What should the European Central Bank actually do?

by on August 14, 2014 at 7:52 am in Economics, Uncategorized | Permalink

As parts of the eurozone seem to be creeping into deflation, a number of you have written  and asked me what I think the ECB should be doing.  Here are my views on three options:

1. Quantitative easing.  People mean different things by this, but I am not sure that a complicated answer would be much better than a simpler one.  I view it as better than nothing, but there is a risk it amounts to little more than a short- vs. long-term asset swap, which is hardly a solution.

2. Nominal gdp targeting.  In general I like this idea, but which ngdp gets targeted?  Eurozone ngdp, presumably.  But when you have multiple countries, individual countries can end up with insufficient nominal gdp even if the eurozone meets a well-specified target overall.  (Given independent bank regulators, debt structures, fiscal authorities and the like, I view this as more serious than say the 50 U.S. states, which have a higher level of integration, most of all at the policy level.)  How much of a guarantee is there that Portugal would reap expansionary benefits, given the private credit contraction in that country?  The potential clustering of ngdp growth in some parts of the eurozone is another way of stating why the currency union wasn’t a good idea in the first place.  This is still much better than doing nothing, but as a monetary policy rule ngdp seems better designed for the single-country case.

There is another issue with ngdp targeting for the ECB, and that is markets simply might not believe it.  If that were the case, what then should the ECB actually do to see through the promise?  That brings us to #3:

3. A new and different inflation target. My current wish would be a new ECB mandate specifying a minimum core inflation rate of three percent for each of the largest countries in the eurozone, say France, Germany, Italy, and Spain.  If any of these four countries seemed to be coming in under three percent inflation, the ECB would have to do more.  And if need be, you could extend this rule through to more countries, with Malta and Cyprus probably at the end of that list.

Sumnerians should note this also might be the best way to actually meet an operational ngdp target for a fair number of eurozone countries.  Note that I accept many of Scott’s critiques of inflation rate targeting, at least on a theoretical level.  The (only?) advantage of this policy is that citizens would know what it means.  They would know they hate it, in the same way that say Americans hate higher gas prices.  They would know this is a higher inflation policy and the ECB would know it could not spin it any other way.  A fair amount of inflation and thus monetary stimulus would in fact result.

Of course that is also why this is unlikely to happen.  We’ll probably get some form of ineffective QE as a cop-out but better-than-nothing attempt.

“Needing a policy that you hate” — maybe there should be a phrase in Nahuatl for that?

Addendum: Scott Sumner comments.

ChrisA August 14, 2014 at 8:08 am

Rather than an inflation target for the three biggest countries, which would instantly alert the inflation phobes in Germany, why not a wage increase target, or perhaps an “employment” target? These would seem much more palatable to the German electorate.

dan1111 August 14, 2014 at 8:27 am

Why don’t they just call it “The Happy Fun Policy”? Target creates the possibility that you might not succeed, and you definitely don’t want to remind people that they have to go to work–such a drag.

ChrisA August 14, 2014 at 9:10 am

Dan, not sure what your response means, but for clarity I am proposing a policy of monetary easing until unemployment hit 5% in Germany, Spain, Italy and France. I think would be highly practical politically and I wouldn’t be too resisted by any one country electorate. The monetary easing could take the form of purchase of 10 year bonds of the governments concerned, which are then cancelled, in other words the ECB prints money. There are two possible things that can go wrong, first the policy does not stimulate so inflation stays low and unemployment stays high. But at least a bunch of debt is paid off. Second (mutually exclusive) alternative is this ignites a inflationary spiral (aka rising prices and wages). But we know how to deal with that – hike interest rates, Ergo -either consequence seems pretty benign to me.

prior_approval August 14, 2014 at 10:02 am

German unemployment is already around 5% – http://countryeconomy.com/unemployment/germany

XVO August 14, 2014 at 11:54 am

What’s wrong with the French? 10.1%

JC August 15, 2014 at 9:05 am

Spanish is 23%…

dan1111 August 14, 2014 at 3:32 pm

As I saw it, you still wanted to cause inflation; you just didn’t want to call it that because it sounds bad. But mostly I was being tongue in cheek.

Das August 14, 2014 at 8:42 am

“minimum core inflation rate of three percent” – whow. I barely manage to not use all the swear words I know of in english.

