Posts Tagged ‘deflation’

Bad Germany? Or Bad Advice From Pluto?

December 4, 2014

Germany decided to go greener than green. Weirdly, that meant increasing the production of the most polluting fossil fuel, lignite. Apparently scared by the tsunami in Japan, it also involved closing down nuclear power. Nuclear power makes zero emissions of greenhouse gases, and it’s nearly as cheap as wind power.

Thus, instead of a fast tsunami increasing sea level by fifteen meters in minutes, Germany has opted for a slow tsunami increasing sea level by seventy meters over, well, a much longer time.

OK, nuclear power has drawbacks: ever since civil nuclear power was used in the USA, nobody ever got killed or injured from it, there. (Whereas coal kills at least hundreds a month… some of it probably from radioactivity, but never mind…) So nuclear power is dreadfully boring. Hence the need to freak out about it.

Going green by going lignite, is a parable for all too many, slightly demented German policies.

All of the Eurozone is on the verge of recession, Germany has grown two percent, total, in six years. Main cause? Not enough money to make the economy turn properly. Also a despondent inner German economy. Hence the need to sell German luxury cars all over the world. OK, machine tools, too.

I used to disdain Paul Krugman’s opinions on Europe, as he was too unaware of the fundamentals, be they historical, political, or economic. However the situation has changed: he had much to learn, and he learned much. Also change did my opinion of German policy, as Merkel got ever more obstinate. In any case, I agree with all of Krugman’s well researched article, Being Bad European. Let me quote from it:

“Unemployment in the euro area is stalled at almost twice the U.S. level, while inflation is far below both the official target and outright deflation has become a looming risk.

Investors have taken notice: European interest rates have plunged, with German long-term bonds yielding just 0.7 percent. That’s the kind of yield we used to associate with Japanese deflation, and markets are indeed signaling that they expect Europe to experience its own lost decade.”

Paul has the courage to go in full PI mode. PI? Politically Incorrect, or Profoundly Investigative:

“Why is Europe in such dire straits? The conventional wisdom among European policy makers is that we’re looking at the price of irresponsibility: Some governments have failed to behave with the prudence a shared currency requires, choosing instead to pander to misguided voters and cling to failed economic doctrines. And if you ask me (and a number of other economists who have looked hard at the issue), this analysis is essentially right, except for one thing: They’ve got the identity of the bad actors wrong.

For the bad behavior at the core of Europe’s slow-motion disaster isn’t coming from Greece, or Italy, or France. It’s coming from Germany.”

Germany has a dreadful history to use its own population as cannon fodder for its plutocrats (see the 1914 German invasion and attack), and currency has a spoiler for reason (see the 1923 inflation, engineered by Schacht, an agent of JP Morgan, and later an instigator and puppet master of Hitler; don’t worry, Dr. Schacht came out of WWII, and a little Nuremberg Trial, just fine).

Here is Krugman again:

“If you try to identify countries whose policies were way out of line before the crisis and have hurt Europe since the crisis, and that refuse to learn from experience, everything points to Germany as the worst actor.

Consider, in particular, the comparison between Germany and France.

France gets a lot of bad press, with much talk in particular about its supposed loss in competitiveness. Such talk greatly exaggerates the reality; you’d never know from most media reports that France runs only a small trade deficit. Still, to the extent that there is an issue here, where does it come from? Has French competitiveness been eroded by excessive growth in costs and prices? 

No, not at all.”

One thing that was out of line with Germany, is that it mistreated its working class:

“Since the euro came into existence in 1999, France’s G.D.P. deflator (the average price of French-produced goods and services) has risen 1.7 percent per year, while its unit labor costs have risen 1.9 percent annually. Both numbers are right in line with the European Central Bank’s target of slightly under 2 percent inflation, and similar to what has happened in the United States. Germany, on the other hand, is way out of line, with price and labor-cost growth of 1 and 0.5 percent, respectively.”

Dis-information about France is great in the USA, because plutocratic propaganda knows France is the number one danger country, the place out of which the most dreadful anti-plutocratic, atheist policies emanate. But Krugman has now understood this, so he pounces some more:

“In other words, to the extent that there’s anything like a competitiveness problem in Europe, it’s overwhelmingly caused by Germany’s beggar-thy-neighbor policies, which are in effect exporting deflation to its neighbors.

But what about debt? Isn’t non-German Europe paying the price for past fiscal irresponsibility? Actually, that’s a story about Greece and nobody else. And it’s especially wrong in the case of France, which isn’t facing a fiscal crisis at all; France can currently borrow long-term at a record low interest rate of less than 1 percent, only slightly above the German rate.”

