Krugman overlooks the smoking gun

Paul Krugman recently commented that Sweden has done much better than Denmark since 2008. Denmark’s currency is pegged to the euro while Sweden’s currency floats.  Krugman (correctly) believes the euro has been a disaster.  So then why this comment?

A couple of years ago Sweden was widely considered a role model, with the best recovery in the advanced world. Now, not so much, thanks to slowing growth — perhaps because of the central bank’s bubblephobia.

Meanwhile, who knew that Denmark was doing so badly? I don’t think that you want to place too much blame on the peg to the euro; this would be a drag if Denmark had entered the crisis overvalued, but it doesn’t look as if this was the case. Instead, the likely culprit is a very high level of household debt.

I find this puzzling.  Mark Sadowski has some excellent comments that suggest that the difference in monetary policy pretty much explains the differing economic performances of Denmark and Sweden.  Sweden devalued sharply in late 2008, and then engaged in aggressive QE and even a bit of negative IOR:

Note that between August 2008 and March 2009 the kronor depreciated by about 16% relative to the euro. The fact that Sweden’s NGDP only fell 4.4% peak to trough instead of 7.8% like Denmark is directly attributable to this fact. The Swedish Riksbank was unconstrained by the requirement of maintaining an exchange rate peg when the crisis hit and so was free to pursue a more expansionary monetary policy than the Danish National Bank.

Note also that Sweden opened up a very wide lead in NGDP with respect to the other currency areas between 2009Q4 and 2010Q4. NGDP grew by 13.4%, 6.9%, 6.9% and 11.2% in 2010Q1 through 2010Q4 respectively. Thus NGDP soared by 9.6% year on year between 2009Q4 and 2010Q4.

Was there anything that the Riksbank did during that period that might account for this?

The Riksbank increased its monetary base by more than the Fed early on in the crisis. By October 2008 it was already 121% larger than in August compared to 25% for the Fed. By December 2008 it was 225% larger compared to 101% for the Fed. However, unlike the Fed which moved to a zero interest rate policy by December 2008, the Riksbank did not lower its repo rate to 0.25% until August 2009.

Although the Riksbank was slower to move to ZIRP, during this time (this lasted through June 2010) it maintained a (-0.25%) deposit rate, the first central bank to institute a negative interest rate, and the monetary base was maintained in the range of 270% to 350% larger than it had been in August 2008. In contrast the Fed was paying (+0.25%) on reserves and the monetary base was only 100% to 140% larger than it had been in August 2008 during this period.

But then the Riksbank got what Krugman correctly calls “bubblephobia.”  They stopped listening to Lars Svensson.  And this is the part that’s interesting—they started raising interest rates.  No more zero bound. They raised them repeatedly beginning in 2011, all the way up to 2%.  Back to “normal” monetary policy.  Now everyone including Krugman would say the Riksbank is steering the nominal economy.

Does this sound familiar?  Yup, it’s what the ECB did at the same time.  In 2011 the eurozone was doing about as well as the US, but by 2013 NGDP growth in the eurozone was falling far behind US rates.

Some people might argue that the eurozone is not a good comparison; the southern members have severe structural problems.  That’s the beauty of the Swedish example—Sweden is a neoliberal economy with strong fundamentals.  Not much debt.  Good at exporting.  Etc., etc.  And what happened when the Riksbank tightened money in 2011?  Here’s Mark again:

Between 2010Q4 and 2013Q3 Sweden’s NGDP has only grown at an average rate of 1.7% annually. This is barely faster than the 1.6% and 1.3% rate it has averaged in Denmark and the Euro Area respectively, and it is dramatically slower than the 3.9% rate it has averaged in the US.

Has the Riksbank done anything differently? Most definitely yes.

By January 2011 its monetary base was reduced to only 2% more than it had been in August 2008. Starting in July 2010 the repo rate was raised in quarter point increments until it reached 2.00% in July 2011 where it remained until December 2011. Since then the Riksbank was eased somewhat with the monetary base now back up to 23% larger than it was in August 2008 and the repo rate having been reduced to 1.00% by December 2012 and to 0.75% only on December 18, 2013.

In contrast the Fed has maintained its zero interest rate policy throughout and has initiated not one but two separate QE programs since the Riksbank left the zero lower bound.

Krugman seems to believe that monetary policy rulz when exchange rates are flexible and interest rates are above the zero bound.  So why not cite Sweden as a textbook example of the folly of tight money?  Why make vague comments about household debt?

Does fiscal policy explain what’s going on?  Once again, Mark:

What about fiscal policy?

In my opinion the most objective way of measuring fiscal policy stance is the change in the general government cyclically adjusted balance, particularly the cyclically adjusted primary balance (CAPB). The cyclically adjusted balance takes into account any changes in the general government budget balance due to the business cycle. Thus changes in the cyclically adjusted balance are mostly due to discretionary fiscal policy, and consequently may be taken as a proxy for the degree of fiscal stimulus. The CAPB goes a step further, factoring out changes in net interest on government debt and thus ensuring that practically all of the changes in fiscal balance are discretionary in nature. The best place to find CAPB data is the IMF Fiscal Monitor. You can find the CAPB on the bottom half of Table 2 on page 70:

http://www.imf.org/external/pubs/ft/fm/2013/02/pdf/fm1302.pdf

Between calendar years 2007 and 2010 the Sweden’s CAPB decreased by 1.6% of potential GDP, which was expansionary. But for comparison, the CAPB of Denmark, the US and the Euro Area decreased by 4.6%, 5.3% and 3.1% of potential GDP between 2007 and 2010 respectively. And in 2010, the year that Sweden soared into the lead, Sweden increased its CAPB by 0.7% of GDP whereas Denmark, the US and the Euro Area decreased theirs by 0.3%, 0.2% and 0.2% of potential GDP respectively. Thus the year Swedish NGDP took off, her fiscal policy stance was actually contractionary in contrast to the expansionary policy stance of the other three currency areas.

.  .  .

Sweden’s CAPB has decreased by another 1.9% of potential GDP between calendar years 2010 and 2013. In contrast Denmark, the US and the Euro Area have increased their CAPBs by 1.8%, 4.4% and 3.7% of potential GDP between 2010 and 2013 respectively. Thus on average Sweden has had an expansionary fiscal policy during 2011-13 while the other three currency areas have had contractionary fiscal policy, and the currency area which has easily led in NGDP growth since 2010Q4, namely the US, has had the most expansionary monetary policy and the tightest fiscal policy of these four currency areas during this period.

And so it would seem that good monetary policy in 2008-2010 and bad monetary policy in 2011-13 completely account for Sweden’s relative boom, and then bust.

If you aggregated all of Mark Sadowski’s data-filled comments over the past few years into one paper, you’d have arguably the best single analysis of the interaction of monetary and fiscal policy in the developed world since 2008.  And yes, I’m including Ivy League academics like Paul Krugman, who has certainly said many wise things about the euro-debacle.

PS.  Unlike me, Mark is highly skilled at the technical side of macro.  And in all the long comments I quoted I couldn’t find even one misspelled word.  That just doesn’t happen in comment sections. He repeatedly defends my analysis despite being a moderate Democrat on other issues.  Who is this guy?  If there was any justice in the world, econ departments would be fighting over the opportunity to interview him at the AEAs.

Off topic.  Am I the only one who never realized how big Andromeda is?  It’s like monetary policy;  you may not see it, but it’s THERE.

Screen Shot 2014-01-01 at 6.23.02 PM

 


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88 Responses to “Krugman overlooks the smoking gun”

  1. Gravatar of 123 123
    1. January 2014 at 16:05

    High level of household debt may be a factor when comparing performance of Denmark and Germany – why did the same monetary policy produced results that are so different, and debt is a plausible candidate here. Of course, such a comparison may be an interesting technical excercise for Krugman, but it is not important for the policy analysis, where the key issue is Riksbank vs. ECB – an issue that Krugman almost neglects with his “don’t think that you want to place too much blame on the peg to the euro”.

  2. Gravatar of TallDave TallDave
    1. January 2014 at 16:27

    Goose, gander, sauce.

    Agree on Mark.

  3. Gravatar of Mark A. Sadowski Mark A. Sadowski
    1. January 2014 at 17:09

    Scott,
    I made a couple of corrections in that comment thread.

    “By January 2011 its monetary base was reduced to only 2% more than it had been in August 2011.”

    should read:

    “By January 2011 its monetary base was reduced to only 2% more than it had been in August 2008.”

