The US is going to fall behind the Euro 19

A James Alexander & Mark Sadowski post

Things are changing. It is looking like Euro Area NGDP growth could soon overtake that of the US, with similar consequences for RGDP.


Mario Draghi and most of the ECB is keen to do more monetary easing. The QE programme seems to be working on NGDP despite his struggles to raise the inflation rate.

Janet Yellen and most of the Federal Reserve thinks monetary conditions are too easy and, using the discredited Philips Curve, believes that low levels of economic slack mean inflation is about to accelerate.

Both central banks use false Phillips Curve models, it’s just that they think they are in different places on the Curve. The Europeans think they have plenty of slack. Massive slack, or rather high unemployment shows something is wrong with the economy and monetary policy can do something about that by raising nominal income. When there is less obvious slack, as in the US, monetary policy should be set to provide stable levels of nominal GDP growth. The US is clearly failing here.

The result is improving economic prospects for the Euro 19 and worsening ones for the US.

The likely further deceleration of NGDP in the US is predicted by the anaemic growth in the US monetary base. The further acceleration of NGDP in the Euro 19 is seen in the strengthening growth in the Euro monetary base.


The market also has to anticipate future changes in the monetary base, and as can be clearly seen there have been numerous false starts, especially in the Euro Area. However, the evil Trichet has gone and the austro-Germans on the board of the ECB significantly weakened in authority and influence. The bias is firmly in favour of more easing, and the market should continue running with that.


Sadly, the Euro Area economy has a lot of ground to make given those horrible NGDP and Base Money growth rates over the last seven years.


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