Bill Black: Deflation Dementia

Yves here. This piece by Bill Black not only does a great job of kneecapping some typically poor MSM reporting, but it’s also valuable as a high-level overview of the insanity of European economic policies.

By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Originally published at New Economic Perspectives

There must be some café in Brussels where all the most inept U.S. financial journalists meet with to get their take on eurozone deflation.  Regular readers know that I am a strong critic of much of what passes for financial journalism, but there are special qualities to the U.S. coverage of the topic of eurozone deflation.  It is so homogenous and its logic is so internally inconsistent that it is breathtaking that so many journalists can repeat the same demented “logic” no matter how many times we explain that it is facially nonsensical.

The latest example of this genre is an AP story that has already been reproduced by elite media without even a scintilla of scrutiny.  Here’s how the AP begins its tale.


Eurozone Inflation Drop Adds Pressure on ECB


BRUSSELS — After breaking out of recession and taming its financial crisis, Europe now faces a new kind of economic threat — deflation, a protracted drop in prices that can snuff out growth for years.

New data released Monday showed the inflation rate fell in March to its lowest level since the 2008-2009 global financial crisis, a sign of economic weakness that piles fresh pressure on the European Central Bank to further ease its monetary policies this week.

Inflation across the 18-country eurozone dropped to 0.5 percent, the Eurostat statistics agency said, down from 0.7 percent in February and below forecasts for 0.6 percent.

The key logical flaw is displayed in the phrase “Europe now faces a new kind of economic threat.”  No, the eurozone suffers the same reality that it has been the victim of since 2008 – grossly insufficient demand.  That is what caused both of its recessions, which largely “snuff[ed] out growth” for the last six years.  A recession has a technical meaning that often has little practical meaning.  If a country has even the most pathetic economic growth in a quarter, e.g., 0.1%, its recession is defined as finished.  It can have Great Depression levels of unemployment, but it “break[s] out of recession.”  The (insane) tone of the article is that the eurozone has just triumphed over recession by producing a positive growth so immaterial that unemployment went down a tiny amount primarily because many of the eurozone’s unemployed workers were so discouraged that they migrated to other nations.  That’s an economic failure, not a success.

The first clause also treats it as a triumph that the eurozone “tam[ed] its financial crisis.”  The reality is that the eurozone’s automatic (fiscal) stabilizers drew it out of the initial Great Recession until the troika (the European Central Bank (ECB), the International Monetary Fund (IMF), and the European Commission) demanded an austerity program that promptly threw the eurozone back into a gratuitous second great recession and much of the periphery of Europe (Italy, Spain, and Greece) back into levels of unemployment that exceed average Great Depression levels.  Those three nations forced into Great Depressions represent roughly one-third of the eurozone’s total population.

Fortunately, the troika was politically restrained from imposing the full severity of the brutal austerity they desired.  Most Eurozone nations run budget deficits that while small and deeply inadequate have provided sufficient additional demand to prevent the entire Eurozone from sinking into another Great Depression and to produce a (pathetically weak) recovery.

Increasingly, however, the eurozone is beset with another of the troika’s “reforms” – the war on wages.  The troika’s increasingly successful effort to reduce eurozone wages, particularly among poorer workers in the periphery has further reduced already inadequate consumer demand.  The troika did not “tam[e] the financial crisis” – it caused the crisis.  The ECB did, eventually, tame the bond vigilantes, but the story there is that it could have done so from the beginning – yet it refused to do so for years.  The triumphal tone of the article indicates that yet another inept reporter is being fed the same faux triumphal story line by one of the troika-trolls.

The central point is that inadequate demand causes each of these problems – the Great Recession, the gratuitous second eurozone crisis brought on by austerity, and the declining inflation rate.  The eurozone is not facing a “new” (underlying) problem and the problem is not some future “threat” but a long extant reality.

So, what does the AP story state causes deflation?  How does the article discuss the inadequate demand for goods that is the dominant driver of falls in prices?  It ignores it completely.  The word “demand” does not appear in the article.  The article treats “deflation” like an evil fairy that winks into existence through magic.  Indeed, the article wilfully misleads by suggesting that exchange rates are the key driver of deflation.

The dip in inflation comes at a time when the euro has been buoyant in foreign exchange markets. A higher currency can push inflation down in two ways: It can make imports cheaper and weigh on economic activity by making exports more expensive on international markets.

Put aside for the moment the fact that no economist thinks that currency exchange rates are the fundamental cause of deflation.  One of the three traditional means of speeding recovery from a recession is to devalue one’s currency in order to increase exports.  The troika has been demanding that the periphery follow a growth strategy premised on dramatically increasing exports.  AP is telling us that the ECB has been following policies that cause the euro to appreciate (which revalues upwards one’s currency), and that this will harm EU growth.  One might think that would flash a warning flag in front of the AP reporter.  The ECB is following a currency strategy that is logically inconsistent with its (purported) growth and inflation-target strategies.  This logical inconsistency would have alerted any sentient reporter to the fact that the real story was the troika’s incoherent and destructive policies.

How, does a “strong” euro weaken eurozone exports?  It acts as a higher price of goods to the importing nation.  The higher cost of goods reduces the “quantity demanded” of eurozone exports.  Notice that the word “demand” appears as soon as one explores causality rather than assuming that the euro fairy explains economic events in the eurozone.

The AP article makes a series of illogical statements.

In Europe, the inflation rate is the main driver of monetary policy decisions — unlike in the United States where the Federal Reserve also takes unemployment figures into account. The ECB aims to keep inflation close to but just below 2 percent.

Why would the ECB adopt an inflation target of two percent?  The article doesn’t explain.

The article notes, but ignores the dreadful implications, of a central bank system that ignores unemployment.  Roughly one-third of the eurozone population is in nations with Great Depression levels of unemployment – and the reaction of the troika-trolls is “yawn.”  Actually, while they bleat about unemployment, they adopt policies that maximize unemployment in the hope that it will force workers to slash their wages. The troika-trolls like the idea of a “reserve army of the unemployed” inexorably engaged in a competition to slash worker’s wages.  This point was made, inadvertently, by the New York Times in a story they posted late Monday that is not attributed to the AP.

