In fiat money we do not trust
Posted by
Neil Hume on May 12 09:10.
Has the
€750bn EuroTarp package been a success?
One market does not think so.
As you can see the price of gold is rising against every major currency, not just the embattled euro.
According to Greg Gibbs of RBS this is because the market, more clearly than ever, sees the true scale of the sovereign risk problem, the solution and fallout.
Monetise. Monetise. Monetise. Inflation. Inflation. Inflation:
If the market won’t buy the government bonds, the central banks have to. There is no other choice. The alternative is just too damaging for the economy to contemplate. If the central banks don’t buy the debt, then governments are forced into a budget surplus (a surplus is required to cover interest payments on existing debt). Imagine the carnage if major economies were forced from double digit deficits to surplus, you are talking Great Depression type scenario or worse.
Even getting close to that outcome is too bad to consider, so when borrowing costs start to rise, as they did recently in the Eurozone periphery, making borrowing difficult, the contagion spreads to equities and global asset markets. This forced the Eurozone governments to promise to throw money at the problem. The US$ 1 trillion bailout package only has some credibility because it involves core countries and the IMF which still have relatively low borrowing costs. However, the package would have little bite if the ECB were not involved. The ECB’s purchase of government bonds (monetization) is critical. It is the most credible source of funds since it creates the money.
It is undoubtedly true that the actions of the ECB this week make it clearer than ever what the real threat of the sovereign debt problem globally is. All countries, not just the Eurozone, when push comes to shove, when bond yields start to rise because of sovereign default risks, will force their central banks to buy the bonds (monetize). You can talk all you like about sterilization, but when the central bank is forced into this path, you can be sure they will not be raising cash rates. They will aim for negative real rates, and until the fiscal house is put back into order, they will aim for nominal GDP growth. Whether this arises from higher inflation or real growth will be of second order importance.
Even though inflation is yet to break out, the price of gold is telling us that this threat is very real over the longer term. People rightly so do not trust fiat money anymore.
Which echoes the thoughts of UBS senior economic adviser George Magnus, who on Tuesday
set out a similar case for why, in his opinion, the EuroTarp stands no chance of working too.
Namely because the OECD is
now in a debt-trap.
And also note the experience of the Federal Reserve and the Bank of England.
They began their forays into unconventional monetary policies via sterilised asset purchases, but ended up with will full blown quantitative easing.
a larderello hanno aperto una centrale nel 1900 , l'islanda si riscalda col geotermico
agricoltura,next stop 
