Nick Cohen is gloomy here.
Roger Bootle gives a market perspective on potential endgames, one of which echoes Paul Krugman, here.
And here is Kantoos, echoing Olivier Blanchard, Ken Rogoff, and many others.
To those who think that an inflation rate of 5%, say, for a few years, would mean the end of the world, one has to ask: is this really the worst potential scenario that you can envisage us facing in the years ahead?
84 replies on “Some eurozone readings”
“To those who think that an inflation rate of 5%, say, for a few years, would mean the end of the world, one has to ask: is this really the worst potential scenario that you can envisage us facing in the years ahead?”
Well, first you have to engineer it. There’s a piece in the Observer today saying that QE has increased income inequality. The money pushed in has gone mostly to profits.
Secondly, once you have inflation, you have to have price rises to match it. There is little evidence that internationally traded sectors have any traction to generate pay rises.
Finally, you have to stop it.
So, let me rephrase your question “is a policy explicitly designed to increase income inequality the worst potential scenario that you can envisage….”
Yes, yes it is.
edit: for “price rises to match it” read “pay rises to match it”, sorry…
The UK has almost 0% interest rates, the BOE has conducted QE equivalent to almost 15% of GDP, inflation is heading towards 5%…yet GDP is even further below its pre-crisis trend than in the case of the Euro area…and the prospects for growth are still pretty gloomy
Kantoo makes a lot of sense. I was surprised by the graph. I had no idea that the EZ GDP had fallen by 10% since the crisis started. Is that correct?
He is correct about the damage done in the crisis by the ECB’s inflation stance. To use my own analogy:
‘The house is in flames but you cannot use water hoses because the downpipes might not be up to standard.’
The Roger Bootle endgame would not be pretty.
There is a way for the ECB to get ahead of the curve. It has probably come up before. Set out a program for bond buying across Europe with severe haircuts: Half of the haircut continues to be paid by the country to the ECB.
Greece 60%, Ireland 40%, Spain 20% etc. Replace the country bonds with Eurobonds. At that level of haircut the Eurobonds should be secure.
The effective national haircut would be half of the ECB buying haircut.
Surely it is possible to manage a QE program, that does not put money into the hands of corporates?
EZ GDP fell by about 5% from its pre-recession peak to the trough in the second quarter of 2009. It has since recovered, and in the year to the first quarter of this year rose by 2.5% (GDP in the UK rose by 1.6% over the same period). GDP is still, though, well below where it would be if it had continued to increase at its pre-recession trend rate of growth, rather than fall sharply in 2008/2009…
An inflation rate of 3-4% would be an ideal way of singeing bondholders after the event.
“Surely it is possible to manage a QE program, that does not put money into the hands of corporates?”
Then it would no longer be QE. The idea of QE is to maintain asset values by becoming a purchaser of last resort. Guess who owns the assets.
“An inflation rate of 3-4% would be an ideal way of singeing bondholders after the event.”
Yeah, right. Until the next bond auction. And then lagging for five years after the inflation rate has moved down.
I despair at the search for magic bullets.
As Kantoos points out, inflation is devaluing money/savings. The primary responsibility of monetary policy should be preserving the value of money, thus, wrt monetary policy, inflation is immoral and impermissable.
Though of course financial/macroeconomic stability trumps vanilla monetary policy.
My question is: what European actor is in charge of financial/macroeconomic stability ?
‘I despair at the search for magic bullets.’
So is there any amunition at all to be used? And something to fire it with?
‘My question is: what European actor is in charge of financial/macroeconomic stability ?
Answer: There is NO ‘actor’ in charge. Hence, next step up in systemic evolution of Europe is to create an ‘actor’, institution more likely, with the ‘power’ [political, economic, military] to take charge.
Blind Biddy now has a surplus of bazookas; and loads of ammunition.
It might be a good idea to keep an eye on the weekend press in the eurozone, to see which way the wind is really going to blow… eg http://www.welt.de/wirtschaft/article13543028/Deutschland-wird-zum-Zahlmeister-Europas.html and http://www.ftd.de/politik/europa/:schuldenkrise-schaeuble-knuepft-eurobonds-an-radikale-reform-der-eu/60091228.html
I am quite surprised. No mention of the moral hazard risks in the normally circumspect German-speaking press. I’d love to throw the clock back to Sep 2008. If the EU etc from that point on had taken measures ensuring that is clear that everyone had to sink or swim. I think everyone would still be swimming today. We seem to have forgotten that before the euro, there were times when European Treasuries had to take very tough short term measures to reinforce their coffers, and somehow they did so.
