Thursday, July 7, 2011

One Interest Rate Hike Closer to Eurogeddon

The ECB today followed through on it plans to tighten monetary policy, the second time it has done so since April.  As I have noted before, tightening monetary policy is the worst thing the ECB could be doing right now if it truly cares about preserving the Eurozone in its current form.  If the ECB does care it should be easing monetary policy to help bring about a real appreciation in the core countries and real depreciation in the periphery.  Even if the ECB is indifferent there is still no justification for tightening monetary policy based on its objectives.  For, as Rebecca Wilder notes, inflation expectations are down and the growth in the ECB's targeted monetary supply is tapering off.  So this tightening cycle is truly bewildering.  Maybe the tightening cycle is to provide cover to the ECB buying up debt from the periphery or maybe the ECB is trying to hasten what seems to many the inevitable downsizing of the Eurozone. Either way, the band Europe has the right diagnosis of what all this really means.

2 comments:

  1. Somehow, policymakers have developed an absolute fetish for fighting inflation (even if there is no inflation) with tight money.

    Japan--the role model?

    Oddly enough, some inflation could do the USA a lot of good. Help us deleverage, and the money illusion would lower business operating costs. A cheaper dollar would help exports, bring tourists here.

    At this point, we have to start getting cynical and ask: Who benefits from recession and deflation?

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  2. Benjamin asks:

    'At this point, we have to start getting cynical and ask: Who benefits from recession and deflation?'

    Creditors can benefit if the default rate on their credits is less than the deflation rate.

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