Worrying about the wrong problem Post author By Kevin O’Rourke Post date April 13, 2009 At a time when the world economy is contracting at Great Depression rates, you wouldn’t think that policy makers would be worried about inflation. Categories In EMU, European politics, Fiscal Policy, World Economy 12 Comments on Worrying about the wrong problem ← Financial Crisis Reading → Arguments Against Nationalisation, Part 5: Lack of Government Expertise 12 replies on “Worrying about the wrong problem” Isn’t the worry that, once we begin to see “green shoots”, the historically low interest rates we now have, combined with new money pumped into the various markets, will cause massive inflation? The real issue in Ireland arises from the future likely use of interest rates by the ECB to control this inflation without regard for the heavy level of mortgage debt carried by Irish consumers. Are 5-9% rates on the cards for 2011-2013? This would be a far worse crisis than we are currently in as we must decrease our wages to european levels for competetiveness while we cannot so quickly reduce our personal debts. Put simply: could the average Irish mortgage be paid by the average German salary at 7% interest rates? interesting critique of the IS-LM model http://blogsandwikis.bentley.edu/themoneyillusion/?p=915 Economic sense from the Germans as always. Only Steinbruck didn’t go far enough. He actually thinks that inflationary policies and fiscal stimuli are actually going to solve systemic problems in the economy, which is of course, nonsense. Sebastian, I think George Reisman has a pretty in depth critique of Keynesianism and IS-LM analysis in Chapter 18 of his magisterial Capitalism. Free here: http://www.capitalism.net/ what’s wrong with trying to stave off a real future threat? Its foresight, something our governments would have done well to have in the last decade. no point in putting out a fire today if it will just cause another somewhere else! …and there’s no point in putting out that fire with petrol either 😉 http://krugman.blogs.nytimes.com/2009/03/20/fiscal-aspects-of-quantitative-easing-wonkish/ The following might be useful reading for Herr Steinbruck. http://www.voxeu.org/index.php?q=node/3444 Note, this is not recommended for our loyal Austrian following. Yet the most damning criticism of stimulus spending is and remains that it will NOT be inflationary, precisely because it will not even be effective. Most of the spending will just crowd out private sector investment and deadweight loss will crowd out the rest. We are already seeing this in reports from the UK that the PFI model is collapsing due to lack of private investment capital, while soveriegn yields continue to grow. @Graham Stull Correct! But our pollies must “DO SOMETHING!” Especially if it means spending money. Patronage is what counts and the economy can go to hell! The money will run out. What worries me is that the money will be sent abroad, via NAMA or whatever. It would make a great laundering device! Are there any practical law enforcement types reading this at all? We just seem to have careerist economist politicians spouting, with a few notable exceptions. The misery being doled out is colossal and is only beginning. Actually being effective might be better than more spin? All these abstract isms seem to be aimed at bamboozling the masses. Elites play games when they have the luxury of not working for a living. Using theory to spin and deceive, is an age old occupation for many intellectuals. Making money without labour is a role only needed in sophisticated inflating capitalism. When it becomes so sophisticated that the elite money makers fail spectacularly shows that something is rotten at the core. The intellectuals have been instrumental in pointing this out, and enabling money makers to make more on the decline, but most went along for the ride. The role of political sense and history, rather than doctrinaire theory, should be paramount in economics. The vanity that the economy can be different “this time” is believed only by those drunk on inflation. This leads to malinvestment just as much as the cheap money fuelling the inflation. Yes we saw what was coming and some took advantage, but even they did not predict the timing. Nor should we waste effort trying to do so for future episodes of bubble madness. If Socialism could not take control in the aftermath of the thirties, it certainly won’t do so now. Perhaps I should say that economic herdheadedness, realism, may be correct in staging these episodes: if the masses keep falling for them, including Warren Buffet apparently, there is evolutionary advantage in worsening them? Cutting economies into pieces is no worse than war, and less destructive of material wealth and human lives. Misery is multiplied but hangovers are part of the fun, n’est ce pas? […] the stimulus may not work. I think the Yanks have a greater worry re inflation than the EU. The Irish Economy Blog Archive Worrying about the wrong problem inflation might be good for ireland, reduces debt and makes us efficient more quickly, big boys […] Comments are closed.