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Home Publications Blogs Beat the Press Italy's Crisis: The ECB Could Just Print the Money

Italy's Crisis: The ECB Could Just Print the Money

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Wednesday, 13 July 2011 05:21

It would have been worth reminding readers that the debt crisis in Italy and other euro zone countries is first and foremost a political crisis. The European Central Bank (ECB) can just print euros which can be used to address any potential default risk among its member countries. There would be little obvious economic downside to this policy since most European counties have large amounts of unemployment and excess capacity due to inadequate demand.

If there is a risk of default it is because the ECB has decided to make an obsession out of its 2 percent inflation target. This shows that numerology can be a very dangerous religion when it is held by central bankers.

Comments (18)Add Comment
mr, Low-rated comment [Show]
Excellent Analysis Ryan!!
written by Paul, July 13, 2011 9:32
You are wrong on every count! Hard to believe that anyone could actually get everything wrong, but you have managed it all in the space of less than 500 words. Amazing feat, sir!
..., Low-rated comment [Show]
...
written by Jay B., July 13, 2011 11:30
You are right, the ECB operationally could substitute a pile of created-out-of-thin-air new money to exactly replace the wealth that disappears in a default. (How is such a substitution inflationary when exactly the same amount of purchasing power remains in existence?) Can't we assume the ECB is well aware they can make those bondholders whole?
It appears, instead, they are afraid that such a substitution will pull the "trigger" on something much uglier. It appears there is a set of conditions they don't adequately understand, a CDS problem, a derivatives problem, they are afraid to unleash.
basic economics, Low-rated comment [Show]
Basic Nonsense
written by Paul, July 13, 2011 2:02
Apparently Ryan is unaware that the Fed has created 2 trillion dollars worth of new money over the past 2 years and U.S. inflation is still below its target! Gee, adam ferguson must be wrong, huh?
to Paul, Low-rated comment [Show]
Check your stats: 555 billion is not 2 trillion.
written by AndrewDover, July 13, 2011 2:50
http://www.federalreserve.gov/...6hist1.txt says M2 was
4461.0 billions in May 2001
5107.4 billions in May 2001
5935.3 billions in May 2003
6447.8 billions in May 2005
7234.8 billions in May 2007
8445.8 billions in May 2009
9012.4 billions in May 2011

"Gold has gained around 12 percent so far this year and more than doubled in price in the last four years." http://www.reuters.com/article...edType=RSS
$2 TRILLION - Straight from the Fed
written by Paul, July 13, 2011 3:46
http://www.federalreserve.gov/...trends.htm

The Fed's balance sheet has more than tripled since 2008. And STILL no inflation!
to Paul
written by Good Habit, July 13, 2011 3:55
Well, the only good thing that kept capitalism going until know was the ability of governments to creat as much money out of thin air as desired. (o.k - sometimes the overshoot, thus creting serious inflation). Otherwise, the western civilization would long be gone. Since Money isn't the total amount of gold dug out of mountains anymore, it's just the total amount of accumulated (global) government deficits. Pay back the debt, and ALL money will be gone, and your back to the stone age..
See you there...
There are multiple forces at work on prices
written by AndrewDover, July 13, 2011 4:31
This being 2011, 2008 is 3 years ago.

Sure, Paul and Dean make good points that we don't see rampant inflation yet. It is true that Fed assets have gone up around 2 trillion since 2008.

However, in the same time period, "Bank reserves balances with Federal Reserve Banks" have risen from $10 billion in early 2008 to $1.65 trillion today.

http://www.federalreserve.gov/...1hist1.txt
To Paul..a quick lesson on inflation, Low-rated comment [Show]
...
written by diesel, July 13, 2011 11:13
But Ryan, aren't you assuming that there is no pent up demand and potential productivity to soak up all those newly created dollars? Inflation wouldn't necessarily result if the economy grew into its new clothes. If growth had formerly been constrained by there being too little money in circulation, then creating money would be just what the economy needs.

You assume that the current state of affairs is optimal. Free marketeers take this as a given. Could it be that, having accepted the hypothesis as proven, you cannot step outside the ineluctable logic of the efficient market view?

By the way, I agree with you. People shouldn't downrate your comments just because they disagree with you. They can argue with you, but downrating should be reserved for commenters who behave like a--holes.
Ryan is a Sensitive guy
written by AndrewDover, July 14, 2011 2:18

Exactly, Ryan is a Sensitive guy. You A** holes leave him alone.
Euro PIGs.
written by Ralph Musgrave, July 14, 2011 2:57

Warren Mosler has been advocating a “print Euros” policy similar to Dean’s for some time. One “Mosler” proposal is to print and distribute Euros on a per capita basis to all Euro countries. I agree with that, as long as the amount distributed is enough to raise employment a bit, but not so much as to seriously exacerbate inflation.

But the problem with Dean’s idea, if I’ve got it right, is that only PIGs get the new money. That amounts to a subsidy of PIGs by core countries, which core country taxpayers would not like.
Apalled
written by ryan, July 14, 2011 5:28
Goodbye to this little forum...cheerio to Dean from the CEPR who has probably spent a fortune on his education and, for his troubles and considerable expense has reached the conclusion that the solution for a country grappling with severe over indebtedness and double digit deficit issues is.....wait for it.....A large printer. Thank you to Paul, my erstwhile critic..who has done me the favour of reminding me that there are people in this world who should not be allowed to have opinions on finance/economics other than whether to buy their coffee in Starbucks or Dunkin Donuts.
When you get to the point in your life (as I have) where you have worked 16 hour days building up a business for 20 years, and you find yourself with a large amount of liquid assets (they are called savings Paul)..you will start to understand the importance of sound money both to an individual and to an economy. Growth and productivity in an economy is ultimately driven by savings (both private and corporate)because savings are channeled into investment and investment produces sustainable growth (debt most certainly does not). If you systematically set about destroying the savings of people who have behaved responsibly by inflating away it's intrinsic value, you destroy the ability of an economy to grow and prosper. Take a look around your once great country (I am not a US citizen) and see if that rings any bells with you. Laters.......
...
written by AndrewDover, July 14, 2011 8:34
The rude post at 1:18 was someone else using the AndrewDover name.



Correct - The ECB could solve the Euro debt crisis at any time
written by ApeMan1976, July 14, 2011 11:46
There is some question of the BEST way to do this; as you may know the Center for Full Employment and Price Stability suggested that it should be based on a per capita grant to all Eurozone members, to avoid creating perverse fiscal incentives.

I agree with that position, but I'd be interested to know CEPR's thinking on the matter.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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