Give war a chance
Let’s hope Barry Eichengreen doesn’t see this Yahoo article:
Japan has set the stage for a potential global currency war, announcing plans to create money and buy bonds as the government of Prime Minister Shinzo Abe looks to stimulate the moribund growth pace.
Economists in turn are expecting others to follow that lead, setting off a battle that would benefit those that get out of the gate quickest but likely hamper the nascent global recovery and the relatively robust stock market.
Update: Ryan Avent and Matt Yglesias have excellent posts criticizing ECB policy. Matt links to another great article from Ambrose Evans-Pritchard:
Japan’s premier Shinzo Abe has more or less ordered his central bank to both reflate and target jobs creation. The US Federal Reserve stands ready to inject stimulus until America’s jobless rate falls to 6.5pc. Yet the ECB professes itself helpless in the face of 11.8pc unemployment, a post-EMU record and rising each month.
The ECB’s Mario Draghi said there is “not much” that monetary policy can do to fight structural unemployment. If it really was “structural”, his plea might convince. It is not.
Ireland has one of the world’s most flexible labour markets yet its jobless rate has risen from 4.6pc to 14.6pc, and that includes the safety valve of massive job flight to the UK, US, and Australia.
. . .
Former ECB governor Athanasios Orphanides — a world expert on deflation –has broken loose, rebuking his ex-colleagues for standing “idly by” as Europe’s socio-economic disaster unfolds.
“We are in the middle of a policy-induced recession and monetary policy can do more to contain it, without compromising price stability,” he said.
Jacques Cailloux from Nomura says money is still ferociously tight for a string of countries. Their sovereign bond yields have fallen far, but not far enough to keep pace with GDP contraction.
Nor have the gains fed through to the economy. Italian and Spanish companies still pay twice as much to borrow as German rivals. The North-South gap is becoming hard-wired into the system.
. . .
I might add that ECB bond purchases amount to fiscal union by stealth, outside democratic control.
Chancellor Angela Merkel has mutualized EMU debt without telling German taxpayers. This may be necessary if the goal is to save the euro — not a goal of any moral content — but it is hardly a healthy state of affairs. The Bundesbank’s Jens Weidman is right to warn that it will come back to haunt.
That is a story for another day. The horror before our eyes right now is social ruin. Europe’s crisis strategy is to the break the back of labour resistance to pay cuts by driving unemployment through the roof. That is what `internal devaluations’ are. It stinks. And the ECB is adding to the cruelty by keeping money too tight.
Mr Draghi deserves his accolades, but his job is not yet done. He has saved the rich. Now he must save the poor. Coraggio.
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15. January 2013 at 12:47
Because if there’s one thing that would tank nominal stock prices, it’s printing money, right?
15. January 2013 at 13:24
Scott…you forgot my quote in Ambrose’s excellent article;-)
15. January 2013 at 13:25
Oops wrong article…here is the right one: http://www.telegraph.co.uk/finance/financialcrisis/9794289/ECB-rules-out-stimulus-despite-record-jobless-and-fiscal-squeeze.html
15. January 2013 at 15:43
I don’t know how the euro can survive. It just doesn’t make sense just like the gold standard doesn’t make sense. All of these countries need different currencies and the euro is essentially a fixed exchange rate. The fixed exchange rate distorts capital flows and creates trade imbalances. The only solution will be to have different currencies. This means the euro will have to collapse; no form of monetary policy can fix the distortions that it creates. The sooner it collapses, the better. In other words, Milton Friedman was right.
15. January 2013 at 16:37
Suvy:
If nominal GDP for the Euro was on the previous growth path, and the PIGS were still suffering depressions (and Germany high inflation,) then maybe we could say the Euro is a mistake.
But if nominal GDP for the Euro-zone is on a lower growth path, the problem is the ECB, not the Euro-zone.
15. January 2013 at 18:38
Bill,
It wouldn’t matter. Take a look at 2000-2008, the boom years. Ireland had much higher NGDP growth than Germany. In other words, different amounts of money printing will lead to different nominal incomes in different countries. Therefore, if you want each country to have the same NGDP target, you need each country to have independent monetary policy and different currencies.
Ireland GDP in 2004 was $187 billion; in 2005 it was $203.28 billion. That’s GDP growth of 8.7% and Germany’s was nowhere close. In other words, if you want to target NGDP, the only way to do it to the same level across the entire Eurozone is for each country to have different currencies.
15. January 2013 at 19:55
I hope the central banks of the world engage in a money-printing war.
There is a serious question:
Given central bank culture, steeped in self-exaltation and the virtues of price stability, and their independence, are central banks flexible enough to evolve?
And what if what is needed is sustained QE, on the order of 10 years, in pretty serious volume?
Not needed you say? Check out Japan, and their five-year QE program (2001-6). John Taylor gushed about its success, yet win they stopped, Japan went bak into zero bound perma-gloom.
Okay, so we know five years might not be enough..nor did the Japanese do it hard enough probably….
Which means now the Fed, ECB and Japan must do it harder and longer…
BTW, no one ever talks about it, but the People’s Bank of China targets a 4 percent inflation ceiling, and their economy is roaring, structural impediments and all!
Where is it written that a 2 percent ceiling is better for real growth than a 4 percent ceiling?
15. January 2013 at 23:04
Europe is actually being ruined as a centre of human life, as a result of this mad monetary austerity, is it not? This is so sad.
15. January 2013 at 23:06
Ben, I think the fear is that if we go from 2 to 4 percent, then what is to stop these technocrats from waking up one morning and deciding it should go from 4 to 6%? And then 6 to 12%… etc. Instead we should pick a level path for nominal GDP and stick to it.
