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Monetary policy in the Germany Media

by rz Thu Jun 5th, 2014 at 10:47:55 AM EST

As certainly everybody here knows inflation across Europe is running way below target. This month it has come in at only 0.5%. Now how did SPON (Spiegel Online) a big and influential news page react to this news? Well it gave us a report about Sparkassen-Präsident Georg Fahrenschon who demands higher interest rates...because currently the 'German Saver' is not high enough interests on his saving. And this is going to threaten peoples retirement savings.

Now, could it possible that low interest rates are a product of the collapsing European economy? Would it not be prudent focus on the amount of goos produced in Europe, instead of focusing on how much you get for your savings? Should we demand that you actually have to take some risk if you want to have a high interest rate?

Obviously, these are questions not asked in the German Media.

front-paged by afew


Last night I watched Tagesschau. These is a 15 Minutes news show, which is watched by a huge amount of Germans. Not one second was spend on lowflation. I have now doubts that tomorrow, after the ECB has decided to do some minor rate cuts, we will have an extended scene on people warning about all the bad bad things the rate cuts do to the 'German saver'. Then ominous warnings about inflation. Its just around the Corner. Hans Werner-Sinn will pontificate how this decision once again shows how the German saver is being expropriated.

If you now want to take all this a step further you can turn to Wirtschaftswoche. The biggest and most influential Business magazine in Germany. The issue of the last month was dedicated to making fun of all those lefties who would think that deflation is an issue we should be worried about. The issue of this month is dedicated to a stern warning about the dangers of cheap money! It could cause inflation, did you know?

This reporting drives me crazy. So I thought I write a diary about it. I actually wrote two diaries way back in 2008, when I was actually optimistic about the EU. Today I thought that I maybe should vote for AfD, just so that Germany leaves the Eurozone, and everybody else is being saved from our Madness when it comes to Monetary policy.

It is now even a matter of left or right! I know a lot of people who are leftish, yet who are constantly bitterly complaining about the horrible inflation. I discussed with a friend of mine just recently about it. I argued that the rise in the Apartment prices in the city where I live might be a because the city is popular and the number of apartments is constrained. And so demand outpaced supply. But for him it seamed clear that it is caused by the ECB, and that the ECB should fix it.

More and more I get the feeling the Eurozone can not be saved.

Well anyway, at least at work I have many colleges from southern Europe. They agree with me.

Display:
Good to hear from you, rz!

You're right, the odds are massively stacked against the Eurozone's survival. The single currency is the greatest single mistake (though there are others) of the European project.

Your media examples remind me that this morning, on French public radio, the usual economics editorialist, an ultra-liberal journalist with Les Echos, came up with a surprise: according to new statistics, France would have been out of the trough of the financial crisis by 2011... if it hadn't been for the euro and Eurozone policies. That piece of news is going to give the pundits a job spinning. They'll probably ignore it.

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Jun 4th, 2014 at 12:02:48 PM EST
This morning, same place same time: presenter Patrick Cohen has a lapsus when introducing the ECB's "new measures against inflation... er, deflation". Like the latter word was some strange new beast.

The editorialist Dominique Seu (same as yesterday) then comes out with a vibrant hymn of praise for the ECB, and says that "observers" are hoping for measures "to stop deflation and bring the € exchange rate down". Seu's getting a message (as usual) from French business circles.

With Draghi and new boy Renzi, Italy's in the forefront, apparently. But not a word about what Merkel, seated on a massive public opinion delusion, will accept.

by afew (afew(a in a circle)eurotrib_dot_com) on Thu Jun 5th, 2014 at 02:04:17 AM EST
[ Parent ]
Talking about nearly getting out of the crisis in 2011:

A few days ago Jürgen Stark was writing in the FAZ that 0.7% inflation is totally ok. The ECB should not act 'mechanically' to reach its 2% target.

