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[XXSockXX]

If you want to fix the economy by disowning savers, that doesn't create a climate where domestic spending will increase.

Again, the return on savings is a function of the real rate of return.  Nominal inflation rates are a part of that but only a part.

But with high inflation and low rate of return, your savings still melt away.

Well, German fear of inflation is rooted exactly in policies from the great depression era, when savings were wiped out several times by inflation, with disastrous political results.

Actually, the inflation was solved long before the Nazi's came to power and the nazi's actually came to power during the hard money policies of the early great depression.

Hey, maybe you should learn from your own countries history!

Sure, but the poor that lost everything to inflation were still there, ready for political radicalization.
German post-war ordoliberalism was actually a result of both the inflation and the hard money policies of the depression era, rejecting both unregulated liberalism and monetary interventionism.

And I wouldn't call pouring billions into Greece giving it the middle finger. If questioning what your billion investment does isn't an economic argument, I don't know what is.

You help with one hand and hurt with the other.  It's the economic profession you are flipping off.

If it's a structural problem you're just throwing money away if you don't push for structural changes. It's not only Germany, the IMF wants to see some changes too. No bank would continue to give you credit if you keep going bankrupt.

Something someone mentioned in this conversation before it came here, about giving up austerity... Uhm... Wasn't there a scandal a few years ago, about how the numbers that made austerity look good economically were fudged, and it's actually a pretty shit thing to be doing? What happened to that? >_>

There was the Rogoff/Reinhart study on government debt that turned out to contain an error. It was used in arguments about Greece, as it made some statements about a 90% of GDP threshold where public debt would basically kill economic growth. As it turned out wrong, it is no longer used in these arguments. Didn't really say much about austerity though and it didn't really have much of an impact outside academic circles.

[mainiac]

But with high inflation and low rate of return, your savings still melt away.

Yeah it would suck with a low rate of return.

Which is why it would be really, fantastically good to end this policy which creates a low rate of return.

Sure, but the poor that lost everything to inflation were still there, ready for political radicalization.
German post-war ordoliberalism was actually a result of both the inflation and the hard money policies of the depression era, rejecting both unregulated liberalism and monetary interventionism.

I can't imagine it helped but you are talking about people who lost their money nearly a decade before and only the people who had something to lose after WWI.  Would they be more angry about that or the economic misery of the moment?

[XXSockXX]

I can't imagine it helped but you are talking about people who lost their money nearly a decade before and only the people who had something to lose after WWI.  Would they be more angry about that or the economic misery of the moment?

That may be subjective, but from what I have heard from witnesses losing all your savings, even if it wasn't that much, does make you very angry, even decades later (actually a lot of people still had something to lose after WWI). Add to that the unrelated losses after WW2 and you have a people very paranoid about their savings.
Even now I hear a lot of people talking about buying gold (even if they certainly won't be able to) in case everything goes down the drain again. That's just anecdotal evidence of course, but it goes to show that giving people the impression that their savings are threatened is not good for the consume climate.

[mainiac]

Even now I hear a lot of people talking about buying gold (even if they certainly won't be able to) in case everything goes down the drain again. That's just anecdotal evidence of course, but it goes to show that giving people the impression that their savings are threatened is not good for the consume climate.

So tell me, has this policy of causing widespread unemployment throughout Europe made the Germans feel more confident?

[XXSockXX]

So tell me, has this policy of causing widespread unemployment throughout Europe made the Germans feel more confident?

I reject the premise of that question.

[Sheb]

GreatJustice: You may think you're "denouncing the results of neo-Krugmannite policy", but what you're really doing is talking bullshit. We could afford much looser economic and fiscal policy in the EU without triggering runaway inflation. Look at the UK/US, why do you think they're growing while the EU is not? Do you really think the UK is inflating his people's saving away?

[GreatJustice]

GreatJustice: You may think you're "denouncing the results of neo-Krugmannite policy", but what you're really doing is talking bullshit. We could afford much looser economic and fiscal policy in the EU without triggering runaway inflation. Look at the UK/US, why do you think they're growing while the EU is not? Do you really think the UK is inflating his people's saving away?

Well actually, the UK has had something of an inflation problem for the past several years, so they wouldn't be a terrible example of monetary devaluation not working quite right. I don't think I've heard of anyone point to them as an economic success story in that sense, either.

Now the US is an altogether different animal because most countries in the world back their money with dollars, so they can get away with quite a bit more than other countries. Further, they've counterbalanced the massive expansion of the monetary base with interest payments on excess reserves, which delays the inflation that would otherwise occur.

Anyhow, the inflation is the direct result of such policies. The indirect result is irreparable damage to the capital structure, as resources are directed from projects that require them to projects that don't. The inefficiencies created by this lead to the conditions necessary for the next crisis to be even worse, for example, the Dot Com bubble's response sowing the seeds of the recent Housing bubble.

[Sheb]

The UK have an inflation problem? First time I ever heard of this. As for economic success, you can't deny they're doing better than the eurozone. They're actually growing again for a start. And it's not surprising: they've coupled an ultra-loose monetary policy with an actual keynesian policy (Their budget deficit is still over 5% of GDP IIRC). Funny that it's a Tory administration pretending to be all about austerity.