The ECB has a clearly defined mandate. What you propose here is a coup that would politically destroy the Eurozone. But then maybe this is exactly what you are getting at: A common currency for the Eurozone members was a dream for good times that didn’t stand the test of reality. Too much difference between say Greece and the Netherlands, to name but two.

Das August 14, 2014 at 8:47 am

To clarify: We do not need a policy that we’d hate. What we need is a policy that works in the interest of the people. If we hate that so be it, but printing funny money isn’t it.

commentateur August 14, 2014 at 9:37 am

This makes no sense. Should Beverly Hills and South Central LA have separate currencies?

The common currency was formulated by the BIS (European Central Bankers, Triffin et al) approx 40 years ago to move the world from USD ‘without war’, sever the links between govts and Central Banks, and reintroduce final settlement of international trade ,. It was sold to the politicians/public as a political scheme, but is actually a victory of Central Bankers over politicians.

Is it coincidence that the ECB is so much more powerful than the laughable EU commission?

mckenziep August 14, 2014 at 10:24 am

One can not sever the link between central banks and government. That link is fundamental, though sometimes disguised to deceive the public.

Central banks are somehow widely accepted as fundamental institutions of modern financial systems– in reality they are highly fallible groups of unnecessary government bureaucrats engaged in classic socialist central planning and economic intervention.
They act routinely against the welfare of the general population in most instances. One can not advocate specific interventionist policies for a central bank — and still honestly claim to be proponent of free markets.

commentateur August 14, 2014 at 10:49 am

You are addressing what you believe to be correct/workable/proper in an abstract, platonic ideal world.
I am specifically addressing intentions the main European Central Bankers have been implementing over the last 40 years.

Wim Duisenberg (first ECB president) said it clearly in his speech launching the Euro;
“The euro … is the first currency that has not only severed its link to gold, but also its link to the nation-state.”

Among other things the Euro founders wanted to create a truly independent Central Bank. Quite achievement to slip this by European politicians (not including German).

Daniel August 14, 2014 at 12:04 pm

Among other things the Euro founders wanted to create a truly independent Central Bank.

Except, in practice, they seem to do what the Germans want.

commentateur August 14, 2014 at 12:09 pm

Daniel
Right. I’m an idiot. Very worthwhile contribution.
Thank you.

commentateur August 14, 2014 at 12:23 pm

Daniel
‘Except, in practice, they seem to do what the Germans want.’

The lineage is clear, BuBa took over the BIS which designed the Euro/ECB architecture.
Germany has ‘help’ keep the ECB independent. That will cease to be necessary within a year or two.

And yes I’m still a moron and an idiot.

Art Deco August 14, 2014 at 10:59 am

Oh yeah, a gold standard will be just Georgia peachy keen for all of us, just like in 1931.

commentateur August 14, 2014 at 11:10 am

Art Deco.
No gold standard.

I am sure you are clever chap with a big IQ attributable to your high-quality pure Caucasian brain DNA. Here is a test, an opportunity to think something you have never thought before;

a) Look at item 1 of ECB’s quarterly balance sheet.
b) Consider Duisenberg’s statement that the Euro is the first currency that has not only “severed its link to gold …”.

What is the connection between these facts? What do they tell us?

Daniel August 14, 2014 at 12:05 pm

a) Look at item 1 of ECB’s quarterly balance sheet. b) Consider Duisenberg’s statement that the Euro is the first currency that has not only “severed its link to gold …”.

What is the connection between these facts? What do they tell us?

That you’re an idiot ?

Art Deco August 14, 2014 at 3:46 pm

mckenziep would like to do away with central banks, which is the subject of my remarks. Nothing to do with the European Central Bank specifically.

Art Deco August 14, 2014 at 10:58 am

Should Beverly Hills and South Central LA have separate currencies?

Beverly Hills and South Central LA are fragments of a single metropolitan settlement. One has a five digit population and the other a six digit population and neither have a full hierarchy of commerce and industry.

A country with an economy the dimension of New Zealand or Norway or Singapore can (as these do) maintain a prosperous existence without joining a superordinate entity and can maintain domestically an array of service enterprises with maximal sophistication (e.g. bourses and university hospitals). You don’t need to go larger bar to corral an ethnic population under one sovereign roof.

