Give War a Chance

Let’s hope Barry Eichengreen doesn’t see this Yahoo article:

Japan has set the stage for a potential global currency war, announcing plans to create money and buy bonds as the government of Prime Minister Shinzo Abe looks to stimulate the moribund growth pace.

Economists in turn are expecting others to follow that lead, setting off a battle that would benefit those that get out of the gate quickest but likely hamper the nascent global recovery and the relatively robust stock market.

Update:  Ryan Avent and Matt Yglesias have excellent posts criticizing ECB policy.  Matt links to another great article from Ambrose Evans-Pritchard:

Japan’s premier Shinzo Abe has more or less ordered his central bank to both reflate and target jobs creation. The US Federal Reserve stands ready to inject stimulus until America’s jobless rate falls to 6.5pc. Yet the ECB professes itself helpless in the face of 11.8pc unemployment, a post-EMU record and rising each month.

The ECB’s Mario Draghi said there is “not much” that monetary policy can do to fight structural unemployment. If it really was “structural”, his plea might convince. It is not.

Ireland has one of the world’s most flexible labour markets yet its jobless rate has risen from 4.6pc to 14.6pc, and that includes the safety valve of massive job flight to the UK, US, and Australia.

.  .  .

Former ECB governor Athanasios Orphanides — a world expert on deflation –has broken loose, rebuking his ex-colleagues for standing “idly by” as Europe’s socio-economic disaster unfolds.

“We are in the middle of a policy-induced recession and monetary policy can do more to contain it, without compromising price stability,” he said.

Jacques Cailloux from Nomura says money is still ferociously tight for a string of countries. Their sovereign bond yields have fallen far, but not far enough to keep pace with GDP contraction.

Nor have the gains fed through to the economy. Italian and Spanish companies still pay twice as much to borrow as German rivals. The North-South gap is becoming hard-wired into the system.

.  .  .

I might add that ECB bond purchases amount to fiscal union by stealth, outside democratic control.

Chancellor Angela Merkel has mutualized EMU debt without telling German taxpayers. This may be necessary if the goal is to save the euro — not a goal of any moral content — but it is hardly a healthy state of affairs. The Bundesbank’s Jens Weidman is right to warn that it will come back to haunt.

That is a story for another day. The horror before our eyes right now is social ruin. Europe’s crisis strategy is to the break the back of labour resistance to pay cuts by driving unemployment through the roof. That is what `internal devaluations’ are. It stinks. And the ECB is adding to the cruelty by keeping money too tight.

Mr Draghi deserves his accolades, but his job is not yet done. He has saved the rich. Now he must save the poor. Coraggio.

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