David Zervos of Jefferies wins the award for the most radical suggestion yet to solving Europe: Unilateral bond purchases by the Fed.A mass exit from or a complete breakdown of EMU will be determined by the German stance on monetization. There have been hundreds of calls by non-German Euro area leaders, US politicians, academics and private sector business leaders to monetise. And if the Germans block it in Euros, the printing presses in Drachma, Punt, Escudo, Peseta, Lira and Francs will surely be fired up once again. In the end of course there will be more paper money in the world chasing the same amount of goods and services – that is the end game!! The path to the end game is of course messy! And let’s face it, we would all like to avoid “messy” if possible.
There is one easy way to do that – get the Americans involved. The US can force monetization at the ECB. If the Colonel deems sado-fiscalism as a global systemic threat (which it is), the Fed could act. The Fed has an account at the ECB in Euros. When the pesky Europeans borrow dollars from us on currency swaps to fund their insolvent banks we get this lovely account. And right now the
Euros just sit there! If things get messy we just jack the “unlimited” lines up, back up the forklift, and buy Euro area bonds. Lots of them. Say a trillion or two across all non-German markets. The Fed already owns nearly 100b in German and French bonds. And if anyone tries to default down the road, well we have a few hundred billion in European gold to confiscate in the basement of the NY
Fed. And if that’s not enough we just institute “annual fees” for NATO membership or start confiscating European assets in the US. If the shenanigans in Europe are going to mess up a US recovery, or even a presidential election, then there should be a serious US response. We did not spend all that money on the Marshall Plan just to have Europe blow up the world again! Good luck trading.
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