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.
Video below
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Seems to me the short term “solvency” issues are a combination of governments long term growth/debt risk with their willingness/requirement to take on private sector debt risk.
if I’ve understood the recent discussions here, for a country that can set it’s own interest rates those risks becomes diffuse and become one of inflation/currency devaluation and continued malinvestment.
For a country that can’t set it’s own interest rate because it shares a currency, that risk has to manifest in it’s loan rates.
The issue at present then being the politics of countries that share that currency also sharing inflation/currency and continued malinvestment risks.
Ed, what is the difference between this and traditional monetary policy? Are you saying that the ECB should let targets for specific euroarea member bonds?
Marshall is saying they should. I say they will as do many traders:
https://pro.creditwritedowns.com/2011/11/heres-what-traders-are-saying-about-ecb-intervention.html
Some are starting to see this as a case where the ECB/EU lose control over periphery governments but also as a moral hazard for banks which get off on their dodgy trades. I don’t see it this way on either count but i do think the ECB will eventually move in this direction.
Ed, what is the difference between this and traditional monetary policy? Are you saying that the ECB should let targets for specific euroarea member bonds?
Marshall is saying they should. I say they will as do many traders:
https://pro.creditwritedowns.com/2011/11/heres-what-traders-are-saying-about-ecb-intervention.html
Some are starting to see this as a case where the ECB/EU lose control over periphery governments but also as a moral hazard for banks which get off on their dodgy trades. I don’t see it this way on either count but i do think the ECB will eventually move in this direction.
Italy is solvent. It is just that it is being attacked on the bond markets. My fears are that if a solvent country like Italy can be shot down then countries like France, Belgium and Austria are much more vulnerable. We should expect the “contagion” to continue. We can see that in the increase in France’s borrowing costs.
Italy is solvent. It is just that it is being attacked on the bond markets. My fears are that if a solvent country like Italy can be shot down then countries like France, Belgium and Austria are much more vulnerable. We should expect the “contagion” to continue. We can see that in the increase in France’s borrowing costs.