Tuesday, August 23, 2011

Malicious ECB rate hikes

Lieblings quote of the day by Dean Baker:
"The ECB is run by a perverse cult that worships 2.0 percent inflation and is prepared to sacrifice almost all other economic goals to meet this target."
The article goes on to argue that the ECB should increase its inflation target to 3-4% in order to facilitate positive wage growth in the debt deflationary economies like Spain. I've argued a similar point in the past.

However, I'd like to add that this "pervese cult" called the European Central Bank (ECB) raised its policy rate on April 13 - a point in time that correlates perfectly with a shift in trend across euro-area bond markets. Specifically, April 13 marks the upswing in risk premia on Italian, Spanish, and Belgian bonds relative to German bunds. Hmmm...policy mistake?

Now that's just malicious.

Rebecca Wilder


  1. It is not possible to "facilitate positive wage growth" without first confronting Globalisation - bankers vs. bankers, a "blue on blue" situation. That leaves default or stick taxpayers with the debt as the only options.

  2. There's demand-side (monetary), inflation, & supply-side (non-renewable natural resources), inflation.  The world is overpopulated with 7 billion people.   In light of the supply side constraints (which aren't identified & segregated by the ECB's target), a 3-4 percent increase in money flows over and above the rate-of-change in real output makes more sense. 

    Even so, un-employment can't be permanently reduced by simply pumping up aggregate demand.  I.e., if there is an inflation-unemployment trade off curve, it is shifting to the right at an accelerated rate.  But unless money flows expand at least at the rate prices are being pushed up, output can't be sold & then the work force would have to be cut back.