats in Europe, Iran will be threatening something, a new country will have an Arab Spring like moment, and Rick Perry will find a new way to make us giggle – and he still won’t be in on the joke.
What is constant, however are the issues that have been facing Europe over the last two years or so. Despite meeting after meeting, we’ve seen nothing but lip-service granted to the underlying issues. I digress- back to the article!
The article argues that there are two options we have on the table:
1)Print money
2) Let the Eurozone crash and burn
The Germans (who run shiz these days), are extremely opposed to the option of printing money. The thought of a printing press classically conditions a stomach ache as a reminder of the hyperinflation in the 1920s of the German Mark.
Normally, printing money isn’t as shock-and-awe as the German 1920’s experience. Bernanke has said it is still in the toolbox to boost the US economy if things go awry with Europe. QE1 and QE2 didn’t send anyone to buy bread with a wheel barrel full of cash. The Bank of England increased their QE program in October. The difference? History has allowed countries to inflate themselves out of debt disasters, paying back the debt with inflated money, then kick-starting the economy once it can get back on its feet. With the Eurozone, if one country needs to inflate, all the neighbours go down with it.
So the question becomes what is more harmful – sinking the whole ship while the Euro flag waves high, or forcing certain exits ending the attempted Euro unity. If inflation does occur and prices rise, the gaps between countries such as Germany where wages are higher than say, Slovakia will no doubt put pressures on income disparity. You’ve solved your debt payment conundrum for a moment in time – now what?
Forcing certain exits will of course cause much shame and embarrassment to Euro leaders. But the countries can undertake monetary policy to fit what is needed in their own economy. Over the 17 nations that share the Euro, each one with veto power entangles the debates further than necessary. Other than shame and embarrassments – oh yeah, the immense fears that defaults will trigger CDS markets off the charts. If sovereigns default (unlike the 50% ‘haircut’) in Greece, who will be the odd man out on those contracts? Most firms hedge their bets, but at some point in the exchange, someone is not going to get paid.
Since firms report net exposure, it is virtually impossible to know where this risk will lie. Enter more contagion fears.
Obviously I don’t have all the answers/considerations. The ECB has been persistent that they are not in the business of purchasing sovereign debt, but rather they take care of monetary policy and the banks, and the individual governments should take care of sovereign/fiscal problems. Essentially the ECB is trying to take the option of printing money off the table.
I think it will be interesting to get in a time machine and fast forward five years. But that's crazy - who wouldn't want to get in a time machine?
Original article:
http://www.cnbc.com/id/45344815/Why_Europe_s_Central_Bank_May_End_Up_Printing_Money
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