Expect nothing but a repeat variation of her 2012 Wolfgang Schäuble laudatio from consummate diplomat Christine Lagarde today. This is not the time to tell the Germans to get over their Schwarze Null fetish and spend money.
Maybe there will be the odd softly spoken hint at clever new injection technology tunneling through southern debt mountains toward the dawn of monetary energies fusing with fiscal ones? Not unlike the new E.Q. tested at the Fed? Except this is not about calming the Repo Market but stabilising Southern Debt?
See also MishTalk on financial-fragmentation-of-the-eurozone-in-pictures
But this sort of stuff is best announced during market hours with Philip Lane ready to counter Jens Weidmann in the eggheads office?
To his credit Mr Lane has done work on money production which highlights realities like “domestic credit growth in European countries … ( being) … strongly related to net debt inflows …”. So presumably he has some grasp of the realities of (bank) money production in the real economy.
In contrast Weidmann’s recent speech on Macroprudential Policy seems to betray a mind not just imprisoned in Wicksellian Central Bank Dogma but a treasure chest of sound money within. Money is a store of value. The banker its guardian. The economy its servant.
For a more patiently critical engagement with Weidmann read Stan Jourdan’s article on his objections to “Green QE”.
Many (central) bankers have had to become money-wise economists to compensate for the economists’ ignorance about money (1). Not so Jens Weidmann. He stays put as Sparkassenchef.
Others have had to move on. Like Mervyn King. Or Andy Haldane. Or Daniel Tarullo. Or William White. Or Count Draghila.
If only the creditors would let her , Ms Lagarde would probably quite like to do what Draghi has been recommending :
“To make our Monetary Union more robust against future challenges, we need to address (the) fragilities.” In particular, Ferdinando Giugliano writes on bloomberg, Mario “… advocated the creation of a single deposit guarantee, which would ensure that all depositors feel equally safe in the monetary union. Second, he advocated a “capital markets union”, which would lead to greater cross-border ownership of European companies. This would ensure that when an economic shock hits one country, the pain spreads more broadly across Europe.
And third, and most controversially, Draghi also made the case for a single euro zone budget. “We need an additional fiscal instrument to maintain convergence during large shocks, without having to over-burden monetary policy,” Draghi said. “Its aim would be to provide an extra layer of stabilization, thereby reinforcing confidence in national policies.”
Hence Draghi’s last words at the Frankfurt handover:
“Monetary policy can still achieve its objective, but it can do so faster and with fewer side-effects if fiscal policies are aligned with it.”
As The Times puts it: “The subtext — that central banks are running out of road and governments need to spend — would not have been lost on Mrs Merkel. His words also alluded to the two big issues that Ms Lagarde … will face. The first is that the ECB arguably is out of monetary ammunition. The second is the one thing that Mr Draghi, 72, failed to achieve: persuading national governments to do their bit for regional growth.”
Draghi has bloomberg’s approval and more or less expresses the any-and-all-flavours Keynesian mainstream consensus that Germany and the other creditor countries need to spend. Now. Wisely, of course. But spend. Not save. Simple.
What is difficult is to understand why the Weidmanners still believe what they seem to believe given how detrimental their faith is to the German, let alone European interest.
Nor has it any discernible philosophical, economic or political foundations. It’s not some purist Austrian, Hayekian or Schumpeterian creative – destructive non – interventionism, after all. That would make some sense. Nor is it MMT or some interesting Post Keynesian heterodoxy, obviously.
Instead it looks like some naive gold standard bankers’ sound money dogma which combines the moral righteousness of the creditor with an anachronistically defunct and possibly subconscious metallist commodity theory of money?
Unbelievable?
But apparently true. After all, we must not mention money. As in fiat money. Credit money. Schuldgeld ! Just can’t cope with that. Neither practically nor theoretically. (1)
To understand the theoretical depth of most economists’ money denial read Geoffrey Ingham below. (1)
Or read Martin Wolf’s “How the euro helped Germany avoid becoming Japan” as another fresh variant of “Stupid German Money”. Or as he puts it : “For Germans, the necessary realisation has to be that the euro is already working to their benefit …”
Hmm. Try telling that to the Black Zero Hard Work Exportweltmeisters.
Maybe be less tears with two tiers?
“The structural divergence of Northern and Southern economies continues to threaten the stability of the Monetary Union. The asymmetric euro regime is meant to achieve convergence through the enforced structural transformation of Southern political economies. In spite of significant progress, however, this goal is ultimately beyond reach because of the size and the exceptional competitiveness of the German economy. Since the German government will not be able to change these conditions, the most likely course of events will lead to a transfer union – which is likely to establish the permanent dominance of more competitive Northern over less competitive Southern economies. In order to avoid this course it would be useful to establish institutional rules that facilitate the transition to a flexible two-tiered European Monetary Federation.”
Pity Ms Lagarde. Bild probably already got their copywriters working on “Macro Mistress Largesse the Lying Lizzard” etc
Just wait for and it follow the money …
(1) Why so many economists are still neutral money credit-money deniers is nicely explained by sociologist Geoffrey Ingham in “The Nature of Money” loc 547 (all emphases added)
“Real (economic) analysis proceeds from the principle that all the essential phenomena of economic life are capable of being described in terms of goods and services , of decisions about them , and of relations between them .
Money enters the picture only in the modest role of a technical device that has been adopted in order to facilitate transactions . . . so long as it functions normally , it does not affect the economic process , which behaves in the same way as it would in a barter economy : this is essentially what the concept of Neutral Money implies .
Thus , money has been called a ‘ garb ’ or ‘ veil ’ of the things that really matter . . .
Not only can it be discarded whenever we are analyzing the fundamental features of the economic process but it must be discarded just as a veil must be drawn aside if we are to see the face behind it. …
The most serious challenge that the existence of money poses to the theorist is this : the best model of the economy cannot find room for it . The best – developed model is , of course , the Arrow – Debreu version of a Walrasian general equilibrium . A world in which all conceivable contingent future contracts are known neither needs nor wants intrinsically worthless money . …
Despite the inexorable growth of bank credit – money , orthodox academic economists clung , with increasing desperation , to the anachronistic theory . Their model of money supply was , in effect , an empirical generalization of a naturally constrained supply of a metallic monetary base provided by a central authority ( the mint ) that was outside the market . That is to say , in the terminology of the late twentieth century , it was ‘ exogenous ’ .
The retention of the commodity theory and its assumptions was achieved by maintaining a sharp distinction between money – proper and credit . The credit supply was seen as the top of a large inverted pyramid on the narrower base of the gold standard . The direct question of whether credit was money was studiously avoided in orthodox circles , but given its pivotal importance in capitalist economies , credit was gradually incorporated into orthodox quantity analysis .
However , this merely exposed the contradictions and inconsistencies in the commodity theory . For example , most orthodox economists of the early twentieth century got little further than seeing credit as a means of economizing on money – proper . But they all stopped short of the idea that bank loans might create credit – money in the form of deposits that were relatively autonomous with respect to the stock of precious metal money .
Credit could not easily be accommodated in the concept of the ‘ real ’ economy as a structure of exchange ratios ( object – object relations ) based on the preferences of individual utility maximizers ( agent – object relations ) . The creation of money by the creation of the social relation of debt ( agent – agent relations ) was utterly incompatible with the methodology of orthodox neoclassical economics . And the extension of this idea … that all forms of money , including commodity – money , are constituted by a social relation of credit was anathema .”
updated 18/4/20