ECB’s Jens Weidmann warns Printing Money for Bailouts may lead to Hyperinflation

ECB’s council member and chief of Germany’s Bundesbank Jens Weidmann says that printing money to bailout institutions may lead to hyperinflation.

From the Bloomberg, (bold emphasis mine)

“One of the severest forms of monetary policy being roped in for fiscal purposes is monetary financing, in colloquial terms also known as the financing of public debt via the money printing press,” Weidmann, who heads Germany’s Bundesbank, said in a speech in Berlin today. The prohibition of monetary financing in the euro area “is one of the most important achievements in central banking” and “specifically for Germany, it is also a key lesson from the experience of hyperinflation after World War I,” he said.

The ECB is under pressure to ramp up its bond purchases to cap soaring yields in Italy as governments fail to contain the two-year-old sovereign debt crisis. Weidmann also rejected proposals to use Bundesbank currency and gold reserves to help finance purchases by a special fund, saying this is another form of monetary financing.

Such a course “undermines the incentives for sound public finances, creates appetite for ever more of that sweet poison and harms the credibility of the central bank in its quest for price stability,” Weidmann said…

And in rejecting the expanded leveraged for the EFSF…

“I am glad that also the German government echoed our resistance to the use of German currency or gold reserves in funding financial assistance to other” euro-area members, he said. “Proposals to involve the Eurosystem in leveraging the EFSF -- be it through a refinancing of the EFSF by the central bank or most recently via the use of currency reserves as collateral for a special purpose vehicle buying government bonds -- would be a clear violation of this prohibition” on monetary financing.

Mr. Weidmann practically exposes the proposed leveraged scheme of the EFSF as concealed money printing operations as I have previously pointed out here and here

However my general impression behind all the ‘smoke and mirrors’ promoted as a comprehensive rescue strategy is that these measures fundamentally stands on the ECB’s monetization of government debt.

In short, the EU’s Bazooka bailout deal represents as an implicit license for or as façade to the ECB’s massive money printing program.

One would note that path dependency continues to influence the mindset of policymakers—Germany’s traumatic experience with the gruesome Weimar episode of hyperinflation has made German policymakers outspokenly resistant to money printing policies, whereas America’s harrowing experience with a decade long of economic depression has made US policymakers more accommodative to inflationist policies.

Nevertheless, the tallied ECB’s 183 billion euros ($253 billion) purchases of distressed nations’ assets has been said to be sterilized, albeit I’m not sure to what extent these has been (as EU’s money supply growth has been ramping up) and what will occur once these neutralization measures reaches its statutory limits.