What Germany did was cutting salaries as low as one Euro per hour (completely illegal in France, where the minimum wage was at least ten times that; in 2014 Germany introduced a minimum wage comparable to France’s.)

And Krugman to conclude:

“What we’re seeing, then, is the immensely destructive power of bad ideas. It’s not entirely Germany’s fault — Germany is a big player in Europe, but it’s only able to impose deflationary policies because so much of the European elite has bought into the same false narrative. And you have to wonder what will cause reality to break in.”

It’s true that “German” policies have actually been plutocratic policies: France, Italy and Spain, together, form an economic behemoth much larger than Germany, so they could easily force “Germany” to do whatever they decided. They did not, because they are all serving Mammon.

German policy at this point is irresponsible. It is demonstrated with the numbers Paul rolls out. But there are others. Germany, weirdly, has resisted French efforts at a Banking Union (it agreed only to phase in slowly a reduced version).

The Banking Union would be similar to the FDIC in the USA: banks would be forced to pitch in what would be a mutual insurance fund. With some rules attached.

However Germany is scared that thousands of its banks are under water, so it has refused the oversight of Banking Union. This tends to show that Germany cares more about what Europe brings to it, rather than it can bring to Europe.

When Greece was in full corruption crisis, a small city in Greece was the greatest purchaser of Porsche in the world. This kind of details was viewed as good for German business, but it actually means that the Germans cooperated with the very corruption they later denounced.

So why is Germany behaving this way?

Tough German reforms were instituted by Schroeder, a “Socialist” who turned out basically into an employee of Putin. The West has known many of these pseudo-socialists, who are actually greedy agents of Plutocracy Supreme. (The latest case is the preceding “Socialist” PM of Portugal, who made millions under the table; he was just arrested.)

Schroeder squeezed German workers as much as possible. That depressed German demand, making Germany more dependent upon exportations. But it made the wealthiest, wealthier.

Same old same old: plutocrats reign.

Some will say: ”Oh, but then you agree with the Brits?” Not at all: London has arguably displaced New York as the world’s dirtiest plutocratic center. London is rich, for the worst reasons, to a great extent (not to a full extent: there are actually some good policies in England, if one searches carefully for them).

So what London does cannot be duplicated elsewhere: its unicity makes it wealthy, mostly by attracting plutocrats from all over, insuring they escape the taxman and the lawman, and any sort of decency.

Ultimately, although Krugman praises France, he did not say that France, herself probably the mightiest country in Europe, all around, could very well break out of the plutocratic mold.

What the government of the French Republic has to do is simple: just look at the European Commission in the eye, and say: ”We plan to run a 4.5% deficit for the next two years. Submit.”

Guess what?

In a break with the plutocratic tradition, this is finally just what France did. The preceding European Commissioner of Finance and Economy, a man completely sold to Pluto, bleated his approval. He was then replaced by a Frenchman, ex-finance minister Moscovici.

This whole situation is about a system of thought. It’s time to change it. Understandably, Germany does not trust its revolutionary instincts. That leaves us, once again, with France to lead the way.

Although it’s hard to imagine Hollande leading anything, his Prime Minister is more of a man. Thus, probably, the change.

Patrice Ayme’

Government Is The Employer of Last Resort

November 25, 2014

Yes, life is quantum. Generalization, generalization… What else can be generalized? Economics, of course. Traditionally, economics is about money. Guess what? Money is doing very well.

But economics ought to be about workers. Then workers will do as well as money is doing now.

A famous fact is that Central Banks are “Lenders of Last Resort”. And who are the banks lending to? The Rich. How come one never talks about the employer of last resort?

Another thing that can be generalized, is the Great Depression. I was totally right to call the present economic degeneracy the “Greater Depression”

Money Velocity Is The Worse Ever: Deflation Coming.

Money Velocity Is The Worse Ever: Deflation Coming.

Yes, worse than in the so-called “Great Depression”. That’s why Putin is angry. (All powerful and angry: a bad cocktail.)

M2 is the total quantity of money in people’s hands, or their saving accounts. The M2 Velocity, measure of economic activity, is collapsing, lower than ever seen before (I will produce a full graph over a century another time; I had a problem with my Federal Reserve account). M2 velocity predicts deflation. Samuelson discovered M2 velocity varied:

“In terms of the quantity theory of money, we may say that the velocity of circulation of money does not remain constant. “You can lead a horse to water, but you can’t make him drink.” You can force money on the system in exchange for government bonds, its close money substitute; but you can’t make the money circulate against new goods and new jobs.”

In other words, Quantitative Easing is not work (take this, Krugman!)

