A dubious achievement
Here’s Martin Wolf:
The extent of the breakdown was not brought home to me by the resignation of Germany’s Jürgen Stark from the board of the European Central Bank, nor by the looming Greek default, nor by new constraints imposed by the German constitutional court. What brought it home to me was a visit to Rome.
This is what I heard from an Italian policymaker: “We gave up the old safety valves of inflation and devaluation in return for lower interest rates, but now we do not even have the low interest rates.” Then: “Some people seem to think we have joined a currency board, but Italy is not Latvia.” And, not least: “It would be better to leave than endure 30 years of pain.” These remarks speak of a loss of faith in both the project and the partners.
In his latest press conference, Jean-Claude Trichet, outgoing president of the European Central Bank, pointed to the bank’s stellar counter-inflationary record, far better than the Bundesbank’s.
There are days when I think I must be living in some sort of alternative universe. In my universe the head of a brand new central bank would not be bragging about reducing inflation to levels “far better” than even the most hawkish country in the world, at the very moment his currency zone region was being wracked by the mother of all debt crises.
But that’s just me. I’m certainly no expert on Europe, and I presume Trichet knows what he is doing.
HT: JimP
Tags:
13. September 2011 at 19:04
Scott
Yes – I feel the same. Its like a strange slow motion alternative universe dream – or nightmare. I can really hardly believe this is happening.
I knew Minsky pretty well. I can just hear him laughing.
As I said in my previous post – I do think a lot of this is political. If there were a real live and actual threat here from the left – from the unemployed – I think the Tea Party deflationists – both here and in Germany – would be looking for other policy solutions than depression.
13. September 2011 at 19:21
Over the years inflation targeting became the “PC” thing to do, and once you are caught in the “PC worldview”, its hard to escape. And for the last 13 or 14 years all these guys have been discussing MP in a Low Inflation Environment! But never considered the possibility that the solution lay in “changing the target”! Yes, some (Bernanke himself) sort of, not very forcefully, mentioned PLT.
13. September 2011 at 19:31
> I presume Trichet knows what he is doing.
ECB is officially supposed to care only about inflation. It’s a retarded design of a central bank, so Trichet doing retarded things and bragging about them is by design.
Of course other central banks like BoE ignore such stupid policy objectives and do the right thing regardless.
13. September 2011 at 19:41
Tangentially: Another (likely) boring book on the “Crisis” is due shortly:
http://www.centerforfinancialstability.org/research/MIT_Press_Publicity.pdf
13. September 2011 at 19:59
Excellent and exasperating post by Scott Sumner.
Somewhere along the way, fighting inflation became a moral issue. So, like fighting a war for human rights, the cost is not the only issue. There is a perceived moral value in zero inflation (forget that we can’t even measure inflation that precisely). Some people even chant that any inflation is theft (especially from drug lords and their large trunks of Ben Franklins, ha-ha). There is a zeal for zero inflation—or even minor deflation—that defies logic.
Add to this a strange fetish or worship for money, and a resolve that paper currency should reflect the value of a yellow metal. The zealots have great language too, as in “expanding the monetary supply is debasing the currency.” From there we we slide to having a gay brothel in the White House, and kow-towing to our Chinese overlords.
Add in that many people conflate social welfare excesses and spending with a “loose” validating monetary policy. And in the USA, I am convinced many want a more-aggressive Fed—-but only after Obama is out of office (Perry made that clear).
It is a battle ahead for the pro-NGDP crowd. All I can say is that the NGDP crowd needs to keep blogging, writing op-eds, showing support for Fed officials (such as Charles Evans) who express an interest in NGDP. At least NGDP has stuck its nose into the debate of late.
I guess this is how Galileo felt–but at least so far the NGDP’ers have not been tossed into prison or executed for treason.
13. September 2011 at 20:39
What should have happened in a parallel universe. Well, what should have happened is no Euro, but let’s say the Euro was an inevitability.
