It’s a Good News-Bad News Situation.

So the bad news is, even the German economy is now struggling. The good news is, now that German inflation has gone off a cliff, the ECB might take some meaningful action.

Eurozone inflation goes off a cliff.

More importantly, German inflation also goes off a cliff.

We are now going to see Jens Weidman’s commitment to low inflation tested. Has his opposition to monetary stimulus been purely a cover to get the best possible policy for Germany at every stage, or does he genuinely believe that it is ineffective and the wrong policy? If the ECB `suddenly’ , after years of rising unemployment in the periphery, that monetary stimulus is appropriate, it exposes the fact that it was pretty much just ignoring the needs of the periphery to help the Germanic Bloc to force through reforms that they wanted. If it refuses to do anything as Europe slips into yet another deflationary recession, then it exposes itself as grossly incompetent, but at least not malicious.

Its a bit of a Morton’s Fork for the Bundesbank. If it now supports monetary stimulus, and it successfully raises demand in the Eurozone, it will be very hard to take it away before the periphery is out of trouble. If it refuses stimulus, it gets to watch the european economy continue contracting.

My own bet is that the ECB will do nothing, at least at first, and when the stock market realises it has wrongly assumed that, when push came to shove, the ECB would follow the other central banks, then European stocks will be crushed.

Meanwhile, in the background, the Bank Of Japan has crushed Keynesian orthodoxy. The question of whether an economy with long and entrenched deflation can get out of its `liquidity trap’ whenever it wants just by announcing that it is going to, and will print unlimited quantities of currency in order to hit its target. All hail Scot Sumner. Because he was right.

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About worldofinterest

I know I live in my own world, but I like it: they know me here.

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