David Beckworth asks whether Germans hate inflation more than bailouts. That is indeed a difficult question.
First of all, I completely agree that looser monetary policy in the Eurozone is necessary. Not only because it facilitates the adjustment in the periphery as Ryan Avent has correctly argued. More importantly, as I have repeatedly written (in German, though) aggregate demand is almost 10% below trend – and falling. So despite my recent claim that ECB policy seems to be right for Germany, it is a disaster for the Eurozone as a whole.
Why then does Germany resist more expansionary monetary policy? First, because many people in Germany think that the ECB policy is already highly expansionary – despite the fact that the inflation expectations for the Eurozone beg to differ, let alone the NGDP data above (albeit, German inflation may be on the rise):
Second, the German approach to inflation is shaped more by diffuse memories of having lost savings twice in the last 100 years than by economic science. These memories seem deeply embedded in the national psyche – even though people who witnessed the first instance are in their nineties. That inflation per se is not a good criterion and shouldn’t be the benchmark for monetary policy would sound outrageous to German economists.
Third, even if the Germans themselves were indifferent as long as their wages increased likewise, this is not primarily a democratic process. European policies are negotiated behind closed doors, always have been, and the politicians themselves are influenced by their economic advisors – and the economic consensus in the public debate and press. The main economic adviser of the German chancellor Angela Merkel is a student of Axel Weber, the president of the German Central Bank and a well-known hawk. What is more, the directors of the main economic research institutes, who are the primary economic commentators in Germany and mostly labor or public economists, can legitimately be described as hawkish, as can the press (especially the FAZ). There is no Brad DeLong in Germany, let alone a Paul Krugman or a Scott Sumner. Sigh.
It is rumored that during the bailout negotiations, Germany made a deal with the other Eurozone countries that in exchange for German money, Trichet’s successor in October will be no other than Axel Weber. You just gotta love Paul Krugman for phrasing what that means:
If you are looking for someone who is aiming for zero inflation while unemployment is rising to 13%, then Weber is definitely the right guy.
Angela Merkel is still reluctant to make it official and in fact, she is my only hope because she is smart and because she may decide that it is easier to sell a non-hawkish ECB president to the German public than another bailout. But for the time being, Germany seems to have made a deal that indeed suggests: we hate inflation even more than bailouts.
This would be the worst possible deal for the Eurozone that Germany could have made: The bailouts prolong the crisis without putting the burden, where it should be put: on the bondholders. And yes, these are in part German banks and insurances. The contractionary monetary policy on the other hand forces the periphery in an already suboptimal currency union to adjust even more than what would otherwise have been necessary with an adequate monetary policy. Or as Ryan Avent puts it:
The only thing worse than a suboptimal currency area is a suboptimal central bank to go with it.
PS: Thanks again to Ryan Avent for adding this post to his Link Exchange. David Beckworth answers on a lighter note with a Youtube video. The Money Demand links as well.
Could as well be kind of cleverness:
Most of the German savings are denominated in EUR, but not all are invested in the periphery. So while inflation will hurt almost all savings, prolongation of the crisis might only hurt part of it?
@ jopa
I doubt it: an adequate ECB policy would raise growth expectations around the Eurozone, make defaults less likely and thereby also benefits the German saver – and more so than inflation could hurt him. Not all savings is in fixed-income contracts. Some of it are shares, partly from all over Europe. But we are guesstimating here…
Kantoos,
I’ve really enjoyed arguing with you.
Nur um klar sein, ich bin American, teil polieren. Ich fühle mich als Deutscher ist eine wichtige Sprache. Vor allem, wenn wir sind Nachbarn. Aber ich habe Ihre monetären Überzeugungen und hoffe, wir können Freunde sein.
Mark
Kantoos argues here, that a loser monetary policy would benefit the periphery in this so called “Eurocrisis”.
He argues against the hawkish Axel Weber becoming ECB President.
Let me just say a few things why I believe Kantoos is wrong, in the first instance, but right in the second, in my humble opinion.
If we want to help the periphery countries, we should do two things in this so called “Eurocrisis”:
(1)Let the European Bail Out fund (EFSF) buy, on the open bond market, periphery country debt until yields fall back to just about a touch higher than Bund yields. As kantoos rightly argued here before, there is not a lot available to be bought in the open market, and a massive buying operation by the EFSF would immediately raise bond prices and lower yields.
(2) Lets abolisch Credit Default Swaps, which are used by speculators to drive up bond yields. That is done by making panic in all financial papers in Europe, which seem to be colluding in the attempts of hedgefunds to drive up yields.
