Dr. Draghi Prescribes a Dose of Deflation for Spain as his latest Quack Cure

By William K. Black

I posted an article earlier today on the demented memes about eurozone deflation U.S. financial journalists parrot after talking to Brussels’ troika-trolls.  That article used the latest AP story to illustrate my points.

I promised a second installment that used a New York Times article (not sourced to AP) that was posted last night to illustrate the meme.  The NYT article is simultaneously more complex and more alarmingly analytically awful than the AP piece. 

This morning brought two April Fools’ Day articles about France and Italy that are also about the gratuitous second Great Recession (in the core) and the second Great Depression (in Spain, Italy, and Greece) inflicted by the troika’s infamous austerity dogmas.  This article discusses one sentence from last night’s NYT piece that notes the position on deflation of the head of the European Central Bank (Mario Draghi).  The NYT article misses the significance of the passage.  I show how the passage, particularly when read in conjunction with quotations from Draghi’s fellow troika-trolls in the articles about France and Italy, reveals the troika’s fanatical devotion to failed dogmas and the clueless nature of U.S. financial journalists covering the eurozone who continue to treat the trolls like savants.

“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.”

The NYT article is so clueless that its response to Draghi’s statement is this non sequitur.

“But that argument becomes more difficult to make when countries like Germany, where unemployment is low and growth is solid, also have very low inflation.”

Draghi’s statement is nonsensical and the NYT response is not to point out any of the reasons it is nonsensical but instead to double-down on nonsense.  It makes one cringe.

The obvious place to start, which the NYT never reached, is what the ECB claims its policy is with regard to deflation and the ECB’s rationales for that policy.  I presented the policy and its rationales in my first installment.  Here’s the link to the ECB site, which took literally 15 seconds to find with a search engine.

Here are the two extraordinary aspects of Draghi’s praise for deflation as the solution to Spain’s Great Depression level of unemployment.  One, Draghi’s pro-deflation policy contradicts the ECB’s anti-deflation policy.  That explains the strangest puzzle economists have had about the troika.  The troika’s practices are insane under their own written policies.  Under their stated policies they should have – over a year ago – adopted maximum monetary stimulus.  Instead, they have been claiming that they are waiting to intervene until the eurozone is minutes from sinking into deflation.  The troika has also been claiming that if this intervention comes a minute too late the results will be disastrous because the intervention will likely fail.  I have written repeatedly to explain how internally inconsistent this “logic” is and how crazed it would be to wait to respond to the inadequate demand that is causing the eurozone’s problems, including deflation.  If Draghi is telling the truth the troika’s policies all make (sick) sense.  He actually wants Italy and Greece to join Spain in deflation because he thinks that deflation spurs growth.  His problems are that (A) his predecessors adopted the opposite written policy, (B) his predecessors’ rationale was that deflation was disastrous for growth, and (C) economists overwhelmingly disagree with Draghi’s delight with deflation.  Draghi’s answer is to let other troika-trolls bleat about deflation while he blocks any action to prevent it or attempt to end it now that it has descended on Spain.

Two, financial journalists see none of these points.  They ignore the implications even when they cite Draghi’s devotion to the desirability of deflation.

Let’s review the bidding at this juncture.  Draghi, the head of the ECB, dominates the bank so completely that he has caused the institution to (secretly) ignore its anti-deflation policy and to welcome Spain falling into deflation.  Draghi’s devotion to deflation is considered insane by about 95% of economists.  The troika is led by failed theoclassical economists who come from a fringe faith-based sect of economists.  They have proven consistently wrong, yet U.S. financial journalists treat them like prophets.

Hollande and France Know Better but Still Inflict Austerity

France suffers from its own bipolar disorder.  President Hollande was elected on the promise of fighting austerity, but did the opposite and called it a “growth pact.”  The result was that France increased austerity to the point that its recovery “stagnated” as the Wall Street Journal explained in an article entitled:  “France’s Valls Faces Economic Challenge on Austerity: Hollande Says France Must Persuade EU to Consider Tax Cuts to Boost Its Economy.”

“Since his election in May 2012, Mr. Hollande has chalked up some success in reorienting EU economic policies by getting his European peers to complement a German-inspired pact for greater fiscal discipline with a so-called growth pact.

But the pact has had little tangible impact in France while Mr. Hollande’s government continued to chase deficit reduction targets by curbing spending and raising taxes.

The French economy stagnated and France went cap in hand to Brussels to extend the deadlines for getting the deficit within 3% of economic output to 2015 from 2013. France’s request was accepted.”

The French voters (unlike the WSJ) had no difficulty seeing through Hollande’s faux “success.”  They just punished Hollande’s party in a series of municipal elections.  “Curbing spending and raising taxes” when a nation is trying to recover from a second, gratuitous recession caused by the troika’s austerity demands is an anti-growth pact, not a “so-called growth pact.”  Calling austerity a “growth pact” represents an act of cynical propaganda, not “chalk[ing] up some success.”  Austerity caused the gratuitous second Great Recession in France and austerity “stagnated” France’s recovery.

Hollande responded to the election disaster by dumping his Prime Minister and declared that the troika must allow France to use fiscal stimulus.  The troika immediately pushed back, demanding greater austerity.  The same WSJ article quotes Olli Rehn.

“It is essential that France acts decisively to ensure the sustainability of its public finances,” EU economics chief Olli Rehn said at a meeting of euro-zone finance ministers in Athens. “The correction deadline for France’s excessive deficit has already been extended twice in recent years.”

