Reply To: Inflation in the EU, Austerity in Greece, and other Fed Miscellaney


The chart of monetary aggregates from the ECB shows that M1 growth rates were above 10 percent from 2003-2006 and then fell as the ECB tightened which triggered the financial crisis in Europe. The growth rate of M1 then increase from near zero in 2008 to nearly 15 percent in 2009 and then slowed until 2011. Since then it has increased from around 2 percent to around 8 percent in 2013 before falling again to around 5 percent currently.

The claim that this degree of monetary inflation was insufficient to revive the European economy should be given no more weight than Krugman’s similar claim about Fed inflation in the USA. Moreover, I don’t know exactly what your antagonist is referring to by “legal restraints” on the ECB, but in practice there are no actual “legal” restraints on government agencies since the government itself writes the law. If he’s just referring to the mandate to keep price inflation near the target of 2 percent, then he is mistaken. This is no more a constraint on the ECB than the same mandate is a constraint on the Fed.

In any case, neither did nearing the 2 percent target correlate with tightening of monetary policy nor lower than 2 percent correlate with expansionary monetary policy. As the growth rate of M1 slowed from 2006 to 2008, price inflation rose from 2 percent to 4 percent. Then as the growth rate of M1 rose from 2008 to 2009, price inflation fell from 4 percent to near zero. Then as the growth rate of M1 fell from 2009 to 2011, price inflation rose from near zero to 2.5 percent. Even though price inflation was already above its target of 2 percent in 2011, the ECB increased the growth rate of M1 from around 1 percent to 8 percent in the middle of 2013. Currently the rate of price inflation in the Euro is near zero percent. So, the ECB target is no barrier to further monetary inflation.

Here are statistics on Greece’s fiscal budget:

Take a look at the article by Selgin, Lapstrates, and White on the performance of the Fed:

The alleged improved performance of the Fed after WWII doesn’t include the recent housing boom and financial collapse. The excellent performance of the economy in the late 1940s and 1950s was caused more by the reconfiguration of capital investment and employment in the face of the giant rollback of the government from its wartime levels than to Fed policy. The great moderation from the mid-1980s to the mid-1990s was not caused by Fed policy at all, but instead was the result of the re-establishment of the dollar as a world reserve currency. Finally, the performance of the Fed is measured by reduced volatility of GDP. But chronic monetary inflation and credit expansion can lead to stagnation of GDP instead of volatility. This is what we’re experiencing currently with the Fed’s massive inflation of the monetary base during the downturn, which (contrary to your antagonist’s claim about what ABCT implies) is not starting another boom but adding to the uncertainty of the economic climate for investments in the future resulting in a dearth of investment today.