What do the Germans really think?

Nicolas Goetzmann sent me the following:

The European Central Bank is doing what it can to help the flagging euro zone economy but it has basically run out of tools, German Finance Minister Wolfgang Schaeuble said on Tuesday.

“It’s no good to hold the central bank responsible for growth and jobs – it’s doing what it can but it has basically exhausted its tools, as you can see from current developments,” he told Germany’s Bundestag lower house of parliament.

“Cheap money can’t force growth either – otherwise we’d have no problems now,” he said.

I have no idea what any of this means, but I can think of at least two possible interpretations:

1.  The Germans think the ECB is stuck in a liquidity trap, and that further stimulus will not boost inflation.  Of course in that case the Germans would not object to further stimulus at the ECB.

2.  The Germans believe that further stimulus would boost inflation, but that higher inflation would not boost RGDP growth.  But in that case the “exhausted its tools” phrase is a completely misleading metaphor, as it [Update: by “it” I meant the metaphor] hints at a liquidity trap, not a vertical SRAS curve.

Anyone else have any idea as to what he means?  And shouldn’t a German finance minister be able to communicate with the public in a way that is understandable to someone with PhD in monetary economics from the University of Chicago?



25 Responses to “What do the Germans really think?”

  1. Gravatar of Joel Aaron Freeman Joel Aaron Freeman
    9. September 2014 at 10:57

    “And shouldn’t a German finance minister be able to communicate with the public in a way that is understandable to someone with PhD in monetary economics from the University of Chicago?”

    Making himself intelligible to PhDs will make him incomprehensible to Average Joe. The Finance Minister’s goal is to be appealing to German voters. He has no incentive to implement reasonable economic policies, nor to speak about economics in a cogent manner. Public choice overrides efficiency.

    The expectation that his words are “supposed to mean something” is erroneous.

  2. Gravatar of Joel Aaron Freeman Joel Aaron Freeman
    9. September 2014 at 11:00

    On a less negative note, the group worth evangelizing new ideas to is the economics profession. The more that the economics profession is persuaded, the more that the new ideas will trickle down to the general population.

  3. Gravatar of W. Peden W. Peden
    9. September 2014 at 11:17

    He means that interest rates are low, therefore money is ALREADY cheap, but the economy isn’t growing. So I think the mental model he’s using is similar to (2), except in a paeleo-macro model with no prices; low interest rates (i.e. cheap money) can boost the economy under certain conditions, but don’t constitute a sufficient condition for growth.

    I actually find the earlier quote even more worrying: the first thing that a central bank can do to help the economy grow is financial policy, and monetary policy as such is a sort of secondary tool that central banks might spend some time thinking about.

  4. Gravatar of JM JM
    9. September 2014 at 11:33

    As an undergraduate student I can tell you, it is a widely held belief that ECB policy is expansive since 2008 – weather you ask a professor or a student.

    They would show you the balance sheet and the development of monetary aggregates and tell you “oh look at how much the central bank has intervened”, “interest rates are low short term and even long term, because of expectations that short term interest rate will be low for long time”. Furthermore stories from Bundesbank about broken transmission channels ( referring to the 1995 papers of Mishkin, Bernanke etc.) and fragmentation of the capital market – in their view ECB pushes competitors out of the capital market because it lowers the interest rate on member state bonds.

    Just recently some studies were published e.g. by the ” Institut der deutschen Wirtschaft Köln” about the risks of the current “low interest rate environment”. Unfortunately these are not available in English: http://www.gdv.de/wp-content/uploads/2014/06/IW-Studie-Niedrigzinsen-2014.pdf

    I think a cause of the malaise is based on the view that interest rates could be a good indicator for current monetary policy.

    Maybe it would be better to look at MB- maybe adjusted by inflation like Meltzer did it sometimes when he wrote about the “liquidity trap”.
    kind regards

  5. Gravatar of Andrew M Andrew M
    9. September 2014 at 11:46

    This was an interesting read that I’m sure caught some people’s attention. Have you seen or thought about this flavor of criticism?


  6. Gravatar of ssumner ssumner
    9. September 2014 at 12:04

    Joel, You said:

    “On a less negative note, the group worth evangelizing new ideas to is the economics profession.”

    That’s been my goal all along. I did a post on this issue a few weeks ago at Econlog.

