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

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William Black, PhD
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Reprinted from neweconomicperspectives.org

The troika (the EU Commission, the ECB, and the IMF) are flirting with throwing the entire eurozone back into a third Great Recession and much of the periphery into the continuation of the Troika Depression. For nations like Greece, the current Great Depression is now more severe and longer lasting than the Great Depression of the 1930s. The New York Times and the Wall Street Journal'sjournalistic malpractice in covering the troika's gratuitous infliction of misery upon the people of Europe has been the perfect side dish to complement the troika's toxic economic malpractice.

Both papers are aflutter today with news that the Eurozone fell into deflation. We have been trying for months to explain that there is nothing magic about the harm caused by deflation (as opposed to very low levels of inflation). We have also been trying to explain for years that the steadily declining rate of (already inadequate) eurozone inflation is most important as a symptom rather than a cause of the harm resulting from the troika's infliction of austerity.

The key fact to understand, which the troika, the WSJ, and the NYT have obscured for six years, is that if inflation were to rise from one percent to four percent in the course of a recovery from a recession that would be excellent economic news because it would spur growth. If inflation were to fall from one percent to one-half percent that would be terrible economic news. Well before the inflation rate becomes negative (deflation), material falls in the (already too low) inflation rate indicate that demand is seriously inadequate and that the economic recovery can be improved by fiscal stimulus. The fall in inflation is one of the symptoms that the demand is inadequate. The fall in inflation is also a problem -- long before deflation -- because it can further weaken the already inadequate demand for goods and services.

This means that it is critical for nations (and the troika) to act vigorously when an economy is weak and underperforming. The government must act long before deflation sets in to provide the inadequate demand and not allow the inflation rate to continue to fall. The stated rationale for the ECB and the Federal Reserve's inflation targets reflects the facts that I have just explained. The ECB, therefore, should have been acting vigorously two years ago to restore demand under its own written standards. Instead, as I have explained, Mario Draghi, the ECB head, dithered and even claimed that rapidly falling inflation that was approaching deflation was actually a (quack) cure that would spur recovery. Draghi has now changed his tune, but not his dithering.

The NYT Reaches a Belated Epiphany about Demand for Goods and Serices

In fairness to the NYT, its story on deflation marks a sea change in one major arena. The NYT now concedes that "the eurozone's fundamental problem -- [is] a dearth of demand from businesses and consumers for goods and services." It only took six years for the NYT, which bills itself as the Nation's best paper, to rediscover basic macroeconomics known for 75 years. As I just explained in an article about the writer who is the WSJ's "Chief European Commentator," the WSJ continues to deceive its readers about the facts of the eurozone crises, economics theory, and economic experience. Relative to the WSJ, the NYT has finally shown real progress.

The NYT still falls into the trap of believing that deflation (as opposed to very low inflation) is somehow a magic threshold where damage to the economy suddenly increases. At the beginning of the article this statement is made as if it were an undisputed fact.

"When deflation takes root, consumers tend to delay purchases because they expect prices to fall further. Corporate profits sag, and companies are forced to dismiss workers. Deflation also raises the cost of servicing loans in real terms, putting stress on borrowers and their lenders."

Well before "deflation takes root" very low inflation begins to cause the problems described by the NYT. The reality is a continuum. Persistent, significant levels of deflation are more destructive than very low but still positively low levels of inflation. We should never allow an economy to get close to deflation. It is beneficial to intervene with effective fiscal policy well before deflation arrives.

The NYT article is internally inconsistent on this point. Near the end of the article they get it right, but even then they treat the inconsistent statement as simply the view of one party (albeit a member of the troika).

"Well before eurozone consumer prices tipped below zero, the region's low inflation rate had been raising alarms.

Economists with the International Monetary Fund warned early last year that the difference between ultralow inflation, which they called lowflation, and outright deflation was mainly a matter of degrees, as the weak price pressures could 'scupper the nascent recovery and pressure the most fragile countries.'"

The IMF, among the world's most rabid inflation hawks, finally made this concession in 2014. "Well before" the IMF admitted the point, it was a broadly held view among economists.

In the context of a pathetic "recovery" from a gratuitous Second Great Recession and the continued Troika Depression, significantly higher inflation in the eurozone would not simply be non-harmful it would be highly beneficial. The NYT article begins with a passage that is written in a manner that leads readers to believe that the choice facing the Eurozone is between two evils -- hyper-inflation and deflation: "the classical definition of deflation -- a widespread, protracted and self-sustaining decline. The condition may be even more debilitating than runaway inflation because it is difficult to reverse." But there is no such choice in the eurozone's context. Significantly higher inflation rates (e.g., 4%) would be highly beneficial to Europe in this context.

The Troika Depression

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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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