Friday, September 7, 2012

ECB Prints Money

Yesterday, the European Central Bank announced that it will purchase all 1 to 3 year bonds issued by troubled EU governments in order to recapitalize those economies.  In exchange, issuing governments commit to a path of public austerity. Given the heavy reliance on government handouts in Europe, this is probably not enforceable (at least without a lot of violence in the streets).  To save the Euro, the ECB and Brussels have no choice but to do this.  While this step averts the risk of default, it could be extremely inflationary.  The immediate impact would be to inflate the cost of exports for such counties like Germany and Finland that count on their strong export oriented economies to stave of recession.  A second impact would be to deflate the value of household savings in high saver countries like Germany. This deal of a lifetime may be the deal with the devil.

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