Sovereign debt bubble thread

[Sheilbh]

If they did it in that size, the Fed and the BOJ and the BofE and every other major currency issuer would have to respond with something similar. And they would.

They all have already. And it's still less than their response to a Euro breakup. Plus as Zanza says the problemse are internal, the current account imbalances are all internal, many suspect countries have an overall current account surplus.

[Admiral Yi]

You are again getting fixated on debt (not to mention so far non-existent inflation). With the notable exception of Greece, public deficit is not the underlying cause of the crisis. It's a symptom.
Just like a critical patient, we need to stabilize the situation so we can fix the actual causes, then we can fix the deficits. Won't work the other way around.

I'm guessing this is directed at me?

OK, what is the underlying cause of the crisis?

And I don't see how pointing out that monetizing debt leads to severe inflation risk equates to fixating on inflation.

[The Minsky Moment]

If they did it in that size, the Fed and the BOJ and the BofE and every other major currency issuer would have to respond with something similar. And they would.

If the Fed did it, they could call it:

Targeted
Action
Response
Plan
2

[MadImmortalMan]

QE7

[Iormlund]

You are again getting fixated on debt (not to mention so far non-existent inflation). With the notable exception of Greece, public deficit is not the underlying cause of the crisis. It's a symptom.
Just like a critical patient, we need to stabilize the situation so we can fix the actual causes, then we can fix the deficits. Won't work the other way around.

I'm guessing this is directed at me?

OK, what is the underlying cause of the crisis?

And I don't see how pointing out that monetizing debt leads to severe inflation risk equates to fixating on inflation.

You and Tamas both.

The underlying cause is an heterogeneous monetary union without political union. We can either ditch it or try to fix it. To fix it we need political will, which diminishes every day as costs increase, both for the core taxpayers (in bailouts, TARGET2 claims and so on) and the periphery (in massive unemployment, emigration, reduced services and buying power).
Now, a political solution will take years we don't have. Years of negotiations, vetos, referenda and the like. We need to buy time. That means making clear that the Euro is here to stay. Now. For this we need some kind of mutualization (especially in banking deposit guarantees and thus supervision) and an unequivocal commitment to monetizing debt from collaborating partners if needed be. Doing this in return for concrete structural reforms makes sense, since it takes away moral hazard (short maturities help here) and facilitates eventual convergence. Lord knows there are zillions of proposals from each country as to how those reforms should look like. We just need to choose some.
Finally, the only entity with the de facto (not de iure) power to do this, and do it now, is the ECB.

WRT inflation fears, both UK and US have been monetizing debt since the crisis blew up. Where is the inflation? It is one thing to watch for it. It is entirely another to cower in terror when core inflation is nowhere to be seen, causing distress all over the world with your inaction.

[Zanza]

I somehow doubt it causes inflation when you basically just write-off bad debt. It's not exactly inserting any new money into the system, just taking bad obligations out. Money will still be scarce in Greece et al. just not as terribly scarce as it is now. I don't see why writing off even a trillion of peripherial debt would cause inflation in the core either. It's not like any consumer would all of a sudden have more money. Just some bad banks would have less obligations.

[Admiral Yi]

The underlying cause is an heterogeneous monetary union without political union.

Monetary union didn't *force* Greece to run ginormous deficits.  Monetary union didn't *force* a housing bubble in Spain. 

WRT inflation fears, both UK and US have been monetizing debt since the crisis blew up. Where is the inflation? It is one thing to watch for it. It is entirely another to cower in terror when core inflation is nowhere to be seen, causing distress all over the world with your inaction.

The difference is that the Fed is blasting out money supply while keeping an eye on inflation.  That's why the market jumps every time the inflation number comes in, because it knows that the Fed has another month to keep interest rates at zero.

What is WRT?

[Barrister]

with respect to

[Iormlund]

Monetary union didn't *force* Greece to run ginormous deficits.  Monetary union didn't *force* a housing bubble in Spain. 

Monetary union without political union *allowed* Greece to run those without supervision. We all knew Greece shouldn't have been admitted. It got in anyway.

Likewise it created a perverse set of incentives that resulted in a real estate bubble in Spain. Interest rates were below inflation for years here. You were actually losing money by not going into debt.
While the real estate bubble is the foremost example, almost everyone played the game. The _only_ sector that didn't accumulate debt was the central government and even they were wary of regulating the whole mess.
For everyone, be it households, bank CEOs, business owners or politicians, debt seemed the rational choice. If you didn't take that loan and buy that machinery your competitor would, and drive you out of the market. If you didn't buy that house now it would be twice as expensive in a few years. If you didn't leverage and sell mortgages you would lose long-term market share. If you didn't obtain funding that massive $·"%" project you would lose the elections.

The difference is that the Fed is blasting out money supply while keeping an eye on inflation.  That's why the market jumps every time the inflation number comes in, because it knows that the Fed has another month to keep interest rates at zero.

I don't quite understand how can inflation take place when money in circulation is quickly decreasing due to uncertainty.
In my admittedly amateur view monetizing now would simply do one of two things: if the money ends in the core, it gets stashed in safe havens. If it ends up in the periphery it decreases the time needed to deleverage. In neither case it actually ends circulating unless confidence in the system returns ... which is precisely what we wanted in the first place.
It might circulate if the core creditor countries could compensate the collapse of the periphery with increased exports to the RotW. "Fortunately" it seems we have managed to fuck up everyone else's economy with our own brilliant performances.

[Admiral Yi]

But monetary union itself didn't allow Greece to run those deficits.  Else they would still be allowed to run those deficits, since they're still in the union.  Deeply retarded Euro banks allowed them to run those deficits.  Then they sort of wised up.

I had no sympathy for US financial institutions that held CDOs or for retard borrowers that bought McMansions with no income, and I likewise don't have any for Spanish banks or mortgage holders.  Even less for Spanish politicians that need to buy votes with deficit spending.

WRT to monetary policy, you seem to be confusing money in circulation with the money mutiplier.  A purchased Bund is money in circulation--Germany uses the money to pay salaries and such.

[Iormlund]

What makes you think I have sympathy for those people? I didn't get a mortgage or buy a tricked out M3. I don't even have a smartphone. I've voted against every government for I don't know how many years.

I'm all for moral outrage, but what help is it to me if I get laid off in a couple months because there's just no work to be done? Will it help me deal with Crohn's if my medication isn't covered anymore for lack of funds? Does it allow me an exemption on the 30% hike in VAT so far?

Moral outrage can be many things, but it's not a solution.

[Admiral Yi]

You're right, sympathy was a poorly chosen word.  What I mean is that monetary union didn't force any of those people to do what they did. 

[Zanza]

You're right, sympathy was a poorly chosen word.  What I mean is that monetary union didn't force any of those people to do what they did.

The bad macro outcome was rational on a micro level though. And that's something you can blame on our politicians and central bankers, but can't really blame on the indvidual. Individuals are expected to act according to their rational individual benefit.

[The Minsky Moment]

You're right, sympathy was a poorly chosen word.  What I mean is that monetary union didn't force any of those people to do what they did.

No it didn't
People did what they did because they responded in a rational fashion to the economic incentives and signals they received from the market.

[The Minsky Moment]

You're right, sympathy was a poorly chosen word.  What I mean is that monetary union didn't force any of those people to do what they did.

The bad macro outcome was rational on a micro level though. And that's something you can blame on our politicians and central bankers, but can't really blame on the indvidual. Individuals are expected to act according to their rational individual benefit.

Oh yeah, that too.