Mr. Draghi has said low inflation is concentrated in crisis countries where falling prices are welcome and necessary to regain competitiveness on world export markets.

Draghi heads the ECB.  As I show below, the ECB’s stated policy is the opposite of Draghi’s actual, personal policy.  Draghi is delighted with collapsing wages, incomes, and prices in Spain, Italy, and Greece.  Draghi is one of the leading designers of the “Road to Bangladesh” strategy in which the working classes of the European periphery are extorted into cutting their wages to the point that they can compete “successfully” with workers in Bangladesh and other much poorer nations.

As I will explain in my next column, the NYT article about deflation is simultaneously more complex and more disappointing in its lack of analysis than the AP story.  It is, unintentionally and unknowingly, more revealing about the dishonesty and depravity of the troika.  It is startling to see how effective the troika-trolls are in leading U.S. financial journalists by the nose.  It is hard to think of anyone in the world with less credibility in finance than the troika-trolls.  Then again, the NYT still acts like Jamie Dimon is a paragon of virtue and competence

What are the logical implications of the ECB’s increasing inability to come close to achieving its inflation target of two percent?  The article does not ask or explain.  Something must be going desperately wrong if the ECB cannot meet its target.  Asking what was going wrong, however, would require the trolls and the journalist to utter the banned word – “demand” – and to place the dread word “inadequate” before “demand.”  That would also force the trolls and the journalist to admit that the problem the eurozone is suffering from is not “new” and it is not simply a potential “threat, “ but instead is the same problem besetting the eurozone for the last six years that has been made far worse by the troika’s quack austerity programs.

What are the trolls and the journalist saying about how bad a thing “deflation” is?  Dread!

Such a downward spiral chokes off economic growth and can be difficult to get out of — Japan was stuck in deflation for two decades.

Wow, deflation is a “0.50 biblical curse.”  It causes nations to wander in the (economic) wilderness for half of the 40 years God made the Jews wander.  That’s really, really awful.  Ollie Rehn, the troika’s preeminent austerity troll, recently admitted that (assuming no further major shocks!) Spain would not emerge from its “crisis” until 2024.  He made no promises on how long it would take after the crisis phase for Spain to reach full employment.  Spain’s bubble peaked in 2006, so he is talking about Spain wandering in the economic wilderness for nearly two decades.

Note that people still disappear from the narrative even when the trolls and inept journalists go “0.50 biblical curse” on us.  We hear only about “economic growth.”  We don’t hear about unemployment, poverty, migration, spousal abuse or suicide.

How does deflation do these terrible things to “economic growth?”  Here, people reappear, but only as generalized “consumers.”

“The steady decline [in inflation], the third in as many months, raises concerns that consumer prices may start to fall outright. That risks creating a situation in which consumers and businesses put off purchases in hopes of better deals down the line and companies cut prices to entice buyers.”

Notice that even in this passage AP and the trolls feeding them their narrative cannot bring themselves to use the “D” word though they are indisputably discussing “demand” and demonstrating that they know that “demand” is “inadequate” and that “inadequate demand” can cause “0.50 biblical curse” disasters.

Why would “consumer prices … start to fall outright?”  What’s the causal force?  The trolls and journalists can’t bring themselves to say it, but their logic proves it is “inadequate demand.”  Why has the already deeply inadequate inflation rate continued to fall despite the ECB’s ultra-low interest rate policies?  Because (1) demand is grossly inadequate in the eurozone and (2) low interest rate policies do not provide the inadequate demand.

Now consider the trolls’ “logic” that the price level only affects consumer and manufacturing demand for goods and service when “prices … start to fall outright?”  Does that make any sense?  No, any reduction in inflation should under this logic lead to deferred purchases and the real issue under this logic would be whether consumers and manufacturers anticipated a risk of deflation.  Under the trolls’ “logic,” many purchases would be deferred even though reported inflation was positive as soon as the purchasers anticipated any material risk of deflation.  This means that long before deflation is reported it should become a top government priority to increase demand.

Note also that there would be no downside in these circumstances to the government using fiscal policy to compensate for the inadequate private sector demand.  The “worst” that would happen under the trolls’ own “logic” was that inflation would increase a bit – which the trolls are telling us would be a very good thing.  Far more importantly, of course, the humans who disappear under the trolls’ and the AP’s narrative would be getting jobs and the dignity and pay that goes with those jobs.  There is, in other words, an obvious “win-win” strategy of fiscal stimulus and jobs programs that the troika refuses to use for reasons of dogma and indifference and even hostility to the unemployed (or at least their “excessive” wage desires).

The ECB’s website’s explanation of its inflation target is hopelessly dishonest, but even it is a model of rectitude compared to the triumphal AP story on deflation.

Consider these passages in which the ECB explains why it is vital to prevent the inflation rate from falling to levels far above where it has in fact fallen.

  • provide an adequate margin to avoid the risks of deflation. Having such a safety margin against deflation is important because nominal interest rates cannot fall below zero. In a deflationary environment monetary policy may thus not be able to sufficiently stimulate aggregate demand by using its interest rate instrument. This makes it more difficult for monetary policy to fight deflation than to fight inflation.
  • take into account the possibility of HICP inflation slightly overstating true inflation as a result of a small but positive bias in the measurement of price level changes using the HICP.
  • provide a sufficient margin to address the implications of inflation differentials in the euro area. It avoids that individual countries in the euro area have to structurally live with too low inflation rates or even deflation.

