Wednesday, August 24, 2011

False Hopes

European stock markets are rising again on hopes that the US Federal Reserve will soon initiative a third round of "quantitative easing." This is foolish. QE1 and 2 were hardly models of effectiveness, and the Japanese central bank has amply proven that expanding the money supply, though undoubtedly the right thing to do in a slump, cannot by itself turn things around: the famous "pushing on a string" analogy is, alas, more than just a metaphor. But Europeans seem to like grasping at American straws, while Americans persist in their Lafferish delusion that tax-cutters walk on water. It would be more useful, perhaps, if Europeans could prevail upon their own central bankers to ease up on their side of the Atlantic. The euro is too high against the dollar, and European inflation is too low. The IMF has recommended higher inflation targeting as one way to reduce the danger of overhanging debt, but the cry has gone unheard in the European wilderness. Indeed, continental inflation rates have begun to diverge from US and UK inflation rates:

(Source: FRED CPI data)

Europe needs to raise its inflation rate and depreciate its currency. It can't count on the Federal Reserve.


bernard said...

Art, how could you? Please replace this plot of price levels with price inflation, or use log of price levels if you must. You will still make your point.

Arthur Goldhammer said...

Give me a break, Bernard. The caption clearly states CPI, and you can eyeball a slope as well as I can.

FrédéricLN said...

;-) !....

For true, if the only expected advantage of inflation is "reducing the sovereign debt"… in front of the many disadvantages of inflation, I suggest to… directly reduce the sovereign debt instead. It will be exactly of the same effect to lenders (they will lose a part of their money) and the social balances will remain.

Inflation IS a mess. And it causes… higher interest rates for any new indebtment. Exactly, or nearly exactly, like a default would.