Trichet & Krugman

Trichet, the ECB President, is on the verge of rising interest rate. In 2008 July, when global economy was in very bad shape, he did the same. few months later, in october, Lehman Brothers fall, and  the Great Recession began.

So, the forward looking capacity of Monsieur Trichet is quite admirable.

In fact, only one country of the 17 members of the euro present an inflationary risk, and it is Germany. Germany is growing at 3,6% a year, at almost full capacity, and Government is impatient to control the inflationary expectations.

But to rise now the interest rate for the rest of the countries members, when theirs debt are carefully watched by the markets, and the possibility of bankruptcy is quite high, is suicidal.

At the same time, Trichet is asking members country to buy bonds in the secondary market, and there are talks about to centralised in an European Treasury the emission of sovereign bonds. All that means a redistribution of financial cost around countries, supposedly against the interest of Germany , Holland, France, Denmark, and the few countries which are paying a lower  interest rate.

It would be a very generous movement of these countries. But, at the end, this centralisation of sovereign bonds will bring, sooner or later, the homogenization of all national tax systems, which could be a very extreme shock for the countries in financial difficulties.

To solve the euro is not easy. Here,  http://www.nytimes.com/2011/01/16/magazine/16Europe-t.html?_r=2&src=me&ref=homepage, a splendid article of Krugman, favorable to this measures.  In spite of his europeism, he has been hardly critisized by his european readers.

Words of Otmar Issing, architect of the euro

Otmar Issing, one of the architects of the euro, has become very pessimistic about its future. See http://www.nytimes.com/2011/01/11/business/global/11issing.html?_r=2&src=busln. Former chief economist of the ECB, he said the euro has not be sufficient to impose discipline one government on another.

That´s true. But it is a truth that I knew before the euro was launched. So, I suppose he also knew.

Now it is too late.

the euro dosen´t work. It has prolonged and  amplified the problem of the crisis.  The bail-out of Greece and Ireland have been pernicious for both and for all the euro zone. The sovereign debt yields ist higher level since ten years ago, when the euro was launched.

Now, US, as in the crisis of last may, is suffering once more the contagion by the falling euro, as in last May, when the tumbled economy forced  Bernanke to a new QE .

The euro is a very menace to global economy, now which  is recovering from the crisis. The assets invoiced in euro are extended in all the world. The fall of the euro would be the origin of a serious crisis.

Benchmark bonds yields. Euro versus non Euro countries

Here, the colected yields of benchmark bonds for main countries. Left, euro countries; right euro countries. Media of euro countries: 5,10%. Media of non Euro countries: 3,48%. Click on figure to see better.

 

Velocity and money demand in Spain

Monetarist models say that when monetary market is in disequilibrium, the effects (inflation, or deflation), could jeopardize real economy.

Here, in the figures below, two measure for Spain of the high increase in money demand since the 2008 crisis.  They represent an indicator of liquidity preference for Households and Corporates. DIviding the mor liquid asset by total assets owned by each sector, we get a proxy measure of movement towards liquidity by the way of selling others assets. The consequences are a huge fall of prices of the other assets, and goods and services, that is, a deflation.

Seeing the continuous preferences of Spaniards to liquidity since the crises, and the fall of assets prices, one has to ask if the major risk for Spain is not  deflation and its consequences: unpaid debt.

Prices go up and down leading real movements

An important question about the figure of two days ago.

If you observe with attention, you could see that when the curves fall, it is the real GDP (red) which led the movement; on the contraire,  it is the nominal GDP wich leads the upwards movements.

Taking account the long period represented, we can say that is a constant in all the conditions imaginable. In other words, the  real GDP contraction (and fall in employment) comes with some force in recessions. Only when inflation stabilize, and when rises, real GDP recovers.

Difficult to see prices and quantities moving in opposite direction!

US. Nominal GDP (blue) and Real (red). Shaded areas, recessions

ECB losses

As we can see in

http://ftalphaville.ft.com/blog/2010/12/16/438896/what-the-ecbs-bond-buying-has-lost, /

And in 

ECB is loosing money when it buys bonds to sustain them in the market.

Bad deal, it seems. And a little liar, BTW.

First, a central bank can not loss money, if it keep up the bonds until theirs term. In fact it could gain a money surplus, as it has bough them at a lower price than their face value.

Second, if it is buying bonds just to get they didn’t fall, ECB is making a worryingly operation.

So, ECB is loosing some  € 6 billion doing (bad) its job. So what? Perhaps putting more billion, it could reach its aims.

Iron law. Is inflation so awful?

Inflation is bad, as we learn. Inflation is the Evil. However, it is not so bad, is not absolute Evil, as we are led to believe. Not to throw everything out the window to stop it, fighting tooth and nail, impoverish us, closing businesses, to end the 89-headed hydra.

As is clear from the graph, inflation and growth have been uneven. The graph is for the U.S., but so would be in Spain.

US. Nominal GDP (blue) and Real (red). Shaded areas, recessions.
What we see in that graph? It represents the annual growth rate of nominal GDP and real U.S. since 1947. We see  clearly, that inflation and output are not incompatible (inflation is the gap between the two lines). Obviously, inflation is bad for those who have no bargaining power of their incomes. It’s bad for the creditor of a fixed debt.When you collect your debt will get a real value less than that paid. It is bad for exporters, who see their costs go up and lose margin, or markets.
It’s good to keep inflation within limits. Sometimes, when it is too high, over competing countries, must be reduced at the cost of production. If you look in the gray areas, recessions, repeat the same story: a decline in inflation and real growth. After recessions, also repeated another story: rising real growth and inflation. It’s like an iron law: more growth, more inflation. And vice versa.
There is a period that stands out, which is that of the seventies, called “stagflation” increased inflation without growth. As we see, this is simply wrong: there was real growth, more than 5%!, But with higher inflation. Then came “The Great Moderation”, the Greenspan era of steady growth (but smaller) and moderate inflation.
Of all this, I can only draw one conclusion: if the U.S. is the country of more flexible markets, it is inevitable some correlation between inflation and growth. It is clear that the NGDP is important, then prices are important. Then to target an  inflation rate very, very low at all times is ridiculous … and harmful.
Second, as the structures of each country, the values of “balance” between inflation growth will be different.
Third, while Germany is endeavoring to impose their ideology of zero inflation, It  impose recession on other countries to avoid inflation for itself.  GDP & inflation are correlated. Everything else is ideology.
In these we are.
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