News of Berlusconi once again slipped into the financial section

This is from CNBC:

European shares quickly cut their earlier gains to end mixed after a projection by Italian TV showed the center-right party, led by former leader Silvio Berlusconi, leading in elections for the Senate vote. Meanwhile, Italian state TV station RAI said none of the four main groups running in the Italian parliamentary election is likely to win a majority in the Senate. A coalition or party must win at least 158 of the 315 Senate seats to gain a majority in the upper house, which a government would need to pass legislation.

Investors have been closely watching the outcome of the Italian election as the government’s decision over the next few months could influence whether Europe can stem its financial crisis. Italy is the euro zone’s third largest economy.

Once again I am reminded of one of my favourite Scott Sumner quotes:

I once read all the New York Times from the 1930s (on microfilm.)  You can’t even imagine how frustrating it was.  They knew they had a big problem.  Then knew that deflation had badly hurt the economy (including the capitalists.)  They knew that monetary policy could reflate.  And yet . . .

Weeks went by, then months, then years.  Somehow they never connected the dots.

“Monetary policy is already highly stimulative.”

“There’s a danger we’d overshoot toward too much inflation.”

“Maybe the problems are structural.”

“There are green shoots, things are getting worse at a slower pace.  The economy needs to heal itself.”

“Consumer demand is saturated.  Even workingmen can now afford iceboxes and automobiles.  We produced too much stuff in the 1920s.”

And the worst part was the way political news kept slipping into the financial section.  Nazis make ominous gains in the 1932 German elections, Spanish Civil War, etc, etc.  In the 1930s the readers didn’t know what came next—but I did.

Last time I used Scott’s quote I wrote the following, which I think is pretty telling of today’s markets:

Since August-September the Federal Reserve and the Bank of Japan the have moved in the direction of easing monetary policy and a significantly more ruled basked monetary policy and even the ECB has eased up with ECB chief Draghi’s promising to do “whatever it takes” to save the euro. And Mark Carney has given investors hope that the Bank of England will move towards some form of NGDP level targeting. As a result the “euro crisis” has more or less disappeared from the headlines in the newspapers’ “financial section” (just take a look at what Google trends has to say).

Hence, it seems pretty clear that the markets’ “responsiveness” to political worries is a function of the tightness of global monetary conditions with tighter monetary conditions leading to a bigger impact of political jitters.

The Fed – and every other central bank in the world – can effectively protect the US economy from negative spill-over from the European political jitters by introducing a proper monetary target – preferably an NGDP level target (the Bernanke-Evans rule already helps a lot).

Related posts:
Spanish and Italian political news slipped into the financial section
Greek and French political news slipped into the financial section
Political news kept slipping into the financial section – European style
“…political news kept slipping into the financial section”

Leave a comment


  1. Ravi

     /  February 25, 2013

    Lars, I was looking at the markets 15 minutes ago and that same quote popped into my head – was coming here to post it, but lo and behold, you have a full post! What do you think are the odds that some members of the Eurozone will eventually throw off the “Euro fetters”?

    • Ravi…great minds think alike (you and Scott that is…)

      The euro zone has the advantage that you can print more euros – would can’t print gold and that was the problem for the ‘gold bloc’. Unfortunately it seems like European policy makers at the moment are doing everything possible to repeat the mistakes of the 1930s. For now, however, monetary easing from the fed, BoJ and BoE will seriously reducing the short-term “explosion” in the euro zone, but I fear for the day when the ‘rest of the world’ is back to ‘normal’ and starts tigthening monetary policy – that could be the infliction point for the euro zone. Hopefully the breathing space the euro zone has now will be used by policy makers to finally get Europe out of the crisis.

  2. Ravi

     /  February 25, 2013

    I’ve been wondering though.. while I certainly hope and believe that easing from Fed, BoJ and BoE will pull those respective economies ahead, then surely there will be cries from within the Eurozone (or perhaps European cousins like the Polish and the Czechs who have been timid so far) to do their own easing . Then the fireworks may start!

  1. It’s Frankfurt that should be your worry – not Rome | The Market Monetarist

Leave a Reply