A guest post by Benjamin Cole
And now Europe is on the cusp of deflation.
For 30 years, inflation rates and interest rates in Europe and major Western economies have been in a secular downtrend, from the double-digit 1980s to the flat-lining of late. Obviously, interest rates cannot go below zero, but the European Central Bank—at least adjudging by their actions and commentary—has hopes of bringing deflation to the continent.
Indeed, in recent commentary, ECB’ers say Europe’s central bank cannot fight deflation—a revival of the old “you can’t push on a string” description of monetary policy.
Speaking in Vienna, Ewald Nowotny, a member of the European Central Bank Governing Council, said a central bank can cut interest rates but cannot force businesses to borrow.
“One shouldn’t overestimate the possibilities of monetary policy,” said Nowotny. Falling energy prices could bring deflation, undaunted by central bank ministrations, he added.
Evidently, Nowotny considers quantitative easing to be a policy either ineffective (despite recent history in Japan), or if effective, then beyond the pale of polite central banking (more likely).
The intellectual gymnastics performed by the tight-money cultists in the last several years would be amusing, if the results were not so depressing for economies and their citizens.
Was it only yesterday that the inflation-hysterics screamed that central banks were but one step away from provoking hyper-inflation? For decades, central bankers at the U.S. Federal Reserve and the ECB and have routinely described inflation as monetary fire amid economic kindling, ready to run out of control without eternal vigilance.
Then, the world was plummeted into the Great Recession by tight money in 2008. Among major nations, only China sidestepped the debacle—never mentioned is the fact the People’s Bank of China is run by the Chinese Communist Party, an organization now as obsessed with growth as Western central bankers are with inflation.
Currently, Western economies are limping along zero lower bound. Sensible observers are pleading with central bankers to gun the engines, to aggressively seek economic growth—and why not? Inflation is dead.
Surely, real jobs for millions of workers, and real profits for business operators are more important than a few percent swing on a nominal price index?
So the new retort from the tight-money cultists is a plea of institutional impotence. Central banks cannot cause inflation. The problems of Western economies are all structural.
It is hard to imagine that modern economies, with giant pools of excess labor, with wonderful infrastructures, with well-educated populations and sophisticated financial institutions, with instant global communications and global sourcing of goods and services—are being held back purely by “structural” problems.
I don’t believe it.
And why should anybody believe the tight-money cultists? This is the same crowd of sweat-drenched hysterics who insisted QE would lead to runaway inflation, so we had to have tight money. Now they insist central banks cannot cause inflation, so there is no point in anything but tight money.
Ay any minute of the economic year, what time is it? The ECB says, “Time for tight money.”
Sadly, there is more at stake than economic growth and prosperity. In recent weeks we have seen the rise of extremists in the European political theater—a reflection of voter discontent with chronic economic weakness and governmental impotence.
It is a very bad arrangement when citizens of democratic nations are voiceless when it comes to monetary policy. That is the current arrangement, and it is not working. For generations, mainstream economists and central bankers have taught themselves and students that “independent” central banks are a good.
Does anyone believe that anymore?
PS There´s irony in this: “BOJ Warns Euro Zone of Deflation Danger”
On the day of a closely eyed European Central Bank policy meeting, a Bank of Japan board member warned of the risk of Europe slipping into chronic deflation, adding that slower growth in Europe could muddy the prospects for global growth.
Historinhas 