You know who acted mechanically to raise rate when in early 2011 the Inlfation rate was pushed a tiny bit above 2% by tax hikes  in the crisis countries? Jürgen Stark, head of the Bundesbank at that time.

by rz on Thu Jun 5th, 2014 at 03:42:11 AM EST
[ Parent ]
by afew (afew(a in a circle)eurotrib_dot_com) on Thu Jun 5th, 2014 at 05:19:07 AM EST
[ Parent ]
Did you make this picture? Can we send this around? Make a meme out of this? Such that it comes up first if somebody Googles for Juergen Stark?
by rz on Thu Jun 5th, 2014 at 05:31:09 AM EST
[ Parent ]
I made it, but the robot pic I used may be copyright, I don't know.
by afew (afew(a in a circle)eurotrib_dot_com) on Thu Jun 5th, 2014 at 05:43:00 AM EST
[ Parent ]
Jürgen Stark (raving mad) was ECB Chief Economist. The Bundesbank President was Axel Weber, who also resigned in protest at ECB policies like Stark did.

Axel Weber went on to become CEO of UBS, and then the butt of jokes:

How the mighty have fallen.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Jun 5th, 2014 at 05:54:59 AM EST
[ Parent ]
"Jürgen Stark (raving mad) was ECB Chief Economist." I see. But anyway, he is no less responsible for the rate hike in 2011.

Axel Weber has been in the Media with his warning about 'more volatility'. That is pretty tame for German standards.

by rz on Thu Jun 5th, 2014 at 06:59:05 AM EST
[ Parent ]
WOlfgang Münchau: Warum Deutsche fallende Preise fürchten (Spiegel, 26.02.2014)
Es ist völlig legitim, Verbraucher nach ihren Inflationserwartungen zu fragen. Das Problem ist nur: Die Befragten geben auf eine ganz andere Frage eine Antwort; nämlich darauf, wie sie die Entwicklung der Kaufkraft einschätzen. Genau das ist bei der aktuellen GfK-Umfrage passiert.

Was aber passiert, wenn ich in meine Lohntüte starre und feststelle, dass mein Gehalt um ein Prozent gestiegen ist, die Inflation aber bei zwei Prozent lag? Dann habe ich an Kaufkraft verloren. Die gefühlte Inflation ist hoch. Wenn mein Einkommen im nächsten Jahr dann plötzlich um drei Prozent steigt - bei unveränderter Inflation - dann steigt meine Kaufkraft. Die gefühlte Inflation fällt. Objektiv hat sich aber an der Inflationsrate nichts geändert.

Genau das ist jetzt passiert. Nach Erhebung des Statistischen Bundesamtes ist die Kaufkraft in Deutschland im Jahre 2013 tatsächlich gefallen. Die Löhne stiegen um 1,3 Prozent, die Inflation betrug 1,5 Prozent. Der Reallohn fiel also um 0,2 Prozent. Und damit fühlte sich die historisch geringe Inflationsrate relativ hoch an.

When you ask people about their inflation expectations, two things happen. One: they look at the recent past and extrapolate; and two: they think about purchasing power, not inflation. Therefore, it is possible for German inflation to be low and for Germans to be concerned about inflation, that is, declining purchasing power. This is because incomes (and, at low interest rates, rents) are declining too.

And the monetary authorities contribute to this when they come out and say that people shouldn't worry about low inflation because it improves purchasing power. Nice bait-and-switch.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Wed Jun 4th, 2014 at 12:39:39 PM EST
That is the problem: They say inflation but mean real income growth or shrinkage.
by IM on Wed Jun 4th, 2014 at 03:13:21 PM EST
[ Parent ]
Yes I noticed that as well. For at least about 15 years German politics has be all about competitiveness. Which means stagnant or falling wages and increasing productivity. Now how to explain that the average Bürger gets nothing from his hard work? Inflation!

Since I wrote about German Media: Around 2012 there was an article on Spiegel Online titled: "Wages grow despite high inflation"

What was the high inflation? 1.6% !

by rz on Thu Jun 5th, 2014 at 03:33:43 AM EST
[ Parent ]
One has to marvel at the arrogance of the notion that savers are entitled to a non-negative risk-free return.

Savers make nothing, run nothing, build nothing. They are hoarding inherently worthless tokens - money - and demanding that society must maintain not merely a stock of the particular commodities they might wish to consume at some future date, but an entire industrial supply chain to provide them with fully flexible choice of what to consume, if and when they should decide to do so. And they have the utter gall to demand that society performs this astonishing service not merely for free, but at cost!

