The sudden rise in Italian borrowing costs in August of 2011 has had an effect on the country’s debt load. Higher interest payments are causing the debt to grow at faster rates. Since September of 2011 the debt has grown at a monthly rate of €9.5bn due to both higher rates and worsening revenue collection.
What can you do about this? Raising taxes won’t work. The U.K. tried this on high earners, and much of this income was moved to other jurisdictions actually lowering the amount collected.
Cutting spending won’t work either. The multiplier effect ensures that spending cuts feed through the system reducing everyone’s income.
Ultimately, Italy (or Spain) cannot be allowed to default. The only thing to do is to turn on the printing press and monetize the debt.
Germany may be standing in the way of money printing now, but it will relent because this is the least bad option. Printing will continue until the system crashes.