ECB is delighted by the splendid prospect of deflation

The great mystery is why the voting public of debtor states continue to put up with an arrangement that ensures years of mass unemployment

If Europe’s elites seem nonchalant about the deflation threat staring them in the face, it is because they do not share the Anglo-Saxon and Japanese orthodoxy that letting it happen is an unforgivable policy failure.

The handful of officials calling the shots at the European Central Bank and Germany’s finance ministry — with applause from Italy’s hard-money “Bocconi Boys” and Spain’s “Austrian School” ultras — do not think deflation would be traumatic even if it were to happen. Some rather like the idea.

Their champion is Jaime Caruana, head of the Bank for International Settlements (BIS). “The historical evidence indicates that deflations have often been associated with sustained growth in output. The Great Depression was more the exception than the rule,” he said in a seminal speech last month.

BIS studies show that much of the 19th century was an era of “good deflation”: gently falling prices amid productivity gains and flourishing world trade. Britain was in deflation for 51 years between 1801 and 1879, the era of British economic ascendancy. German prices fell 2pc from 1880 to 1913 yet catch-up growth was a blistering 4pc on average.

Mr Caruana implicitly argues that we are back to the 19th century. The opening up of China and eastern Europe amounts to a “positive supply” shock for the world that pushes down inflation in a healthy way, and should not be resisted.

Full article: ECB is delighted by the splendid prospect of deflation (The Telegraph)

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