In Greece, deflation and not inflation is the problem.

Government debt in Greece is 150% of GDP. Will they be able to pay these debts back? Of course not. On top of a severe economic crisis – prices are deflating too. GDP-deflation is, at the moment of writing, -0,7%. This alone will cause the debtlevel to increase with 1% of GDP…

And things won’t get better. The relation between money and inflation is complicated and holds – as we all should know – only in the medium run and especialy when the rate of money growth is relatively high, i.e. over 20%, while causality sometimes runs from prices to money growth. As is clearly shown during the housing bubble: higher house prices en expectations of even higher prices enabled and enticed people to borrow more  and, therewith, led to an increase in the amount of money. Sometimes, however, the causality may be the other way around, for instance in a situation of capital flight from a country. In Greece, this contributed to a severe contraction of activity and unacceptable unemployment: no ‘neutrality’ of money in Greece. It leads, at this moment, also to deflation (consumer prices are still rising slightly, but the broader GDP-deflator declines). Which makes things worse.

Anyway – despite low interest rates in Frankfurt money in Greece is extremely ‘tight’.

About these ads