Also, can you back up your claim of irreparable damage to the capital structure? I'm not even sure what you're talking about.

[GreatJustice]

The UK have an inflation problem? First time I ever heard of this. As for economic success, you can't deny they're doing better than the eurozone. They're actually growing again for a start. And it's not surprising: they've coupled an ultra-loose monetary policy with an actual keynesian policy (Their budget deficit is still over 5% of GDP IIRC). Funny that it's a Tory administration pretending to be all about austerity.

Depends on where in the Eurozone we're talking. After all, the occasional influence of the former Bundesbank on ECB policy can't counteract the effects of the poor economic choices made by southern European countries. Regardless, though, the growth in the UK is basically a joke, considering that the real effects have been (A) real wages dropping significantly (as inflation overtakes any paltry wage increases) and (B) bankers getting nearly all of the "benefits". GDP is up, but then GDP is a meaningless statistic if it gets manipulated the way it is today.

Also, can you back up your claim of irreparable damage to the capital structure? I'm not even sure what you're talking about.

Certainly, though you'd have to be willing to read a book or two. Anyhow, the main point is that inflation (in the monetary sense) leads to the misallocation of resources, as it misleads investors into believing that more resources exist than are actually present. In a market, a low interest rate indicates an excess of resources available for capital investment, while a high one indicates a shortage and that more savings are required. When a central bank artificially lowers rates, it creates the impression that there are more resources than are actually available, which leads to entrepreneurs investing in long term capital rather than short term consumer goods. Of course, these resources don't actually exist, nor does the demand for them, so eventually these projects have to be shut down to allow resources to flow back to the sectors where they are required. The longer it takes for this adjustment to take place, the more resources are squandered on unprofitable projects, making the inevitable readjustment that much worse.

[Sheb]

Depends on where in the Eurozone we're talking. After all, the occasional influence of the former Bundesbank on ECB policy can't counteract the effects of the poor economic choices made by southern European countries. Regardless, though, the growth in the UK is basically a joke, considering that the real effects have been (A) real wages dropping significantly (as inflation overtakes any paltry wage increases) and (B) bankers getting nearly all of the "benefits". GDP is up, but then GDP is a meaningless statistic if it gets manipulated the way it is today.

Taking the Eurozone as a whole, the UK is outperforming it. Of course, you can find place that are in better shape, just like parts of the UKs or the US are doing better than other.

Certainly, though you'd have to be willing to read a book or two.

So basically, theory unsubstantiated by fact. I'd love to read your books, because I'm really curious how they explain that there is little link between high inflation and economic health. Brazil's average inflation was 42% in the 60's and 70's, during which period it was one of the fastest growing economy in the world. Korea had inflation rates of close to 20% during the 60's and 70's. Sure, hyperinflation is a bad thing, and I'll admit there even is some evidence that inflation over 10% has a slight negative impact on long-term growth*, but a fear of any kind of inflation is totally unfounded.  See for example M. Sarel (1996), ‘Non-linear Effects of Inflation on Economic Growth’, IMF Staff Papers or M. Bruno (1995), ‘Does Inflation Really Lower Growth?’, Finance and Development

*Although other studies show now negative effect under 20 or even 40%.

[GreatJustice]

Depends on where in the Eurozone we're talking. After all, the occasional influence of the former Bundesbank on ECB policy can't counteract the effects of the poor economic choices made by southern European countries. Regardless, though, the growth in the UK is basically a joke, considering that the real effects have been (A) real wages dropping significantly (as inflation overtakes any paltry wage increases) and (B) bankers getting nearly all of the "benefits". GDP is up, but then GDP is a meaningless statistic if it gets manipulated the way it is today.

Taking the Eurozone as a whole, the UK is outperforming it. Of course, you can find place that are in better shape, just like parts of the UKs or the US are doing better than other.

Uh, well considering the fact that nearly all growth in the UK right now is centered in London, and most of that is from the financial sector, I think you might be slightly understating the issue a bit.

Certainly, though you'd have to be willing to read a book or two.

So basically, theory unsubstantiated by fact. I'd love to read your books, because I'm really curious how they explain that there is little link between high inflation and economic health. Brazil's average inflation was 42% in the 60's and 70's, during which period it was one of the fastest growing economy in the world. Korea had inflation rates of close to 20% during the 60's and 70's. Sure, hyperinflation is a bad thing, and I'll admit there even is some evidence that inflation over 10% has a slight negative impact on long-term growth*, but a fear of any kind of inflation is totally unfounded.  See for example M. Sarel (1996), ‘Non-linear Effects of Inflation on Economic Growth’, IMF Staff Papers or M. Bruno (1995), ‘Does Inflation Really Lower Growth?’, Finance and Development

*Although other studies show now negative effect under 20 or even 40%.