Three benefits would accrue:
1) Lower bond yields, which save periphery countries stacks of money when refinancing their debt, which provides the same effect as loser monetary policy
2) The end of the “Eurocrisis”, which is currently defined by high periphery country bond yields
3) The steep decline in the value of Credit Default Swaps, which would bring large losses to hedge funds.
So, this policy, here proposed, has the benefit of providing loser monetary policy to the periphery countries, by lowering bond yields. Kantoos pointed out before that a lower interest rates would be inappropriate for Germany, as it is close to its NGDP trend line. So the three steps above would provide what kantoos is seeking for, loser monetary policy for the periphery, whilst leaving rates high in Germany.
The second point, about Bundesbank President Weber becoming the new ECB President. That, I would think, would be inappropriate, as kantoos does. However, I have a different reason:
Weber belongs to the circle of advisors who helped Chancellor Merkel to steer through the Eurocrisis. Almost anything which was provided by these advisors made the crisis worse, rather than better. That helped hedgefund investors make large profits on the rising CDS prices on periphery country debt. He should go, along with the other advisors to the German Finance Ministry or Chancellor. He should certainly not become ECB President.
@ kantoos:
As I said, it *could* be a kind of cleverness. In the end, it all depends on if the positive growth effects of an “adequate” (i.e. inflationary) monetary policy overcompensate the losses caused by the same. As we do not know the average private indivual’s portfolio nationwise, we can indeed only resort to educated guessing. Actually, it was not my intention to take on any different position, but just to remind you of that portfolio effect.
If Axel Weber becomes the head of the ECB needless to say I will take an entire day off in a state of depression. Please God (of the Christians) let a better choice be chosen.
@ Kantoos
Reading your post I encounter different statements which I doubt adhere very well as an argument regarding your question:
1) Indeed, the question why Germany (the Germans) resists more expansionary monetary policy than the one presently executed by the ECB may have something to do with their beliefs about the causes of inflation and thus be a valid explanation, if they hate inflation. But it does not contribute to the question whether they hate inflation MORE than bailouts.
2). Of course one can argue that a looser monetary policy of the ECB is necessary for the Eurozone as a whole. But any argument in favor of this position does not contribute to the question at issue. Neither does it help to point out that the aggregate demand is almost to 10% below trend.
2) If one ponders over the German’s attitude towards inflation, it is misleading to exclusively refer to the “national psyche”. I would rather point to the high rate of savings that goes to capital life insurance (as against ownership in stocks) whose payout value very much depends on inflation. To understand this one does not need to have WITTNESSED inflation. It is sufficient to draw the simple correlation between the payout value of a long running capital life insurance and the rate of inflation in order to know what one has to EXPECT from inflation.
What you seem to argue for is that Germans should accept a looser monetary policy in the Eurozone with benefits for the whole Eurozone AND as a possible or likely consequence a somewhat higher rate of inflation in Germany.
Here my answer to the stated question, not more than conviction:
If they had to decide, the vast majority of Germans would opt for bailouts instead of inflation provided it would be bailouts that do not show up when they are counting their savings.
@ Dietmar
As said, it is a difficult question: the rumoured deal (bailouts in exchange for the ECB position) seems to suggest that they hate inflation even more than bailouts.
My argument about Eurozone NGDP was just an introductory statement for a post about German hatred for inflation.
Your arguments about life insurances is much more difficult than you suggest: if these insurances consists of European government bonds that are unlikely to be repaid, unless you have an adequate monetary policy that might include some more inflation in Germany, than inflation might be a better choice.
Finally, bailouts in the current form do not seem help at all. So what you are saying is: lets opt for a completely useless policy (bailouts) while running an inadequate monetary policy that makes default more likely (!), ruins the Eurozone economy, but at least, we have 2% inflation instead of 4%… Does not make much sense to me.
RE:What hurts German savers more inflation or some default, the answer is very clear, once you KNOW the portfolio roughly, which people living here usually know.
It is inflation.
Roughly 5% of all Germans own stocks – mostly people who can afford to lose some money on it-, maybe less today as this number is a few years old and people scaled down after the New Economy crash, so I would expect the same from the current crash. Apart from real estate, the dominant form of saving are life insurance products. They have a minimum rate of return, that will be hard enough to produce. In this case it is quite likely, that the saver in case of moderate defaults is quite well isolated. Only when Allianz etc. are bankrupted, the return will be reduced.
Of course the single most important form of “saving” rather than saving is the public retirement fund, which would profit from growth in the periphery, but the FIRE industry is at least within the politically interested milieu quite successful to make people underestimating what share of their future retirement income will come from this source.
@ Martin
Well, the life insurance products themselves consist of what? Up tp 35% stocks. I am not sure the argument is that easy. But I find it hard to imagine how Germany would suffer from a thriving Eurozone economy, with a little more inflation. And the sooner we get an adequate monetary policy in the Eurozone, the better it will be for various government balance sheets. And aren’t German savings invested in peripheral bonds as well…?
Ein Kommentar zur Sprache:
Ich kann natürlich verstehen, dass es Dich ehrt, Kantoos, dass Bloggerschwergewichte aus den USA Deine Einträge hier zitieren, was sie wohl nur im Falle englischer Posts tun werden.
Trotzdem möchte ich Dich ermutigen in deutscher Sprache zu schreiben, da der mangelnde öffentlicher Diskurs über Details der Wirtschaftspolitik gerade in Unwissenheit ihre Ursache hat. Du würdest mit weiteren deutschen Posts sicher zumindest einen kleinen Beitrag leisten dass sich das ändert im Bloggerentwicklungsland Deutschland.
weissgarnix und auch der Herdentrieb sind meiner Ansicht nach etwas zu oberflächlich und gehen nicht oft und nachhaltig genug in die Analyse von Details und sind teilweise mehr politisch als wirtschaftstechnisch – und ansonsten sieht es eben ziemlich düster aus.
Danke, Martin. Natürlich habe ich mich gefreut, aber mein Plan ist tatsächlich, weiterhin auf Deutsch zu schreiben.
@ Kantoos
A footnote on why bad polemics does not replace good economics:
>If you are looking for someone who is aiming for zero inflation while unemployment is rising to 13%, then Weber is definitely the right guy.>
Now consider the following statement:
If you are looking for someone who is adding continuously to inflationary potential in the face of failing to lower unemployment, then Bernanke is definitely the right guy.
Regarding this statement, wouldn’t you commit yourself to a judgement similar to the one on Krugman, namely to “You just gotta love the author for phrasing what it means, if Bernanke becomes his successor”?
@ Dietmar
Polemics do not replace economics, you are right, and I was half-joking, as was Krugman. But Axel Weber probably does not realize the need for more monetary expansion, that is in my view obvious from the development of Eurozone aggregate demand. And if you look at US data, Bernanke is not much better, even though he understands the whole issue probably better than Weber. So your statement about Bernanke does not really hit the nail on the head.
@ Kantoos
It is amazing how we miss each other.
It seems to me that you favor an economic position and SUPPORT it with the best arguments available to you. Needless to say that this is a valid approach.
For my part, I am interested above all on the REASONING for an economic position, because I accept a position only on the validity of the support offered in favor for it. Of course, I don’t believe at all that a badly supported position makes that position untenable.
If, in my opinion, the offered support is untenable, it is for me just a position that I may or may not share for other reasons.
Referring to concrete examples at issue, let me demonstrate what I mean.
1. “Witnessed inflation”
Last century inflation experiences in Germany are very appealing, because in the context of the argument they are so easily refuted: Since for biological reasons almost no living German can have these experiences, “witnessed inflation” cannot support hating inflation. This is true. It is true too, that it is irrelevant reasoning because of the biology and as such is useless reasoning. Furthermore it is bad reasoning, if, as often implicitly or explicitly, it is used to conclude that Germans have no good reason to hate inflation. For the reference to “witnessed inflation” does not warrant this conclusion.
This in mind I shifted the base of reasoning from witnessed inflation to the expected results of inflation and as an example for this to life insurances. If one considers the real value of one’s life insurance as dependent ONLY on inflation – and this is the only relevant criterion in the context of your question –, then it is quite clear that one MUST hate inflation. Take instead of life insurance any other kind of savings as for instance a bank deposit, than this claim is still true.
Thus it is wrong to insist “Your arguments about life insurances is much more difficult than you suggest”. MY argument is as simple as I have stated it. However, you are of course RIGHT in pointing out that the value of a life insurance, based mainly on government bonds as it is, does not solely depend on inflation. But this is quite a different topic which should not be mixed with the originally stated one.
And because it is undeniable a very important one (besides others), one must Germans tell again and again that they are uninformed or irrational as long as they almost inclusively focus on inflation.