In the giant Inca empire, there was plenty of work, and the main employer was the government. (Things went well, until smallpox showed up, courtesy, and advance guard, of the Castilians…)

When Darius founded his giant empire, his government was the employer of first resort, building a giant road system. Later Darius switched to other forms of economic governance, including free market capitalism. The Achaemenid Empire was such a stunning success, not doubt because of the extremely activist stance of its economic governance. (Athens reciprocated in kind, with just as active private-public military industrial complex.)

Here is Paul Krugman in “Rock Bottom Economics. The Inflation and Rising Interest Rates That Never Showed Up”:

Six years ago the Federal Reserve hit rock bottom. It had been cutting the federal funds rate, the interest rate it uses to steer the economy, more or less frantically in an unsuccessful attempt to get ahead of the recession and financial crisis. But it eventually reached the point where it could cut no more, because interest rates can’t go below zero. On Dec. 16, 2008, the Fed set its interest target between 0 and 0.25 percent, where it remains to this day.

The fact that we’ve spent six years at the so-called zero lower bound is amazing and depressing. What’s even more amazing and depressing, if you ask me, is how slow our economic discourse has been to catch up with the new reality. Everything changes when the economy is at rock bottom — or, to use the term of art, in a liquidity trap (don’t ask). But for the longest time, nobody with the power to shape policy would believe it.

What do I mean by saying that everything changes? As I wrote way back when, in a rock-bottom economy “the usual rules of economic policy no longer apply: virtue becomes vice, caution is risky and prudence is folly.”

Indeed. Reason emanates from the Quantum, and what does the Quantum do, when boxed-in, with no classical way out? It tunnels out!

This is exactly why bacterial genetics can exhibit intelligent behavior (as Lamarck correctly anticipated); a changed environment changes the Quantum tunneling prospects, and can induced “directed mutagenesis”[John Cairns, Harvard U., 1988).

So intelligence ought not to be boxed in. Folly is often the best wisdom.

Economics, at this point, has been completely boxed in by the plutocrats.

Krugman again:

“Government spending doesn’t compete with private investment — it actually promotes business spending. Central bankers, who normally cultivate an image as stern inflation-fighters, need to do the exact opposite, convincing markets and investors that they will push inflation up. “Structural reform,” which usually means making it easier to cut wages, is more likely to destroy jobs than create them.

This may all sound wild and radical, but it isn’t.”

The bottom line is that there is not enough economic activity. Rather than repeating what I have said in the past, here is a new argument.

The reason interest rates are so low is that there is too much money for too little employment proposed. So money is not in demand.

If money were in demand, banks would pay for it.

So the bottom line is that work has to be created. Those who have money, the plutocrats and their agents, have no interest to create work, by investing capital, as this would make them dependent upon workers.

Instead they have increasing means, from financial derivatives to robots, to complicit central banks, and fiscal tolerance, to make money from capital without using human capital. The more they do it, the more they like it, the more vicious they get, and the more inclined they are to do it some more.

So what is the way out? Just as the government (in its role as central bank) is the lender of last resort, the government is the employer of last resort.

We are now experiencing the last resort. Thus the government needs to create employment. It can do this in two ways:

1) making it easier for business activity. Say by taking spectacular fiscal measures: as it is some corporations, typically very large pay very little taxes, why small ones are suffering from the opposite: way too much taxation. Most jobs are from the small businesses, most clout, and corruption, from the very large ones. This is a case where more democracy would lead to more economic activity, by creating a fairer market.

2) by outright paying people to work. An obvious target would be to create jobs in education and fundamental research.

Instead, our friend, the naïve, ill-advised Obama has decreased fundamental research, instead stuffing his “friends” and helpers with subsidies.

There are several promising leads with thermonuclear fusion (in part from more advanced electronics). But the government refuses to finance the research as much as it deserves (austerity for research, cornucopia for plutocrats).

Students are forced to borrow to attend ever more expensive universities. That forces them into “profitable” fields, which do not profit society at all.

The times are crying for massive investments in education, research, green infrastructure, cheap and efficient mass transportation and housing.

None of these projects can bring a quick buck. So the notion of profit is not relevant. Instead this infrastructure economy will quick-start the for-profit economy.

Is there an economy working that way somewhere? Well, yes, Switzerland. There, propped by the citizenry, the governmental economy, which is generally at the level of the canton, is very active.

Direct democracy mitigates massive corruption.

So, as Samuelson noticed, we need to go well beyond giving more money to the largest banks (Crude Men’s approach, called Quantitative Easing). We need to follow Roosevelt approach, the old synthesis of government and economy, long practiced by the most advanced civilizations, from Persia, to Greece, to Rome, to the Tang in China…

Provide people with hugely useful work. Recently the Chinese government was working on its system of grand canals. At some point, 14 centuries ago, a particular canal in that system provided three million laborers with work, all at the same time. And it is useful to this day.