The EU and the Council of Europe et al are properly destroyed and replaced with a customs union and military alliance and perhaps some co-operative ventures like a front-line immigration and customs inspectorate. Self-government has been ruined with the current arrangements (along with the economies of Mediterranean Europe).

commentateur August 14, 2014 at 11:18 am

Completely irrelevant. The users of a currency are much less important than how the currency is managed.

The Euro was designed to have roughly balanced trade/current-accounts with the rest of the world and thus they are safely insulated from the external dollars the world is awash with.

Art Deco August 14, 2014 at 3:47 pm

Completely irrelevant.

It’s a precise reply to your rhetorical question.

Randy McDonald August 14, 2014 at 2:52 pm

The European Union is, among other things, a customs union.

Art Deco August 14, 2014 at 3:46 pm

Aye, but it’s much more than that, and not in the best interests of it’s constituents.

Millian August 14, 2014 at 10:13 am

It would not be a coup. It would be a new target. Grow up. 3% inflation doesn’t mean tanks on the streets, despite what the Germans think.

Daniel August 14, 2014 at 12:06 pm

Gotta love it how the German are always willing to inflict pain on the Southern Europeans. It’s for their own good, you see. They gotta learn to be more like the Germans. Or starve.

commentateur August 14, 2014 at 12:17 pm

65% of greeks want to stay in the Euro.
If only they were as smart as you Daniel.

The ECB is the best CB they will ever get,

Daniel August 14, 2014 at 8:33 pm

Obfuscate all you want, you’re still a sadistic moron.

Oh, and in case it’s not clear to you – the truth is not a popularity contest. The ECB’s performance has been disastrous.

Mainly because it’s run by racist Germans.

Peldrigal August 15, 2014 at 3:56 pm

For your assertion to be true, both these assumptions would be true: that a greek central bank would behave differently from the ecb (maybe), that said beaviour (printing money one way or another, I guess) would be more beneficial to the greek economy that the ecb behaviour. If you know that this assumption is true, you should write it quick and go collect your Nobel Prize, since nobody, not even on this blog, agrees on that.

Daniel August 15, 2014 at 7:04 pm

You are a very stupid and ignorant man.

I’d advise you to read some Fisher, Hawtrey or Cassell.

Tom August 16, 2014 at 8:00 am

The quality of comments ever increases around here.

Art Deco August 14, 2014 at 8:47 am

what I think the ECB should be doing.

Co-operate in a project to replace the Euro with national currencies.

commentateur August 14, 2014 at 9:28 am

What? So Greece gets to be Argentina and default every 10 years? No thank you. The ECB is the best Central Bank the PIIGS will ever get and approx 2/3rds of the population there know it. These economies needed to to restructure and are being forced to do it, unlike the basket cases-in-waiting of US, UK and Japan.

The only significant noise demanding an EZ break-up is in the US/UK. Clueless,

Once the USD fails as Int Reserve you will understand the point of the Euro. You will understand what ‘demonitized’ gold is, and the value of severing the link between CB and state.

Art Deco August 14, 2014 at 10:49 am

You want deflation in lieu of devaluation to bring your comparative labor costs into line, be my guest. Kinda masochistic.

commentateur August 14, 2014 at 11:02 am

I don’t want anything.
Monetary policy does not create wealth. The ECB knows this and are not playing bullshit NDGP games.

The massive pile of global debt is going to be unwound diffently in the ECB to the US/UK/Japan.

In 2015 ECB will allow many Eusopean banks to fail, (with sov defaults there will be in HUGE haircuts and bail-ins). The upshot of this is a currency with stable purchasing power. The Fed has to save its banks (nominal performance at all costs) and thus the USD has a very bleak future.

Only in a world of ever-expanding credit is deflation a bad thing. You and Tyler have lived inside that bubble so long, that you cannot understand the alternative system being implemented across the Atlantic.

Art Deco August 14, 2014 at 11:04 am

Only in a world of ever-expanding credit is deflation a bad thing

No. In a world where labor markets operate as they have for the last 90 years, deflation is a bad thing. And, of course, unexpected deflation is a bad thing (as was discovered in spades by those holding balloon mortgages in 1931).

Daniel August 14, 2014 at 12:07 pm

Only in a world of ever-expanding credit is deflation a bad thing

Two words – STICKY WAGES.

You’re an idiot.

commentateur August 14, 2014 at 12:13 pm

Daniel.

I may be an idiot, but I have also been fortunate enough to hear from some individuals at key Euro institutions.

