As It Turns Out Deflation Is Good After All

Earlier today, in typical German fashion, the chief of the Bundesbank poured cold water on Europe's latest round of demands that Germany carry the weight of the rebound from the triple-dip on its shoulders, as usual, when Buba President Jens Weidmann Friday rejected calls for a German stimulus plan, saying only structural reforms and more competitiveness would kick-start eurozone economies. “Calls for a public fiscal stimulus plan in Germany to boost the Eurozone economy are amiss,” said Mr. Weidmann in a speech for an economic summit hosted by the German newspaper Süddeutsche Zeitung. He is, of course, right: the longer Europe's insolvent, uncompetitive governments kick the can and force Germany to do all the hard work, the longer Europe will be unable to get out of a hole that gets deeper with every passing day. In short: Mr. Weidmann refuses to "get to work" for a bunch of corrupt, clueless politicians.

He then proceeded to do something shocking: he was logical. Quoted by the WSJ, he said: "Investment rates that are above the growth potential of a developed economy aren't likely to boost prosperity—this applies to both public and private investments."


The German government shares Mr. Weidmann’s view. It says public investment can’t solve the eurozone’s growth problem as structural reforms are needed. The International Monetary Fund and neighboring countries France and Italy have called on Germany to boost public investment. But Berlin has pledged only €10 billion ($12.5 billion) in additional public investment over three years starting in 2016, hoping this would spur private investment worth €50 billion.


Mr. Weidmann stressed that it is also wrong to believe central bank monetary policy would be able to solve the bloc’s economic problems.


“It is an illusion to believe that monetary policy means can raise economies’ growth potential permanently, or create lasting jobs,” Mr. Weidmann said. “In the end, this can only be achieved by structural reforms, because growth and employment occur in innovative companies and competitive products, and well-educated and highly motivated employees.”

Therein lies the rub: Europe is allergic to structural reforms, and as we have shown in the past, it blames its woeful fate on evil, evil "austerity" (somewhat paradoxical for a continent where record debt gets recorder with every passing quarter), when in reality what is causing the ongoing European depression is crime, corruption, cronyism and capital misallocation.

But none of that is news. What was news, and what was truly notable in Weidmann's statement is his open jab at the stupidity of Keynesian economics itself. To wit from Bloomberg: ECB Governing Council member Jens Weidmann says at event in Berlin that consumer prices in euro area “are strongly influenced by the energy prices, which are at the moment experiencing a positive supply shock.”

The punchline:  "There’s a stimulant effect coming from the energy prices - it’s like a mini stimulus package."

But wait a minute, isn't deflation under Keynesian voodoonomics, the biggest bogeyman imaginable?

It turns out deflation is only bad when it impacts... the S&P 500. Otherwise deflation for such things as energy prices and other input costs is suddenly bullish? So, by that logic, Japan with its soaring energy costs as a result of its currency devastation must be smack in the middle of the biggest depression ever. Which, of course, it is, as we warned would happen in early 2013.

For now, however, we are more focused on the official transformation of the German Central Bank into the central bank of "Austrian" economics.