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

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Reprinted from neweconomicperspectives.org

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."

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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.

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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.

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http://neweconomicperspectives.org/

William K Black , J.D., Ph.D. is Associate Professor of Law and Economics at the University of Missouri-Kansas City. Bill Black has testified before the Senate Agricultural Committee on the regulation of financial derivatives and House (more...)
 

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