    And:

    “In contrast Denmark, the US and the Euro Area have increased their CAPBs by 1.8%, 3.7% and 4.4% of potential GDP between 2010 and 2013 respectively.”

    should read

    “In contrast Denmark, the US and the Euro Area have increased their CAPBs by 1.8%, 4.4% and 3.7% of potential GDP between 2010 and 2013 respectively.”

    (Yep. US fiscal policy was tighter than the Euro Area’s in 2010 through 2013.)

  4. Gravatar of Mark A. Sadowski Mark A. Sadowski
    1. January 2014 at 17:15

    Darn it.

    “…in 2010 through 2013.”

    should read

    “…between 2010 and 2013.”

    (That’s what I get for adding a parenthetical comment.)

  5. Gravatar of ssumner ssumner
    1. January 2014 at 17:20

    123, I don’t think debt affects output very much. More likely Germany has a better industry mix for exports right now, and is also benefiting from labor market deregulation.

    Even Germany hasn’t seen very fast NGDP growth of late.

    Mark, I made the corrections you mentioned in the post. Let me know if I got it right.

  6. Gravatar of Mark A. Sadowski Mark A. Sadowski
    1. January 2014 at 17:26

    Scott,
    I was rereading the post when I realized the corrections were already there. That was fast!

    Yes, it’s perfect. Thanks.

  7. Gravatar of Geoff Geoff
    1. January 2014 at 18:11

    “And so it would seem that good monetary policy in 2008-2010 and bad monetary policy in 2011-13 completely account for Sweden’s relative boom, and then bust.”

    http://research.stlouisfed.org/fredgraph.png?g=qwQ

    To be consistent Sadowski would have to argue the same thing for US monetary policy, but that isn’t what I am seeing…

  8. Gravatar of TallDave TallDave
    1. January 2014 at 19:00

    I became a lot more skeptical of debt arguments after reading DeSoto’s book. Increased debt often reflects capital liberated by increased trust — poor countries generally have a large proportion of assets tied down by a poorly functioning formal economy.

  9. Gravatar of Benjamin Cole Benjamin Cole
    1. January 2014 at 22:29

    Yes, who is Mark Sadowski? The guy is dead-on solid all the time.

    Yes, Krugman is bending himself into pretzel to stay with his belief that only deficits can work, when it seems clear monetary policy works a lot better.

    And as for the right-wing and their obsession with tight money and zero inflation…fugetaboutit. It defies all reason. It is a religion or dogma.

  10. Gravatar of Ralph Musgrave Ralph Musgrave
    2. January 2014 at 02:45

    Sweden can’t be blamed for its concern about its housing bubble. So the key question is how to deflate a bubble without deflating the economy.

    A partial solution is to bar private banks from creating and lending out money, as advocated by Positive Money and others. Private banks create and lend money to property speculators big time when property prices are rising. In contrast, under a PM regime, money creation is done solely by the central bank, and the CB / government only creates and spends money if they think that general stimulus is needed.

    As to anyone wanting to borrow to purchase property or for any other purpose, they have to find another private sector non-bank entity to borrow from.

    The latter system would not stop all and sundry marking up the price of their houses in “tulip mania” type fashion. But it would put an end to private banks finding themselves with a large stock of mortgages worth less than their face value. And that’s largely what sparked of the crises five years ago.

  11. Gravatar of 123 123
    2. January 2014 at 04:08

    Scott: “I don’t think debt affects output very much”

    Debt overhang may reduce the neutral interest rate, making monetary policy tighter in Denmark vs. Germany.

  12. Gravatar of Michael Byrnes Michael Byrnes
    2. January 2014 at 04:24

    Ralph Musgrave wrote:

    “Sweden can’t be blamed for its concern about its housing bubble. So the key question is how to deflate a bubble without deflating the economy.”

    Lars Svensson wrote several articles about this. His argument: the Riksbank tightened policy out of concern about household debt overhang, but their tightnening actually led to higher loan-to-value and loan-to-income ratios (i.e. more debt overhang).

    http://www.voxeu.org/article/debt-deflation-and-riksbank-s-policy

  13. Gravatar of ssumner ssumner
    2. January 2014 at 06:18

    Talldave, Good point.

    Ralph, Yes, regulation is a more precise instrument than monetary policy. I suggest they focus not on the housing bubble per se (I don’t believe in bubbles) but rather excessive risk taking by banks due to moral hazard.

    123, If there is excess saving in Denmark doesn’t that lead to a Danish CA surplus? I’m not saying you are wrong, certainly some sort of “reallocation” argument is possible, but I’m just trying to figure out the mechanism.

  14. Gravatar of Mark A. Sadowski Mark A. Sadowski
    2. January 2014 at 07:20

    123,
    I’ve already responded to Krugman’s comments on the household debt issue. Since you brought up Germany I added it to the NGDP graph and the household leverage ratios. Here is what I find.

    Here’s a graph of NGDP for Sweden, Denmark, the US, the Euro Area and Germany since 2007. This is quarterly instead of annual since I thought the higher frequency is beneficial in explaining what happened. It is indexed to 100 in 2007Q3 since NGDP was close to the 2007 average for all of the economic entities that quarter.

    http://research.stlouisfed.org/fred2/graph/?graph_id=153435&category_id=0

    I don’t see very much difference in Denmark’s and Germany’s performance although they did trade places in 2011Q1 so obviously NGDP growth has been higher on average in Germany during the recovery. But since 2012 the differences between them are smaller than the differences between either of them and the Euro Area as a whole.

    Household and Non-Profit sector loan amounts can be found at the ECB Statistical Warehouse. The most comparable measure to the BEA’s Disposable Personal Income (DPI) measure is Household and Non-Profit sector Gross Adjusted Disposable Income (GADI) which can be found at Eurostat.

    Here are the debt leverage ratios (in percent) for the five entities in question. The figure for 2013Q2 is the average for 2012Q3 through 2013Q2 in order to address the fact that the Eurostat household income measures are not seasonally adjusted:

    Year-Sweden-Denmark-US-EuroArea-Germany
    2007—–98.5–193.2—-128.8–79.5–81.9
    2008–-103.5–201.0—-126.7–80.5–78.6
    2009–-107.3–203.8—-124.9–81.7–77.7
    2010–-112.5–201.2—-118.6–82.7–75.6
    2011–-114.1–198.8—-110.8–82.6–73.4
    2012–-114.5–198.7—-106.0–82.5–72.4
    13Q2–-114.8–196.6—-104.9–82.2–72.0

    Yes, household debt leverage is very high in Denmark. In fact it is the highest in the OECD and is only approached by Ireland and the Netherlands.

    But despite its far higher household leverage, Denmark’s NGDP performance is in between the Euro Area’s and Germany’s, both of which have far lower household leverage.

    Moreover, as Michael Byrnes points out above, ex-Deputy Director of the Riksbank Lars Svensson has argued that household leverage is inversely correlated to monetary policy stance, and furthermore that NGDP is a cause of leverage, not leverage a cause of NGDP. Thus Denmark’s high household debt leverage is not the cause of Denmark’s poor NGDP performance, but rather, Denmark’s poor NGDP performance is making Denmark’s already high household debt leverage even higher than it would be otherwise.

    In my opinion, Lars Svensson is exactly right, and in this particular instance, Krugman is reversing cause and effect.

  15. Gravatar of genauer genauer
    2. January 2014 at 08:10

    I want to question a little bit, to what degree the Swedish EURSEK=X exchange rate was the result of deliberate Swedish CB policy. In times of crisis there is a flight to stronger players (The Euro until End of 2009, when Ireland and Greece popped up)and the subsequent overshoot the flight to a supposedly safe haven in Europe, but outside the Euro, just like into the Swiss Franc, until the Swiss took firm action in Nov 2011, and declared a unilateral, “whatever it takes” peg to the deutschmark. Small countries just got filled up with flight money.

    This way it makes a lot more sense from the point of view of an anxious german investor.

    Having said that, I also want to say, as a German Ordnungspolitik guy, that Mark A. Sadowski understands a lot more than most of the tenured American economists.

  16. Gravatar of Lars Christensen Lars Christensen
    2. January 2014 at 08:31

    Scott,

    For kind of reasons I don’t want to get into a deep discussion of Danish monetary policy, but it is very clear that the Danish peg to the euro is the key reason for Denmark’s lackluster growth performance since 2008 compared to Denmark. In Denmark the ECB effectively is our central bank. As a result we suffer in the same way as any other euro zone country.

    Anyway, my view on Sweden versus Denmark is spelled out here: http://marketmonetarist.com/2012/08/02/the-luck-of-the-scandies/

  17. Gravatar of Lars Christensen Lars Christensen
    2. January 2014 at 08:40

    btw Krugman’s talk about household debt in Denmark is not meaningful in anyway. Danish households also have extremely high private pension savings. Add to that strong public finances, no net foreign debt, very large FX reserves and a large current account surplus.