Question; how sticky are the wages for 25 year old greek with a technical/ STEM degree who has never had a job?

Peldrigal August 15, 2014 at 3:59 pm

Am I mistaken or I read on this very blog last week a paper that showed that deflation had NO RELATION WHATSOEVER with economic growht?
And we’re still arguing about it?

Art Deco August 14, 2014 at 11:02 am

While we’re at it, you might just explain why you fancy a national currency promotes defaults (given that you’ve lent money hand over fist so the Greek crooks can keep the balls in the air).

commentateur August 14, 2014 at 11:15 am

Huh? I think someone must have put some lower caste DNA in your tea, cause this sentence is v hard to parse.

commentateur August 14, 2014 at 11:26 am

Art Deo;
“In a world where labor markets operate as they have for the last 90 years, deflation is a bad thing.”

Fantastic point. Labour markets and credit markets are going to be very different in the ECB over the next 5 years.

The latest BIS annual report gives a good overview of how the ECB intends to use the supply-side as basis for new econ model.

Yancey Ward August 14, 2014 at 11:11 am

Greece is going to do that anyway.

derek August 14, 2014 at 11:32 am

As opposed to what? Greece defaulting every 10 years? That happened didn’t it?

A common currency is only a benefit if it comes with discipline. The problem with small countries is that their currencies swing dramatically, making export markets very difficult. What happens in Canada, outside the primary resource sectors, is manufacturing is essentially ‘import components/raw materials from destination country, add value in some way, export to destination country’, with no or little inventory. The Canadian dollar can swing 10-15% in a year which adds enormous risk.

So a common currency can stabilize your export markets.

What came with the Euro is the ability of Greece and other countries to borrow at slightly more than Germany. Without discipline, they took on unsupportable amounts of debt.

What I would suggest is to remove the political influence from banking regulation and remove the sovereign debt favoring. Apply good bank lending practices with cost and risk priced. You want to spend a few billion to build an Olympic games, then here is the price of the money.

Those countries acted as expected, frankly. Free money below cost with no risk pricing. Essentially price fixing on a continent wide scale that collapsed.

Brian Donohue August 14, 2014 at 1:32 pm

German has had a good run in recent years and suddenly is the expert on how to run an economy. I can see why the rest of Europe finds y’all annoying.

Good old fashioned hard money mercantalism. I get it. Scarred by 1920s inflation, you can’t get within 10 feet of understanding what Sumner is saying. As a result, you make some silly predictions and endorse some dumb policies.

Spectators August 15, 2014 at 5:11 am

Just a mental stimulation, what if there is no WW1?

Luis Pedro Coelho August 14, 2014 at 8:50 am

At least in Portugal, deflation has a fact for a few months. Interestingly, this coincides with a fast fall in the unemployment rate (from ~18% to 15% in a year). Perhaps there is a point when price stickiness just gives way.

*

For the eurozone, I’ve been saying for years that pundits underestimate the probability that nothing will be done. It’s the Pundit Fallacy:

Something must be done; therefore, something will be done.

Nope, sorry. Sometimes something must be done and nothing is (see pension systems in Detroit 15 years ago, or climate change now).

Art Deco August 14, 2014 at 11:03 am

Pensions funds you can repair. Climate is always changing and nothing you can do about that.

Luis Pedro Coelho August 14, 2014 at 9:03 am

The ECB could also try to have a policy of inflation close-to-but-below-2% in the eurozone.

It’s not that it has been tried and found wanting, but found difficult and left untried.

commentateur August 14, 2014 at 9:18 am

The ECB should do what it is doing; keep a balanced current/trade account and wait for the USD to expire as world reserve currency.
After that they will have an inflation target of approx 0%.

commentateur August 14, 2014 at 9:19 am

The ECB should do what it is doing; stick to its single mandate; price stability.

Tom August 14, 2014 at 2:51 pm

Actually, the ECB has never technically had a “single” mandate. In the European treaties, price stability is specified as the ECB’s “primary” mandate, but it is also and simultaneously mandated to contribute to and pursue the general and founding goals of the EU, which include prosperity and economic growth — in the words of the article in the most current treaty,”balanced economic growth,” “full employment,” and “economic, social and territorial cohesion, and solidarity among Member States.” Point being, “single” mandate is a myth. There’s definitely room for multiple interpretations of the nature of the ECB’s mandate. And thus, Tyler’s suggestions are certainly valid and would need to be argued against on the merits, not by some absolute appeal to the mistaken notion (however widespread) that the ECB simply has only a single mandate of price stability, period.

commentateur August 15, 2014 at 2:31 pm

Your are correct that there are other considerations, but price stability takes precedence every time.

