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Where the Europe crisis is heading

September 29, 2011

Where the Europe crisis is heading
By Albert Gallatin

Recent events in Europe have once again highlighted the macro-economic problem of the developed economies: over borrowing at all levels, public and private, led to unrealistic expansion of credit which eventually led to a bust. In each case Western governments dealt with the private debt crisis by transferring these assets onto the public’s balance sheet (think TARP and the Federal Reserve’s special lending facility in the US). Now, in Europe, the bill for these public sector bailouts is coming due. Absent some extraordinary rescue the governments of Europe’s southern tier will need to default on their debt– as the President said in a recent press conference regarding America’s own shaky budget situation, it’s simply math.

However default of any of the Eurozone members would likely spell catastrophe for the EU project as a whole. Therefore the flinty northern economies, particularly Germany, are in a position to decide whether to work to fund the excesses of the Greeks and the Italians, or be accused of destroying Europe (again).

Ultimately the problem in Europe is the same as exists for all fiat-currency unions: creating more money is limited only by the political will to create more money. When confronted with the choice of printing more euros or watching Europe disintegrate, the Germany’s will like choose to support the print options. Therefore today’s Europe crisis is likely a temporary blip on the road to a more coordinated and tightly bound Europe. Whatever depreciation comes from printing more money will likely quickly dissipate, given the relative lack of alternatives.

How exactly this plays out remains the challenge of the day. Nevertheless it appears the European Union will be with us awhile longer.

  
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Bob Clark September 29, 2011

A figure of 2 to 3 trillion Euros in new monies via leveraging up the European Financially Stability fund is being considered. That is a very huge expansion in monetary base. It actually ends up threatening the viability of the European Central Bank as it takes on the junk soverign debt loans onto its balance sheet in unimaginable amounts.

As for the U.S, I think rather than the Treasury borrowing massive amounts from the likes of China and others, the Treasury should simply print currency the old fashion way with printing press to meet the current federal budget deficit. Freeze total federal spending in place, and wait for subsequent inflation from the printing of new monies to raise federal tax revenues; Thereby, possibly narrowing the budget deficit at a steady annual pace. Most folks can hedge against inflation by buying hard assets ahead of time, and prices of hard assets tend to rise correspondingly with inflation.

Idea September 29, 2011

Somebody please send this article (along with Bob Clark’s comments) to Europe rigth away.

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