Sunday, November 13, 2011

Depression or Inflation?

Nice post by Simon Johnson at The Baseline Scenario: Johnson lays out neatly and concisely the choice facing Europe, and the world, at this juncture: monetization or depression.

The logic is that, as many others have been pointing out for a good while now, there is no feasible readjustment or recovery under the existing regime. Sovereigns will default unless bailed out, and Italy is too big to bail out unless this is achieved through the ECB printing money to buy up Italian bonds. And sovereign default would drag Germany down with the rest of us.

Johnson argues that there is a huge moral hazard problem here, but at this point we're just going to have to deal with that later. After all, what's the point of averting moral hazard by destroying the world economy?

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