Thursday, July 28, 2011

Krugman Spots the Problems in the Eurozone

The European Central Bank continues to maintain a tight money policy, which if it continues will lead to an Austrian Business Cycle crash. None other than Paul Krugman has spotted the developing crisis:
For some reason events in European bonds markets aren’t making big headlines. But they should be: even as the GOP does its best to destroy America’s credit, things are falling apart, with a vengeance, on the other side of the Atlantic.

The interest rate spread between Italian and German bonds is now higher than it was before the big European rescue package was announced. Since the purpose of that package was, first and foremost, to calm markets before Italy and Spain sank into self-fulfilling debt spirals, this is very bad news.

Also, German interest rates are plunging. This does not reflect greater confidence in German solvency; if anything, investors are less confident in that respect, as the potential costs of a peripheral bailout start to get reflected in credit assessments of the core economies. What this is surely about, instead, is the growing sense that European recovery is sputtering out, and that the European Central Bank — which sets short-term rates — will eventually call off or even reverse its planned rate hikes, with rates staying low for a long time.
It remains to be seen what actions the ECB takes, but Krugman is correct about the facts. Though he goes on to call it the Japanification of the eurozone, when it is simply the liquidation of malinvestments caused by earlier ECB money printing. 

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