The AP story admits that Spain is one of the eurozone nations suffering from deflation.  The ECB sold its eurozone average two percent inflation target as a means to assure a “sufficient margin” to “avoid” “individual countries” suffering deflation.  The ECB, in convoluted and dishonest language, manages to admit in its first bullet point that monetary policy is particularly ineffective in providing vital stimulus when demand is severely inadequate and deflation occurs.  Again, recall the asymmetrical nature of the “type 1” and “type 2” errors in these circumstances.  Assume, contrary to fact, that the ECB could use monetary policy to provide the necessary stimulus and that the ECB cared about minimizing unemployment, poverty, undesired migration, inequality, and suicide.  Inflation is far below the ECB’s target.  For technical reasons (second bullet point), inflation measurements tend to overstate actual inflation.  The eurozone’s true inflation rate, therefore, may already be negative (deflation) rather than the 0.5% reported inflation rate.  If the ECB does nothing, millions of Europeans will remain unemployed – a pure waste that collectively amounts since 2008 to over 10 trillion euros.  Add to that all the human suffering the trolls consciously ignore.  If the ECB does “too much” (as it, incorrectly, defines that concept) the eurozone would have far lower unemployment and human suffering and much more wealth – and three percent inflation.  Three percent inflation would cause no crises.  It would, under the trolls’ “logic” spur demand and greatly speed the recovery, which would increase tax revenues and reduce welfare costs.

The ECB is violating its own purported standards by refusing to add the monetary stimulus it says it should add.  Under the ECB’s own logic this will cause immense, gratuitous harm.  But that harm will be to the people of Europe and the ECB was deliberately set up as an anti-democratic institution structured to ignore people and care for bankers.  Mission accomplished!

Let’s review just how insane the “logic” of the trolls’ narrative is to this point.  The trolls are telling us that deflation is a financial catastrophe that can cripple a nation for two decades.  The trolls tell us that the eurozone’s reported inflation rate is so low that the real inflation rate may already be negative – deflation may have begun, on average, in the eurozone.  The trolls are telling us that the eurozone’s fourth largest economy, Spain, is already suffering deflation and that their most hopeful scenario under existing austerity policies is that Spain will be in economic crisis for a total of nearly two decades.  And the trolls are telling us that – all of this is a big yawn.

The trolls’ plan – as they describe it – is that they have allowed (actually, coerced) Spain to go into Great Depression levels of unemployment, and deflation, and it is still not time to act.  Their plan is to wait until the eurozone as a whole is on the verge of losing two decades of economic growth before they are willing to attempt a monetary stimulus through the ECB (a stimulus which their own website admits would likely fail).  The trolls also admit that acting now (actually, acting in 2008), rather than waiting, would be far more likely to succeed and would reduce massive economic waste and human misery – and would have zero downside.  The troika-trolls and the financial journalists) that regurgitate their drivel) are preaching a narrative that is so obviously demented that it tells us a great deal about the political class and economists as well.  The trolls and journalists know they can get away with creating a narrative in which it is difficult to judge whether its failure to pass even the most basic test of logic or its depravity for its conscious effort to remove completely gratuitous human suffering from the tale is the most offensive aspect of the enterprise.

The trolls and journalists, however, end on an even worse note.  The problem, of course, stems from the troika’s “Great Lie” – “there is no alternative” (TINA) to austerity.  How then, to end an article that logically must discuss alternatives.  The trolls’ and their journalists’ answer, inevitably, is to eliminate the obvious, effective alternative from the narrative.  This is why the “D” word must be avoided as an abomination.  As soon as they admit that demand matters and that demand is so inadequate that one-third of the eurozone’s citizens live in nations suffering from Great Depression levels of unemployment the obvious alternative of increasing demand through government spending on the eurozone’s many unmet needs arises.  The purported (but false) problem with providing fiscal stimulus in these circumstances is that it produces inflation.  Even if we (falsely) assume that, however, the trolls have just admitted that we need to create (modest) inflation.  So the faux downside to fiscal stimulus becomes an additional advantage under the trolls’ own “logic.”

The only “logical” escape from the trolls’ logical dilemma is to employ the reverse of the standard joke about neoclassical economics (“assume a can opener”).  The troika-trolls “assume that there can be no can opener” – they assume that fiscal policy does not exist.  It is easy to understand why the TINA-twits want to assume fiscal policy out of existence.  The troika-trolls would suffer under a crippling disadvantage if intellectual honesty were any constraint.  IMF’s studies have confirmed that fiscal stimulus is not only effective, but far more effective than the IMF thought possible.  Fortunately for the troika-trolls, they realized that if they were s willing to assume fiscal stimulus out of existence they need not consider the evidence from their own colleagues that fiscal stimulus was the optimal policy response to the Great Recession.

It is a measure of how inept and led by the nose the American financial journalists are who write about eurozone inflation that they overwhelmingly write articles that assume fiscal stimulus out of existence as an alternative.  American journalists all know that the U.S. employed modest fiscal stimulus (that provided only a small portion of the lost private sector demand resulting from the Great Recession) and produced modest positive growth rather than the troika’s gratuitous second Great Recession in the core and Great Depression in much of the periphery.  American journalists, therefore, have no conceivable excuse for failing to raise the fiscal alternative.  (It is not an answer to say that there are rules barring fiscal stimulus in the eurozone.  It is fine to discuss those rules, but the troika has repeatedly changed the rules in response to the crisis.  There are two things preventing the troika-trolls from changing the fiscal rules.  One is ideological.  The trolls are theoclassical economists taught that suffering (by others) is redemptive.  The second reason is that the troika-trolls and TINA-twits would have to admit they were wrong about economics and that they caused immense, gratuitous misery because of their failed dogmas.  Admitting they were wrong would require great courage.

But change need not come from these ideologues.  It can come from the people as it has in Latin America.  Latin America was the “test bed” for austerity, plunder through privatization, and wage suppression under the Washington Consensus.  The economic results and resulting human suffering were awful, but the eventual political result was the election of national leaders running on platforms pledging to end these failed dogmas.  France’s President Hollande’s party has just suffered severe municipal election losses (and the Prime Minister has been dumped) because Hollande betrayed his pledge to fight austerity.  It will take time, but there will be a series of leaders elected in Europe who will honor their electoral pledges and lead the struggle against economically-illiterate and inhumane austerity policies masquerading as economics and their theoclassical acolytes

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  1. allcoppedout

    It’s hard to imagine who in Europe we could put up as ‘our Bill Black’. Well said as ever, Sir.

