Aha. I missed this, from Jürgen Stark, which is one of the most amazing things I’ve ever seen written by a former central banker: “It is likely we are living in an extended period of price stability,” the former European Central Bank board member wrote in a recent op-ed for the Financial Times. “This is good news. It boosts real disposable income and will eventually support private consumption. Inflation expectations are well anchored, and there is no evidence households and companies are delaying purchases because of negative expectations. Warnings about outright deflation and calls for E.C.B. action are misguided and irresponsible. The longer this discussion continues, and the more intense it becomes, the more likely the risk of a self-fulfilling prophecy.”
So, Mr. Stark began by asserting that low inflation boosts real disposable income. That’s a zero-credit answer on any undergraduate exam: yes, low inflation makes income gains higher for any given rate of increase in nominal (or unadjusted) income, but low inflation reduces the rate of nominal income growth one for one. The notion that an influential former monetary official doesn’t understand this is breathtaking.
Now, it’s not true that low inflation has no effect; it increases the real value of debt, which is contractionary because debtors cut spending more than creditors raise it, and low inflation also results in an increase in real interest rates when nominal rates are near the zero lower bound. But these are both demand-depressing effects.
Oh, and low overall European inflation makes the adjustment problem for debtor countries much worse, which Mr. Stark didn’t even mention.
But the real kicker is his claim that even talking about the possibility of deflation is irresponsible, because that can turn into a self-fulfilling prophecy. That’s right: if inadequate action from the E.C.B. leads Europe into a Japan-style lost decade or two, it’s the fault of all those critics who warned that this might happen; if only everyone had kept clapping, everything would have been O.K.
I can understand why some policy makers would like to live in a world like that – a world in which, if critics say that their policies will fail, and then they do fail, it’s the critics’ fault. But it’s hard to imagine the state of mind of someone who would actually state that view in the Financial Times.