So fuck 'em. Inflate the fuckers' savings away, and if they piss and moan about not having old age pensions, well then they could have fucking voted against politicians who dismantle the public pension system. I have no sympathy whatever for people who first vote to destroy the public provision of old age pensions and then demand that the public must protect their private hoards.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jun 4th, 2014 at 06:51:16 PM EST
"and if they piss and moan about not having old age pensions, well then they could have fucking voted against politicians who dismantle the public pension system."

You do realise that a great number of them would have done just that, only to end up in a minority because a younger generation had decided that there was no need for a social contract?
Also, many of the politicians who dismantled the system had campaigned on a promise to strengthen it.

There is an issue for people who played by rules that were imposed to them, only to find that the outcome is a collapse. I wouldn't say a working class saver is a hoarder.

Thankfully, there is a neat solution: it's not just the inflation but what causes the inflation. Credit every single person with an equal amount of money (we'd need to find a way to do that for people out of the banking system, and even out of the system entirely, such as hoboes), until the desired inflation is reached. That way, yes, there will be some reduction in the savings pile for people who don't know how to use anything other than the state-regulated savings account, but the effect would be much less than the increase in wealth from the transfers.

For genuine hoarders, not so much.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Thu Jun 5th, 2014 at 02:35:31 AM EST
[ Parent ]
You do realise that a great number of them would have done just that, only to end up in a minority

Speaking from the Danish experience, less than ten per cent have done so consistently through the last three or four parliamentary election cycles.

And going by poll numbers, those ten per cent are not people with any savings worth mentioning.

Also, many of the politicians who dismantled the system had campaigned on a promise to strengthen it.

That's an excuse for voting for them the first time. Not consistently for ten or fifteen years.

It's not like the PES parties' stance on this issue over the last fifteen to twenty years has been in any way ambiguous when you look at the actual laws they've passed, rather than the mouth-noises they make in public.

Voters who take politicians' mouth-noises at face value might be worth my sympathy if they I didn't have to live with their stupid decisions. But I do, because elections have consequences.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Jun 5th, 2014 at 03:31:13 AM EST
[ Parent ]
this would be the best policy. It would be certainly more popular than giving the money to the banks that created the problem in the first place.
by rz on Thu Jun 5th, 2014 at 03:47:55 AM EST
[ Parent ]
Instead: minijobs.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Jun 5th, 2014 at 05:55:41 AM EST
[ Parent ]
I think you may be missing a couple of zeroes.
Alternatively, send 100. And again. And again...

This could be on top of a living wage.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Thu Jun 5th, 2014 at 08:02:34 AM EST
[ Parent ]
Quite. No need for metaphorical helicopters. In the ideal case you could mandate that debts have to be repaid first. Then watch the financials atrophy due to lack of rents.
by generic on Thu Jun 5th, 2014 at 08:18:42 AM EST
[ Parent ]
"So fuck 'em. Inflate the fuckers' savings away"

But this is not the point. A different monetary and fiscal policy would produce much more growth. In a environment of growth it is possible to get good returns on savings.

But even more importantly: For everybody to have enough we need not money but enough goods. And 15% unemployment is not the way to create enough goods.

by rz on Thu Jun 5th, 2014 at 03:46:43 AM EST
[ Parent ]
In an environment of growth (or, which is a more realistic target, not backsliding), it is possible to get good returns on investment.

But in an environment of good returns on savings, it is impossible to get growth.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Jun 5th, 2014 at 07:31:23 AM EST
[ Parent ]
You are clearly right. I understand now what you mend to say in your original post.
by rz on Thu Jun 5th, 2014 at 07:35:17 AM EST
[ Parent ]
Basically: if you want wealth, start a business. If you don't want to or can't start a business, buy into current businesses, ideally through the stock market.

I think Jake might confuse a few people when he rails against savers - in lots of countries this word is used to describe not only people who have cash in the bank or own sovereign bonds, but also people who own shares in listed firms, who do risk their capital for the hope of a good return.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Tue Jun 24th, 2014 at 11:05:45 PM EST
[ Parent ]
Of course it was the lack of goods to purchase with the Mark that caused the hyperinflation. Too bad there is no practical way to remind the average German of that inconvenient fact.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jun 5th, 2014 at 09:12:01 AM EST
[ Parent ]
Those people seem to be totally unselfconscious, in a historically ignorant way. You can't have it both ways as the Japanese example should have shown. Sure you can hike rates but then you can also watch the economy descend into long-term full-on deflation (Sweden is riding ahead). But maybe that's the dream of financiers who can't find anything worthwhile to invest in. Deflation is super for savers and bankers get an easy job - again see Japan. The old eats the young. Is this the beginning of the latter-day Oeconomica Geriatrica?

