tag:blogger.com,1999:blog-582368152716771238.post3395037802332457560..comments2024-03-28T11:50:52.581-05:00Comments on The Grumpy Economist: Euro explosionJohn H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger21125tag:blogger.com,1999:blog-582368152716771238.post-87677532787299678932012-06-19T19:08:00.078-05:002012-06-19T19:08:00.078-05:00I agree, but how realistic is this? They can anno...I agree, but how realistic is this? They can announce any change of policy and reverse it in the next elections. I just don't see the bond market being fooled by that. Who is going to buy Italian bonds? Other than German and French banks?IndependentVoterhttps://www.blogger.com/profile/10978132678617731242noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-52964017128976543372012-06-19T18:11:46.743-05:002012-06-19T18:11:46.743-05:00What really matters is a clear commitment to liber...What really matters is a clear commitment to liberalization. Persuade the bond market it will really happen, that you will have a free and hence growing economy sometime in the future. The crisis would instantly be over.John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-17650013648705844692012-06-19T18:10:45.017-05:002012-06-19T18:10:45.017-05:00Is that really that much economically easier or po...Is that really that much economically easier or politically palatable than just cutting payments by 1/3? <br /><br />More generally, people who want devaluation: it would be almost as easy to say all prices and wages are cut in half tomorrow morning, as it is to say all euro contracts are now paid in drachma tomorrow morning.John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-17960639360595282262012-06-19T14:20:19.901-05:002012-06-19T14:20:19.901-05:00Wow, Absalon, you really are open minded. Obviousl...Wow, Absalon, you really are open minded. Obviously republicans just want to screw the middle class because it's politically expedient. Nothing says "vote for me" like spending cuts and entitlement reform. That makes a lot of sense. Also, it's super important to the middle class to subsidize poverty, and drive up the price of housing and health insurance.<br /><br />I'm glad you've open mindedly determined that republicans are sadistic monsters. Keep on laughing derisively, you've obviously got things figured out.Jason Weinmanhttps://www.blogger.com/profile/11211087552762790514noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-74207333044531400442012-06-17T22:45:52.769-05:002012-06-17T22:45:52.769-05:00Greek economist Yanis Varoufakis came up with a st...Greek economist Yanis Varoufakis came up with a strategy in dealing with the E.U "troika" for the radical left party Syriza which is angling to form a government in the new election. He explains it on <a href="http://bloggingheads.tv/videos/9943" rel="nofollow">Bloggingheads.tv</a>. I can't say it inspires much confidence, but like I said it seems Greece is doomed no matter what.TGGPhttps://www.blogger.com/profile/11017651009634767649noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-13938852375808045492012-06-17T21:52:56.352-05:002012-06-17T21:52:56.352-05:00John, shock liberalization won't work. There...John, shock liberalization won't work. There definitely need to be structural reforms in Italy, Spain and Greece. But the reality is, these things take a long time. It's like saying "Russia should stop being a corrupt petrodollar state and it will grow faster". Yes it should and yes it will. But how can that just automagically happen? it cannot. In the mean time, the only answer is 3 to 4% inflation which is not super devastating as far as inflation goes, but at least will make the debt payments manageableIndependentVoterhttps://www.blogger.com/profile/10978132678617731242noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-86288866409901947772012-06-17T17:59:02.617-05:002012-06-17T17:59:02.617-05:00"The central ingredient is: sovereigns who ca..."The central ingredient is: sovereigns who can't pay their bills default."<br /><br />Right. So we need to have countries like Spain, which held a debt-to-GDP ratio of around 30 percent prior to the crisis, default. Makes sense, in some perverse and twisted world in which bankers inflate gigantic asset bubbles, get bailed out by the state, and then the state defaults because it's deemed "fiscally reckless."Joehttps://www.blogger.com/profile/01709995807329945280noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-42491077350323172572012-06-17T13:38:12.064-05:002012-06-17T13:38:12.064-05:00Can the Greek government reintroduce the drachma w...Can the Greek government reintroduce the drachma without seizing anyone's euros? I'm thinking that they could change over to paying pensions and government wages in drachma at 1:1, but banks keep separate accounts for euros and drachma and are not expected to honour 1:1.