Salient to Investors:

Scott Sumner at Bentley University writes:

Europe is in recession because the ECB unknowingly wants a recession. By trying to hold the highly flawed CPI including oil and VAT well below 2% will inevitably produce the anemic NGDP growth that will inevitably produce recession.

The wacky UK-style proposals to stimulate bank lending got us into this mess in the first place. Europe needs to do monetary stimulus, which has nothing to do with bank lending. More currency depreciates the value of a euro note for the same reason that a big apple crop depreciates the value of an apple.

Money is very tight in the eurozone so Europe needs an easy money policy. Easy money is more than low interest rates – cf Japan’s “easy money” policy of near zero rates for 16 years brought the Japanese stock market from 39,000 in the early 1990s to 8675 by mid-November 2012. When Japan really did adopt a slightly easier money policy, stocks soared 70% in 6 months.

The past few months have decisively confirmed the Bernanke/Friedman/Mishkin/market monetarist view that low rates do not mean easy money and that high rates don’t mean tight money. Tight money is a sufficient condition for recession.

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