Anyway, there is zero chance that the ECB will interpret its mandate in order create some inflation to make life easy for the debtors. Unlike the Fed is forced to play the nominal performance game and will play it until the bitter end (hence reverse repos – if US rates go negative the international dollar is toast).

This means EZ 0% inflation in the medium- to long -term, From 2003 – 2015 the ECB had to to deal with a) all the extra dollars swilling around the globe, b) EZ being forced to overpay for energy, so changed their policy to “below but close to 2% in annualized HICP in the medium term”. Unlike the treaty, this interpretation is flexible and contingent.

Draghi recently said; “Expectations over the five-year horizon are still anchored at 1%”.
Only in the USD world is 1% a problem. Once dollar starts to expire internationally, the world will see there is no need to play the positive inflation rate game.

Daniel August 15, 2014 at 3:46 pm

STICKY WAGES, you moron. STICKY WAGES. And debts. And other nominal rigidities.

God you’re stupid.

commentateur August 15, 2014 at 6:08 pm

I wasn’t talking to you.

Fuck off.

Daniel August 15, 2014 at 7:05 pm

You’re an ignorant moron.

Tom August 15, 2014 at 6:25 pm

I think you’re correct about how European central bankers, backed by significant portions of the ideological spectrum and the business world, have been inclined to interpret their mandate, but I wish more journalistic and expert commentary on eurozone monetary policy, was more upfront and frank about the fact that this interpretation, whether one agrees or disagrees, is a contingent one. It’s partly what fuels people thinking they either have to accept the euro the way it is or completely rebel against it. No — there are notable other options for how eurozone monetary policy could be implemented. It would take a new political consensus, arrived at after open, conflictual political debate, but there are other possible eurozone settlements. Not simply the relatively hard money one. People / political parties / countries feel backed up against a wall, when in fact they really aren’t if they made a concerted effort to campaign or organize around other envisioned monetary policies.

commentateur August 16, 2014 at 4:54 am

“It’s partly what fuels people thinking they either have to accept the euro the way it is or completely rebel against it”

That is exactly the situation. The world has to accept the ECB/Euro as it is; a currency system without almost no wriggle-room. The ECB/Euro architecture is constructed precisely so that it can operate free from political/democratic consensus (a consensus which is almost always ‘print money when times are bad and debts are big’).

It is not democratic. The Central Bankers who designed the Euro believed that democracy would work better when the politicians/electorate had no access to the currency issuers. This was worked out at the BIS over the last 50 or so years – with heavy German/BuBA influence).

THE ECB is not going to print money, create inflation or play silly nominal (NDGP) games. It’s all in the Treaties and the ECB consistently communicates (in press releases, speeches, lectures, papers their website, and privately) their intentions to stick their own rules no matter what the Fed/IMF/Anglosphere media would like.
They will print to prevent outright deflation, but not to prevent low inflation or deleveraging (which is the suicidal path the Fed/BoE/BoJ are on).

THis chart shows the ECB is on a radically diff path to other big 3 central banks
http://postimg.org/image/p85ybxijx/

This is very rarely acknowledged in anglosphere media, and when discussed we are told the ECB is too stupid to do what needs to be done; i.e. print money and let it wash around, create inflation and hope that it inflates assets prices or kickstarts another credit-fuelled ‘recovery’.

Daniel August 16, 2014 at 7:20 am

Ah yes, nothing like a little blood-letting to let the bad humours leave the body.

God you’re retarded.

Michael August 14, 2014 at 9:51 am

What I don’t understand is that this blog post is fully Keynesian in prescriptions and sentiment. What about the free market, letting individuals be responsible, average is over and the best people will get richer while the worthless ZMP get what they deserve?

Why is Tyler so Hayekian in mood affiliation and Keynesian in practice?

Millian August 14, 2014 at 10:17 am

Why would a Keynesian care about higher or lower inflation targetting?

Daniel August 14, 2014 at 12:07 pm

Except Hayek favoured NGDP targeting. So troll somewhere else, moron.

