Faisal Islam posted to Twitter some quotes from his book, “The Default Line” (Kindle edition here), which I thought were a fantastic illustration of Nick Rowe’s favourite slogan – I hope Faisal will not mind a transcription here:
It was well known that Greece was running out of cash, in metaphorical terms at least. In June 2011, after months of stalling on its economic reform programme, the foreign Troika that effectively ran the country had run out of patience with the Greek leadership. […]
But what people did not know was that Greece was literally running out of cash. There were shortages of all denominations apart from the €10 note. Greeks had responded to the uncertainty regarding the Troika’s next move by withdrawing euros from their bank accounts at a record rate. Soon there would be not enough euro notes in the country to cope with the number of Greeks trying to get their hands on their money from cash machines and bank branches. A secret plan was activated. […]
As it happened, in June 2011 demand for paper currency had nearly trebled. To deal with this crisis, the Greek military cargo planes returned from abroad laden with freshly printed euros. The secret mission was intended not only to preserve Greece’s fracturing social stability, but also to preserve the single currency itself.
I do not think you could ask for a clearer example of a money demand shock. People are literally trying to hoard the monetary base, the physical currency. Of course it is also a nice illustration, perhaps, how financial crises and recessions are intertwined. I think it’s not unreasonable to argue that the chain of causation can go from “banking crisis” to “money demand shock” to “recession”. But monetarists would argue in between those last two steps we have a central bank which refuses to satisfy money demand by printing “enough” money.
I can recommend buying Faisal’s book based on those quotes!
Update: Giles Wilkes has a great post about how money should be central to our macro debates. It’s great that Giles is blogging again!
I liked the heading used in Draghi’s speech this week
Five years of monetary policy – the ECB has delivered
In the last five years, the ECB has continued to take the necessary measures with a view to maintaining price stability in the euro area.
The narrative for 2011 is fun:
Initially, while the economic impact of the sovereign debt crisis was limited and largely confined to vulnerable economies, the rapid global recovery put upside pressure on energy prices. This drove up inflation also in the euro area. We decided to raise interest rates in early 2011 given upside risks to the medium term inflation outlook stemming from energy prices and from ample monetary liquidity.
So you raised rates to fight an energy supply shock and “ample monetary liquidity”. How did that work out?
However, the sovereign debt crisis deepened and the euro area entered a second recession.
Oh. “However” is a bit out of place, don’t you think? “Naturally” would work better. We raised interest rates and naturally the Euro area then entered a second recession.
The inflationary pressures that had emerged before receded.
What a relief, bonuses all round, job well done.
There’s always “good news” from the European periphery where the cost of living is falling, falling, falling – every British politician’s dream (and they don’t even need price controls).
Looking at Eurozone macro data still feels a little like “rubbernecking”… but I’ve mastered Eurostat now, so here goes. Charts here show the headline HICP, the HICP at constant taxes (HICP-CT) and the HICP ex administered prices.
All three of the above have large “VAT wedges” since 2009.
In fact even the aggregate Eurozone HICP has a noticeable “VAT wedge” of its own, which I had not realised.
Question: I have two questions. The first one is: do you see any risk of deflation in some countries in the euro area? […]
Draghi: […] First, on deflation: the price path that has been foreseen by the staff projections is lower than the price path foreseen in previous staff projections, both for this and next year. This is mostly due to a decrease in the price of oil. If you discount oil and food, you see that the difference between the two price paths, of the previous and of today’s projections, is much smaller. Second: is there deflation? We must first ask ourselves what deflation is. Deflation is a protracted fall in prices across different commodities, sectors and countries. In other words, it is a generalised protracted fall in prices, with self-fulfilling expectations. Therefore, it has explosive downward dynamics. We do not see anything like that in any country.
He waffles around a bit here, but he is clearly saying “no” to the risk of deflation, “no” to a “generalized protracted fall in prices” in any country. I know Eurostat is hard to navigate, but deflation is really not so hard to find: