Home > Economics, Finance > Did Trichet Read AZ on Friday?

Did Trichet Read AZ on Friday?

On Friday, in my morning after summary I wrote the following:

Get a solution to Greece.  The ECB has to do something and do it fast.  That does not mean they have to rush into making a rash decision.  There are several options that do not require a total dismantling of the Euro or an outright default by Greece.  The most attractive option I have read about recently was to have the ECB buy up some sovereign debt around Europe and print away part of the problem.  Sure it is inflationary, but so too is the collapse of the Euro.  Each day the price drops farther, the corresponding costs of goods in the Eurozone rise a corresponding amount.  Jean-Claude Trichet: GET IT DONE ALREADY!  This accomplishes several goals, and most importantly prolongs Greece’s ability to come up with real solutions and decisions not made in the midst of an emotional panic.  We all know how poor decisions can be amidst chaos and it takes hindsight to truly reflect and realize our mistakes.  Let’s not let that happen again (no need to rehash Lehman, AIG, TARP, etc.).

Seems like someone in Europe was listening!  Right now the most important thing was restoring sanity to these incredibly volatile markets.  Correlation was exceptionally high and the contamination was spreading to even semi-healthy subsets of the GLOBAL economy.  Global being the operative word here.  The risks were far larger than just Greece or Europe.  Some might say that the European Central Bank (ECB) opened up the “moral hazard” door for Europe, but that is not the case.  The moral hazard long predates this sovereign debt bailout package and it long predates the 2008 U.S. financial crisis.  Moreover, can we please stop calling this a bailout of Greece?  Sure Greece gets “bailed out” to an extent, but this problem is a two way street–the bailout was as much for Greece’s bond holders (and more realistically, all owners of assets on Europe and abroad) as it was for Greece itself.  Labeling this solely a bailout of Greece is missing the point and hints at a not-so-subtle agenda–to save creditors at the expense of debtors.

I just want to reiterate one of my longstanding themes at this point in time: deflation remains persistent on a global level and hyperinflation is not a certain outgrowth of the massive bailout initiatives undertaken in the U.S. and Europe.  Hyperinflation requires more than just simply printing new money.  With continued deflationary pressures in the private sector, the expansion of public sector debt is not the catalyst that many pontificators deem it to be.  Our situation is far from that of Weimar Germany’s, the classic example of hyperinflation.  There is just absolutely no basis to make such a claim.  Anyone who does has a policy agenda, or a trading book that they would like to talk up.  People should take any such talk with a grain of salt.

An additional point that deserves stressing right about now is that this past week demonstrates the prevalent fragility of credit markets and our economy at this point in time.  We are not at the point where this recovery is self-sustaining.  Yes there are particular subsets of our economy performing exceptionally well; however, fear and macroeconomic volatility remain at heightened levels.  The “extended period” language with regard to interest rates should remain a key component of near-term Federal Reserve statements as a result.  The risks are far greater in pulling that support too early than leaving it around too long.  The lack of any real inflation in the economy is just one more factor that adds credence to the Fed’s decision to maintain its aggressive monetary policy stance.  Let us all factor this reality into our investment decisions moving in the near to mid-term.


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