Brian Donohue August 14, 2014 at 1:43 pm

Do Austrians regard Friedman as a Keynesian?

I don’t. Sumner is the new Friedman.

Here’s a good read from Friedman on the subject in 1968. Not too long.

https://www.aeaweb.org/aer/top20/58.1.1-17.pdf

Brent August 14, 2014 at 9:54 am

Or they could get really crazy and dump their welfare regulatory burdens in favor of some market capitalism?

Daniel August 14, 2014 at 12:08 pm

Do the terms “aggregate demand” and “sticky wages” mean anything to you ?

Or do you think they’re fictions concocted by communists ?

prior_approval August 14, 2014 at 10:06 am

‘My current wish would be a new ECB mandate specifying a minimum core inflation rate of three percent for each of the largest countries in the eurozone, say France, Germany, Italy, and Spain.’

If wishes were fishes, the Bundesbank would have been transferred 1:1 to the EZB – and the Bundesbank has always guffawed loudly at the idea that any inflation is ever a good idea, with particular deftness in soi-populist politics. But then, we all know what a hell hole that policy turned Germany into.

B.B. August 14, 2014 at 10:38 am

People often do hate the solution. Especially if it involves admitting a major blunder.

Europe is not an optimal currency area. Period. Sometimes, that doesn’t matter. The 2001 mild recession did not put any big strains on the system.

But the low interest rates of the mid-2000s made sense for Germany but was a disaster for the housing markets in Spain and Ireland. And the bust starting in late-2007 showed that Europe cannot handle a single currency. Moreover, there is no banking union. And Greece used low interest rates to expand debt instead of taking the opportunity to reduce it; it was a subprime sovereign.

The solution that everyone hates is for the PIIGS to exit the euro, get their own currency, devalue massively, and accept a bout of high inflation. The core of the euro (Germany, France, and Benelux) can probably work it out and maintain a low inflaton rate. They need to form a banking union, however, with high capital requirements for their banks. And the ECB needs to be able to do QE using sovereign debt.

If UK and Sweden had joined the euro in 2001, how would they be doing now?

commentateur August 14, 2014 at 11:21 am

You think the UK is doing well? Balance-of-payments crisis, followed by currency crash are certainties in 2015.

Daniel August 14, 2014 at 12:09 pm

Balance-of-payments crisis, followed by currency crash are certainties in 2015.

Let me see you put your money where your mouth is, moron.

msgkings August 14, 2014 at 2:14 pm

Exactly…commentateur seems pretty sure of himself so by 4Q2015 he should be very very rich…sounds like he’s going to do a Soros and be a billionaire!

commentateur August 15, 2014 at 2:43 pm

Not sure of myself, just fortunate to learn a perspective that is never aired in the UK or US.

Daniel August 15, 2014 at 3:46 pm

You’re just an idiot. Nothing new.

commentateur August 14, 2014 at 12:15 pm

Seriously, Daniel, what is your problem?

Two ‘idiots’ and a ‘moron’.

My money is exactly where my mouth is, and will continue to be. I can demonstrate this easily if you are interested.

Tell the world, O wise one where specifically I am wrong.

msgkings August 14, 2014 at 2:15 pm

‘Demonstrate’? I’m interested…

Daniel August 14, 2014 at 8:42 pm

My problem is with racist Germans who use their sway over the ECB to ruin Southern Europe.

Balance-of-payments crisis, followed by currency crash are certainties in 2015.

Like I said, moron – put your money where your mouth is. Short the bond market and let us know how your “investment” went.

where specifically I am wrong.

It’s not that you’re wrong, it’s that YOU’RE NOT EVEN WRONG. You don’t have the slightest clue about macroeconomics – and yet, with all the confidence idiots have, make stupid predictions and endorse idiotic policies.

Daniel August 14, 2014 at 8:46 pm

http://worldofinterest.wordpress.com/2014/08/12/deflation-coming-to-a-continent-near-you/

Is this an example of proper German leadership ? Plunging an entire continent into recession because … ?

I can’t even begin to grasp the reasoning. Is it just racism ? Or is it some long-term scheme, where you ruin the rest of Europe via deflation so you can take over the show ?

commentateur August 15, 2014 at 2:37 pm

The PIIGS are being taught a valuable, but painful lesson; how to run an economy without cheating (real VS nominal performance).

BTW I am from one of the PIIGS, and am not a racist.

