Dona Merkel Quichotte vs the Mills of Inflation

We might be at a turning point. As you may know, I've started the year with the Bulls and my main argument was that the Sheriffs, governments and central bankers "worldwide", having learnt the lessons from the Great Depression would do anything possible, whatever the price is, to make sure the recovery would sustain. It may be time now to re-assess this view and it might be the time for the Bear Lord to come back. Since the very beginning of the crisis, I've been thinking that the better way out was to articially create some inflation (or at least prospects of it), thinking that ultimately this inflation once started could be controlled with the modern tools the Sheriffs have handy (or not but it's not the topic now). A few weeks ago, the situation as I could see it was a battle between two different groups of countries, those whose interest is the fight of deflation notably the US, Europe and Japan and those whose interest is to fight inflation, the emerging countries eg China and India. My bet was that ultimately, the fight against deflation would prevail but the recent moves tend to show I was wrong on this.

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Timely post Sauros. I have read a bit of commentary from both sides of the "austerity" vs. growth debate. My view is that growth needs to be organic. By organic I mean new innovations in existing domestic industries coupled with investment and/or risks by young entrepreneurs. Growth can no longer be fueled from borrowing. I believe in the beginning of 2009 world GDP was close to $62T while world debt was about $80T. If the former number increases at the expense of the later, more institutions and sovereigns will unravel. For instance, Greece is preparing to offer close to 4 B Euros in order to rollover debt maturing in July. If lenders are dumb enough to subsidize a failing economy and trust irresponsible policy makers with new bags of cash the problem will only become worse.

You pointed out Britain's lack of empathy for the unemployed and greater population of citizens in 1931 for the sake of balancing a budget. However, this was a time when Central Bankers acted more as the governments exclusive club of private bankers rather than Policy makers. My point: Central Banker's no longer have motives to make self-enhancing decisions unless of course they enjoy macro-economic experimentation. The only thing central bankers know how to do effectively is print money. That is what will continue to happen if the public sector does not own up to the private sector debt they willingly accepted to pay. There is no way to move debt off of the government balance sheets without cutting expenses. Taking on more debt to subsidize more risk taking in the financial sector/corporate world is not the answer.

Undoubtedly, growth is key in order to stave off the elusive grey swans from deflation. However, I am in favor of cutting costs and taking my chances. It is better to get shot in the arm today then the head 5, 10, or even 50 years from now. My argument does not address emerging countries such as China, Vietnam, Russia, or Malaysia. That is a different discussion that cannot be linked to the problems of the developed world.

Great post though.

Batman wrote:

Timely post Sauros. I have read a bit of commentary from both sides of the "austerity" vs. growth debate. My view is that growth needs to be organic. By organic I mean new innovations in existing domestic industries coupled with investment and/or risks by young entrepreneurs. Growth can no longer be fueled from borrowing. I believe in the beginning of 2009 world GDP was close to $62T while world debt was about $80T. If the former number increases at the expense of the later, more institutions and sovereigns will unravel. For instance, Greece is preparing to offer close to 4 B Euros in order to rollover debt maturing in July. If lenders are dumb enough to subsidize a failing economy and trust irresponsible policy makers with new bags of cash the problem will only become worse.

You pointed out Britain's lack of empathy for the unemployed and greater population of citizens in 1931 for the sake of balancing a budget. However, this was a time when Central Bankers acted more as the governments exclusive club of private bankers rather than Policy makers. My point: Central Banker's no longer have motives to make self-enhancing decisions unless of course they enjoy macro-economic experimentation. The only thing central bankers know how to do effectively is print money. That is what will continue to happen if the public sector does not own up to the private sector debt they willingly accepted to pay. There is no way to move debt off of the government balance sheets without cutting expenses. Taking on more debt to subsidize more risk taking in the financial sector/corporate world is not the answer.

Undoubtedly, growth is key in order to stave off the elusive grey swans from deflation. However, I am in favor of cutting costs and taking my chances. It is better to get shot in the arm today then the head 5, 10, or even 50 years from now. My argument does not address emerging countries such as China, Vietnam, Russia, or Malaysia. That is a different discussion that cannot be linked to the problems of the developed world.

Great post though.

Thanks for your comment.
First to be back to my reference to 1930s, I understand that it may seem inappropriate and not timely as Central Banking has definitely changed since. But the mistakes made then that precisely helped to a large extent designing modern Central Banking (at a high cost of blood, sweat and tears) have to be avoided and in the post, I just wanted to remind about the dangers of tightening in the name of a balanced budget while the recovery is still fragile.
This said, I can onIy agree your point on an excessive debt but like in the trading game, everything is about the timing or more precisely bad timing can have a dramtic impact: there's a time to ease and a time to tighten and I think that particularly in Germany, time to tighten has not come yet : they still have room.
I will mitigate my point here saying that the UK case is much more arguable as the need to cut the deficit seems to make more sense than in Germany
Finally regarding your point on taking chance, I agree that's a bet, the thing is to have handy a plan B in case the gamble doesn't work as anticipated, the consequence of being wrong in that bet is just too profound.