Rehn is the troika-trolls’ enforcer.  He breaks economies (rather than legs), forces elected government leaders to resign, and blocks democratic votes on austerity.  He replaces the leaders he deposes with unelected troika-trolls.  He is the envy of the modern CIA, once the master in arranging similar coups.

France’s “deficit” is vastly too small to fill the gap in inadequate private sector demand that has caused France’s continuing economic and social failures.  What’s “excessive” in France is unemployment.  There is nothing remotely “[un]sustainabl[e]” about France’s “public finances.”  The policies that the troika inflicts on the eurozone have harmed, not “correct[ed],” France’s economy and people.

Italy’s Bipolar Approach to Austerity

Meanwhile, Italy is acting in its own crazed fashion.  The WSJ article about Hollande claims that Italy’s new prime minister in as ally of Hollande’s anti-austerity efforts.

“The French president can count on Italy’s recently elected premier as a key ally. Fellow socialist Matteo Renzi has presented similar tax-cutting plans to those of Mr. Hollande, and also called for Brussels to let his country rely on increased debt.

When Mr. Renzi visited his French counterpart in Paris last month, the two leaders vowed to make Europe more focused on supporting economic growth.”

A preliminary note is in order.  The WSJ uses the word “socialist” as a swear word indicating depravity.  The article I am quoting makes it sound like Hollande and Renzi are wild extremists.  They are, in fact, their country’s equivalents of Tony Blair and Bill Clinton.  Hollande tried a stint of criticizing the banks, but overall these leaders of the “left” often out-compete the conservative parties in their slavishness to championing the interests of the CEOs who run the largest banks, the systemically dangerous institutions (SDIs).

The reality in Italy is far different from how the WSJ article quoted above pictures the situation.  Notice the vague statements Hollande and Renzi made: “more focused” and “supporting economic growth.”  Recall that Hollande tried to sell the eurozone on the propaganda that his anti-growth austerity policies of “curbing spending and raising taxes” were part of a pro-growth pact.  So, is Italy actually seeking to use fiscal stimulus, the real growth plan that actually works?  A contemporaneous WSJ article (“Italian Premier Renzi Turns to IMF Veteran to Wrangle Public Finances”) reveals how confused the answer must be.  The “socialist” Renzi just appointed an IMF troika-troll to a top position in his government and gave him the mission of “curbing spending” by “€34 billion ($46.8 billion) in state savings, or 2% of Italy’s economic output.”

According to this article, Renzi plans no increase in spending for the three categories that best drive economic growth and the well-being of the citizenry – education, health, and infrastructure.  Instead, he plans to use the reductions in government spending to make up for the reduced government revenue he wants to produce through tax cuts, largely on businesses. 

Conclusion

What do all three of these major articles in the top two U.S. financial papers have in common?  They never mention the word “demand.”  “Demand” is the single most important word and concept in the subjects they purport to discuss.

They also never bring up the alternative of a true fiscal stimulus.  (Both WSJ articles use the word “fiscal,” but neither of them even mentions the alternative of a fiscal stimulus involving spending on the eurozone’s tremendous unmet needs and a jobs guarantee program.)  The NYT article is so disgraceful that it does not even mention the unemployment (that exceeds Great Depression levels in Spain, Italy, and Greece or any of the resultant human suffering).  We know why the troika-trolls want human suffering to disappear from the narrative, but since it should be the overwhelming focus of any article about these topics we have to ask why journalists continue to display such malign malpractice no matter how many times we spell out in detail the errors.

We know why the “there is no alternative” (TINA) chorus is desperate to avoid discussing the obvious, long-proven alternative to failed austerity.  What is incomprehensible is why U.S. financial journalists continue to parrot the troika-trolls and TINA-twits without even approaching the degree of critical thinking and knowledge about the economy that our freshmen undergraduate students are required to display to succeed in their first test in their first course in macroeconomics.

UMKC’s offer still stands.  We’ll hold a free two-day seminar for a group of journalists who want to learn the basics of macroeconomics and critical thinking necessary to write in this field.

 

4 Responses to Dr. Draghi Prescribes a Dose of Deflation for Spain as his latest Quack Cure

  1. James Cooley

    Hey, a free seminar means work. What you need to offer is a free lunch at a posh club or restaurant and a couple of single malt scotch whiskeys, then you would be really competing for their attention.

  2. Draghi is right and William Black is wrong. All William seems to be advocating is stimulus for Spain, which would be fine for a monetarily sovereign country: a country which issues its own currency.

    The problem for Spain and other periphery countries is that they’ve lost competitiveness relative to Germany. If Euro countries all had their own currencies, the solution would be easy: devalue periphery currencies relative to Germany’s, and implement stimulus. In contrast, in a common currency area, the equivalent is internal devaluation, which requires an extended period of deflation. That involves horrendous social costs, but that’s common currency areas for you.

    An entirely separate contributor to Spain’s high unemployment level is that unemployment has ALWAYS been extraordinarily high in Spain: since long before it joined the Eurozone.

    • Alex Seferian

      I agree with Mr. Sanjay Mittal and thank him for the clarity of the comment.

      It matters whether a country pegs its exchange rate to a “foreign” currency. Unless it can ensure a positive inflow of the thing it pegs to, it must adopt austerity to keep domestic wages and prices low. This is the reality faced by some European nations that have gone a step further, and abandoned their currencies altogether and become “users” a “foreign” currency (the Euro).

      Question I have is whether the status quo can go on, and if so, for how long? As you point out, what Europe is going through is “common currency areas for you”. Given the absence of a fiscal authority, is it a proper currency union, or more of an accident waiting to happen?

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