You have got to be kidding! Wouldn’t we see an end to all values and usher in the apocalypse if we temporarily reverted to Volker/Thatcher/Reagan norms on inflation.
(Maybe somebody should suggest this to the ECB. I just accepted the bizarre ECB policy as a kind of weird natural aberration until I heard Kelly’s recent talk — it now makes much more sense.)
in terms of Ireland, aren’t all the assets actually owned by massively indebted consumers/homeowners, or by a massively indebted state, and so it is they who would benefit from any QE (or more correctl,y an inflation-targetting policy)?
re ‘No mention of moral hazard…’
I imagine that the Daniel Gros quote from the Die Welt article below is now a far more worldly threat to ordinary Germans than the rather ephemeral ‘moral hazard’. This is his estimate of a disorderly collapse of the Euro.
@ Joseph That’s right. That’s why policy now seems to be taking quite an aiffrmative tack, as today’s articles above from the German press demonstrate.
@ Joseph Ryan
Notice that the graph displays NOMINAL GDP, not real GDP.
“in terms of Ireland, aren’t all the assets actually owned by massively indebted consumers/homeowners, or by a massively indebted state, and so it is they who would benefit from any QE (or more correctl,y an inflation-targetting policy)?”
You might want to think about the juxtaposition of “indebted” and “owned”… the ‘wealthy’ would do well to think about it too…
“So is there any amunition at all to be used? And something to fire it with?”
Same as last time. Infrastructure spending from the EU. Maybe tendered to the EU rather than locally, but artificially favouring employment in the locality. Tax to be paid as part of the grant to the national government at an EU-wide set rate with payments to contractors tax free (and so end salaries). This is partly to diminish the black economy element, by making it all black, but mostly to provide stimulus to the government immediately on grant approval.
Paid for how? Financial services tax… EU wide, no exceptions. Oh and a tax on capital flows into/out of the eurozone. Enough to discourage wild flows for leveraged bets.
PS The rest is the stuff that we should already be doing – as Paul Hunt and many, many others have identified.
Also I’d add another element to the inflation debate. We all well know that there is suspicion of just what is in a CPI, for example some of these goods are very different economically, as well as the CPI only representing the mythical average consumer.
However from (say) my recent grocery shopping, I notice more price volatility/variation. The same goods are available much cheaper for price sensitive customers. Thus I think proper inflation analysis requires metrics such as standard deviation. Because the moral implications of a ‘pure’/monotonic/low SD inflation rate of 5%, are quite different to a 5% one with higher SD.
Given the ECB’s mandate for price stabiity, I’m surprised they haven’t bothered their arses to gather more detailed micro price data.
Note also that the Green Line is kantoos graph is “deviation from trend”, not the actual movement of nominal GDP.
Of course, trends based on past performance contain no guarantees into the future. Given we have just had a financial crisis largely centred on the eurozone, it is not surprising that growth is underperforming trend. That is what financial crises result in; more so sovereign debt ones.
So I am not sure what the point of the graph is other than to have dramatic lines on it.
The lines would be just as dramatic if you just did growth instead of deviation from trend growth – the green line would be bobbing around 4% instead of 0% from 1996 to 2009 and then would plummet to -6% rather than -10%.
So I think the dramatic lines illustrate a dramatic reality!
“To those who think that an inflation rate of 5%, say, for a few years, would mean the end of the world, one has to ask: is this really the worst potential scenario that you can envisage us facing in the years ahead?”
Who are these people who think that 5% inflation for a few years would mean the end of the world?
If they think it would mean the end of the world then surely it probably is the worst potential scenario they can evvisage us facing in the years ahead.
Most rational people would agree that the end of the world is a fairly unpleasant prospect, wouldn’t they?
Do these people exist or are they straw men?
And on the distributive consequences of inflation (not that that should necessarily be the main consideration of monetary policy, since we have other mechanisms for redistribution): Eoin Bond’s point is on the, ahem, money. Inflation helps debtors and hurts creditors (assuming nominally fixed contracts). Presumably the poor are more burdened by debt and the rich are more likely to be creditors.
