by Warren Mosler, The Center of the Universe
With the Eurozone leaders meeting this week to address the resolution of the regions’ myriad of sovereign debt issues, attention is focused on the proposal to recycle national bank funds through the IMF to underwrite lending programs for peripheral EU countries with severe debt funding problems.
As a matter of chance, the euro’s lucky stars fall in line with the latest IMF musings.
Perhaps most important, operationally, the ECB lending to the IMF, which then lends to euro member nations, doesn’t count as ‘printing money’ in the Teutonic monetary bible.
When the ECB buys bonds, it credits member bank accounts on the ECB’s spreadsheet.
Those accounts count as ‘money’ while the bonds did not count as ‘money.’ So this is said to be ‘printing money.’
The ECB then offers different euro accounts that pay interest with relatively short maturities, also data on the same ECB spreadsheet. This is called ’sterilization’ because those deposits don’t count as ‘money.’
However, when the ECB buys SDR from the IMF loans to the IMF, and it credits the IMF account at the ECB with euro, that doesn’t count as ‘printing money.’
Nor does the IMF lending those euro to the likes of Italy count as ‘printing money’
And, while a bit of a stretch, the IMF was, after all, set up to address balance of payments issues.
And while overall the euro zone doesn’t have a balance of payments issue of any consequence,
it’s not wrong to say the euro nations in question do have balance of payments issues among themselves. So here’s one place in the world of floating exchange rates between nations
where IMF involvement can be said to actually fit its original mandate.
Furthermore, if there’s one force that can be trusted to impose austerity, it’s the IMF, of course.
Also interesting is that the IMF takes the credit risk for the loans it makes, while the ECB takes IMF credit risk on its balance sheet. This means the rest of world is assuming the risk for the loans to the national governments.
Lastly, while it triggers a massive relief rally, it’s just Bigfoot kicking the can way down the road, as the austerity continues to weaken the euro economy. The weakening now will get to the point of driving up deficits as GDP growth goes negative.
So bringing in the IMF helps Germany preserve it’s ‘max austerity’ image, kicks the solvency issue down the road, and all without the ECB ‘printing money’!
So now let’s see if it actually happens.
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About the Author
Warren Mosler is co-founder and Distinguished Research Associate ofThe Center for Full Employment And Price Stability at the University of Missouri in Kansas City. CFEPS has supported economic research projects and graduate students at UMKC, the London School of Economics, the New School in NYC, Harvard University, and the University of Newcastle, Australia. He is Associate Fellow, University of Newcastle, Australia.
Warren is the founder and principal AVM, L.P., a broker/dealer that provides advanced financial services to large institutional accounts. He is also founder and principal of Illinois Income Investors (III), specializing in fixed income investment strategies for 29 years. He is presently located in the U.S. Virgin Islands where he heads Valance Co, Inc., the corporation that owns the shares of III Offshore Advisors and III Advisors, the companies that manage AVM and III.
Warren has a degree in economics from the University of Connecticut. He has 38 years of experience in a variety of fixed income markets, including derivatives. He writes at his blogmoslereconomics.com and widely in the press and blogosphere. Warren is considered to be the founder of Modern Monetary Theory (MMT). You can read a longer bio here.