It’s Brand New, but Make It Sound Familiar
I see the marketing article on the familiar as acceptable.I will think more on that. It is avoiding the aspect I want to study.
It would not surprise me if Krugman's column looked a lot like this.
http://krugman.blogs.nytimes.com/2011/09/25/catastrophic-stability/
"September 25, 2011, 11:18 am
Catastrophic Stability
I look a fair bit at bond market “breakevens” — the difference in interest rates between regular bonds and inflation-protected bonds of the same maturity, which give a measure of inflation expectations. It’s not a perfect measure by any means, since there are issues of risk and liquidity, and anyway what bond investors expect isn’t necessarily reasonable. But breakevens do give a quick read on the issue, and can be helpful in thinking about where we are.
So, let’s look at German breakevens:
The market seems to expect price stability for Germany — an inflation rate of 1 percent or so over the next 5 years. And that has a clear message: it’s signaling catastrophe for the euro.
Why? I tried to lay this out a while ago.A reasonable estimate would be that Spain and other peripherals need to reduce their price levels relative to Germany by around 20 percent. If Germany had 4 percent inflation, they could do that over 5 years with stable prices in the periphery — which would imply an overall eurozone inflation rate of something like 3 percent.
But if Germany is going to have only 1 percent inflation, we’re talking about massive deflation in the periphery, which is both hard (probably impossible) as a macroeconomic proposition, and would greatly magnify the debt burden. This is a recipe for failure, and collapse.
Another way to say this is that the euro is going to have a chance of working only if the ECB delivers much more expansionary and, yes, inflationary policies than the market now expects. If you don’t think that’s a possibility, say goodbye to the euro project."
The whole thing.
So, let’s look at German breakevens:
Why? I tried to lay this out a while ago.A reasonable estimate would be that Spain and other peripherals need to reduce their price levels relative to Germany by around 20 percent. If Germany had 4 percent inflation, they could do that over 5 years with stable prices in the periphery — which would imply an overall eurozone inflation rate of something like 3 percent.
But if Germany is going to have only 1 percent inflation, we’re talking about massive deflation in the periphery, which is both hard (probably impossible) as a macroeconomic proposition, and would greatly magnify the debt burden. This is a recipe for failure, and collapse.
Another way to say this is that the euro is going to have a chance of working only if the ECB delivers much more expansionary and, yes, inflationary policies than the market now expects. If you don’t think that’s a possibility, say goodbye to the euro project."
The whole thing.
The first one is the source for the chart.
the link:
http://krugman.blogs.nytimes.com/2011/01/18/european-inflation-targets/
European Inflation Targets
Jean-Claude Trichet is sounding hawkish about inflation again — and this is very bad news for the European periphery. Let me offer a stylized example to explain why.
So, imagine a eurozone that contains only two countries, Germany and Spain. And let’s make two assumptions: first, Germany’s economy is three times the size of Spain’s, so that German inflation is 3/4 of the overall index, Spain’s inflation 1/4; second, past events have left Spanish wages and prices 20 percent logarithmic too high relative to Germany. (Why logarithmic? So I can just add percentage changes, without having to worry about compounding.)
Now suppose that you want to get relative prices and wages back in line over the course of 5 years. How can this happen? Well, one way or another we need to have German inflation 4 points higher than Spanish inflation over that period.
So consider two scenarios: in scenario A, we have 2 percent German inflation and 2 percent Spanish deflation. This implies an overall eurozone inflation rate of 1 percent. In scenario B, we have 4 percent German inflation and zero Spanish inflation, implying eurozone inflation of 3 percent.
In a frictionless world, it wouldn’t matter which scenario gets chosen. But in reality, scenario A, the low-inflation scenario, is vastly worse for Spain — for two reasons. First, it’s much, much harder to get actual deflation than simply to have stable prices, so scenario A means much higher unemployment. Second, because Spanish debt is in euros, scenario A implies a significantly worse debt burden.
So what we’re seeing is an ECB catering to German desires for low inflation, very much at the expense of making the problems of peripheral economies much less tractable.
This is going to be ugly."
So, imagine a eurozone that contains only two countries, Germany and Spain. And let’s make two assumptions: first, Germany’s economy is three times the size of Spain’s, so that German inflation is 3/4 of the overall index, Spain’s inflation 1/4; second, past events have left Spanish wages and prices 20 percent logarithmic too high relative to Germany. (Why logarithmic? So I can just add percentage changes, without having to worry about compounding.)
Now suppose that you want to get relative prices and wages back in line over the course of 5 years. How can this happen? Well, one way or another we need to have German inflation 4 points higher than Spanish inflation over that period.
So consider two scenarios: in scenario A, we have 2 percent German inflation and 2 percent Spanish deflation. This implies an overall eurozone inflation rate of 1 percent. In scenario B, we have 4 percent German inflation and zero Spanish inflation, implying eurozone inflation of 3 percent.
In a frictionless world, it wouldn’t matter which scenario gets chosen. But in reality, scenario A, the low-inflation scenario, is vastly worse for Spain — for two reasons. First, it’s much, much harder to get actual deflation than simply to have stable prices, so scenario A means much higher unemployment. Second, because Spanish debt is in euros, scenario A implies a significantly worse debt burden.
So what we’re seeing is an ECB catering to German desires for low inflation, very much at the expense of making the problems of peripheral economies much less tractable.
This is going to be ugly."
No comments:
Post a Comment