Damn the Side Effects

A debate between the inflation doves and hawks in the ECB is underway. We already know the winner: In a speech today on the Risks of Low Inflation, ECB president Mario Draghi effectively said damn the side effects, more stimulus is coming.

European Central Bank President Mario Draghi on Thursday said it could be risky to delay additional stimulus for the eurozone, hitting back at a warning from Germany’s Bundesbank that the ECB shouldn’t overreact to lower inflation.

Adopting a wait-and-see attitude” to the steep fall in oil prices “brings with it risks,” Mr. Draghi said in a speech at the Bundesbank’s home in Frankfurt, namely that weaker inflation could become entrenched if people reduce their expectations of future price growth.

“The risks of acting too late outweigh the risks of acting too early. … The longer inflation stays too low, the greater the risk that inflation does not return automatically to target,” Mr. Draghi said.

Former Bundesbank President Axel Weber, now Chairman of UBS Group AG, warned in Davos, Switzerland, in January that additional easing by the ECB would “have a much lower impact in the future,” while the side-effects of its policy—such as distortions to banks’ behavior—were growing stronger.

Mr. Draghi played down such concerns. If the ECB does decide to adopt more stimulus, “the risk of side effects would not stand in our way,” he said.

Price Deflation Should be Welcome

Falling prices of goods and services make money go further. People love bargains.

There is no credible evidence that people put off buying something because prices are falling. Those who need a coat, a computer, or a car will buy one. If your computer or toaster goes out, you throw it away and buy another. If your gas tank needs filling, you fill it. If prices are low enough, impulse buying goes up, not down.

Inflation expectation theory widely believed by central bankers is total nonsense. As I have explained on numerous occasions, low interest rates foster economic bubbles.

And it’s asset deflation not CPI deflation that central banks ought to fear. Even the BIS agrees with that statement. For discussion please see Historical Perspective on CPI Deflations: How Damaging are They?

Economic Challenge to Keynesians

Of all the widely believed but patently false economic beliefs is the absurd notion that falling consumer prices are bad for the economy and something must be done about them.

I have commented on this many times and have been vindicated not only by sound economic theory but also by actual historical examples.

My January 20, post Deflation Bonanza! (And the Fool’s Mission to Stop It) has a good synopsis.

And my Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.

In their attempts to fight routine consumer price deflation, central bankers create very destructive asset bubbles that eventually collapse, setting off what they should fear – asset bubble deflations following a buildup of bank credit on inflated assets.

Risks of Low Inflation

Draghi speaks of the “risks of low inflation”.

The only risk associated with falling consumer prices is the 100% likelihood that central bankers attempt to do something stupid in response!

Mike “Mish” Shedlock