Ireland and Spain troubles are mainly self -inflicted .The long term interest rates were just as low in the rest of Europe without creating any real-estate bubble .There is no possible return to stability without a return of real-estate prices to a level that is commensurate with the private income of the Irish. To ask for an easy money policy which would reflate the prices of real-estate is asking for the creation of a new bubble ,with the same results as the previous one.
The last thing that France and Germany need right now is inflation ,why would they ask for it?
“Inflation helps debtors and hurts creditors (assuming nominally fixed contracts). ”
This is only true if wages rise for debtors.
Returning to the substantive issue raised in the blog entry at first, it is easy to call for higher inflation, as argued by the IMF’s Blanchard (already for some years now), and today the “young” German PhD (as Kantoos describes himself). It is quite another matter to manage the consequences of loosening up on inflation targets. And it is yet another matter again to be able to even engineer higher inflation and/or demand. The experience of quantitative easing in the UK/US illustrates that.
Of course, in a 300-word blog entry, you can’t solve problems quite so easily, let alone cover the different facets of the debate. But we could expect some references from those who argue for easier liquidity conditions as to research on what the impact of such policies might be for the eurozone. We need more than just affirmations.
Kantoos does note that we have asynchronous business cycles. Indeed yes. It is ever more striking how different the economy feels as seen from Paris, Brussels or Frankfurt than Dublin. Some areas definitely feel very buoyant here, e.g. housing. As I’m not sure how Kantoos’ solution for asynchronous business cycles, “get it over with quickly”, actually helps (that is good advice for spendthrift sovereigns though).
>Implying that most people have public sector pensions linked to salary levels and paid out of current government incomes.
(Meme use deliberate)
I got the following from a translation of the article you linked…..”The debate over eurobonds wants to only lead Germany according to world on Sunday if the crisis leaves only two alternatives: the breakup of the currency community apart or one more strongly on Brussels level co-ordinated financial and economic policy. Then Germany wants to out-act in response for such a financial transfer concessions of the euro-partners. Eurobonds could provide that in its sights the financial markets guessed/advised States of discharge with the admission from credits to”
It seems the translation might be in line with the thinking (smiley)
In my view you are confusing two things: (real) growth and aggregate demand. The graph in my post shows the latter, and here it should be the central bank’s role to provide a stable growth. That is my argument.
You are referring to growth, for which there certainly is no guarantee that past performance will result in a similar performance in the future.
“In my view you are confusing two things: (real) growth and aggregate demand. ”
Since you infer aggregate demand from the historical growth of nominal GDP, I don’t see the difference (but then I am an ignorant amateur 😀 ). Once again, past performance in the growth of aggregate demand does not guarantee similar performance in future, since it is determined by nominal GDP growth, not by changes in the distribution or spending power of GDP (i.e. who gets the GDP growth and what they do with it).
Having relooked up the definition of aggregate demand, I don’t see that it is anywhere referenced such that you can measure it in terms of deviation from trend. The green line just doesn’t make sense to me.
There are two things that are missed by just looking at GDP – debt levels and external deflationary influences (less demand consumes the same amount). If you only look at demand in terms of fixed money terms, you miss out on the effects of productivity and technological change. If you miss out debt, you miss out the fact that it is drawing consumption (demand) from the future. Eventually the bill needs to be repaid.
Essentially, I believe you are arguing the monetarists case for them by using their own mistaken methods of measurement.
Growth of nominal GDP is not the same as real growth. Growth of nominal GDP (aka aggregate demand) could be all inflation, i.e. 4% growth of NGDP with 4% inflation = 0% real growth. So the difference between real growth and aggregate demand is inflation.
Kantoos’s graph doesn’t measure AD as the deviation from trend, it just posits a trend in growth of AD (4%) and then shows a (fairly dramatic) deviation from that trend in the past two years.
@ Ciaran O’Hagan
“…it is easy to call for higher inflation…. It is quite another matter to manage the consequences of loosening up on inflation targets. And it is yet another matter again to be able to even engineer higher inflation and/or demand. The experience of quantitative easing in the UK/US illustrates that.”
You seem to simultaneously be saying that there will be difficult-to-manage consequences to a looser inflation target and that it will be difficult to achieve higher inflation – isn’t this a contradiction? I’m assuming the difficult-to-manage consequence is excessive inflation?
