Index

10:  The Blind Paradoxes of a Degenerate

William Krehm

The replacement needs arising from the Iraqi war and the transformation of China from a frugal Communism to a dream-boat of capitalism have begun pulling the world out of its depression.

However, that is producing more problems than it is likely to solve. For its solutions somehow mix up matters basically irreconcilable: growth with destruction: prosperity with massive joblessness, crushing debt with prosperity, population explosion in areas like China and India, with depopulation in Africa and the former Soviet Union.

The confusion of irreconcilables is as apparent in the ideologies as in the policies they beget.

Thus The Wall Street Journal (5/12, “Inflation Creeps Back into Euro Zone Outlook” by G. Thomas Sims) highlights a corner of the broader canvas: “Frankfurt – Inflation is creeping back on the radar screen of the European Central Bank. The ECB yesterday kept interest rates on hold as expected, but sharpened its rhetoric about the risk of inflation as the world’s No. 2 economy picks up steam. Its comments reinforced expectations that [interest] rates could rise next year and propelled the euro to a new high against the dollar of $1.2155 before falling back.

“Jean-Claude Trichet, president of the ECB, repeated that inflation will hover around 2% in coming months. But he dropped last month’s judgment that the longer-term outlook for inflation was ‘favorable.’ Now Mr. Trichet said he expected only a ‘gradual and limited decline’ in inflation.”

Solving Society’s Problems by Interest Rates

“We judge that we have to remain vigilant,’ Mr. Trichet told reporters after the bank left its key interest rate at 2%. Despite the slightly tougher tone on inflation, he didn’t signal that a rate increase is imminent. During the past 21/2 years, the ECB gradually cut its key rate from a peak of 4.75 as Europe succumbed to the global economic slowdown and inflation became less of a concern.

“Some central banks around the globe already are beginning to raise interest rates. This week, Australia’s central bank raised borrowing costs for a second time in as many months. The Bank of England left its rate on hold yesterday after its first increase in four years in October. The US Federal Reserve, however, has signaled that rates will remain low for some time. The US, after all, is waging a war, implementing a tax cut for the folks who count, and approaching a presidential election – all at the same time.

“The source of the ECB’s disquiet on inflation is a new twice-yearly economic projection compiled by staff and presented at yesterday’s meeting of the bank’s top policy makers. Six months ago, the projections showed inflation would likely fall on average to 1.3% next year – well below the central bank’s target of ‘close to but below’ 2%.

“Inflation in November was 2.2%, after 2% in October, despite high unemployment and an economy weaker than the US and Japan. The ECB blames higher oil prices, new taxes and rises in food prices after a hot summer.”

Here you run into the nonsense deductions at the heart of official theory. The ECB blames higher oil prices and the dearer food supplies due to a scorching summer for the rise of the price index from 2% to 2.2% since October. But how would higher interest rates – the ECB’s sole response to higher prices – possibly remedy these identified arch-villains in the price rise? The shortage of oil in large degree is due to the romance of the Americans with SUV’s, a romance that has now started spreading to China. Our planet warming is probably due in whole or in part to the pollution of our atmosphere.

How does one inject a bit of logic into this empire of dogmatic greed?

W.K.

— from Economic Reform, Jan. 2004

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