    If Danish household are not consuming because of high gross debt ratios then it is because they ignore every other measure of public and private debt sustainability. And that obviously is not the case. Furthermore, it should be noted that Danish households have very large cash holdings, which of course is consistent with deflationary expectations (too tight monetary policy).

    For those who “read” New Keynesian I recommend to read a new paper from the Danish central bank on the crisis. You should be able to read between the lines, but it is clear that the crisis to a large extent is a result of too tight money and very little else.

    If you are an expert on DSGE models you could try to replace the fixed exchange rate rule in this model with an NGDP level targeting rule and see how the Danish economy would have performed during the crisis. My educated guess is that the Danish economy would have done at least as well as the Swedish economy: http://www.nationalbanken.dk/C1256BE2005737D3/side/9E99B85BA4A2FE04C1257C440051EC2E/$file/DNWP%2088_2013.pdf

  18. Gravatar of 123 123
    2. January 2014 at 08:57

    Mark:
    1. Svensson is wrong, as he assumes that debt/NGDP ratio is a perfect measure of financial risk.
    2. Even if he was right, this would be irrelevant for our discussion, as he was discussing a single monetary area.
    3. Krugman makes it clear that Denmark performed better than the Eurozone average because Danish exchange rate was not overvalued in contrast to PIGS, but it performed worse than it could due to debt problems.

  19. Gravatar of 123 123
    2. January 2014 at 09:03

    Scott, yes, Denmark has got a current account surplus.
    And yes, unfortunately the intra-Eurozone allocation of demand is what interests Krugman here, given his Keynesian views.

  20. Gravatar of Jan C Jan C
    2. January 2014 at 10:52

    “123, If there is excess saving in Denmark doesn’t that lead to a Danish CA surplus? I’m not saying you are wrong, certainly some sort of “reallocation” argument is possible, but I’m just trying to figure out the mechanism.”

    1. Why would excess saving lead to a CA surplus? Its counterpart could be higher domestic investment as a percentage of GDP.
    2. What exactly is meant by excess saving? Country A could save 40% of GDP but invest 50% of GDP, so the CA would be minus 10%. Country B could save ‘only’ 20% of GDP and invest 10% of GDP, so the CA would be plus 10%.
    Which of the two has excess saving?

  21. Gravatar of Mads Llindstrøm Mads Llindstrøm
    2. January 2014 at 11:32

    Lars, I think it is good to point out that Denmark also has large private pension saving accounts. But for many people these savings account is also extremely illiquid. Personally (I am a Danish citizen) I would have take residency in another nation, before my pension company would pay out my pension prier to my retirement. Many Danish workers is in a similar situation to me. I think you should consider the liquidity before saying that household debt do not matter due to large private pension saving accounts.

    But I am very glad to see you make the connection between private pension saving accounts and large household debt. Obviously, when you force people to save large sums at pension accounts (force, as in if you want this job/sector X% of your pay must go to your private pension account), then people will save less elsewhere. Often people will be less inclined to pay off their mortgages.

    It gets really crazy when you consider how people typically finance private property in Denmark. Danish people typically finance private property by selling bonds. The same private property owners save in private pension accounts, where large parts of the investment goes to buying the bonds homeowners sold to finance their dwellings. Still Danish media and politicians almost always talks about the Danish pension system as if it is the best in the world.

  22. Gravatar of Mark A. Sadowski Mark A. Sadowski
    2. January 2014 at 15:02

    123,
    “Svensson is wrong, as he assumes that debt/NGDP ratio is a perfect measure of financial risk.”

    If you read all three of Svensson’s Vox articles on this topic, you’ll see that he considers the issue using a variety of measures: 1) nominal debt, 2) real debt, 3) debt to GDP ratio and 4) household debt to income ratio. Not only does he address the matter comprehensively, he addresses the very measure that Krugman claims to be the problem in Denmark.

    “Even if he was right, this would be irrelevant for our discussion, as he was discussing a single monetary area.”

    Yes, Svensson was talking specifically about Sweden, but the principle is a general one, and is applicable to any currency area.

    “Krugman makes it clear that Denmark performed better than the Eurozone average because Danish exchange rate was not overvalued in contrast to PIGS, but it performed worse than it could due to debt problems.”

    But we’re not comparing Denmark to the GIIPS, we’re comparing Denmark to the Euro Area as a whole, and the Euro Area as a whole cannot be overvalued with respect to itself.

  23. Gravatar of 123 123
    2. January 2014 at 15:23

    Mark,
    Denmark is not a currency area, it is a part of a currency area, so Svensson’s argument is not applicable.

    “we’re comparing Denmark to the Euro Area as a whole”
    You may be comparing, but that’s not what Krugman did.

    Svennson is ignoring the tail risk argument that creating a mini debt crisis today will prevent a large one ten years later.

  24. Gravatar of Mark A. Sadowski Mark A. Sadowski
    2. January 2014 at 15:55

    123,
    “Denmark is not a currency area, it is a part of a currency area, so Svensson’s argument is not applicable.”

    Are you claiming that if the ECB had a different monetary policy that this would have a different effect on Denmark’s price level, NGDP and household income level than that described by Svensson simply because it is part of the currency area and not the currency area itself?

    “You may be comparing, but that’s not what Krugman did.”

    In “Melancholy Danes” Krugman said:

    “I don’t think that you want to place too much blame on the peg to the euro; this would be a drag if Denmark had entered the crisis overvalued, but it doesn’t look as if this was the case.”

    In other words there’s no mention of the GIIPS, implied or otherwise. Krugman claims that the krone was not overvalued relative to the euro (which is probably true). Thus the relevant comparison is the Euro Area, not some subset of the Euro Area.

    “Svennson is ignoring the tail risk argument that creating a mini debt crisis today will prevent a large one ten years later.”

    I do not follow what you are saying here at all.

  25. Gravatar of 123 123
    2. January 2014 at 17:47

    Mark,
    “Are you claiming that if the ECB had a different monetary policy that this would have a different effect on Denmark’s price level, NGDP and household income level than that described by Svensson simply because it is part of the currency area and not the currency area itself?”
    Mark, forget the monetary policy, Denmark does not have it. If Denmark had lower level of household debt, household debt would grow faster than it is now, and NGDP would grow faster too (holding the ECB stance constant).

  26. Gravatar of 123 123
    2. January 2014 at 17:52

    Mark, remember that the fiscal stimulus works in an individual part of a monetary zone (if thete is no credit risk). The same way high local debt can restrain the local growth.

  27. Gravatar of Erik Erik
    3. January 2014 at 00:26

    Stefan Ingves latest statements is truly remarkable stuff. He effectively seems to say that the Riksbank should abandon inflation targeting and instead focus on (debt and bubble fears) more than three years in the future.

    (Swedish link)
    http://www.di.se/artiklar/2014/1/3/ingves-vill-ha-bostadskommission/

  28. Gravatar of genauer genauer
    3. January 2014 at 03:17

    Denmark has a monetary policy, and this is keeping a tight 7.45 peg to the Euro, within a 0.2% range

    Sweden keeps a looser peg, tightened, when they decide to join. The decision I expect in 1 – 3 years, then joining in 3 – 5 years

    Just look at e.g.
    http://www.economist.com/news/finance-and-economics/21591873-creeping-ascent

    for example the employment rate graph, to see what the future will look like, with the rest of Euroland catching up to Germany, and positive current accounts already now.

    http://www.economist.com/blogs/graphicdetail/2014/01/european-economy-guide

    defacto Switzerland and most of the Balkans are already pegged to the Euro

    The KfW provides 2.0% loans to promising SME’s in Spain and Ireland, and experience Germany gained during the reconstruction of Eastern Germany

  29. Gravatar of ssumner ssumner
    3. January 2014 at 08:43

    Mark, Thanks for the Denmark/Germany comparison. Not much difference.

    Genauer, There are many types of monetary policy decisions, including “regime decisions” such as whether to peg to the euro. The Swedes could have done so but chose not to. That decision was wise. Not sure what your last comment is supposed to show, other than that the eurozone is a complete disaster. In 2014 the eurozone will fall even further behind the US in per capita GDP. The past decade has been a disaster with no sign of a turnaround in the near future.

    Lars, Thanks for the info on Danish debt.

    Jan, The Keynesian argument is that desired saving might exceed desired investment at the zero bound, forcing income lower. Of course it depends on the monetary policy, but Denmark has no control over that variable, if they peg. It could also lead to a CA surplus.

    Erik, Very interesting comment, and very sad.

