The ECB Blasts Governmental Fear-Based Racketeering, Questions Keynesianism, Believes The Fed's Powers Are Overestimated

Tyler Durden's picture

In what could one day be seen by historians as a seminal speech presented before the Paul Volcker-chaired Group of Thirty's 63rd Plenary Session in Rabat, the ECB's Lorenzo Bini Smaghi had two messages: a prosaic, and very much expected one: of unity and cohesion, if at least in perception if not in deed, as well as an extremely unexpected one, in which the first notable discords at the very peak of the power echelons, are finally starting to leak into the public domain. It is in the latter part that Bini Smaghi takes on a very aggressive stance against not only the so-called "inflation tax", or the purported ability of central bankers to inflate their way out of any problem, but also slams the recently prevalent phenomenon of fear-mongering by the banking and political elite, which has become the goto strategy over the past two years whenever the banking class has needed to pass a policy over popular discontent. The ECB member takes a direct stab at the Fed's perceived monetary policy inflexibility and US fiscal imprudence, and implicitly observes that while the market is focusing on Europe due to its monetary policy quandary, it should be far more obsessed with the US. Bini Smaghi also fires a warning shot that ongoing divergence between the ECB and Germany will not be tolerated. Most notably, a member of a central bank makes it very clear that he is no longer a devout believer in that fundamental, and false, central banking religion - Keynesianism.

First, a quick read through the "prosaic" sections of Bini Smaghi's letter.

Bini Smaghi, who is a member of the executive board of the ECB, has a primary obligation to defend the ECB's public image in this time of weakness and complete lack of credibility. And so he does. When discussing the ECB's response to the Greek fiasco and contagion, he is steadfast that the response, although delayed and volatile, was the right one. Furthermore, he claims that the hard path Europe has set on is the right one, as it will ultimately right all the fiscal wrongs, even without the benefit of individual monetary intervention. Ultimately, the ECB is convinced that not letting Greece fail, either in the form of union expulsion or partial default, was the right decision, as "this sill force euro area countries to address their fiscal positions earlier. It’s not easy. But it will be done, because it can be done and it has to be done in any case. And, last but not least, because there are no alternatives." Alas, while we agree that admission is the first step on the road to recovery, the subsequent steps will prove to be insufficient. The imbalances in Europe are of such great magnitude that hoping that countries eventually grow into their balance sheets by way of austerity is simply a ridiculous assumption, and as such does not merit extended overviews. We note this with irony, because apparently the ECB, contrary to elementary school rule #1, favors quantity over quality. As the ECB board member says:

Let me consider the arguments put forward by those who regard a Greek default as unavoidable.

Their first argument is economic. The adjustment programme is too harsh, given the level of the debt-to-GDP ratio reached in Greece. It will produce a debt spiral which will lead the country into a recession and deflation. The problem is made worse by the loss of competitiveness suffered by Greece over the last decade and the impossibility of devaluing the currency. Their reasoning is generally no more sophisticated than that. Some analysts have put together a few numbers to show that they are aware of the problem. But I have not seen a serious analysis of the 120-page report produced by the IMF which looks at the various aspects of the programme, including the impact of the structural measures on growth, the sustainability analysis or other features of the programme. Not one review of the realism of the assessments made by the staff of the IMF and the Commission. In fact, I suspect most market analysts have not even looked at the adjustment path for the primary surplus which is embedded in the programme, which aims to reach 6% of GDP in 2015, a level no different from the ones that other countries in the past have implemented to consolidate their public finances. It’s a level that a number of other countries – including some outside the euro area – will have to achieve if they want to stabilise their debt. Most market analysts and other observers have probably not even looked at the structural measures that are embedded in the programme, affecting for instance the labour market, or at several liberalisations, and their impact on economic growth. The inefficiencies in the tax collection system, which have been aggravated before the elections, have also been overlooked. The perception that the Greek programme will not work looks more like an assumption than the result of a serious assessment.

To summarise, I wonder which analysis is more serious and credible: the many one-pagers, very well publicised – I must admit – which probably aim to influence the rest of the market; or the IMF’s 120 pages of rather tedious analysis describing the contents of the programme, together with its risks.