I’m not sure QE provides a test for the capacity of central banks to achieve higher inflation, since my understanding is that the advocates of a higher target expect that the mere announcement of this higher target (provided it is credible – a “credible commitment to irresponsibility” as Krugman playfully puts it) will itself influence market expectations of inflation, and hence inflation itself. I think Krugman’s lukewarm assessment of QE, for instance, is based on his judgement that it would be of limited effect unless the Fed also raised the inflation target.
Head of World Bank says some euro zone countries moving from drama to trauma..”.
Zoellick is right, the demented cacophony from European ‘leaders’ , with their short term ‘solutions’, narrow jingoism, and general reality avoidance has rendered them incredible.
This is why their policy options are narrowed, options that rely on future actions, will no longer be believed. Fudges will be spat out by the markets. The latest ban on short selling is a futile action, and worse still is not even being used ads ‘breathing space’ to trash out a credible and viable solution.
At this stage, I really do rather hope that a shadowy group of financiers and industrialists might exist. Perhaps ‘the Bankerati’ might hire a few secret agents to
1) Carry out a commando neutering orf Berlusconi
2) A similiar surgical intervention with Sarko, to increase his height by 6 inches
3) Administer industrial quantities of LSD and esctasy to Merkel, in order to de-robotise her
4) Administer radical behavioural therapy to Trichet to have him lose his inflation obsession
PS I agree with the analysis of Nick Cohen, Roger Bootle and Kantoos. It is the solutions I have a problem with. I believe that inflation in a time of already expensive commodities and low-wage industrial production competition will lead only to stagflation – we will not get real growth and nominal growth will be composed of price inflation – with no accompanying wage inflation.
Eurobonds without rules will not work. Look what Signor Tremonti is saying:
“Italy’s economy minister has said that a solution to the euro zone’s current debt crisis would be the creation of euro bonds, according to a report published Saturday.
Reuters reported that Giulio Tremonti said that such bonds would have prevented the continent from reaching the point it has, with Greece, Ireland and Italy among countries pushing through austerity measures in the hope of avoiding sovereign defaults.”
Eurobonds without rules would simply be more debt on already indebted economies. So, much as it may pain us to lose sovereignty (not that we have much left to lose anyway), Herr Schauble is right.
Funded (i.e. backed by tax) eurobonds to allow rollover at low interest rates for long durations and to invet in capital spend (excluding residential) might provide a real boost to growth as well as providing an outlet for capital looking for a secure home – of which there is an unbalanced (there are plenty of insecure homes) excess.
Perhaps the Bankarati (nice one!) have decreed, in conclave, that modest inflation is esssential to rescue their asset values, ensure their incomes increase, and that ‘growth’ can be sidelined, to be resumed some time later. They, and their sychophantic political supporters, have pawned their respective taxpayers to backstop their debts. Yep. inflation (in money and prices; but wages?) it will be.
“…nominal growth will be composed of price inflation – with no accompanying wage inflation.”
Why do you believe this?
Because I don’t see where labour will get wage traction from. That prices are rising might be enough, if there wasn’t imported competition and if input prices weren’t also rising. As it is, the downward pressures on wages are high.
“Head of World Bank says some euro zone countries moving from drama to trauma..”
Personally, I don’t like Zoellick – the guy’s a neocon of the highest order who would gladly see things like democracy taken off the table. But that aside, this speech would have been written for him – he didn’t come up with it himself. Zoellick is just a mouthpiece.
I’m scared about how things may turn out over the next year or so. Really scared. I suspect that eurobonds will bring a lot of consequences with it and I suspect if Sarko gets his way, that’s where we will end up. We are probably in for a few more ‘crisis points’ between now and then though that will make this week on the markets just look like the preamble.
The potential outcomes of what’s going on out there range from more control from the centre (whether that’s Frankfurt or Brussels I’m not sure any more) and further loss of sovereignty, to a complete collapse of either the Euro or even the global financial system if some of these muppets in government don’t start finding some better, longer term solutions.
That said, there’s a huge amount of cash washing around out there that may well step in from time to time when it looks like there are bargains to be had but keep those trailing ‘stop losses’ in place lads. Things could turn on a sixpence.
@ Ciarán O’Hagan
I posted the links you mention on the thread “Democracy, the euro, and the nation state”.
