Market Anthropology: The Best Laid Schemes of Monetary Men

Friday, November 8, 2013

The Best Laid Schemes of Monetary Men

A funny thing happened on the way to deflation… the currency strengthened regardless of monetary policy!  

The ECB should seize this opportunity to indicate that it is not worried about a declining euro exchange rate but sees it as a way to move the inflation rate back towards its target of 2 per cent. And an indication that the interest rate could be reduced again in December unless inflation rises back to 2 per cent would reinforce the market’s understanding of the ECB’s relaxed attitude towards a lower-value euro.”  A weak euro is Europe’s best means of beating deflation – Martin Feldstein – Financial Times 11/7/13

I’m sure the Bank of Japan had the very same intentions that the esteemed Mr. Feldstein urgently beckons of the ECB. Unfortunately, the best laid schemes of monetary men often go awry…

The irony here is that the euro’s fatal flaws could ultimately save Europe from suffering the same duration of deflation’s pernicious tentacles that Japan still struggles with today. 

Break up the currency – and perhaps break free of deflation.