Nobel Winner Dares To Go There: "No Reason To Fear Deflation... Greece May Benefit From Gold Standard"

Tyler Durden's picture

"Historically, there is no reason to fear deflation," Nobel Laureate Thomas Sargent explains to Germany's Wiwo.de, "we all benefit from lower prices." Crucially, he continues, "countries with declining prices, such as Greece, must improve the competitiveness they have lost in recent years," requiring falling wages and rising productivity (and falling unit labor costs) which will lead to companies cutting prices, "this is not a dangerous deflation, but part of the necessary correction so that these countries are internationally competitive again." That central banks pursue an inflation rate of around 2%, Sargent blasts, is because they consider it their job to "make bad debt good debt," adding that inflation is "a major redistribution machine - reducing the real debt burden for the benefit of creditors and devaluing the assets of the creditors." A return to a gold standard,he concludes, to prevent governments and central banks from limitless money-printing "would not be foolish."

 

Thomas Sargent (via Wiwo.de) dares to go there (and is likely about to be stripped of his Nobel)...

"The countries with declining prices is troubled countries like Greece. They must make their price competitiveness, they have lost in recent years, again. This requires falling wages and rising productivity. As a result, unit labor costs go back, and the company may cut prices. This is not a dangerous deflation, but part of the necessary correction so that these countries are internationally competitive again, "Sargent said in an interview.

 

In addition, there are, according Sargent "historically no reason to fear deflation."

 

On the contrary: "We all benefit when technological progress lowers the prices, such as computers," said Sargent.

 

That central banks pursue an inflation rate of around two percent, according to Sargent is because they consider it their job to "make bad debt good debt". Of an inflation governments benefited with high debt.

 

Sargent: "Inflation is a major redistribution machine, which reduces the real debt burden for the benefit of creditors and devalued the assets of the creditors."
To prevent this, according to Sargent, the reintroduction of the gold standard would be possible, "I would not necessarily say that it would be the best solution, but it would not be foolish."

 

Until the First World War, had the gold standard, to prevent that governments and their central banks print money limitless. During this time the prices would indeed have fluctuated, but had compensated over the years.

and specific to Europe, Thorstein Polleit adds (via Wiwo.de),

"The ECB will continue to push the rate toward zero percent and then buy government bonds," Polleit said. Background of this development are falling consumer prices in the euro-crisis countries and the resulting fear of deflation.

 

At the same time Polleit warns against the consequences of the low interest rate policy. "You can defer the market-based adjustment of the credit boom of the past few years through lower interest rates and the printing of new money most, but not prevent," said Polleit. In the medium term there is no way to lead a massive correction, coupled with cuts and debt deflation.

Polleit's conclusion seems very apt givne the current melt-up:

"The longer you postpone this process, the more destructive is its effect."