‘Die Deutschen drehen immer durch’: Interviewed by Tageszeitung 23rd April 2012

While in Berlin, last week, I gave an extensive interview to Tageszeitung. Click here for the article, as it appeared on their website (you can use Google Translate if you have no German). Alternatively, you can read the pdf version of the print edition (complete with a weird photo…): Tageszeitung YV interview 23rd April 2012

21 Comments

  • Reading the interview (with google translate) i noticed you were pretty straight-forward,saying “And that does not mean that you can print money. Borrowing is not printed. If you anschmeißt the money press, threatening inflation.”

    I have to ask,how printing money can by definition be inflationary?
    If this was true then you have MV=PY,with M growing and V,Y constant so P has to grow.Dont you agree that this is a special occasion,especially if we are talking about economies with significant output gaps ?

    • Printing money is NOT inflationary by definition. The Quantity Theory of Money identity that you mention simply says that if you increase the quantity of money, then prices will rise ceteris paribus. That is, only of other things remain the same. But, if in a recession, other things are not the same; they are changing. To be precise, transactions (i.e. sales) or incomes (Y) are falling (by definition). This means that to keep prices steady, as long as V (the velocity of circulation) remains more or less constant, the quantity theory must rise. Well, this is what the Fed and the ECB are doing. Having said all this, it is strategically important to state that our Modest Proposal does not involve increases in the quantity of money for the purposes of dealing with either public debt or aggregate investment. It is important so as to de-link our Proposal from even the slightest hint of inflationary policies.

    • I understand your take now and i agree with the choice not to include money printing as an option, so as to surpass chronic phobias.Thanks!

    • This article is wrong because it is making 2 false assumptions.

      1)QE is not adding net financial assets in the system ie. doesnt alter the money supply in contrast to what the article implies.The bonds,banks are holding are effectively savings accounts at the FED.During QE these bonds are swapped for reserves which are effectively checking accounts at the FED.In aggregate there is no alteration in money supply.(if you move your money from a savings account to a checking account you dont suddenly have more or less money).
      This picture can make it more clear: http://pragcap.com/wp-content/uploads/2010/11/BS.png

      QE was believed to heat the economy up because they thought more loans could be given but the problem is that demand for loans has decreased,so the reserves are “sitting” at the FED doing nothing.

      2)It claims that an increase in money supply,is by definition inflationary.If you look below you will see that we already discussed with Prof. Varoufakis that this is not true.Based on the tautology MV=PY where M is money supply,V is Velocity of money,P is price level,Y is real output
      in order for an increase in M to be inflationary it is required that V and Y are constant so that P must rise.Its pretty safe to say that this would be a short of special occasion to happen.Especially V is far from constant and in fact it tends to move opposite from M.

    • About par.1 of Crossover’s answer:

      I suppose:
      And that is why the American debt ,even if it is trillions and trillions ,is not as important as the European debt. Because everything sits at the fed. When time comes to pay for the bonds bought from China ,a simple transfer is all they do.

    • @Dimitri

      More or less thats right.Not everything sits at the Fed but its as simple as you describe it.They just credit certain accounts.And that goes for any country that is issuing its own fiat,free-floating currency not just US,but its not the case for Eurozone.

  • Do I understand correctly you propose that Germany should transfer money via Eurobonds and work via industrie allocation to the GISPIFs?

    This won’t work. The GISPIFs crave for more cheap money like drug addicts. They will never pay their debts back (Germany won’t either) because the’ll use it again to please certain interest groups like the public sector employees, the finance industries, the retirees…

    And whatever industries the GIPSIFs get, they wouldn’d do the jobs right. Because if they did, the had competitive sectors already, no?

    So I doubt you can make the whole (EU) stronger if you weaken the strong ones by transfering money and jobs to the weak ones.

    • No you don’t. Our ECB-EIB bond scheme has the purpose of putting idle savings from all over the world, primarily outside Europe, into productive investments in the deficit regions (including East Germany) so as to generate the income that will pay back the debts and the deficits.

    • Which investor in the world would poor his money voluntarely into Europe, especially in the PIFGIS? – Noone. We have seen this with the EFSF etc. Why should you invest in this stuff if you have alternatives such as stocks of companies that operate from much safer places?

      A much better bond would be to force the population of the PIFGIBSto buy bonds of their countries at below market rates. Germany did just that after the war. The allocation would be according to financial assets. It would require capital controls. But we will get capital controls anyways, because anyone with a brain and financial assets is moving them out of the EU already! Better not taking a risk of having your capital in a soon socialist planning economy where you cannot get your money out or even exchanged anymore. EURO =Transfer Rouble!

  • Weird picture?

    Come on ,you liked it. 🙂
    You are bored of economics and you want to become a male model. 🙂

  • @crossover I only have one question for you to answer to. Do banks pay their maturing illiquid bonds with the new liquidity of the ECB?

    If yes (and I think you wont disagree), then money is transfered from the maturing illiquid bonds, to the hands of the owners of these bonds (and the bonds are stored in the proverbial closet of ecb), and then this new liquidity finds its way to the supply chain through commodity and asset purchasing.

    Of course giving money to rich people it doesnt have the same inflationary effect as giving the same amount to poor people, so this “spill over” is contained, but you cant deny that there is a spill over. If not why commodity prices are skyrocketing in pre 2008 fat days, when in fact the whole west is in recession from 2008 and on?

