Krugman on European Financial Suicide

[Matthew Cissell]

Thanks for the rundown, Al. I appreciate the explanation of the Economic Issues series. Though not a nobel laureate or even a non-specialist in "this stuff", I done heard of that inflation stuff. I remember Reagan's quote but I'll spare ya the recital.
I reckon 10 yrs out we will have an idea of what worked, but god knows what we'll be mired in by then.

ciao
mc otis



________________________________
From: alice wellintown <alicewellintown at gmail.com>
To: pynchon -l <pynchon-l at waste.org> 
Sent: Tuesday, April 17, 2012 11:16 PM
Subject: Re: Krugman on European Financial Suicide

Not an expert? Who is? Most economists I know admit that there are no
experts in their field. Non-specialists? Yes. So get an education in
this stuff. Where? Lotz of places, but try the IMF. In this easy to
read paper we learn that Spain & Co. turned to inflation tagets to
gain credibilty. If they inflate now, as Krug suggests, they will lose
the confidence of the capital markets because bond holders will get
burned. So, itz not suicide, itz what they must do to stay alive.

The Economic Issues series aims to make available to a broad
readership of nonspecialists some of the economic research being
produced on topical issues by IMF staff. The series draws mainly from
IMF Working Papers, which are technical papers produced by IMF staff
members and visiting scholars, as well as from policy-related research
papers.

On Inflation:

Inflation is bad news. Besides distorting prices, it erodes savings,
discourages investment, stimulates capital flight (into foreign
assets, precious metals, or unproductive real estate), inhibits
growth, makes economic planning a nightmare, and, in its extreme form,
evokes social and political unrest. Governments consequently regard
inflation as a plague and try to squelch it by adopting conservative
and sustainable fiscal and monetary policies. Experience and
convenience have induced most of them to conduct their monetary policy
by relying on intermediate targets such as monetary aggregates or
exchange rates. During the past decade, however, seven small and
medium-sized advanced economies have broken with this tradition of
using such intermediate targets and have begun to focus on the
inflation rate itself. This new approach to the age-old problem of
controlling inflation through monetary policy is known as inflation
targeting.

[...]
During the past decade, inflation targeting has been adopted (in
chronological order) in New Zealand, Canada, the United Kingdom,
Finland, Sweden, Australia, and Spain. Unsatisfactory experience with
setting intermediate monetary targets or with maintaining a fixed
exchange rate prompted this innovation in most of these countries. In
New Zealand and Canada, the governments initially introduced the
targets to help with disinflation. The success of these two countries
in taming relatively high inflation (by industrial country standards)
spurred in part the adoption of similar policies by the other five
countries, where, in contrast, the inflation rate was already
comparatively low.

These seven countries shared a relatively poor record in fighting
inflation over the past 30 years in comparison with Germany, Japan,
Switzerland, and the United States. Moreover, market participants
generally perceived the seven as lacking monetary policy credibility.
In one sense, inflation targeting was the foundation on which these
countries sought to build a record of both low inflation and monetary
policy credibility. In these countries, the inflation rate was the
overriding objective of monetary policy and was given precedence over
other objectives, such as the exchange rate or the level of
employment.





On Tue, Apr 17, 2012 at 5:01 PM, alice wellintown
<alicewellintown at gmail.com> wrote:
> Well, I don't know what Germans think; I simply made use of an
> expression. "I'm German on this inflation issue" is an expression that
> means I'm against raising inflation targets. That's all it means. The
> expression may be based on a false or stupid reading of what Germans
> think, but that doesn't matter. Expression needn't any basis in facts
> to do their work.