The way is clear. It is the exact opposite of austerity and the rule of greedy plutocrats. Time for work, intelligence and generosity.

Patrice Ayme’

Currency Crisis In A Nutshell

August 24, 2012

INFLATION-DEFLATION IS THE PROBLEM, & COMMAND THE SOLUTION:

Abstract: A situation similar to the one we have today developed in the Third Century of Imperial Rome. Rome’s economy had outgrown its currency. There were three solutions to the problem. One was chosen by the Tang, paper. Another by the Franks, invasion.

Rome, under Diocletian, unable to grow the currency, chose the third way. Command and control of a barter economy. So, ironically, those who advocate the gold standard in the USA, such as Paul Ryan (candidate VP) are partisan of a Soviet style economy. Instead we have to make banks and financiers regurgitate the money they create just for themselves.

***

Starting in the Third Century, Rome, the world’s largest economy, was increasingly run on the gold standard. With disastrous results.

Gold Solidus: JULIAN THE PHILOSOPHER EMPEROR.

Caption reads: FLavius CLaudius IVLIA NVS (Flavius Claudius JULIA NUS) P P AVG (Princeps Populus AUGustus). VIRTVS EXERCI-TVS ROMANORVM (Strength Roman Army). (Pearl-diademed, draped and cuirassed bust right.) 

A Franco-Australian collaboration on Greenland ice cores showed that from 366 BCE to after 36 CE, a period when Rome was at its peak, 70 percent of the global atmospheric lead pollution came from the Roman operated Rio Tinto mines in southwestern Spain (that can be seen from some characteristic isotopes ratio).

The Rio Tinto mining region was the richest source of silver in Antiquity. Some 6.6 million tons of slag were left by Roman smelting operations there. Rio Tinto was exploited by slaves with extremely short life spans. It was a vision of hell, the sky was black, fires everywhere, to the horizon. The rio ran red, still does.

The Romans worked Rio Tinto until Rio Tinto was exhausted with the technology they had (shortly after 36 CE). The mine re-opened in recent times, with powerful machines replacing slaves (and ‘Rio Tinto’ is well known to precious metal investors). 

The demand for silver increased dramatically after precious metal coinage was introduced in Greece around 650 BCE (although Sparta insisted to use iron for coinage: that was paper money, Fiat Currency, Spartan style). Ionian Greece, in particular Phocaea, and Lydia used Electrum, a naturally occurring alloy of gold, silver and other metals.

Interestingly, judging from the Greenland ice cores, the peak of Roman mining pollution was in 79 BCE. That is nearly two centuries before the maximum of the extent of the Roman empire under Trajan (originally a Spanish general) and his successors, the Antonine emperors. 79 BCE was not the peak of the Roman economy, that was reached later. But it is about when Sulla became dictator. This is an important hint.

Just when the commons ran out of coinage, greedy plutocrats monopolized worth. A co-dependency pattern repeated nowadays.

The smelting of lead-bearing ore declined sharply after the fall of the Roman Empire but gradually increased during the Renaissance of the Middle Ages. By 1523 CE, the last year for the Greenland ice analysis, atmospheric lead pollution had reached nearly the same level recorded for the year 79 BCE, at the Roman peak.

So what happened? Rome used three precious metals: gold, silver, and copper. The first was used to make a coin, the Aureus, renamed the Solidus under Diocletian.

The Roman currency crisis of the Third Century was caused by Rome being, de facto, on the gold standard. The Romans had run out of the most precious metals to make small coins with. That left a currency too small for the growing Roman economy. Diluting the precious metal content of the coinage commoners had to use was no solution: it created obdurate inflation (while the gold solidus kept on being made and used for another 7 centuries, it was used only for big transactions).

Diocletian and his colleague “solved” the crisis with a command barter economy. In other words, Diocletian invented the Soviet system. So ironically, that is what going back to the gold standard would force the economy into.

Around 284 CE, the Roman economy had become too big for the amount of currency that could be created from precious metals. Emperor Diocletian solved this with a command barter economy. Even armies started to get paid in kind (say with food instead of coinage; that led to a de-professionalization of the army; soldiers had to marry and live with their families; the Franks under Charles Martel, four centuries later, would re-professionalize the army by getting precious metals in churches).

In the Seventh Century the Tang dynasty in China solved the problem in the modern way, by creating a “fiat currency” from paper notes. (It would lead to catastrophic inflation under the Yuan, six centuries later, and a reversion to metal, when the silver from Potosi became available). In the Eight Century, the Franks solved the currency problem for their growing economy by going where the Romans had not dared to go,  and seizing silver mines in Eastern Europe.

