EDITOR: This article explores the implications of the voters in Greece, Portugal, Spain and others of the weaker Eurozone nations rejecting austerity and, as a result, the European Central Bank needing to turn to an expansionary monetary policy that would likely lead to inflation and higher interest rates. It should be noted that such an approach in the USA has not led to serious inflation. Furthermore, some economists and the editor believe that a rate of real inflation of 2% is essential for the USA and other nations to be able to deal with the massive soverign (governmental) and consumer debt. We encourage that the article be read in its entirety.
We search for solid information concerning the repercussions of Greece leaving the Eurozone (which is separate and distinct from the European Union.) To date all we encounter is talk suggesting ‘The sky is falling.’ Intuitively we doubt it.
BLOOMBERG: …Today, there are about 8.5 trillion euros ($11 trillion) of sovereign bonds outstanding in the euro area, and more than $180 trillion in derivatives linked to interest rates (looking at the notional value of those contracts and keeping in mind that “net”derivative positions tend to understate true losses in a full-blown crisis). These interest-rate derivatives — known as swaps– are held by large leveraged financial institutions (banks,hedge funds), or by pension and insurance companies with large, long-term liabilities. If interest rates rise, bond prices fall, and derivative contracts change in value (good news for people who have hedged into fixed interest rates and a potential disaster for those exposed to rising interest rates)…
This type of shock could produce instability at least as extensive as the aftermath of the collapse of Lehman Brothers Holdings Inc. in September 2008. It would lead to massive redistribution of capital and wealth, forcing some leveraged institutions into instant insolvency. Investors would flee first and check the details later.
For European politicians, the most important task now is to cover their tracks and blame others. Inflation is confusing. It also is an unfair tax on savers and a transfer of wealth to borrowers (assuming that interest rates can be held down or otherwise controlled, probably through nonmarket means). The [European Central Bank] will now be under great pressure to take actions that create inflation. This may bring the end of the euro. (more)
