| Lemming Economics |
12 May 2003
|
ECB May Unwisely Lower Inflation Floor
The European Central bank is considering a change in policy that would require member states to keep their inflation rates to 1% or lower. This would be a sound idea if growth were at a break-neck pace, jobs were in search of workers (rather than the other way round), and if spending were too high. Since none of that applies, perhaps, the ECB should go back to finding a replacement for the alleged crook they want to replace Wim Duisenberg as head of the body and leave things as they are.
Like generals fighting the last war, central bankers appear to worry too much about the problems of their youth. Inflation used to be a worry. Of course, the Soviet Union used to exist, MTV used to be interesting, and the NBA used to have offense, too. Inflation has been dead in the developed world for many years. Too great a concern for it has actually produced slower growth than necessary, and in Japan, policy has erred so far the other direction, that deflation is a reality.
Central bankers should be worried about deflation these days. Interest rates are at generational lows, and growth remains sluggish. A concerted effort to tell the markets that inflation is no longer an issue, that the high rates of the 1970s can directly from the colsing of the gold window and the massive increase in oil prices for non-market reasons.
Instead, the ECB is offering the world a Europe that cannot reflate when it needs to. The ECB will render itself unable to attack unsatisfactory market conditions because the interest rates it has to work with will be too low for comfortable and sponstaneous adjustments. Fighting the last war is almost always bad for the side that does it. Fighting the wrong ecnomic problem has contagion effects for one's neighbors. The ECB is not just being foolish with the economic prospects of its members; it is threatening all the world.