2. Judging about Weber/Bernanke
> … Bernanke is not much better, even though he understands the whole issue probably better than Weber. So your statement about Bernanke does not really hit the nail on the head.>
What “whole issue”?
You escape the comparison of the two statements by blowing them up into an indefinite sphere.
Krugman judged Weber on monetary policy aiming at zero inflation in relation to unemployment – on NOTHING else to NOTHING else. (Just as a remark without further relevance: This statement borders on defamation, if I am right, that Weber never gave reasons to suggest that he aims at zero inflation.)
I had to stay within this narrow framework when I wrote the statement about Bernanke. Otherwise it would not habe made any sense.
Any considerations about “the whole issue”, which is what monetary policy can or cannot achieve under which conditions and about Weber’s or Bernanke’s understanding are totally beside the point. If one wants to hit the nail, one has to focus on it.
Last point:
>Finally, bailouts in the current form do not seem help at all. So what you are saying is: lets opt for a completely useless policy (bailouts) while running an inadequate monetary policy …>
I don’t know where you are getting this from.
I have commented on what you have stated on inflation with respect to the GERMANS. Where do I, Dietmar Tischer, opt in my name or in the name of the Germans for anything of the sort your list under “what you are saying”?
You may come to the conclusion that the consequences of the Germans attitude towards inflation amount to what YOU have stated. If this was intended, I have no major problem with it.
@ Dietmar
It seems we did miss each other. If I had flaws in my argumentative reasoning, I am sorry.
First, I tried to explain to non-Germans that the obsession of Germans with inflation is not based on some German economic science, but mostly on stories and myths that are passed on and so entered the national psyche. Regarding life insurances, I am not so sure that the argument goes in one or the other direction. Maybe we forgot one point, namely, that the Germans see the performance of the Bundesbank and the Mark and think that a loose monetary policy has caused the crisis etc., so they might think that they have a point here (which they have not).
Second, regaring Krugman and Weber, you seem to take every word seriously. Krugman was obviously exaggerating, as was I. I just wanted to note that Bernanke, one of the best macroeconomists on the planet, probably understands the need for monetary stimulus a little better than Weber. But this is admittedly just speculation. My hunch is that Weber is not a good choice for Europe because even the media in Germany don’t seem to understand the need for additional stimulus. So I think it is fair to say that Weber, a well-known hawk, does not see things as I do.
@ Kantoos
o.k.
Also erst mal Glueckwuensche, Herr Kantoos.
Alles schoen auf Englisch geschrieben, (auch die Kommentare aller anderen). Sie haben mit Sicherheit irgendwo in England oder Amerika studiert, vielleicht auch in beiden Laendern. Auf irgenwelchen renommierten Elite Unis vielleicht?
Eins wundert mich doch schon sehr. Sie schreiben ja normalerweise auf Deutsch. Am 26. schreiben Sie dann das erste Mal was auf Englisch, und sofort wird das besprochen (am 27.) im Economist Free Exchange Blog. Liest Ryan Avent vom Economist alle auslaendischen Blogs, bis er zufaellig mal einen Artikel findet, der auch in Englisch geschrieben wurde, und auf den er hinweisen kann? Oder ist der tatsaechlich sofort von Ihren schlagkraeftigen Argumenten so beeindruckt, dass er sofort darauf hinweist?
Auch auf diesen Artikel, wird im ja Economist hingewiesen, gleich neben Martin Wolf von der FT.
Sie muessen in der Tat ein Genie sein, wenn auch ein wohl noch verkanntes.
Also, was mich auch wundert, warum schreiben Sie nicht unter Ihrem eigenen Namen? Wer steckt dahinter, oder was? Oder heissen Sie wirklich Kantoos? Ihre Ko-autoren hier (Lindner und Kaspar) hatten ja schon mal was mit dem Zeit Herdentrieb zu tun, Sie auch?
Und was halten Sie von meiner Idee (oben in Englisch erlaeutert), quasi eine lockerere Geldpolitik in der europaeischen Peripherie zu fahren, indem man deren Anleihen, auf dem offenen Anleihenmarkt durch die EZB/EFSF solange aufkauft bis deren Anleihenrenditen wieder gefallen sind? Das wuerde mich doch mal wirklich interessieren, denn Sie sind ja anscheinend ein Experte in der Geldpolitik, und ich nur ein Laie.
Die Eurokrise waere, so glaube ich jedenfalls, mit meinem Vorschlag sofort beendet. Glauben Sie das auch, und sind sie da dafuer?