Schengen is toast!
by epochepoque on Wed Jun 4th, 2014 at 07:19:22 PM EST
"Sweden is riding ahead"

how is it going in Sweden? Considering that it has fallen into deflation the economic indicators still looked somewhat decent.

by rz on Thu Jun 5th, 2014 at 03:43:59 AM EST
[ Parent ]
Our housing bubble is never-never-neverending, with apparent wealth for all! All owners, anyway.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Thu Jun 5th, 2014 at 07:51:44 AM EST
[ Parent ]
It's pretty crazy. I have owned a small apartment for 7 years. A neighbour just sold his apartment, which is the same size and standard as mine. Apparently, during this time the price has risen by 50 percent. I was worried about the price already 7 years ago, and felt pretty nervous buying this apartment. However, it seems that Keynes was right when he said that the market can stay irrational longer than you can stay solvent, except this time it is the other way around.

Oh, yes, there is this as well (Google translate)...

Sweden's homeowners are estimated to have increased their wealth by 972 billion because of that the construction was not as high as in Finland. Of this, 865 billion went to the richer half of the population and 350 billion to the richest decile.

Stockholm county homes are worth 375 billion more due to supply constraint. The municipality with the largest wealth effect per person is Danderyd 500 000.

The 972 billion figure is possibly the greatest wealth transfer in the history of Sweden. As a comparison, revenues from the (now abolished) the wealth tax 6 billion per years and the state budget includes 830 billion.


This transfer of wealth to from old to new homeowners is roughly 25-30 percent of GDP. That is a very large amount of capital, even if a lot of the old homeowners are unlikely to have cashed out, and have just had nominal profits.

I feel especially bad for young people who are buying right now, with a down-payment of 15 percent and the rest borrowed. As the Swedish rental market is stupidly regulated, renting is usually not an option. People who have coveted rental contracts are not keen to let go of them. Also, 30 percent of the money you pay in interest on mortgages is deducted from your income tax, so whatever rentals that emerge through loop-holes unto the private free-ish grey rental market are considerably dearer cashflow-wise than buying the equivalent apartment, especially when you take into account that a lot of people have interest-only mortgages.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Tue Jun 24th, 2014 at 11:05:30 PM EST
[ Parent ]
How very Irish. What could possibly go wrong?
by Colman (colman at eurotrib.com) on Wed Jun 25th, 2014 at 03:01:02 AM EST
[ Parent ]
Don't you know that real estate prices can never go down, just because? :)

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Jun 25th, 2014 at 04:05:21 AM EST
[ Parent ]
Normally you would want to use monetary policy to optimize aggregate output, and use regulation to burst bubbles. But with deregulation-mania in full  swing, now the central bank is supposed to fix bubbles and to hell the the overall economy.
by rz on Tue Jul 1st, 2014 at 09:16:52 AM EST
[ Parent ]
As if on cue...


A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Jul 1st, 2014 at 09:21:35 AM EST
[ Parent ]
The BIS thinks any problem can be solved with monetary tightening. We could replace the BIS with a parrot and no-one would notice the difference.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon Jul 7th, 2014 at 02:19:59 PM EST
[ Parent ]
Yesterday evening Spiegel Online posted a quite balanced article about the current monetary discussion at the ECB.

But it used one of my favored switch and bait tactics: Now that the situation is going radically down hill, ECB action will probably change nothing (which is most likely true, we need fiscal action). Ergo: Why do anything!

by rz on Thu Jun 5th, 2014 at 03:37:15 AM EST
For Gods sake:

Erstmals könnte ab diesem Donnerstag ein Minus vor einem EZB-Zinssatz stehen - ein sichtbares Symbol für die Krise des Kapitalismus. Wer Geld sicher anlegen will, wird nicht mehr belohnt, sondern bestraft.
by rz on Thu Jun 5th, 2014 at 04:05:49 AM EST
[ Parent ]
This is from the currently Leading article on Spiegel online titled " Das Ende des Kapitalismus, wie wir ihn kennen".
by rz on Thu Jun 5th, 2014 at 04:06:46 AM EST
[ Parent ]
From Wolfgang Münchau on Eurointelligence:
In Germany, opposition to today's expected rate cut is running high. Spiegel Online is announcing "the end of capitalism as we know it". Germany's savings banks association warns that the low returns would force German banks to invest in riskier securities (and we all know where that ends. This statement is the equivalent of: "Hands up, or I shoot myself!").