To this we ask: if a collective brain trust is charged with the goal seeked, and well compensated by taxpayers, duty to put together a 1,200 page report that confirm the primary tenets of the trust itself, will Mr. Smaghi give it 10 times the credibility of the ECB's report? Or how about one million typewriter-armed monkeys putting together 1,200,000 page "analyses" claiming that the Greek default is inevitable? We hope someone has the facilities to conduct just such an experiment. Perhaps the futility of such a simplistic act is the very reason why not more than a one-pagers is required to refute the central bank dogma.

Thus the key axis of contradiction emerges: the ECB is willing to set off on the "demonstratedly" arduous journey of forcing its member states to right their fiscal (income statement) evils, yet while not acknowledging that the key missing link, balance sheet restructuring, is not necessary but critical. There is a reason why plain vanilla restructurings focus on the balance sheet, and not on the income statement: a company with a fresh start balance sheet can grow its income statement without its debts being a hindrance, on the other hand, rarely if ever, do income statements allow companies to grow into untenable balance sheets. This is the main flaw in the ECB's plan. And it is these very contradictions that force the European populace to lose its credibility in the ECB, a concern which even the central bank is all too aware of.

The balance of the "prosaic" part of the speech is along the same lines: merely a defense of the ECB's line of actions, driven primarily by a direct response to the market, and thus a very short-sighted and reactive, instead of proactive, policy response, which merely invites the market to test out the ECB's lack of resolve. And once again, the ECB is not naive and is fully aware of this, yet it redirects attention to other source of "market-test" weakness: "Financial markets are testing each country, one by one, to see whether they are willing to adopt the necessary budgetary measures, starting with those which seem to be facing the greatest hurdles to consolidation." Bini Smaghi is right and wrong here: the market will continue testing country by country, but not to determine fiscal resolve, only to take advantage of the lack a monetary one. And so from crisis to crisis, the market will continue reaching deeper until it finally tests the very core of the eurozone: Germany.

And speaking of Germany, this brings us to the other part of Bini Smaghi's letter. In one of the first open shots of public confrontation, we see that the ECB has been very much displeased not only by rampant fear-mongering, but by the words of Germany's Angela Merkel, whose recent repeat declarations that Greece could be allowed to leave the union, have undermined the bedrock of the ECB. Furthermore, as the WSJ reports, "in a rare show of defiance for the consensus-driven ECB, Germany's
central bank head Axel Weber told the German newspaper Börsen-Zeitung
that he viewed the bond-buying decision "critically" and that it
carried "substantial stability risks." Is this the type of rancorous infighting between Europe's two main powers, that will seal the fate of the Eurozone experiment far more certainly than parliamentary stormings in Athens?

We read in Bini Smaghi's letter the first fingerpointing of displeasure by an ECB official aimed squarely at Germany:

A further dimension, in the European context, is the difference in cultures and sensitivities. They affect how issues are communicated within countries, in particular between politicians and their electorates. These are differences which totally disconcert financial markets. For instance, in one large euro area country it was thought that public support for swift action could be achieved only by dramatising the situation, for instance, by telling the public that “the euro is in danger” or by considering the possibility of expelling a country from the euro area. But it was not realised that, in the midst of a financial upheaval, such words are like fanning the flames and that the cost of the support package could only increase following such dramatic declarations. By contrast, in other countries, leaders want to be seen as being in control of the situation and taking all sorts of initiatives to reassure their electorates. The media, of course, have a field day reporting on such apparently inconsistent activities.

We hope that the ECB's displeasure by the kind of racketeering that Americans have grown to know and loathe, as it is performed either openly by politicians who directly threaten with end of the world scenarios every time they wish to get their way, or indirectly, such as when the market crashes a 1,000 points when it appears that the Fed is on the verge of losing its secrecy, is espoused by more individuals and organizations. On the other hand, we will closely follow the now open feud between German and Europe's Central Bank - if past experience is any indication, infighting between these two will only lead to mutual weakening, and result in an even faster forced reorganization of peripheral European countries, and, eventually the euro.