    I see no hope from any current economics (though admire those keeping up the protests against the neos). We are too detached from reality. Most people feel entirely powerless, though I guess most enter personal denial on this to counter depression. I’ve tried a few radical groups out in the UK but they don’t feel like a rising tide. The National Front in France polled only 7% across the country. We may see a much bigger protest vote for UKIP in the coming EU elections here. As with the French outfit the constituency of UKIP is an add mix of rather crusty, decent middle-old folk who fall for the ‘charisma’ of racism and self-sufficiency. UKIP is running at 15% in our opinion polls with no policies other than leaving the EU and allowing smoking in pubs. That’s 5% more than the Liberal-Democrats who are in coalition government, Even I am considering voting UKIP in the absence of a ‘none of you hapless neo-liberals’ slot.

    Much as I appreciate Bill and tend to whatever ‘Hudson politics’ would be, no party is articulating the position. All of Europe is currently running scared. Deep down I’ve had it, a bit like something I saw Walter Map say the other day and hear from old socialist colleagues from time to time. We tried, failed and got old. The jock left in me doesn’t want to preselect defeat, and I hope I’d still walk towards the bullets and truncheons. Yet everywhere we see that seems manipulated and doomed to new kleptos in power. It hardly helps t have been active in the Labour Party to elect Blair and Brown. I wonder now whether they were ever good men to go bad. Hayek, Popper and others were all stung by the grim realities of Soviet and Nazi “Paradise” and the road to serfdom (and so hardly ‘the enemy’).

    We all follow Goebels and Schact now. Vince Cable our Liberal Business Minister was probably Britain’s most admired politician as an old duffer out of power. Now he’s managed to sell-off our Post Office to the usual thieving suspects and gives us the usual PR lies that his good professional job, that lost the country over a billion, was the best that could be done. Education has failed to bring about a sophisticated electorate and even a forum for intelligent debate.

    We need a new constitution across what remains of democracy and some new ideas on the control of leadership and wealth. This entails something positive and institutional from the politics of negativity. What would any of us have done if in the position of Hollande as a newly elected socialist president? Why has he ended up so naff? What is the point of national elections under the jackboot of the rich? Why are various rabbles who run towards the bullets failing? How are we all living on a one-party state? How are the chains of illusion so secure?

    1. Banger

      I feel your pain about the lack of social movements and alternative political parties. As I’ve said many times our problems in the West are that we live in a culture of narcissism and, as such, social and political movements are unlikely to get any traction. We live for ourselves and those close to us the public sphere is simply like the weather–we endure economic hard times and try to corner whatever we can for ourselves. I see little interest anywhere in civic virtue. I think people are content to let their “betters” rule and hope for the best–for themselves. If our neighbors suffer, well, that’s too bad.

      Having said that, I believe the power-elite’s solution to climate change is to enforce austerity. This has the virtue of keeping the power-elite in power and perhaps mitigating the worse of the effects to the very poor–or so they think. The irony is that we are in possession of a wealth of alternatives–we have never had more “access to tools” that we do now. We have never had the knowledge we have now to create almost any kind of world we want–yet, just on the verge of some kind of new age we have lost our nerve and faith in ourselves. It breaks my heart that our imaginations tend to extend mainly to silly toys–I see us at all ages turning back into children in the face of a world we have lost the will to try and understand.

      I know youth who are struggling to build something more real. There is some hope some of the young people around me who have not yet mortgaged their hearts.

      1. The Dork of Cork

        That is nonsense.
        Austerity may reduce local energy use as local production is shut down but the total energy used to supply the population increases as the scale of banking operations increase.
        Try to look at peripheral European energy balances in lets say 1971 and today.
        The oil used in transport was typically lower then the oil used for local manufacturing.
        Today almost all oil is used for transport and no oil used for industry (much of which was used to supply local demand)
        But of course we burn much more resources today despite or because the energy used for real final demand is much less.

        The simple objective of the european union is to maintain the integrity of the hamster wheel via quite extraordinary scarcity polices..
        This therefore increases the power at the apex which is of course the true goal.
        Its power for powers sake.
        This is capitalism as defined by agrarian Belloc or Industrial C H douglas.
        The will to power.

    2. Moneta

      Here in Canada, 13 years of public education and maybe a few hours on our political system. None on our monetary system…

      By mistake or by design?

      1. allcoppedout

        Endless support for that Moneta (name your MP/Senator etc.). BBC television history is still in the dismal format (Kings and Queens) I was taught 45 years ago.

        Banger, you old softy – you should be hating youth by now as all generations before! You are a disgrace to the gerontacy. We’ll never get in their club if we keep expressing admiration for youngies. Not that I’m keen on reaching the age qualification, let alone the ideological one.

        I don’t mean to be pessimistic. It’s as though we are trying to explain chemistry with phlogiston theory. Even in the market-maths it’s clear the bosses only allow stuff as a common language (the single Gaussian copula and various frequency distribution stuff). In fact, there are at least 5 probability ‘thinking options’ we’d want to consider in relation to the reality of markets. Yves’ confidence fairy stuff is a classic. There are already algos sniffing for the very policy uncertainty being measured and placing bets that influence the measurement. I won’t get into the maths here, but even at that level we are operating at massive levels of exclusion and ignorance.

        Even those in here can’t vote in the same elections on a constitution for cooperation and competition in which we could sensibly bring full employment/decent-incomes about by removing crap wages as a competitive advantage, We need to brave a wider debate on the limiting aspects of capitalism for the rich.

