Austerity as a response to the recent rise in Italy’s borrowing costs is therefore exactly the wrong policy prescription...the only way to break out of the remorseless spiral of contagion is to take radical steps to fundamentally change market expectations about Italy’s debt market.
The European Central Bank is the only institution that has such power right now...
And given the ECB's crackerjack job to date...excuse me while I curl up under my desk for a while.
Catch 22.
ECB prints, which somehow is illegal acording to Germany,
gas and commodity prices go through the roof.
Italy can't borrow more in the open market.
Austerity lowers GDP.
Lower GDP can't keep up with what could be
never ending higher interest and principle payments.
No way out.
To big to fail.
To big to save.
Historical rhyme.
Posted by: Abner Doon | Nov 09, 2011 at 12:18 PM
George, are you saying that the 2008 commodity price surge was the result of the ECB "printing money"? If so, I disagree and would point instead to rising commodity demand in BRIC countries. Monetary policy, whether by the Fed or the ECB, has had little or nothing to do with recent commodity price movements.
But I agree with what I take to be your characterization of Italy's vicious circle. Its rising borrowing costs are unrelated to its fiscal position per se, but at this point the process starts looking like a bank run.
Posted by: Andrew Brod | Nov 09, 2011 at 02:09 PM
2008 Commodity surge was from ultra low interest rates and easily available consumer debt and supply and demand. 2009 and and 10a was from fed and printing and china stimulus etc... now, hopefully prices fall to non leveraged more normalized levels
Posted by: GeoHartzman | Nov 09, 2011 at 04:48 PM
I believe it's going to get real ugly
Posted by: GeoHartzman | Nov 09, 2011 at 04:51 PM
You're obviously welcome to hate the Fed, but you can't blame commodity prices on the Fed's actions. It's Econ 101: cost-push inflation. If it had been the Fed, then (a) we would have seen it in wages, not just commodity prices, and (b) the commodity-price surge wouldn't have petered out and in some respects reversed itself.
I agree that the Italy thing is going to get ugly. But not because of commodity prices.
Posted by: Andrew Brod | Nov 09, 2011 at 06:35 PM
The metrics in your econ book are wrong. They pumped money into the system to get more borrowing going, which didn't happen, so the money borrowed short term went into financial markets, which is where commodities etc... are traded.
Posted by: GeoHartzman | Nov 09, 2011 at 07:08 PM
I heard birds chirp as the sun rose this morning. Clearly, the birds caused the sun to rise.
Posted by: Andrew Brod | Nov 10, 2011 at 07:34 AM
Should we take from your deliberately backward geocentric avian causality that you believe that as a result of commodities rising in price that the Fed pumped money into the system?
Posted by: polifrog | Nov 10, 2011 at 08:49 AM
Nope.
Posted by: Andrew Brod | Nov 10, 2011 at 12:09 PM
So you agree with Geo?
Posted by: polifrog | Nov 10, 2011 at 07:22 PM
Nope.
Posted by: Andrew Brod | Nov 10, 2011 at 08:18 PM
be a teacher, andykins!!!
Posted by: sean | Nov 10, 2011 at 08:42 PM
I did that. The growth in the world economy right now is in the developing and emerging economies, and it's that growth, not the Fed, that's been pushing commodity prices around. In normal times, the Fed's expanded balance sheet would have indeed caused inflation (though it'd be a general inflation, not just in commodity prices). But these aren't normal times. The Fed's actions have been offset by low velocity of money, which is just a fancy way of saying that people aren't spending much and hence money is circulating very slowly.
Posted by: Andrew Brod | Nov 10, 2011 at 09:15 PM
Buy copper! It's cheaper than gold and almost all gone.
Posted by: Billy Jones | Nov 10, 2011 at 09:40 PM