German chancellor chastises US for easy money

Angela Merkel, the German Chancellor has rebuked the United States for its easy money policies, suggesting it was kicking the can down the road and setting up a greater problem later.  It is high time the debate about monetary policy made it to the political arena.  And Merkel, who has developed a reputation as a forthright and plain-spoken politician, never pulls her punches.

It remains to be seen whether he commentary will be addressed in the U.S.  However, it should be seen as a good indication of the dichotomy between German hard money instincts and American easy money policies.

Angela Merkel, the German chancellor, turned the tables on her international critics on Wednesday by accusing the U.S. and other governments of making “cheap money” a central tool of their economic management, thus planting the seeds of a similar crisis in five years.

“Excessively cheap money in the U.S. was a driver of today’s crisis,” she told the German parliament. “I am deeply concerned about whether we are now reinforcing this trend through measures being adopted in the U.S. and elsewhere and whether we could find ourselves in five years facing the exact same crisis.”

There have been calls from outside Germany for it to beef up fiscal support, but Ms Merkel has been wary of raising public borrowing to stimulate demand, fearing that the extra income could boost Germans’ savings rate, which is already high.

The chancellor defended her government’s modest fiscal stimulus – worth €12bn over the next two years – as a “measured and proportional response?.?.?.?tailored to the situation”.

Merkel criticises U.S. over crisis – Financial Times

  1. Stevie b. says

    Ed – Merkel is nearly right, except the crisis in 5 years wont be the same, it’ll be worse – especially if the dollar starts to succumb.

    I always used to think that the one thing the Fed couldn’t overly influence was the long end of the yield curve, which would act as a counter-balance to inflation-inducing monetary excesses. It would seem from all I’ve read in the last month that I couldn’t have been more wrong. It appears that not only can this be done, but there may actually be real buyers foolish/desperate enough to fall for it and thereby lock-in the inevitable capital loss when inflation eventually puts the lie to such manipulation. Inflation does seem the inevitable outcome, unless you could please kindly explain if/how such actions by the Fed could be successfully sterilized without meaningful cost and without inflation eventually emerging and long rates rising substantially?

  2. Edward Harrison says

    Stevie b. – sorry for not responding a bit earlier. I have been in a food coma all day. In the states, Thanksgiving is all about giving thanks to the ability to eat more in one day than you usually eat in a week.

    Yes, the long end is falling now with the short end. Bernanke has been quite effective in manipulating interest rates across the curve. I still think that these measures may prove ineffective because of the money multiplier. In essense, inflation will not show up if banks don’t lend and people hoard cash. Money velocity in that scenario decreases and the Fed ends up pushing on a string.

    The true Armageddon scenario is an uncontrolled deleveraging that decreases credit and therefore brings deflation. This is the scenario I actually anticipate but fear. On the other hand, Bernanke has really reflated so much and used other methods to control the long end that inflation may be the result.

    At this point I am still agnostic regarding the deflation/inflation debate. It could go either way depending on the pace of deleveraging in the financial sector.

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