  2. vlade

    I’d actually argue that it’s not ECB ideologues per se, but Bundesbanks. ECB just follows what Buba wants (as was evident in early 2000s when ECB run rates low to accomodate Germany – but this was way way too low for the rest of EURzone). The only semi-rational argument why is that they think if Buba/Germany stopped supporting it, EUR would fall apart and hence they would loose their cushy jobs and pensions. Otherwise, ECB is one-(wo)man, one-vote, so outvoting Buba-block is easy.

  3. Ross Worthington

    This all assumes of course we can maintain economic growth forever. We cannot.

      1. susan the other

        The science is there and almost undisputed about global warming and the depletion of the planet’s resources. Proof enough. We could do a voluntary extinction on capitalism which itself requires voracious growth to stay alive, and just opt for something else. Growth of an enviro-technology would be good growth. But no fudging of facts – like “alternative energy will save CO2 levels from rising” because it will not. Not with our current technologies.

        1. Noncist

          You’re assuming that all economic growth comes from the use of environmental resources. Both the growth of virtual entertainment and the increased efficiency and reuse of existing goods contribute to economic growth without any additional strain on resources. As long as Moore’s law continues computers will continue to do more with the same amount of electricity and there are many many ways remaining to cut waste from our existing production processes to make the same goods with fewer resources and energy.

          I would not assume that economic growth can go on forever, but it is not so tightly coupled with using resources either.

  4. Gibby the Fifth

    Unfortunately, after the excesses of the Great Moderation, there was never going to be an easy or painless way out of Recession. That does not, however, allow our policymakers to avoid significant blame for the current distress.
    One immdeiate deduction from the discussion of alternatives is how appropriate the other D word might have been: a devaluation, long used by italy as a way to overcome its governance issues. Of course, such a thought is anathema to the Euro elites, but it worked pretty well in Asia post 1997, and the existence of the Euro makes it impossible for countries within it to reach an appropriate monetary stance. It is clearly not possible to fix a single interest rate for such a disparate group of countries – as Bill Black points out – and part of the reason for that is that economies differ in their structure and hence sensitivity to the same economic stimulus. Germany, for example, has a hjome ownership rate below 50% whereas in Spain it used to be over 80%. Changes in interest rates will have a very different effect in these 2 economies. Spain and the UK have been quite similar in terms of home ownership but today Spain has perhaps 0.5m surplus flats whereas the Uk has a similar shortfall. So despite apparent similarities, policy in the 2 countries needs to be very different. So break up the Euro and create at least 2 separate blocks, the Neuro for the northern countries and the Pseudo for the periphery (joke courtesy of the FT at least 2 years ago).
    Looking further ahead, Bill Black points out the problem caused by the separation of monetary and fiscal policy-making. Does it make any sense at all for austere fiscal policy to be offset by monetary policy constrained by the zero bound? What would a Man from Mars think about this? At the very least the two sides should talking to each other, they are not playing knock-out football here.
    Another suggestion is to replace Dodd-Frank with a single, simple suggestion: abolish everywhere the tax deductibility of interest. Not easy in practice, of course, but think of the advantages of stability that would flow from the global reduction of leverage, and the reduction of the importance of bankers.
    Finally, specifically for Londoners, it is amazing that rateable values have not been revised in most of the UK (Wales is the exception) since 1991. London´s size and scale are making it the evil vampire squid sucking the blood out of the UK economy, and that needs to change. Changing relative rateable values would make a good start, but the real way to change is for the Government to mkove out of London in its entirety, Houses of Parliament, Downing Street and everything. Move at least 150 miles North to a declining city – my flippant choice is Hull and not Liverpool, Manchester, Birmingham, Leeds or Newcastle but I am open to suggestion – and sell all the London property. What better time to relocate, should one sell 10 and 11 Downing Street separately or as a single unit? Which would raise more money? And scrap HS2: there is no point in moving more people from the Midlands to London, we need to move London to the Midlands. Not Scotland.
    Alas, I can only dream of such an outcome

  5. allcoppedout

    Essentially, economics rules out something we could create – full employment/income guarantee. Economics should be about achieving this and its smooth running. This for many scientific reasons excluded from current discussion, not just in the incredibly parochial quarters of government in Washington, London and Brussels (wherever).
    ‘The trolls are theoclassical economists taught that suffering (by others) is redemptive. The second reason is that the troika-trolls and TINA-twits would have to admit they were wrong about economics and that they caused immense, gratuitous misery because of their failed dogmas. Admitting they were wrong would require great courage.’

    Fine. I go further in thinking politics-economics as no more than a giant religious control fraud for looting. And sadly, we are part of it, perhaps like court jesters or sparring fodder kept in the establishment zoo and fed by it. We taught these politicians and useless journalists. Aristotle taught the vile barbarian Alexander.

    One can cite endless criticism, summed-up in this short:

    We might think of telling the truth to power. Years ago the CEO of our largest transport operation poured me a scotch and asked for a one sentence summary of management development in the company. I was briefer. ‘Expletive useless’. He agreed.. We continued a frank discussion over lunch. The three hundred page report I’d written didn’t change and contained none of our lunch-time material. It was a whitewash. The essential problems lay outside the company.

    I can’t think of any socialist who would disagree the neo-con theories are stupid and vile. They revolt me as a scientist. But where are the plans to deal with an enemy that is not rational, hideously vindictive and an indoctrinated docile body-public?

    1. susan the other

      +100. And that enemy is armed to the teeth. I think that the European austerity is caused as much by our dictates as by the troika. We wouldn’t let them do more than a 50% “default” on all the crappy currency swaps our big banksters sold them, etc. I believe that NATO is without a mandate these days. Adrift. And we have no political enemy in light of the desperate condition of the planet. Everyone agrees we gotta do stg. So maintaining control via NATO is iffy. And Europe and we are NATO. It looks pretty clear that Germany (and maybe France) has thrown in with Russia. Which turns NATO on its head. So protecting the Euro and the Dollar are almost the last defense. If we keep demand down here in the most industrialized countries, it will plummet in the developing countries and we will have the power of our currencies to defeat and control most of the world. For a while.