15. January 2013 at 23:19
OMG Evans-Pritchard says Draghi was educated by Jesuits! Ha! yes that’s just perfect isn’t it.
15. January 2013 at 23:25
Has everyone seen this? (also by Ambrose) http://www.telegraph.co.uk/finance/personalfinance/investing/gold/9804444/Bundesbank-to-pull-gold-from-New-York-and-Paris-in-watershed-moment.html
15. January 2013 at 23:36
Oh god, the Germans just never learn do they?
16. January 2013 at 02:14
Just a little warning to all the Ambrose Evans-Pritchard fans out there.
Read some of his articles about Clinton, the Oklahoma bombing, Vince Foster’s death etc from the 90s when he was a Washington correspondent. Maybe he’s a different man today, he certainly seems much more reasonable today.
16. January 2013 at 02:54
Scott will probably also want to see this: Adam Posen on Japan http://www.ft.com/intl/cms/s/0/15aa8934-5e72-11e2-a771-00144feab49a.html
I wonder what your take is on this paragraph:
16. January 2013 at 02:55
Scott will probably also want to see this: Adam Posen on Japan http://www.ft.com/intl/cms/s/0/15aa8934-5e72-11e2-a771-00144feab49a.html
I wonder what your take is on this paragraph:
16. January 2013 at 02:59
Also, Nick Rowe on sofas and monetarism (he’s back on form): http://worthwhile.typepad.com/worthwhile_canadian_initi/2013/01/do-sofas-refute-monetarism.html#more
16. January 2013 at 04:09
Sorry, but I have to post this: Which Blogs Does Bernanke Follow? http://economix.blogs.nytimes.com/2013/01/14/bernanke-unplugged/
16. January 2013 at 05:45
Lars, Good comment.
Saturos, They got away with low rates in Japan because of ultra-tight money, just as Friedman said.
16. January 2013 at 09:13
Getting away with something politically isn’t exactly news. It’s SOP. That’s why James Buchanan died with a Nobel prize to his credit.
16. January 2013 at 09:39
Ambrose is onviously intelligent and talented. If he has uncovered evidence that our governemnt lied…maybe you should follow up and read about it instead of just dismissing the whole body of work of a intelligent man:
What Really Happened in the Oklahoma City Bombing? Many Victims’ Families Believe FBI Knew Bombing Was Being Planned;
By Ambrose Evans-Pritchard
As printed in Human Events, October 31, 1997, pp. 12,13,18.
In his new book The Secret Life of Bill Clinton: The Unreported Stories, just published by Regnery, renowned investigative reported Ambrose Evans-Pritchard alleges massive corruption and cover-ups in the Clinton Administration in connection with many incidents, including the death of Vincent Foster, drug dealing in Arkansas, and the Paula Jones case.
He also raises, as the Terry Nichols trial begins, some very serious questions about the tragic 1995 bombing of the federal building in Oklahoma City. There is no doubt that Timothy McVeigh was guilty, says Evans-Pritchard, but he believes that nothing like the full story has ever come out. Why? Because the government, although it interviewed over 20,000 people, failed to call many knowledgeable witnesses during the trial, witnesses who could discuss collaborators with McVeigh and Nichols. He makes a strong case that the reason the government covered up–and continues to cover up–is that bumbling FBI agents knew in advance that the bombing plot was afoot but failed to stop it.
He discloses what he calls “the smoking gun of the Oklahoma bombing,” a memo written only two days after the bombing. The memo discusses the FBI’s debriefing of a Bureau of Alcohol, Tobacco and Firearms undercover agent who infiltrated a neo-Nazi paramilitary group where men close to McVeigh talked about using violence against the U.S. government.
The charges in this book are sure to stir emotional reactions, but, writing about the book last week, national syndicated columnist Robert Novak said that Evans-Pritchard “is no conspiracy theory lunatic [and] is known for accuracy, industry, and courage.” Evans-Pritchard has reported from the United States for both the Spectator and the Sunday Telegraph, for which he was Washington bureau chief.. He has recently returned to England and is now serving as the Daily Telegraph’s roving European correspondent. In the following excerpts from the first two chapters of The Secret Life of Bill Clinton, Evans-Pritchard explains why so many families of bombing victims are suspicious of the official story of what happened that day and why hundreds have now filed suit against the government.
—
16. January 2013 at 09:42
Funny that a intelligent, world famous journalist did a lot of actual investigative work and uncovered some scary stuff…and your reaction is to just assume that you know more about the topic that he investigated because you watch TV reports onthe subject and have faith that the government does not tell big lies.
16. January 2013 at 10:14
AEP is killing it right now. Maybe someone over there will start listening.
16. January 2013 at 10:46
Why do the Germans fear inflation.
In the pre-Euro europe, if your country had a higher real GDP rate than your neigbor, you raised your raised your interest rates and you let your currency inflate, you lost a little bit of “competitiveness” in export markets, goods prices fell because imported good were cheaper and the real wage rose.
In the post-euro eurozone, you don’t have the interest-rate and exchagne rate mechanisms to ballance things out for you. The price level has to a lot more work.
What should happen, is wages rise in EZ-North and fall in EZ-South. Goods prices produced in the north rise but not as much as the nominal wage is rising, and goods prices produced in the south hold nearly constant. Inflation clicks along at a modest rate for EZ as a whole.
Unfortunately, the individual countries a resistant to let the price level fluctuate as it needs to. The buraucrats fight for sticky prices. And are ultimately fighting for lower growth and higher unemployment