Trillion Dollar Madness

Tuesday, May 11, 2010
By Paul Martin

by Robert Wenzel

European policy makers have unveiled an unprecedented loan package worth almost $1 trillion and a program of bond purchases to stop the sovereign-debt crisis. The Federal Reserve will also play a role through currency swaps.

The 16 euro nations agreed in a statement to offer as much as 750 billion euros ($962 billion), including International Monetary Fund backing, to countries facing instability and the European Central Bank said it will buy government and private debt.

There is nothing more to be said other than this is potentially the greatest inflationary plan ever designed. Although statements have been made in the past that the EU has failed to follow through on, the statements issued last night appear to have a sense of seriousness about them, especially the ECB announcement to buy government and private debt, and the Federal Reserve launching of currency swaps. Both these actions suggest spectacular inflation may not be far away. Although the ECB statement says the purchases will be sterilized, meaning they won’t increase the overall money supply in the system, one wonders how long this will go on. A sterilization of the money printing would mean that money would be drained out of other sectors of the EU economy to be given to the governments of the PIIGS, who are proven irresponsibles with money. Draining from the potentially productive sectors of the EU economy to give to the PIIGS is almost as insane as printing the money without sterilization.

That no objection to this madness has come from any finance minister or central banker signals how far down the road we are from any real concern about inflation or the taking away from the productive sectors of the economy. Indeed some of the the statements coming out of the emergency meeting of EU finance ministers are simply absurd.

“The message has gotten through: the euro zone will defend its money,” French Finance Minister Christine Lagarde told reporters in Brussels early today. How opening up the printing presses defends the euro, she did not explain. The last I looked printing money destroyed a currency. It did not help the currency.

As for other parts of the plan that call for EU members to chip in with bailout funds, Venkatraman Anantha- Nageswaran of Bank Julius Baer & Co put it best, “It might temporarily calm nerves but questions will come back later on how they will pay for this package when all of them need fiscal consolidation.”

Markets are reacting in knee-jerk ways that do not at all suggest long-term trends.

The euro appreciated 3.7 percent against the yen as of 6:55 a.m. in New York, its biggest gain since November 2008. Spain’s benchmark stock index, the IBEX 35, rose the most on record. Futures on the Standard & Poor’s 500 Index rallied 4.4 percent.

Over time the euro won’t be able maintain gains. Gold is down by double-digits, but with major inflation threatening around the corner, the gold weakness will be very short-term.

The complete EU/ECB statement is in the EPJ vault, here.

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