No Kantoos, you’re not the only one who thinks it’s crazy

Kantoos is a German blogger who occasionally posts in English; he has a thoughtful response to an earlier piece by Ryan Avent here.

(I would add two comments. First, that when people talk about fiscal union they can mean many different things. And second, that we already have the politically noxious conditionality which Kantoos is worried about.)

23 replies on “No Kantoos, you’re not the only one who thinks it’s crazy”

I have been banging on about the free Gold mechanism on the Euro balance sheet for some time now .
Europe does not have any real monetory constraints , its the very opposite of the Gold standard.
It can circumvent the fiscal rules by giving Euro cash to the goverments.
This will not cause consumer inflation probally – it will just provide the money to pay down private debt.
The European continent is in relative trade balance unlike America , I sense forces from the US treasuary behind some of the Bundesbanks strange actions.
It has close links to the company don’t you know………..

@ The Dork,

I’ve been thinking about that a bit.

The ECB’s main mission is to keep inflation moderate at just under 2%.

During the property bubble billions of extra credit flooded into Ireland, yet inflation didn’t go through the roof. Property prices of all kinds did.

Is it as simple as saying that the rate of inflation should include property/rent inflation (assuming it isn’t). If it was, then we’d see that Ireland had gone through a period of massive inflation and now deflation.

@ Gavin

we had asset price inflation as opposed to consumer price inflation.

Asset prices are, by their speculative nature, often very volatile. While in theory it might make more sense to track inflationary hurdles to them, in reality you’d have a central bank reacting to a constantly fluctuating inflation rate. Imagine the central bank using the equity market to track inflation!

Consumer prices, however, are generally quite sticky, so there is a much smaller volatility embedded in them, and so easier for a central bank to watch and react to over a medium term basis.

I have always argued that it should be a FDIC type program as lender of last resort rather than the Irish goverment who should have been covering deposit insurance for Irish and other European banks, as is the case with the States.
The FDIC is funded by premiums that banks pay for deposit insurance coverage and from earnings on investments in U.S. Treasury securities.
It has allowed many banks to fail in the States, especially over the last few years. All depositors have been refunded up to 250,000dollars.
Angela Merkel said that countries would have to work out their own gaurantee scheme when the crisis broke. That was a pity.
I agree with this guy that this needs to be set up in the EU along with total central regulation of banks. After all the wholesale banking market in the Eurozone is very well integrated.
As for fiscal union, its really the next step in EU integration. Are we going to stop here at monetary integration? I’m not sure if we can. The alternative may be a step back to using a countires own currencies. I had a choice between the 2 I’d go with more fiscal integration.

@ Kevin, I would be interested to know your preference between breaking up the Eurozone, further fiscal integration and a ‘lost decade’ of austerity in the PIIGS. We have been told that breaking up the Eurozone could be very messy, it seems that austerity is not working as planned, and of course there are the valid reservations made above about the fiscal union.

Yes the 2% CONSUMER inflation target can be acheived during a near credit hyperinflation if wage levels are kept stagnant or fall – therefore the revenue can flow to the ECBs friends which are the holders of capital.
All CBs have been active in this since the 70s which experienced wage inflation through the labour unions of that time – but the monetory inflation of that period was created during the 60s of Vietnam & the Great society , intense cold war spending which dwarfs military spending of today etc etc.
The holders of capital during this 60s ,early 70s period lost out in their share of wealth – so they got the CBs to create dervatives and engage in a global wage arbitrage model using private credit to sustain demand from western workers who were not experiencing real wage increases and therefore could not sustain demand without credit.
That period came to end in 2006 ,7 ,8 – from then on the CBs especially the ECB have stuck countries & citizens with the malinvestment bill.

I remain convinced that much higher Gold is the solution in a debt based system , although greenbacks are a option for the more libertarian America and indeed surprisingly the Governor of the BOE who claimed at least he wants full reserve banks back again.
But for a currency union Gold revalued dramatically upwards is the solution if the debt is really internal and of course if they really own the stuff now given rumours of leasing to commercial banks.

Ail io says hang on to your bonds, the markets are divorced from reality.
Wow, crisis over…for now.

