Monday, June 27, 2011

Stagflation? Not so much...

Krugsandra on Calvinball Redux:
The [Bank for International Settlements] report also argues that potential output has been permanently reduced by the slump, arguing in particular that “the destruction of human capital due to long-term unemployment” will weigh on growth. You might think that this was a reason to take urgent action to reduce long-term unemployment. But no.

And, inevitably, there are the alleged parallels with the 1970s. Except their own data suggests hardly any parallel at all. Here’s one comparison (ULC is unit labor costs):

Notice the difference in scales. In the 1970s there was a major wage-price spiral; this time none at all. But whatever.

And the BIS also goes for a lot of vague warnings about how low interest rates discourage responsible behavior.

There’s something going on here, and I don’t think it’s really about economic analysis. Like others, the BIS is clearly engaged in monetary Calvinball, making up rules and concepts on the fly so as to justify monetary tightening whatever the circumstances. There seems to be a deep urge to inflict pain, to purge the rottenness or something.

It’s scary. And the world will suffer for it.

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