These days economists have a bad reputation. And not only because almost all of their forecasts are wrong. They failed to predict both the financial crisis and the Euro crisis; indeed, most of them did not even have a vague hunch that they were under way. Moreover, they only recognised other developments, such as the rise of emerging markets, long after they had started.
It is not only their forecasts that are not up-to-scratch; their analyses of the causes and consequences of economic developments are also contradictory. A neutral observer could rapidly come to the conclusion that economics is like a bag full of treasures, which interest groups or representatives of specific ideologies can dip into in order to pull out arguments that suit their purposes. And it has nothing to do with objective science.
This negative impression is reinforced by the role assigned to economists by the modern media – the role of the “party pooper”. When current affairs programmes require a gloomy expert to issue credible warnings that things are going to come to a nasty end, they go looking for an economist. If a TV talk show needs a finger-wagging, cautionary and completely humourless participant, they generally invite an economist. And if they decide they want to feature two people in a talk show accusing each other of being completely incompetent, they then invite two economists from different camps.
But why is the quality of economics so bad? Is the state of economics really so pitiful? Or is the general public being presented with a distorted picture of reality? Read more ›
Due to the nuclear disaster in Fukushima 2011 and the US shale revolution prices for natural gas have developed in different directions in the past. However, this trend seems to have reversed recently.
A great video with Tim Harford from the FT, putting financial meltdowns into the broader context of complexity.
There is no sound empirical evidence and no convincing theoretical justification for why deflation is such a danger to the economy. Although deflation can be the result of an economic crisis, it can also be caused by cost reductions due to falling raw material prices or technological progress. Historically, not only crises, but also periods of lasting economic success — e.g., the rise of Great Britain in the 19th Century — have both been linked to deflation.
Deflation is always the outcome of a (positive or negative) economic development and can in very unrealistic circumstances become the cause of a negative development such as a deflation spiral. There is also very little evidence that low or moderate inflation exerts a particular influence on economic growth. Could it be that it does not matter whether there is inflation or deflation — as long as inflation does not spiral out of control?
It does, however, matter for long-term investors, creditors and debtors, whose debts and liabilities are measured in nominal values. Inflation or deflation brings about a redistribution of the real value of assets between these groups. Read more ›
There have been different stages of varying levels of inflation in world economic history, but also long periods of price stability. The present period, which is characterised by relatively moderate and constant inflation rates of about 2% p.a., is relatively unusual from a historical perspective. Historically, there is only one other comparable period — that of the “price revolution” in the 16th Century, a time when changes in the money circulation and gold imports from the Spanish colonies permanently eroded the gold-based value of money throughout Europe.
As far as history can be reconstructed (there is very little meaningful data for many ancient cultures and the Middle Ages up until circa 1270), three phases of “genuine monetary stability” can be identified. In these phases, the value of money remained constant for an extended period of time and phases of inflation and deflation alternated.
- The pre-Christian Roman Republic and the first decades of the Empire.
- The age of Venetian gold ducats in the 14th and the 15th Centuries.
- Great Britain in the 18th and 19th Centuries.
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The concept that very low rates of inflation are dangerous is closely related to the belief that there is some sort of an “optimum rate of inflation” for the economy, at which economic growth can progress at its smoothest. This concept emerged in the 1950s and 1960s based on the Keynesian approach to macro-economics, the prevailing model of the times.
On the one hand, policy-makers wanted to avoid strong cyclical fluctuations, which had been typical of the 19th Century. They generally favoured anti-cyclical fiscal policies which largely served to stabilise employment, even if they had an inflationary impact. In addition, both the USA and Great Britain discovered the benefits of “soft” inflation (also called “financial repression” today). An inflation rate that was only slightly below or even above government bond interest rates could relatively easily be used to devalue the public debt resulting from World War II. The main prerequisite was the policy had to be implemented very carefully, so that the effects were hardly noticeable, in order to avoid an escalating inflation spiral, as experienced in the German Reich between 1914 and 1923.
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For months now, we have been showered in a flood of press reports and comments by economists, warning us about the catastrophic effects of potential deflation. However, they never justify their statements to any great extent. As a rule, the authors make vague references to the world economic crisis in the 30s and Japan’s lost years in the 90s. There are only very few economists, who find the warnings too superficial and do not support them.
But what is deflation and why is it supposedly so dangerous? Read more ›