    So yes there is a spill over effect, yes there is inflation of around 3% when in fact in a recession we would normaly expect deflation, no this is not the apocalyptic picture of von mises, but then again who said he was right when he cunningly bonded together in the same sentence two different beasts (inflation and hyper-inflation)?

    and yes this policy is designed to help only the rich by transfering the blown up illiquid assets to the hands of the public (ecb), giving them fresh and hot cash in the process.

    lets call a rose by its name and not try to obscure things in order to ¨surpass chronic phobias” because this is the definition of elitism

    • @ Wasteinc (@TechieChan)

      I understand what you are saying (me thinks) ,but if i remember correctly you also say that the actions of the rich people (buying hard assets as fast as they can) are because they know money will lose its value because of the printing alone.

      This becomes a self-fulfilling prophecy. Ignorance-based psychology ,but rich people have “experts” managing their money.

      It is true though that most people believe more money=higher prices.
      Especially in Greece from the day the euro was introduced and thanks to the media talking all the time about inflation.
      Another self-fulfilling prophecy and one more reason (not the main) for higher prices.

    • @ Wasteinc (@TechieChan)

      ———————————–
      “Of course giving money to rich people it doesnt have the same inflationary effect as giving the same amount to poor people….”
      ———————————–

      The exact opposite. Rich people may affect prices with their money the way you described.
      If the money were going directly to small businesses and for the purpose of production and investment ,inflation would be easily managed.

    • @Wasteinc

      I cant comment on what happens with ECB as i havent spent enough time looking for info about its”QE”.But given that the article i commented on,was critizing the actual American QE,im pretty sure that what you are describing is not the case.

      http://bilbo.economicoutlook.net/blog/wp-content/uploads/2009/07/Fed_Reserves_June_2009.jpg
      This graph precisely shows what happened after QE took place:The great majority of Excess Reserves is sitting idle doing nothing.The FED (mistakenly,if you ask me) thought that by pumping excess reserves,it would enable banks to make more loans.The problem is that banks dont need reserves to make loans,so it doesnt matter if the injection happens or not.They are only capital constrained.The actual reason they didnt proceed with making more loans,was that on one hand they cant find enough customers that they consider credit-worthy and on the other hand there isnt enough demand for new loans.

      “If not why commodity prices are skyrocketing in pre 2008 fat days, when in fact the whole west is in recession from 2008 and on?”
      You can certainly blame QE2 up to a point for speculation (though its not an absolute connection,pre-08 FED debt holdings were flat and commodities were already up).The problem lies in the fact that instead of setting a target price,the FED set a target quantity.But this doesnt prove that “money printing” is by definition inflationary.
      But apart from QE there are several other factors for inflation.For example you seem to be taking for granted that ECB’s interest rate policy is correct whiile it is not.And this is another serious flaw in the design of Euro.Given that economies of the core and the periphery are totally different, a simple Taylor rule shows that the one-size fits all interest policy is actually bad.To be precise it seems to be appropriate for core countries but not the periphery: http://www.frbsf.org/publications/economics/letter/2011/el2011-18-3.png
      The graph shows that the periphery has been needing higher interest rates.If you are interested see full article here: http://www.frbsf.org/publications/economics/letter/2011/el2011-18.html

      “So yes there is a spill over effect, yes there is inflation of around 3% when in fact in a recession we would normaly expect deflation”
      Are you implying that whenever recession is in the house.authorities should let deflation kick in?Seriously?I thought deflation is precisely what Japan has been trying to kill for the last decades(while people have been warning (and some still are) for hyper-inflation caused by BOJ monetary policy)

      “lets call a rose by its name and not try to obscure things in order to ¨surpass chronic phobias” because this is the definition of elitism”
      Im anything but an elitist.By chronic phobias i was referring to Germans,who get a sick stomach whenever they hear about money printing and im pretty sure thats exactly the reason why Prof. Varoufakis wanted to make clear that the MP does not involve any kind of printing money.Im still looking for proof (apart from Weimar and Zimbambwe) that money printing is by definition inflationary.

    • *Forgot to mention

      Any possible inflationary pressure that QE might have is more or less offset by the fact that banks swap an interest-bearing asset with an almost non-interest bearing asset (interest on excess reserves is 0,25% and thats only after Fed decided to pay interest on excess reserves,normally it wouldnt).

      Btw in the case of ECB,it purchases bonds at market price so thats still an asset swap and nothing else,given that bond markets are pretty liquid.

    • “Of course giving money to rich people it doesnt have the same inflationary effect as giving the same amount to poor people….”
      Are you implying that rich people keep their money in their closets?Rich people hate to hold money without investing it somewhere.Lets face it,QE might partly be responsible for speculation and for creating inflationary expectations (the same expectations you seem to have) but thats nothing like actual demand pull inflation (which would happen if too much money would be chasing too few goods).Especially in the case of Greece where we are talking about an economy with (if i remember well) 12% output gap ie idle capital etc
      This type of inflation we are having, is not sustainable since theres reduced consumption ie reduced demand.Did you read the latest provisions for the inflation?

    • @Crossover

      ——————————
      “The graph shows that the periphery has been needing higher interest rates.If you are interested see full article here: ……”
      ——————————

      Not higher interest rates. Lower for the periphery. Lower than the ecb target rate.

      ——————————
      “It is uncertain whether the peripheral countries will be able to grow fast enough to generate the income they need to service their sovereign debt obligations. Increases in interest rates may make reaching such growth levels even more challenging.”
      ——————————

      Nice article.

    • @Dimitri
      My bad.i was referring to the need of higher nterest rates pre-08.We need lower rates now.