In simple world, would policy makers allow a repeat of the 1970's period, where debt burden was somehow reduced by allowing high inflation to take place. For me the answer is "NO", I think we will head to period more like the beginning of 80's or 90's where asset price deflates to readjust to people's income as opposed to the contrary where income readjust upward to the asset level (i.e. 1970's).
In Canada, where a speculative bubble has developed in the housing market have started to tighten their rates :
"The Bank of Canada raised its key interest rate from a record low today, the first Group of Seven country to do so since last year’s global recession, and said further moves will be “weighed carefully” against future growth in Canada and elsewhere.", 01.06.2010 - BloombergIn the US, where the housing bubble has deflated in the past years and where usually the readjustment take place first, are starting to hint the exit strategy:
“In the medium term, like the Federal Reserve and many other central banks, the Bank of Korea will have to manage its exit from accommodative policies,” Bernanke said in pre- recorded remarks to a conference hosted by South Korea’s central bank in Seoul today. The Bank of Korea “will have to weigh the risks of a premature exit against those of leaving expansionary policies in place for too long,” 31.05.2010, Ben Bernanke
While the Fed will raise interest rates from a record low before the economy returns to “full employment,” Bernanke said officials don’t know when that process will start. The banking system isn’t fully healthy and lenders are “cautious” in providing credit, he said.In Europe, the president of the European Central Bank, Mr Jean-Claude Trichet, is on communication campaign, making sure that the latest move by the ECB (huge guaranty for Greece and co) are not mistaken for a relax stance on inflation or misled with a Quantitave easing strategy.
Interview with Jean-Claude Trichet, President of the ECB,Another interesting interview:
conducted by Gerald Braunberger and Stefan Ruhkamp on 19 May 2010
FAZ: But by purchasing government bonds, you’ve crossed a red line. Has the credibility of the ECB suffered as a result?
Trichet: There has been no crossing of any line. Our line is price stability, and our credibility is derived from achieving this objective over the medium term. The Governing Council of the ECB observed that the effectiveness of the transmission mechanism for our monetary policy was being severely hampered. We are not increasing the money supply. By contrast with what other major central banks have done, we are not purchasing government bonds in order to inject liquidity into the markets. What we are doing is fundamentally different: we sterilise. We ensure an unchanged stance of monetary policy. This is why the liquidity supplied is immediately being absorbed again in its entirety. We have to do whatever we consider appropriate in order to ensure price stability. If we always listened to the criticism directed at us by politicians, social partners and financial pressure groups, we would be unable to fulfil our mandate.
FAZ: The crisis stems from excessive debts. We are now fighting the crisis with even more credit and even more money. How do we get out of this spiral?
Trichet: We have a number of ways of providing the banks with additional liquidity support, which will automatically be discontinued when the situation improves. Owing to the serious tensions observed very recently in the markets, we have now reintroduced some of these support measures. But you can be sure that we will exit those measures in a timely fashion in line with improvements in the functioning of the markets. We will never lose sight of our primary mandate of ensuring price stability over the medium term, with the right monetary policy stance. There is a clear separation here. By the way, note that the growth of the monetary aggregate “M3” is currently negative. I have been committed to price stability all my life. For me, inflation is a tax that would mainly hit the poorest and weakest in our society.
Interview with Der Spiegel
Interview with Jean-Claude Trichet, President of the ECB,
conducted by Thomas Tuma and Christoph Pauly on 13 May 2010
SPIEGEL: In a talk he gave to the Spiegel a few months ago, Jürgen Stark, the ECB’s chief economist, said that the ECB was not permitted to buy government bonds. Who is right?
Trichet: I have already said that this is explicitly authorised by the Treaty. Over the past 11 ½ years, we have ensured price stability in Europe and have successfully met our target of keeping inflation below, but close to, 2%. We have done a good job fully in line with what the best central banks in Europe were doing before the euro. Those who believe - or, even worse, are suggesting - that we will tolerate inflation in the future are making a grave error. The Governing Council of the ECB did not hesitate to increase rates in July 2008 in a period of financial turbulence in order to ensure price stability. We were criticised at the time by the markets. This is a measure of our inflexible determination.
SPIEGEL: But the banks, too, are being spoilt by the ECB. As part of your so-called non-conventional measures, you have again made it possible for them to borrow countless billions. In doing so, are you not handing out even more play money to the financial markets?
Trichet: Again, we do what we believe we have to do in all consciousness in order to be able to deliver price stability over the medium term. We do not take into account pressure groups and lobbies. We supply liquidity to the banks so that they can finance the real economy and support the recovery, they know that.