For all its grand philosophy and thinking, Athens would probably not have amounted to much, if not for its silver mines. It’s actually the discovery of a new silver mine that allowed Themistocles to propose to build a 200 trireme fleet to fight off the Persians with. Thanks to her silver, Athens could buy a lot, including wheat far away, in the Black Sea region (hence the far flung Athenian empire).

We are presently in a crisis similar to what struck Rome, a dearth of money for the real economy. Indeed,  banks have diverted money creation away from the real economy, which is starved of investments (that is money and credit, from banks, for private industry).

The situation is even worse in Europe. In the Eurozone, states are supposed to be borrowing from banks. And the banks are unwilling to lend, as they have better things to do with their money, such as investing in derivatives. The result is a dearth of Euros (relative to the size of the Eurozone economy) and an overvaluation of the euro relative to the USA Dollar.

At least in the USA, the UK and Japan, central banks create as much fiat currency as needed. it’s all backed up by the mighty Pentagon, creating a virtuous, and, or vicious circle (depending upon one’s perspective).

In early 2011, Mr. Paul Ryan, chairman of the House Budget Committee, gave Ben Bernanke, the Federal Reserve chairman, a warning: “There is nothing more insidious that a country can do to its citizens, than debase its currency.”

Never mind that France clung to the gold standard in the 1930s much longer than the USA, Britain and Nazi Germany, with disastrous results. This essay demonstrates something even more insidious that a country can do to its citizens: not having enough currency. And this is what is happening now. So Mr. Ryan is as wrong as wrong can be.

The unwillingness of banks to lend to the real economy, and the division of the economy between real and virtual makes us presently suffer both from deflation (in the real economy) and inflation (in the fake economy)

The way out is to print more, but, using command to send money that is created to the real economy and not to the fake world of derivatives and the like (as is presently happening). A good way to start is by taxing financial transactions, just like any other transaction is taxed in the real economy. The French financial transaction tax passed in France on August 1, 2012.

However banks did not fall on the heads of the French. According to The Economist, August 18, 2012, the French real estate market is still twice more overvalued than the British real estate market. In Britain, finance reigns, contributing 10% of GDP, in endless conspiracies.

And the other great temple of greedy financiers who give society meaning, the USA, sees, according to The Economist, a real estate market undervalued by 20%. Thus the real estate index is at 80 in the USA, and 145, in France.

Now remember that the wealth of common people is mostly in real estate. Hence a country where finance is repressed, such as France, sees much more wealth going to commoners than it does in the USA.

Some are sure to come up with GDP per capita at this point, and point out that the USA GDP is larger than the French. But that means nothing: a country with more traffic jams and expensive health care and education will see a big GDP, just like somebody with dilated cardiomyopathy, will have an enormously enlarged heart.

(Moreover the French GNP numbers are 10% higher than the GDP numbers…)

And it gets worse, because the French true ownership rate is higher than that of the USA. There is only that much wealth to go around (as the Gini Index observes). If most of the wealth goes to plutocrats, it does not go to the People, and vice versa.

Conclusion: The People on which the Wall Street empire reigns is naked, and that is because the financiers stole it. At least, relative to the French. Everything is relative, as long as there is life and it breathes… A Soviet style economy, as unknowingly advocated by the likes of Mr. Ryan, would bring with it the attending ominous fate of tyranny and theocracy (Stalin, Ibn Saud, Putin, etc.)

To come back to the situation in Rome, the increasing debasement of the Denarius, the common currency, relatively to the 80% pure gold Solidus could have been solved by introducing paper money. But that would have required a stronger state. It was, precisely, an occasion to get a stronger state. The Tang were able to organize a paper money currency, precisely because they had a strong state, with formidable sovereigns such as empress Wei.

Rome did not seize the opportunity to go to paper money. instead Rome went for theocracy, and its living descendants are Putin’s Russia, and various Islam theocracies, wobbling between cretinism and civil war.

And thus what the fanatics of the gold standard are proposing is actually a weaker state. It does make sense: most of the right wingers in the USA who are for the gold standard are also proposing to weaken the state.

They much prefer the jungle, and its law. 

***

Patrice Ayme

4% Inflation Best

May 20, 2010

ECB, FED, BAD.

Summary: The psychological effects of inflation are misunderstood, and misemployed, causing underemployment. Gentle inflation is best, ultra low inflation is bad and dangerous. There are philosophical, and technical, reasons for that.

Gentle, but significant, inflation stirs the economy as needed, and advantages advancing technology relative to the forces of sedimentation of the obsolescing past.

