From Great Unwind to Greater Depression?

While thoughts of deflation are rippling through the Anglosphere, the European Central Bank is still more concerned about rising prices, hiking interest rates again today.

There are a couple of reasons this makes sense: one, the ECB’s only mission is to contain inflation, while the US Federal Reserve, the shadow of which hangs over all anglo monetary policy, is also charged with maximizing employment; two, the less flexible labour force in much of Europe would probably mean wage inflation would necessarily follow price inflation, while the link between the two is much weaker where English reigns supreme.

But justified or not, the ECB’s move came under heavy fire to today from several quarters. If the great unwind becomes a worldwide recession, blame old Europe, according to Ambrose Evans-Pritchard in the Telegraph:

This is madness. It is the mirror image of the early 1930s, when the Federal Reserve (cowed by the Chicago liquidationists) precipitated the collapse of 4,000 banks, and transmitted their fervour to rest of the world through the Gold Standard. This time there is no Gold Standard. But the globalised capital and currency markets — egged on by Trichet — are playing much the same role.

Evans-Pritchard goes on to describe the outcome of the ECB move: a higher euro, lower dollar, and even higher crude prices since oil prices are trading as the inverse of the US$. Essentially, this move to ostensibly cap inflation will only generate more, since the majority of the 4% inflation the eurozone is experiencing is the result of soaring commodity (mostly oil) prices. As an English columnist, he can’t resist taking a poke at the Francophone head of the ECB:

The ECB mantra is that Europe and the world is on the cusp of a wage-price spiral along the lines of the 1970s. This directly contradicts Ben Bernanke at the Fed, who insists — correctly — that today’s conditions are not remotely like the 1970s.

(Perhaps this is uncivil, but I might add that Bernanke is one of the greatest economists of our age. Trichet studied political administration at ENA. He is a fine and honourable man, but he is a politician, not an economic historian)

But he doles out respect to Frenchmen when respect is due:

For once I find myself in total agreement with France’s Nicolas Sarkozy, who said the EBC rise was “at best pointless, at worst counter-productive.”

In the end, the ECB’s Trichet may escape blame no matter what the outcome. With things as bad as they are, and so many tiny pieces of bad news piling up, how would we ever be able to tell whether this decision made things worse or not?