Home > Uncategorized > Breaking: record high unemployment, record low inflation in the Eurozone. Time to un-anchor expectations about the power of the ECB.

Breaking: record high unemployment, record low inflation in the Eurozone. Time to un-anchor expectations about the power of the ECB.

Today, Eurostat published new data on unemployment (September) and inflation (October).

* Unemployment is stable compared with August – but August was revised with a whopping +0,2%. Unemployment stands at 12,2% now. An all-time post Great Depression record.

* Inflation stands at a post 2009 record low of 0,7%, down from 1,6% in July. Core inflation, excluding energy, decreased from 1,6% to 1,1% in the same period.

Some economists have tried to explain the apparent lack of disinflation during this crisis. Might they just have looked at the wrong data? A shibboleth of neoclassical ‘macro’-economics is the idea that inflation is ruled by ill-defined expectations of an ill-defined sector households about ill-defined headline consumer price inflation and the rather adventurous idea that a central bank controls headline consumer price inflation as it controls household expectations by stating that the bank controls headline consumer price inflation as it is willing to wreck the economy if expectations become ‘unanchored’… (please, read Thomas Sargent about this). Robert Lucas, the economist most spectacularly wrong about the crisis, was rather enamoured by such ideas: supposedly, the expectations of households about the price of bread and other ‘frequent out of pocket expenses’ (which are decisive for household expectations of inflation) are set by the omnipotent central bank, and these expectations keep prices of new as well as existing houses in check… Led astray by such rather circular and clumsy ideas they did mis out on the disinflation which has been taking place for five years already. It’s time to un-anchor our Eurozone inflation expectations and to reset out ideas about the power of the central banks and the structure of the economy. It’s not all about expectations (a sixties-‘Zeitgeist’ idea, by the way) – it’s all about money and spending.

  1. October 31, 2013 at 12:17 pm

    “Ah, but if we do anything to fix these problems there might possibly be high inflation”, you will no doubt hear.

    Why is inflation so challenging to policy makers and a certain freshwater/German/right wing brand of economists? The basic dynamics should be clear: If money supply is fixed it appreciates as an externality on economic growth, leading to regressive distributional and investment effects. If money supply keeps pace with growth it generally has healthy effects on investment and surplus recycling. Positive inflation is a distributional effect like a tax which you might want sometimes, and hyperinflation cripples the economy in exactly the same way as overtaxation. Why all the myths abut gold, sound money, balanced budgets, the hyperinflation bogeyman, and general nonsense on the issue? Is there an elite somewhere that has their wealth stored Euro coins, or what?

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