1. The economies of Greece and Portugal should not have been allowed in. They are really semi-functioning Latin American countries with structurally lower economic growth, not countries worthy of bonds taken as collateral from the ECB. The Maastricht should have been followed (with no accounting shenanigans to hide deficits
2. Ireland’s allowed in, but then it does not guarantee the liabilities of all its banks.
3. For other countries such as Spain, Italy, Belgium and France, the ECB gives explicit backing against an artificial run on their debt through higher borrowing costs. The only reason Italy with its primary surplus has a run now is because they do not have a printing press.
Option #3 is the hardest for ultra-austere Germans to swallow, but they don’t realize that the run on Spain and Italy’s debt is likely artificial. Investors are not really scared of their future austerity but of other investors and the lack of ECB action. In this case, a Paulson bazooka of 5% ceiling on interest rates could actually create interest rates less than 5% and prevent the ECB from having to buy any of the bonds.
The interesting question is what would happen if Spain and Italy remain refusing to do any austerity. The ECB can then make explicit requirements for its backstop, even just following the Maastricht treaty, to its backstop. The main issue with the animal spirits of investors is that taking a huge haircut on Italian and Spanish debt is suddenly a possibility, and not explicitly allowing the ECB to be the lender-of-last-resort for its countries was beyond stupid.
So, instead, we’re looking at a break-up of the Eurozone where Spain and Italy have a completely unnecessary run on their debt and (later) their currency, producing huge, completely unnecessary pain for most Europeans, including probably Germans and Americans.
For Germans and Americans, we shouldn’t have to suffer from their defaults. Both countries should be fine as long as their countries remain committed to keeping NGDP on target. Of course, both the ECB (later the Bundesbank?) and the Fed have shown the ability to sit and watch by while the #$#@ NGDP #@#$ tumbles and we have another #@#$@! Great Depression.
At best, Bernanke could at least go to PLT which would be MUCH better than the current nonsense we call monetary policy. But Europe’s screwed. It will be 1931 and I just hope the 25+% unemployment doesn’t produce too many fascist regime in the years to come.
Have a nice day.
13. September 2011 at 20:39
“I’m certainly no expert on Europe, and I presume Trichet knows what he is doing.”
Somewhat against my will, I shall state that I have become an expert on Europe (albeit one who resides in the US). I have spent too much time studying the matter to be otherwise and now I find people I respect tremendously defering strenously to my opinions on European matters.
And in light of that observation I shall state that mining engineers like Trichet have absolutely no business running central banks. The proof is in the pudding. (Or in the melting green icing on the cake as in “MacArthur Park.”) Perhaps the recipe for the euro has been lost forever.
“I don’t think that I can take it,
because it took so long to bake it,
And I’ll never have that recipe again
Oh, no!”
Waylon Jenning’s version of the song for all you country fans (it won a Grammy in 1969):
http://www.youtube.com/watch?v=hQz-SdcjcWY
13. September 2011 at 20:44
Mark
But no version beats the Richard Harris original!
13. September 2011 at 20:49
The link:
http://www.youtube.com/watch?v=wadrAU6baV0
13. September 2011 at 21:05
Marcus,
I’m a big fan of all of the versions. (There are many.) Believe it or not I’m even a huge fan of Donna Summer’s disco version:
http://www.youtube.com/watch?v=xaZim6ybvdA&feature=player_embedded
It’s so athletic, and I was 14 when it reached #1 on the billboards.
One of the weirdest top pop songs of the past half century.
So maybe the euro has much in common.
13. September 2011 at 21:13
“so far the NGDP’ers have not been tossed into prison or executed for treason”
Or burned at the stake for heresy.
13. September 2011 at 21:18
A little history here. While the hyperinflation in Germany during the 1920s was very bad, it did not lead to the collapse of the Weimar republic. It was the depression and deflation in the early 1930s that led to the collapse of the Weimar republic and fascism.
Moral: Inflation is not the greatest economic evil, and absolute price stability is not the greatest economic good.
13. September 2011 at 22:27
“Someone left the cake out in the rain”
Yes, his name is Claude Trichet.
13. September 2011 at 22:35
ECB is officially supposed to care only about inflation. It’s a retarded design of a central bank, so Trichet doing retarded things and bragging about them is by design. As is normal when it comes to EU dysfunction, the problem is not a bug but a feature. Being the most inflation-pure was the “winning” strategy, so that was taken.
