Going very much against the zeitgeist, an influential economist is arguing that what the economic world needs now is…more quantitative easing.
Adding to all the anguished talk about tapering (i.e., easing out of quantitative easing) at the Fed, The Wall Street Journal earlier this month published “Confessions of a Quantitative Easer,” written by the former official who managed the Fed’s mortgage-backed security purchase program, and is now critical of it.
So while panning QE is in vogue, not least among economic conservatives, John Makin, a resident scholar at the free-enterprise-oriented American Enterprise Institute (AEI), has been beating the drums warning that letting up on monetary stimulus might send the global economy into a dangerous deflationary spiral.
His influential economic outlook last month warned of the extreme danger of going over the “monetary cliff,” and his warning grows more urgent in his new December outlook, updated with alarming new consumer price index (CPI) data. October U.S. CPI—which is one measure of inflation—rose at a meager 0.9% rate, down from a 2.2% pace a year ago. The disinflationary trend is even more pronounced in Europe, where the inflation rate was 3% at the end of 2011; 2% at the end of 2012; and has dropped to 0.7% in October.
“If this pace of disinflation (falling inflation) continues, Europe could be living with outright deflation by next spring,” Makin warns.
With euro area Q3 growth barely registering a pulse—at 0.1%–there is little to encourage those who might think reflation is on the way. Indeed, Makin warns that deflation has already taken root in Europe’s periphery. Bulgaria, Greece and Latvia are experiencing negative inflation; Ireland is at zero inflation; and most European countries are at or below a 1% inflation level.
The AEI scholar faults the European Central Bank’s tight monetary policy and fiscal austerity policies imposed on Southern Europe, which he says has exacerbated the area’s high unemployment (28% and 27% for Greece and Spain and 12% for the euro area as a whole).
Given the impossibility in a floating-exchange-rate world of effective currency devaluation, Makin says the only alternatives—increased QE, increased ECB security purchases, tax cuts or spending growth—are simply unlikely in the European context: