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Wednesday, May 09, 2012 9:12 PM

German Central Banks Signals Willingness for Higher Inflation; Catastrophic Uncertainty vs. Catastrophic Certainty

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As Europe careens towards catastrophic certainty, German finance minister Wolfgang Schäuble admits he is more worried about the uncertain rather than the certain.

Please consider Bundesbank signals softening on inflation

The Bundesbank, the most hawkish of central banks, has signalled it would accept higher inflation in Germany as part of an economic rebalancing in the eurozone that would boost the international competitiveness of countries worst-hit by the region’s debt crisis.

A future German inflation rate above the eurozone average could be part of a natural adjustment process as crisis-hit countries pulled themselves out of recession, the Bundesbank argued in evidence to German parliamentarians submitted on Wednesday.

It followed comments at the weekend by Wolfgang Schäuble, German finance minister, backing stronger wage increases, which would boost domestic demand – benefiting other European countries exporting goods and services to Germany – but could drive German inflation rates higher.

Despite the Bundesbank’s conciliatory stance on inflation, German policy makers have been among the toughest in insisting that Greece sticks to its agreed reform programme underpinning its bailout in the aftermath of Sunday’s Greek election in which most voters rejected the plan. Speaking in Brussels, Mr Schäuble said that changing the bailout terms would unleash ‘’catastrophic uncertainty’’ in financial markets.
Catastrophic Uncertainty vs. Catastrophic Certainty

For starters, higher inflation in Germany is not likely to stoke much demand. Such is the nature of German demographics. Furthermore, the idea Spain and Greece will be exporting more to Germany while all countries are still tied to the euro is complete silliness.

Finally, it still has not dawned on central bank clowns and government bureaucrats this is a balance-sheet recession and ordinary rules do not apply.

The best thing for Europe is a breakup of the eurozone and the sooner the better. Unfortunately, eurocrats cannot see the obvious and are hell-bent on preventing a breakup, citing fear of the uncertain.

The irony is attempts to prevent what is certain (a eurozone breakup), unleashes the very "catastrophic uncertainty" they seek to prevent.

Mike "Mish" Shedlock
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