QE = Devaluing the currency....

lvader

Most of the problems we have today and this is especially true in the Eurozone could be resolved fairly simply, the problems are political. Italy for example is a wealthy nation, has a low deficit, has the 4th largest gold reserves in the world. If it could only borrow at the same rates as Germany, the US or Japan would be perfectly fine. Even Greece would be fine if they could borrow at 2%.

heathcote123

wotsthat wrote: »

What a lovely black and white world you must live in.

Have you considered that the extra money may lead to extra growth which has the potential to make Sterling a more attractive currency and therefore strengthen?

I think we're at the point where we've realised that spending more money than you have doesn't lead to eternal growth.

heathcote123

lvader wrote: »

The deficit in double the QE, that overall is deflationary. .

Having a deficit is deflationary?

heathcote123

lvader wrote: »

Most of the problems we have today and this is especially true in the Eurozone could be resolved fairly simply, the problems are political. Italy for example is a wealthy nation, has a low deficit, has the 4th largest gold reserves in the world. If it could only borrow at the same rates as Germany, the US or Japan would be perfectly fine. Even Greece would be fine if they could borrow at 2%.

Well it seems to be evading our 'brightest and best' right now.


As a seasoned representative of the finance industry, What is your simple solution to the eurozone problem then?

lvader

heathcote123 wrote: »

Having a deficit is deflationary?

Yes when at the same time you are also keeping spending flat or cutting. Basically the government has to collect money in the form of selling gilts. Gilts remove money from the ecoonomy because the money would have gone into supporting the economy.

lvader

heathcote123 wrote: »

Well it seems to be evading our 'brightest and best' right now.


As a seasoned representative of the finance industry, What is your simple solution to the eurozone problem then?

The solutions havn't evaded anyone, what they lack is political will.

In a single country you have the same currency and it's normal to have parts of the country that are economically better off than others. When it comes to paying for government run services and borrowing the money to pay for them (when you have a deficit) we don't say that the poorer parts of the country must borrow their own money and pay 4-5 X the interrest rate. We don't say they must cut back at a much faster rate because they can't afford it. (Partially because of the higher rates they have to pay)


This is essentially the problem in Europe, they have the same currency but they aren't one country and don't come close to acting like one. For the Eurozone to work there has to be much closer integration. This will take a long tme but a quick stop gap that would solve current issues is to create the Euro bond, i.e. instead of having bonds for each country with different rates you have a single bond with a single rate.

This isn't a new idea that I have made up, it has a lot of support in europe but it would require all the countries to agree. Ultimately though in times of crysis there is no political will to agree on anything, even when the answer is obvious.

heathcote123

lvader wrote: »

Yes when at the same time you are also keeping spending flat or cutting. Basically the government has to collect money in the form of selling gilts. Gilts remove money from the ecoonomy because the money would have gone into supporting the economy.

So is having a deficit deflationary when you are increasing spending?

Cutting spending is deflationary, but I don't see the link with the deficit. We've had one for a very long time, and it doesn't seem to have been deflationary so far.

heathcote123

lvader wrote: »

The solutions havn't evaded anyone, what they lack is political will.

In a single country you have the same currency and it's normal to have parts of the country that are economically better off than others. When it comes to paying for government run services and borrowing the money to pay for them (when you have a deficit) we don't say that the poorer parts of the country must borrow their own money and pay 4-5 X the interrest rate. We don't say they must cut back at a much faster rate because they can't afford it. (Partially because of the higher rates they have to pay)


This is essentially the problem in Europe, they have the same currency but they aren't one country and don't come close to acting like one. For the Eurozone to work there has to be much closer integration. This will take a long tme but a quick stop gap that would solve current issues is to create the Euro bond, i.e. instead of having bonds for each country with different rates you have a single bond with a single rate.

This isn't a new idea that I have made up, it has a lot of support in europe but it would require all the countries to agree. Ultimately though in times of crysis there is no political will to agree on anything, even when the answer is obvious.

Well, thats not much of a solution as far as I see it (not to say it wont happen). You seem to put this down to simple 'politics', but in reality, politicians have to (at least make an appearance to) serve the will of the people.

Now it's quite understandable that the Germans don't want to guarantee the debts of the greeks, irish, spain, italy etc and it wasn't what their people signed up to. So it seems a bit much a declare it a simple solution, as it tramples all over any kind of democratic rights left in europe.

You're seem to be suggesting a model based on the USSR, and lets face it, that didn't work out to well for the russians.

Do you honestly think that making the Germans guarantee everything is preferable to countries simply spending more money than they have on a eternal basis? or just it just kick the can down the run for another decade until they run up debts they can't afford to pay even at low interest rates? (and lets not pretend for a minute that goverments are not capable of getting round any deficit rules the eu lays down!)

The root problem is that the Euro was a crock from the outset, that only worked when times were good & no-one checked the accounts very carefully - no amount of band-aids is going to fix it.

As you allure to, maybe the solution is tighter integration & running the place like one country with rich areas subsidising the poor. Good luck in getting the Germans to vote for that.

lvader

Just because you have some deflationary pressures it doesn't mean that you will have deflation, just like QE which on it's own is inflationary doesn't mean you will have increased inflation or even inflation overall.

This has been my point from the start, you have to take into account the amount of gilts being issued, the number of gilts being bought by the BOE (QE) and government spending. The hope is to balance things out a bit.

The last time QE was used we didn't have high inflation, it was below the 2% target. Some argue that the current inflation is down to (UK) QE but there is no evidence of this. Current inflation is almost entirely down to the sharp rise in commodity prices and the increase of VAT. The UK on it's own has virtually no influence on commodities.

Are the sharp commodity prices down to US QE? Yes, this is very likely, as evidence there was a very sharp drop in commodity prices when the US QE stopped (Paused). This again suggests that QE only hs short term effects.

lvader

heathcote123 wrote: »

Well, thats not much of a solution as far as I see it (not to say it wont happen). You seem to put this down to simple 'politics', but in reality, politicians have to (at least make an appearance to) serve the will of the people.

Now it's quite understandable that the Germans don't want to guarantee the debts of the greeks, irish, spain, italy etc and it wasn't what their people signed up to. So it seems a bit much a declare it a simple solution, as it tramples all over any kind of democratic rights left in europe.

You're seem to be suggesting a model based on the USSR, and lets face it, that didn't work out to well for the russians.

Do you honestly think that making the Germans guarantee everything is preferable to countries simply spending more money than they have on a eternal basis? or just it just kick the can down the run for another decade until they run up debts they can't afford to pay even at low interest rates? (and lets not pretend for a minute that goverments are not capable of getting round any deficit rules the eu lays down!)

The root problem is that the Euro was a crock from the outset, that only worked when times were good & no-one checked the accounts very carefully - no amount of band-aids is going to fix it.

As you allure to, maybe the solution is tighter integration & running the place like one country with rich areas subsidising the poor. Good luck in getting the Germans to vote for that.

Goverments often have to do things that go against the will of the people, if the goverment is weak like it is in Germany they will have trouble doing the right thing.

USSR or Unites States of Europe? You can't have a single currency with every state being self serving. As I said that will take time and they have to find a solution in the short term.

Europe will either self destruct or work togther to find a solution. Germany wont allow the Eurozone to self destruct because they would be the biggest loser. There was a lot of talk about the recent German vote on the EFSF and how unpopular it was with the German people, it wasn't even close in the end.