American central bankers and economists aren’t alone in their Phillips Curve nightmare. They are joined by others practically everywhere else around the world. In Europe, for example, the unemployment rate there continues to fall while inflation keeps on misbehaving in its meandering. Unlike the US, however, the Europeans don’t have the luxury of burying millions of prospective workers in other categories that aren’t counted for the unemployment rate. They have one for “inactive” persons, but the rules are different as to who can be forgotten there.
The wide national disparity in unemployment rates makes all that window dressing impossible. It doesn’t mean there aren’t related misconceptions about the state of Europe’s economy as represented in the unemployment rate.
Spain’s rate is down to 16.4% in Q3 2017 from a high of 26.9% set in Q1 2013. That sounds impressive, very impressive, until you realize that it took four full years just to get back to 16.4% which is only halfway to pre-crisis levels. These differences mean quite a lot in the real economy beyond these statistics.
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Europe’s inflation rate (HICP) was unsurprisingly lower again in December 2017. Coming in at 1.4%, that’s down from 1.5% in November and at the lower end of the range for 2017. Worse for Mario Draghi and his QE platitudes, the “core” inflation rate remained under 1% for the third consecutive month to end last year.
All monetary policy is aimed, of course, at the financial sector, the money sector. It is not, however, the only basis for economic growth. Savings can fund projects and organic economic needs just as lending can. In fact, we have seen over the last ten years the use of whichever bond market as just that sort of ad hoc workaround. Everyone from corporate businesses trying to manage working capital (instead of relying on lines of credit) have been going there to countries (like Argentina and now Mexico) floating dollar bonds rather than continuing to rely on eurodollar funding flowing (or not) through the global banking sector.
But that monetary policy emphasis is there for a reason; the funding detour through savings via bonds or whatever other form isn’t enough. In the end it may be a substitute for some, but even then it’s nothing like a perfect substitute for a healthy monetary sector.
That’s what’s missing in practically everywhere in the world economy. Cyclical recoveries continue to happen no matter the continued interference of this downturn/upturn cycle. Yet, as we observe here of Europe, they aren’t nearly as strong as they need to be because what’s absent is what monetary policy was supposed to fix. There is a clear drag from the financial sector – which is what the inflation rates there and here are telling us.
The more immediate problem for central bankers is that their best ideas came up so short. Massive amounts of “stimulus” failed to move the financial sector even slightly. What you see immediately above is actually the most favorable look for ECB policy. A more appropriate view of European money is this:
The banking/money sector went into zombie status starting in late 2007 (the slight recovery 2009-10 notwithstanding). No matter what has happened in the almost ten years since, nothing changed that condition. Nothing.
And what the ECB did do to try and more than nudge banks back into recovery economics was intense and massive – since 2014, more than €2.25 trillion and still going. What that tells us is that central banks aren’t really part of the monetary system, they are outside of it looking in. It doesn’t matter that their textbooks say that system revolves around central banks, clearly the orthodox view is plain wrong.
What those monetary policy attempts demonstrate instead are those periods when the money sector itself experiences enough trouble to warrant official intervention; enough disruption that even perpetually sunny central bankers have to try something even though it contradicts their always optimistic disposition. That they are ineffective is again merely the way things are in monetary and therefore economic practice.
It has left Europe with what might otherwise appear to be a stunning dichotomy. GDP has grown now for eighteen straight quarters through Q3 2017, and there is no reason to believe Q4 wasn’t #19. The unemployment rate for the EA19 has dipped during that time from 12.5% to 9%. It all seems like Europe is poised for something like normal, if not a full-blown boom.
Except those money indications, including inflation, continue to point toward the thing that is missing; that it’s all a mirage, a half-truth where the dynamic monetary energy that any real recovery or growth period really needs to truly take off continues to be nowhere.
None of this should be a surprise or even news to the general public. It is not just Europe that is stuck in this dangerous state (the close correlation of inflation there and here really does disprove QE as any kind of factor, positive or negative; it’s just irrelevant apart from whatever effect on expectations), nor is this story unique to our time. Where else have we heard of a money sector thoroughly infected by zombie banks and an overactive central bank determined to often drastic monetary policies to overcome them, ultimately accomplishing nothing despite a quarter century of it all?
Japan never actually stopped growing, it’s more so that it’s growth withered (becoming more unstable and uneven) from a lack of dynamism and energy normally making the difference for necessarily getting beyond the mere continuation of positive numbers.
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