    W. Peden, So you think be believes further stimulus would boost inflation. Then what does he mean when he refers to low interest rates? Why are they a problem if further monetary stimulus would boost inflation?

    JM, You said:

    “As an undergraduate student I can tell you, it is a widely held belief that ECB policy is expansive since 2008 – weather you ask a professor or a student.”

    Given how idiotic ECB policy has been since 2008 I’m not surprised to hear that the experts in Europe are clueless. If they weren’t you’d think the ECB would have changed policy by now.

  7. Gravatar of Rajat Rajat
    9. September 2014 at 12:29

    Sorry Scott, maybe this shows how little I understand after 4 years reading this blog, but is your second point back to front? As in, the ability to raise inflation but bit real GDP hints at a vertical SRAS curve rather than a liquidity trap?

    And no surprise a finance minister doesn’t have a clue what he’s talking about.

  8. Gravatar of TallDave TallDave
    9. September 2014 at 13:54

    They think money is loose. They’re fooled by nominal interest rates.

    Conveniently, ECB policy is much better suited to Germany than the EU.

  9. Gravatar of Rajat Rajat
    9. September 2014 at 16:57

    Oops, sloppy smart phone reading!

  10. Gravatar of Saturos Saturos
    9. September 2014 at 17:01

    3. Policymakers generally have no idea what monetary policy is or does. And economics courses at most institutions really don’t help much with this.

  11. Gravatar of benjamin cole benjamin cole
    9. September 2014 at 17:57

    Central banks today are impotent, unless they cause hyperinflation.

  12. Gravatar of Andy Andy
    9. September 2014 at 21:34

    Almost everyone in Europe thinks money is already very cheap, including policy makers, academia, central bankers! etc. Head of Bank of Finland recently gave a lecture how cheap money in Eurozone acts as a great stimulator of Finnish economy. As an European this is a very depressing state of affairs.

  13. Gravatar of Darko Darko
    10. September 2014 at 00:22

    The Germans think “you shouldn’t do it, it would be inflationary”, but they say “you can’t do it any more, it’s over”. It’s a common stratagem in discouraging someone’s unwanted behaviour. The contradiction is well spotted, tough.

  14. Gravatar of John Bailey John Bailey
    10. September 2014 at 05:35

    You are assuming that his goal was communication.

  15. Gravatar of ssumner ssumner
    10. September 2014 at 17:43

    Andy and Darko, I’m getting increasingly depressed about European macroeconomics.

  16. Gravatar of ThomasH ThomasH
    10. September 2014 at 18:34

    Maybe he means that there would be inflation in Germany but that the growth would be in PIGS + C + (thought he would not admit it) F. And that offends his belief that the rest of they have not suffered enough yet for not being Germans.

  17. Gravatar of ThomasH ThomasH
    10. September 2014 at 18:38

    Read: “rest of them”

  18. Gravatar of Stefan Stefan
    10. September 2014 at 22:27

    Every analysis of the crisis in Europe (in Not only Mr. Schäubles view) rests on the notion of the reckless Southerners. High fiscal deficits in the GIIPS are seen as the cause of the crisis. All subsequent policy actions built upon this. With great fanfare he presented the First debt-free Budget since 40 years yesterday. But if he points out, certainly right, that MP is at its end, shouldn’t then fiscal policy do more to stimulate??? He says no. Do it through structural reforms (whatever that means in his mindset) and hard cuts, and growth will return magically.

  19. Gravatar of Rien Huizer Rien Huizer
    10. September 2014 at 23:42

    Why should a German Finance Minister be able to communicate with a mere Chicago economics PhD. Economists have no status in Germany (a pity Kantoos is no longer around) except when a minister quotes them, favourably.

    As to Dr Schauble’s personal economics beliefs: I guess he heard about market monetarism (yes, it is controversial, so one should be on guard as maybe some ECB boffins get infected) , his advisors have told him that it is unorthodox, hence both an easy target for detractors and a trap for the users (politically speaking of course) , plus that a bit of unemployment is actually good (competitive position in a fixed exchange rate environment) , but politicians should avoid mentioning that. Better to admit that we’ve exhausted all available remedies. If Germany was still independent, it might have been a different story.

