Europe’s Italian Economic Problem

Warren Buffet famously said that only when the tide goes out, do you discover who has been swimming naked.

In Europe, the tide of very easy money is about to go out at the very time that the Italian economy has been swimming naked. This could constitute a major problem for the global economy which is in no position to weather a sovereign debt crisis in a country as systemically important as Italy.

With European inflation now running at a record 7.5 percent, the European Central Bank (ECB) is signaling that soon it will be turning off its monetary policy spigot to fight the inflation beast. Over the past two years, that spigot has flooded the European economy with around $4 trillion in liquidity through an unprecedented pace of government bond buying.

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