ECB and Inflation

[Iormlund]

The problem is we are now burdened by the dead weight of several million unemployable workers, which was entirely avoidable.

But do you guys really believe this can go on to infinity? Will ECB's assurance carry weight ad infinitum as all members state continue to drawn in debt?

Eh. Spain cut its debt during the good times. You are thinking about Greece.

[frunk]

But do you guys really believe this can go on to infinity? Will ECB's assurance carry weight ad infinitum as all members state continue to drawn in debt?

Different times call for different policies.  There are times for austerity, and times for spending, and during a recession is when the government should be spending.

No political organization lasts forever, so no I don't think ECB's assurances will carry weight ad infinitum.  That's true whether the member states draw in debt or not.

[MadImmortalMan]

Our GNP is projected to grow again. That will reduce the debt

No it won't. It will increase the income.

[celedhring]

It will reduce the debt to GNP ratio at the very least, and I meant all the positive effects derived from economic growth that I spoke about; less social benefits paid, more taxes paid.

As Iormlund said, we did reduce our debt during the good times, it's not that we are chronically addicted to it.

[Sheilbh]

Who was going to lend them that money Joan?

Same people who were, at low levels, and who have been at record lows since Draghi's speech?

[Tamas]

https://www.youtube.com/watch?v=I5QwKEwo4Bc

[The Minsky Moment]

As expected, no ECB action.

[Sheilbh]

Yet they are now down to 2% while still running a 7% deficit in 2013, having failed to meet all deficit reduction targets despite austerity. It was ECB's assurances what reduced our yields, not austerity.

Yep.

Yi's view is dogmatic not based on the facts. Yields have fallen despite massively rising debt and constant (EU-mandated) failure to meet austerity targets because it was never an issue of government debt/deficits but one of confidence and contagion that the ECB and EU could have ended far earlier.

Having said that the crisis seems to me to be dormant rather than dead. If the German Constitutional Court prohibits OMT, or if the markets test the substance behind Draghi's words over, say, Italy then we could be back in the same situation of panic cresting at every European Council summit.

[Admiral Yi]

  I'm dogmatic?  "Confidence and contagion" are pretty much what I've been talking about.  Investors lost confidence that they would be repaid, and Greece and Ireland "contaminated" other countries because they made investors realize those valuations were absurd as well.

The fact that the ECB pledge to effectively cap EU sovereign yields has had the intended effect doesn't mean deficits and debt stocks were and are subjects of purely academic interest.  The interesting question is why ECB monetization of debt hasn't led to inflation.  Every single instance of hyperinflation in history has been caused by monetization of large public sector deficits.  Every single one.  Very concievably it's because the staggering unemployment rates and the reduction in aggregate demand caused by the "unnecessary" "austerity" are putting strong downward pressure on wages.

So what happens to yields and debt service as the weaker economies start to recover, as i believe Spain has already begun to?  Will investors continue to buy bonds yielding 2% in full confidence that the ECB will maintain the cap at the cost of price increases?  Or is there something unique about the Eurozone that will allow it to monetize deficits in perpetuity?

[MadImmortalMan]

Look. Nothing happens in perpetuity. The ECB's fix was a good one in this environment and might be a bad one in a different hypothetical environment.

My only question is, when interest rates hit ten or fifteen percent, can they keep doing the same thing?

Japan has taken 25 years and is still in this place. Can they keep doing this? If they can for that long, then we can too, but what then? Maybe Japan will break first and we'll know.

[Admiral Yi]

It's questionable if the ECB's fix fixed anything, in the sense of a permanent solution.  I tend to think they bought some time for member countries to get their acts together, at God only knows what future price.

[Iormlund]

The interesting question is why ECB monetization of debt hasn't led to inflation.

Since when is the ECB monetizing debt?

[Admiral Yi]

Is it not?  I thought they were buying up bonds in the secondary market.

[Iormlund]

They bought bonds under SMP, but those were sterilized operations (or at least that was the idea).

AFAIK there hasn't been any bond buying after Draghi's last-second intervention two summers ago. Everyone assumed after it that the ECB would monetize debt, but OMT hasn't been invoked yet (and it doesn't look like it'll have to).

[Admiral Yi]

What exactly has the ECB done then?