Get the printing press ready!
Last week, the Federal Reserve joined all major central banks in the world to ease liquidity restrictions on banking facilities in an effort to ease credit markets from the strain caused by the European debt crisis. This was on the heels of Monday's report that large French businesses had to seek credit from China and Japan, and that European banks had stopped lending to each other.
Unfortunately, this appears as if it won't be enough to stem the coming crisis. There is too much supply of government debt in Europe (like the U.S. housing market in 2007) and the demand for that debt is dropping precipitously. This is causing bond prices to fall, banks to take writeoffs, and a vicious cycle of deflation feeding itself.
The only immediate term solution I see besides balanced budget austerity is a coordinated purchase of government debt by the same Central Banks that participated in the liquidity restriction easements. The reason that Central Banks act in coordination is to avoid disruption in the global currency markets which can cause their own liquidity problems.
Basically, what all the central banks are doing is devaluing their currency at the same time, to make the transition (ie money printing) more smooth. Their hopes are that the credit markets will unfreeze, allowing for businesses to operate normally, and economies to grow.
I want to delineate that I AM NOT advocating this move, but predicting it. I believe a true solution to this crisis is for all Euro-dominated governments to balance their budgets with elevated interest expenses on their debts included. Then, as rates, calm, these governments will turn surpluses based on the difference between the elevated interest expenses and the actual results. That surplus can be applied to the national debt, reducing it, and beginning a cycle of responsible fiscal actions.
Unfortunately, that solution makes too much sense for politicians to implement.
