Bottle the Inflation Monster!

by niamh on April 3, 2012

Do you know what the ECB does? It fights the Inflation Monster! Which used to rampage around in some indeterminate quasi-Dickensian era (evidently standing in for ‘the past’). Hilarious video is here.

Because ‘Lower interest rates generally spur economic activity, while higher interest rates slow inflation down’.

Now I know that these materials are produced for educational purposes and they aren’t going to get too complicated, and the mandate of the ECB is inflation-targeting. But reading them, you might be left wondering where this economic activity was to come from, what generated demand, how growth comes about. You wouldn’t easily pick up that interest rates are currently at extraordinarily low levels in the midst of a savage economic downturn (recession in Ireland, Greece, Spain, and Portugal), or that there are big debates about how monetary and fiscal policy link together. Nor would you get much insight into the problems entailed by having a currency union with a central bank that can’t pool lending risks or act as lender of last resort to governments, but which has taken on this role for the private sector through an extraordinary surge in liquidity provision, since keeping banks solvent is less politically controversial.

Furthermore this seems to me to play once again into the view that ‘economics’ is technical and has right answers, while ‘politics’ is emotive and contested, so students of the EU don’t have to talk about it.

Q: ‘What is the meaning of life, the universe and everything?’
A:  ’<2%’.

It seems – it is – a very long time since Helmut Schmidt famously stated that ‘five percent inflation is easier to bear than five percent unemployment.’

{ 20 comments }

1

Bloix 04.03.12 at 1:32 am

Has David Graeber seen this video? It explains the reason for the existence of money with the barter myth. Without money, “How would a baker pay for a haircut? By offering the barber some bread.”

This is one of those educational aids that is designed to make you stupider than when you started.

2

Bloix 04.03.12 at 1:35 am

And that power point is marvelous:

‘But euro area inflation is expected to come down (to below 2%, within the
ECB’s “comfort zone”) due to slow growth and high unemployment.’

High unemployment – sounds mighty comfy to me!

3

ECBad Boy 04.03.12 at 8:34 am

The visuals are ok. They just need a complete rewrite of the script. Remix time!
What remixes you all would like to see?

My pick: the youth of a possible future learn how a reformed ECB combats income inequality by whole heartedly engaging in fair and therefore firm taxation of the “<2%" a.k.a. the "1%". The "inflation monster" is recast as the "tax haven monster" and his pal the "tax planning monster". The historical backstory tells the sad tale of the impoverished life prior to new and radically courageous redistributive welfare state policies and a basic income provision for all. High five!

4

John Quiggin 04.03.12 at 10:09 am

Hard to believe the ECB can survive much longer, but still seems immovable

5

bert 04.03.12 at 10:10 am

6

bert 04.03.12 at 10:19 am

[ context for the above:
“Lord Wolfson is offering a prize for turning an omelette back into its constituent parts.” http://www.ft.com/cms/s/0/16d19598-fb2f-11e0-8756-00144feab49a.html ]

7

bert 04.03.12 at 10:36 am

8

Neville Morley 04.03.12 at 10:56 am

With production values like these, and all that lovingly-crafted generic Euro-English, who wouldn’t be convinced?

Actually I don’t know why they didn’t just record an alternative soundtrack to the scene from Downfall like everyone else does…

9

niamh 04.03.12 at 1:05 pm

If the ECB lasts that long, Jurre Hermans clearly has a great future in European central banking. Watch that boy.
Great links.
We all devoutly hope we won’t have to have a ‘Downfall’ moment of course.
Meanwhile, I vote for ECBadBoy’s filming of Alternative Reality EU.

10

Random Lurker 04.03.12 at 2:27 pm

At first I tought it was parody, and I tought it was very good parody…

:°( [weeps]

11

mpowell 04.03.12 at 3:21 pm

What is the chance that the ECB charter is changed to include a dual-mandate? Is anyone talking about this at all?

12

Steve LaBonne 04.03.12 at 3:35 pm

It’s tragically ironic that almost everything we might think of as the post-WWII “European project”- once a model for the world- is going to be destroyed by the misconceived Euro experiment.

13

bert 04.03.12 at 4:46 pm

There’s also Roubini’s op-ed in today’s FT:
http://www.ft.com/cms/s/0/dc5be3fa-7cac-11e1-8a27-00144feab49a.html
The “foreign exchange trading corridors” strike me as an insanely generous handout to the currency markets. If the whole purpose of your plan is to substantially reduce the value of a group of selected currencies, then a declared open-ended commitment to cushion their drop at public expense by buying said currencies above market rates seems extremely rash.

Sorry for focusing on breakup, Niamh. It’s not what I want either.

14

bert 04.03.12 at 5:49 pm

bq. What is the chance that the ECB charter is changed to include a dual-mandate?

Zero.
The Germans are having austerity written into other people’s domestic law. They are not about to let anyone near the ECB mandate. For a Bundesbanker the dual mandate means imprecision, laxity and asset bubbles. Given that Alan Greenspan’s fans could fit in a phonebox, it would take a lot more hard evidence over a much longer period to even begin to sell the American model.

15

JustBob81 04.03.12 at 8:33 pm

The scenario laid out in this video from FT

http://www.ft.com/intl/cms/s/0/161839c0-7cd2-11e1-a676-00144feab49a.html#axzz1qukoMjFz

of a Germany only recovery followed by inflation followed by monetary tightening seems depressingly likely. At this point, the whole Euro project is like being in a bus whose driver is compelled to run into the first brick wall he sees. You’re OK for now, but it’s just a matter of time, and it’s a pretty depressing trip to be on in the meantime.

16

Jeffrey Kramer 04.04.12 at 11:59 am

I believe it was F. H. Bradley who defined economics as “the finding of bad reasons for what millionaires want the rest of us to believe by instinct.”

17

Memory 04.04.12 at 11:33 pm

It is sad to be linked to this charming video right after reading this. (My apologies if the link fails to embed properly.

Yes, it is inflation that always harms poor people on fixed pensions the most.

18

jared 04.05.12 at 2:30 am

My favorite part: “It seems that the less well off are always hurt most by inflation”…. yea, not the creditor class who the ECB really cares about

19

Tim Hicks 04.05.12 at 5:50 pm

Hilarious video!

Quite apart from any unemployment-inflation trade-off, I wonder if there is another reason to ditch <2%. Isn't a higher inflation target just good sense when you are operating a monetary union in which its constituent parts are periodically going to be required to engage in internal devaluation (and there are downward-sticky prices)? I mean, you'd think they'd want a higher target just to be consistent with the internal logic of the system they operate (in).

20

bert 04.08.12 at 2:26 pm

Just out, this call to abandon the dual mandate.

Apparently, the Fed has been politicised.
The way to fix this is to entrench its control over monetary policy while restricting its freedom to pursue anything other than price stability, we’re told.
As you’d expect, the author is an economics professor in Chicago.

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