The result is that savers are insulated and borrowers penalised.

That is, if you have a central bank that actively seeks to limit losses due to inflation…

Of course they took risk. I’m sure they didn’t think they were, but they were - if their bank went bust by lending to “reckless” borrowers then their savings were at risk. I’m sure many borrowers you consider to have been reckless were in the same boat - do you think they expected the property market/world economy to collapse?

Lack of inflation is good for savers but it is bad for borrowers. You (like many others it has to be said) seem to think savers are necessarily virtuous and borrowers probably sinful.

Any chance of a few snippets, preferably in local lingo, on references to Nero, milk, asses, senators, Roman epics and so on as local political discourse in Germany heats up ………. (-;

I noted before that Greece is going to be pushed very hard, and possibly out. Hans Eichel former German finance minister is quoted today as saying that it had been a mistake to admit Greece into the EZ.

@Michael Hennigan - I raised the fact that the German government would rather focus on other matters and that they have their own experience of bailouts through reunification and their own domestic bailouts of federal states significantly in the Sunday Business Post last sunday:
http://www.thepost.ie/newsfeatures/germany-reluctant-to-bail-out-the-piigs-47390.html

@sean o’ - I agree with Karl - there are huge downsides to leaving the Euro so I think you are wrong.

Instead it is a decision to restore real effective exchange rate flexibility.

The distinction is of upmost importance, because the costs to economies contained within a sub-optimal currency area will ocntinue to accrue over time. Greece, Ireland, Portugal etc. will continue over time to experience REAL economic adjustment in the absence of price flexiblity until such a time (if not when) as the constituent Euro countries suffer less from assymmetric shocks, have fully integrated labour markets and labour mobilitiy, etc etc.

“Okay, which liquidity traps have been cured with central bank purchases?”

How about much of the Western world circa 2009?

Tony Demello = Oliver Vandt = E65bn

Discuss.

“All attempts to have negative rates (through massive deficit spending for example…”

Massive deficit spending should drive interest rates up, not down. If the government is borrowing lots of money the demand for capital is increased, hence so too is the price of capital (i.e. interest rates). Obviously this is an “all other things being equal” principle - if private demand for lendable funds is plummeting (as is often the case when the govt engages in big deficit spending) then interest rates won’t rise. But deficit spending won’t cause them to drop.

ECB policy is too tight because Eurozone unemployment is 10% and inflation is well below the 2% target (which is itself arguably too low a target).

You “see no reason why old prudent german savers should suffer inflation…in order to devalue the debts of the reckless.”

What inflation? Also, the recklessness of borrowers is equivalent to that of lenders. Ultimately the lenders were your prudent German savers. In any case millions of non-reckless people (including Germans!) should not suffer unemployment because of anti-inflationary policy that borders on sado-monetarist paranoia.

I’m not arguing that fiscal policy is monetary policy. What I am arguing is that inflation is not always and everywhere a monetary phenomenon and that neither is deflation.

I am also arguing that curing the ills are a necessary condition for curing the liquidity trap, otherwise the liquidity trap will return, as has appeared to be the case in Japan once positive inflation was achieved and interest rate rises were attempted.

My understanding is that Friedman thought stimulus to be weak and temporary in effect, but that his acolytes thought it enough to bump an economy out of mild deflation. Initially that was what Japan was faced with.

If you are so certain, why don’t you wave your monetary wand and fix all our ills?

The paper opens on the line
“Europe is now moving ineluctably toward a bailout”
whereas
“Completing its monetary union requires Europe to create a proper emergency financing mechanism. ”
The two solutions are radically different.
There are other outcomes too. I for one don’t see why an “emergency financing mechanism” would have to be both explicit and unconditional
I’d have done exactly like what the Heads of State did do.

@ Kevin O’Rourke
You plant a quote from a non-English language newspaper article of no special value. And you certainly don’t indicate why it should be of value.
I read the article you quote from and it fails to stress the conditionality that JC Juncker attached to what he said…
ie. *IF* Greece’s measures are found to be lacking, Eurogroup will vote more on 16 March. That was always Eurogroup’s position.
Far better off going direct to the source, and transcripts of Ecofin press conferences are available.

Kevin, you launch interesting threads (IMF one for instance of a fundamental nature) but no follow up, no analysis on your behalf!