A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Jun 5th, 2014 at 04:36:38 AM EST
[ Parent ]
At least at "Die Zeit" there is a reasonable article:


Deutsche Sparer fühlen sich um ihre Zinsen betrogen. Aber ist dafür tatsächlich EZB-Präsident Mario Draghi verantwortlich? Die Geschichte einer Zinslüge
by rz on Thu Jun 5th, 2014 at 04:33:48 AM EST
[ Parent ]
Die Zeit: Das Geld tut nix (5 June 2014)
Sie beginnt in München, bei BMW. Der Autobauer hat im vergangenen Jahr kräftig investiert: in neue Maschinen für die Produktionsstätten in Leipzig und Landshut etwa, in ein Motorenwerk in China. Weltweit hat der Konzern fast sieben Milliarden Euro ausgegeben, fast 20 Prozent mehr als im Vorjahr. Die Geschäfte gehen gut, neue Modelle gelangen auf den Markt. Trotzdem kommt BMW praktisch ohne neue Kredite aus, das Unternehmen finanziert die Investitionen weitgehend aus eigener Kraft.

Die meisten deutschen Unternehmen geben deutlich weniger aus, als sie einnehmen. Im Jahr 2012 belief sich der Überschuss des Unternehmenssektors nach Angaben der Bundesbank auf 13,2 Milliarden Euro. Ganz ähnlich ist die Lage in den anderen großen Industrieländern. In den USA etwa haben Technologiegiganten wie Microsoft oder Google riesige Barreserven angehäuft. Allein Apple kann Schätzungen zufolge über rund 150 Milliarden Dollar verfügen - das entspricht in etwa dem jährlichen deutschen Sozialetat. "Die Unternehmen sitzen auf Bergen von Geld", sagt David Milleker, Chefvolkswirt der Frankfurter Fondsgesellschaft Union Investment.

Für die Sparer ist das keine gute Nachricht. Denn in normalen Zeiten leben Privathaushalte und Unternehmen in einer Art symbiotischen Beziehung. Die Haushalte geben weniger aus, als sie einnehmen, und deponieren ihr überschüssiges Geld bei der Bank. Die Unternehmen leihen es sich aus, um Maschinen anzuschaffen oder neue Produkte zu entwickeln. Aus den Erträgen bezahlen sie den Kredit mit Zinsen zurück.



A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Jun 5th, 2014 at 05:30:52 AM EST
[ Parent ]
The article is by Mark Schieritz, who is one of the exceptions in the German media. He is the author of a quite good antidote to inflation fears. The book contains nothing that would surprise one of us, but one can recommend it (or give as a birthday present) to people who believe in the danger of inflation. It is easy to understand for non-economists.
by Katrin on Thu Jun 5th, 2014 at 06:11:33 AM EST
[ Parent ]
It's a very good article on the role of investment in determining growth and inflation.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Jun 5th, 2014 at 06:43:06 AM EST
[ Parent ]
Yes. Schieritz's articles usually are good.
by Katrin on Thu Jun 5th, 2014 at 07:17:10 AM EST
[ Parent ]
rz: "we need fiscal action" ...but, but...good German common sense tells people that the last thing they should do is spend money in such a crisis. And, of course, Keynes was wrong. The only fallacy of composition was in his mind.</snark>  

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jun 5th, 2014 at 09:23:07 AM EST
[ Parent ]
the clt of the balanced budget is second only to the cult of the low inflation.
by IM on Thu Jun 5th, 2014 at 10:18:30 AM EST
[ Parent ]
The cult of balanced budgets is strong. But not insurmountable. But if there is fiscal action it is probably going to be rather small.
by rz on Fri Jun 6th, 2014 at 03:37:14 AM EST
[ Parent ]
I support balanced budgets. The only problem is that we seem to insist that our modern industrial society should balance its budget according to the pace set by the old pre-industrial agricultural economy, that is, over the course of the growing year. For obvious reasons, balancing the annual budget makes perfect sense when your output is basically entirely agricultural, and your consumption almost entirely is food.

