Eddie Lee has picked up my Crossing the Gate of Deflation Land post, which was really a reference to the debate Stephen Roach had been organising over at Morgan Stanley GEF. This is a tough topic, and it is reassuring I am not the only one who is hesitating. I think Eddie, and Stephen Roach are completely right, something special is needed, and needed now. Talk of what may or may not be the case ten years from now is to fail to get to grips with the situation we have. So we need to plead some special-caseism for the Germany economy, and apply all the macro stimulus we ahve available, which realistically isn't too much. I also agree that this may not be the precise moment to reform German pensions. The reform will have to come, but introducing them now will only deflate internal German demand even further. There may be a case for some fine distinctions here, since I think that shaking up the under 45 labour market can only be good, and should be done as soon as possible. It is the advisability of sending a lot of 50+ people out onto the street, with reduced pension expectations, and limited job expectancy, it is the advisability of doing this in the precise moment that you are trying to 'jump start' the economy that fails to convince me. Likewise changes in the law which make it easier to start small businesses can only be beneficial. So it is not a question of postponing reform, but looking to reform where most short term benefit can be achieved.
On the topic of inflation targeting, perhaps I should make clear that I am not against inflation targeting in principle, I am against using inflation targeting as a panacea for all our ills. Clearly having an inflation targetting approach in the eurozone now would be beneficial, trying to avert the disaster. Now once you have reached where Japan is today, the problem becomes much more complicated, and I think there is a real problem of putting in place a credible inflation target, and, in addition, of winning political support from an elderly population for any such target. Also given the fundamental instability which characterises Japan today, it isn't clear to me that you might not risk a serious brush with hyperinflation if you really stoked up the fires to a sustained rate of 4 or 5% over a number of years as some commentators are suggesting. Once the genie is out of the bottle, it may not be so easy to get back in.
Just read your blog. I believe your “Crossing the Gate of Deflationland” is the closest thing to an action plan. If I get you correctly, you’re making the argument for freeing up the macro arsenal. And fire as much and as quickly as possible.
Avoiding deflation is better than trying to fight it. Of course Germany’s foot is probably already in the ‘quaqmire’. There is no time to lose. The lower you sink, the harder it is to get out. I think these pension and labour market reforms should probably be delayed so as not to distract from the more immediate tasks. That is, we give ourselves too much of a burden by bundling recovery and reform as a package. Because the deflationary pressures are so great, reform is not possible without some recovery first? And to get the recovery, you need all the resources you can muster. And you need the focus.
You seem more sympathetic to inflation targeting then usual. Perhaps it’s the desperate situation Germany is in. The world can’t afford the second and now the third largest economies sinking into deflation. I sympathise with this idea simply because you need to just try any demand-side stimulus you can think of. But it may be hard to change expectations. I get your point about ageing and fear of inflation. Still there may be time left if the median age is 40 and not 50. You need to create jobs and push people out of the dole mentality. such a mammoth task. My sense is that you’re right on the argument that all this, even if it succeeds initially, will fail if "German society (fails to).. open itself and its labour markets to the world " If Europe doesn’t see it. Then there is no future (literally). There is no other way I think. Immigration would ease the pension reform, that must still come. But at least changed when the economy is growing again. So here we have a starting point “Germany must unshackle itself from the Euro”, and a plan “free its labour market and the german mindset”.
But realistically, what are the chances of this path being taken? The starting point itself is as painful as the plan. Isn’t Schroder trumpeting those structural economic reforms as the only cure?