Thursday, January 27, 2011

Policy Paralysis in Germany

Kantoos responds to my earlier question as to whether Germans dislike inflation or bailouts more. He says that this is a difficult question since Germans passionately detest both. What is known, though, is that because of these strong views there is a sort of  policy paralysis in Germany that leads to a non-optimal policy outcome:
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.
Sigh. On a lighter note, Merle Hazard has penned a new song about Germany's problems:

And here you can find Merle Hazard's song on Ireland's problems.


  1. David,

    This is off topic, but there were a two unusual items in today's gdp report that pertain to QE2/NGDP, and I wonder if you have a comment on them.

    From the report:

    -"Real gross domestic purchases...decreased 0.3 percent in the fourth quarter, in contrast to an increase of 4.2 percent in the

    -"Current-dollar GDP...increased
    3.4 percent, or $125.3 billion, in the fourth quarter to a level of $14,870.4 billion. In the third quarter, current-dollar GDP increased 4.6 percent, or $166.4 billion."

    It looks like nominal spending actually decelerated in the quarter, even while Final Sales were quite robust. Am I reading that right?

  2. David:

    Nominal spending can measured different ways, but the key is that you look at the current dollar amount. Thus, the first measure you cite, real gross domestic purchases (Real GDP less inventory changes less exports)is not nominal spending. It is real domestic demand. You would need to look at its current dollar version to get the nominal version(i.e. plain old domestic current dollar spending by US residents).

    Alternatively, you could look at the current dollar final sales of domestic output (nominal GDP less inventory changes). This is generally considered aggregate demand (i.e. total current dollar spending on the U.S. economy by anyone).

    Finally, you could look at nominal GDP as a measure of nominal spending, but it includes inventory changes. To the extent these inventory changes were not desired it is probably not accurate to consider them a part of nominal spending.

    Using these definitions, the BEA report shows 7.3% growth in aggregate demand, 5.4% growth in domestic demand, and 3.4% growth in nominal GDP. Exports really made an impact on nominal spending 4th quarter.

  3. David,

    Thanks -- that paints quite a different picture of demand.

  4. Yes, it indicates to me that there is some "catch-up" spending taking place.