@ Gavin,

You are onto the right thing, but missing something…

From the 1930’s through the 1970’s the top tax rates in western economies were effectively maximum wages. From 1944 to 1962 tax rates for income over $250,000 ranged from 94% to no less than 89% in the US, and was still 70% in 1980.

This had the effect of levelling the income distribution so that as Elizabeth Warren points out it was fashionable to bemoan “my parents are so middle class”. Everybody was middle class.

Coupled with post depression financial regulation, asset price bubbles were non-existent. The market was neutered. Interest rates which are a very blunt instrument only had to target the real economy, as that’s where the money was distributed.

Also, post WWII, corporations paid over half again as much tax in the US as income tax. It was no lax regime.

@ Chris
I can’t find a reference to what you claim Chancellor Merkel said. Instead, when the crisis broke (Sep through to Oct 2008), the key reference I find from Dr Merkel is a Bild Zeitung interview on 2 Oct `The federal government cannot and does not want to issue a blank check for all banks, regardless of whether they have acted responsibly or not’. These views applied as much to German as to any other bank.

Later in Parliament on 15 Oct, she said the aid on offer “is about the protection of citizens, not the protection of banking interests … We’re offering something and they (the banks) have to offer something in return.” Etc.

At Colombey-les-Deux-Eglises, on 12 Oct, Dr Merkel said `Germany and France are united in that we need an agreed upon, coherent reaction in the euro-zone to the international financial crisis’. That was a clear invitation for the EU to work together.

I think a reading of the news at the time – and my memory – supports the notion that there was considerable 1) surprise 2) then consternation, at Ireland’s decision to guarantee all banks. Yes Europe should not have stood idly by. But Europe’s leaders had other crises on their plate at the time.

I think it also interesting to note the Irish guarantee was not just a late night decision, that immediately became irreversible. Before the legislation was passed into law, there was time for reflection. The guarantee was signed into law late on 24 October 2008, a Friday.

@ Gavin Kostick:
“The ECB’s main mission is to keep inflation moderate at just under 2%”

Don’t agree Gavin. I believe the ECB’s main mission is to engineer a situation where closer economic integration is the only option. So far, so good. I think Tricker can be looking forward to his banker’s bonus!

His argument for differentiated monetary policy is one I’ve pushed a few times. Both public and private credit can be subject to local counter-cyclical controls. The only issue is the detailed design. Leaving aside that local governments may have differing fiscal policies/sizes…fact is the regional real economies are different…and this ‘one size must fit all’ monetary policy is old fashioned nonsense.

@ Various people

Thanks for the various informative replies.

I suppose I was thinking that if every once every quarter 2000 – 2007 newspaper headlines screamed, “RAMPANT INFLATION RIPS THROUGH IRELAND: extreme winners and losers being created”, the situation might have been viewed differently.



Global influences created significant deflation in some areas for many years so:

a) inflation in other areas (eg rent, local services etc) could be allowed to rise significantly without the aggregate going up.

b) the yields required from investments to compensate for inflation fell as aggregate inflation did really (broadly) from about 1982 to date – so prices of assets went up.

There is almost a generation of observers who don’t appreciate the significance of b).

This Trichet guy is really losing the run….he wants the Italians to change their constitution before he will buy their bonds according to the IT. Silvio is scheduled to hold a press conference late and it will be interesting to see if the Italians are to be governed by the ECB (as we are) or Silvio tells him to take a hike. Silvio is obviously in a better position than us as he could blow up the entire system.

Reparations and Nazis are interesting historical allusions, but we could in time find that the governing system in the world’s most wealthy currency union is more dysfunctional and socially disruptive than the EMU’s.

Apart from the need for a more credible stability fund, the many critics of the current conditional bailout system seem to be vague as to what the preferred alternatives are, on a spectrum at one end of giving cash with aspirations similar to the Stability and Growth Pact to meet targets, to the current system, at the other end.

Wouldn’t it be nice if we all could have FÁS holidays?

@ Ceterisparibus

The ECB is hardly a eager hegemon of countries like Ireland.

“The ECB is hardly a eager hegemon of countries like Ireland.”

You have to wonder about democracy when the ECB can dictate constitutional change. Reuters are reporting that the Italians have agreed and the US is bouncing back on the news. No sign of Silvio though.

