Deflation Dementia

By William K. Black

There must be some café in Brussels where all the most inept U.S. financial journalists meet with the troika-trolls to get their take on eurozone deflation.  Regular readers know that I am a strong critic of much of what passes for financial journalism, but there are special qualities to the U.S. coverage of the topic of eurozone deflation.  It is so homogenous and its logic is so internally inconsistent that it is breathtaking that so many journalists can repeat the same demented “logic” no matter how many times we explain that it is facially nonsensical.

The latest example of this genre is an AP story that has already been reproduced by elite media without even a scintilla of scrutiny.  Here’s how the AP begins its tale.

“Eurozone Inflation Drop Adds Pressure on ECB


BRUSSELS — After breaking out of recession and taming its financial crisis, Europe now faces a new kind of economic threat — deflation, a protracted drop in prices that can snuff out growth for years.

New data released Monday showed the inflation rate fell in March to its lowest level since the 2008-2009 global financial crisis, a sign of economic weakness that piles fresh pressure on the European Central Bank to further ease its monetary policies this week.

Inflation across the 18-country eurozone dropped to 0.5 percent, the Eurostat statistics agency said, down from 0.7 percent in February and below forecasts for 0.6 percent.”

The key logical flaw is displayed in the phrase “Europe now faces a new kind of economic threat.”  No, the eurozone suffers the same reality that it has been the victim of since 2008 – grossly insufficient demand.  That is what caused both of its recessions, which largely “snuff[ed] out growth” for the last six years.  A recession has a technical meaning that often has little practical meaning.  If a country has even the most pathetic economic growth in a quarter, e.g., 0.1%, its recession is defined as finished.  It can have Great Depression levels of unemployment, but it “break[s] out of recession.”  The (insane) tone of the article is that the eurozone has just triumphed over recession by producing a positive growth so immaterial that unemployment went down a tiny amount primarily because many of the eurozone’s unemployed workers were so discouraged that they migrated to other nations.  That’s an economic failure, not a success.

The first clause also treats it as a triumph that the eurozone “tam[ed] its financial crisis.”  The reality is that the eurozone’s automatic (fiscal) stabilizers drew it out of the initial Great Recession until the troika (the European Central Bank (ECB), the International Monetary Fund (IMF), and the European Commission) demanded an austerity program that promptly threw the eurozone back into a gratuitous second great recession and much of the periphery of Europe (Italy, Spain, and Greece) back into levels of unemployment that exceed average Great Depression levels.  Those three nations forced into Great Depressions represent roughly one-third of the eurozone’s total population.

Fortunately, the troika was politically restrained from imposing the full severity of the brutal austerity they desired.  Most Eurozone nations run budget deficits that while small and deeply inadequate have provided sufficient additional demand to prevent the entire Eurozone from sinking into another Great Depression and to produce a (pathetically weak) recovery.

Increasingly, however, the eurozone is beset with another of the troika’s “reforms” – the war on wages.  The troika’s increasingly successful effort to reduce eurozone wages, particularly among poorer workers in the periphery has further reduced already inadequate consumer demand.  The troika did not “tam[e] the financial crisis” – it caused the crisis.  The ECB did, eventually, tame the bond vigilantes, but the story there is that it could have done so from the beginning – yet it refused to do so for years.  The triumphal tone of the article indicates that yet another inept reporter is being fed the same faux triumphal story line by one of the troika-trolls.

The central point is that inadequate demand causes each of these problems – the Great Recession, the gratuitous second eurozone crisis brought on by austerity, and the declining inflation rate.  The eurozone is not facing a “new” (underlying) problem and the problem is not some future “threat” but a long extant reality.

So, what does the AP story state causes deflation?  How does the article discuss the inadequate demand for goods that is the dominant driver of falls in prices?  It ignores it completely.  The word “demand” does not appear in the article.  The article treats “deflation” like an evil fairy that winks into existence through magic.  Indeed, the article wilfully misleads by suggesting that exchange rates are the key driver of deflation.

“The dip in inflation comes at a time when the euro has been buoyant in foreign exchange markets. A higher currency can push inflation down in two ways: It can make imports cheaper and weigh on economic activity by making exports more expensive on international markets.”

