Ryan Avent and Karl Smith ‘get it’. Tyler Cowen not so much

From R.A.:

TYLER COWEN writes on the euro-zone economy:

Would the new helicopter drop money be kept in periphery banks and lent out to stimulate business investment? Or does the new money flee say Portugal because Portuguese banks are not safe enough, Portuguese loans are not lucrative and safe enough, and Portuguese mattresses are too cumbersome?

The former scenario implies that monetary policy should be potent. The latter scenario implies that the helicopter drop will be for naught and the fiscal policy multiplier also will be low, on the upside at the very least (fiscal cuts still might cause a lot of damage on the downside). I call this the liquidity leak, rather than the liquidity trap.

Karl Smith gives the correct response:

What Tyler calls a liquidity leak, I call markets at work. The ECB provides enough stimulus to get all of the Eurozone going but it all leaks to Germany. Fine. The German market heats up. German wages and rents rise. Retired German doctors start considering the virtues of a flat in Lisbon overlooking the harbor. German consultancies hold seminars on “How to make your Mediterranean town competitive in the new German Outsourcing Model.”

This is the way things are supposed to work. The idea that a more competitive and efficient Germany should not command higher wages and rents is bizarre; and is only called inflation because the Eurozone, in its heart-of-hearts, doesn’t actually believe it´s one monetary union where the richer parts are distinguished principally by the fact that they have more money.

In a previous post I charted France´s dire demand situation which was prompting Hollande to ‘act’. The situation is much the same for the other Eurozone countries except, you guessed, Germany. As a representative for ex-Germany unemployment I picked a large (southern/periphery) economy, Italy, and a small (northern/core) economy, The Netherlands.

“These are their charts”: