The fear of the printing press

Good friend Ramana and batchmate from IIM-A days sent me the link to an interesting piece by Richard Evans on the historical background to the German aversion to inflation and their inflation phobia. Those who have read ‘Lords of Finance’ would be familiar with the contents of the piece by Richard Evans. Others would find it fascinating to read the turbulent and painful history of Germany in the 20th century that lasted nearly four decades.

[Parenthetically, I had covered this in my MINT column in July, 2010 inspired, no doubt, by Liaquat Ahamed’s ‘Lords of Finance’. Germany/ECB is setting policy for the 1920s while the Federal Reserve is setting policy today for the 1930s]

The interesting issue is that the market is validating German inflation-phobia. Last week’s German government bond auction went so poorly that the Bundesbank had to pick up nearly 40% of the debt auctioned. Far from strengthening the case for the European Central Bank buying bonds of Italy, Spain, etc. in unlimited quantities, this failed auction underscores the risk to the core countries from such an approach. It is a quicksand that would drag and drown them all in. The failed bond auction is a warning from the market that the risk of inflation is too high in the Eurozone to justify such a low yield, even from Germany.

Those who advocate/suggest that Germany should shed its fear of inflation and allow ECB to print and buy European debt in unlimited quantities  – Richard Evans is one of them – are guilty of one thing. Sure, they are not guilty of making a wrong suggestion. They are guilty of not admitting that the consequences could be global and are unforeseen in their magnitude. Surely, there will be a inflationary impact on the Rest of the World as it would breathe fresh life into commodities. How would the emerging world respond? Trade barriers? Capital Controls? Renminbi devaluation?

What would be America’s response to that remains to be seen? At one level, America would be happy at the complete transformation of the ECB into a clone of the Federal Reserve. That eliminates the threat of Euro emerging as a dominant international reserve currency. At another level, the resulting strengthening of the US dollar would be viewed with mixed emotions at best or negatively, at worst. America would not be able to engage in a stealth default of its public debt. Its stated goal of doubling exports would also be jeopardised.

This suggestion has been made not just by Mr. Richard Evans but by several others like George Soros, Martin Wolf, et al.

As is the case with the American Keynesians (think Paul Krugman), their vanity lends an exaggerated sense of certitude to their policy recommendations.

This blog has no shame in putting up his suggestion as a starting point for discussion among Eurocrats!


Gavyn Davies, formerly of Goldman Sachs, has this new blog post on the various scenarios for the Euro. Check it out here. Subscription may be required. Look at the graphic embedded in the post. The way option (3) is presented is disingenuous. It is not easy at all. Will peripheral countries be prepared to lose fiscal sovereignty? If so, under what conditions? What is the quid pro quo? If the quid pro quo is that the Euro strengthens, that is no compensation at all. It is doubling the pain of surrendering fiscal sovereignty and accepting fiscal austerity. How will the ECB know where and when to stop with its bond purchases of the indebted European issuers?.

The truth is that, at this stage, all the easy answers are over. Either the pain is taken by the peripheral countries fully (unlikely), the pain is kept within Europe as far as possible or it is spread globally by the printing of the Euros. Actually, scratch that. All options would result in global pain. The duration and the intensity of the pain would differ depending on the option chosen. That is the only that remains to be established.

Felix Salmon thinks that the Federal Reserve has a lot to teach the ECB. Quite.


8 thoughts on “The fear of the printing press

  1. Dear Andy,

    No, I hadn’t heard about the “Atlas Shrugged” yoga bags. They sound truly salacious! 🙂 I will look up in the Internet.

    Regarding the brainwashing quote you lifted out of my comment, there was a time when the US really did offer an opportunity for poor persons to escape poverty. Elementary and High Schools were decent for the most part, and college was affordable. Venture capitalists stayed with start-ups until they went public, and companies went public on the basis of solid balance sheets, and not “prospects”. None of these statements is true today. The brain-washers on the US Right are harking back to those days and would like everyone to believe that the same situation still prevails today; but it doesn’t! This is what I was trying to explain in response to Raghuram Rajan’s column and comments. The brain-washers are fond of pointing to entertainers like Oprah Winfrey or Michael Jackson as examples of people who escaped poverty and became fabulously wealthy. Sports stars are other examples cited. Indeed, Raghuram Rajan explicitly mentions both entertainers and sports stars as noble and deserving members of the “1%”. However, enabling one or two persons to escape poverty and become millionaires is not a defining characteristic of being “a land of opportunity”. One might as well distribute free lottery tickets amongst the poor and point to the winners as vindication of the “land of opportunity” argument. To my mind, the real test of available opportunity is whether hundreds of thousands of poor people are able to escape poverty and become at least lower-middle class, not whether a handful persons become fabulously wealthy. But it is obvious to me that the brain-washers really know what they are doing. Again, I repeat: It is all so sad!


  2. “In other words, those becoming poorer by the day are brainwashed into thinking that the USA is the “land of opportunity,” so if they are poor it must be their own fault.”

    Thus spake Ayn Rand, and her disciple Alan. Did you hear about the controversy of the “Atlas Shrugged” yoga bags?


  3. Dear Ananth,

    This is hardly news, and some version or the other of this factoid has been making the rounds for quite a while now. The precise format might vary, but the content is pretty much the same. The banks borrow at nearly zero interest rate, DON’T lend to small businesses that would create jobs, and instead squeeze marginal persons through enhanced debit card fees, overdraft fees etc., and then show “record” profits.

    A massive rearrangement of wealth is going on in the USA, but the people are so satiated with the American mythology of “self-reliance” that they are incapable of seeing the inverted Robin Hood effect taking place. In other words, those becoming poorer by the day are brainwashed into thinking that the USA is the “land of opportunity,” so if they are poor it must be their own fault. It is all so sad!

    Warm regards.



  4. Dear Ananth,

    Not that I understand any of this stuff, but in today’s Huffington Post Robert Kuttner has an article entitled “Europe on the Brink”.

    He says in part:

    “All of these criticisms have some merit, yet all miss the deeper point. Once we get through the management of the immediate panic — which is not yet assured — we need to treat the deeper disease. This crisis occurred because bankers and shadow bankers (such as the hedge funds that are betting against Europe’s bonds) have too much power.

    Bankers had too much power when they invented the highly leveraged toxic securities that caused the collapse, and now they have too much power over the fate of entire nations as political leaders seek to clean up the mess that the bankers made. The ability of governments to finance their debts should not be dependent on the caprices of private speculators.”

    I have no idea about who is right and who is wrong, but this particular statement does ring true. Why is no one talking about allowing a few banks to go bankrupt, e.g. the Bank of America here in the USA? How can financial institutions be allowed to bet against entities that they don’t even own, which if I understand correctly is what “naked” credit default swaps are all about?

    I guess that in the passage “As is the case with the American Keynesians (think Paul Krugman), the error is that the error of certitude and vanity that come with their policy recommendations.” there is an extra “that”. It reads better either as “… the error is the error of certitude …” or “… the error is that of certitude …”

    Warm regards.



  5. I think there is no option but to print. It is just that the squabbles are about who’ll own the notes now and how they’ll be distributed. They have got to somehow backstop weakening of banks and sovereigns – The Fed stepping in may not be a bad idea, but that if it happens may actually trigger a serious market reaction (and likely negative).

    By going so slow on this, they have probably sent the market into a tail spin. I think we are coming to a point where no one is going to believe what is being said and Euro may unravel. This is a probable “eventuality” but I think is being hastened into certitude by institutional limitations of the way Euro is set up.

    I think the Euro is doomed. I am no longer sure of the resolve of Germany and France to fight to stop the blood loss.


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