  30. Gravatar of Mark A. Sadowski Mark A. Sadowski
    3. January 2014 at 09:22

    123,
    “Mark, remember that the fiscal stimulus works in an individual part of a monetary zone (if thete is no credit risk). The same way high local debt can restrain the local growth.”

    And in fact if we had a measure equivalent to CAPB for the household sector we could talk of whether household fiscal policy was expansionary or contractionary. The closest equivalent I can think of is financial accounts “net lending”, and if you take the ratio of household sector net lending to GDP what you find is that in the Euro Area household sector net lending moved from (+2.0%) of GDP in 2007 to (+4.2%) of GDP in 2009 and it fell back to (+2.8%) of GDP in 2012. In contrast, in Denmark household net lending has moved from (-4.7%) of GDP in 2007 to (+0.8%) in 2012 with a relatively minor pause in this trend in 2010 and 2011. So household sector fiscal drag has been a consistent problem in Denmark and is much greater than in the Euro Area.

    On the other hand compare this to the US where household sector net lending (using an SNA compatible measure) moved from (-1.8%) of GDP in 2006 to (+8.8%) of GDP in 2011 and then fell to (+6.0%) of GDP in 2012. So from trough to peak the change in the household sector fiscal balance was nearly twice the size in the US than in Denmark relative to GDP, and this is true despite the fact that household sector leverage was substantially greater in Denmark than in the US.

    In short there is no firm relationship between the level of household sector leverage and household sector net lending across countries. As Lars Christensen points out above there may be institutional reasons for why household sector leverage is so much higher in Denmark than everywhere else. Thus what does it really mean to say household sector leverage is “high” in Denmark?

    “Mark, forget the monetary policy, Denmark does not have it. If Denmark had lower level of household debt, household debt would grow faster than it is now, and NGDP would grow faster too (holding the ECB stance constant).”

    Of course, if one could wave a magic wand and instantaneously reduce household sector leverage this would be true of any country all other things being equal. But no such magic wand exists.

    On the other hand a different monetary policy is a feasible choice and tight monetary policy reduces nominal household incomes and promotes deleveraging which leads to household sector fiscal drag. Looser monetary policy would increase nominal household incomes and decrease the incentive for household sector deleveraging and the consequent household sector fiscal drag.

    Again, I reiterate, Krugman has cause and effect backwards.

  31. Gravatar of genauer genauer
    3. January 2014 at 09:48

    Scott,

    based on what metric / Figure of Merit (FOM) has the Euro currency union been a “complete disaster”, especially in comparison to the US / UK, Japan?

    Please plot it from 1992 on. If possible, try to focus on “median” numbers.

    For the moment, I would say, it has shown the poverty of anglo-amercian economic thinking, and induced renewed interest in Ordnungspolitik.

    After Jens Weidmann called it required reading for all Politicians,

    used copies of “Foundations of Economics” by Eucken, Walter. (Springer,2011) [Paperback] are selling for 302 Dollar,

    compared to “The Conscience of a Liberal by Paul Krugman (Jan 12, 2009)” going at 99 cent : – )

  32. Gravatar of 123 123
    3. January 2014 at 10:15

    Mark:
    “Of course, if one could wave a magic wand and instantaneously reduce household sector leverage this would be true of any country all other things being equal. But no such magic wand exists.
    On the other hand a different monetary policy is a feasible choice …”
    No, different monetary policy is feasible for the whole currency area. For Denmark, feasible policy is macroprudential policy (relaxing regulations that constrain household leverage), and fiscal policy.

    “Krugman has cause and effect backwards.”
    No, you are overstating his guilt. He is only guilty of mixing two different policy issues in one paragraph in a Keynesian manner, that’s what is the source of the confusion.

    And by the way, why haven’t you started a blog? I am subscribing to your comments with a RSS reader, but the feed includes your comments in some blogs only.

  33. Gravatar of 123 123
    3. January 2014 at 10:21

    Scott, Mark,

    Another way to read Krugman is the following: he is using Keynesian external balance/internal balance framework in his post, and he is concerned with Danish, not Eurozone policy. It would be absurd to use it if Denmark had an independent monetary policy, but since it doesn’t, it is defensible. Krugman assigns the ECB policy to external balance, and he notes that Denmark does not have the external balance problem. This means that Denmark is free to use domestic policy tools (especially fiscal tools) to achieve the internal balance. So the household debt comment can be read “Gee, these Danes underestimated the amount of fiscal stimulus they need to do. They forgot that their household debt is too high, and without extra fiscal stimulus internal balance would not be achieved”.

  34. Gravatar of Mark A. Sadowski Mark A. Sadowski
    3. January 2014 at 11:26

    123,
    “No, different monetary policy is feasible for the whole currency area. For Denmark, feasible policy is macroprudential policy (relaxing regulations that constrain household leverage), and fiscal policy.”

    Unlike the Euro Area members Denmark still has its own currency. Pegging it to the euro is also a policy choice. Unpegging the krone is also feasible even if it would be a substantial change and involve breaking some committments. I also think it would be more effective than resorting to macroprudential or fiscal policy changes.

    But I think we’re now getting away from what I think was my initial point, which is that the difference in monetary policy between Denmark and Sweden explains their different outcomes far more easily than household debt does.

    “No, you are overstating his guilt. He is only guilty of mixing two different policy issues in one paragraph in a Keynesian manner, that’s what is the source of the confusion.”

    I wouldn’t call it confusion. I would call it frustration. Krugman is one of my favorite bloggers, but he routinely dismisses or ignores monetary policy, and this is why and when I feel compelled to take issue with him.

    “And by the way, why haven’t you started a blog? I am subscribing to your comments with a RSS reader, but the feed includes your comments in some blogs only.”

    I didn’t know such a thing was possible or that anyone (especially someone who apparently disagrees with me so much) would find my comments interesting enough to do such a thing.

    I would never have considered starting a blog until about a year ago when I realized my commenting had become informed and disciplined enough that blogging made sense. I did some guest posts at Historinhas and one at Macro Mania in the middle of last year which gave me a taste of what it might involve.

    My initial posts were way too long and involved too much effort. Some of my *comments* probably would make good posts in and of themselves.

    But at the moment I have one big project that needs finishing and, more urgently, my current financial situation is so bad that it is surreal. Starting a blog would require putting my personal affairs in order first.

    But thanks very much for the interest and encouragement.

  35. Gravatar of 123 123
    3. January 2014 at 12:20

    Mark:
    “But I think we’re now getting away from what I think was my initial point, which is that the difference in monetary policy between Denmark and Sweden explains their different outcomes far more easily than household debt does”
    Unless you are interested if the decisions of Danish government are optimal, as Krugman apparently is.

    “I wouldn’t call it confusion. I would call it frustration. Krugman is one of my favorite bloggers, but he routinely dismisses or ignores monetary policy, and this is why and when I feel compelled to take issue with him.”
    I never defend him when he ignores the monetary offset except in the cases involving the a part of the monetary area. And he does not completely ignore the monetary policy here, he said ” place too much blame on the peg to the euro”, so maybe he meant that some of the blame can be placed on the euro.

    “I wouldn’t call it confusion. I would call it frustration. Krugman is one of my favorite bloggers, but he routinely dismisses or ignores monetary policy, and this is why and when I feel compelled to take issue with him.

    “I didn’t know such a thing was possible”
    This is a feed on your typepad activity: http://profile.typepad.com/sadowskiudeledu/activity/atom.xml

    “especially someone who apparently disagrees with me so much”
    we start with the same market monetarist framework, and I see two differences:
    1. I am more interested in the optimal policy of individual member states of the Eurozone than most
    2. some time ago we discussed the ECB and LTRO at this blog. Our disagreement was mainly driven by the fact that you think that the main monetary problem in 2008-09 was inability to commit that the monetary base expansion was permanent, while my position is that at the end of 2008 monetary base has vastly exceeded the long term level, and the problem was the inability to commit to the optimal path of the monetary base in the near future (on the 1-3 year horizon).

    “Some of my *comments* probably would make good posts in and of themselves. ”
    That was my point.

  36. Gravatar of genauer genauer
    3. January 2014 at 12:37

    Mark,

    Scott and 123 are not the only ones, reading your “comments” with great interest, especially if they are detailed (a.k.a. as long : – )

    While disagreeing on many things.

    Just as Scott, I can imagine you very well at some tenured position. Princeton should just kick out the idiot Krugman, to make place : – )

    just for reference, some more details on the currencies:

    Swiss franc (one sided) pegged at 1.2 to the Euro
    Albanian leg EURALL=X 137 for one Euro
    Macedonian denar EURMKD=X 61 to the Euro
    Polish zloty EURPLN=X 4.2

    wiki/Montenegro_and_the_euro “has no own currency”
    This also hints to 4 states outside the EU with Euro issuing rights, interesting, isn’t it?

