John Cochrane's blog
At 1:31, my favorite part. Betty: "OK I don't get this. So, Professor, you're saying that..."
You're a Very Serious Person! Media tip : Next time when warning about a possible high base money growth + high fiscal deficits runaway inflation, just add "it wasn't big enough", like the competion, it will make you less serious :)
I saw the interview during the trading hours in London, but it's not available online - either at the moment, or in the region. I like the concept of "shock liberalization", however the political will to proceed is absent - at the moment or in the region, or both.
I went to the Bloomberg link you cite, and it said that the media was not available at this time. You didn't make a derogatory comment about the NYC jumbo soda ban, did you? It is rather odd that the video isn't available.
On the question "this should be led by whom?" , obviously Greece would have to take the initiative on a default since Germany won't like it.Hopefully the default would give the Greek government enough political capital with the Greek public to do structural reforms as well. I think that's probably the least bad plausibly politically feasible solution to the crisis.
You emphasize how much worse an exit from the Euro would be, but that's mostly because a run would spread to other weak Eurozone economies. If you're a Greek politician, do you really care? You just care whether you think you'll benefit from Athens controlling your currency rather than Frankfurt.You say other than shock liberalization the three terrible options are simple default, Euro inflation and exiting the Eurozone, with the latter two being worst. Australia has managed well enough with 4% inflation for decades, let's say we double that to 8% inflation (I believe the Euro has been running less than 2% in recent years). Will that solve all Greece's problems? No, but it seems quite plausible that trying to pay off their nominal debt with devalued currency (call it a partial default) would be a less hard/brittle solution than complete default. Italy is even supposed to have a primary surplus so debt would be manageable with mere monetary stimulus.
The interview and the previous blog posts on the theme “default and exit are not the same thing” leads me to wonder what I’m missing. The interviewer from Bloomberg seemed surprised and confused by the suggestion but she’s not alone. So, let’s pose the question as bluntly as possible: is it realistic to think that there could be default without exit? I don’t see why not. The Greek government should be perfectly happy defaulting on debt held by outsiders--German Marines are not going to storm the beaches of Santorini and in fact, various Greek governments have defaulted four other times since becoming a nation in 1832. Sure, there would be hard feelings, law suits and other repercussions. Sure, Greece will be locked out of debt markets. But isn’t that sort of unpleasantness inevitable no matter what? Defaulting on payments to Greek citizens is, of course, a different matter. Could the Greek government raise enough euros to pay the Greek pensioners, public employees and still pay for critical imports? If not, wouldn’t the government be pretty much forced to create a currency to pay the Greeks? This is both a question of accounting and politics. Greek politics are even more bizarre than Greek government accounting, but if I understand the numbers, the ECB reports that in the fourth quarter of 2011 Greece had a primary surplus of 767 million euros.Of course, the question turns on more than cash-flows. Even if the government isn’t forced to print drachma to pay off internal interest groups, would they have to impose capital controls on Greek banks? Once that happens a euro in a Greek bank becomes a very different thing than a euro in a German bank. In fact, doesn’t a “Greek euro” really just become a new currency? I guess that could happen but the capital is already fleeing. Does a default doesn’t make it worse? The point is that while you can certainly make up a story in which total default would necessitate exit, that’s not the only possible story. (And, of course, the story might be different for different countries). What is there about the analogy to the U.S.—Texas could default and keep the dollar—doesn’t translate to Europe?
Let’s ask the more interesting question: if Greece could default and keep the euro, should they? If asked, the ever-helpful “good economist from another planet” (i.e, someone who answers these questions on the basis of clear facts and first principles) would certainly say yes. Even a Martian economist knows that Greece suffers all sorts of structural flaws that have nothing to do with currency or even finance. Fixing these problems will be easier to if the Greeks can continue to use a stable and predictable currency. (Try this analogy: suppose your German friend loaned your teenage son a Porsche. After several years of hard driving and no maintenance, the car has a blown head gasket, four flat tires and an oil leak. Miraculously, the kid managed to get the thing home to your heated garage where a complete set of tools and a factory trained German mechanic await. Would it make sense to push the car onto the street and try fixing it with duct tape? The euro is a heated garage, the drachma is duct tape.) A number of really smart economists, though, don’t see things this way at all and seem to think it best if Greece exits (I suspect, btw, that it’s really this idea that inspired John’s rants). Now, of course it makes sense to advocate exit if you believe (1) that the conditions imposed on Greece for staying in the Eurozone are actually inhibiting growth and (2) exit is the only way to avoid these conditions. But the charm of the default no exit solution is to free Greece from the Frankfurt/Berlin/Brussels axis of adulthood. Even if those smart economists believe (1), why do they believe (2)? If Greeks default on their debt, the other Europeans can’t forbid them from using the euro. As nearly as I can tell, though, the really smart economists who want to bring back the drachma don’t care to discuss the default option because they aren’t really thinking on these lines at all. Instead, they’re buying into the Econ 101 argument about devaluations increasing competitiveness and spurring exports. They understand that the central problem is structural, Greece doesn’t produce enough relative to what they want to consume. They think a cheap currency will induce the Greeks to produce more export goods and consume fewer imported goods. But are the structural problems in Greece really just caused by sticky prices? Is Greece is uncompetitive just because of some tragic flaw in the pricing system? After all, Greek exporters always have the option of cutting prices—if a bartender in Athens wants more German tourists, what’s stopping him from extending happy hour? The Econ 101 types view this as somehow unthinkable. Noreil Roubini dismisses the option of “internal devaluation” as leading “to five years of ever-deepening depression, while making public debts more unsustainable”. If Greece defaults, the public debts are irrelevant. And does anyone expect less than five bad years for Greece? Simon Johnson can’t fathom prices adjusting to relative productivity, writing that “as a matter of practical economic outcomes, it is hard to imagine anything less likely.” But an “internal devaluation” is just an adjustment to the reality of Greece’s relative productivity. Why is this worse than “external devaluation” designed by politicized Greek monetary authorities? Greece didn’t get in trouble because the euro was too expensive relative to other currencies. It got in trouble because Greek goods were too expensive relative to other goods. That happened because Greece is riddled with inefficient regulation and bizarre disincentives. Of course Greece has to become more competitive, but it has to become more competitive by becoming more efficient. Playing games with the currency just creates more uncertainty. Larry Summers recently wrote in FT that “it is not certain that the full repayment of all currently contracted sovereign debts, sustainable growth for all, and the eurozone retaining all its current members will prove feasible”. Just so. If something has to go, why not full repayment of debt?
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