Posted by Karl Denninger
European Central Bank President Jean-Claude Trichet says some countries in the euro zone might have to accept a period of deflation to restore long-term economic growth prospects.
And what are the criteria?
“It is normal that some regions, after growing above the EMU average for some time, and after having accumulated high national inflation, experience a correction and therefore a period of negative inflation, as it is currently happening in Ireland,” Mr. Trichet said.
Let’s remember that inflation is the expansion of the monetary supply, and since money and credit spend the same, they’re identical in the economy.
Where have we had an extraordinary growth in the credit supply?
Is that a “large” growth?
As Paul Krugman put it in a New York Times column today: “Deflation is a painful process, which invariably takes a toll on growth and employment. So
GreeceThe United States won’t grow its way out of debt. On the contrary, it will have to deal with its debt in the face of an economy that’s stagnant at best. So the only way GreeceThe Untied States could tame its debt problem would be with savage spending cuts and tax increases, measures that would themselves worsen the unemployment rate.”
Fixed it for ‘ya….. oh yeah, we’re not smart enough to figure it out yet, as you can see.
10 years of the same game and all we’ve done is make it worse.
What worries me most about the U.S. situation right now is the rising clamor from inflation hawks, who want the Fed to raise rates (and the federal government to pull back from stimulus) even though employment has barely started to recover. If they get their way, they’ll perpetuate mass unemployment. But that’s not all. America’s public debt will be manageable if we eventually return to vigorous growth and moderate inflation. But if the tight-money people prevail, that won’t happen — and all bets will be off.
What growth Paul?
Go look at that graph up above again. We never exceeded 2% GDP growth coming out of the 2001 recession in real terms.
Why? Because the government’s “replacement” of private demand crowded out innovation and private use of capital by supporting bankrupt entities and policies.
Contrary to popular belief Hoover did the same thing. Bernanke claims that he practiced “liquidation”; that’s an intentional lie. It is true that Mellon (Secretary of the Treasury) preached this, but it was never practiced. Indeed, written at the time and later by Hoover himself:
As his admiring biographers, Myers and Newton, declared, “President Hoover was the first President in our history to offer Federal leadership in mobilizing the economic resources of the people.” He was, of course, not the last. As Hoover later proudly proclaimed: It was a “program unparalleled in the history of depressions in any country and any time.”
Uhh…… what did Hoover manage to get to happen?
Hoover insisted that if wage rates were to be reduced eventually, they must be reduced “no more and no faster than the cost of living had previously fallen, (so that) the burden would not fall primarily on labor.”
Let’s see, 99 weeks of unemployment anyone?
If industry followed this course, “great hardship and economic and social difficulties would be avoided.” The industrialists all agreed to carry out the Hoover program, and further organized cooperative efforts on its behalf in a conference in Washington on December 5.
Oh, and for The Fed of the time?
If the Federal Reserve had an inflationist attitude during the boom, it was just as ready to try to cure the depression by inflating further. It stepped in immediately to expand credit and bolster shaky financial positions. In an act unprecedented in its history, the Federal Reserve moved in during the week of the crash-the final week of October-and in that brief period added almost $300 million to the reserves of the nation’s banks. During that week, the Federal Reserve doubled its holdings of government securities, adding over $150 million to reserves, and it discounted about $200 million more for member banks.
Wait a minute…. isn’t that exactly what we did this time around?
President Hoover was proud of his experiment in cheap money, and in his speech to the business conference on December 5, he hailed the nation’s good fortune in possessing the splendid Federal Reserve System, which had succeeded in saving shaky banks, had restored confidence, and had made capital more abundant by reducing interest rates.
Let’s see, how did all this turn out…… oh, and was there a period of euphoria – that “the panic has passed and we’re on our road back to prosperity”?
I’ll let you do the research on that one.