Thanks for the link. Always nice to hear from people who have no fucking idea what they are talking about.

Daniel August 15, 2014 at 3:45 pm

Oh, so you’ve internalized the self-loathing and think that “beatings will continue until morale improves” is a good policy.

God you’re stupid.

commentateur August 15, 2014 at 6:06 pm

Ignoring all comments from Daniel nutcase supertroll.

Daniel August 15, 2014 at 7:06 pm

Yup, keep on being a moron.

Unblinkered August 17, 2014 at 2:03 am

i’m a third party trying to follow the argument, and the lack of humility it takes to hurl invectives at the end of 1 line retorts to arguments is a clear sign the real moron is you Daniel. Except it likely beyond you to realize it.

Simply make your argument. If it’s a better one, it will win out. The profound necessity to insult commentatuer singularly suggest you have no argument.

Merijn Knibbe August 14, 2014 at 1:21 pm

A technical point: it is the explicit prerogative of the ECB itself to specify its inflation target.

A cultural point: within the ECB there used to be a very strong culture to focus exclusively on the Eurozone as a whole and not on individual countries. This attitude sure did change, but I do not know how much.

commentateur August 15, 2014 at 2:48 pm

The EZ was set up to have roughly balanced trade- and current- accounts with the rest of the world
This will change anytime soon, as it is one of the key factors protecting the EZ from the trillions of homeless dollars swilling about the globe.

commentateur August 15, 2014 at 2:50 pm

*will not

Effem August 14, 2014 at 1:43 pm

Oh yea – Japan’s higher inflation target is a dream. Who feels like paying more for all basic necessities while wages stagnate?! That’s progress?

Daniel August 14, 2014 at 9:05 pm

Who feels like paying more for all basic necessities while wages stagnate?!

Who needs reality when you have IDEOLOGY. Moron.

Tom August 14, 2014 at 2:25 pm

It’s weird Tyler that you can be so sensible on so many issues and so utterly clueless on monetary policy.

“parts of the eurozone seem to be creeping into deflation, a number of you have written and asked me what I think the ECB should be doing”

Deflation is a symptom of problems, not a cause. Deflation can also be a symptom of high productivity growth or falling import prices, which are positive, or of population shrinkage/graying, which are unchangeable facts of life.

Deflation on the whole is caused by nominal spending growing slower than productivity (including of imports). The ECB has no authority to spend, only to lend, so it’s not the first body you would turn to if you were determined to increase the inflation rate. The surefire way to increase the inflation rate is to increase nominal public spending. Hence you need to go to the EU or national governments. The ECB could support that by lowering their borrowing costs, and has … if that were the limitation.

“Quantitative easing … better than nothing, but there is a risk it amounts to little more than a short- vs. long-term asset swap”

Quantitative easing is always an asset swap, usually of money for sovereign bonds. It mainly a) lowers interest rates, but they’re already about as low as they can be, and b) drives up asset prices. QE only increases spending if a) the government is using it to fund increased spending, which is taboo in Europe as it must be for any confederation wanting a lasting common currency, or b) the level of base interest rates is limiting private sector demand to borrow and spend, which isn’t the case.

“Nominal gdp targeting. . In general I like this idea”

Oh lord love a duck. A central bank can’t modulate nominal GDP unless it has authority to spend in the real economy, which the ECB is obviously not going to get.

“My current wish would be a new ECB mandate specifying a minimum core inflation rate of three percent for each of the largest countries in the eurozone … If any of these four countries seemed to be coming in under three percent inflation, the ECB would have to do more.”

No, the ECB can’t increase inflation unless it’s given authority to spend in the real economy, which isn’t going to happen.

What you’re really asking for is higher fiscal spending. You’re basically a Keynesian who doesn’t know which part of public authority does the spending.

Brian Donohue August 14, 2014 at 3:00 pm

Nope. Here are the key points:

1. Uncle Sam currently has $17.5 trillion on the nation’s credit card. Most of this has been run up this century.

2. Several years into an economic recovery and after 2013 ‘austerity’ (tax increases, sequester), we are still running an annual deficit of $500 billion, which goes right on the card (at least until the next debt ceiling showdown after the election.)

3. Uncle Sam’s fiscal conditions will deteriorate early in the next decade. This is not an economic prediction- it is a demographic fact. In the meantime, being in government will really suck if what you like to do is give out goodies (lower taxes, higher spending.)