It makes less sense when agriculture constitutes 1 percent of our national economies. Modern firms report results to their owners every quarter. Why not balance the state budget every quarter as well? Why not indeed balance it every month, or every week? Why not every day, every hour or every minute?

If you've managed to get this far when discussing this issue with a friend or co-worker, the absurdity of arbitrarily focusing on balancing the annual budget should be patently clear to all involved.

So what's the alternative? Well, the modern equivalent of the old growing year is the business cycle. Hence, the state budget should balance over the business cycle. Clear as crystal, right?

If your friend seems to be of the clever kind, you can add that actually, you don't really need to balance the budget at all. Indeed, you can run a permanent fiscal deficit, as long as the national debt is not growing at a faster pace than the economy is. As long as that is the case, the size of the national debt as a fraction of GDP will stabilize, despite the budget being in permanent deficit.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Tue Jun 24th, 2014 at 11:06:12 PM EST
[ Parent ]
And actually, changing portfolio preferences (e.g. as a result of an aging population shifting its portfolio increasingly into sovereign bonds) means that the correct level of sovereign debt is not even constant after you smooth out the business cycle.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jun 25th, 2014 at 03:35:18 AM EST
[ Parent ]
One of the great tragedies of our time is the fact that in the media the correct response to the aging Population is lower levels of debt. When in fact it should be the other way round.
by rz on Tue Jul 1st, 2014 at 08:47:50 AM EST
[ Parent ]
For obvious reasons, balancing the annual budget makes perfect sense when your output is basically entirely agricultural, and your consumption almost entirely is food.
You should still use fiscal policy to balance out years of good and bad crops, so the balanced budget is a myth even fot the agricultural economy.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Jul 1st, 2014 at 09:24:13 AM EST
[ Parent ]
Well, I was thinking of a very simplified model where the surplus of the summer months (the "boom") is saved to "finance" the "deficits" of the winter "bust".

It's not a perfect analogy, but it is first and foremost meant to be pedagogic and super-simple.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Mon Jul 7th, 2014 at 02:22:16 PM EST
[ Parent ]
European Central Bank: Markets poised for rate cuts and stimulus measures - business live | Business | The Guardian

So, what might the ECB do today?

Effectively there are five tools in the monetary policy toolbox which it could grasp.... and my colleague Katie Allen has rounded them up here:

  • Cut interest rates (both the headline rate of 0.25%, and the 0.0% rate paid on bank deposits at the ECB -- which would herald negative interest rates)
  • A new programme for bank lending, perhaps fashioned like the Bank of England's funding for lending scheme which provided cheaper credit to banks.
  • It could inject more liquidity into the system by stopping 'sterilising' bond purchases it made during the eurozone crisis in 2012
  • Reviving the asset backed securities market -- to help banks package up SME loans into packages which can be told on (but with tighter controls than in the run-up to the financial crisis)
  • A full-blown QE programme -- printing euros to expand the money supply and drive inflation up

Or it could do nothing....



It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
by eurogreen on Thu Jun 5th, 2014 at 05:46:44 AM EST
Meanwhile, in Turkey:
After the March 30 local elections, Turkish Prime Minister Recep Tayyip Erdogan began applying suffocating pressure on Erdem Basci, the governor of Turkey's Central Bank, to lower the interest rates he deemed as too high.

The frequent calls to "lower the interest rate" by Erdogan in his usual abrasive manner, in a language tantamount to scolding, are threatening the presumed independence of the Central Bank and denting the international prestige of the institution.

[...]

Erdogan's reaction to Basci was harsh. In his address to the AKP parliamentary group on May 27, he said, "So what? What independence? ... Don't make fun of people [by lowering the interest rate by] half a point. This interest rate is too high. This has to go down so that real investments will increase. We are politicians. We are accountable to people."

He continued, "It's enough. I have to say this. ... The interest rate is the cause, inflation is the effect."