      1. allcoppedout

        Had a houseful tonight watching a debate on Europe (we have elections late in May). Opinions ranged from a Labour councillor, a Social Workers’ Party guy to my Bulgarian neighbour. Nigel Farrage the UK Independence Party won hands down in our company, amazing as their is a fascist undercurrent to UKIP and they are anti-immigration. I think the reason for this is that Farrage is at least anti-establishment and we have all had a bellyful of them. None of us believe in UKIP, it’s just that the established parties are just one long played-out lie. Farrage’s biggest cheer of the night came on keeping Britain out of hapless foreign wars that just make things worse. This is indeed, upside-down politics.
        My partner pointed out that my USUK term could be FUKUS when thought of as Wall Street, City banks and military intervention around the world. I can see a new European free-trade area including Russia replacing the EU. We need an engagement of ordinary people everywhere and a completely new currency practice.

  6. The Dork of Cork

    “Europe now faces a new kind of economic threat.” No, the eurozone suffers the same reality that it has been the victim of since 2008 – grossly insufficient demand. That is what caused both of its recessions, which largely “snuff[ed] out growth” for the last six years.”

    Except it goes a little further back then that………..Ireland effectively left the UK monetary union in 1979.

    We had a immediate & massive deflation which was already building within the system since 73 (EEC entry) but was hidden by the credit inflation of that time.(Ireland had a massive car boom at that time.)
    The 80s mini depression was seen as the most brutal of all western european countries.
    But what came after the 80s ?
    Capital goods dumping on a epic scale.
    The rump Irish domestic economy was taken out of the equation during the 1980s.
    This created a energy vacuum which was filled with the products of bank credit production be it cars or houses.
    Its a mistake to think of the euro boys and girls as somehow stupid.
    By their calculations the destruction of local economic exchange is a good thing – they simply want us to mindlessly export to gain access to artificially scarce currency.
    This fosters the illusion of intensely competitive international markets and thus maintains and increases the money powers hold on the human soul as it destroys all village life.

    The Ireland of today is now beginning to feel the first signs of yet another round of capital goods dumping.
    As I predicted – Y2014 new Irish car sales heading for 100,000 ~ units for the first time since 2008 while the market town economy of Ireland is no more.
    You see in all banking unions the machines do not work for you , human roboten work for the machines and the special people behind them.

    The euro boys have been busy.
    Soon all memories of the past will be extinguished as the cultural bedrock of these places has been wiped.
    We must all be compelled to embrace the market state – even if it kills us inside.

    1. allcoppedout

      I don’t know what to say other than you’re right Dork. This is broadly Jurgen Habermas’ argument about communicative versus systemic rationality, without the thumping boredom effect of his prose and some actual facts.

      I want some bigger trading block we can vote in to prevent ‘poverty competition’, but the EU is s useless I might even vote UKIP in protest knowing the MEPs can’t do anything. And I think we could have massive economic expansion if we gave up on our current idiot notions of what this expansion “has” to be. I suspect the real solution is people having enough to spend more time doing what they want to. Economics and politics should work up from that base. And so should how we work out motivation to get the work done.

      1. MikeNY

        If you haven’t read her, Simone Weil in “Oppression and Liberty” has a great take on Marx’s concept of reversal of the subject-object relationship, how man is now made to serve machine, and the rise of the technocratic class. Yes, she agrees: it is dehumanizing to the worker.

        As and aside (which I’ll never tire of repeating): if we accept that ‘inadequate demand’ is the fundamental problem in the West, there is in principle an easy answer:

        Redistribute wealth.

      2. The Dork of Cork

        @all coppeout.

        I have been messing around North Cork from the back of a Ford Transit.
        The place is quite some mess – with massive and isolated trophy houses and a deep red sodium glow of light pollution at night while the town centers are now lifeless voids of non exchange,
        These are not very touristy agricultural towns such as Charleville and the old garrison town of Fermoy.
        Just to give you a idea of how this rentier country operates the new motorway is virtually empty as you must pay a toll while the old road is always busy as people need a car so as to seek scarce money however useless & unproductive their job truly is.

        What happened to these places ?
        The 1987 Irish film ” The Clash of the Ash ” captures the deflation inherent in these market towns (Fermoy) of the time.

        I guess it starts proper at 34.45
        At 38.00 minutes ” you are only a gurrier- there will be no job in the bank for you”

        1. allcoppedout

          Family from Cork about 5 generations back. Plied trade with Porto.
          Noticed similar in Wales and Northern England. Millom in Cumbria was wasted by 1972.

          ‘Progress and Poverty” was about the increase of want in increase of wealth. Are we slow learners or what? I taught in Sweden last year. It ain’t so bad there.

        2. Teejay

          My mom’s parents were from Cork and Armon. Hello to you Dork from Cork!
          ‘ Love your “handle”. Thanks for the link. I’ll spread it to my four siblings.

  7. Rodger Malcolm Mitchell

    Bill, with a few slight modifications, your article could be talking about the United States of America, where austerity is causing a slow-but-sure reduction in demand and a not-so-slow widening of the gap between the rich and the rest.

  8. eeyores enigma

    Bill talks a lot about what is not being said but there is a lot he conveniently skips over too.
    All money is loaned into existence. So Bill’s point is that people need to be encouraged to borrow again in order to increase demand which will in turn create growth.

    Or to put it another way, the only way to save the global economy is to get people to use money they don’t have to buy stuff they don’t really need, throw it away and then get more, and work twice as hard as they normally would to pay the inflated prices plus interest. All of which causes pollution on a massive scale that is literally killing us.

    “China’s toxic air pollution resembles nuclear winter, say scientists
    Air pollution now impeding photosynthesis and potentially wreaking havoc on country’s food supply, experts warn”

    “KILLER SMOG: The worst pollution for 60 YEARS to strike Britain TOMORROW”

    “Does Paris have worse air pollution than Beijing?
    On Friday, levels of pollution in Paris were higher than in many of the world’s most notoriously polluted cities. With your help, Karl Mathiesen, investigates how the City of Light became the City of Smog.”

