Oooops It Isn’t Baaack….

Morgan Stanley team members Steven Jen and Eric Chaney (joined by Takehiro Sato and David Miles) debate today the interesting question of whether the eurozone economies have entered a liquidity trap (LT). Those who have no idea what one of these would look like could do worse than read Paul Krugman’s classic article on the topic: It’s baaack! Japan’s Slump and the Return of the Liquidity Trap (pdf).

So what is all the fuss about?
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That Dreaded D Word

“Dial D for Deflation” declared the Economist in 2002 in an article which amazingly is still available online. Since Alan Greenspan officially declared the deflation scare over, the word has hardly cropped up in economic debates.

Yet anyone looking at the rapid rise in value of the euro, and the absence of growth in some key economies – Germany, Italy – could have been forgiven for thinking that the ‘all clear’ signal was being given a bit too soon.

Today the latest EU inflation figures are out from Eurostat (PDF file), and Goldman Sachs are warning that: ?without preventive action from the ECB, unit labour costs threaten to pose a future risk of deflation?.
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What’s It All About Alfie?

Well I suppose it’s better to end the week on a bang rather than a whimper, so here I go with another of those posts. What really ended the week on a high note (or should I say a low one) was the US labour market. And since I am arguing that the euro-dollar parity is being driven at the moment by US labour market data, this news can only mean one thing: more upward pressure on the euro. Which makes me only want to re-iterate, and even more strongly, that an important opportunity was wasted yesterday to take some remedial action by lowering the interest rate. Remedial action which would also have supplied a much needed lifeline to Germany’s beleagured economy. But this, like so many things, was not to be.
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