    Romanian leu closing in on 4.5

    Bosnia eurbam=x 1.96 to the euro, they apparently do like to keep the former deutschmark exchange rate, since 1998 : – )

    serbian Dinar

    Counting 18 official Euro members, and another 11 unofficial

    All subscribing to Bundesbank doctrine of hard money, with a 2.0% inflation rate as a single mandate

  37. Gravatar of Jason Jason
    3. January 2014 at 12:42

    With the naked eye, you typically only see the central core even in the darkest places.

    It looks more like this:
    http://www.dl-digital.com/astrophoto/astrpix/m31-fullframe.jpg

    Though eventually it will look like this:
    http://upload.wikimedia.org/wikipedia/commons/4/44/Milky_Way_%26_Andromeda_Galaxy_Collision.jpg

  38. Gravatar of Mark A. Sadowski Mark A. Sadowski
    3. January 2014 at 14:36

    Scott,
    “Am I the only one who never realized how big Andromeda is? It’s like monetary policy; you may not see it, but it’s THERE.”

    I meant to mention this before now. I came across the following passage in Adam Tooze’s “The Wages of Destruction: The Making and Breaking of the Nazi Economy” recently.

    “What is unmistakable is that in both 1933 and 1934 there was a powerful ‘natural’ recovery in the German business sector. In 1933 investment expenditure-mainly in stock building-was a major driver of the recovery. The first signs of of this upswing had underpinned the strange wave of optimism that befell the Weimar Republic shortly before its demise. After 1933 government left such a deep imprint on the evolution of the economy that talking about the continuation of the ‘natural recovery’ is a degree speculative. We cannot know with any certainty what might have happened if a different government had been in power. However, the signs of continued upswing in German business are there in the statistics…”

    He goes on to give specific examples.

    Well, Adam Tooze is a very fine historian, but he is clearly not an economist.

    Currency controls were imposed in July 1931, effectively taking Germany off the gold standard 18 months before Hitler became Chancellor. This freed the Reichsbank to pursue expansionary monetary policy, which according to Peter Temin, it had started by at least the summer of 1932. The League of Nations Statistical Yearbook states that Germany’s industrial production reached bottom in August 1932 and had already increased 6.8% by January 1933, the month Hitler entered office.

    By April 1934, when Germany issued its first MEFO bill, and started running its first “large” deficit (about 5.4% of GDP in FY1934 according Albrecht Ritschl, counting the “shadow” budget), industrial production was already 45.8% above the level it had been in August 1932.

    What Adam Tooze calls a “natural recovery” I call good monetary policy. You may not see it, but it’s there.

  39. Gravatar of Erik Erik
    4. January 2014 at 03:14

    Lars svennson replies to ingves

    (In english)
    http://larseosvensson.se/2014/01/03/ekonomistas-problems-with-the-housing-market-are-no-excuse-for-ingves-to-miss-the-inflation-target/#more-1525

  40. Gravatar of ssumner ssumner
    4. January 2014 at 06:55

    Genauer, Around 2010 the US and eurozone had roughly the same unemployment rates. Now the eurozone has a rate that is 500 basis points higher. That human suffering is caused by the euro.

    The data you gave me suggests that in 2014 the eurozone will fall even further behind the US, so the disaster is getting worse.

    You cite the wisdom of the Germans. Those would be the people who said a few years ago that we can’t have monetary stimulus because the ECB must focus like a laser on prices. But now that monetary stimulus is needed to hit the 1.9% inflation target, they suddenly insist that inflation isn’t the right target, the ECB must focus on stopping a German housing “bubble,” even though German housing prices are much lower that 20 years ago.

    123, I agree that the Danes could make some gains through fiscal stimulus (no monetary offset), but I still would oppose that option, as there are much better ideas available, such as devaluation. Also recall that monetary offset still applies at the eurozone level. Thus the ECB will tighten to offset the impact on eurozone AD and inflation, which means AD increases in Denmark are offset by declines elsewhere.

    Genauer, You said;

    “All subscribing to Bundesbank doctrine of hard money, with a 2.0% inflation rate as a single mandate”

    Lots of countries subscribed to the gold standard in 1930. That doesn’t make it a wise policy.

    Thanks Jason.

    Mark, Good analogy with Germany circa 1933.

    Thanks Erik.

  41. Gravatar of ssumner ssumner
    4. January 2014 at 07:00

    Jason, I can’t wait for the collision! It will be awesome. And as I recall almost no stars will collide.

  42. Gravatar of 123 123
    4. January 2014 at 07:25

    “Also recall that monetary offset still applies at the eurozone level. Thus the ECB will tighten to offset the impact on eurozone AD and inflation, which means AD increases in Denmark are offset by declines elsewhere.”
    No, as Denmark is outside the formal Eurozone.

  43. Gravatar of genauer genauer
    4. January 2014 at 11:47

    Scott,

    1. Apart from me seconding your moral support for Sadowski, I used pretty neutral language, not using the word “wisdom”, mainly reporting facts (countries using or pegging to the Euro) and asking you for justifying your “total disaster” statement, with time series.

    2. You seem to have choosen unemployment for this, quoting a momentary delta in “basis points”, the first person on earth I see doing this. I would like to refer you to Figure 3 in http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Unemployment_statistics

    You can see

    a) that even during to minimums of the pre crisis time, unemployment numbers in Euroland (EA-17) were about 3% higher (7.5 vs 4.5% in the US), not exactly surprising, given the significantly more generous terms in a more social democratic Europe

    b) The US shot up End of 2008 by 5.5% above prior minimum, is at present at 7.1%, 2.6% above pre crisis minimum. The EA-17 is reaching the maximum overshoot of 4.5% just now, due to the delay in government actions in southern member states

    c) Given that just talking about one country, namely Spain, with a population fraction of about 20% of Euroland, with a “structural unemployment” of 23%, apparently using this apparatus in a very different way compared to your, my, and most other countries, adds about 20% * (23 – 5% NAIRU,whatever that concept this is worth) = 3.6% to this number, count this by 3.6% * (1- 20%) to 2.9%

    d) Therefore I could argue, that Euroland is actually even now, ignoring the time shift, relatively better of by 1.0% = 2.6% – (4.5% – 2.9%). A rather arbitrary numerical exercise, of course, but “Total disaster” looks different to me : – )

    3. Where you got your ‘But now that monetary stimulus is needed to hit the 1.9% inflation target, they suddenly insist that inflation isn’t the right target, the ECB must focus on stopping a German housing “bubble,”’ from, I would be really interested to know.

  44. Gravatar of Daniel Daniel
    4. January 2014 at 11:54

    genauer,

    This doesn’t have to be a pissing match.

    The facts are very clear – the European Central Bank’s monetary policy is tailored to suit Germany and Germany only.

    And thus, the rest of the Eurozone and the countries that unwisely chose a Euro peg are subjected to tight money – leading to poor macro performance (in some places worse than others).

    So what exactly is your point ?

  45. Gravatar of genauer genauer
    4. January 2014 at 12:39

    Daniel,

    your claim “European Central Bank’s monetary policy is tailored to suit Germany”

    is pretty much the opposite of Scott’s

    “the ECB must focus on stopping a German housing “bubble,”

    both false, unreferenced, or ….. ?

  46. Gravatar of Jan C Jan C
    4. January 2014 at 14:01

    Mark,
    “What Adam Tooze calls a “natural recovery” I call good monetary policy. You may not see it, but it’s there.”

    Doesn’t ‘natural’ in this context means a recovery that was not dependent on fiscal policy? Maybe not a good choice of words from Tooze. I read the book some time ago and it didn’t seem to me that Tooze is ignorant of monetary policy. I should read that part of the book again.

  47. Gravatar of Daniel Daniel
    4. January 2014 at 14:08

    http://macromarketmusings.blogspot.ro/2012/01/is-there-really-german-bias-at-ecb.html

    http://esoltas.blogspot.ro/2012/04/uber-alles.html

    Now either you’re oblivious of the facts – namely that the ECB is shafting non-Germans.

    Or you think they deserve it for not being righteous.

  48. Gravatar of genauer genauer
    4. January 2014 at 14:41

    Daniel,

    your first link states that your claim is in direct opposition to most others

    “Scott Sumner, Christian Odendahl at The Economist pushes back on my claim that there is a German bias to ECB monetary policy. He argues that ECB monetary policy was not appropriate for Germany prior to the crisis and since then it is only been a coincidence that ECB policy seems more aligned to the needs of the German economy than the rest of the Eurozone. He therefore concludes there is no German bias at the ECB”

    your second link is technically hilarious. Given the strong economic interaction of the core Euro states, any other combination of countries, maybe with some 3 or 6 month lag, could produce any correlation number one desires.

