Can a Real Central Bank Save Europe?

The ability to print money, officially known as quantitative easing (QE), has allowed the U.S., British and Japanese governments to run whatever deficits they wanted and to offer their banks unlimited support without suffering the sky-high interest rates that are now driving the Club Med countries toward bankruptcy. Instead of raising money from private investors, these governments finance their public spending and deficits by borrowing from their own central banks. This means that the U.S., British and Japanese governments are actually much more solvent than their huge deficits suggest, because much of their debt does not really exist. They are an accounting fiction – an IOU from one branch of government, the treasury, to another, the central bank. The Bank of England, for example, is lending £375 billion to the British government in 2009-12, out of a total planned deficit of around £450 billion. The Fed’s $3 trillion balance sheet effectively reduces the U.S. government’s total debt by 20 percent, from $16 trillion to $13 trillion.