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Let me try to understand what you mean here: do you mean that this '3rd play' would be betting on the ECB forcing these countries into so much austerity that government revenues will collapse so much that they will be forced into debt write-downs, or even a Euro exit? Betting on the ECB fiddling while the Euro burns. I'm confused how this can be a convincing 'play'. Second question: what happens if it is not investors doing a 'play', but investors being scared of a default, or banks forced to mark to market, that sell their bonds to limit possible losses? Those parties will stay scared for some time, just by the volatile price movements, even after the ECB openly states it will support the prices. Is there a point of no return, beyond which even the ECB cannot stabilise rates at a level to keep Italy solvent?
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Can it be that a non-zero inflation makes it easier when relative prices of goods have to change, due to some structural or external pressure, or a political motive to increase or decrease in incomes? A low inflation makes it more difficult to change the relative level of sticky prices. A higher inflation makes adaptation of relative prices somewhat easier: it forces relative pricing of goods to be renegotiated, at the rate of inflation. Having to renegotiate all the time is a hassle, and takes away attention and energy from 'normal' productive processes. So too much inflation is obviously bad. But with changing scarcity of resources, or political pressure to improve social inequality, it may help to force the renegotiation of certain relative prices that need to be changed.
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Nov 23, 2011