The Ability to Use the Printing Press to Inflate Away Your Debt Gives Investors More Confidence in Your Bonds
Yes, it is bizarre. But it's twue, it's twue!!
Paul Krugman explains why and how:
The Printing Press Mystery: John Plender at the FT seems mystified by something that has become obvious lately: bond vigilantes are only going after countries that no longer have their own currencies. He writes:
The underlying logic is that no country defaults on its domestic bonds if it retains the right to set the printing presses in motion. Yet it seems counter-intuitive that bond markets, with their traditional fear of inflation, should punish a country for not being able to debase its currency.
Oddly, he seems unaware of the pretty good explanation offered by Paul DeGrauwe…. Part of the answer is that countries on the euro are stuck with a severe competitiveness problem that can only be resolved with grinding deflation, making their debt problems worse. On top of that… countries without a printing press are subject to self-fulfilling crises… fears of default, by driving up interest costs… trigger default — and… once a country crosses that line it will probably impose fairly severe losses on creditors. A country with its own currency isn’t in the same position: even if it is pushed into some inflation, there’s no red line that need be crossed.
That’s why America isn’t Greece; and why the UK is being foolish in imposing eurozone-type austerity on itself.