What's growth? Do you mean GDP growth? Because obviously inflation is going to do wonders for GDP (something I never disputed, by the way), but that has basically no relevance to any actual economic improvements in eg. the standard of living. Drawing meaningless statistical connections is pretty meaningless, though. If Obama ordered the construction of a gigantic golden statue of himself, he'd certainly create quite a lot of growth in the sense of spending, and he'd definitely stimulate demand, but it would realistically not result in an improvement in the standard of living of Americans. Anyhow, it's just as easy to point to eras of massive deflation that still featured significant growth in statistical terms as well (for example, the late 1800s in America), so this is a bit of a waste of time. If you'd like actual analysis of the Great Depression, a prime example of capital misallocation, well, knock yourself out.

[mainiac]

Sheb, be careful what you are stepping into.

[kaijyuu]

Deflation would be lots of fun for people who are rich. Instead of having to invest their fortunes in order to maintain them, they could literally sit on a mountain of gold and it would accrue wealth by simply existing.

(note: not saying anyone's promoting deflation. Didn't read enough of the thread to determine that. Just wanted to pop in)

[Sheb]

Not only GDP growth, but long-lasting increase in standard of living. Per capita real income increase by 4.5% per year during that time period in Brazil. As for Korea, even a blind fool can see that it grew tremendously in all the relevant way during that time period.

Now, of course if you're just going to disregard all facts (Or 'Drawing meaningless statistical connections is pretty meaningless' as you call it) I'm not sure why I'm even bothering talking with you. Why bother with facts when we got Glorious Theory, amirite?

Also I'm not sure why you're bringing the Great Depression in there. I'm not arguing that capital cannot be mallallocated (you only have to look at present-day China for a prime example), just that moderate inflation doesn't cause such problem.

[GreatJustice]

Deflation would be lots of fun for people who are rich. Instead of having to invest their fortunes in order to maintain them, they could literally sit on a mountain of gold and it would accrue wealth by simply existing.

(note: not saying anyone's promoting deflation. Didn't read enough of the thread to determine that. Just wanted to pop in)

Technically, if it was deflation, sitting on a mountain of gold would be a bad idea, as the gold wouldn't be gaining value with respect to the money. It would be a mountain of money they'd be sitting on.

Anyhow, realistically, no rich person in a deflationary economy would keep their money under the mattress/in a cave/buried at the bottom of a mineshaft etc, they'd put it in a bank, which in turn would actually support the economy.

Besides that, a rich person in an inflationary economy is even better off, as he has the benefit of receiving the newly printed money first, meaning he gets all the benefits of free money without the downsides of higher prices. He can dump his money in the stock market and outpace the inflation on goods that the suckers at the bottom of the printed money pyramid have to shoulder.

Of course, deflation isn't really a good thing in of itself either, but it's not necessarily a bad thing under certain circumstances either.

Not only GDP growth, but long-lasting increase in standard of living. Per capita real income increase by 4.5% per year during that time period in Brazil. As for Korea, even a blind fool can see that it grew tremendously in all the relevant way during that time period.

Now, of course if you're just going to disregard all facts (Or 'Drawing meaningless statistical connections is pretty meaningless' as you call it) I'm not sure why I'm even bothering talking with you. Why bother with facts when we got Glorious Theory, amirite?

Also I'm not sure why you're bringing the Great Depression in there. I'm not arguing that capital cannot be mallallocated (you only have to look at present-day China for a prime example), just that moderate inflation doesn't cause such problem.

Okay, well if you want specific analysis of Brazil and South Korea, I can do that too.

Brazil is pretty simple. Yes, there was quite a lot of short term growth in Brazil in the 60s and 70s. However, the result of this was a veritable collapse in the Brazillian economy in the 1980s which necessitated gigantic economic reforms. The boom of the 60s/70s led to the spectacular bust of the 80s, which is more or less how I said such policies end up working. I'm honestly surprised you would use them as an example, actually. Unless you're missing the point of what I'm saying entirely, I guess, in which case I'll clarify: inflation and artificially low interest rates can create massive short term growth, but it will inevitably end with a similarly massive bust

South Korea is a bit more complicated. After the Korean War, the Korean economy was built around the Chaebol, family owned corporate conglomerates with state backing in the form of tariffs, subsidies, cheap credit, and so on (think of the Zaibutsu in pre-war Japan). In the 60s, the Korean government basically worked overtime negotiating good export deals for these Chaebol with other countries, which generated impressive economic growth. This worked for a time, when cheap Korean goods were exported throughout Asia, but it promptly ran into trouble when it ran into competition from South East Asian countries able to produce the same goods at similar prices without subsidies. As a result, nearly all of the resources of South Korea were channeled into providing credit for the Chaebol, while the rest of the country hopelessly fell behind (South Korean farmers weren't much better off than their counterparts in the North in terms of technology or even living standards). This was followed by a parade of coups and political turmoil, as well as a gigantic collapse in economic growth. Finally, the system was completely reformed in the mid 80s, with the easy credit being cut off and banks being privatized, allowing for those not connected to the Chaebol to actually receive credit. This also marked the end of the massive inflation that had characterized South Korea in the past. Mind, the reforms were not absolute and the Chaebol system basically continued well after the 80s, but that's another story for another time.

The state of South Korea's system is actually quite interesting, so you can read about it yourself if you're interested and not just grasping for "facts".