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Monday, October 18, 2010 12:05 AM


Bitter Feud at ECB over Monetary Policy; BOE to Expand Stimulus; Japan's Great Deflation; Will the US Follow?


Although there is a huge debate amongst Fed members regarding US monetary policy, especially the merits of Quantitative Easing, that debate can easily be described as relatively friendly discussion.

Things are quite different in the EU where there is a bitter feud between ECB president Jean-Claude Trichet and Trichet's rumored replacement, Bundesbank President Axel Weber.

Trichet Chastises Weber Regarding Who is the President

In a public display of animosity, Trichet has let Weber know who is in charge. Please consider ECB’s Trichet Rejects Weber’s Call to End Bond Purchase Program

European Central Bank President Jean-Claude Trichet rejected Bundesbank President Axel Weber’s call to end the bond purchase program that has provided a lifeline for European governments and banks trying to shore up their finances.

“This is not the position of the Governing Council, with an overwhelming majority,” Trichet said when asked to respond to Weber’s Oct. 13 call for an end to the program, according to the a transcript of an interview published yesterday in Italian newspaper La Stampa.

Weber, who also sits on the ECB’s 22-member decision-making council, said the risk of “exiting too late” from the emergency measures was greater than pulling out too soon.

“Trichet is sending a clear signal to Weber,” said Carsten Brzeski, an economist at ING Group NV in Brussels. “The majority seems to favor a safety belt option for the moment and isn’t comfortable with sending conflicting signals to the markets.”

Trichet also backed the possibility of extending in some form the European Union’s temporary financial backstop for financially stressed nations. “This non-standard measure, like all other such measures, was designed to help restore a more normal functioning of our monetary policy transmission mechanism,” Trichet said, according to the la Stampa interview.

Trichet also said that as ECB president he is the only one who speaks on behalf of the Governing Council. Weber, who opposed the bond purchases since their inception in May, is regarded by economists as a frontrunner to succeed Trichet when his non-renewable eight-year term expires in just over a year.

“There is only one single currency; there is one Governing Council, only one monetary policy decision, and one president, who is also the porte-parole of the Governing Council,” he told La Stampa.

“Trichet’s comments highlight that he is not pleased with the ongoing public criticism of some council members regarding the securities market program,” said Juergen Michels, chief euro-area economist at Citigroup Inc. in London. “Trichet’s comments highlight that the program will continue.”
Trichet a Monetarist Pussycat

It is interesting to see Trichet continuing as the dove just as Bernanke is at the Fed. Trichet had an undeserved reputation as a central bank hawk.

The reality is quite different as discussed earlier this year in Trichet, a Monetarist Pussycat at Heart, Throws ECB Rulebook Out the Window

Currency Implications

Unlike Bernanke, Trichet is due to step down October 2011.

Weber had widely been viewed as the leading candidate to replace Trichet. I wonder if that is still the case after this open feud.

Implications regarding the valuation of the US dollar vs. the Euro are at stake.

CEBR says Bank of England Will Expand Stimulus

According to the Centre for Economics and Business Research, the Bank of England will join the Fed's currency debasement strategy. Please consider BOE Will Expand Stimulus by 100 Billion Pounds, CEBR Predicts
The Bank of England will expand its stimulus program by 100 billion pounds ($160 billion) to aid the economic recovery, the Centre for Economics and Business Research said.

The central bank will also keep its benchmark interest rate at a record low of 0.5 percent until at least “late” 2012, the London-based group said in an e-mailed statement yesterday. The bank kept its stimulus plan at 200 billion pounds this month.

Britain faces the largest public spending cuts since World War II as the government tackles the record budget deficit. The British Chambers of Commerce earlier this month backed a call by policy maker Adam Posen for the central bank to expand its bond stimulus plan as recent data indicate the recovery has slowed.

“We expect the authorities to push the monetary policy levers hard in the opposite direction to the fiscal policy levers,” the CEBR said in the statement.

The CEBR’s forecast for economic growth in the first three months of 2011 is 0.1 percent, which implies there is almost a 50 percent chance the economy will contract during the quarter, according to the report.
Japan's Great Deflation

The New York Times reports Japan Goes From Dynamic to Disheartened. Here is a somewhat lengthy snip, but the article is a full 3 pages long.
Few nations in recent history have seen such a striking reversal of economic fortune as Japan.

But the bubbles popped in the late 1980s and early 1990s, and Japan fell into a slow but relentless decline that neither enormous budget deficits nor a flood of easy money has reversed. For nearly a generation now, the nation has been trapped in low growth and a corrosive downward spiral of prices, known as deflation, in the process shriveling from an economic Godzilla to little more than an afterthought in the global economy.

The downsizing of Japan’s ambitions can be seen on the streets of Tokyo, where concrete “microhouses” have become popular among younger Japanese who cannot afford even the famously cramped housing of their parents, or lack the job security to take out a traditional multidecade loan.

These matchbox-size homes stand on plots of land barely large enough to park a sport utility vehicle, yet have three stories of closet-size bedrooms, suitcase-size closets and a tiny kitchen that properly belongs on a submarine.

In 1991, economists were predicting that Japan would overtake the United States as the world’s largest economy by 2010. In fact, Japan’s economy remains the same size it was then: a gross domestic product of $5.7 trillion at current exchange rates. During the same period, the United States economy doubled in size to $14.7 trillion, and this year China overtook Japan to become the world’s No. 2 economy.

But perhaps the most noticeable impact here has been Japan’s crisis of confidence. Just two decades ago, this was a vibrant nation filled with energy and ambition, proud to the point of arrogance and eager to create a new economic order in Asia based on the yen. Today, those high-flying ambitions have been shelved, replaced by weariness and fear of the future, and an almost stifling air of resignation. Japan seems to have pulled into a shell, content to accept its slow fade from the global stage.

As living standards in this still wealthy nation slowly erode, a new frugality is apparent among a generation of young Japanese, who have known nothing but economic stagnation and deflation. They refuse to buy big-ticket items like cars or televisions, and fewer choose to study abroad in America.

“A new common sense appears, in which consumers see it as irrational or even foolish to buy or borrow,” said Kazuhisa Takemura, a professor at Waseda University in Tokyo who has studied the psychology of deflation.
Demographic Pendulum in Motion

“We’re not Japan,” said Robert E. Hall, a professor of economics at Stanford. “In America, the bet is still that we will somehow find ways to get people spending and investing again.”

Robert Hall, like most others, does not understand the deflationary impacts of the entire gamut of changing socioeconomic trends and attitudes.

After 20+ years of deflation fighting tactics, Japan has nothing to show for its deflation fighting efforts but massive public debt.

To be sure, one can point out that US demographics are more favorable than Japan's. However, US consumers have a much bigger and much more deflationary pile of leveraged debt on their balance sheets than do most Japanese families.

Inflation Targeting Madness

Not only has Japan's two decades of failure shown the futility of fighting consumer attitudes, common sense alone would suggest that it is futile to fight changing social trends with monetary policy.

Unfortunately that has not stopped the Fed with reckless proposals on top of reckless proposals.

Please see Inflation Targeting Proposal an Exercise in Blazing Stupidity; Fed Fools Itself for further discussion.

Will the US Follow?

As I stated in June of 2008, we are now on the back side of peak consumption and Peak Credit.

Regardless of what Bernanke of the Fed does, the demographic pendulum is in motion. There is no going back. Once attitudes hit extreme then reverse, there is nothing the Fed or anyone else can do about it.

Thus, the question is not whether the US will follow the footsteps of Japan, the question is whether the US or Japan blows up first from misguided central banks fighting a battle that cannot be won.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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