One has to understand that the EU is misbegotten at its core. Its core idea is that nationalism was the great sin of European history, that nationalism is a popular sentiment, so inappropriate popular sentiments are the great danger. The so-called “democratic deficit” is the original EU-not-a-bug-but-a-feature. All based on the idea that the EU elite can steer the benighted masses into a new world of harmony. Plato’s Republic Bureaucratised. (Or is that Eurocratised? Possibly Brusselscratised?)
Actually, the great problem of European history was irresponsible power, and creating a new regime of irresponsible power is a “cure” which is just more of the disease.
A badly designed European Central Bank focused on what the elite thinks is a mark of “true” credibility is just par for the course.
Also, what Full Employment Hawk said. Central banks do their worst damage when they inappropriately obsess over inflation.
13. September 2011 at 22:49
Lorenzo,
Yes, words to live by:
“Moral: Inflation is not the greatest economic evil, and absolute price stability is not the greatest economic good.”
The end of the incredible dream of the euro is engraved in the heartless stone of price stability. If only stable nominal spending growth had been the goal. Alas, a dream impaled on stupid fears.
13. September 2011 at 23:25
Scott:
“But that’s just me. I’m certainly no expert on Europe, and I presume Trichet knows what he is doing.”
Well as others have pointed, price stability is the job of the ECB. In fact the treaty has it as the overriding objective for the ECB: once price stability is achieved they can care about anything else. The governing council of the ECB has decided that price stability means ‘somewhat less than 2% inflation’, and they have achieved it, as Trichet would say ‘Impeccably!’.
I agree a great deal with his press conference, this debt crisis was something the euro-zone brought on itself, this is not the fault of a central bank that has warned those countries in the past. This is the fault of those countries breaking the stability & growth pact and asking the ECB to lower rates. This is the fault of countries that tried to subvert the independence of the ECB. This is the mistake of politicians allowing in countries such as Greece and Italy that did not meet the criteria.
To call on the ECB and Trichet in particular to solve this mess is to undercut the future credibility & independence of the ECB and to create a dangerous dynamic in a future Eurozone where members will not engage in structural reform expecting higher inflation instead.
One can argue that this is a bad institutional setup and many have done so, but what one can not argue is that the ECB is not doing its job properly. The eurozone members chose this setup, because they promised to do the adjustments to make this setup work.
Also if you look at eurozone indicators: unemployment is at 10%, less than 2% above its pre-crisis low and probably less than 1% above average. Were it not for the sovereign debt crisis, this would be the euro-zone as it is supposed to be.
13. September 2011 at 23:49
Martin,
“Also if you look at eurozone indicators: unemployment is at 10%, less than 2% above its pre-crisis low and probably less than 1% above average. Were it not for the sovereign debt crisis, this would be the euro-zone as it is supposed to be.”
Huh???
Eurozone nominal GDP is way below trend (about 8%). The unemployment numbers conceal a great deal of job sharing. The sovereign debt crisis is a direct result of nations not having the revenue they used to have. Spain and Ireland used to consistently run surpluses before this. Now not so much.
What are you smoking? Can I sample a puff?
14. September 2011 at 00:29
All your Weiners are belong to us!
Bow down to Zorg… accept this wafer thin cracker as the body of hegemony. Drink this hot tea, it will not burn thy throat, but verily it will clarify the fat of the ass you road in on.
Beg forgiveness of the yawning giant before it has its morning coffee and starts the work of the day.
To keep us from shutting down the Dept of Education, Huma Weiner should have to name her baby Morgan. Boy or girl, Morgan is a very nice name.
Brooklyn baby!
14. September 2011 at 00:45
@Mark, if you look at the employment indicators they will tell you roughly the same story.
This is total employment working day and seasonally adjusted:
http://sdw.ecb.europa.eu/quickview.do?SERIES_KEY=119.ESA.Q.I6.Y.1000.TOTEMP.0000.TTTT.N.P.A
You can see that there is a bulge in 2006-2008, take out that bulge and total employment is basically on trend from 2002-2011.