    This is intellectual bankruptcy.

    The only thing constant here is that both you and Scott arguing from opposite sites engage in constantly blaming Germany for all ills in the world.

    Just in case you missed it:
    2 German ECB board members resigned in protest, the 3rd one now for “family reasons”, and the fourth, Jens, demands that the decision protocols are made public, following the FED, and in order to name and shame those who vote for rate reductions.

    About 170 german economics professor sign protest letters, a number of them are suing at the supreme court, and some founded political parties (AfD, coming pretty close to 5% at the last elections) to abandon the Euro.

    Does this sound like german economists being happy with the ECB?

  49. Gravatar of Daniel Daniel
    4. January 2014 at 14:56

    So the ECB is pursuing an insanely tight monetary policy. Germans wish to make it even tighter and throw a tantrum when they don’t get their way.

    Conclusion – Germany is blameless.

    http://thefaintofheart.wordpress.com/2012/01/06/the-pro-german-ecb-is-not-a-myth/

  50. Gravatar of genauer genauer
    4. January 2014 at 15:14

    Daniel,

    dont obscure the simple facts, that the ECB is running an ultra loose policy with just 0.25%, and plenty of LTRO.

    It looks more and more, that you just want to warm up your 2 year old, generally ignored repetitive uttering (2, 3, 8 commments, huugh what an impressive audience, for essentially the same shtick, especially given that you pretty openly played to better known names like Scott : – )

    That does really warrant an ad hominem: LOOOOSER

  51. Gravatar of Daniel Daniel
    4. January 2014 at 15:52

    http://www.slate.com/content/dam/slate/blogs/moneybox/2013/03/18/ecb_s_monetary_policy_can_t_just_be_good_for_germany/euro_NGD.jpg.CROP.article568-large.jpg

    If that’s what “ultra-loose policy” looks like, then you’re just another moron.

    Go hold hands with Geoff, you’d get along swimmingly.

  52. Gravatar of ssumner ssumner
    4. January 2014 at 18:23

    Genauer, The eurozone has experienced a double dip recession, which correlates almost perfectly with the two big drops in NGDP growth. We know the second drop was triggered by tight money at the ECB, which was not at the zero bound (and hence is steering AD.) In contrast, the Fed did not adopt a tighter policy in 2011, the US did not experience a big drop in NGDP growth after 2011, and the US did not experience a double dip recession. Since 2008 there have been two big surges in unemployment in the eurozone, both caused by ultra-tight ECB monetary policy.

    In my view the evidence is very strong that causation runs from NGDP shocks to high unemployment.

    Regarding the German housing “bubble” check out this post:

    http://www.themoneyillusion.com/?p=25492

    As for low interest rates proving that the ECB is running an ultra-loose monetary policy, may I remind you that interest rates in Germany were very high in 1923. Or that rates were very low in the US in 1932. Did the US have an ultra-loose policy in 1932, and did Germany have an ultra-tight policy in 1923? And how would you describe Japanese monetary policy over the past 20 years of deflation?

    You said:

    “The only thing constant here is that both you and Scott arguing from opposite sites engage in constantly blaming Germany for all ills in the world.”

    This is comical given that I am one of the most pro-German bloggers in America. I’ve frequently defended their huge CA surplus. I’ve praised their labor market reforms, and suggested other countries should follow. Even monetary policy, where I disagree, is determined by a vote of 18 countries, so Germany is not solely to blame their either, it’s a joint decision that has caused the disaster.

  53. Gravatar of genauer genauer
    5. January 2014 at 11:39

    Scott,

    The Wording got a little bit awry last night, with Daniel saying the opposite of you, and me getting itched with your “total disaster”. 2 or 3 % higher unemployment rates are certainly not a nice thing, but not a disaster in European countries with working social systems.

    Disaster is, when you have to carry orders for a “friendly” nuclear strike on your own home town.

    Daniel actually succeeded to irk me to a degree using a word like “loser”. Hasn’t happened in a long time. Sometimes it just gets on my nerves enough with what we see as pointless, endless anti-German hate mongering.

    You too see many things from the perspective of the one American Nation, kept unified by force (Civil War), common social institutions, and so far with the wiki/Exorbitant_privilege of providing the global reserve currency. And with an export fraction of a little more than 10% of your GDP pretty immune to exchange rate swings.
    Nobody else has this luxury.

    Quite a number of EU countries are suffering from the consequences of the real estate / debt bubbles until 2008, but it is certainly not a “total disaster”, but much more like the wiki/Anna_Karenina_principle:
    Happy families are all alike; every unhappy family is unhappy in its own way.

    Portugal, Spain, Italy, Ireland, Greece, to a lesser extent France are facing very different structural problems, and none of them are solved with just some injection of unconditional cheap money.

    2. The Rule of Law

    Something most American economists are missing out on, is that the setting of European Monetary Policy is not up for discussion by funny theoreticians, especially not from the outside.

    “no bail out, no money printing” are enshrined in treaties. Every EuroArea member has signed wiki/European_Stability_Mechanism, as “public international law”

    People have two choices,
    to be on the good sight of “The Law”, enjoy 2.0% loans via ESM for the government, and for SME’s via EIB / KfW support programs,

    or to play the wild card, to go criminal, jump into the abyss, and to face the wrath of the rest of Europe, which typically accounts via trade for 40% of their GDP, and to be left outside alone in the cold.

    3. ESM as the financial NATO

    This mechanism is in many ways modeled after the NATO “flexible response”. No blank cheques, and with the nuclear option of OMT, which will most likely never be used, lurking in the background.

    We have established a permanent mutual financial security mechanism, signed, funded, and staffed, operational, and Reinhart&Rogoff papers and Krugman columns ignoring it, are just childish.

    Therefore, economically, it is “all quiet on the southern front” now, interest rates are dropping like stones, Ireland is scheduled for February 2014 to get even with 10 year rates in the US, Italy and Spain are under 4%, and Hollande will face his intra-French demons.

    4. German CA surplus

    Foreign investments are notorious for bad results, from the south sea bubble, over English loans to US state loans for canals in the 1840ties, the Federal US refused to cover : – )

    At present Germany provides about 750 billions at miserable rates (minus 1.5% after inflation) via Target 2 and similar, to our lovely European neighbors, and we will be more than happy to spend it on being a little bit more in the southern sun, as we did in all the decades until 2005

  54. Gravatar of Daniel Daniel
    5. January 2014 at 13:56

    2 or 3 % higher unemployment rates are certainly not a nice thing, but not a disaster

    followed by

    very different structural problems, and none of them are solved with just some injection of unconditional cheap money.

    You do realize you just contradicted yourself, right ?

    The Rule of Law

    Where exactly does it say that millions of people must go unemployed (provided, of course, they’re not German) in order for inflation to be 1,5% ? And even that is too high for Germany’s liking !

    Krugman may be an polarizing figure, but he isn’t always wrong

    http://krugman.blogs.nytimes.com/2013/11/12/germanys-lack-of-reciprocity/

    Complain all you want, but the rest of Europe is right to be angry at Germany.

  55. Gravatar of ssumner ssumner
    5. January 2014 at 18:51

    Genauer, As I said I don’t agree with Daniel’s argument that the Germans are to blame for the eurozone crisis. Germany just has one or two votes on the ECB, the other countries are free to ignore Germany. The real problem in Europe is not real estate, it’s slow NGDP growth. Of course there are also bad economic models (Greece, etc) but that was true before the crisis. NGDP growth crashes cause big rises in unemployment.

    Having said that, Europe would be experiencing slow RGDP growth even with good monetary policy, but from a higher base, and with less unemployment.

  56. Gravatar of Daniel Daniel
    6. January 2014 at 02:52

    I never said Germany is solely responsible (it takes two – or 18 – to tango).

    However

    the other countries are free to ignore Germany.

    The political reality in Europe is such that Germany’s opinion cannot be ignored (witness the tantrum they threw when the ECB refused to tighten further).

    It’s like saying “see that big guy who can easily bully you ? You’re free to ignore him, you know”. It just doesn’t work that way.

    To provide you with another example – remember when Mexico’s president made some noises about ending the war on drugs ? And then US officials tightened the screw a little and he made an about-face ? Wasn’t he free to ignore US opinion ?

