This story was abstracted from a long phone interview a couple of days ago and is reasonably well reported.
It was a follow up to my last interview with them when the euro was 119.
At the time all forecasts there were seeing were for it to keep going down.

Unreported was the part of the discussion reviewing that the traditional export model keeps fiscal tight enough to keep domestic demand relatively low, and at the same time buys fx to prevent currency appreciation and keep real costs down to help the exporters. And that the ECB has an ideological constraint against buying US dollars, in that building dollar reserves would give the appearance of the dollar backing the euro, when they want the euro to be a reserve currency.
(And interesting that they kept my name out of the title.)

Austerity Will Push Euro to $1.50 by Year End: Economist

By Antonia Oprita

October 7 (CNBC) — The euro will keep rising and will likely end the year at up to $1.50, as the European Central Bank pursues a highly deflationary policy, despite buying euro-denominated bonds, economist Warren Mosler, founder and principal of broker/dealer AVM, told

Mosler, who predicted that the euro would bounce back towards $1.60 in June, when the single European currency was trading at around $1.19, said there was nothing to stop the euro’s [EUR=X 1.3965 0.0036 (+0.26%) ]appreciation versus the dollar, short of a policy response from the European Central Bank.

“If it (the euro) keeps going at the rate it’s going, it could go to $1.45-$1.50 by the end of the year,” he said.

The ECB started buying government bonds belonging to distressed euro zone members such as Greece, Ireland, Portugal and Spain to ease market concern regarding these countries’ ability to fund themselves and some analysts have said the measure may be inflationary.

But the policy is, if anything, deflationary because it is accompanied by tough austerity conditions, Mosler said.

“They’re causing a shortage of euros by requiring governments to rein in spending. It’s a highly deflationary move and that’s what is driving the euro higher,” he said.

“Right now the ECB and the euro zone are tightening up their supply of euros.”

Billionaire investor George Soros accused Germany earlier this week ofdragging the euro zone in a deflationary spiral by promoting austerity measures.

Many analysts have said that the ECB is promoting policies that go hand in hand with the euro zone’s biggest member’s fears of inflation.

One element of uncertainty is the ECB’s willingness to continue to buy government bonds, Mosler warned.

“No-one knows how long the ECB are going to do it… they could change their mind tomorrow,” he said.

But market speculators, while being able to attack the euro zone’s weakest members, will not be able to speculate against the central bank, which can print money and distribute it among its members at any time, Mosler said.

“The markets cannot punish the ECB. They can’t punish the issuer of the currency,” he said. “When you’re the issuer of a modern currency, you can credit an account and there’s nothing the market can do about it.”

He reiterated his view that the ECB has now de facto shifted to deciding fiscal policy for the countries in the single currency area, since their help by buying bonds comes with conditions regarding cutting debt and budget deficits.

Another factor behind the euro’s appreciation will be China’s announcement that it will buy Greek debt, which was hailed in Europe as proof of confidence in Greece’s ability to pay its debt.

“China would like nothing more than to buy euros – they’re doing it through buying Greek debt. That’s just one more force for a stronger euro,” Mosler said.

2 Responses

  1. Good call.

    The headline bet has to be hedged because it is near impossible to determine with certainty what choices the central bank and government will make.

    This is a prediction of political policy, which is less certain, and then its implications which are more certain. If you believe those in charge actually know all or most the implications of their choices, it appears very dangerous people are in charge.

    Dangerous policies are those that destabilize the status quo in a direction that makes things worse for most people.

    The only way these people will continue in their dangerous policies is to keep everyone (but themselves?) ignorant.

    Perhaps we need MPT, modern political theory, that can implemented through MMT.

Leave a Reply

Your email address will not be published. Required fields are marked *