We Can Inflate Too …

Perhaps it is a coincidence that we get these news so shortly after James Bullard forwarded his ideas as to how the ECB could most effectively join the global inflatathon. In any case, ECB board member Peter Praet – hitherto regarded as a 'hawk' – let it be known that the ECB too has a 'toolkit' at its disposal that can be 'expanded' to inflate the euro area back to economic Nirvana. What a surprise!

According to Reuters:

 

“The European Central Bank could expand its monetary policy toolkit if needed to respond to threats to price stability, and must ensure the euro zone economy does not enter a downward spiral, ECB Executive Board member Peter Praet said on Wednesday.

"We have an objective: price stability," Praet, who is in charge of the economics portfolio on the ECB's six-member executive board, told a conference in Washington.

"If that objective is at risk, we have the possibility … to expand the range of (monetary policy) instruments if we think it's necessary for that objective," he said.”

 

 

(emphasis added)

We already mentioned a year ago for the first time that we eventually expect the ECB to use declining consumer prices, or even a mere slowdown in the rate of increase of consumer prices as 'measured' by CPI as an excuse to step up inflationary policies.  After all, the 'price stability' policy is held to mean that consumer prices should increase on average by 2% per year. 'Stability' in other words means 'constant inflation'. Falling prices are held to be evil, and this is very likely what Praet actually refers to when he speaks of the euro area economy potentially entering a 'downward spiral'.

 

The 'Evil' of Falling Prices

It has been reported that the pace of consumer price inflation in the euro area fell to 1.4% in April, so we are already in a state of 'semi-evil' so to speak – a devaluation of the monetary unit that is not rapid enough for the taste of the central planners. The idea behind their 'price stability' quackery is that consumers will simply stop spending if prices begin to fall, in expectation of lower prices tomorrow.

According to this theory, not a single computer, cell phone or flat-screen TV should have been sold over the past three decades. After all, their prices have been falling rapidly and without respite. Moreover, the industries associated with producing these gadgets and their suppliers should have been in a permanent state of depression. Somehow that didn't happen, but the idea that falling prices are 'evil' and produce an 'economic downward spiral' is as popular as ever with central bankers and the courtier economists who pen apologias and paeans to central banking socialism day in day out.

Meanwhile, the details of the EU's new 'inflation' report reveal that prices are finally falling ever so slightly in Greece. Greece of course needs lower prices very urgently – one of the reasons for its economic downfall failure to recover is that the inflationary boom that has ruined the country after it joined the euro area has driven prices to levels that have made Greece's industries uncompetitive. Its large tourism industry is especially under strain and falling prey to the far more enticing prospects offered to tourists by e.g. neighboring Turkey. The ECB probably believes this 'lack of price stability' is bad, but in Greece's case it is just what the doctor ordered. It is of course true that existing debt will become more difficult to service, but given that 25% of all loans held by Greek banks are already non-performing, it seems unlikely that the situation can get much worse on that front. On the contrary, if Greece regains a measure of competitiveness due to falling prices, some of the currently non-performing assets may become current again.

 


 

euro-inflation

Consumer price inflation in the EU: not high enough for the ECB (Reuters / Eurostat).

 


 

For a more detailed discussion as to why the 'price stability' policy is as misguided as it is dangerous, see this previous article: “The Errors and Dangers of the Price Stability Policy”.

 


 

 

 

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2 Responses to “ECB Ready to ‘Expand its Toolkit’”

  • Crysangle:

    VAT has an amazing effect on CPI , ‘they’ could try that (again) maybe . In Spain industrial prices declined 1Q , first time since 2009 , driven by energy prices . So I am wondering how the ECB might drive up energy prices next – its a big market to move globally so if they try that method I expect it will have to be domestically with more taxes ? That is not the ECB tool kit really though , so I expect they mean devaluation of the Euro … near zero rates , balance sheet full, no real borrowing going on … no, so maybe they will go for a crisis – ‘we can’t get OMT running properly , the Euro must be worth less ‘ … but when they say tool kit and I am thinking energy for some reason the image of Praet and co. loosening bolts in an oil refinery comes to mind. Most likely they will start pulling strings across the EU and wash over the real reasons for CPI increasing . When was the last time YOU bought something for no other reason than to make sure the price of it stayed high ? You would only do that if there was some profit to be made from doing that … right ? What profit are they offering YOU for making sure you pay a higher price the next time you buy something ? They are offering you that without THEM you will be worse off . Personally though , I don’t like being threatened, and I don’t like the idea of the creation of an unfair dependence which is imposed (you have no choice in that your money will be worth less , they are dependent on your participation, you are obliged to participate) .

    • Crysangle:

      …. And four days later they ‘allow’ Spain to increase its deficit while suggesting a rise in VAT and demanding a rise in fuel tax.

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