Friday, June 10, 2011

Contractionary Mania

The current bizaare mania for contractionary policies during a time of low inflation and economic weakness is not confined to the US, or to fiscal policy:
ECB signals eurozone interest rates are set to rise

The European Central Bank (ECB) has signalled that it will raise interest rates next month, from 1.25%.

Earlier on Thursday, the ECB kept rates unchanged for the second month in a row, after increasing them in April for the first time in almost two years. The central bank wants to raise rates again in July to curb inflation in some of the eurozone's 17 member states.
However, one really has to squint to see any signs of an inflation problem in Europe. Commodity prices around the world (particularly oil and some raw agricultural products) experienced a bump in prices between the fall of 2010 and spring of 2011. But that is really the only source of inflation the Euro area has experienced recently, as the ECB itself admits, writing in their most recent Monthly Bulletin (pdf):
The increase in inflation rates during the first four months of 2011 largely reflects higher commodity prices.
Excluding energy and raw food prices, the core rate of inflation remains in the neighborhood of 1.5% over the past 12 month, well below the Euro-zone's average inflation rate over the past decade. The following chart shows core inflation separately in Germany and in the rest of the core Euro-zone over the past decade.

Yet despite its acknowledgement that the recent rise in inflation is almost completely due to transitory factors (which began to reverse themselves in May), and without providing any reasoning for this statement, the ECB continued its discussion of inflation in the latest Monthly Bulletin by adding:
Looking ahead, inflation rates are likely to stay clearly above 2% over the coming months.
It's hard to see how this will happen, when core inflation is well under 2% (which is by far the better predictor of future inflation -- see this post by Paul Krugman for further details on that), this winter's rise in commodity prices (that the ECB itself admits is the primary cause of the current bulge in headline inflation) is over, and in fact commodity prices have recently begun experiencing deflation as their prices fall back somewhat.

It's mystifying.


  1. Richard Kane9:12 AM

    If you want to be demsytified, read Krugman's colunm.  Trichet is acting on the principle of restoring "soundness" and serving the interest of the German, British, American, Swiss, Dutch, and French bankers who are the ECB's core constiuency.  Its consistent with his and the ECB's "Non" on any restructuring or hair cut of the PIGS sovereign and bank debt.  The Creditor's Class interest above all else.   

  2. JohnB5:09 PM

    If certain people wanted expansionary monetary policy, even extraordinary measures, they would instruct their central bankers to provide it.  I say this because I have seen it happen.

    If certain people wanted socially-enabling fiscal policy, even irresponsible policies, they would instruct their politicians to provide it.  I say this because I have seen it happen.

    If certain people wanted to turn or mislead public opinion toward the need for unpopular monetary and political policies, which they favored, they would instruct their media to turn or mislead public opinion to their purposes.  I say this because I have seen it happen.

    With that in mind, if central bankers, politicians, and mainstream media persist in focusing on inflation fears and the tightening cure, unsustainable deficits and the austerity cure, unaffordable social programs, vaguely shameful entitlements and the disenfranchisement cure-- all done in the face of  glaring stagnant economic conditions, increasing poverty, increasing unemployment, and increasing desperation among the working class, one can be mystified by that if one so chooses.  But it would seem to require some wasted effort.

    If Paul Simon was correct; if there does exist some 'loose affiliation of millionaires and billionaires,' then it seems worthwhile to stop wondering why policy makers are suddenly stupid, or why the media is suddenly blind, and start seriously asking yourself what their plan is, and what is the best preparation for it.  They tend to get what they want.  As noted, I have seen it happen.  I am neither smart, nor totally unaware of my internal biases.  But here my thoughts are  supported by some people who are smart, and who have never stopped insisting that a debt deflation scenario must eventually follow a credit bubble collapse.  I think the 'affiliation' has had time to prepare; I think eventually is really soon; I think the plan is liquidation on a global scale.

    Or maybe I spend too much time lurking over at Zero Hedge.

    And I have a question.  How is it possible, within the economy of a net-importer state, for an increase in fuel price, which is an external cost to both producers and consumers, to not have deflationary effects?

  3. Stephan2:42 AM

    No mystery here. Read the Financial Times piece Ignoring the core can keep inflation at bay from our ECB overlord Lorenzo Bini Smaghi.

  4. Linus Huber4:45 AM

    I do think that it is the change of attitude that results in deleveraging on many different levels. The ECB's stand is just one of many such changes. Cutting budget deficits is another. Paying down debt and the realisation that one's debt makes one a slave are other aspects of the same change in attitude presently in progress in the Western World. This is meant with credit bubble collapse and will result in the opposite of what we enjoyed over the past 30 years when we built up these unsustainable mountains of debt.