Put aside for the moment the fact that no economist thinks that currency exchange rates are the fundamental cause of deflation.  One of the three traditional means of speeding recovery from a recession is to devalue one’s currency in order to increase exports.  The troika has been demanding that the periphery follow a growth strategy premised on dramatically increasing exports.  AP is telling us that the ECB has been following policies that cause the euro to appreciate (which revalues upwards one’s currency), and that this will harm EU growth.  One might think that would flash a warning flag in front of the AP reporter.  The ECB is following a currency strategy that is logically inconsistent with its (purported) growth and inflation-target strategies.  This logical inconsistency would have alerted any sentient reporter to the fact that the real story was the troika’s incoherent and destructive policies.

How, does a “strong” euro weaken eurozone exports?  It acts as a higher price of goods to the importing nation.  The higher cost of goods reduces the “quantity demanded” of eurozone exports.  Notice that the word “demand” appears as soon as one explores causality rather than assuming that the euro fairy explains economic events in the eurozone.

The AP article makes a series of illogical statements.

“In Europe, the inflation rate is the main driver of monetary policy decisions — unlike in the United States where the Federal Reserve also takes unemployment figures into account. The ECB aims to keep inflation close to but just below 2 percent.”

Why would the ECB adopt an inflation target of two percent?  The article doesn’t explain.

The article notes, but ignores the dreadful implications, of a central bank system that ignores unemployment.  Roughly one-third of the eurozone population is in nations with Great Depression levels of unemployment – and the reaction of the troika-trolls is “yawn.”  Actually, while they bleat about unemployment, they adopt policies that maximize unemployment in the hope that it will force workers to slash their wages. The troika-trolls like the idea of a “reserve army of the unemployed” inexorably engaged in a competition to slash worker’s wages.  This point was made, inadvertently, by the New York Times in a story they posted late Monday that is not attributed to the AP.

“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.”

Draghi heads the ECB.  As I show below, the ECB’s stated policy is the opposite of Draghi’s actual, personal policy.  Draghi is delighted with collapsing wages, incomes, and prices in Spain, Italy, and Greece.  Draghi is one of the leading designers of the “Road to Bangladesh” strategy in which the working classes of the European periphery are extorted into cutting their wages to the point that they can compete “successfully” with workers in Bangladesh and other much poorer nations.

As I will explain in my next column, the NYT article about deflation is simultaneously more complex and more disappointing in its lack of analysis than the AP story.  It is, unintentionally and unknowingly, more revealing about the dishonesty and depravity of the troika.  It is startling to see how effective the troika-trolls are in leading U.S. financial journalists by the nose.  It is hard to think of anyone in the world with less credibility in finance than the troika-trolls.  Then again, the NYT still acts like Jamie Dimon is a paragon of virtue and competence

What are the logical implications of the ECB’s increasing inability to come close to achieving its inflation target of two percent?  The article does not ask or explain.  Something must be going desperately wrong if the ECB cannot meet its target.  Asking what was going wrong, however, would require the trolls and the journalist to utter the banned word – “demand” – and to place the dread word “inadequate” before “demand.”  That would also force the trolls and the journalist to admit that the problem the eurozone is suffering from is not “new” and it is not simply a potential “threat, “ but instead is the same problem besetting the eurozone for the last six years that has been made far worse by the troika’s quack austerity programs.

What are the trolls and the journalist saying about how bad a thing “deflation” is?  Dread!

“Such a downward spiral chokes off economic growth and can be difficult to get out of — Japan was stuck in deflation for two decades.”

Wow, deflation is a “0.50 biblical curse.”  It causes nations to wander in the (economic) wilderness for half of the 40 years God made the Jews wander.  That’s really, really awful.  Ollie Rehn, the troika’s preeminent austerity troll, recently admitted that (assuming no further major shocks!) Spain would not emerge from its “crisis” until 2024.  He made no promises on how long it would take after the crisis phase for Spain to reach full employment.  Spain’s bubble peaked in 2006, so he is talking about Spain wandering in the economic wilderness for nearly two decades.

Note that people still disappear from the narrative even when the trolls and inept journalists go “0.50 biblical curse” on us.  We hear only about “economic growth.”  We don’t hear about unemployment, poverty, migration, spousal abuse or suicide.

How does deflation do these terrible things to “economic growth?”  Here, people reappear, but only as generalized “consumers.”

“The steady decline [in inflation], the third in as many months, raises concerns that consumer prices may start to fall outright. That risks creating a situation in which consumers and businesses put off purchases in hopes of better deals down the line and companies cut prices to entice buyers.”

Notice that even in this passage AP and the trolls feeding them their narrative cannot bring themselves to use the “D” word though they are indisputably discussing “demand” and demonstrating that they know that “demand” is “inadequate” and that “inadequate demand” can cause “0.50 biblical curse” disasters.

