William K. Black — Dr. Draghi Prescribes a Dose of Deflation for Spain as his latest Quack Cure

Here are the two extraordinary aspects of Draghi’s praise for deflation as the solution to Spain’s Great Depression level of unemployment. One, Draghi’s pro-deflation policy contradicts the ECB’s anti-deflation policy. That explains the strangest puzzle economists have had about the troika. The troika’s practices are insane under their own written policies. Under their stated policies they should have – over a year ago – adopted maximum monetary stimulus. Instead, they have been claiming that they are waiting to intervene until the eurozone is minutes from sinking into deflation. The troika has also been claiming that if this intervention comes a minute too late the results will be disastrous because the intervention will likely fail. I have written repeatedly to explain how internally inconsistent this “logic” is and how crazed it would be to wait to respond to the inadequate demand that is causing the eurozone’s problems, including deflation. If Droghi is telling the truth the troika’s policies all make (sick) sense. He actually wants Italy and Greece to join Spain in deflation because he thinks that deflation spurs growth. His problems are that (A) his predecessors adopted the opposite written policy, (B) his predecessors’ rationale was that deflation was disastrous for growth, and (C) economists overwhelmingly disagree with Draghi’s delight with deflation. Draghi’s answer is to let other troika-trolls bleat about deflation while he blocks any action to prevent it or attempt to end it now that it has descended on Spain.

Two, financial journalists see none of these points. They ignore the implications even when they cite Draghi’s devotion to the desirability of deflation....

UMKC’s offer still stands. We’ll hold a free two-day seminar for a group of journalists who want to learn the basics of macroeconomics and critical thinking necessary to write in this field.

New Economic Perspectives 

Dr. Draghi Prescribes a Dose of Deflation for Spain as his latest Quack Cure

New Economic Perspectives

William K. Black | Associate Professor of Economics and Law, UMKC