The same principle leads to the conclusion, that the encouragement of mere consumption is no benefit to commerce; for the difficulty lies in supplying the means, not in stimulating the desire of consumption; and we have seen that production alone, furnishes those means. Thus, it is the aim of good government to stimulate production, of bad government to encourage consumption.-Say, Jean-Baptiste
For some it is held the current actions by Eurozone government represent as “deflationary policies”.
Such notion has been premised from the economic ideology which sees the economy as driven by aggregate demand.
Demand side economics see spending as the ultimate driver of any economy. Where private spending has been reckoned as insufficient or inadequate, government has been prescribed to takeover the spending process or through “socialization of investment”; otherwise the lack of spending, which supposedly impairs the aggregate demand, would result to people hoarding money, an outcome which this camp morbidly dread most: deflation.
This is why this camp argues for the “euthanasia of the rentier” which is to keep interest rates at perpetually low levels (if only they can abolish interest rates!).
Also, because spending is seen as the only driver of the economy, it doesn’t matter if spending is financed by unsustainable debt loads or by money printing “parting with liquidity”[1]. For them, spending is spending period.
This is an example of what I would call as analysis blinded by the Nirvana fallacy or “the logical error of comparing actual things with unrealistic, idealized alternatives. It can also refer to the tendency to assume that there is a perfect solution to a particular problem[2]” where mathematical models based on aggregate assumptions have substituted for real life activities. Statistical aggregates assume that people think and act homogeneously.
This also serves as another example where this mainstream economic pedagogy leads to a lack of common sense and self-discipline[3] because this camp basically advocates that people should borrow and spend to prosperity even when reality says that this would be impossible (see Jean Baptiste Say quote above).
How true has deflation been the problem of the PIIGS or the crisis affected nations of peripheral Europe?
At present, NONE of the PIIGS has shown DEFLATION as an economic condition as exhibited by the charts from tradingeconomics.com.
Instead, PIIGS have shown symptoms of mild stagflation (high unemployment and high inflation).
Of the five, only Ireland encountered consumer price deflation for over a year in 2009-2010.
Others like Spain and Portugal experienced very limited bouts of deflation in 2009.
Thus, little of what the demand side economics have feared has ever been true since the 2008 Lehman crisis began to unravel.
Theoretically, fiscal austerity means transferring of non-productive resources to productive resources.
Yet because of the dependency/entitlement culture which had been inbred from too much of “socialized investment”, as in the case of Greece, Greeks have taken to the streets[4]
As Takis Michas, staff writer for the Greek national daily, Eleftherotypia in a Cato Forum accounting for the seeds of the crisis[5]
The largest part of public expenditure was directed, not to public works or infrastructure, but to the wages of public service workers and civil servants.
The grounds for the rent-seeking struggles of the future were thus firmly laid.
As resources are freed for productive use, deflation then should be seen as positive because the productive private sector should be able to use these freed resources to produce goods and services, which would fuel a genuine recovery. With more output than than the growth of supply of money this is known “growth deflation” similar to the dynamics of falling prices of mobile phones, appliances and computers.
And that’s why a major part of Greece’s crisis ‘austerity plan’ resolution has been to undertake mass privatization[6].
However theoretical isn’t actual.
The unfolding Greece crisis isn’t being resolved entirely to free resources for productive means, instead the bailouts have been intended to use these resources to protect the banking system from a collapse[7]. Resources are merely being transferred from government welfare programs to the politically privileged banking sector.
Thus, the Greece bailout has been and will continue to be financed by European Central Bank’s inflationism.
Since the end of 2009, just as the Greece Debt Crisis surfaced[8], ECB’s M3 annual growth rate continues to climb, as shown by the chart from Bloomberg[9] (upper window). Such rate of increase in the money supply has shadowed the growth rate of the Euro’s inflation (chart from trading economics.com[10]).
For as long as the ECB and EU governments will continue to finance these serial bailouts by inflationism, then we should see more inflation and not deflation.
At the end of day, false economics leads to misdiagnosis and wrong predictions/conclusions.
[1] what-when-how.com SOCIALIZATION OF INVESTMENT
[2] Wikipedia.org Nirvana Fallacy
[3] See Financial Success is a Function of Common Sense and Self Discipline June 23, 2011
[4] See The Anatomy of False Economics as Revealed by the Greece Crisis, June 28,2011
[5] Michas Takis , Policy Forum: A Greek Tragedy, Cato Policy Report Cato.org, July/August 2011
[6] ca.reuters.com Greek sovereignty to be massively limited: Juncker, July 3, 2011
[7] See Greece Crisis: The Lehman Moment Hobgoblin, June 19, 2011
[8] News.bbc.co.uk Greece timeline June 16, 2011
[9] Bloomberg.com ECB M3 Annual Growth Rate SA (ECMAM3YY:IND)
[10] Tradingeconomics.com Euro Area Inflation Rate
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