ECB's Weidmann Spoils The Party: Says Leveraging EFSF Violation Of EU Treaty, Warns Of Hyperinflation
Here is my response:
From one of your MMT friends:
Weidmann is bonkers.
See Cullen Roche's history of MMT predictions about what would happen to the EMU at Pragmatic Capitalism, MMT, THE EURO & THE GREATEST PREDICTION OF THE LAST 20 YEARS?
Best regards,
Tom Hickey, contributor at Mike Norman Economics
19 comments:
Obviously there are inflation risks involved in the monetary financing of government spending - spending not offset by borrowing or taxation. MMTers are the first to recognize it, and MMT theorists have included thinking on the preservation of price stability in their thinking on the monetary system.
But Weidmann's idea seems to be that we should have a system in which there is no room at all for thoughtful monetary policy in making decisions on the scope of deficit spending. Instead countries need to be forced to adhere to a stubborn absolutistic prohibition, no matter what economic conditions obtain. It's like saying that because people can overdose on pain killers, doctors should be prohibited outright from prescribing painkillers.
I know the Germans took over Austria in 1938. But I didn't realize the Austrians have engineered a reverse Anschluss and have taken over Germany in 2011.
But I didn't realize the Austrians have engineered a reverse Anschluss and have taken over Germany in 2011.
Yep.
Now the Germans are caught between the rock of fear of hyperinflation and the hard place of needing the EZ to absorb its exports. No way they can have tight money and the ability of other countries to pay for German exports on the cuff. Austerianism will just result in reduced German exports, higher unemployment in Germany, and unsustainable social unrest in the EZ periphery.
The only outs are to either redesign or destruct the EZ, that is, go forward to a political union with a Treasury corresponding to the ECB and a unified fiscal policy or else abandon the euro. Alternatively, Germany could withdraw from the EZ and go back to the DM, leaving the euro to the rest of the EZ, which might be more or less workable. With Germany in the mix, no way the euro can work on a sustainable basis without a real union in which countries cede political sovereignty as well as currency sovereignty.
It's really interesting to me how spectacularly wrong policy makers can be without so much as a moment's reconsideration of their underlying paradigms. They see the folly of the policy, yet continue to try to find models to correct the problem within the flawed system in which they are operating.
I think Einstein would say they were insane.
Tom I'm afraid your post has fallen on deaf ears over there.
No matter, the commentariat at Zero Hedge is unreachable. I have not read more economic inanity on any financial blog although the base of out-of -paradigm thinking is well established anywhere you go.
It feels like the-Earth-is-flat argument being re-played over and over.
I wonder if Durden is in any way embarrassed by the types of people the blog attracts?
Papademos 'agrees to be Greek PM'
"He is in place to take over the parliament for an era of technocratic government to try to actually calm this crisis....."
'Code' for, TPTB have forced the Democractically led Government to be taken over by an unelected banker who was previously Vice-President of the European Central Bank.
And clever use of the term 'technocratic' to justify such an authoritarian outcome. This is the only reason why the term Technocracy was ever invented. No one is an all knowing oracle who can magically gauge the wants and desires of everyone in the community.
He'll be in power just long enough to plunge Greece into years of suffering.
F'ing Beautiful.
Ohh
It stinks: EU to install puppet governments in Athens and Rome
New Greek Prime Minister: No decision reached, Papademos likely
"The likely front runner now for the position of Prime Minister is Lucas Papademos, who is not actually an elected politician."
this seems to be Europe doing what Europe does best...dumb-ass, roll-all-over-me continental dictatorships/monarchies. Why do they have this pattern over and over again? Hitler, Stalin, Napolean, the monarchs, William the Conqueror, Charlemagne, etc., etc.
What exactly are the Europeans looking for from these "systems"?
I read Zero Hedge, but there are some writers over there who positively yearn for hyperinflation and the resulting playout of their goldbug fantasies.
These same ones also have an ideological problem with fiat currency. They constantly repeat the misinformation that there has never been a fiat currency that has not collapsed.
With that much confusion about the nature of money, I doubt they can get MMT.
agreed anon.
however clearly Tyler at least understands it...whether or not he agrees with it who's to say.
Welcome to the EUSSR
ewww ouch Laura....that one nailed it! good one!
This jumped out at me from Dan K's comment:
"Obviously there are inflation risks involved in the monetary financing of government spending - spending not offset by borrowing or taxation. MMTers are the first to recognize it, and MMT theorists have included thinking on the preservation of price stability in their thinking on the monetary system."
