Merkel and Trichet just don't get it

Tuesday, December 16, 2008

What's worse?

(1) A fiscal sector that says more is needed, but the economy must wait until January. From Deutsche Welle:

German Chancellor Angela Merkel acknowledged that Germany's current 31 billion euros ($42.36 billion) stimulus package might not be enough, but said she wants to wait until January before putting forward a new proposal.

Merkel acknowledged in a speech on Tuesday, Dec. 16, that the government's stimulus package "might not suffice." But Merkel hinted that she wants to coordinate future efforts with the incoming Barack Obama administration.

(2) A central banker who apparently failed his economic history course. From Bloomberg:
European Central Bank President Jean- Claude Trichet said there’s a limit to how far the bank can cut interest rates and signaled policy makers may pause in January.

“Do we have a feeling there is a limit to the decrease in rates? At this stage certainly yes,” Trichet told journalists in Frankfurt late yesterday. The comments were embargoed until today. Asked whether the ECB will refrain from a further rate reduction next month, Trichet said it wants to “concentrate at this stage on getting what we already decided to be really operational.”

Trichet should have audited one of Bernanke’s courses at Princeton.

Rebecca Wilder


Irrational Doomsday Blog December 16, 2008 at 2:07 PM  

"Trichet should have audited one of Bernanke's courses at Princeton"

Alternatively, Trichet is trying to delay falling into a liquidity trap too soon and losing traction the way the US appears to be.

Time will tell what works, but so far, by prediction is Bernanke and a lot of mainstream monetary theory will be completely discredited by the end of this.

Econophile December 16, 2008 at 4:36 PM  

I love it when Keynesians think they know what's going to happen. I've got to ask: do you think it's going according to the playbook? Or, is something not right? Are you expecting the miracle of massive fiscal stimulus to work? Are you concerned, as is the Fed, about catching the Japanese disease? Do you think they can print enough $$ to buy up all the bad assets? Inquiring minds want to know.

David Pearson December 16, 2008 at 5:40 PM  


You may be too harsh on the ECB. This is a game of "choose your poison". If you're a German, your poison is unemployment and lower standard of living. If you're an American, your poison is inflating your debt away and a lower standard of living. Is one better than the other? Ben Bernanke seems to think so; Trichet thinks he's wrong. But then, Trichet doesn't oversee an economy with a 350% debt/gdp ratio...

Rebecca Wilder December 16, 2008 at 6:39 PM  

HI David,

It seems that Europe's credit markets are not doing well either, and perhaps Trichet should be pumping out the money faster. We will see - definitely!

Are you referring to the US debt/gdp or the Treasury debt/gdp? For either, 350% is just not the case, unless you are talking about Iceland (which is more). US debt/gdp is roughly 2.5 (250%), while the Treasury debt/gdp is roughly 0.70 (70%).

As always, thank you for your comments!


David Pearson December 16, 2008 at 8:56 PM  


Here's a Ned Davis Research chart showing the 350% figure. I do think total credit is in the $50-$55tr range. Let me know if you can link to a different figure as I'd like to make sure I have the correct one.

If the 350% figure is correct, then the only choices are 1) grow our way out; 2) write it down; or 3) inflate it away. We appear to be choosing 3).

David Pearson December 16, 2008 at 9:16 PM  

The number comes from the Fed's Flow of Funds report. I see -- you may be netting out financial which is about $16tr. There's an argument for this since its really "middle man" debt. I'm not sure that argument holds given that financial debt is at the epicenter of the current crisis.

Rebecca Wilder December 17, 2008 at 6:41 AM  

Hi David,

I would argue that I am being too harsh on Angela Merkel. Conducting deficit-driven expansionary fiscal policy without an autonomous monetary authority can be tricky and costly.


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