“Reality is sticky.” That was the core of Adam Posen’s message to German policymakers on their home turf, at a recent conference in Berlin.
What did the former UK Monetary Policy Committee member mean? Quite simply, that the types of structural economic changes that Germany has been pushing on the euro zone are not only destructive but also bound to fail, at least if history is any guide.
Posen, who now heads the Peterson Institute for International Economics in Washington, argued Germany’s imposition of austerity on Europe’s battered periphery is the product of an instinctive but misguided fear of an inflation “ghost” that has haunted the country since the hyperinflationary spurt of the Weimar Republic in the 1920s and 1930s. However, Posen offers a convincing account of modern economic history that shows inflation episodes are rather rare events associated with major political and institutional meltdown — and not always around the corner.
The risks of inflation going up quickly, or in the long term, are smaller than are usually recognized in Germany. The issue is not that inflation is harmless; it certainly has its harms. The issue is, realistically, when you are facing choices, how much risk do you think there actually is of inflation occurring. I don’t want to pretend that there is some kind of exact, scientific, precise answer, but there is more of a historical record to draw on than most people acknowledge. This historical record is not often taught to German economic elites. […]
Inflation is actually quite sticky when you don’t have huge political breakdowns. Focusing on this period of the 1920’s in Germany — this horrible, horrible period — is economic solipsism instead of a good basis for current policymakers. To pretend that this source of the German hyperinflation is anything other than the political breakdown at the time is misleading; there is nothing economic that causes this situation on its own. You can say it was because the money supply grew too fast, or you can say it was because the central bank lost independence, but that is just telling you what happened technically. The cause was the breakdown of civil society, or at least of political decision-making, not the effect.