The above is a quote from Goethe, a German writer (1749-1832) who put it into the mouth of Mephistopheles in the Faust. The FT reports that Mr Weidmann of the Deutsche Bundesbank, the German central bank, quotes Goethe these days:
After weeks of macro-economic sniping following his isolation at the European Central Bank over its new bond-buying policy, Jens Weidmann, on Tuesday resorted to Goethe’s Faust to make his point. The classic play highlighted, he argued, “the core problem of today’s paper money-based monetary policy” and the “potentially dangerous correlation of paper money creation, state financing and inflation”.
In early scenes from Goethe’s tragedy, Mephistopheles persuades the heavily indebted Holy Roman Emperor to print paper money – notionally backed by gold that had not yet been mined – to solve an economic crisis, with initially happy results until more and more money is printed and rampant inflation ensues.
There is some truth to it (the printing money story), but what I find disappointing is that I haven’t seen a full explanation of how rampant inflation is going to be the consequence of the recent ECB policy proposals. That is sad. It would be very helpful to bring out a story which is not based on Goethe but on some kind of model which shows us the critical assumptions. Goethe only tells us that printing money can create rampant inflation, whereas recent (post-WWII) history tells us that money “works”. What are the crucial conditions? Paper money had been around for hundreds of year now, why should it fail us today?
And by the way: a state financing itself by printing money and creating inflation is not what we are seeing today. We have seen a private sector piling up hundreds of billions of euros in non-performing loans, and now the banks want to be bailed out by the governments, which are themselves constrained because they cannot print euros to finance those debts. So, the comparison of today’s problems in the euro zone with the Emperor and his printing press is not convincing at all. It is the conditions of the banks that are pushing the governments to deal with them, perhaps even bail them out.
I doubt that Mr Weidmann can come up with some more elaborate model which would convince, well, most other economists. Goethe’s model is that from a. printing money follows b. rampaging inflation. That is a bit too simplistic for my taste, although I like to quote works from non-economists as well. Let us face the facts:
- Inflation in the euro zone is low (not rampaging).
- Economic growth in the rest of the world is average with downside risks (US, China).
- Economic growth in the rest of the euro zone is weak and may be worse in the future.
- The primary product prices (oil) are quite high in historical standards, and weaker demand will take its toll. A decoupling of primary product prices from world demand is quite unlikely.
- The ECB has many tools to fight inflation – like raising the interest rate and selling some illiquid assets back to the public that it put on its balance sheet in the last years. It could act very swiftly and with great confidence.
So, inflation is unlikely. What bothers me next is that Mr Weidmann does not come up with an alternative. If higher inflation in Germany and elsewhere – let’s say of 4 percent in Germany and 2 in the periphery – are not the solution to the macroeconomic imbalances, then what is? Without providing an alternative it is difficult to understand how Mr Weidmann would want to act. Perhaps he does not want to act and falls into the Austrian “liquidate everything” camp? Once more we see a non-discussion in the German media as one policy maker does not deliver a debate, but instead a story of a power struggle.
Here is a Faust quote that would fit Mr Weidmann quite nicely. After all, I think that his concern for the state of the economy is genuine.
Meine Ruh’ ist hin,
Mein Herz ist schwer;
Ich finde sie nimmer
My heart’s so heavy,
My heart’s so sore,
How can ever my heart
Be at peace any more?
- ––Gretchen (Margareta), lines 3374–7.