In this regard, perhaps Bini Smaghi's speech created far more damage than damage control: now that the public's, and more importantly, the market's, attention is be drawn to the duel between Germany and the ECB, this will merely destabilize the monetary union even more, now that monetary and political unions, and conflicts, are synonymous, a point not lost on the ECB executive himself: "As I said earlier, monetary union is de facto a political union."

And now that European monetary "politics" are the center stage, we find two other pearls in Bini Smaghi's speech.

Not too surprisingly, the ECB is now directly pointing a finger at the Fed, where conventional wisdom has long held the belief that due to its ability to determine independent monetary policy, backed by the world's reserve currency, the Fed can and always will easily inflate its way out of any complication.

To believe that an inflation tax can solve the problem posed by the mounting public debt is an illusion that some people like to cultivate. For several reasons. First, people are less naïve than some might think – they dislike an inflation tax as much as other forms of fiscal adjustment. Second, it’s not so easy to generate inflation, in particular ‘surprise’ inflation, without provoking a more-than-proportional increase in interest rates, also in light of the short average maturity of public debt in most countries. Third, a rise in inflation, and inflation expectations, would produce a major upward shift in the yield curve, inflicting major losses on the banks and financial institutions which have been heavily investing in these markets, potentially undermining the recovery.

This is probably the best encapsulation of the threats, or rather threat, that another QE episode by the Fed will bring with it. In essence the ECB is saying that should the Fed pursue another QE episode, the imminent explosion in short-end interest rates will lead to a solvency crisis within the US itself, monetary policy or not. Bini Smaghi points out one very critical truth: in not having a reserve currency, and thus protected by the belief that the ECB can inflate its way out of complication, it is forced to pursue fiscal reform, much sooner than the US will, which will only result in a much greater crisis in the US, once it becomes clear that the marginal influence of monetary policy will be drowned out by a sea of fiscal imprudence. And for the one true shining example of the latter, look no further than the CBO's 10 year budget deficit estimates.

In short, the impossibility of resorting to an inflation tax is forcing euro area countries to tackle the burden of public debt sooner rather than later. In other countries the illusion of being able to resort to the inflation tax might delay the adjustment, but the longer the treatment is postponed the harsher it’s likely to be. End of digression.

Was this the first shot across the bow in the the transatlantic central bank wars? Too bad the ECB will be insolvent overnight if the Fed decides to truly escalate and pull all its swap lines tomorrow. Why risk retaliation? This is easily the most important question needing answering over the next several weeks.

Last, but not least, are the following zingers that have no other intent than to poke at the ever larger holes appearing in the fabric of that one modern false economic religion known as Keynesianism.

In the aftermath of the Lehman failure, governments around the world seemed to rediscover Keynes. They injected huge amounts of borrowed money – public funds – to stabilise the economy after the shock of the Lehman failure. These policies worked, and averted a global depression. The success of those policies has led governments – encouraged by international organisations – to continue using expansionary fiscal policies to try pulling the economy out of the recession and getting it back to the pre-crisis level.

The strategy is based on a model which may turn out to be inappropriate in the current conjuncture. Let me discuss some of the underlying assumptions of the model. First, the initial fiscal impulse was successful in avoiding a depression because it helped to coordinate agents’ expectations, in the Keynesian or Knightian way of reducing uncertainty, thereby avoiding a vicious circle of recession and deflation. The direct impact on domestic demand may have been more modest, as shown in countries where the size of the fiscal stimulus was more contained but nevertheless fared equally well. Second, potential growth might have been severely affected by the crisis. As a result, the pre-crisis level of output, achieved in a bubble economy, would not represent a sustainable objective over the policy-relevant horizon. Third, the level achieved by the public debt in many countries may have impaired the effectiveness of further expansionary fiscal policy.

To sum up, while the fiscal expansion was successful immediately after the Lehman crisis, it may not be sustainable over time and may have to be corrected rapidly. Financial markets seem to be giving increasing attention to this hypothesis. And they have started to test it.