<br /><br />With a lot of customers whose only income is in drachma, local businesses will likely accept drachma, at say three drachma to the euro. Greeks with euros in their bank accounts and local purchases to make will get used to selling a euro for four drachma, instead of flaunting it in the local shops to get three euros of goods and services. So those with drachma income will have access (on unfavourable terms) to euros.Alan Crowehttps://www.blogger.com/profile/08629794297052502326noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-72359583812900100652012-06-17T12:40:16.088-05:002012-06-17T12:40:16.088-05:00Michael Darda (hat-tip to David Beckworth) says th...<a href="http://mkm.na.bdvision.ipreo.com/NSightWeb_v2.00/Handlers/Document.ashx?i=716ee8a098ad4112960dac860a4db904" rel="nofollow">Michael Darda</a> (hat-tip to David Beckworth) says the German five-year breakeven inflation spread has bounced from its 2012 low, but eyeballing the chart it's still well below where it was even in the middle of May.<br />He also says that markets have reacted positively when the ECB took accommodative steps and negatively when they backed off or reversed, but the only charts I see in support just indicate what happened when the ECB hiked rates in 2011.TGGPhttps://www.blogger.com/profile/11017651009634767649noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-27679170853847276772012-06-17T12:17:09.091-05:002012-06-17T12:17:09.091-05:00"For the ECB to buy back the money it must ha..."For the ECB to buy back the money it must have an asset people want instead"<br /><br />If we are talking about enough cash to move the economy then it seems likely that the money will either: (1) go into real estate which might provide some relief to the bannks or (2) go into a bank account which the bank could then use to pay off the special loans they received from the ECB to cover the bank run and the bales of cash (musty and possibly dirty) go back to the ECB and are cancelled.Absalonhttps://www.blogger.com/profile/09131268683451462949noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-81088010569179283322012-06-17T11:43:32.697-05:002012-06-17T11:43:32.697-05:00Are Euro inflation expectations going up? Lars Chr...Are Euro inflation expectations going up? Lars Christensen <a href="http://www.themoneyillusion.com/?p=11217" rel="nofollow">showed</a> them dropping sharply in 2011. Does anyone know what those spreads are indicating now?<br />Greece will probably be screwed no matter what, but Argentina was able to able to make a recovery after defaulting & devaluating. Iceland's recovery has relied a lot on devaluation. Sweden devaluated as well, though it didn't have the massive banking problems that Iceland did. Australia has maintained something like 4% inflation every year and avoided recession for decades. Canada was able to achieve "austerity" (cut government spending even in nominal terms, maintain growth) by devaluing the "loonie" during the 90s. Yglesias describes devaluation as "<a href="http://www.slate.com/blogs/moneybox/2012/06/13/devaluation_is_austerity_done_right.html" rel="nofollow">austerity done right</a>". Alesina has been one of the big boosters of expansionary austerity, and I think that most of his examples of recovery were accompanied by inflationary monetary policy (leading Krugman to respond that they don't count and their lessons can't be applied). Maybe it is a "stealth" way of default, but it seems like some sort of default is inevitable.<br />Does rapid growth often come from a short period of "shock" reforms? I thought that good "structural" growth tended to come from a long period of developing good policy and establishing the credibility of a responsible political system. I suppose the "German miracle" post-WW2 is the main example, not sure what happened with inflation at that time but they did replace the Reichsmark with the Deutsche Mark.TGGPhttps://www.blogger.com/profile/11017651009634767649noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-72122785453620557252012-06-17T08:24:41.208-05:002012-06-17T08:24:41.208-05:00So long as the depositor wants to keep bales of cu...So long as the depositor wants to keep bales of currency in his back yard, everything is in fact ok. <br /><br />But sooner or later people get tired of keeping bales of non-interest bearing currency in their back yards. Then, the ECB either has to buy back the money or the money chases goods and causes inflation. For the ECB to buy back the money it must