browner55 wrote:John,
I must say that I am a "deflationist" through and through. However, isn't monetizing debt extremely inflationary? What if they did this? What if the US decided to monetize state debt in the same manner? I still think the gold bugs will be wrong, but at the same time these types of actions certainly add fodder to the argument against fiat currency. Actually, if the ECB did this it would certainly break the union. I am not sure what it would mean for ours if the Feds monetized state debt. I know you have addressed the inflation/deflation debate to the point of overkill, but you have to admit that it is fascinating.
Hi, I'm not John but i know a lil bit about this stuff too
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Yes it would be inflationary. Another reason for it being very problematic in this Greece scenario, is that every other euro-country would also be affected. I really doubt they would choose this option for this reason. Like so many other things in economics, monetizing debt would spark a chain reaction because everyone expecting a devaluation will try to put their money in material assets, which would inflate the prices even further and lower the purchasing power even more. Also investors will try to hold as much, more stable, foreign currency as possible, which would change the exchange rate dramatically, making the euro weaker and other currencies stronger, because everyone wants to buy Dollars with their Euros but nobody wants the Euros.
So, in summary, while the actual monetizing of debt itself wouldn't affect inflation too much (IMHO), these other aspects i described would dramatically exaggerate inflation.
OLD1953 wrote:Could Germany simply guarantee the interest payments? It would be a terrible deal in the long run, and they'd quit doing it eventually, but short term fixes are what the world is all about now.
This is an interesting idea, but Germany (and every other EU country) have huge debt themselves. Pushing debt around won't make it vanish. Germany pays so much interest for its own debt already and any more would make it impossible to ever achieve a positive budget again. And it wouldn't solve the debt crisis of the other PIIGS countries. As you said yourself it would only be a short term fix, but IMHO way shorter than you might think. We see Greece in the news every day, but in reality it's not too much better in any other European country.
And this, i think, is what Merkel thinks to herself. Sure we could defuse Greece's current crisis for a little while, but there are so many other states on the brink of a debt crisis which can't all be bailed out, so why should we pay for delaying the crisis for a while, when we can't stop it in the long run anyway?