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I think we have to accept that the people at the ECB and EC operate under a different understanding of reality than we, and most economists, do. They are thoroughly influenced and even blinded by their ideology. It's a bit like the Iraq war. We understood it was absolutely stupid, even I who was just 17 at the time understood that, but all these highly educated and intelligent American officials did not.

The ECB+EC people believe that Europe's return of growth is dependent on investor confidence, because if confidence returs investors will invest and create jobs and hence demand, even if ironically don't admit the problem at the moment is a lack of demand.

Krugman has called this the belief in the confidence fairy. If we just behave virtuosly, she will arrive, wave her magic wand and make all the economic problems go away. They also believe that the one thing which scares investors the most is when bondholders have to take haircuts (in spite of the fact that the reason bondholders get higher rates than you get for deposits at the central bank is that they carry higher risk), followed by bondholders being converted to equity, or equity holders being invited to take part in rights issues.

It is unclear why they believe these things, as they are not in any way supported by evidence. According to surveys, investors currently refuse to invest not because they lack confidence (or because taxes are too high and regulations too paralyzing), but because there is not enough demand for their products. Why build a new factory when your old one is operating at half capacity? Further, why should you worry in the least over bond vigilantes when every country with a central bank which is doing its job can borrow at the lowest rates for several centuries?

Because this is ideology. It is belief. This is a world-view which says the world works in this way, and damn the consequences and evidence. This is the why Olli Rehn tells economists to stop researching this subject, because evidence will show that the current policies are not working, which will undermine confidence and hence stop said policies from working. Pointing out that confidence is not the crucial factor will result in the same kind of answer, in this Kafkaesque world of circular arguments.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Mon Mar 18th, 2013 at 07:37:00 AM EST
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