Is this the last degree of "religious" doubt before outright revulsion set in and the oligarchic heretics emerge? More so than the question of whether or not the euro is viable, is whether the beginning of the end for Keynesianism is approaching? If so, the imminent revolution in Western world economic thought will be unprecedented, and the resulting global reset will lead to a world where daily news will no longer be dominated by headlines about more record banker theft going unpunished, co-opted and facilitated by a cheaply purchased legislative, executive and judicial system.

Link to full speech by Lorenzo Bini Smaghi, Member of the Executive Board of the ECB at “The Group of Thirty”, 63rd Plenary Session, Session I: The Crisis of the Eurosystem, Rabat, 28 May 2010

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lynnybee's picture

this article is exactly why i love this website ........ i learn so much & really appreciate Tyler's efforts.    sincerely .....

hound dog vigilante's picture


ZH is a template that will multiply... smart, nimble SMEs driving web-based journalism (and dialogue).

If broadsheet press is dying, then ZH is both executioner and mid-wife to the next generation...  long live ZH.


Postal's picture

Hail Tyler! Long live ZH! *raises goblet of wine in toast*

ThreeTrees's picture

Agreed.  Crowdsourced media:  The Market at Work.

trav7777's picture

TOD was really among the first of this breed

AnAnonymous's picture

What did you learn? That the Euro has not the same properties as the USD, that the missing properties matter, that the Euro doesnt allow to do what you can do with the USD and that the Europeans resent?


It is hoped this is not this. Because it is not news.

Trichy's picture

No, what you learn from this great article is that however close europe is getting to the Ben way, applauded by the Frogs and the Meds, there are still some responsible Europeans left. The Germans are going to resist Keynes, which supports my view that it will be them walking out of the Euro disaster. It will take more clout than Sarkozy, Berlusconi and Mr. Bean of Spain have to bully the German population into bailing out the trash.

The only reason the Germans have gone along, so far, has been their weak banks overlevered with the periferis junk bonds. They will soon recognize that it is cheaper to redirect these bail outs directly to their own banks instead doing the detour through the corrupt states.

My bet is that the next time Sarkozy punches his fist into the table on behalf of his Keynsian gang, both the ECB and Merkel will call his bluff. That could well start the fun.

(Reflection: Ever wonder why there were so many zeros on Mediteranean bills

1 Merkel= 100 Drachma= 100 Mr Bean Pesetas 1= 1000 Lira = Keynes)


Thx Tyler, great piece.

AnAnonymous's picture

Where does your appreciation of who is a Keynsian and who is not come from?

Europe is trying to mimick the US. But they work with the Euro, not with the USD.

That is why they will never achieve the same results as the US.

Trichy's picture

Agree, they will never achieve the same result as the US, thank god, and that is just because Gemany won't let them. If it was up to the French, Spanish etc. they would already have US like deficits, bailouts et al in all of Europe. The current bailout has back doors as previously reported here at ZH, and was only partially agreed to by Merkel after Sarkozy bluffed by threatening to leave the Euro, lol.

AnAnonymous's picture

Clearly, the results achieved by the US are ugly. That is why the EU is trying to mimick the US by the way.

Trichy's picture

Sorry for insisting, but I interpreted your first post to imply, "move on no news here", which I disagree with. For the Euromarket as well as international it is extremely important to follow the mood of the ECB and the EU sovereigns and this was a big move from ECB. When you say EU is trying to mimick the US I again disagree cus you imply EU is reigned by the frogs. They had a win in getting the bail out through but the French have never won a war. (If you need to verify the later fact google "french war victories" and go for the I'm feeling lucky button.)

AnAnonymous's picture

That is that. Move on, no news. The Euro has not the same properties as the USD. Therefore the ECB cannot accomplish what the FED can accomplish.

sgt_doom's picture

"..they will never achieve the same result as the US.."

I believe the reason for that is because JPMorgan Chase, Goldman Sachs & Morgan Stanley have control of the single largest concentration of credit derivatives (mark-to-myth, of course).


