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How the European Endgame Will Be the Death Knell For Modern Economics

user profile picture Gregor Macdonald Dec 05, 2011
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How the European Endgame Will Be the Death Knell For Modern Economicsby Gregor Macdonald, contributing editor
Monday, December 5, 2011
Executive Summary

Central banks are running out of options, leaving only increasingly desperate choices
Why Europe is most likely to begrudgingly print a whole lot more money soon
The harsh judgment day is approaching for mainstream economists
Why 2012 heralds the dawn of a new era of economic understanding

Part I: It’s Time To Give Up On Mainstream Economics
If you have not yet read Part I, available free to all readers, please click here to read it first.
Part II: How the European Endgame Will Be the Death Knell For Modern Central Banking
Central Banks Becoming Increasingly Desperate
Has Europe decided to print its way out of the crisis? The big-bang announcement last week among global central banks suggests as much. Unfortunately, the global US dollar swap solution only patches up the liquidity portion of Europe’s present dilemma and does nothing to address the solvency issue.
As readers know, I take the mildly heretical view that “money-printing” in our present debt deflation actually functions as a status-quo maintainer. It does not risk hyperinflation, but instead keeps social confidence intact — at low levels, of course — as the familiar institutions of Western economies are maintained. Hard defaults, on the other hand, especially hard defaults that appear out of the hands of either fiscal or monetary policy makers, risk a confidence collapse on a large scale.
In my view, hyperinflation typically begins with a broad rejection of a country’s sovereign debt. This is the initial threshold that is crossed on the path to currency rejection, as foreign holders exit first. Domestic institutions are more restricted, slower to react, often bound by investment mandates, and thus left “holding the bag,” as it were, on a country’s bonds. Eventually, domestic confidence in the currency itself is lost, as the public, having watched its institutions fail, rejects the currency.
In my view, Europe is still at very high risk for such a catastrophic outcome. No global central bank, including the European Central Bank (ECB), can change the fact that the…

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I have found the public remarks of the Bundesbank President, Jens Weidmann, particularly naive throughout this crisis because Weidmann clearly sees Germany as...
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