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EU Deflation Arrives and the Troika Continues to Fiddle While the EU Burns

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The NYT also, albeit after six years, put in print what we have been saying for years -- the unemployment rates in the periphery are at or beyond Great Depression levels.

"[I]n the second- and third-largest of the eurozone economies, France and Italy, the jobless rates climbed, with Italian unemployment reaching a new high of 13.4 percent.

And in Greece and Spain, about one-quarter of the population remains without work, a level consistent with economic depression."

Three supplementary facts are important. Italy's 13.4% unemployment rate is a Great Depression level -- and it is rising. The Troika Depression in Italy, Spain, and Greece has lasted longer than the Great Depression in some of those nations. One hundred million Europeans -- one-third of the eurozone's total population -- live in these three countries. The fact that the Germans insist that the troika treat such a catastrophe as acceptable -- and the willingness of the troika to agree to inflict these cruel and economically illiterate German diktats upon the people of the periphery -- is a disgrace.

The NYT Mentions EU Fiscal Policy

The NYT finally also mentioned fiscal policy and pointed out that monetary policy is typically ineffective in the circumstances of the eurozone. While both points are obvious ones taught in the first semester of economics and six years is a long time to ignore such obvious points and the critics pointing out the NYT's glaring errors, the NYT is still far ahead of the WSJ.

"The central bank has an official goal of trying to keep inflation at just below 2 percent -- which it considers an optimal level for a healthy economy. But the bank has not met that target in two years.

Japan's experience in the '90s showed that traditional monetary policy instruments are largely ineffective with nominal interest rates at zero, as they essentially are now in the eurozone.

Another way to address the problem might be for eurozone countries to drop their insistence on balancing budgets and to instead use tax cuts and public spending to create demand."

The quoted passage could certainly be improved. Explaining why "inflation at just below 2 percent" was considered "optimal" by the ECB -- even when the eurozone economy is vibrant -- would have aided the reader greatly. It would have required the NYT to explain why low levels of inflation are not simply "not harmful," they are actually helpful. Had the NYT explained why even the ECB -- one of the world's looniest inflation hawks -- considered inflation in the two percent range "optimal" would have required the NYT to explain the harm that very low levels of inflation cause well before deflation occurs.

Explaining why the ECB had failed -- for two years -- to meet that inflation target -- would have been of great benefit to the readers. The troika is so dedicated to the faith-based economic malpractice of austerity that it has consistently violated its own standards on maintaining adequate inflation. The troika's refusal to follow its own rules has led the eurozone recovery to stall and caused immense, gratuitous harm to the people of Europe. It has also created, gratuitously, a material risk that the eurozne will sink back into a third Great Recession and that the Troika Depression will continue in much of the periphery.

Yes, monetary policy is typically ineffective in these circumstances, but that is not because interest rates are "at zero." Raising interest rates would not make monetary policy effective. The obvious, well understood policy response to a problem of insufficient private sector demand is to provide public sector demand to fill the gap. Fiscal policy is not "another way to address the problem" of insufficient demand -- it is the proven way to do so. The related obvious response to mass unemployment is to have the public sector provide a jobs guarantee (another example of fiscal policy).

The NYT Still Accepts a German Fable as Unquestioned Fact

The most disappointing aspect of the NYT article is treating the following German claim as if it were fact rather than fiction.

"Jörg Krämer, chief economist at Commerzbank in Frankfurt, on Wednesday defended the German view, saying that the danger was being overstated in light of the debt overload that was behind the global and European financial crisis that developed in 2008."

"Debt overload" was not "behind the global and European financial crisis that developed in 2008." The global and financial crisis was a problem of massively overstated asset values that were often concentrated in a few systemically dangerous institutions (SDIs) that also took on off the charts liquidity risk through suicidal leverage ratios. Much of this massive overvaluation and extreme leverage occurred because doing so maximized the "sure thing" guaranteed to make the CEOs of the SDIs that led the three most destructive epidemics of accounting control fraud in history immensely wealthy. The German story of "debt overload" as the cause of a global crisis is a fable.

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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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