Here you can also see the distribution on a per country basis and the difference in unemployment in the eurozone and the wider EU-27.
http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/3-31082011-BP/EN/3-31082011-BP-EN.PDF
The difference between the EU-27 and the eurozone buttresses the point that at most the currency is responsible for 1/2 % unemployment. The problem here is not nominal, it’s structural.
The whole bail-out of the periphery is about bailing out core banks, not about keeping those countries in the euro, that’s a nice plus if we don’t have to complicate matters more than necessary.
14. September 2011 at 01:13
“…I presume Trichet knows what he is doing.”
You are far too indulgent. There is plenty of blame to go around for the euro-mess and plenty of culprits, but Trichet stands out even so. Your frequent complaints about Bernanke are reasonable but I’ll take Bernanke ahead of Trichet any time. It’s true that the ECB’s mandate puts price stability above all else, but it doesn’t dictate that price stability means under-shooting your inflation targets in a slump. And the idea that creditors should be able to count on the clout of the central bank to prevent debt writedowns doesn’t come from any mandate or any sensible economic analysis.
14. September 2011 at 01:17
My feelings towards Trichet and his fellows at the ECB are similar to Jesus said about the Romans. “Forgive them for they know not what they do.”
BTW, FT Alphaville has two interesting posts on why lowering IOR would be disastrous, ending with a quote from Svensson. I thought it might interest you.
http://ftalphaville.ft.com/
14. September 2011 at 01:51
@Kevin:
“It’s true that the ECB’s mandate puts price stability above all else, but it doesn’t dictate that price stability means under-shooting your inflation targets in a slump.”
What are you talking about? Inflation is at 2.5% y-to-y and is on target if you interpret the mandate as level targeting. The average, the level, and current inflation are all either at or over 2% a year.
14. September 2011 at 04:19
Martin, take a look at the behaviour of inflation since the crisis hit in 2008:
http://www.euroeconomics.eu.com/inflation_variables.htm
14. September 2011 at 04:29
Scott, this is neither here nor there, but it cracks me up how many of your RSS posts are sponsored by Goldline.
14. September 2011 at 04:33
Scott, here’s the main FT Alphaville piece Oscar is referring to with Svensson quote.
I had to read the piece three times to wrap my head around it. This strikes me as a huge problem for Europe’s money multiplier: European banks don’t have to worry about FDIC fees, so they’re able to send their money to the Fed and arbitrage.
Reading Gorton’s papers about the repo market and other activities “banks” engage in these days makes me think that today “money” is as tough to define as “banking.” As such, some of the more simplistic solutions put forth ignore the complexity. I like Selgin’s Theory, for example, but the banking he describes looks much different than the banking we read about on FT Alphaville.
14. September 2011 at 04:40
Just time for a few comments:
Kevin, I was being sarcastic about Trichet. I agree.
Martin, The sharp fall in NGDP suggests the problem was at least partly AD. I don’t deny that some countries (Greece) have structural problems as well.
And does the decision to inflation target also require inflation to be reduced “far below” German levels in the midst of the world’s greatest debt crisis?
14. September 2011 at 04:46
JTapp, What sense is there in doing $600 billion in QE and having ALL THE EXTRA MONEY SIT IN EUROPEAN BANK EXCESS RESERVES?
14. September 2011 at 04:46
Oscar, Svensson seems to favor negative IOR.
14. September 2011 at 04:49
Kevin,
I’ve taken a look at the site, but I still do not see how you can claim that inflation is below target? Even if I’d grant you the core rate instead of the HICP and take the line supposedly representing the target rate, then all I see is that the ECB is consistently hitting its target. The core rate fluctuates around the target and it is not perfect, but it certainly is no dereliction of duty on part of the ECB.
I see my comment to mark is awaiting moderation, but what I did there is post a link from eurostat that showed the difference in unemployment between the EU-17 (Eurozone) and the EU-27. The difference is negligible: 0.5%.
I also posted a link from the ecb’s statistical data warehouse showing total employment seasonally and work-day adjusted as being pretty much on trend that is if you discount the bulge between 2006-2008.
I have therefore severe doubts that the ECB is at fault here. It has not missed its target and unemployment is not up much and total employment seems to be on trend.
