Here is Ambrose Evans-Pritchard at the Daily Telegraph:
“A near universal view has emerged that Europe’s crisis can only be solved by governments and fiscal policy, with varying views over the proper dosage of pain. I beg to differ. This is a monetary crisis, caused by a jejune central bank that aborted a fragile recovery by raising rates earlier this year, allowed the money supply to collapse at vertiginous rates in southern Europe, and caused a completely unnecessary recession — and a deep one judging by the collapse in the PMI new manufacturing orders in November…Needless to say, drastic fiscal austerity is making matters a lot worse. You cannot push two-thirds of the eurozone into synchronized fiscal and monetary contraction without consequences.”
Do I need to say I agree? I do of course – even though I am less worried about the fiscal austerity than Ambrose.
“The eurozone economy is in imminent danger of crashing into deflation, bringing down the whole interlocking edifice of sovereign debt and distressed lenders. And bear in mind that Europe’s bank nexus — including the UK, Swiss, Scandies — is €31 trillion. Big stuff.
This crisis can be stopped very easily by monetary policy, working through the old-fashion Fisher-Hawtrey-Friedman method of open-market operations to expand the quantity of money, ideally to keep nominal GDP growth on an even keel.“
We already know that Ambrose is reading the Market Monetarist blogs – now we know he also understands and agrees (I kind of had an idea about that already…did he for example read this comment). Back to Ambrose:
“This does not solve the 30pc intra-EMU currency misalignment between North and South, of course, but it quite literally “solves” the solvency crisis for Italy and Spain. They would not be insolvent if the ECB had not driven them into depression by letting their money supply implode.
Yes, I know there are lots of central bankers who say or think monetary policy cannot achieve these miracles. They are wrong. Of course it can. A whole generation of policy-makers have been side-tracked into cul-de-sacs like (Bernanke) creditism, or German religious theories of “expansionary fiscal contractions”. (By the way, I learned in Ireland last week that the country’s 1980s experience used as the poster child for that credo is based on false data. It does not validate the theory at all).
I have no idea whether ECB chief Mario Draghi really believes the mantra he is constrained to utter by his masters. It hardly matters. But his insistence that this crisis must be solved by governments alone — “a new fiscal compact” as he called it today — is a derelection of duty.”
I have nothing to add. Lets just conclude that we have a Market Monetarist at the Daily Telegraph and it is a joy to read his comments.
If you want to read some of my comments on the topic covered by Ambrose see below.
On “monetary policy defeatism”:
Adam Posen calls for more QE – that’s fine, but…
Gustav Cassel foresaw the Great Depression
“Our Monetary ills Laid to Puritanism”
Calvinist economics – the sin of our times
Fisher (and bit on Friedman):
Repeating a (not so) crazy idea – or if Chuck Norris was ECB chief
The Chuck Norris effect, Swiss lessons and a (not so) crazy idea
Irving Fisher and the New Normal
The Fisher-Friedman-Sumner-Svensson axis
Update: David Beckworth also has a comment on Ambrose.