However, the FT has a different reading of the situation. It could be summed up in the phrase that he that expects little is seldom disappointed, especially as far as the deadly duo of Merkel and Sarkozy is concerned.
The plan must be to see how the markets react to the Italian austerity announcements tomorrow. Hope springs eternal is another phrase that comes to mind.
Using Google earth again to witness our built envoirment – its shocking really , even after all these years of witnessing credit excrement.
The so called fiscal gap that some economists think remains after the bank problem is supposedly solved is the huge input costs needed to sustain our subrural dreams.
All of the Irish “investments” have been catastrophic.
A sort of dark shadow of Libyan oil fields.
George Soros lays it on the line (and the political stakes get higher and higher!).
‘… European policy makers and central bankers are wrecking one of the most fascinating projects in human history, the unity and friendship among the countries of Europe. This is beyond depressing. Way beyond.’
@European Social Democracy
Wake up! Rise up! Win!
Sounds great, let’s do it.
Gabriel, the chairman of main German opposition party, the SPD publicly supports the idea of eurbonds but only in return for strict conditions and a certain ceding of sovereign control over national budgets by countries participating in their issuance. (This game of political ping-pong threatens to end in tears).
If we only had the deciding! That is what is worrying the Germans.
The Chief Economist of Deutsche Bank (and presumably Ackerman) opposes Euro Bonds or an increase in the EFSF…
A concern is that the ECB and/or the Fed does not have the ability to create inflation in a controlled manner.
Lets say the Fed introduced a 5% inflation target for five years.
What happens next?
Well you would expect to see an instantaneous rise in in interest rates, right?And that rise would be quantitatively related to the extent to which investors believed that the Fed could achieve, accurately, the target? Some might take the view it would end in hyper inflation, others that inflation would remain weak despite the Fed’s efforts.
(It would be an interesting economic experiment!)
Similarly some actors in teh broader economy would form new expectations of future inflation, and this may in turn through a self fulfilling mechanism influence the inflation rate.
But how will these real economy actors know or predict the consequences of the Fed’s policy if even the Fed itself, economists and professional investors don’t know and, further, disagree fundamentally about the conceptual method or model to be used when determining or predicting the effects of the change in policy.
In short, how can we rely on the self fulfilling mechanism unless people believe that the fed will be successful in raising inflation in a controlled manner?
If some people believe hyper inflation and a devalued dollar will be the result and others believe nothing will change – if people are working off of different models – how can we possibly predict with any certainty what effects the policy will have
This bit is very odd:
“Mr Tremonti argued at the weekend that jointly issued bonds would effectively make individual governments’ debt a common burden, and said they were the “master solution” to the euro zone debt crisis: “We would not have arrived where we are if we had had the euro bond.” The sentiment has been echoed frequently by the Chancellor, George Osborne, from the most important European economy ousted from the eurozone.”
Is that just rubbish journalism, or have I missed something?
Even if the only growth as a result of a policy of more inflation was nominal, that would still ease Ireland’s public debt burden, and the resulting lower than expected tax increases would make things not quite as difficult for households, especially if combined with lower interest rates.
Predictive text has gotten seven out of the last four misunderestimations correct…
(Should be ‘outside’?).
I meant to ask earlier… does anyone on this site read the Italian newspapers. It would be interesting to find out how ordinary people (and unions) are reacting to the announcement about even more austerity in Italy on Friday. Do they do Greek-style protesting in Italy?
@ James Conran
‘Presumably the poor are more burdened by debt and the rich are more likely to be creditors’
Waht about the small savers, (which is most savers), and the very many people on fixed incomes ? Inflation wil steal from them.
Inflation worked in the past in reducing debt burdens.
In the 1970s, the surge in inflation caught bond investors on the hop and sovereign debt maturities were over a long period.
It’s different today:
“Even if the only growth as a result of a policy of more inflation was nominal, that would still ease Ireland’s public debt burden, and the resulting lower than expected tax increases would make things not quite as difficult for households, especially if combined with lower interest rates.”
Well, if it didn’t feed into wage rises, tax income would be static. The deficit would remain, indeed, given the amount of final consumption that the state engages in, it would probably increase.
It is the deficit that drives tax increases, not the debt-to-GDP ratio.
