The euro will not dissolve and the US Treasury is virtually interest-free and can borrow as much money as it wants. This is because some central bankers say so. That is the true Banks Power.
But businesses aren’t hiring, consumers aren’t spending, governments are deeply in debt, and American workers are trying for years for the same central bank to improve things. Despite this, I have given up searching for useless jobs. That is where the power of central banks reaches its limits.
The European Central Bank and its US counterpart, the Federal Reserve, can generate and distribute money by lending it. This, coupled with the ability to set target levels of interest rates, is effectively controlling the price of the money they generate, and how central banks affect our daily lives. If you run out of money and it is too expensive, it will hinder your economic activity. When money is cheap and abundant, consumers and businesses are free to borrow and spend, stimulating demand and creating jobs. But if too much money circulates, inflation will occur rapidly. Central bankers try to balance.
Currently the system is not working well.
On both sides of the Atlantic, governments have developed a huge desire for low-cost money. Only the central bank can meet with the ability to create funds from thin air and lend at selected prices.
Governments with budget deficits usually only issue bonds that pay fair interest rates, and investors, from private citizens to foreign central banks, believe in a healthy government that controls a healthy economy. So buy a bond. You can repay the money. When confidence in the government’s creditworthiness declines, investors demand higher interest rates or bring money elsewhere.
This happened before Greece, Ireland and Portugal sought relief from their Eurozone partners. This is still happening in Spain, which has so far sought limited assistance to the banking sector, and in Italy, which has not so far sought assistance. Italy and Spain are the third and fourth largest euro economies after Germany and France. Providing them major support goes beyond the resources of all existing institutions except the ECB.
So it was big news that ECB Governor Mario Draghi declared that his banks were ready to buy unlimited purchases of Spanish, Italian and other government bonds to keep government borrowing costs low. Draghi promised that the central bank would “sterilize” this massive intervention by withdrawing similar amounts of cash elsewhere in the financial system to prevent inflation. He also said countries must seek help from the European Financial Relief Fund to benefit from the artificially low interest rates generated by banks. The fund has the power to impose austerity and demand economic reforms that the Diet has hesitated to create on its own.
“We say the euro is irreversible,” Draghi said. “Therefore, the unfounded fear of reversibility is just that, the unfounded fear.” (1)
However, as Bloomberg reported, Draghi also provided a realistic assessment of the power of the central bank to insist that the government must undertake reforms to make efforts to save the euro’s work. .. “There is no central bank intervention, no central bank intervention, and it is actually effective without simultaneous government policy measures,” he said. (2)