    Don’t expect large numbers of people to drop the belief that easy monetary policy equals low interest rates. And in CDU/CSU Germany the two are associated with two undesirables: inflationary expectations and low returns for senior, respectively. Very bad for poll results.

  20. Gravatar of ssumner ssumner
    11. September 2014 at 06:20

    Rien, Low interest rates are correlated with low inflation, and high interest rates are correlated with high inflation. Every accepts that fact.

    What puzzles me is why “most people” think easy money leads both low interest rates and high inflation. What is going on in their minds?

  21. Gravatar of Jean Jean
    11. September 2014 at 09:10

    German preference for tight money means they began the euro experiment with too few notes and coins in circulation. Underconsumption, relative to the savings rate, was always a problem in Germany. Shortly after the euro began circulating, the Germans introduced labor reforms to restore international competitiveness, by holding wages down – which made the underconsumption problem worse. German banks, seeing too few opportunities in Germany, began heavily investing in the periphery countries in the eurozone. Because base money was too tight to begin with, and the structure of the euro prevents printing new money, private banks in the periphery had to make the new ‘money’ the ECB wasn’t making the only way they could – through credit.

    Then Jens Weidmann called for a rate hike in June 08. All euros were sucked out of the periphery and into Germany, but nobody wanted to hold the euro, so investors sought dollars and German ten year bunds. Bernanke had to send $600 million to European central banks. We were already too tight over, and the dollar run caused by the Germans didn’t help!

    If you want to understand the state of economics in Germany consider this – Germany sits in third place for the number of Nobel prizes won, yet has only won for economics once! They don’t know what they’re doing!

  22. Gravatar of Rien Huizer Rien Huizer
    11. September 2014 at 23:35


    You said:

    ien, Low interest rates are correlated with low inflation, and high interest rates are correlated with high inflation”

    I know, I just wrote something Dr Schauble might believe or at least considers to be something the relevant part of the electorate (which excludes economists except Dr Sim).

    Why do people believe that low interest rates equate easy money? Because everyone from high school teachers to financial analysts in the media, tell them so. And the reason for that may be that the monetarist tradition has had a bad reputation for a long time (especially when politicians competed on issues that implied they could improve the economic condition of all voters, or at least their own) and that hence not many people are interested in doing or studying empirical work that would disprove their belief. Just look at the models policymakers used to have available to them during the past 25 years or even longer. A whole generation grew up with beliefs embedded in those models and theories that are at odds with MM analysis and prescriptions.

    I have become convinced at least that if it could be done*, level NGDP targeting is far superior to any other macroeconomic policy, especially when there are not to many in- and external frictions in the economy or world trade. But when I get into debates with acquaintances about those issues (and at least half of those have masters degrees in economics) they think this is nonsense and policy based on it irresponsible. My suggestion is to get a Nobel Prize, or have a panel of Nobel winners (economics especially) endorse MM.

    *) I believe that it is against the self interests of politicians as a group to have a system that guarantees a stable NDGP growth path. It is about as undesirable as world peace or affordable universal health care provided by virtuous and omnipotent aliens…

  23. Gravatar of Rien Huizer Rien Huizer
    11. September 2014 at 23:45


    Germans consider underconsumption virtuous and politicians arguing against that would have no audience. The long standing corporatist political economy of Germany (not too different from Japan in that respect, and shared by a few countries around it) , makes Germans proud of their export success and secure in the knowledge that their firms will be the last to go out of business in a depression. The banks are another issue: everyone in German policymaking is familiar with the moral hazard characteristics of a system where the vast majority of banks is either government (including municipal and Bundesland) owned, cooperatively owned or government-supported. Banking executives there have a long tradition of gambling with taxpayer’s money and enough clout to go on doing that for a long time.

  24. Gravatar of Jean Jean
    12. September 2014 at 08:38

    Rien, yes, I understand ‘das Rheinland Modal’ as I’ve lived in Germany for ten years. Not sure how much longer Germany’s system can go on though – German firms have now lost all of the customers in the peripheral countries.

    Germany may have to embrace the hated ‘anglo-sachsen Capital!’ Which, btw, would be great for reducing the moral hazard of German banks lending directly to businesses.

  25. Gravatar of ssumner ssumner
    12. September 2014 at 17:40

    Rien, I should have been clearer that my comment was directed at the people you were quoting, not you.

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