Can Inflation be Too Low?

[Oceander]

Can Inflation be Too Low?

On Tuesday, Bundesbank chief Jens Weidmann opened the door to QE and negative interest rates.

    European Central Bank governing council member and Bundesbank chief Jens Weidmann said negative interest rates would be more appropriate to use to counter a higher exchange rate.

    Weidmann also added that it was not 'out of the question' for the ECB to buy bank assets to fight deflation, in a softening of the German central bank's strict stance on the issue.

Monks Recant

The above announcement had the monetarists led by Ambrose Evan-Pritchard preaching "Monks recant: Bundesbank opens the door to QE blitz".

Policy Shift or Just Extreme Verbal Intervention?

Others are scratching their heads. Is this a bluff of some sort or is it the real deal?

Comments yesterday and today on Eurointelligence are quite interesting.

Eurointelligence Today

    Nobody we have talked to has the slightest clue what the ECB is doing right now. In one of the press conferences Mario Draghi is dovish, the next one he is hawkish. One day, Jens Weidmann says the QE is not right for the ECB, then he can live with it in principle. One day, they warned that negative interest rates would produce all sorts of distortions and risks, and now we are told that they have long ceased to be a subject of dispute. In the meantime, nothing happens. We have reached a point where nobody listens to verbal intervention any more. A Reuters news analysis by Eva Taylor observes: "While some economists said the Bundesbank president 'left the door open, although only slightly' for asset purchases, others saw it merely as a more precise statement of its position and an attempt to talk down the euro exchange rate."

Eurointelligence Yesterday

    Substantively, what happened yesterday is that some central bankers acknowledge a risk we have known all along, that inflation can be too low, and that the ECB has policy tools at its disposal to fight this. None of this should be news. The most interesting bits were Liikanen's and Weidmann's statement about negative deposit rates - a route the ECB now appears less reluctant to take. It would address the dual problem of the overshooting exchange rate and the fall in excess liquidity. We find it harder to figure out Weidmann's much reported statement on QE. It seems to us that he is merely signalling that he opposes it for different reasons than usually stated - not out of a fundamental belief but because he does not think it to be appropriate now. So this seems just another form of verbal intervention? We thought his qualifier was more important, which suggests that if QE ever were to happen, it will probably occur on an insufficient scale. In our own analysis, inflation expectations have already decoupled in recently month, caused by ECB policy errors. The governing council has been persistently complacent and some of the members are now beginning to panic. We do not think that a further rate cut, a half-hearted QE programme, let alone verbal intervention, will be sufficient to re-anchor inflation expectations.

Can Inflation be Too Low?

There is nothing quite like making an economically illiterate statement backed up only by the supposition that another clueless party agrees.

Let's play a thought game.

Here is the question at hand: What if the price of everything fell to zero?

Certainly no one would go hungry. But it goes far beyond that. Everyone would have their own private jet, the biggest house that they could imagine, etc.

From a practical standpoint, nirvana cannot happen of course, but here are three points to consider.

    Falling prices mean goods and services are more readily available and more affordable
    Falling prices increase standards of living
    Falling prices reduce wealth inequality (With everything priced at zero, income is irrelevant).


In light of the above, the notion that "inflation can be too low" is patently absurd.

Ironically, the myth we need inflation is widely held, even though the Fed's inflationary policies are the biggest cause of rising wealth inequality.

For further discussion, please see Monetarism, Abenomics, QE, and Minimum Wage Proposals: One Bad Idea Leads to Another, and Another

As to whether or not the announcement is a Bluff or Insanity, I suspect both.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Read more at http://globaleconomicanalysis.blogspot.com/2014/03/ecb-ponders-negative-interest-rates-and.html#oeirdqW2qSSH6A3I.99

[EC]

Falling prices mean goods and services are more readily available and more affordable
    Falling prices increase standards of living
    Falling prices reduce wealth inequality (With everything priced at zero, income is irrelevant).

Lets take this:

It makes them less available and less affordable, not more. If everything is priced at zero, who needs to work? Sure, you'll get some people who will make furniture, or paint, or grow food because they find it fun or relaxing, but no bugger is going to want to work in a packing plant or a factory. Those are not fun places to be. Very few people grow up dreaming of being a quality control inspector, or a sewer maintenance guy. As the old saying goes - if work was fun, they wouldn't have to pay us for it.

Even if everything is not priced at zero, lower prices in low margin industries wipes businesses out. They either have to find a way of cutting costs or go under. My son in law is a maintenance engineer and he bitches like hell about this. Fewer people to do the same amount of work on his shift, wile the work load is increasing because, in his words, "The bastards cut costs by cutting corners."