The only question I have been toying with today apart from all the other ones is whether it was the big bazooka or not. The Melbourne Age article (October 28, 2011) – Euro summit fires ‘bazooka’ at debt monster – lead me to believe that the big one had come out, but then the Financial Times article (October 28, 2011) – Merkel’s mantra works without ‘big bazooka’ – suggested the bazooka was left in the rack. Perhaps the bazooka was brought into action but the big bazooka was left at home. That conclusion would reconcile things nicely. It is very confusing though isn’t it. About as confusing as trying to work out what the EMU leaders might define as leadership. The way I understand it the only bazooka that the EMU has at their disposal refused to play ball and stayed at home in Frankfurt. The result – no matter what the political spin is and no matter how much the governments pledge to put into the EFSF or claim they can get from the Chinese the situation remains – they are recursing back to insolvency. None of the member governments can ultimately stump up the euros when Italy, then France or any other member state requires bailing out. In the end, they will be picked off one by one. I guess they did bring out some sort of bazooka – but just aimed it at themselves.
For starters, imagine that you come down from Mars and have studied basic macroeconomics. You thus know the following:
1. Spending equals income equals output which drives employment.
2. Employment growth drives tax revenue and reduces welfare outlays.
3. Budget balances are the difference between spending and revenue.
4. You note that governments issue debt to the non-government sector which matches their budget deficits although you wonder why they would do such a thing given they issue the currency that everyone uses. You muse to yourself (not being rude) – “Why do these Earthlings do such a curious thing?”.
5. You also note that some governments (over in Europe) delight in making life harder for themselves and their citizens by deliberately refraining from issuing their own currencies and instead, ceding that authority to some faceless, unelected people who are located in Frankfurt. But being polite you duly note the idiocy of this arrangement and worry about the citizens whose welfare it retards.
You land in Brussels on October 26, 2011 and the Earthling leaders (Angie, Nick, George and some others) ask you for some advice: They want smaller budget deficits although their reasoning is somewhat odd.
They think that by reducing budget deficits they will have lower interest rates, even though you tell them they already have relatively large deficits and virtually zero interest rates and show them some data from the Bank of Japan that you picked up which suggests they have had the same for 2 decades.
Not to be daunted they tell you that the other major concern is that if they don’t get the budget deficits down they will face accelerating inflation. You note again that the deficits are historically large and inflation is mostly falling. Again, you tell them that Japan has faced deflation with high budget deficits for two decades.
But then they tell you that the bond markets are attacking some of the governments under their leadership. This is a problem because these governments signed away their capacity to generate their own funds and if the bond markets don’t lend to them they cannot pay their daily bills. The bond markets are rightfully worried that they might not get their money back without some haircut because they know the governments in question do not issue their own currency. Its a no-brainer!
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