My understanding of MMT (where I could be utterly wrong) is that government spending carries the exact same inflation risks whether it is accompanied by bond issuance or not.
That treasury bond issuance only swaps demand deposits for time deposits, draining reserves and impacting interest rates but not inflation rates.
(I think) MMT says taxation the only government tool that offsets spending, that is removes net financial assets from the private sector and impacts inflation.
I believe you are correct there geerussell. The only inflationary element to bond issuance versus direct spending is the interest income as I understand it. This is why Warren continually refers to QE2 as a tax since it is taking away that interest income from the private sector.
In fact I just read Warren post today this:
"leave the fed fund rate at 0 permanently and don’t let the tsy sell anything longer than a 3 mo bill.
don’t allow publicly insured pension funds to buy equities.
narrow banking as per my proposals
etc."
I suppose the government could also institute certain mandatory fees and penalties as well which could also work to drain aggregate demand just like taxes.
Non-government drains are trade deficits and savings desires which can effect UE and aggregate demand, etc., etc. if not properly supported fiscally as I understand it.
Geerussell, Mario:
My understanding of MMT (where I could be utterly wrong) is that government spending carries the exact same inflation risks whether it is accompanied by bond issuance or not.
Not exactly the same, but close. At times like right now, it really doesn't matter, at least not to the extent that anyone on earth can currently understand.
Inflation is about spending. Saving is not-spending. So the more saving, the less spending & inflation.
The magical mystical mainstream idea is that bonds are not-money, and that they represent & cause increased savings. So "offsetting" spending with bond issuance will equate to saving, and act just like a tax.
But things just don't work that way, except maybe in some rare situations. Since it is important, the mainstream doesn't study it (hardly could, the question interferes with ideology) and as there are only a finite number of MMT economists, the topic is little studied by people with their heads screwed on straight.
There are other inflationary & deflationary effects of bond issuance versus currency issuance in addition to the mainstream savings ideology & interest income. For instance, raising interest rates by issuing bonds may raise businesses' borrowing costs & lead them to raise their prices. But for normal interest rates, "these effects are not likely to be very great" (Lerner), because they can cancel each other out.
I think what can be said is that for very high, Latin American interest rates like 90%/yr, the MMT recommendation to cut inflation would be to drastically lower bond rates. And would clearly work & be completely opposed to the mainstream which would interpret this cessation of showering nominal money on bondholders as "loose money". That very grosso modo, the mainstream is exactly wrong as usual, and printing money tends to be less inflationary than printing bonds. (E.g. Japan for the last 20 years).
According to MMT, the quantity of money, however that is figured — HPM, M1, M2, M3 — is irrelevant to inflation in itself. There is no empirical evidence of changes in quantity of money affecting the inflation rate.
Unless the propensity to consume, i.e., effective demand, exceeds the ability of the economy to expand to meet the increasing level of spending, the economy will grow and the price level will not continuously rise (the economic definition of inflation). However, if effective demand exceeds the capability of the economy to expand to meet it, then a continuous rise in the price level can be expected to occur.
The key is balancing effective demand with the availability of real resources. According to MMT, the government fiscal deficit must offset non-government saving in order to keep the sectoral balance in equilibrium at full employment. To undershoot is results in economic contraction and rising unemployment. To overshoot results in inflation.
Thanks for the corrections guys. You're right. I goofed.
It would seem that swapping a financial asset that bears interest and has a future maturity for one that bears no interest and has present maturity might have some marginal impacts here and there on effective demand. But compared to taxation, which simply extinguishes net financial assets, these impacts should probably be seen as negligible.
According to MMT, the government fiscal deficit must offset non-government saving in order to keep the sectoral balance in equilibrium at full employment.
It's interesting now that you think about it....how does one know what the savings rate really is at any one time? I mean is it a percentage of income or something or a static target level of cash or what? And how does one know when we've fulfilled that level?
If federal deficits = private savings then doesn't it beg the question what is the natural rate of savings and how does one quantify that level?
in response to my own question I just read this article proving how "investment makes savings possible"
It's brilliant to me and just a great read. Couldn't have been at a better moment. Enjoy!
http://seekingalpha.com/article/175009-investment-makes-saving-possible
Mario, the simple MMT solution is that if there is unemployment, then the deficit is too small. If there is a continuous rise in price level at full employment, then it's too large.
(If there is continuous rise in price level without full employment, then it's not monetary inflation but a supply issue involving resource shortage.)
good point Tom. That's a healthy and easy barometer. thanks!
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