Interest rates would only be lower while inflation was being permitted. It would have to rise to, say, 7% given inflation of 5%. Mortgages are the longest duration debt in the debt multiverse. Guess how many corporations hold variable rate mortgages? Or governments?
“Well, if it didn’t feed into wage rises, tax income would be static”
Wouldn’t tax income from VAT, CAT, CGT, stamp duty etc all increase? Indexing of tax thresholds would also, everything else unchanged, see an increased tax take.
Vat would probably not increase as overall spending would be the same, indeed if VAT exempt items increased in price more, spending would probably decline. Remember, you’re talking about the same pot of money trying to buy the same amount of essentials.
Likewise, CAT, stamp and CGT would only increase if property values (largely speaking) increased. This is not really likely in the absence of wage rises.
Simply put, the inflation would be largely imported, with no traction within the country to do anything about it.
I don’t get the mechanism here. How do you generate 5% inflation? As I understand it inflation is contributed to by energy costs, food costs and rental etc. How could you let those increase and keep wages steady without seriously affecting aggregate demand, affordability and political stability.
If the 5% increase in cost of living was associated with a 5% increase in wages that would be fine – but there are too many productivity hawks around that would fight to keep wages down.
Inflation is dangerous. 15% inflation over 3 years is more than the fragile social order of many countries could take. This current debt crisis seems to be a situation where you can print money and devalue a currency without stirring up inflation (seems to be the case in the US).
All going a bit circular now, but here is Paul Krugman: ‘Will the ECB Change Course?’, which if you click the last link includes the Kantoos blog from the top pf this thread.
Also, Krugman quotes a Joe Stiglitz article, which I happened to notice appear in the FT (bored in a bus shelter in Bristol, bit of a long story).
‘How to make the best of the long malaise’
‘Europe’s other problem is too many think fiscal stringency is now the answer. Yet Ireland and Spain had a surplus and low debt-to-GDP ratios before the crisis. More austerity will only ensure that Europe grows more slowly and its fiscal problems will mount. Only latterly have Europe’s leaders finally recognised that Greece and the other crisis-plagued countries needed growth – and that austerity would also never bring that growth.’
lets take the extreme inflation targetting policy – a zero percent interest rate policy. This would surely have some upward impact on asset prices, as debt would be much cheaper to service even without wage increases.
Re the same pot of money – if there is in fact some inflation, you could argue that this, or the expectation of such, will help to move people out of cash or fixed income savings into something exposed to inflation, ie equities, property etc, helping to support prices and demand for those assets.
Or you could argue that with zero interest savings and increasing mortgage costs (as interbank rates spike once again on inflation concerns) mean that debt-deleveraging gains pace once again. With few wage rises and no new jobs, the number of available borrowers would not change, so aside from the rises in price, nothing is done to help the demand side.
An elevated inflation rate with no demand side measures is supply side destruction.
The likely outcome for those with cash is a move to unproductive assets that either contribute to inflation and/or don’t contribute to growth (secondary shares, commodities, and property bubbles in other parts of the world).
22bn is the magic number…
*ECB SPENT EU22 BLN ON BONDS LAST WEEK VS EU15 BLN FORECAST
@Bond. Eoin Bond
22.b Definitely “shock and awe” and it worked. Wonder why they did not
do the same when we were going down the tubes.
“Waht about the small savers, (which is most savers), and the very many people on fixed incomes ? Inflation wil steal from them.”
The smallest savers of all are the net debtors! I’m not sure why inlfation constitutes “stealing” any more than do wage cuts for people on unfixed incomes.
So if labour has no leverage to secure wage rises (no rises at all at all?) then all the growth of nominal GDP goes where? Business profits? Which might lead to employment expansion, no?
And note also that even if nominal wage rises don’t amount to real wage rises (i.e. higher inflation leads to real wage cuts – which is actually what some advocates of higher inflation hope for), this might still leave many indebted workers better off, since the principal of their debt is nominally fixed.
Nope 22bn is not the magic number the magic number is 7%.
If the lending banks had insisted on refusing to lend into daft property projects residential or otherwise (i.e. doing their job) across the EZ where yields were below the 7% long run average market yield we simply wouldn’t be here debating these issues.
Sadly it really is that simple.
What has let us down is not leadership or Regulation or an ism of any particular variety whats actually let us down is the bankers ability to use long division and read their history.