4. Monetary policy can ‘offset’ fiscal ‘austerity’. Keynesians predicted a recession due to 2013 ‘austerity’, but the Fed’s forward guidance on monetary accommodation produced growth instead. For real.

In short, this is the opposite of ‘fiscal stimulus’. This is monetarism, just like Uncle Milty used to make.

Tom August 15, 2014 at 1:25 am

1-3. Totally off-topic. What does the US debt have to do with my point that inflation is driven by spending, central banks can only indirectly influence spending by lowering interest rates, and rates in Europe are already about as low as they can go?
4. Monetary loosening can only offset fiscal consolidation if the private sector would like to borrow and spend more but is limited by the cost of funds. In 2013 private sector savings decreased despite a rise in rates, the opposite of what you’re saying.

I have no idea what “this” you’re talking about. Tyler’s proposal to have the ECB make an empty declaration that it wishes for a 3% inflation rate, when there’s no private sector demand to borrow and spend even at zero rates, and governments are limited by the fiscal compact? Milty never addressed that. but if he had he very likely would have got it as wrong as Tyler. He was a practitioner of the “science” of confusing stocks with flows. Money supply is not spending.

Daniel August 15, 2014 at 8:36 am

have the ECB make an empty declaration that it wishes for a 3% inflation rate

So printing money doesn’t actually cause inflation now ?

God you’re stupid.

Brian Donohue August 15, 2014 at 10:27 am

I only mentioned 1-3 for context, since you are under the impression QE is a Keynesian plot.

Keynesian’s have mostly felt that ‘monetary policy is pushing on a string at the ZLB’ and that fiscal policy is needed to boost the economy. I offer 1-3 as evidence that our fiscal house is in shameful disarray, underscoring that the fiscal window will be closed for the next couple decades, thank you.

I posted this link above, which makes it abundantly clear what Friedman thought on the subject:

https://www.aeaweb.org/aer/top20/58.1.1-17.pdf

Apparently, Austrians think it’s just them and Keynesians, with Friedman in the Keynesian camp.

Effem August 14, 2014 at 3:10 pm

The market has CLEARLY voted that US debt levels are sustainable. Short the bond market if you disagree (good luck).

JimO August 14, 2014 at 3:44 pm

Anything. Any kind of structural reform to improve the economy is surely passé …

ThomasH August 14, 2014 at 6:12 pm

A good start would be the Obama foreign policy dictum, “Don’t do stupid stuff.” A target of not letting unemployment rise past x% or not letting inflation or not letting inflation fall below y% or ngdp growth fall below z% and actions that show that the ECP was serious about achieving the target would;d all have worked better than whatever “policy” it has supposedly been following.

chuck martel August 14, 2014 at 8:24 pm

If the ECB went out of business and the Euro governments cut back on regulating every move everyone makes there would probably be mass starvation, right? No sophisticated human society can prosper or even survive without bankers fixing the prices of loans and taking their cut of the world’s commerce.

Daniel August 14, 2014 at 9:04 pm

Way to miss the point, moron.

Jack De R August 14, 2014 at 9:25 pm

:A comment on the European Central Bank solution vs. the Keynes solution:

http://ideas.repec.org/a/mes/postke/v35y2013i3p457-462.html

Ciaran August 15, 2014 at 7:17 am

How exactly is the ECB going to meet the new, higher inflation target ? What’s the mechanism ? If QE is just an asset swap that won’t help much if at all and isn’t there the same problem as with NGdp , nobodies is going to actually believe that they mean it – so if the markets just shrug , what’ do they actually do to meet the target ?

Daniel August 15, 2014 at 8:34 am

So printing money doesn’t actually cause inflation now ?

God you’re stupid.

Ciaran August 15, 2014 at 11:48 am

I think it may not be as straight forward as you appear to think .
Print money and do what with it exactly ? Fair question I feel .How would this money get into circulation ? Now notionally they could mail a check to everybody a public service number , but institutionally and politically that’s not going to happen.

Ciaran August 15, 2014 at 11:50 am

Personally I say let’s have monetary financing of government deficits , given the conditions it’d be a veritable free lunch , but again that can’t and won’t actually happen .

Brian Donohue August 15, 2014 at 7:59 pm

Dear Daniel,

Kindly knock it off. I think there is an interesting discussion trying to happen here, and you’re not helping.

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