Whats wrong with striving for spare time , holidays etc ?
If the human species was not big into labour saving devices & techniques it would be still sucking marrow from some bones in the Rift valley somewhere.
Capitalism is all about avoiding labour as much as possible.
We have a gigantic trade surplus – who do you want to work for ?

@ Bond Eoin Bond

‘Asset prices are, by their speculative nature, often very volatile’

In this view, ir seems, speculation is not something which people can choose to do, or not to do, it’s something which is inherent in an asset. Assets are just made for speculating, just like forests are made for clear cutting, fish stocks are made for made for fishing out and tribal people are made for extinction.

If that is so, Greenspan would be proud of you. The Great Moderation was all about concealed inflation, and the sucking off of private gains from serial asset bubbles. All hidden behind the solemn po-face of central banking.

Please don’t take this personally, I respect your expertise, but how far do we go with the old speculation ? I have two kidneys so I only need one. Can we set up a kidney market and speculate in kidneys. (But not my kidneys please ‘cos the other one might pack in).

Very poor people are tempted to sell their spare kidney so they can feed their families or pay off a debt shark. Do we have kidney futures where we can collect the kidneys as we need them ? These things are already happening.

In brief, there is a thing called decency.

‘The Industrial Revolution was merely the beginning of a revolution as extreme and radical as ever inflamed the minds of sectarians, but the new creed was utterly materialistic, and believed that all human problems could be resolved given an unlimited amount of material commodities’

Karl Polanyi The Great Transformation 1947 p43

There are big differences between stock market and property volatility. Stocks are held by a small portion of the population while property is owned by up to 80% of the population in some countries. When stock prices rise the rich reinvest when house prices rise everybody spends particularly since the advent of the principal residence as cash box. Home equity lines of credit (HELOC) become readily available from banks as property values ramp up. When the less well off complain about house prices the government reduces the mandatory down payment from 20 to 5% and in some cases 0% and extends the term from 25 years to up to 40 years. The property binge leads to all kids of waste including Mercedes and BMW instead of Skodas and Fiats and second pied a terres in NIce and St Tropez. Ireland has learned the hard way about the resulting collapse and slow recovery. In most countries property binges are reined in by government imposing higher down payments and shorter mortgage terms. Especially onerous conditions are placed on purchase of second properties. Taking away the gravy bowl is never popular but most governments do act responsibly.
It appears that our bank regulators and statistics office do not know that banks have computerised records and reports that can be finely sliced and diced and produced daily.

Does anyone know if the Irish gov’t has made an attempt to actually gather the relevant data in a timely fashion. I would ask if they are expected to act on it but I would be expecting too much.

I heartily agree with Kantoos that the best solution is for the ECB to facilitate high inflation. Desperate times require desperate measures. Normally I would make disparaging remarks about a high inflation strategy and refer to it as the Italian solution where the cure led to more pain. In this case where central leadership is sorely lacking and the aid is too little and too late as stated by Kantoos, high inflation is the only solution. As the leadership of the ECB becomes dominated by representatives from high debt and high deficit countries it appears to me that high inflation will be inevitable.

At last it looks like fate will unfold as it should. Down the road in the long run interest rates will have to rise but in the long run we will all be dead and in the short run everybody has a right to a decent life.

@Ciaran, here is an example from Oct 7th 2008,

“German Chancellor Angel Merkel continued to oppose a European fund to rescue struggling banks, saying that each country needed to “face up to its own responsibility.”

I agree with almost everyone at the time that the Irish garantee was exagerated. I would have liked it if a common EU wide deposit garantee of up to 200,000 euros, FDIC type program was put into place for all of Europe. So Irish and German banks would pay a premium to a FDIC type institution, which would go towards helping out Irish depositors if Irish banks failed, rather than the Irish state. In the meantime the EU governments could have made up any shortfall with a common fund to protect depositors rather than state by state.

“Most finance ministers think the same way — that their banks are okay and that it’s everybody else’s that are the problem,” he said. “But if the share price of Deutsche Bank drops by another 30 percent, I think the Germans will change their minds.” – Daniel Gros Oct 2008

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