In Ireland until we recognise that the issue remains a very basic one – a mis priced asset class namely property – we go nowhere.
I’ll say it again fix the problem. Re price the asset class and all manner of good things will happen in short order and allow those you where duped by the banking classes and then double duped by the policos in paying for the banking errors to write down the debt to the true price of asset class. Given that all else has failed why not?
“And note also that even if nominal wage rises don’t amount to real wage rises (i.e. higher inflation leads to real wage cuts – which is actually what some advocates of higher inflation hope for), this might still leave many indebted workers better off, since the principal of their debt is nominally fixed.”
You are presupposing that there will be nominal wage rises, that employers are swayed by cost of living rises. I am saying that the traction for even nominal wage rises is not there. As you say, competitiveness demands nominal wage restraint. The foolishness of the noughties was the idea that wages could track Irish inflation without reference to the rest of the eurozone.
The foolishness now is the idea that the eurozone can inflate while the rest of the world isn’t.
@Berlin from Berlin
On the Left
Left-leaning Tageszeitung writes:
“The message that the conservative-liberal coalition politicians have been espousing since the beginning of the crisis is immensely damaging. Their position triggers alienation, and not only in neighboring countries which traditionally keep a close eye on Germany, both because of its economic clout and its history. When the largest nation treats the rest like a school master, it harms confidence.”
“It is wrong that the politicians stick to the nationalistic rhetoric of fear instead of stressing the value of the European community. Right now it is urgently necessary that someone speaks of the positive aspects of Europe…. They should also remember which country has most profited from the union: Germany.”
On the Financial Right
Financial daily Handelsblatt writes:
“It would be desirable to avoid euro bonds — but realistically one has to assume that we will get them in the end, whether we want them or not. So it doesn’t help to criticize the principle of these instruments, as, for example, economics minister Philipp Rösler has been doing. It would make more sense to start a debate about the conditions that should accompany the launch of euro bonds and the concrete design of such conditions.”
“Three points are essential: 1. All euro-zone countries must include an effective debt-brake mechanism in their constitutions. Those should only be able to be overturned if a two-thirds majority votes against them. 2. Sanctions attached to the stability pact should be beefed up and imposed automatically. 3. A lack of budgetary discipline should be punished, for example, the nominal interest rate should be lifted in keeping with key indicators”.
Momentum = Mass X Velocity ….
Well, whoop-dee-doo for the ECB.
€22billion of bond purchases!! Just to save the Euro from implosion!
At an EZ GDP of approx €9.2 trillion (Wikipedia), that amounts to less than one quarter of one per cent of EZ GDP. Some spend.
€22 billion! The Paddy’s were able to come up that plus another €12 to €15 billion, just to pay off the bondies in Anglo.
Maybe Trichet & Co should be recommended for the Charlemange Medal d’honneur.
The way RTE are reporting this, it sounds like RTE would be happy to present the medals already.
@ James Conran
‘The smallest savers of all are the net debtors!’
Lets not mix up stocks and flows here. If someone has a mortgage they are a debtor. If they have a house worth x and a mortgage debt greater than x they are still just a debtor. In balance sheet terms of course they have a problem, but as long as they can make the payments, nothing changes.
But yes, a dose of inflation would help the balance sheet, which is fair enough for all those in that situation. But they are not the only folk in trouble, so we have to think carefully.
‘I’m not sure why inflation constitutes “stealing” any more than do wage cuts for people on unfixed incomes’
Most employees have had significant wage cuts at this stage. A great many private sector workers have been made redundant, which is a brutal (as they say in Dublin) state of affairs. I wouldn’t argue that there has been much justice or economic wisdom in any of that.
I am happy to withdraw the term ‘stealing’, but inflation can have pretty toxic consequences. It certainly did in Russia when the insiders grabbed the state assets of the former Soviet Union, and the fixed income employees and pensioners were hung out to dry. Millions were impoverished. The legacy is prostitution, AIDS and God knows what else.
“German Chancellor Angela Merkel’s coalition partners are threatening a withdrawal from government if she agrees to eurobonds or any form of fiscal union to prop up southern Europe.”
Courtesy of Ambrose over at the Telegraph
“The legacy is prostitution, AIDS and God knows what else.”
Stolen nuclear materials and other weapons doing the rounds to the highest bidder and a black economy that they can’t measure.