    But never mind lets just focus on growth and getting the economy back on track THEN we can look at those other little issues.

    I say kill the global economy before it kills us.

    1. James Levy

      It’s very complex. Lack of work is, for most humans, demoralizing. We are hardwired for physical activity and out bodies go to hell in a handbasket if we are too sedentary. On the other hand, too much work is also a problem, and leads to the pathologies you describe. What would be best would be work for everyone for 20-25 hours a week, four or five days a week. But we have no mechanism to put such a system into practice, and if we did, it would very likely be coercive. I sympathize with your points but see no way out of this situation.

      1. eeyores enigma

        James – You make the same thought less mistake that got us into this situation and makes it impossible to have a “way out of this situation”.

        You mindlessly repeat the lie sold to us that with out the threat of “no money = you die” hanging over humanity we would all just sit on the couch until we “go to hell in a handbasket”.

        I am sure you are an intelligent person but your statement is not well considered at all.

        The facts prove other wise. It is in our nature to be creative and productive. It is only a deviant human aberration that demands that that behavior only be exploited for another persons benefit by withholding food and the right to live.

        If you have given up then just say so and go but this is certainly not the truth nor inevitable.

  9. James Levy

    I’m still not sure where all the fear comes from. Are Euro politicians really afraid, almost completely in the direct pay of the 1%, or gullible to the importuning of bond marketers and rich campaign slush fund contributors? How come such uniformity across countries and parties? As an academic, a curious person, and someone who wants the lid blown off, the answers are of great concern to me. We need evidence. We need causal relationships. We need proof.

    1. Alejandro

      It has been suggested that we are born with the fear of falling and the fear of noises. If this is true, then all other fears are learned (or taught). What little we know about this mental state is that it produces intense concentration (primal instinct in reaction to perceived danger) but also makes us susceptible to manipulation and demagoguery. Some psycho-therapists use the acronym of FEAR (False Evidence Appearing Real). A classic case study is “The War of the Worlds radio drama of 1938”.

  10. Knut

    It’s not just American journalists. Le Monde carried exactly the same story with exactly the same words in yesterday’s business section. They read from the same handout. Ollie Rehm is a truly cruel individual. Must have had a very unhappy childhood.

  11. washunate

    I agree that the MSM media is useless for much of anything other than keeping tabs on the establishment meme du jour, but I find this broadly sweeping statement puzzling:

    “The central point is that inadequate demand causes each of these problems…”

    The fundamental question of political economy for Europe is what is Europe. Increasing aggregate demand doesn’t fix political disputes or make bailing out the banksters a good idea.

  12. Mickey Marzick in Akron, Ohio

    While “falling prices” and price level analysis are suggestive of deflation, if the quantity of the good or service purchased is less in absolute terms then are we still talking about deflation? To the extent that CPI or other measures of inflation only look at price level to the exclusion of the quantity purchased at that price over time the methodology is flawed. So is all this talk about deflation really a mask for inflation?

    When the price of a 16 oz box of rice was $1.99 and the amount of rice in that box was 16 oz, what is the economic term for when the price of this box of rice remains at $1.99 but this same box now only contains 8 oz of rice in it – a quantitative decrease of 50%. My dementia defines this as INFLATION and I don’t give a shit about the econospeak employed to mask this bite out of my ass. But if you don’t do your own grocery shopping you wouldn’t know anything about the phenomenon I’m describing. Lucky you!

    This entire piece is just a long-winded argument for fiscal stimulus [Keynesian countercyclical policy]. It’s a deadend. Inadequate demand is the result of the success of Liberalism 2.0, not the cause of much slowed economic growth, which has depressed wages/benefits for 40 years accompanied by “chronic excess capacity”. In other words, the capitalist social relations of production have become a fetter on the forces of production. There is no absolute shortage of anything, except will power -– energy supplies, foodstuffs, minerals, etc – but rather an artificially-induced scarcity to maintain the ideology supportive of such scarcity – economics – by its proponents and the policy-makers subscribing to such an ideology.

    But the proposition of endless economic growth itself implicit in Keynesianism is little more than an effort to supplant any discussion of redistribution by shifting the debate backwards onto PRODUCTION. More of the latter will raise all boats because there will be more to go around. But such an argument never gets around to asking if there is enough to go around already. Such an argument may have worked in the 1930s and much of the postwar period when the “ absolute demand” for goods and services existed. But is this still the case in advanced political economies? Japan’s lost decades of “deflation” were not solely attributable to “inadequate demand” but overproduction – chronic excess capacity coupled with an aggressive export strategy. How many cars, toys, etc can one accumulate before the demand for such goods is satiated? Hence, financialization was a response to chronic excess capacity in an effort to absorb the profusion of goods and services produced. But all the while Liberalism 2.0 undermined the economic foundations on which this consumption was predicated – full employment coupled with good wages/benefits rooted in goods-production [manufacturing].

    Returning to the latter is a pipedream in advanced political economies. Employment for what is the more pertinent question? What is this preoccupation with “gainful employment” mouthed by neoliberals and their Keynesian counterparts [LIBERALs all of them] about if not to maintain the ideology of scarcity and its attendant social relations of production – private ownership and control over the forces and means of production – which make for the wealth and power whereby the 1% control the 99% reduced to wage slavery, the latter forced to sell the only commodity they own – labor power. How much of this make-work is even necessary? When scarcity was the result of NATURE, there was no make work to speak of. Of course, one suspects there was no more “work” than was absolutely necessary either. Our ancestors were not stupid.