According to Erdogan's thesis, which points to inflation as an effect of interest, if the interest rate is lowered, inflation will follow.

by gk (gk (gk quattro due due sette @gmail.com)) on Thu Jun 5th, 2014 at 07:03:17 AM EST
Why doesn't he stick to what he knows best, like banning twitter?

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Jun 5th, 2014 at 07:06:17 AM EST
[ Parent ]
Well, what he knows best is micro-managing every aspect of Turkey. He's already assumed direct control over the judiciary, the police, the media... why should the central bank escape him?

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
by eurogreen on Thu Jun 5th, 2014 at 07:16:53 AM EST
[ Parent ]
According to Erdogan's thesis, which points to inflation as an effect of interest, if the interest rate is lowered, inflation will follow.

A good one. This idea is e.g. shared by Jaime Caruana, General Manager of the Bank for International Settlements. But obviously in this other direction: Inlfation in the Eurozone is low because rates are low!

For Turkey the situation is not so easy. If you are a smaller economy you have to import a lot, therefore dropping the value of your currency can have substantial negative effects. That is why capital control is so important. Turkey should have controlled the influx of money, to prepare for its inevitable outflux.

by rz on Thu Jun 5th, 2014 at 07:08:49 AM EST
[ Parent ]
From the Guardian:

ECB imposes negative rates on banks, and cuts benchmark interest rate to 0.15%

Breaking: The European Central Bank has cut the refinancing rate, the headline interest rate across the eurozone, to 0.15% from 0.25%.

And it has also taken the historic decision to impose negative interest rates on the region's banks, to -0.1% from 0.0%

If this is all, it will not do much. We will drop towards all-out deflation in a few month.

by rz on Thu Jun 5th, 2014 at 07:49:53 AM EST
Further monetary policy measures to enhance the functioning of the monetary policy transmission mechanism will be communicated in a press release to be published at 3.30 p.m. CET today.

Lets see what this is going to be.

by rz on Thu Jun 5th, 2014 at 07:53:59 AM EST
[ Parent ]
ECB announces features of monetary policy operations with settlement until December 2016
The Governing Council of the ECB has today decided to continue conducting its main refinancing operations (MROs) as fixed rate tender procedures with full allotment for as long as necessary, and at least until the end of the Eurosystem's reserve maintenance period ending in December 2016.

Furthermore, the Governing Council has decided to conduct the three-month longer-term refinancing operations (LTROs) to be allotted before the end of the Eurosystem's reserve maintenance period ending in December 2016 as fixed rate tender procedures with full allotment. The rates in these three-month operations will be fixed at the average rate of the MROs over the life of the respective LTRO.

In addition, the Governing Council has decided to discontinue the Eurosystem's special-term refinancing operations with a maturity of one maintenance period, following the operation to be allotted on 10 June 2014.

Finally, the Governing Council has decided to suspend the weekly fine-tuning operation sterilising the liquidity injected under the Securities Markets Programme, following the operation to be allotted on 10 June 2014.



A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Jun 5th, 2014 at 10:13:36 AM EST
[ Parent ]
ECB announces monetary policy measures to enhance the functioning of the monetary policy transmission mechanism
In pursuing its price stability mandate, the Governing Council of the ECB has today announced measures to enhance the functioning of the monetary policy transmission mechanism by supporting lending to the real economy. In particular, the Governing Council has decided:

To conduct a series of targeted longer-term refinancing operations (TLTROs) aimed at improving bank lending to the euro area non-financial private sector [1], excluding loans to households for house purchase, over a window of two years.

To intensify preparatory work related to outright purchases of asset-backed securities (ABS).

...



A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Jun 5th, 2014 at 10:15:30 AM EST
[ Parent ]
Finally, the Governing Council has decided to suspend the weekly fine-tuning operation sterilising the liquidity injected under the Securities Markets Programme, following the operation to be allotted on 10 June 2014.

This sounds good to me.

by rz on Thu Jun 5th, 2014 at 10:31:31 AM EST
[ Parent ]
ECB introduces a negative deposit facility interest rate
* Deposit facility interest rate cut effective as of 11 June 2014
* Negative rate to apply also to average reserve holdings in excess of the minimum reserve requirements and other deposits held with the Eurosystem

When deciding to lower the key ECB interest rates at its meeting today, the Governing Council of the ECB took the decision to cut the interest rate on the deposit facility to -0.10%.

