How can Europe get out from deflation ?
We are not more impressed by nominal negative rates in Europe. The last “surprise” was the German bond with a maturity of five years. Investors accepted to lend money to Germany for a -0.10 % nominal rate and a real rate much worse.
Roubini has calculated that there are three thousand billion of bonds in Europe and Japan from three to ten year maturity, with negative interest rates right now. So what is going to happen? How long the investors will accept a similar situation. Roubini has the answer: until the governments of these countries will undertake serious fiscal stimulus and investments in the infrastructure. So investors can find better opportunities for their capital.
Roubini sustains that the negative interest rates help the economy to get out from the deflation because people do not save but consume much more.
We also know that, if there’s deflation the people wait for lower prices and this cause further deflation.
However the fiscal stimulus and the investiments in the infrastructure are for sure a way to get out of deflation. The big amounts of public debts don’t help governments to undertake big infrastructure investments and fiscal stimulus but the negative interest rate for sure will help the balance of the government budgets on mid-term. That event will allow the public sector to be more active in the economy, boosting both inflation and growth.