Obviously the European Central Bank (ECB) has nearly unlimited power to inflict suffering on the people of the Eurozone. And, from the looks of it they it intend to use it. Power unused is unless power, and all that.

“Have we delivered price stability? Yes, we have delivered price stability,” he said. “Are we credible in delivering price stability over the next 10 years? Yes. These are not words, these are deeds.”

However, lets suppose that the ECB is able to make good on its promise to stabilize the European banking system while simultaneously throwing as many Europeans on to the breadline as possible delivering stable prices over the next 10 years. What does that mean for America?

I’ll be the first to admit that I need to think harder and more carefully about international capital flows but I have to say at this point that it looks like a net positive for the US economy. As sad as that might be, I think its true.

Here is my reasoning.

So, core in my assumption is the power of the overnight lending markets to swamp what happens in other capital markets. European stock indices may collapse. Loans to European companies and consumers might be in the toilet. Yet, if the German and French banks are stable and the overnight lending rate is elevated then ultimately it will attract global capital.

This will cause the Euro to rise against the Dollar. Now US exports to Europe might still fall as European consumption decline.  However, holding capital flows constant this is going to put even more upward pressure on the Euro which means that US imports from Europe should fall even more.

Now I take the Fed at its word that it sees both inflation as too low and unemployment as too high and would like to stimulate the US economy but is finding a hard time reaching consensus on the proper tools.

Collapsing imports from Europe gives them a tool. It raises the price level in the United States by eliminating cheaper European goods and increases employment by having consumers switch to American made goods.

None of this is undone through monetary policy because its consistent with where the Fed wants to go.

Or looking at it through another lens. As the current account reverses direction dollar bills flow from Europe to America, while capital flows from America to Europe.

This provides monetary stimulus to America and monetary contraction to Europe. Both are consistent with the goals of the respective central banks and so no policy moves offset these flows.

In the end America grows as Europe falters.

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