This change will come into effect on 11 June 2014, together with the changes to the interest rates on the main refinancing operations and on the marginal lending facility. The negative deposit facility interest rate will also apply to:

(i) banks' average reserve holdings in excess of the minimum reserve requirements;
(ii) government deposits held with the Eurosystem that exceed certain thresholds that will be set in the relevant Guideline to be published by 7 June;
(iii) Eurosystem reserve management services accounts if not currently remunerated;
(iv) participants' account balances in TARGET2;
(v) non-Eurosystem NCB balances (overnight deposits) held in TARGET2;
and
(vi) other accounts held by third parties with Eurosystem central banks when stipulated that they are not currently remunerated or are remunerated at the deposit facility rate.

Wait till Hans Werner Unsinn finds out that the ECB will charge for Target2 balances...

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Jun 5th, 2014 at 10:19:59 AM EST
[ Parent ]
I don't get it. What does it mean? How charges for what? I know Target 2 has been a hot issue with the inflation paranoia crowd, but I do not understand what is said here.
by rz on Thu Jun 5th, 2014 at 10:30:36 AM EST
[ Parent ]
I think I get it know: If the Bundesbank has a positive Target II balance it will have to pay some extra interest rate.

Hans is going to go ballistic. I feel a certain dread, when thinking about the commentary in tonights Tagesschau.

by rz on Thu Jun 5th, 2014 at 10:47:24 AM EST
[ Parent ]
Exactly.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Jun 5th, 2014 at 11:16:58 AM EST
[ Parent ]
A ghost of Keynes' bancor plan that haunts only the Eurozone! Headline: ECB PUNISHES SUCCESS!

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jun 5th, 2014 at 01:46:25 PM EST
[ Parent ]
Waiting for a Migeru diary to explain this to the profane.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
by eurogreen on Thu Jun 5th, 2014 at 11:03:47 AM EST
[ Parent ]
Just looking at the macro numbers - net exports as a percentage of GDP, labor force participation as compared to best practice, I would say that the problem with the German economy is that the german worker is being paid.. somewhere  around 15 % too little. In real terms.

10% export surplus. Every year. That's insane - you cant keep on selling more stuff than you buy and get paid, it is a logical and accounting impossibility.

 Boosting consumption by ten percent would likely boost german output and labor force participation - and there is significant slack there - so demand has to grow by a good bit more than ten % to bring things back into balance.

 Since wage hikes that large probably would cause some inflation, in order to balance things, it would likely be necessary to hike wages 20 + % in nominal terms.

It bloody well has to be possible to sell this to the german people, if not the current german government. The problem with their economy isn't that they are living beyond their means, the problem is that they are living Vastly beneath their means.  

by Thomas on Thu Jun 5th, 2014 at 11:01:24 AM EST
Vastly below their potential means, at the very least.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jun 5th, 2014 at 01:50:42 PM EST
[ Parent ]
Wage increases are obviously immensely popular and Unions in Germany are doing their best. While I wrote about stagnating wages, in fact for the last two years wages have been growing at a healthy rate. But I fear it is still to slow to save the Euro. If we are optimistic and project an ongoing wage growth of 4%, we will still need 5 years to get to the 20% increase you estimated.

I believe what will happen is that the Eurozone will dip back into recession and unemployment will start to rise even in Germany. And then it is clear what will be the political answer: wage cuts to increase competitiveness.

by rz on Fri Jun 6th, 2014 at 03:33:25 AM EST
[ Parent ]
German unions seem to suck, as German real wage increases in the last decade (and a half?) has been about zero percent.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Tue Jun 24th, 2014 at 11:06:00 PM EST
[ Parent ]
So, yesterday evening I drove home from work, turning on my normal radio channel...and want was on? A full 30 minutes special on the horrible decision the ECB had taken. 'expropriating the saver' 'creating great uncertainty in the monetary system' and so on. And it is actually a channel that normally plays mostly music!

Not once was the downside of doing nothing mentioned.

Tagesschau had only a short report on the decision and they obviously gave the word to Sparkassen-Präsident Georg Fahrenschon.

by rz on Fri Jun 6th, 2014 at 03:41:26 AM EST


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