Inflation is more volatile than before, but that reflects underlying macroeconomic conditions rather than that the ECB is making a mess of things: the swings are still around 2%. That the swings are around 2% proves to me that the ECB is still in control even though the transmission mechanism was damaged according to them. They repaired it by the bonds purchasing program and you see that the volatility in inflation declined. The ECB will stabilize NGDP as long as it does not lead to more than ~ 2 % inflation.
14. September 2011 at 05:05
Scott:
“And does the decision to inflation target also require inflation to be reduced “far below” German levels in the midst of the world’s greatest debt crisis?”
That depends, take a look at the inflation dashboard at the ECB: http://www.ecb.europa.eu/stats/prices/hicp/html/inflation.en.html
If you take the average inflation over the period 1985-1999 for Germany that’s the great moderation before the intro-duction of the real Euro, the inflation rate was 2.2% and 2.5% for the core. The ECB is pretty much at that rate.
And because unemployment is not up much compared to the EU-27, I do not attach as much weight to AD in the case of the eurozone as I’d attach to the US.
I agree with you that there is definitely an AD component when the ECB temporarily lost traction and they allowed AD to fall, but the problem is mostly structural. The reason I think this crisis coincided with the crisis in the US is that the EU as a whole exports more than it imports.
14. September 2011 at 05:10
Sorry Scott, I should have guessed you were being snarky.
Martin: “The core rate fluctuates around the target and it is not perfect, but it certainly is no dereliction of duty on part of the ECB.”
The core rate has been consistently below target since the end of 2008 and the headline rate has been below target a lot more than it has been above it.
14. September 2011 at 05:24
Kevin,
look at the data you linked. The headline rate from 99 to 2008 has been mostly above it. It dropped below it and is now again above it. As far as I can see it and as far as I can see the forecast, inflation is moving around the target.
14. September 2011 at 05:32
The problem with the European Cental Bank is that it was set up at a time when the New Classical Economics dogma that:
Stablizing prices is all a central bank should do, as a matter of fact, all it can do had become the established dogma for monetary policy. Establishing this piece of misguided dogma is one of the major items of damage the New Classical Economists are responsible for.
The realization that the most important function of a central bank is to act as lender of last resort during a financial crisis has to be reestablished.
14. September 2011 at 05:43
If Greece defaults, it will probably be the Eurozone’s Lehman Brothers, leading to a chain of defaults by the other weak countries. And it will have been brought on, at least to a large extent by the contractionary monetary policy of the ECB, just as it was brought on in the U.S. by the contractionary monetary policy of the Fed. It will be deja vu all over again.
So the ECB will have achieved its inflation target, while the Euro collapses.
“The operation was successful, but the patient died.”
14. September 2011 at 05:58
Scott, that was my point about the European reserves, so I agree with you (I think you got that and were not yelling at me, but just to be certain…).
If anyone read the long Michael Lewis article on Greece last year they knew there was never, and had never been, a chance that Greece would ever be able to repay its debt. It’s no different than subprime borrowers who took out “liar loans.”
Greece lied for years about both its taxes and expenditures, hiding that fact form the IMF and rating agencies, and still hasn’t solved that underlying problem. And you can’t generate tax revenue if you’re not growing. There are no credible ways to keep Greece from defaulting. I think if the market was truly efficient this would have been over with 4 years ago when the light was shed on Greece’s books.
14. September 2011 at 07:20
Apparently you do not know your history and therefore do not understand why the ECB has inflation and only inflation as its goal. As well as why the ECB has to be more hawkish than the Bundesbank.
It’s easily told in a story about my great grandfather on the depression era Vienna, Austria. My great aunt told me how she felt when her father had to go to the baker and buy bread. He carried the money in a wheel barrow. My great aunt said. “None of us will ever want to see this again.” Not only that she also said because of this “We got the awful communist red-shirt hooligans and Herrn Hitlers brown-shirts beating everybody up on town.” She later went on to be the first woman allowed to teach at the University of Vienna and the first female ever to become a professor (in Economic history no less)
So for Germans it doesn’t matter how painful a zero inflation target is. They’ll take any amount of pain but the pain of inflation and in their minds the coming social unrest of an inflationary economy.
