dhpar:Trichet is dealing with the initial effects of a currency union. Given that this means that wildly differing economies are all being forced into the same interest and exchange rate straitjacket, the last thing he needs to worry about is inflation. Also, panics like the one we're having now will hit the fragile underpinnings of a new union far more than it will one that has been around for a long time, like the U.S. Bernanke, as I have stated before (and I referred to this in my post, which made only a glancing reference to the state of the markets) raised rates beyond the potential growth rate of the economy, which is about 4 - 4.5% (2.5 - 3 for productivity, 1 - 1.5 for labor market growth). By doing so, he lowered productivity: check the figures for <a href="http://research.stlouisfed.org/fred2/series/OPHPBS/chart?cid=2&fgid=&fgcid=&ct=&pt=&cs=Medium&crb=on&cf=pc1&range=10yrs&cosd=1998-01-01&coed=2007-04-01&asids=+%3CEnter+Series+ID%3E" target=":">1998-2004</a>, and compare to what has happened since then. This will increase inflation, by lowering the potential growth rate of the economy. That effect is what we're seeing now. Neither of these things is exactly advanced stuff. It's really just common sense, combined with actually observing the real world, rather than referring to textbook explanations. Everyone here gets on Greenspan, but he was a) a gold bug who b) actually made his decisions based on the real world, rather than a textbook recreation of it. He made some mistakes, but mostly he was on the money. That's because he actually trusted the markets to know what was going on, unlike virtually everyone around here.
i don't know what to say. so higher rates are causing inflation through making people less productive? this is pretty strong coffee. I definitely don't have the same common sense as you do. I think you are confusing the cause and the effect. Lower rates make even very inefficient investment profitable therefore you do not be that productive to break even - that's exactly what was happening in the past few years - declining productivity because of lower rates causing long term potential rate to decline. I don't understand what point you're trying to make about trichet.
Trichet: simple: local currencies are more efficient than currencies covering a very large area. Widen the area a currency governs, and you make it less efficient, which hurts growth. Like government: the more local, the better, given the constraints of practicality, of course. Trichet wouldn't even know what I'm talking about. Bernanke: It's in the chart I cited. Guessing, or pontificating about what should happen, is not the same thing as data that shows what actually happened. I showed the data.
Well, Trichet is paid to know this stuff. On the evidence, though, he's clueless. See Joachim Fels for some real wisdom on the euro.
you have absolutelly no clue what you are talking about. what you say is nonsense without pointing to specifics of individual economies, e.g. differences in productivity growths in different regions of the covered ccy area. simply said somebody gains somebody losses the overal effect being more positive as the economies become more similar - that's the idea behind euro and reason for all that criteria etc... by the way I am from europe - and not from eurozone...
The overall growth rate of the eurozone is much less than it was prior to the adoption of the euro. <a href="http://www.teameurope.info/FSno9-economiccompetetiveness-FINAL.pdf" target=";">Simple point</a>. This was also true for the US pre and post the free banking era, from the time Andrew Jackson abolished the first central bank the US had, to the time Lincoln imposed a central currency to finance the Civil War by taxing state bank issued bank notes out of existence. Grover Cleveland spent two non-contiguous terms dealing with the deflationary effects of the then relatively new currency union.
So, you don't think that the Eurozone is an optimal currency area. Do you advocate a return to legacy currencies? Interesting that you also think Trichet is clueless. Do you expect him, as the ECB president, to state in a press conference that the introduction of the Euro was a mistake? How old are you?
I was on the fence about whether a cut was needed or coming, but the recent employment numbers are making me think twice. If people are scared enough to stop hiring, they are scared enough to stop hiring, and both are bad for the economy. I'm leaning toward there being a "pre-emptive, precautionary" cut.