    Simply put, Keynesianism is every bit as reactionary as neoliberalism insofar as it does not take us beyond the capitalist social relations of production which have been superseded by the forces of production. Even Marx predicted this much… but for some reason most of us remain mired in the ideology of scarcity when the era of POSTSCARCITY is upon us. AUSTERITY is nothing more than an attempt to eliminate “excess capacity” so as to maintain scarcity, thereby preserving the institutional basis of the wealth and power [CONTROL] predicated on it. And too many a member of the ecolariat makes the case for the proponents of austerity by focusing on the legitimate concerns regarding anthropogenic climate change and the limits to endless growth now confronting us ALL to the exclusion of transforming the social relations of production [DISTRIBUTION] whereby every human being is fed, clothed, housed, educated and employed when and where socially-necessary to his/her fullest abilities in an equitable and sustainable environment. The argument for POSTSCARCITY enables us to address both, something which neoliberalism and Keynesianism cannot.

    We are on the threshold of a dream, but refuse to wake up.

    1. allcoppedout

      We should be talking a lot more about this Mickey. One of the things about the capitalist organisation is that a lot of it is anti-organisation in terms of doing the right and sensible things. I’d bet we could organise on the lines of the massive productivity gains and job losses in agriculture across the board. That’s something like 50% down to 2% post WW2 in France.

      1. Mickey Marzick in Akron, Ohio


        How much has productivity increased since 1938 when the Fair Labor Standards Act legislating the 40 hour work week was passed? We should be discussing “sharing the work” and reducing the work week to 32 hours, if not by more, without any loss in compensation to make up for the past 40 years. Instead of trading productivity increases for pay increases we should focus on reducing the amount of time required to ensure a decent standard of living for everyone. That progress!

        But no…. we’re stuck talking about full employment and fiscal stimulus. Like going backwards is the answer.

        1. allcoppedout

          @James & Mickey
          Agree completely – we need the enquiry for facts and some sort of vision on work.

          1. Canuck

            Max Sawicky used to regularly feature The Sandwichman on his blog, Maxspeak. He is one of the founders of the Work Less Party. Check them out. He’s got plenty of research and ideas for you.

        2. Mike Hall


          Perhaps you aren’t familiar with MMT, or their proposed Job Guarantee?

          and allcoppedout,

          having written at length about how surreal the entire system is (which I agree with), I’m astonished you agree with Mickey here??

          Really, what is the point of suggesting we try to turn the whole damn system upside down – to what exactly, some vague notion you can’t even be arsed to articulate better here? – when we are struggling to even get a public discourse on a Job Guarantee that would at least guarantee a minimum weekly income to (near) all?

          Having noted that the fear of poverty, and the crap housing, poor diet & all the rest of the misery that entails for most who have no option but to live it, what is so f&%$g hard to comprehend about just getting to ‘stage 1’ in Maslow’s hierarchy??

          I have lived that life.

          I know first hand what a difference this one simple thing would make.

          A real, meaningful income floor, and the immense feelings of personal security for many that that would mean, in return for some light work – but likely quite rewarding – contributing something tangible to a local community or charity.

          And we know that there is no shortage of ‘fiat’ currency with which to to do this – ever.

          I have to say that I get seriously fecked off by some of you twats that have read hundreds of weighty philosophical tomes and learnt +nothing+ whatever about how the millions of most disadvantaged humans live.

          Let’s feed everybody, then move on to the complicated sh1t perhaps?

          Or are you just going to continue your mental masturbation & hope you can just sneak in with last (wealthy) few percent standing when TS really HTF?

          Wood and f&^%%g trees….open your eyes.

  13. John Mc

    Philip Mirowski’s work should be required reading for Financial Journalists.

    Shaming the MSM to do its job needs to be taken up a notch. Like the FHLBB’s (Dr. Black and the teams who prosecuted the S&L Crisis), there should be a top 100 offender or financial propagandist list made. Heading the TINA (twit-troll brigade) are these flapjacks:

    1) Andrew Ross Sorkin
    2) James Cramer
    3) Larry Kudlow
    4) David Brooks
    5) Rick Santelli

    1. Alejandro

      Agreed with regards to journalists.

      Also, IMHO, we should collectively require that all assigned or self-proclaimed economists articulate their opinion as to the purpose of an economy. Maybe we can boycott reading their stuff UNTIL…or jump to ridicule based on OUR opinions…or scorn with the imagery of real world results, juxtaposing misery with excess.

  14. Oregoncharles

    It’s noteworthy that the Italian government, although disastrously dysfunctional, has been going to great lengths to avoid a new election – the normal solution in parliamentary systems. The reason is simple: they’re afraid the 5 Star Movement, started by a couple of comedians, will win any such election. They nearly won the last one, and refuse to form a coalition with either of the previous major parties – hence the desperate parliamentary maneuvers. 5-Star would immediately take Italy out of the Euro and initiate populist policies. (I wish it were the Italian Green Party, with similar principles, that was in that position. Maybe they should have nominated comedians.)

    At this point, democracy itself is the greatest threat to the Eurozone.

  15. allcoppedout

    ‘It will take time, but there will be a series of leaders elected in Europe who will honor their electoral pledges and lead the struggle against economically-illiterate and inhumane austerity policies masquerading as economics and their theoclassical acolytes’.

    How is this going to happen FFS! Leaders? What do we already know from history about these turkeys? Politics as we have it is like trying to work with sodium in water. You’d just do something else. Typical leaders fail, have secret offshore stashes and lie to us. If any economics works why do we need charismatic sociopaths to mediate it for us? Why would we leave the banking and power viruses in place if we want a healthy human society.

    I’d want to try a new look at our society from the perspective of the social model of disability. This may seem strange as I think this model fails on disability itself. Much as a lass in a wheelchair is disabled by the lack of a ramp (or a blind student being told to read more by a harridan arse pretending to be a lecturer – or 50% of our school population by focus on academic stuff they can’t do), we should be asking what economics disables, what leadership disables – in animals this is often a great deal.

  16. AltoBerto

    I wonder how much of the cash hording amongst the rich is motivated by preventing inflation.

  17. wally

    Is a country that is undergoing long-term population doomed to continuing low demand and possibly deflation?

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