The Germans only became willing to set up the ECB if it ran like it were the zero inflation Bundesbank i.e. any director like Trichet has to be more conservative and inflation hawkish than the most inflation hawkish Bundesbank director. Especially now when the EMU, Euro zone, solely rely’s on German support for further bailouts of the Euro zone banking sector.
It has nothing to do with what you think is sound monetary principles, it has to do with history and the German reluctance of the EMU project. In my personal opinion even though Merkel said that they wouldn’t let Greece default I think that Germany already has left the project…..
14. September 2011 at 07:20
Death of Public Employees Unions is ALWAYS a successful operation.
14. September 2011 at 08:16
Full Employment Hawk–
Excellent commentary by you. People forget that deflations and depressions are far worse than some or even quite a bit if inflation.
George Gilder even used to equate inflations with boom times, back when Reagan was president.
14. September 2011 at 10:12
@FEH
“The realization that the most important function of a central bank is to act as lender of last resort during a financial crisis has to be reestablished.”
http://www.ecb.int/press/pr/date/2007/html/pr071212.en.html
@BC
“Excellent commentary by you. People forget that deflations and depressions are far worse than some or even quite a bit if inflation.”
http://www.ecb.europa.eu/pub/pdf/other/price_stability_web_2011en.pdf
“Reasons for aiming at inflation rates of below but close to 2 %
By referring to “an increase in the HICP of below
2 %”, the definition makes it clear that both inflation above 2 % and deflation (i.e. declines in the price level) are inconsistent with price stability. In this respect, the explicit indication by the ECB to aim to maintain the inflation rate at a level below but close to 2 % signals its commitment to provide an adequate margin to avoid the risks of deflation”
14. September 2011 at 11:32
I still think Fisher is a superior human being to Trichet.
“Noting gold has been “richly priced” in a number of currencies, Fisher says “we need to be the best in absolute terms, not just in relative terms.””
Or, as Charlie Sheen would say, WINNING!
14. September 2011 at 11:35
Merkel has said she’s against an “uncontrolled” greek default. The markets are up today not because they think greece will be bailed out, but because they’re glad that Europe is finally acknowledging that Greece is going to default, and preparing to backstop the EU financial system (read, French and German banks).
Seriously, the implied default probability for Greece is now between 90% and 98%.
14. September 2011 at 11:37
Creating more money could even save the Euro! Why don’t we fix this?
14. September 2011 at 11:44
Either way Greeks are going to get less in pensions. There is no saving the pensions. Italy is in same situation.
50% of last salary will become the European standard.
14. September 2011 at 12:23
Morgan, it’s not even so much the last salary, it’s the starting age.
14. September 2011 at 12:51
Tomasz Wegrzanowski,
The UK has a long history of ignoring policy targets as they reach bankrupcy. The government abandoned full employment targeting in 1976; it started ignoring broad monetary targets from about 1980 onwards, narrow monetary targets from 1988 onwards; then the government stuck with the ERM for about 20 months before the government realised that the ERM system forced them to make choices and stick to them; since 2002, inflation targets have first been redefined and are now being ignoried.
Inflation targeting is in a similar period in its history to monetary targeting in about 1984: there are redefinitions (“core-inflation”) and rationalisations (“temporary blips”) all making up for the fact that inflation targeting doesn’t seem to correlate with good monetary policy anymore.
Of course, on the basis of history, the BundECBank will stick with inflation targeting until around 2025.
14. September 2011 at 12:52
(I’m not a big fan of flexibility, by the way. But better to be a knave than a fool.)
14. September 2011 at 13:27
Stats,
You aren’t quite right (it’s both), but IF you premised every single argument you ever make about the Euro with the phrase,
“of course the pensioners MUST receive and live on much less.”
Two things would happen:
1. Conservatives would listen to you – you’d have their full attention.
2. Liberals would stop supporting you policy prescriptions no matter what they are.
14. September 2011 at 14:48
“When the President signs this act [Federal Reserve Act of 1913], the invisible government by the money power — proven to exist by the Monetary Trust Investigation — will be legalized. The new law will create inflation whenever the trusts want inflation. From now on, depressions will be scientifically created.”
