...Italian debt is 132% of GDP today, and if they enact their announced tax and spending policies, they will soon be looking at 150% debt to GDP. And rising.
For all intents and purposes, Italian Prime Minister Renzi has looked the ECB’s Mario Draghi in the eye and said, “I double dog dare you to stop buying Italian bonds, even though we are no longer keeping the agreement on deficits. You stop buying my bonds and allow my interest rates to go to market rates (which would blow Italy out of the water), and you will force us – your Italian countrymen! – to leave the European Monetary Union. You said you will “do whatever it takes”? What it is going to take is you buying my debt, no matter what we do. And if you don’t keep buying, it will be your fault that the euro collapses.” Side bet: Draghi blinks. Or decides to take a cushy consulting job in some big investment bank....
...The final speaker at Jackson Hole this year was Nobel laureate Christopher Sims of Princeton University. His paper was titled “Fiscal Policy, Monetary Policy and Central-Bank Independence.” It is actually a thoughtful paper that addresses some very real issues. It is worth reading, although I disagree with some of his conclusions. ...
He asks this question, and it’s an interesting one: “Why has monetary policy been ineffective in the US, Europe and Japan?” He continues:
The answer to this question should be mostly clear from the previous section’s discussion. Reductions in interest rates can stimulate demand only if they are accompanied by effective fiscal expansion. For example, if interest rates are pushed into negative territory, and the resources extracted from the banking system and savers by the negative rates are simply allowed to feed through the budget into reduced nominal deficits, with no anticipated tax cuts or expenditure increases, the negative rates create deflationary, not inflationary, pressure.
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