Bloomberg Editorial: European Central Bank needs to Inflate Aggressively

The Editors of the Bloomberg write, (bold emphasis mine)

In the short term, then, somebody other than German Chancellor Angela Merkel and French President Nicolas Sarkozy will have to take on the task of avoiding disaster. The only candidate is ECB President Jean-Claude Trichet. Unlike Merkel and Sarkozy, Trichet is not constrained by short-term political concerns, and the ECB has access to an almost unlimited resource: the power to print euros. It has already demonstrated a willingness to use that power by purchasing tens of billions of euros in Spanish and Italian bonds to keep those governments’ borrowing costs from skyrocketing.

In its simplest form, ECB intervention would entail the central bank buying Greek and other euro-area government bonds. To keep countries’ borrowing costs in check until European leaders come up with a more comprehensive solution, such purchases would go far beyond the 440 billion euros available to the European Financial Stability Facility (the euro area’s bailout vehicle). The ECB would be buying bonds from banks at an artificially high price, leaving the central bank to suffer losses if and when some of the debts are written off.

The ECB could also be more activist, spurring governments to restructure their debts and get their fiscal affairs in order. The central bank, for example, could pledge to buy newly issued bonds at full face value only if governments adopt credible rules to balance their budgets over the economic cycle; the bank would guarantee existing euro-area debt at only half its face value. Market prices for existing debt would quickly fall to what investors believed governments could actually afford to pay, putting them in a position to negotiate debt- relief deals with creditors. As with the issuance of euro bonds, this approach would require governments to recapitalize banks that take heavy losses as a result of debt restructurings.

To be sure, ECB intervention would come at great cost, including threatening to undermine the central bank’s inflation- fighting mandate. It would not substitute for a real fix to the euro area’s flaws. Europe is reaching a point, though, where aggressive ECB action could be the lesser of all possible evils.

Well, the above sentiment are emblematic of what I had earlier written about,

That’s because central banks can always surreptitiously work for the state’s political agenda camouflaged by the esoteric nature of the operations of central banking.

In the fitting and resonant words of Henry Ford,

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”

So while the fiscal side of governments may be scrutinized by a vigilant public over the perceived profligacy of a government, central banks actions can and will likely substitute for such a loss.

The call to action for more intensive short term fixes had been predicted by the great Ludwig von Mises (Theory of Money and Credit), [bold emphasis mine]

A government always finds itself obliged to resort to inflationary measures when it cannot negotiate loans and dare not levy taxes, because it has reason to fear that it will forfeit approval of the policy it is following if it reveals too soon the financial and general economic consequences of that policy. Thus inflation becomes the most important psychological resource of any economic policy whose consequences have to be concealed; and so in this sense it can be called an instrument of unpopular, i.e., of antidemocratic, policy, since by misleading public opinion it makes possible the continued existence of a system of government that would have no hope of the consent of the people if the circumstances were clearly laid before them. That is the political function of inflation. It explains why inflation has always been an important resource of policies of war and revolution and why we also find it in the service of socialism. When governments do not think it necessary to accommodate their expenditure to their revenue and arrogate to themselves the right of making up the deficit by issuing notes, their ideology is merely a disguised absolutism.

So goes part of the political process aimed at conditioning the public for the acceptance of the ideology of ‘disguised absolutism’

Austerity Equals Deflation? Not In The Eurozone

If you read mainstream analysis, their mantra seems to be ‘austerity equates to deflation’. (Because B follows A, B is the cause of A-post hoc analysis)

Yet when applied to the Eurozone, this seems NOT to be happening.

This from the New York Times, (bold highlights mine)

Higher energy prices drove inflation in the euro area to an annual rate of 1.7 percent in July, the highest level in 20 months but still within the range considered acceptable by the European Central Bank.

Excluding energy prices, inflation increased by 1.1 percent in July when compared with the previous year. That was up from 0.9 percent in June, Eurostat, the European Union’s statistics office, said Monday.

The rise in overall prices, from a rate of 1.4 percent in June, was not considered alarming by economists, who generally expect price pressures to remain in check as growth slows in most of Europe.

“We need to see convincing signs of an upturn in domestic demand, and we’re not seeing that just yet,” said Nick Matthews, an economist at Royal Bank of Scotland. “Underlying domestic price pressures are still quite contained.”

But the European Central Bank could have problems finding a monetary policy that is right for all 16 euro area members if prices continued to rise in some countries while holding stable or even falling in others.

This chart from Tradingeconomics.com

Additional observations:

1. The above development goes to show that inflation is always relative. Some areas experience more and some experience less. In short, money is never neutral.

2. If inflation has been rising in spite of weak domestic demand as alleged by the expert quoted, then obviously it isn’t domestic demand that is the root of inflation. So the expert failing to account for the recent rise likewise fails to look at genuine drivers or the bigger picture.

3. One should note that the inflation dynamics in the Eurozone doesn’t suggest that this is a one time event or random walk, but seemingly a momentum trend on an upswing.

4. This also shows why listening to the ideas of the mainstream seems to be like placing a noose around one’s neck.