Auerback: In Europe, national solvency first, then aggregate demand
Marshall Auerback was on BNN yesterday talking about the sovereign debt crisis. He believes that there are two distinct issues at play. One is national solvency, the other is aggregate demand. In his view, the national solvency issues take precedence and this puts the ECB on the hot seat. Marshall says that only if the national solvency issue is removed from the debate can you return to the issue of economic growth.
For Italy, Marshall advocates rate easing i.e. where the central bank sets and explicit target rate for a financial instrument in the currency it creates, backed by a guarantee to buy at that rate in unlimited quantities. This is akin to what the Swiss National Bank has done recently in the currency markets, drastically reducing its need to intervene. And this is also what the Fed has done with its policy rate, announcing that US policy rates will stay at zero percent for two years.
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