Liquidity traps can, and have, been cured with liquidity. Theory and evidence, for once, is pretty clear on this.

No matter how many times you say it, fiscal policy is not monetary policy. Look it up in your ladybird economics textbook.

Curing the liquidity trap is a necessary but not necessarily sufficient condition for curing Japan’s ills. You started by arguing that Japan’s problems had a simple and single cause: a bursting speculative bubble. Now you say it’s all a wee bit more complex than that. Well done. Progress.

Neither Friedman nor his acolytes would ever ever advocate stimulative fiscal policy. Again, I would refer you to Friedman’s writings. But that would need access to a library I guess.

Taking the piss is not the same as ad hominem.

@ALL
Also of interest.

http://vimeo.com/9501422

@All
Interesting article from Sept 2009 here:

“It (NAMA) is worthy of substantive debate — one based on factual analysis, not misinformed cynicism.”

http://www.independent.ie/national-news/call-spade-a-spade-and-bury-the-myths-1885338.html

I think it’s a stupid idea.

My point, which you chose to turn into a series of ad hominem attacks on me, is that you can’t cure a liquidity trap with liquidity. It doesn’t matter if the liquidity is deficit spending, it doesn’t matter if it is QE, it doesn’t matter if it is outright purchases.

Once you hit the zero bound, it is likely your economy is a bucket with holes in it. You have to fix the holes before you put any water in it. You can catch the water falling out the bottom and put it back in the top (deficit spending) or you can stick the bucket under a tap (printing), but it is not going to cure the holes.

Therefore, negative interest rates at the zero bound are irrelevant.

Supposing you flood the japanese economy with liquidity and generate wild inflation. Will that bring japanese asset prices and disposable income back into balance? Will it introduce workplace flexibility? Will it boost the reproduction rate? Will it reduce the resistance to foreigners? Will it fix the zombie banks? Will it do anything other than start another speculation that will collapse with the same distressing symptoms as the last one when you try and normalise interest rates and cut off the purchases?
(I’m not saying that one, some, or any of these are the problems with the japanese economy; they’ve all been put forward at some time or another and many more besides - the age-related one, being intractable, is popular at the moment…).

Apologies - that spat was both self-indulgent and tedious in the extreme. Sometimes I get fed up with the economic solecisms visited upon this blog. I have no role as policeman, nor should I even try. But I can’t resist one last dig:

@yoganmayhew
Precisely. The government of Japan has been following your policy advice for 2 decades - spending lots of money, financed by bond sales. Those cumulative bond sales have resulted in a debt/GDP ratio of 200%. Japan has had no growth for those 20 years and is still stuck in outright deflation. It’s called a liquidity trap. Monetary policy could have cured that deflation (it really is very very easy if you try) but they chose not to do so.

As an economics illiterate, can ye continue this to hopefully some point where I can figure out what ye are saying or even arguing over.

p.s. if ye need to slag someone off or think a point is too obvious so as to be patronising to either one of ye; you can address the comments to me

Ireland will not become a net contributor to the EC budget until 2013 — 40 years after joining and over €40bn in net aid.

Germany had its own problems following the 1 for 1 exchange of the D-mark for the Ostmark on reunification and later it had the difficult task of reducing generous state benefits.

It took 18 years from the fall of the Iron Curtain in 1989, for the first budget surplus to be recorded.

Each year since 1990, German taxpayers had pumped more than $100 billion into East Germany. Approximately $3 trillion had been spent on infrastructure.

While there is still a need for further reform of spending and tax, it’s not clear how running up bigger deficits will help the smaller countries.

The CAP remains a big farmers’ welfare program and the EU internal market in services is still only an aspiration.

Germany is the export powerhouse but reformed Med countries should still be able to prosper.

So you are telling me that if I, the government of Japan, borrow massively and pump that into stimulus packages of public works, it is not going to be inflationary in the short term? That if I increase social welfare spending, that that has no effect on money in circulation?

As noted by Edgar and others earlier, French banks hold ‘lion’s share’ of Greek debt - others German, Dutch, Swiss …….. hence the projection of ‘un gros problème allemand’ here and French sympathy for ‘l’effort .. considérable’ by the Greeks [and 5.25 in one year is massive] ….. intensely political stuff - if it wasn’t so serious it would be fun!