Goods (and Services) Price Inflation and Asset Price Inflation Are the Two Forms of MONETARY DISEASE that PLAGUE the Modern Economy

The writers of the Maastricht Treaty had no knowledge about the disease of asset price inflation let alone any prophetic vision of its potential threat to the survival of their cherished monetary union. The monetary constitution in the Treaty was put together by a committee of central bankers who made low inflation (euphemistically described as ‘price stability’), as measured exclusively in the goods and services markets, the key objective. The famed monetarist Bundesbankers of the 1970s (subsequently described in this volume as ‘the Old Bundesbankers’) had departed the scene to be replaced by politicos and econometricians. 

The Old Bundesbankers, in fairness to their successors, also had no clear understanding of asset price inflation. But they did instinctively realize that strict monetary base control (MBC) in which interest rates were free of manipulation was essential to overall monetary stability in a wide sense (which transcended the near-term path of goods and services prices). Instinctively they applied a doctrine of pre-emption. According to this the pursuance of strict monetary control would mean less danger of various forms of hard-to-diagnose economic disease (possibly as yet unclassified), including those characterized by excessive financial speculation, with their origin in monetary disequilibrium. 

The intuition of the monetarist Bundesbankers took them one stage further than Milton Friedman’s famous pronouncement that ‘inflation [goods and services] is always and everywhere a monetary phenomenon’. Indeed, we should say the same about asset price inflation. Goods (and services) price inflation and asset price inflation are the two forms of monetary disease that plague the modern economy. They have their joint source in money ‘getting out of control’.

—Brendan Brown, Euro Crash: How Asset Price Inflation Destroys the Wealth of Nations, 3rd ed. (Houndmills, UK: Palgrave Macmillan, 2014), Kobo e-book. 

As Europe “Reinterpreted” the Maastricht Treaty to Avoid Catastrophe, Ben Bernanke Launched His “QE-Infinity” Policy

Towards avoiding the feared 2nd Lehman crisis, which incidentally would sink the re-election prospects of their commander-in-chief, President Obama, Treasury Secretary Geithner and Federal Reserve Chair Bernanke were prepared to put US taxpayer funds on the line by way of swaps with the ECB even though under some scenarios the ECB might itself become insolvent. As part of the deal Chancellor Merkel was persuaded to put at stake a much larger amount of German taxpayer funds, either directly via the new EU bail-out entities, the European Stability Mechanism (ESM) or European Financial Stability Facility (EFSF), or indirectly by standing (albeit to an unknown extent) behind the ECB’s vast loan programs. The LTROs [Long-Term Refinancing Operations] were highly dubious in terms of constitutionality — with critics arguing that the Maastricht Treaty specifically banned such bail-out operations. What followed was even more dubious, and to such a degree that we describe it here as a coup against the monetary constitution in the Treaty.

This coup played itself out in Summer and Autumn 2012 as the Spanish government debt market plunged and another crisis of survival erupted in EMU, this time with the centre of the storm in Spanish banking collapse. ECB Chief Mario Draghi, buttressed by the US Treasury Secretary, persuaded German Chancellor Merkel that the only way to avoid ‘catastrophe’ in Europe would be to ‘re-interpret’ the Maastricht Treaty so as to allow direct monetary financing of weak sovereigns, albeit subject to certain conditions. Simultaneously Chairman Bernanke launched his QE-infinity policy setting no time or quantity limit to massive monetary base expansion.

—Brendan Brown, Euro Crash: How Asset Price Inflation Destroys the Wealth of Nations, 3rd ed. (Houndmills, UK: Palgrave Macmillan, 2014), 217-218.

Germany Broke Free from the Worldwide Dollar Standard (Bretton Woods System) By Floating the Deutsche Mark in May 1971

US monetary chaos has been both a hugely creative and a destructive force in the history of EMU [European Monetary Union].

If monetary stability had reigned throughout in the US there would have been no impetus to monetary union in Europe at least in its modern gargantuan form. Each country there might well have adhered individually to an international US dollar standard. . . . 

Instead the inflationary path taken by the Martin and Burns Federal Reserves fanned direct US monetary conflict with Germany where monetarist titans had assumed power in the Deutsche Bundesbank. Eventually Germany ‘broke free’ from the deeply flawed worldwide dollar standard often described as ‘the Bretton Woods system’, floating the Deutsche mark in May 1971. The calculation in Frankfurt and Bonn was that that the gains for the German economy from domestic monetary stability now possible would more than match the losses from exchange rate instability. Even so there was considerable concern about those possible losses.

—Brendan Brown, Euro Crash: How Asset Price Inflation Destroys the Wealth of Nations, 3rd ed. (Houndmills, UK: Palgrave Macmillan, 2014), 210.