Why would “consumer prices … start to fall outright?”  What’s the causal force?  The trolls and journalists can’t bring themselves to say it, but their logic proves it is “inadequate demand.”  Why has the already deeply inadequate inflation rate continued to fall despite the ECB’s ultra-low interest rate policies?  Because (1) demand is grossly inadequate in the eurozone and (2) low interest rate policies do not provide the inadequate demand.

Now consider the trolls’ “logic” that the price level only affects consumer and manufacturing demand for goods and service when “prices … start to fall outright?”  Does that make any sense?  No, any reduction in inflation should under this logic lead to deferred purchases and the real issue under this logic would be whether consumers and manufacturers anticipated a risk of deflation.  Under the trolls’ “logic,” many purchases would be deferred even though reported inflation was positive as soon as the purchasers anticipated any material risk of deflation.  This means that long before deflation is reported it should become a top government priority to increase demand.

Note also that there would be no downside in these circumstances to the government using fiscal policy to compensate for the inadequate private sector demand.  The “worst” that would happen under the trolls’ own “logic” was that inflation would increase a bit – which the trolls are telling us would be a very good thing.  Far more importantly, of course, the humans who disappear under the trolls’ and the AP’s narrative would be getting jobs and the dignity and pay that goes with those jobs.  There is, in other words, an obvious “win-win” strategy of fiscal stimulus and jobs programs that the troika refuses to use for reasons of dogma and indifference and even hostility to the unemployed (or at least their “excessive” wage desires).

The ECB’s website’s explanation of its inflation target is hopelessly dishonest, but even it is a model of rectitude compared to the triumphal AP story on deflation.

Consider these passages in which the ECB explains why it is vital to prevent the inflation rate from falling to levels far above where it has in fact fallen.

  • provide an adequate margin to avoid the risks of deflation. Having such a safety margin against deflation is important because nominal interest rates cannot fall below zero. In a deflationary environment monetary policy may thus not be able to sufficiently stimulate aggregate demand by using its interest rate instrument. This makes it more difficult for monetary policy to fight deflation than to fight inflation.
  • take into account the possibility of HICP inflation slightly overstating true inflation as a result of a small but positive bias in the measurement of price level changes using the HICP.
  • provide a sufficient margin to address the implications of inflation differentials in the euro area. It avoids that individual countries in the euro area have to structurally live with too low inflation rates or even deflation.

The AP story admits that Spain is one of the eurozone nations suffering from deflation.  The ECB sold its eurozone average two percent inflation target as a means to assure a “sufficient margin” to “avoid” “individual countries” suffering deflation.  The ECB, in convoluted and dishonest language, manages to admit in its first bullet point that monetary policy is particularly ineffective in providing vital stimulus when demand is severely inadequate and deflation occurs.  Again, recall the asymmetrical nature of the “type 1” and “type 2” errors in these circumstances.  Assume, contrary to fact, that the ECB could use monetary policy to provide the necessary stimulus and that the ECB cared about minimizing unemployment, poverty, undesired migration, inequality, and suicide.  Inflation is far below the ECB’s target.  For technical reasons (second bullet point), inflation measurements tend to overstate actual inflation.  The eurozone’s true inflation rate, therefore, may already be negative (deflation) rather than the 0.5% reported inflation rate.  If the ECB does nothing, millions of Europeans will remain unemployed – a pure waste that collectively amounts since 2008 to over 10 trillion euros.  Add to that all the human suffering the trolls consciously ignore.  If the ECB does “too much” (as it, incorrectly, defines that concept) the eurozone would have far lower unemployment and human suffering and much more wealth – and three percent inflation.  Three percent inflation would cause no crises.  It would, under the trolls’ “logic” spur demand and greatly speed the recovery, which would increase tax revenues and reduce welfare costs.

The ECB is violating its own purported standards by refusing to add the monetary stimulus it says it should add.  Under the ECB’s own logic this will cause immense, gratuitous harm.  But that harm will be to the people of Europe and the ECB was deliberately set up as an anti-democratic institution structured to ignore people and care for bankers.  Mission accomplished!

Let’s review just how insane the “logic” of the trolls’ narrative is to this point.  The trolls are telling us that deflation is a financial catastrophe that can cripple a nation for two decades.  The trolls tell us that the eurozone’s reported inflation rate is so low that the real inflation rate may already be negative – deflation may have begun, on average, in the eurozone.  The trolls are telling us that the eurozone’s fourth largest economy, Spain, is already suffering deflation and that their most hopeful scenario under existing austerity policies is that Spain will be in economic crisis for a total of nearly two decades.  And the trolls are telling us that – all of this is a big yawn.

