Friday, May 15, 2009

Fighting "Deflation" Irish

Ahead of this morning's CPI figure, Ed from Credit Writedowns takes a look at some ugly inflation (or lack thereof) in Europe:

In my opinion, the ECB’s recent announcement that it was getting into the covered bond market has a lot more to do with Spain and Ireland than it does with Germany. Spain and Ireland suffer from their joining the Euro to escape the impossible trinity of free exchange rates, independent monetary policy and free capital movement. Having sacrificed monetary policy for a fixed exchange rate, the Spanish and Irish are seeing some horrific debt deflation dynamics. The ECB seems to have awoken to this and is now engaged in quantitative easing via the covered bond market (although Trichet denies this).
(note the chart below is quarter over quarter change annualized)


Of course this is of no surprise to readers of EconomPic (time to brag... I'm wrong enough that I have to):