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Wednesday, August 30, 2006



"But have central bankers truly slain the hydra of inflation?"

Of course not. Killing inflation is never permanent. Dampening, at most, is possible over the short and medium term.

Inflation is provoked by a confluence of factors in the market place that bring about a disequilibrium that causes prices to rise.

What is different nowadays, in Europe, is the fact that the BCE has a central control on interest rates, unlike the recent past when political leaders could influence national central bankers.

Seriously controlling internal inflation cannot be envisaged until autonomous regional and state budgets are submitted to controls. Without restraint, such budgets can, at any moment, fan the fires of inflation. Particularly if budget expenditures are made from increased national debt, which must be paid by increased taxes that can affect prices.

Permanently killing imported inflation cannot be envisaged at all given the complexity of a global economy and its often pronounced vicissitudes. These factors are often unpredictable and uncontrollable. The controlling factor, here, is typically a global recession that uniformly affects all prices.

jon livesey

I think that the notion that the ECB "controls" interest rates is a bit naive. The ECB certainly "sets" interest rates, but it does so in response to events that it cannot control. Now, it could control more than it currently does. It could, for example send in troops to enforce budget discipilne on Italy - I joke, of course - but no matter how wide you draw the perimeter of control for the ECB, there will alsways be important influences outside its control. You can easily explain how terrified the EU is by the prospect of UN sanctions on Iran, for example, by observing that it would vastly amplify fluctuations in one of the things that are outside ECB control - the price of oil.

FWIW my own opinion of the EU is that it is based on a pervasive fallacy of control. That if you pile up institutions on institutions and bureacracies upon bureacracies you will eventually banish the wild currency and employment swings of the seventies and eighties through control. It's never worked in the past, but that is hardly likely to deter them today.

Arthur Eckart

Fiscal policy is often neutralized by monetary policy. Increasing government expenditures or cutting taxes, for example, may result in more restrictive monetary policy. Also, the ECB only controls short-term interest rates. Nonetheless, it certainly controls economic growth. If there's an unexpected shock, the ECB will adjust to maintain price stability.


"We should consider the possibility that the unprecedented pace of modern globalisation, recently emphasised by Ben Bernanke, the Federal Reserve chairman, might also have played a role"

We should not take comfort from the drop in retail goods when much of the price drop is due to increasing technological efficiencies. We cannot go on increasing the money supply as we do without seeing inflation somewhere

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