The trolls’ plan – as they describe it – is that they have allowed (actually, coerced) Spain to go into Great Depression levels of unemployment, and deflation, and it is still not time to act.  Their plan is to wait until the eurozone as a whole is on the verge of losing two decades of economic growth before they are willing to attempt a monetary stimulus through the ECB (a stimulus which their own website admits would likely fail).  The trolls also admit that acting now (actually, acting in 2008), rather than waiting, would be far more likely to succeed and would reduce massive economic waste and human misery – and would have zero downside.  The troika-trolls and the financial journalists) that regurgitate their drivel) are preaching a narrative that is so obviously demented that it tells us a great deal about the political class and economists as well.  The trolls and journalists know they can get away with creating a narrative in which it is difficult to judge whether its failure to pass even the most basic test of logic or its depravity for its conscious effort to remove completely gratuitous human suffering from the tale is the most offensive aspect of the enterprise.

The trolls and journalists, however, end on an even worse note.  The problem, of course, stems from the troika’s “Great Lie” – “there is no alternative” (TINA) to austerity.  How then, to end an article that logically must discuss alternatives.  The trolls’ and their journalists’ answer, inevitably, is to eliminate the obvious, effective alternative from the narrative.  This is why the “D” word must be avoided as an abomination.  As soon as they admit that demand matters and that demand is so inadequate that one-third of the eurozone’s citizens live in nations suffering from Great Depression levels of unemployment the obvious alternative of increasing demand through government spending on the eurozone’s many unmet needs arises.  The purported (but false) problem with providing fiscal stimulus in these circumstances is that it produces inflation.  Even if we (falsely) assume that, however, the trolls have just admitted that we need to create (modest) inflation.  So the faux downside to fiscal stimulus becomes an additional advantage under the trolls’ own “logic.”

The only “logical” escape from the trolls’ logical dilemma is to employ the reverse of the standard joke about neoclassical economics (“assume a can opener”).  The troika-trolls “assume that there can be no can opener” – they assume that fiscal policy does not exist.  It is easy to understand why the TINA-twits want to assume fiscal policy out of existence.  The troika-trolls would suffer under a crippling disadvantage if intellectual honesty were any constraint.  IMF’s studies have confirmed that fiscal stimulus is not only effective, but far more effective than the IMF thought possible.  Fortunately for the troika-trolls, they realized that if they were s willing to assume fiscal stimulus out of existence they need not consider the evidence from their own colleagues that fiscal stimulus was the optimal policy response to the Great Recession.

It is a measure of how inept and led by the nose the American financial journalists are who write about eurozone inflation that they overwhelmingly write articles that assume fiscal stimulus out of existence as an alternative.  American journalists all know that the U.S. employed modest fiscal stimulus (that provided only a small portion of the lost private sector demand resulting from the Great Recession) and produced modest positive growth rather than the troika’s gratuitous second Great Recession in the core and Great Depression in much of the periphery.  American journalists, therefore, have no conceivable excuse for failing to raise the fiscal alternative.  (It is not an answer to say that there are rules barring fiscal stimulus in the eurozone.  It is fine to discuss those rules, but the troika has repeatedly changed the rules in response to the crisis.  There are two things preventing the troika-trolls from changing the fiscal rules.  One is ideological.  The trolls are theoclassical economists taught that suffering (by others) is redemptive.  The second reason is that the troika-trolls and TINA-twits would have to admit they were wrong about economics and that they caused immense, gratuitous misery because of their failed dogmas.  Admitting they were wrong would require great courage.

But change need not come from these ideologues.  It can come from the people as it has in Latin America.  Latin America was the “test bed” for austerity, plunder through privatization, and wage suppression under the Washington Consensus.  The economic results and resulting human suffering were awful, but the eventual political result was the election of national leaders running on platforms pledging to end these failed dogmas.  France’s President Hollande’s party has just suffered severe municipal election losses (and the Prime Minister has been dumped) because Hollande betrayed his pledge to fight austerity.  It will take time, but there will be a series of leaders elected in Europe who will honor their electoral pledges and lead the struggle against economically-illiterate and inhumane austerity policies masquerading as economics and their theoclassical acolytes.

7 responses to “Deflation Dementia

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