Wednesday, May 23, 2012

Germany: Stimulus + Misc. thought

Two points:

1. Stimulus. With the 2-year bond yields falling to 0.07, how do you justify to yourself NOT doing a giant stimulus program. I don't care what it is: tax cuts, infrastructure spending, whatever. People are literally giving you money for free. Forget real yields, which have been negative for a long time, now even nominal yields are at zero. I mean, WTF??? What even remotely plausible, argument could there be for not borrowing more money? You could put the money in a sock drawer and still come out ahead in two years time. Is the German infrastructure so good that they literally can't think of anything that needs doing? Or are German taxes so low that they can't lower them any further? Or does Merkel thinks that, say, a 1000 euro tax rebate check to every german household would harm her re-election chances? The basic situation that Germany finds itself in right now is that if there is anything you can think of that the German government can do with extra money, now is the time to do it. Later won't be as good* Seize the day!

As far as the rest of Europe goes, a German stimulut would also be an unmitigated good.** If done in the form of a tax cut, people mind spend extra money vacationing in Spain, Italy or Portugal (Greece is an unlikely destination for Germans at this point). Yay! If done in the form of infrastructure spending, at least some of it will spillover in increased demand for raw materials or just plain labor from the poorer parts of Europe. In any event, given that unemployment in Germany is not that high, inflation in Germany just might pick up a tick** (again), helping the unit labor cost problem that people are trying to wrap their heads around.

2. Misc. Just an observation: how does this nation can manage to come out looking like total a**holes so often in its history is beyond me. It's like a genetic decease. Take this FT sub-heading: "Berlin deaf to pleas from IMF and OECD ahead of summit". Great, innit? Pretty sure that if Europe falls apart and shit totally hits the fan the press will lay this down at Germany's feet. And not entirely without merit.

*Unless nominal yields continue to fall into negative territory, which Citi thinks they just might. Crazy times, right?
**Unless, as per the Sumner Critique, the ECB offsets all effects of stimulus with tighter money. But I kinda doubt they will, because I don't think there is a real chance of pan-European inflation rising even a tick above 2%. It'll probably continue to go down below the 2% ceiling. Which, as history shows, doesn't make the ECB do anything. Contra Sumner, the ECB has a very assymetric response function.

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