  57. Gravatar of ssumner ssumner
    6. January 2014 at 05:31

    Daniel, Mexico should just legalize pot like Colorado and Washington and Uruguay did. The US is a paper tiger, we wouldn’t do anything significant.

    And the rest of Europe should vote for the ECB to push inflation back up to 1.9%, the Germans won’t do anything significant to retaliate.

  58. Gravatar of genauer genauer
    6. January 2014 at 07:17

    I would be interested where both of you get the idea from, that Germany would not play by the rules.

    And the inflation rule is <=2.0% inflation as calculated in HICP for the whole EA-18, over mid-term. Last summer we had a perfect geometric average of 2.0% over the life time of the Euro.

    Interest rates were lower by a quarter percentage in November.

    Unemployment is at 5%, profits are good, I dont think the German unions need a special invitation to be a little more demanding this year, given their bargaining power.

    The universal minimum wage of 11 $ will raise wages also in non-unionized areas.

    The coalition treaty states, that we will raise certain pensions somewhat more, instead of lowering the contributions.

    Soo, Germany will for a while have a little higher inflation to compensate for somewhat lower numbers in other countries.

    Trust me, we have no intention to go down the japanese path.

    Daniel, the public opinion of Germany is excellent with the people in most other countries, see especially the

    PEW 2013
    http://www.pewglobal.org/files/2013/05/Pew-Research-Center-Global-Attitudes-Project-European-Union-Report-FINAL-FOR-PRINT-May-13-2013.pdf

    but also BBC 2013
    http://www.worldpublicopinion.org/pipa/2013%20Country%20Rating%20Poll.pdf
    Germany page 19, views by large EU countries large and rising, and especially in France at overwhelming 81%

    fascinating numbers given the substantial anti-German hate mongering by many media.

    The normal people know pretty well, that you can not built a community on crimes.

    But in the moment, some folks would try to not just bend but to openly break the maastricht treaty, there are plenty of effective ways to prohibit this. The ECJ ruling in the Irish Pringle case used "strict conditionality" about a dozen times. The Bundesverfassungsgericht ruling is still pending.

  59. Gravatar of 123 123
    6. January 2014 at 08:08

    Genauer,

    First, the target of the ECB is not optimal. If the ECB targeted 4% NGDP growth (level target), the Eurozone would get lower average inflation and higher unemployment compared to the situation under the current target.

    Second, current policy of the ECB is too contractionary under its current mandate, as the ECB admits the Eurozone may experience a prolonged period of a below-target inflation.

  60. Gravatar of genauer genauer
    6. January 2014 at 09:31

    123,

    there is no point in warming up the same discussion for the 426th time.

    We have the law and the majority vote on our site, everything is set up as it should, with the ESM and the AQR coming.

    Everything else is a crime, and will be dealt with accordingly.

    If you want, we could stray a little bit off topic, for a moment, and talk about what you know about Ordnungspolitik,

    or why we will certainly never become liable for the (financial) consequences of behavior like this:

    http://news.yahoo.com/restive-staff-seize-bosses-french-goodyear-161323951–finance.html

  61. Gravatar of 123 123
    6. January 2014 at 11:21

    Genauer,
    one additional weak datapoint, and the majority will act again, with Weidmann dissenting again.

    Germany is already suffering the financial consequences of tight money, earning tiny 0.25% on Target2 loans, while with normal money it could earn more.

    Draghi is a strong supporter of Ordnungspolitik in monetary matters.

  62. Gravatar of genauer genauer
    6. January 2014 at 11:44

    123,

    lowering the rate by the last quarter is

    STUPID BUT ­CONSTITUTIONAL : -).
    http://nymag.com/news/features/antonin-scalia-2013-10/

    The majority of Euro interest rates are tightly coupled to the German rate. They suffer the same negative consequences of such low rates just as we. If they find the advantages more important, so be it.

    In the moment we are not exactly afraid of heating inflation up excessively, are we?

    And Draghi, just as the other Mario, Monti, is a clever guy, who knows how Ordnungspolitik ticks, in contrast to the vast majority of anglo-american economists : – )

  63. Gravatar of 123 123
    6. January 2014 at 12:36

    Genauer,
    Let me quote you from Eucken lecture “Krisenmanagement und Ordnungspolitik” Weidmann gave one year ago:
    ” Schon vor einiger Zeit wurde – zum Beispiel von IWF-Chefvolkswirt Olivier Blanchard – vorgeschlagen, dass sich die Notenbanken höhere Inflationsziele setzen sollten. Neuerdings wird über einen Übergang zu nominalen Niveauzielen diskutiert.

    Die gemeinsame Idee hinter einer sogenannten Preisniveausteuerung oder einer nominalen Steuerung des Bruttoinlandsprodukts ist, dass die Geldpolitik nach einer Phase niedriger Inflation oder schwachen Wachstums eine Zeitlang höhere Inflationsraten toleriert, um wieder auf den Zielpfad zu kommen, und so der Konjunktur einen zusätzlichen Impuls gibt.

    Ich sehe diese Vorschläge skeptisch: Ein dauerhaft höheres Inflationsziel bewirkt dauerhaft höhere Kosten der Inflation; Niveauziele vermeiden das zwar, weil sie nur vorübergehend höhere Inflationsraten zulassen, haben aber eigene Probleme.

    Während der Krise den geldpolitischen Rahmen zu ändern, könnte im Übrigen das Vertrauen in die Notenbanken beschädigen und den Verdacht wecken, dass de facto andere Ziele hinter einem Strategiewechsel stecken.”

    Of course Weidmann is completely wrong here. 4% NGDPLT target would ensure the stability of inflation expectations, it would enhance central bank independence, simply it is the best way to achieve the sole price stability mandate of the ECB. On the other hand, Weidmann is right to criticize the discretionary approach of Blanchard, however Weidmann himself is guilty of this crime – the current situation whith prolonged period of below target inflation is a clear violation of the ECB mandate.

  64. Gravatar of genauer genauer
    6. January 2014 at 13:35

    123,

    nice try to transform this back to NGDP.

    The truth is of course, that just last summer we were at a perfect 2.0% over time, as I mentioned above, that being at current slightly under is absolutely no cause for concern, and of course no violation of the <=2.0% mandate.

    But it is extremely typical for folks like you to construe non-existing violations, to justify most severe crimes against the constitution ("no bail out"). That was the exact reason why these rules were written very specifically, because people like you would always try to weasel around them.

    Weidmann represents exactly what the vast majority in Germany thinks and wants.

    Maybe you say here, how you would define a "substantial" deviation of the <=2.0% rule, and justify it against a past dataset of Euro inflation of your choosing ?

  65. Gravatar of 123 123
    6. January 2014 at 13:52

    Genauer,
    there is no need for me to define anything. The ECB itself expects that the extended period of below-mandate inflation has started, i.e. it expects to violate the mandate in the near future. Read the latest introductory statements.

  66. Gravatar of genauer genauer
    6. January 2014 at 14:16

    quote ? reference ? significance ?

  67. Gravatar of 123 123
    6. January 2014 at 14:40

    Quote:”Such a constellation suggests that we may experience a prolonged period of low inflation, to be followed by a gradual upward movement towards inflation rates below, but close to, 2% later on. ”

    Reference: http://www.ecb.europa.eu/press/pressconf/2013/html/is131205.en.html

    Significance: after such a prolonged period, the geometric average of HICP will be below what the mandate requires.

  68. Gravatar of genauer genauer
    6. January 2014 at 14:53

    At the same time, inflation expectations for the euro area over the medium to long term continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2%

    The risks to the outlook for price developments are seen to be broadly balanced over the medium term.

    From the original(“the one with the artillery, draghi seems to like “big bertha : – )
    http://www.ecb.europa.eu/press/pressconf/2013/html/is131107.en.html

    “We have acted fully in line with our mandate of maintaining price stability with an objective of having an inflation rate below, but close to, 2%. That is not to be forgotten.”

    “As I said, we have a whole range of instruments that we can still activate before reaching the lower bounds. I mentioned some of them before but, in principle, we could even cut the interest rate, the MRO rate, further. So, we are not there yet.”

    How you construe a “violation of mandate” into that, remains a mystery to me : – )

  69. Gravatar of Daniel Daniel
    6. January 2014 at 15:12

    Weidmann represents exactly what the vast majority in Germany thinks and wants.

    So you’re admitting that the Germans are a bunch of inflation-phobes who don’t care about the human cost of a prolonged recession as.

  70. Gravatar of genauer genauer
    6. January 2014 at 15:22

    No, Daniel,

    I certainly do not “admit” any of your false claims, which are bordering on racist hate-mongering.

    We are just not accepting crimes against treaties, only a small minority like you claims to be beneficial to remedy the problems of a minority number of Euro member states.

  71. Gravatar of Daniel Daniel
    6. January 2014 at 15:34

    If it’s racist to point out that the ECB’s (and Germany’s) inflation-phobia has kept the Eurozone in a prolonged recession – then so be it, I am a racist.

    crimes against treaties

    Last time I checked, the treaty does not actually define ECB mandate beyond “price stability”. It is the inflation-phobes who choose to give it the narrowest possible meaning.

    beneficial to remedy the problems of a minority

    Good to know the millions of people without jobs are just an irrelevant minority.

  72. Gravatar of genauer genauer
    6. January 2014 at 15:36

    the treaty is very specific on “no bail out”

    it is you only who called them “irrelevant”

    the typical endless twisting of words

  73. Gravatar of Daniel Daniel
    6. January 2014 at 15:58

    So a relaxation of an insanely tight inflation target that causes unemployment is a “bail out” ?

  74. Gravatar of Daniel Daniel
    6. January 2014 at 16:05

    Dude, you admitted that unemployment is 2-3% higher than it would otherwise be (that means a few million people are out of work involuntarily) – and that can only mean that money is too tight.

    And then you say that Weidmann speaks for the Germans in their desire for tight money.

    From that, a sane man can only draw the conclusion that the Germans are perfectly happy with the current situation.

    How is it racism to point out the parties that are to blame ?

    Yes, France and Spain and Italy have structural issues. And the ECB has decided to compound those issues with tight money. And the only thing Germany has to say is that money isn’t tight enough !

  75. Gravatar of genauer genauer
    6. January 2014 at 16:06

    “no bail out”
    means that other countries do not become liable for the debt of others, involuntarily, through the central bank, and its actions.

    Countries can apply for very generous, voluntary ESM support,
    subject to the conditions of the creditors.

    Daniel, how about you think about a way to sue your way in courts, or convincing majorities to do your bidding?

    Because the rock is not moving, and you know that.

  76. Gravatar of Daniel Daniel
    6. January 2014 at 16:08

    So a monetary policy that brings the Eurozone to full employment is “a bail out”.

    The insanity of the inflation-phobes laid bare.

  77. Gravatar of ssumner ssumner
    7. January 2014 at 08:20

    genauer, You said;

    “And the inflation rule is <=2.0% inflation as calculated in HICP for the whole EA-18, over mid-term. Last summer we had a perfect geometric average of 2.0% over the life time of the Euro.”

    That’s utterly irrelevant for all sorts of reasons:

    1. The ECB does not do level targeting.

    2. Expected inflation going forward is below 2%.

    3. In 1933 the average inflation rate since 1913 was roughly 0%. Is that price stability?

    Your comments on German unemployment and minimum wages has no bearing on anything I said.

  78. Gravatar of genauer genauer
    7. January 2014 at 08:42

    Scott,

    if you would read the whole thread, you could see how often the inflation target of the ECB is spelt out precisely, with official references, and that the ECB is operating fully within its mandate.

    And with the German wages I explained to you, how that will be achieved with legal means.

  79. Gravatar of genauer genauer
    7. January 2014 at 09:46

    To provide the easiest, direct statement:

    http://www.ecb.europa.eu/mopo/strategy/pricestab/html/index.en.html

    ‘The ECB’s Governing Council has announced a quantitative definition of price stability:
    “Price stability is defined as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%.”
    The Governing Council has also clarified that, in the pursuit of price stability, it aims to maintain inflation rates below, but close to, 2% over the medium term.’

  80. Gravatar of Daniel Daniel
    8. January 2014 at 03:21

    Jens Weidmann speaks for the majority of Germans.

    http://worldofinterest.wordpress.com/2013/04/18/the-astounding-hypocrisy-of-jens-weidmann/

    Like I said – a bunch of inflation-phobes who don’t care about the human cost of a prolonged recession.

    Because ending the recession would be “a bail out”.

  81. Gravatar of genauer genauer
    8. January 2014 at 08:19

    @ Scott

    2 links relevant for your understanding, I stumbled upon today:

    1. Enforcement of Maastricht treaty

    Even some Munchau now admits, that we have not only the law on our side, but also the political will and the legal means to enforce it
    http://www.ft.com/intl/cms/s/0/73b623d8-73e0-11e3-a0c0-00144feabdc0.html

    „act in such a way as to stop the implementation of this programme in practice”

    “these programmes are subject to a national veto”

    So much for Germany being a “paper tiger” : – )

    2. Practicality of NGDP (markets)

    Cardiff in
    http://ftalphaville.ft.com/2014/01/07/1734802/the-economy-is-great-and-then-its-not-and-then-it-is-and-then/

    referring to a „detailed Brookings paper” :
    “the tools simply don’t exist to measure the economy with anything like the precision implied by these ridiculous GDP trackers. Not even years later, much less in real-time”

    @ Daniel

    Your latest links goes to a year old posting of somebody admitting:

    “I know I live in my own world, but I like it”

    “Something I don’t understand: Endogenous Money, Forward Guidance, and QE Exit”

    With exactly ZERO comments, and even not one single “facebook like”, not even from you : – )

    Did you ever consider asking for professional help, to get out of your autistic corner?

  82. Gravatar of ssumner ssumner
    8. January 2014 at 09:25

    geneaur, The question of whether the ECB is “within its mandate” is of course completely uninteresting. Its mandate may be wide enough to cover a range of inflation rates over the next few years, but surely what matters is whether it is doing a good job. There are mandate consistent outcomes that are far superior to other mandate consistent outcomes. For instance, a mandate consistent outcome that produced 1.9% inflation over the next three years is far superior to one that produces 1.0% inflation over the next three years. That’s assuming that you are correct about the mandate, which I don’t accept.

    The Murchau post has no bearing on anything I’ve said here. It in no way restrains the ECB from adopting a more expansionary policy, even if the OMTs are outlawed. I don’t even have an opinion on that subject. You are confusing tactics with policy. The ECB sets both.

    The Cardiff post has no implications for my NGDP targeting proposal, as I’ve explained many times. There are papers in the right column of this blog you can read if you actually want to understand the proposal, instead of just taking uninformed potshots. The short explanation is that revisions in 2 year NGDP growth rates are not macroeconomically important, and I favor level target of NGDP forecasts.

  83. Gravatar of genauer genauer
    8. January 2014 at 12:16

    Scott,

    for you, in an american economics department, and no skin in any investment, european constitutional law may be irrelevant. You will retire soon on generous terms.

    For those investing, or making decisions in Europe, and stay out of jail after that,

    obeying European law is all what counts, and not some academic theories : – )

  84. Gravatar of Daniel Daniel
    9. January 2014 at 03:33

    Nowhere in the treaty is an inflation target clearly defined.

    The fact that the ECB chooses an interpretation which leads to unemployement and a prolonged recession is a massive disgrace on their part. They are quite literally to blame for the economic hardship of millions.

    And the fact that the Germans choose to hide their prejudices behind legalistic definitions speaks very poorly of them.

  85. Gravatar of ssumner ssumner
    9. January 2014 at 06:25

    Genauer, It would help if you actually read what I wrote before responding, instead of completely mischaracterizing what I wrote. I didn’t say it’s OK for the ECB to violate the law. I said my preferred policy would not involve them violating the law. If getting 1.9% inflation through one technique is illegal, use a legal technique! God, how complicated is that to understand?

  86. Gravatar of genauer genauer
    10. January 2014 at 11:38

    @ Daniel,

    the treaties are set up the way we wanted it. In contains a lot of institutional and political wisdom.

    And we will of course not give one millimeter to tiny groups of racist hate mongerers, who promote crimes against the treaties.

    And as the BBC and Pew results have shown, we have not only the law but also broad majorities on our side.

    @ Scott

    I did read you carefully.

    Only for people outside the reach of european law enforcement

    ‘The question of whether the ECB is “within its mandate” is of course completely uninteresting’

    And my answer was pretty specific to this.

    You try to implement your ideas in your country, and we go by our rules here : – )

    And those restrict the toolset of the ECB in very clear terms.

  87. Gravatar of ssumner ssumner
    10. January 2014 at 15:20

    genauer, That’s a silly evasion, which suggests you’ve run out of ideas. The ECB is not allowed by law to cut interest rates? I don’t think so.

  88. Gravatar of Daniel Daniel
    10. January 2014 at 16:29

    crimes against the treaties.

    Thank you for proving my point.

    The fact that the Germans invoke such tortuous interpretations of the “treaties” to justify prolonging the recession is … very curious, to say the least.

    I wonder why they would do such a thing. Maybe because old prejudices die hard ?

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