TUGboats of money...

Willem Buiter has spotted that the ECB has the cash to bail out the fiscal incontinence of the eurozone, something that has been said on here for a while. Helicopter Ben, move over, TUGboat Jean-Claude is about to be pulled into town…

ftalphaville.ft.com/blog/2010/07/22/295051/buiter-cant-believe-its-not-traditional-european-central-banking

Now I’ve definitely reached the limits of my understanding with this…

How can the ECB put 7 trillion euros into the system and assume inflation at 2%?

By buying existing assets (i.e. money) with a nominal value of 7 trillion. As long as they buy liquid assets (like sovereigns) they are not increasing the cash in circulation. Therefore it is not inflationary. In theory…

Is the assumption not that the ECB is buying the debt of countries or companies for which there is no market, i.e. closed, illiquid etc.
In that case the ECB is just printing money in the knowledge that it’s never coming back.

Anyhow, how does Buiter calculate that there is this enormous sum available to the ECB; it seems to have some basis but where is the human factor… the ‘we know what you’re up to’ response of the eurozone debt holders?

In terms of “we know what you’re up to”, I am sure the Japanese and the Chinese know what the Fed and the Treasury are up to but they keep buying the T-bonds instead of gold (so far).

WRT to Buiter’s core thesis, if I understand it (not sure I fully do) it basically puts numbers on how much less tax the EU states need to raise to effect a bailout by debasing the currency rather than by actually taxing the EU citizens. He gets to figures that range between 100pc and 25pc of Eurozone GDP.

I assume some of this is reversed over time (higher than average interest rates post crisis a la Volcker 1982 and Greenspan 1994) and some of it just impoverishes savers. Since the eurozone does not borrow much from outside (net) there is no free lunch as there is for Ben and young Timmy.

So if you’re German or Dutch, its a major bummer. If you’re Ireland, it is small compensation for bankrupting your taxpayers to save dopey European bank bond investors who should have been hit with 20-50bn of losses.

If you’re Spanish or Greek, its time to party ! (Again)