Wednesday, February 25, 2015

All Show and No Go

From Athens to Berlin to Washington DC, what passes for economic policy is conversation lacking substance.

Greek politicians were recently elected by promising to walk away from the economic reforms required under the European Union bailout.  Listening to both sides suggests that neither is listening to the other.  There is no real agreement between Greek officials and the Troika other than to "extend and pretend." Two years from now, the Greek debt and economic situation will be much worse than it is today (which will also be true for almost every country in the Eurozone).  Conversation alone cannot possibly do anything about the manifold problems in the Eurozone broadly and Greece in particular.

Another strange and bizarre exercise is the testimony this week of Fed Chairman Janet Yellen.  Rather than openly admit that economists no longer, if they ever did, have any idea what the effect of monetary policy may or may not be, Yellen got out the straight-edge once more and predicted that whatever is currently going on will continue to go on (which is basically the same speech given at every Fed briefing since Ben Bernake's reign began.

The most serious risk to the American economy, aside from terrorism, is the risk of unexpected and unanticipated inflation. We no longer have any real idea what causes inflation and an absurd pre-occupation with the possibility of deflation.  Historically, deflation has rarely done any economic damage to any real economy (with the possible exception of Britain's return to pre-war gold parity in the 1920s).  The massive expansion in central bank balance sheets throughout the western world in the past decade likely will lead to levels of inflation that are currently assumed to be impossible.  We shall see.

In any event, nothing of substance is going on in Athens, Berlin, or Washington DC these days that appears helpful to economic growth in the future.

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