Ropingdown's picture

Agree, Trichy: Merkel's quick independent implementation of various short-sale restrictions seemed to me the stage-setting for a move to rescue German banks directly, as the leadership saw the French trying to lock-in an absurd concept of "no restructuring, no defaults, no withdrawals."  Smaghi is desparate. The French "gang of three" have gone delusional. What will happen is still obscure.  The heart of industrial and engineering Europe is still either not in the Euro zone or willing to follow Germany, one would guess.

Kayman's picture

Ahhh AnAnon y mouse

Squeak louder, I cannot hear you.  Must be my racist ears.

Since you already know everything, why not move to China, set up your own site and wait for the knock on the door.

AnAnonymous's picture

You have a strange definition of knowing everything.

ISEEIT's picture

I adore this site. Shit on the fucking liars and I'll help do it. I need a hand though: Would love to have someone explain to me what "Liberty 33" is?

Tyler makes reference to that entity and my stupidness is unfamiliar with it.

Like the Angel said "Pleeese heeelp".

mikla's picture

Liberty 33 is a reference to the Federal Reserve Bank of New York, (at 33 Liberty Street, downtown Manhatton, New York City, New York, USA) through which "the Fed" handles most of its market operations.

Kayman's picture



I don't know who junked you and why, but you have asked a fair question and you have been given the answer.

I think most ZH'rs are happy to provide answers where they can, and I am certain most ZH'rs will confess they do not have the answers to every question.

That is, except for AnAnon y mouse, who while he/she/it already knows everything and disdains this site, still has the temerity to come on to this site and bother us with his tedious bleatings.

ISEEIT's picture

Thank you all. I am now somewhat less stupid. Honestly, I appreciate it.

Fíréan's picture

@ ISEEIT. ".... and my stupidness is unfamiliar with it."

Don't be hard on yourself.You are in good company here and probably know more than the majority,yet  not all, who post replies. I wonder how many have read the 120 page analysis refered to in the leading article here ? ! ? Maybe Zero Hedge  are conducting their own experiment of  multiples of typewriter-armed monkeys ?





Fíréan's picture

@ ISEEIT. ".... and my stupidness is unfamiliar with it."

Don't be hard on yourself.You are in good company here and probably know more than the majority,yet  not all, who post replies. I wonder how many have read the 120 page analysis refered to in the leading article here ? ! ? Maybe Zero Hedge  are conducting their own experiment of  multiples of typewriter-armed monkeys ?





exportbank's picture

I've asked this question on ZH previously but never received an answer:

Why is there a target inflation rate and why is it never 0%?

Why do governments target a 3% deficit and think they're doing well - why don't they target a 0% deficit or even better a 5% surplus to pay down debt?

akak's picture

I have been asking that very same question since I was a kid --- with never a logical or honest answer to it yet.

mikla's picture

I've asked this question on ZH previously but never received an answer:


Why do governments target a 3% deficit and think they're doing well - why don't they target a 0% deficit or even better a 5% surplus to pay down debt?


Why is there a target inflation rate and why is it never 0%?

There are (at least) three good answers:

  1. Inflation is a tax.  By forcing inflation, governments get to spend "new" money that they did not have before (because it did not exist).  Governments don't need to explicitly tax its citizens for this money -- they simply print it (so it is politically advantageous).  With a target rate of 0%, governments would not get "new free money".  Further, society doesn't "feel" the inflated effects of the new money (currency devaluation) until later, so governments get to spend "stronger" money before the citizens play with it (at which point it becomes "weaker" money).
  2. Inflation devalues current debt.  Since nearly all governments are in debt, it is advantageous to governments to "de-value" what they owe by debasing the currency.  Deflation kills debtors, including governments.  Hello Iceland, Greece, etc.
  3. Inflation forces transactions.  Since you are "punished" for holding currency (you are punished at the rate of inflation), more transactions occur because people are accustomed to "getting rid" of a devaluing currency.  This increases the velocity of money, encourages excise taxes, and otherwise promotes economic activity (which benefits the government through increased property valuations and a HOST of other taxes).
In theory, economists are so afraid of "deflation" (where economic activity is punished) that they don't want to go anywhere near 0% inflation.  This is the famous "deflation spiral".  To encourage a "safe" margin from deflation, they shoot for 3%.  If you go too high, then it's similarly possible to destabilize economic activity (e.g., capital access becomes risky at greater interest rates, which similarly punishes economic activity).
I have been asking that very same question since I was a kid --- with never a logical or honest answer to it yet.
IMHO the central planners would rather you not understand such things (they benefit most with a compliant citizenry). There are more "nuanced" answers regarding positive-and-negative inflation rates, but then we start to touch into the "business cycle", which the central planners absolutely do NOT want you to discuss.
mikla's picture

