{"id":4794,"date":"2011-11-17T06:41:37","date_gmt":"2011-11-17T13:41:37","guid":{"rendered":"http:\/\/www.jasonapollovoss.local\/?p=4794"},"modified":"2018-09-21T02:04:37","modified_gmt":"2018-09-21T06:04:37","slug":"european-central-bank-holds-the-key-to-resolving-the-european-sovereign-debt-crisis","status":"publish","type":"post","link":"https:\/\/jasonapollovoss.com\/web\/2011\/11\/17\/european-central-bank-holds-the-key-to-resolving-the-european-sovereign-debt-crisis\/","title":{"rendered":"European Central Bank Holds the Key to Resolving the European Sovereign Debt Crisis"},"content":{"rendered":"<p>&nbsp;<\/p>\n<p><span style=\"font-size: 16px;\">This will be a short post, but I wanted to update my recent post about the European sovereign debt crisis.\u00a0 Everything in that post that I wrote I still hold to be self-evident truths.\u00a0 If anything the situation in Europe is worse now than when I wrote the post.\u00a0 Here&#8217;s what I have to add now:<\/span><\/p>\n<ul>\n<li><span style=\"font-size: 16px;\">Beyond the Euro-negotiators not addressing the underlying causes of their misery, the next biggest problem is differing focus on time scales.\u00a0 Huh?\u00a0 What does that mean?\u00a0 It means that the investment markets around the world appreciate an intra-day\/intra-moment timescale.\u00a0 Whereas, the politicians trying to resolve the European sovereign debt crisis have an intra-decade time scale.\u00a0 This differing appreciation for time only serves to exacerbate the crisis.<\/span><\/li>\n<li><span style=\"font-size: 16px;\">It&#8217;s my feeling that we are down to one power source that has the power to resolve the crisis: the European Central Bank (ECB).\u00a0 Because of the gigantic Gordian knot of a problem in Europe only those power sources that stand outside of the system can affect an outcome.\u00a0 The International Monetary Fund is another such party, but they have already committed inordinate resources to help resolve the European sovereign debt crisis.\u00a0 That leaves the ECB as a last resort.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-size: 16px;\">Why is it that it is highly likely that the ECB, and only the ECB, can resolve the crisis?<\/span><\/p>\n<ul>\n<li><span style=\"font-size: 16px;\">The sovereign debts in Europe far exceed any of the European nations&#8217; ability to grow themselves out of the problem.\u00a0 In other words, debt balances are growing faster than the economy.\u00a0 To reverse that trend, governments would have to run very, very large government surpluses from tax revenues harvested from a growing economy or growing tax rates.\u00a0 Unfortunately, Europe already has high tax rates and historically put-put growth.\u00a0 So this looks to be an unlikely scenario.\u00a0 However, the ECB can print money.\u00a0 That excess of money chasing the same set of goods will drive up prices and create inflation.\u00a0 That cheapening of money makes the debt cheaper to refinance as it comes due.\u00a0 Unfortunately, to do this, the ECB would have to break the law as it is expressly forbidden that the ECB inflate the money supply of the Eurozone.\u00a0 So this solution &#8211; a highly potent and easy one &#8211; requires a change to European law and philosophy.<\/span><\/li>\n<li><span style=\"font-size: 16px;\">Another version of printing money, and one that the ECB has been engaging in &#8211; is to be the bidder and buyer of last resort in European sovereign debt markets.\u00a0 All open\u00a0financial markets are auction markets.\u00a0 What happens on eBay when no one bids on an item?\u00a0 That&#8217;s right, it doesn&#8217;t sell.\u00a0 A smart seller would lower her price in such a situation in order to transact.\u00a0 This is exactly the scenario taking place in Europe right now.\u00a0 Well almost.\u00a0 The ECB is buying European sovereign debts.\u00a0 Thus, the ECB is providing bids in the auction and in many cases I am guessing they are the only buyer.\u00a0 This action is maintaining some semblance of price stability so that European sovereign debt prices don&#8217;t collapse\/European sovereign yields rise to crazy levels.\u00a0 When the prices on debt fall, but the interest paid remains the same, then the yield increases.\u00a0 Why is this important?\u00a0 It is important because most governments around the world do not pay off their debt.\u00a0 Instead they refinance it.\u00a0 Governments, just like businesses and people, are forced to refinance at the going yield.\u00a0 So if the yield is astronomical then they just increase their needs for more debt in order to pay increased interest.\u00a0 Think about nearly bankrupt consumers who use a lower rate credit card to pay off a higher rate card.\u00a0 This works until the rates get higher.\u00a0 Then their credit\/refinancing needs actually grow and it becomes a spiral toward bankruptcy.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-size: 16px;\">To my worldview, it looks like this whole (almost) catastrophic situation is down to just the ECB.\u00a0 Sans the ECB, we are very near the kind of perfect storm whose outcomes are very difficult to predict.\u00a0 What&#8217;s more those outcomes are varying degrees of bad, with not much good in them on the short to medium time scale.\u00a0 On the long time horizon a catastrophe has the ability of changing the behavior of how governments around the world budget themselves.\u00a0 To get there is like withdrawal for an addict &#8211; not pretty.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">Jason<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>&nbsp; This will be a short post, but I wanted to update my recent post about the European sovereign debt crisis.\u00a0 Everything in that post that I wrote I still hold to be self-evident truths.\u00a0 If anything the situation in Europe is worse now than when I wrote the post.\u00a0 Here&#8217;s what I have to [&hellip;]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","footnotes":""},"categories":[3],"tags":[],"class_list":["post-4794","post","type-post","status-publish","format-standard","hentry","category-the-blog"],"_links":{"self":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/4794","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/comments?post=4794"}],"version-history":[{"count":0,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/4794\/revisions"}],"wp:attachment":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/media?parent=4794"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/categories?post=4794"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/tags?post=4794"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}