-Charles August Lindbergh Sr.
/////
Charles August Lindbergh Sr. (January 20, 1859 – May 24, 1924) was a United States Congressman from Minnesota’s 6th congressional district from 1907 to 1917. He opposed both American entry into World War I, and the 1913 Federal Reserve Act.
He was the father of famous aviator Charles Lindbergh.
14. September 2011 at 17:12
Martin, That’s certainly an interesting defense of Trichet–he’s not that bad at policy because he’s lying about inflation. OK, but I was mocking his logic, and your defense doesn’t help at all.
I agree with Kevin, I see core inflation dropping after the crisis in 2008. That seems mad, why would you want core inflation to fall in the midst of a debt crisis?
If you are going to argue they can’t hit their target each and every moment in time, I agree. But that logic suggests they need above target core inflation for a couple years, to make up for the below target core inflation.
FEH, I agree about the flawed inflation targeting regime, but the ECB could have done more even under that regime. At least produce 2% core inflation–they didn’t even do that.
JTapp, Sorry I should have been clearer that I was mocking the thing you quoted. I agree with you–Greece’s government (previous) was like a criminal enterprise. I think the leaders should be prosecuted and sent to prison.
Old Whig, My area of expertise is monetary history. So yes, I do vaguely recall hearing about the German hyperinflation.
Gabe, The US would have been better off if the Fed hadn’t been created in 1913, indeed the world would have been better off.
14. September 2011 at 19:45
The risk free rate is no longer risk free. Default is not only imminent but necessary. Restructuring needs to occur both here in the US and in Europe and maybe even in China if they keep buying all the European debt.
14. September 2011 at 21:03
Scott; you clearly need a satirical emoticon 😉
On the “words to live by” (Moral: Inflation is not the greatest economic evil, and absolute price stability is not the greatest economic good) one should always remember to ask the question: what is money for?
The short answer is: to make transactions easier, to reduce transaction costs (both immediately and across time). The notion that “price stability” at the cost of pushing transactions seriously below trend is some advance is a classic piece of goal displacement. This is what makes targeting money GDP/Py make so much sense: it is the monetary authority aiming to optimise money’s performance of its central purpose–to promote transactions: both immediate and cross-temporal transactions.
14. September 2011 at 21:45
I thought the last was worth a more complete and precise treatment.
15. September 2011 at 00:58
Scott:
“If you are going to argue they can’t hit their target each and every moment in time, I agree. But that logic suggests they need above target core inflation for a couple years, to make up for the below target core inflation.”
Well they can’t, using the interest rate is a sub-optimal policy instrument to target inflation as you know: HICP futures would be ideal 😉
That brings me to the second point, the ECB does not target core inflation, it targets HICP and having had a look at the numbers a while ago it was on level and y-y slightly above.
All I am saying is that you can’t blame the ECB for fulfilling its mandate. You can argue that they should not target inflation, but then you’re more in the broader inflation-targeting vs other monetary rules debate.
On a side note, from a distributional perspective, NGDP-targeting vs Inflation-targeting. The growth-risk is with the creditors in the former and with the debtors in the latter. Seen from that perspective NGDP would probably be optimal. However, strong creditors (unions for example) can bargain to shift that risk back on the debtors and in that scenario wouldn’t inflation-targeting be optimal?
Given that the EU is a strong union country one would assume that inflation-targeting would be better than NGDP-targeting for the EU.
15. September 2011 at 00:59
*Of course the EU is not a ‘country’ but you get my drift: whether or not NGDP would be optimal now, depends on who should bear the growth-slow down and this in turn depends on bargaining power of creditors vs debtors.
15. September 2011 at 03:33
With the ECB they have an explicit inflation target. I don’t agree with it, but at least they are implementing their mandate.
Here across the pond, the Fed has a dual mandate, one of which they are ingoring. They act as if they only have one mandate, inflation. I personally would like to see more accountability. Nothing happens if the FOMC screws up!