DOCH. Apparently the SPD supports Eurobonds, as do all the usual lobbyists. So unless Merkel really makes a clear decision to choose systemic financial collapse over Eurobonds – not very in character for her, or for most other politicians over the past few years – then Eurobonds we will most likely have, possibly just before or after a change in government in Germany. (Actually, most likely we’ll see some other kind of transfer of risk and wealth that has the political advantage of not being called Eurobonds, and the downside of not being large enough, but that’s a detail.)
Of course, if (as seems likely) even a consolidated Eurozone has trouble bearing the burden of its consolidated bank and public debt, then systemic financial collapse will be back in prospect. At that point the only remaining options will be a Chinese bailout (hurry, while stocks last) and Eurozone QE. At the far end of all that, the end state will be either a Japanese lost-generation miracle, or systemic financial collapse … or one, then the other … and this decision will be made by economic reality and the bond markets – the politicians and technocrats will just be flipping a coin. In fairness, there are two other alternative outcomes if the Eurobondzone turns out to be (aheh) unmanageable: World War Three and a bailout from planet Mars.
Alternatively, you could insert a Eurozone breakup into any stage in this process, but I’m not sure how much difference it makes to anything. It leaves the Eurozone states doing their QE severally rather than jointly, and shifts around the distribution of the bailout costs somewhat: but even under these conditions it seems likely that sufficiently large taxpayer bailouts to avert systemic financial collapse can’t be made without explicit transfer payments between member states, or that they can’t be made at all. As I’ve said before, I think Europe should undergo a prompt systemic financial collapse inside the Eurozone; this also happens to be the course of action required by law under the EU treaties.
Likelihood of a grand coalition in Germany?
It that’s What It Takes to prevent a worldwide systemic financial collapse (and, bonus, keep Die Linke out)? Quite likely over 50%, wouldn’t you guess? In any case it probably won’t require a grand coalition: no grand coalition was required to pass TARP, and probably our EU/IMF bailout would have passed without a grand coalition if that had proved necessary.
@ Hogan …competitiveness demands nominal wage restraint.”
No, it (arguably) requires real wage restraint.
“The foolishness now is the idea that the eurozone can inflate while the rest of the world isn’t.”
There’s no reason the EZ can’t/shouldn’t do this. A more expansionary monetary policy would be expected to produce higher inflation within the EZ and a corresponding external depreciation of the Euro.
“@ Hogan …competitiveness demands nominal wage restraint.”
No, it (arguably) requires real wage restraint. ”
No, it requires nominal restraint. We need to reduce wages down to a level that makes them competitive with countries both in the eurozone and outside it.
“A more expansionary monetary policy would be expected to produce higher inflation within the EZ and a corresponding external depreciation of the Euro.”
That has worked sooooo well in Japan and in the US. Only the UK has managed to generate significant inflation, but, noticeably, not in wages. With the UK economy joining the rest of the EU at stall speed, stagflation beckons.
To be clear, you’re saying that Japan and the US have not done the inflation part, right? In other words, not that inflation had negative consequences but that it didn’t happen? Well, in neither case was the inflation target raised. As I said before, advocates of raising the inflation target (I’m mainly thinking of Krugman) tend to see QE as being in itself fairly ineffective in a liquidity trap such as that experience by the US and Japan/
Re: wages and competitiveness, nominal wages are what matters within the EZ, since countries within the EZ can’t devalue relative to each other. But we’re talking about EZ-wide monetary policy, i.e. the ECB adopting a higher inflation target. Higher inflation in the EZ should correspond to depreciation of the Euro so that Euro-denominated wages can rise in nominal terms without hurting competitiveness.
It doesn’t matter what you raise the inflation target to. Japan could have a target of 10% It was stuck at near-zero all the time the target was 2%. Central banks don’t solely generate inflation. In particular, they don’t generate deflation. It is not always and everywhere a monetary phenomenon.
You can keep repeating that higher inflation should correspond to depreciation of the euro. I don’t believe it. I don’t believe it has been the case in other countries with over-shooting inflation. If it was true, the yuan would be depreciating…
The British example which you cited earlier has both depreciation and inflation. In China, monetary policy (as well as capital controls) are holding the value of the yuan down (i.e. depreciating the currency relative to where the market “wants” it to be) – at the cost of higher inflation. If they let the yuan appreciate, inflation should come down.