The inflation target of the European Central Bank, 1%, is way too low. The US Fed is just as bad, with its zero interest rate policy, which mostly serves its friends in the plutocracy. As it is, the zero interest rate policy does not provide money to the real economy, and other things need to be done.

One of the things to do: target inflation around 4%.

***

EURO SINKING, EUROPE RISING:

The European constitution enshrined the erroneous notion that the European Central Bank could enforce the value of the euro without worrying about the European economy in general, as if one could have a currency without an economy (the mandate of the Fed of the USA is to watch over the currency, and the economy).

This conceptual imbalance, a currency with an economic disconnect, led to an overvalued euro, while putting the Chinese economy on steroids, and allowing American plutocrats to splurge through the elaborated web of corruption they sneakily set up for themselves worldwide, leveraging themselves on the strong euro.

The Sino-American circus at the Copenhagen climate conference pretty much torpedoed decades of European evolution towards greater efficiency. It was pretty obvious that Europe’s entire strategy to switch, at immense cost, to sustainable energy and low CO2 production, was a casualty of plutocratically driven Sino-American expediency.

Europe was condemned to keep on sacrificing itself while China rips its intellectual property (example: duplicating Siemens Very High Speed trains!), demolishing moreover its industry by unfair competition, due to the undervalued Chinese currency, and the USA could keep on enjoying quasi free energy, while polluting the entire planet with its addiction to deadly fossil fuels, while rampaging militarily throughout Central Asia, looking for more, as it enjoyed the protection of the overvalued euro.

Something needed to be done. The Sino-American arrogance was enabled by the overvaluation of the euro. European products could not compete. The European economy was stagnating, and its substantial essence was invigorating Chinese and Americans, whose economy progressed by leaps and bounds.

The euro had to go down, European advisers concluded. Miraculously, suddenly, Europe observed the presence of Greece in its midst. It was always known that Greece was a desperate case, as it converted its drachma into euro at too high a rate (making the Greeks instantaneously rich and unemployed). But it had not been observed yet, as it deserved. It’s good to have a desperate case in one’s closet, to frighten the vampires with.

So now the euro is going down. Patriotic Europeans ought not to be satisfied until it reaches parity. Come to think of it, a few years as undervalued as the euro was overvalued, should do wonders for the European economy. (Let see what happens to the plutocratic USA, as it faces competition from correctly priced European products!)

This being said, the ECB inflation target of 1% is deeply erroneous. Inflation actually spurs demand: it is no coincidence that so many German products were sold to the parts of Europe with the most inflation (the PIIGS). Without that inflation, Germany would be doing much less well.

Just an example: Spain has bought Very High Speed trains from Siemens (which reach 250 mph, 400 km/h on the Madrid Barcelona line). Spain could have bought equivalent VHS trains from Alstom, the French company which is the competitor of Siemens. So now Spain has a deficit, and some Germans whine. Would they prefer Spain to have bought French trains? (By the way, the Chinese deconstructed and mass produced Siemens VHS trains, in an apparent violation of intellectual property… and now they propose to sell said stolen property to the USA).

***

THE EURO: A MINIMUM WHICH NECESSITATES MORE.

After 1,000 years of intra European wars between people who wanted too much, the meta principle of construction of Europe is to proceed minimally, as needed. No more, no less. The euro was established because one cannot have dozens of countries each with its own currency, in a small place: that was the necessity.

Another more drastic reason is that the French and the Germans (and the Benelux, Austrians and Northern Italians) do not see why they should not have a common currency, although they see plenty of reasons to have one. As far as the French and Germans are concerned, to have different currencies is as smart as having West Texas with a different currency from East Texas. But then France, Germany and the Benelux, that’s 180 million people.

So now 16 countries are in the Eurozone. More are in it informally (such as Romania). Estonia should formally join in 2011.

The euro was established as a currency, without governance, except an honorable promise, that everybody would be saintly, and keep yearly budget deficits below 3% of GDP (and 60% GDP for total state debt). That promise was broken, as soon as France and Germany found it was in their best interest to break it. At that point a crisis was certain: the magic spell had been broken. If France was going to allow a 8% deficit, Germany 6%, why should not Greece have 9.4%? After all the paragons of financial supremacy, the USA, has 11% deficit, and Britain, 12.8%…

So the crisis exploded, after the Copenhagen disaster. Greece was called a disaster, and the money manipulators scurried for their little lives, unknowingly doing the work of French intellectuals. The euro finally went down. A bit too fast, though: scary interest rates of the order of 21% on some Greek government debt were seen. It was time to slow things down.

