Inflation the New Anti-Deficit Policy
Want some euros? There is plenty of them around, and there is going to be even more. The European Central Bank is considering a massive expansion of money supply to fight deflation, which is undoubtedly the enemy of a recovery. Deflation means that falling consumer prices depress the profitability of today’s production and investments. This is the last thing you want to add to the macroeconomic mix in a recession, where profit margins are slim to begin with.
However, the ECB wants inflation for another purpose as well, namely to close the budget deficit gaps that persistently plague Europe’s welfare states. This raises two questions:
- How smart is this strategy?
- Even if it was smart, could the ECB provoke inflation just by printing money?
Let’s address the latter question first. Printing money does not necessarily help. Consider this chart:
At least in the past four years, Europe has experienced an inverse relationship between the…
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