Tuesday, November 12, 2013

Sinn, Unsinn, And The ECB

Paul Krugman wrote that there are huge tensions over the ECB rate cut. German "economists" are criticising the rate cut decision. Well, that is true, but for the most part it's just stuff we've heard a hundred thousand times before.

For example, Michael Hüther head of the IW institute said that the policy is both not working in program countries (which is true) and damaging the North (which is wrong) at the same time, because ... poor savers. He claimed that the rate should be "around 3.0 percent to 3.5 percent" for Germany, which is completely laughable if one actually looks at inflation which just "reached" a new low three year low of 1.2 percent in Germany, in Oktober. But hey, the ECB could also look after German savers instead of doing its actual job of keeping inflation close to but below 2.0 percent.

Hans-Werner Sinn head of the Munich based IFO institute also criticised the decision. He thinks interest on program country bonds should be higher to force them to continue reforming. A seemingly completely unrelated Hans-Werner Sinn offered a solution for the euro crisis a day earlier, which is in part based on Germany accepting significantly higher inflation.

It's just the usual suspects saying something because of a dogma which seemingly has nothing to do with their own analysis. I seriously do not get Sinn, if he is for higher inflation in Germany then he should also favor rate cuts and significant liquidity injections. I think what happened here is in Germany called "Beißreflex" ("biting reflex") meaning that something is criticised without thinking about it. The discussion within the ECB seems to have been about timing more than anything else, with some wanting to wait till next month, so even Weidmann seems to have understood that the current development isn't good. He might have just been more timid.   

Also, the media are actually talking about falling inflation and the dangers associated with deflation. Bild recently complained about the incompetence of German "economists", who claimed for years that hyperinflation was just around the corner (something the newspaper itself preached for years). Yes, there is clearly an overemphasising of German savers and only little talk about German workers or German unemployed and even less about the crisis countries; but overall there seems to be a growing understanding of the context. The FAZ and the Wirtschaftswoche are exceptions on the media front. FAZ actually published an article which claimed that deflation would "for now" be positive for Germany (there is currently no danger of deflation in Germany); and their, well, prove is that Germans remember "hyperinflation more than the deflation a few years later." One of those events significantly helped Hitler and the other didn't, so I would guess that the latter had significantly worse consequences for the whole world, but perhaps they think that the roaring twenties were just as bad as Hitler, who knows.

Krugman should really not care about people like Wirtschaftswoche's Malte Fischer (the quote Krugman used is from that piece). This person thinks that the rate cut is a "perfidious policy" to push savers into buying bonds of Spain and Italy. He also claimed that the low inflation was "primarily due to falling energy prices". Oh really? Then I guess that destatis must be lying because inflation excluding energy* was at 1.5 percent; and I might be wrong here, but I think that is actually a bit below target, let's also not forget that groceries were up 4.2 percent, so inflation excluding the volatile energy and food was 1.1 percent(pdf German page 54). The whole article is based on an inability to understand even the most basic facts, like: 1.5 is significantly lower than 1.9.  Let me end by gutting the final sentence from Mr. Fischer: Germany truly deserves better than having "economists" that fail at kindergarten level math (I think they understand that 3/4 of a cake is less than 95 percent of a cake).

*perhaps he wanted to but was unable to talk about inflation excluding fuel which would have been 1.7 percent, which is still below target, but he said energy which of course includes household energy.

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