The French have long promoted ECONOMIC GOVERNANCE. The way many see it in France, French taxes act as a subsidy for many other European powers. And not just because of the completely independent French nuclear umbrella; Britain has long behaved as a less regulated extension of Wall Street, with plenty of fiscal paradises attached to itself (Anglo-Normand islands, Isle of Man; arguably all of Britain was a tax heavens for non UK plutocrats), something that exploded in 2008: the AIG unit that cost US taxpayers around 180 billion dollars was based in London, to fully enjoy deregulation, New Labor style.

The trick to lower the euro degenerated in a sovereign debt crisis, and Europe finally reacted to it. Merkel went to Moscow to celebrate victory on the Nazis with the Russian leaders, as NATO forces paraded on Red Square in front of the Kremlin, as they should. Sarkozy cancelled, stayed home in Brussels to handle the debt and fiscal crisis, leaving French troops to parade without their president.

That was the Franco-German duo at its best: France, seconded by a trusting Germany, in command, making the Lisbon Treaty instantaneously obsolete, as required by the crisis at hand. The European Central bank was suddenly given powers it never had, and that the Lisbon constitution excluded (but which all real central banks have), such as buying bonds from member states (the US Fed has long been selling and buying its own bonds, in a gymnastics incomprehensible for those not abreast of these mysteries… but it is crucial; the Fed also bought for no less than 2,400 billion dollars of mortgages.)

France and Germany together are a superpower. Others have to join. This is how the EU works, how the Schengen Treaty and the Eurozone work.

***

CONTROLLED FLIGHT INTO TERRAIN (CFIT):

Inflation is collapsing:

clip_image002BLS, Cleveland Fed.

This is bad: should this go on a bit more, there is no way out.

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American economists ought to worry about deflation, instead of penning anti-European rants with no deep philosophical underpinnings. The European Union had deep philosophical roots, 2,000 years before there was Hitler, and he got crushed, he and his fascist racist ideological company. As soon as Germany and France became again politically identical, there was no reason left for the Verdun Treaty’s partition (August 843 CE). So now we have a united Europe, and American economists should worry about depression in the USA, not worry about fostering disunion on a continent far away, in the apparent hope that the USA will triumph once again.

Uncontrolled deflation is flight into terrain, and low inflation targets invite it. It is clear to me that the 1% (!!!!) inflation target of the ECB is a philosophical, and technical mistake. Recently the ECB was congratulating Estonia for having achieved that target: bad.

First technically: inflation can be controlled, by rising interest rates. Once Carter had nominated Volcker to crush inflation, Volcker was able to do so by rising interest rates to 23% (causing 2 recessions and making Carter lose the election).

Deflation cannot be controlled, though. A simple analogy: in a plane, if one is high enough, one can go higher. But if one has gone down too much, one crashes into the ground. A plane can fly higher, but a plane cannot fly underground. Economists need to be brought back to earth safely.

To pursue the aeronautical analogy, an economic bubble is like a stall for a plane: one goes up too high, too fast, forward motion in the medium becomes insufficient, lift disappears and one falls.

Forward motion, in economics, is real progress made into the physical world (some of it Sisyphus style, as in repairing potholes, curing the sick; some of it grandiose, as when switching to new, more advanced technologies, some of it necessary as in teaching the young, and the deciders). The economy, as the plane, needs to provide lift, lest it crashes (the world economy is the largest machine, and, as all machines, it can fail). When the Soviet economy failed, lifespan, health, income and creature comforts collapsed. Economy is not just about profits, contrarily to what plutocrats think (supposing they think)

There is another more subtle effect illustrated by the aeronautical analogy. Applying the full power of zero interest rates when already crashing from a bubble gone wrong, can make the situation worse.

There was a strange crash of an Airbus A 330-200 in Tripoli, with a fatigued, sleep deprived crew, facing the rising sun, with a foggy mist on the ground. The pilots apparently mistook all too long the desert for the runway. After removing the last safeguards of the plane’s computerized brain, they came next to the ground, realized their error, and applied, too late, the full power of the Airbus, which is enormous. The plane reared steeply, more than 20 degrees, said the captain of an Alitalia jet behind, and roared up. But its tail hit the ground hard, tearing from the rest of the airframe. Still dragged fiercely by the engines at maximum power, the jet pitched down, and drove into the ground, pushed by its engines, disintegrating into remarkably tiny pieces.

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Controlled Flight Into Terrain. What happens when you apply maximum thrust while crashing into the ground (A 330-200, Tripoli, May 2010).

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Morality: if one has already started to crash into the ground, applying more power will only cause further damage.

Translating this analogy to economics: in a free market, fractional reserve banking system, the maximum thrust is given by the zero interest rates policy. The more one lowers interest rates, the more banks can lend (since they get money at zero interest, free money, from the state). Fine, that’s the theory. But to who do they lend, and for what? Absent government control, they will do what they have done best lately.