...sorry, I missed the other half of your question:  Governments never want budget surpluses.  They want to spend everything they can (the budget), plus more (the deficit).  It's fun spending other people's money, so they always run deficits.

Politically, spending money yields fame, power, influence, wealth, etc.  Since there is almost no "pressure" to combat fiscal irresponsibility (all interest groups want their cut, and they are the ones with the pressure), deficits are always-big-and-getting-bigger.

But, I bet you already knew that.  ;-)


DosZap's picture


Plus,if you have a surplus, the following year is difficult to INCREASE..................

Local & State Gvt's do this lose your cut of the pie.............IF it's not ALL USED.

ArsoN's picture

Thank you, Professor Mikla.  But isn't it also good to run a deficit as long as you grow faster than you borrow?  So if your GDP grew at 5% you could have a deficit of 4% of GDP.  This implies that you generated a positive rate of return on your investment (providing the financing/debt servicing costs don't ruin it).

mikla's picture

But isn't it also good to run a deficit as long as you grow faster than you borrow?  So if your GDP grew at 5% you could have a deficit of 4% of GDP.  This implies that you generated a positive rate of return on your investment (providing the financing/debt servicing costs don't ruin it).

Yes, that's true.  However, this brings in two things:

  1. Increasing roll-risk.  You borrowed more, so you have to keep rolling more debt (issue new bonds as your old ones expire).  This means you increasingly *require* stable capital markets, and you're increasingly at-risk to a favorable interest rate (if the bond market demands higher rates from you, that will really hurt).  The FALSE assumption is that the bond market will grow in capacity as your borrowing needs grow (e.g., tied to GDP):  NO.  At some point, the bond market must correlate to the "real" economy, which never grows as fast as the "financial leverage" economy.  However, as you mentioned, it's possible to walk this thin line (of "leverage") while things are "nice".  Of course, governments don't save for a rainy day, and rainy days come ...
  2. Liar statistics.  GDP is mis-calculated, and mis-reported on purpose (it doesn't reflect productivity).  Rather, changes in GDP for the last couple decades are merely changes in debt.  When we say a country has "only" 90% debt-to-GDP, it's a little silly because the government doesn't *own* that GDP (the private sector produced and owns that, the government merely takes a cut).  Further, that "90%" isn't real -- the government's liabilities are FAR higher than what's reported, and the "real" GDP is FAR LOWER than what's reported.

You are correct that leverage can give you net positive return -- but that assumes we spent money on something worthwhile.  In the real world, we set fire to piles of money (for no gained value) and call it GDP.  We build "bridges to nowhere" and call it GDP.  We account for future expected profits that aren't real, and call it GDP.

So, if you take out leverage for *real* productivity -- fine.  But that's not what we do, and that's not what will happen.  Give Greece a zillion billion dollars -- their "real" GDP won't move an inch.  They won't export any more olive oil than they do today (and quite possibly, they will export less).  That's "diseconomies of scale" and "increasing overhead".  Almost the entire $1 Trillion US stimulus is that (almost no productivity), and the $1 Trillion EU pledged bailout is the same thing (nobody will be more productive as a result).

Trichy's picture


And would add the Feb is investing in GDP growth as if it was an asset. They have seriously learnt the lesson of the French, who used to employ people to dig holes in the ground, just to be able to fill them again.

Lux Fiat's picture

GDP is mis-calculated, and mis-reported on purpose (it doesn't reflect productivity).  Rather, changes in GDP for the last couple decades are merely changes in debt.

Very thought-provoking take on things.  Goes back to that old saying that you get what you measure.  In spades.