15. September 2011 at 05:58
UK, ECB and U.S. inflation shows no sign of declining. Twelve month inflation is at 3.8%. Despite the SPR release, the global growth slowdown, and the IEA’s prediction that Lybian oil will be on-stream in 18months, Brent crude is up 40%+ from pre-Jackson Hole levels. Today we saw significant increases in such items as apparel and rent. The former reflects import price pressures that are in turn a function of wage inflation in emerging markets exporters — hardly a temporary phenomenon.
Paul Krugman recently said nominal yields are low because they reflect “deflation, or at least disinflation, fears”. I see little evidence to support that statement.
15. September 2011 at 08:59
The data below is partly a consequence of this stubbornly high inflation:
“In August real average hourly earnings fell fell -0.6% as nominal wages fell -0.1% and the CPI rose a stronger than expected 0.4%. On a year-over-year basis real average hourly and weekly earnings are down -2.4%.”
With this drop in real wages, employment should be picking up smartly.
15. September 2011 at 13:57
David: I think we need to differentiate between inflation caused by monetary phenomena and inflation caused by external price shocks, such as oil prices and knock-on effects from same. We should not expect employment gains based on real wage decreases when inflation is solely the result of increases in the price of commodity inputs. I think your argument (unless it was tongue-in-cheek) grabs the wrong link in the chain of causation.
Monetary growth does not increase employment because it creates inflation. Monetary growth increases employment AND inflation because it provides additional money to chase the same employees and market goods.
Likewise, inflation not resulting from monetary growth does not increase employment because employers facing higher prices for X BOTH think “Maybe I should buy more Y.” (a substitution effect) and “Wow, I have less money left over to buy Y.” (An income or wealth effect). Thus, inflation caused by commodity input price rises will affect employment depending on the relative size of the substitution and income effects; it depends on whether workers are a good substitute for copper wire and crude oil.
I’ll leave deciding how to run a car on unskilled labor to the humorists among us.
15. September 2011 at 18:42
Rich, There is no need to default on T-bonds.
Lorenzo, Thanks for the link.
Martin, It doesn’t help to look at headline inflation–there was severe deflation in 2009–surely that’s not doing their job either.
Unions care about much more than just inflation risk–for instance unemployment risk. I wouldn’t make any quick judgments about how they’d respond to NGDP targeting.
dwb, You said;
“With the ECB they have an explicit inflation target. I don’t agree with it, but at least they are implementing their mandate.”
I don’t agree, check out the graphs Kevin provided. They haven’t prevented either core or headline inflation from falling below 2% during the recession.
David, You said;
“Paul Krugman recently said nominal yields are low because they reflect “deflation, or at least disinflation, fears”. I see little evidence to support that statement.”
Same here, he needs to start thinking in terms of NGDP. It’s NGDP (level and growth) that drives rates, not inflation.
You said;
“With this drop in real wages, employment should be picking up smartly”
I strongly disagree. Higher oil prices don’t make companies want to hire more workers. Rising NGDP would.
15. September 2011 at 18:42
This is not a dubious achievement this is GREAT:
“Officials said the 17 eurozone countries are close to a deal where Greece would offer either shares in state-owned companies or “illiquid” commercial real estate as collateral.”
http://www.ft.com/intl/cms/s/0/b6ded476-dfb2-11e0-8e15-00144feabdc0.html#axzz1Y4xqCYtI
—-
Dude, GREECE is being FORCED to grow up and enter the modern age.
That is SPECTACULAR!
17. September 2011 at 09:30
Morgan, Every cloud has a silver lining, but it’s still a big cloud.
3. November 2011 at 06:14
[…] I responded: There are days when I think I must be living in some sort of alternative universe. In my universe the head of a brand new central bank would not be bragging about reducing inflation to levels “far better” than even the most hawkish country in the world, at the very moment his currency zone region was being wracked by the mother of all debt crises. […]
10. January 2012 at 06:16
“I presume Trichet knows what he is doing” – I’m sure he is.. wise enough.. Inflation is like cancer…
It will crawl throughout the world.. soon..
12. May 2012 at 17:28
[…] are completely unthinkable, then the “highly undesirable” starts to look pretty good. Trichet bragged upon leaving office that the ECB’s “stellar counter-inflation record” was […]