Unfortunately in the present morally corrupt system, the banks look for the strongest profit, for themselves, and that is not obtained by investing to optimize the real economy. Instead publicly financed private banks invented a casino in the sky where they attribute each other imaginary profits.

Thus, the stronger the banks, the more they do what they do best: giving to their friends, to their politicians, past, present and future, indulging their addiction to derivatives, shadow banking, and various other conspiracies between each other, to create fake profits, while the central banks shower them secretly with free money.

In other words, the lower the interest rates at which the central bank gives money to the banks, the more the banks do exactly what caused the crash. Or rather, the crashes: the financial crash of 2008, and the slower and more formidable crash of the entire social and economic system of the West (which has been going on for more than a decade).

This is true in Europe, where the enormous "private" financial institutions fed the economic imbalances of the PIIGS (Greek GDP per head is way higher than Greek earnings, through borrowing and subsidies). Thus the real economic and fiscal problems of Europe have nothing to do with not providing low interest rates (they are nearly as low as they can get), rather the opposite. The same holds in the USA.

Instead, the economic and social problems arise from the moral values of the main economic actors, what they do, and the activities which have been encouraged, creating imbalances, but mostly a lack of forward lift (hence the Tea Party, the return to no government, the early Neolithic).

Forward lift in economy is provided by better (more powerful, efficient, ecological) technology (necessary, as the old resources and methods get exhausted). So, to sustain the economy and the way of life, one needs to provide continually better, more complex, technology (this flies into the conception of Tainter that higher complexity kills; instead, it saves lives, and provides economic lift).

How does one provide more advanced, more complex technology? Well an ever more advanced thinking system is one necessary factor, dire need and regulation are others. One can even get a little help from the free, for profit market free enterprise as in Silicon valley, where greedsters mix with inventors to produce gadgets.

But INFLATION ITSELF CAN HELP TECHNOLOGY BY MAKING THE GENERAL POPULATION THIRSTY FOR INNOVATION.

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INFLATION INFLATES THE DESIRE FOR BETTER TECHNOLOGY:

Inflation advantages the implementation of more advanced technology, because inflation forces people to continual reevaluate their old habits.

Conventional economic theory has it that people look for the cheapest product, or for better products, or a mix of these characteristics. Right. But, before looking, people have to WANT TO LOOK. Or have to be FORCED TO LOOK.

Conventional economic theory has forgotten that detail: if consumers don’t need to bother, they may well not bother. Inflation is a spur that forces economic participants to look, and makes actually the entire public into savvy , even philosophical, economic participants, lest they drown in rising prices.

Indeed, old habits depend upon old values, and old consumption patterns. When inflation permeates the economy, all prices rise, and create a dynamic ecology, by changing continually the environment, forcing speciation of new technology, that serve new habits. It is exactly what happens when speciation in biology is forced by environmental changes.

Increasing prices force people to continually look afresh at whether their old habits are WORTH IT. People see the costs and prices of what they used to like go up, and they ask themselves: why not to try something else?

Often they find the old less worthy than the new. How? New products depending on higher technology benefit from automation and simplification of production. The latest TVs have very few parts, several orders of magnitude less than the old ones, and this is true over all of engineering. Hence the prices of the most modern products rise less. Some will say that the price of these products and services would go down in a zero inflation world, and it makes no difference. Sure, they would go down, but there is a difference.

Te point is that consumers do not have to look at the costs of the new products and services, so they may, and will, ignore them, MUCH MORE than in a world where the products they are used to rise in price.

Also, as inflation works its magic, people will question MORE paying through the nose for traditional, hence less efficiently provided products and services. Basically a good measure of inflation forces the hand (manual labor) to compete with the mind (intellectual labor), and the hand is found wanting.

Gentle inflation continually swirls the economy, for higher performance.

1% inflation target is a clear problem: it risks to forever extend the Great Depression we are in. For all the preceding reasons, 4% ought to be the inflation target. This is not enough, but it will help.

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PA

P/S: A well known interest of gentle inflation is that it makes sovereign (government) debt manageable, through nice and easy default, compensated by increased economic activity. This is all the more necessary since the present austerity packages will only make the deflation worse, and are untenable, if not compensated by significant inflation (which will have to be engineered by government programs, as during the New Deal, or with the help of national banks as in India or China; clearly these examples show what needs to be done, in the West, again).

Inflation can be compensated with subsidies for the poor, as France did in the pre-Trichet era (Trichet was head of the Banque de France for 10 years or so before becoming ECB head, and is an anti-inflation hawk of the excessive type).

PA