Can we send Bernanke to the ECB in exchange for Smaghi?

To the person who junked mikla's comment - at least have the decency to explain why you thought that this deserved junking.  That would serve to further discourse and understanding, instead of sowing confusion.

Great job ZH - it is articles such as this one that keep me coming back.


Votewithabullet's picture

That "junking" feature is fucking useless. I will not donate to ZH as long as it exists.


~sarcasm~ on

ISEEIT's picture

Thanks Mikla:

If I weren't previously indoctrinated, educated to know better, I might begin to suspect that modern society is basically a crop being harvested by a bunch of elitist.

Could you PLEASE define Liberty 33 for me????

mikla's picture

Liberty 33 is a reference to the Federal Reserve Bank of New York, (at 33 Liberty Street, downtown Manhatton, New York City, New York, USA) through which "the Fed" handles most of its market operations.

juangrande's picture

address of the fed? liberty 33?

sgt_doom's picture

Wall Street, Broad Street, Park Avenue, Main Street and Liberty 33.....

Rusty_Shackleford's picture

Also, please consider for a moment that GDP is not the Federal Government's "profits" or "income".


People tend to think of GDP as it applies to the Federal Government like they think of their own salary as it applies to them.  This is an inappropriate analogy.


This would be akin to the owner of a company including the incomes of all of his employees as his own when he applies for a higher credit limit on his credit card.  The GDP does not "belong" to the state.  It is the sum total of all economic activity in the country INCLUDING government borrowing and spending.

The only reason it is used when talking about a country's debt, is because THAT's the number THEY want to use.  It makes it look better for them.  3% of GDP doesn't sound so bad.


Again, would the owner of a factory be able to borrow against the sum total of all the incomes of all of his employees?  Of course not.


It's all BS.


If anyone else is interested in a basic lesson in inflation and why the government likes it, consider checking out Irwin Schiff's "The Kingdom of Moltz".

exportbank's picture

As I thought.. Inflation and deficits are political instruments that have nothing to do with the long-term betterment of society.

It's like one of my other theory's - "Pension Plans don't exist to provide pensions".

mikla's picture

+1 ... I completely agree with what you're saying.  I will now say something else, and I don't want it to undermine the fact that I believe BOTH your statements are true.

It's possible that a targeted inflation rate (like 2%-3%) does actually benefit society.  It *does* result in increased activity.  Yes, it's not "free" -- the savers are punished (it is a mere hidden tax extracted by government from the poor).  I don't like the central planning aspect (I don't trust their intentions nor competence), and it inevitably amplifies "booms" and "busts" (it's hard to quantify its impact on the natural business cycle).  However, there are a lot of moving parts, and this "priming of the pump" quite possibly has net positive effect.

So, I don't complain specifically about "targeted" inflation rates (they are fraudulently reported anyway).  Rather, I complain that the central planners violate the social contract by fiddling with the value of money in MASSIVE ways (don't trust and plan your life such that a goal of 2% targeted inflation will be achieved; we will see double-digit inflation again at a most inopportune time).

WaterWings's picture

Great posts.

The central planners also use their alchemy to promote the ultimate racket: WAR

KTV Escort's picture

I wish my university professors could have been as crisp and laser accurate in their explanations as you.

ISEEIT's picture

I wish that every woman were as lovely as you (ass-uming) that is a actual pic of you.

Sorry for real if offended. I said it, but 100% I'm not the only one to think it.

GNH's picture

Excellent post.  Inflation is arguably the biggest enemy of the investor.  So, if there was no inflation, one could take their cash and shove it in a coffee can in the backyard as a means of saving -- and not have to keep pace with inflation.  But, what would then happen to the financial services industry if we didn't have to put dollars "at risk" in order to keep pace? The industry would be decimated and the casino would not have all the forced players at the table.  


One more reason why they need inflation > 0%.

philgramm's picture

It never ceases to amaze me when I read examples like your mikla's explanation as to the vast financial and historical knowledge possessed by ZH'ers.   I am not at all versed in this field but I am learning so much from the articles but just as much from the comments section.  Kudos!!