have an asset people want instead -- no defaulted Greek bonds please. If its coffers are bare, basically the money has to get soaked up by more taxes or less spending, government surpluses somewhere in the eurozone. We're back to "let's run for the exit and stick Germany with the bill" <br /><br />In technical parlance, Europe does have a plausibly much higher money demand right now, as money demand in the US shot up during the financial crisis. But that will subside eventually. This is the year or so opportunity I mentioned for shock liberalization to work, between ECB bailing out the banks with freshly printed euros and those euros causing inflation.John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-29712725095881307512012-06-17T01:56:05.004-05:002012-06-17T01:56:05.004-05:00I don't really understand why the depositor wa...I don't really understand why the depositor wants to hold onto a currency that she expects to be devalued. If the Greek government declares Greek Euros as Drachmas and then devalues the depositor should not want to put it under her pillow.<br /><br />The way I imagine it would work is similar to "price gouging" during a hurricane. People start bidding up the price of "essentials". Though it is hard to imagine what an essential would be in the face of an economic disaster, black market foreign currency might be one example. I think it easily demonstrates how an inflationary mechanism could occur.<br /><br />As long as there are fears of inflation, inflation can easily happen...in my story anyway.LALhttps://www.blogger.com/profile/08196675112184615614noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-89968140716444294862012-06-16T19:25:25.834-05:002012-06-16T19:25:25.834-05:00"If the ECB doesn't stop this massive len..."If the ECB doesn't stop this massive lending, it understands well that it will essentially end up monetizing all the debt of the southern tier, and a huge inflation will eventually break out."<br /><br />So the ECB lends money to the banks to cover deposits and delivers bales of currency to the banks who pay it to depositors (with the result that the bank note is basically a zero interest loan back to the ECB) and the depositor takes the note and buries it in the back yard or stuffs it in a mattress - it is hard to see how that is going to fuel inflation.Absalonhttps://www.blogger.com/profile/09131268683451462949noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-12405824907079516322012-06-16T11:41:37.066-05:002012-06-16T11:41:37.066-05:00Jason - I am interested in engaging with an open m...Jason - I am interested in engaging with an open mind. So, we have the Ryan plan and it now appears to be the center piece of the Republican and Romney economic agendas. I say the Ryan plan is important only because Romney and the Republicans say it is important. <br /><br />The Ryan plan calls for cuts to spending on the poor, big cuts in taxes for the rich and some unspecified, but very large, cuts to tax deductions to pay for the tax cuts and to balance the budget.<br /><br />The big tax deductions that might be reduced are things like the mortgage interest deduction, employer medical plan deduction and retirement savings deductions (pensions, IRAs, 401(k)s). Ryan refuses to say what will be cut - saying someone else will have to decide that, and thereby avoiding responsibility. <br /><br />The Ryan plan is meaningless without specifying the deductions that will be eliminated to pay for it. The major candidates for elimination that I have referred to are all very important to the middle class.<br /><br />The only appropriate response by responsible voters to the Ryan plan as it stands and all who endorse it are: derisive laughter and cries of "faker" or worse.<br /><br />However, being an open minded sort of fellow, I invite Mr. Ryan, or Professor Cochrane, to fill in the gap and say what deductions the Republicans would be eliminate. We could then engage in an appropriate and informed dialog about a specific proposal. <br /><br />You may believe that an essentially fraudulent proposal like the Ryan plan is a necessary evil to achieve the greater good of a Republican victory. I do not. I believe in a politics based on the electorate being told the truth and making informed choices.Absalonhttps://www.blogger.com/profile/09131268683451462949noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-76568161111306198322012-06-16T10:54:55.564-05:002012-06-16T10:54:55.564-05:00The post said"But if you have a bank account,...The post said"But if you have a bank account, leaving the euro means that you go to bed one night with € 10,000 in your bank account. The next morning, you have 10,000 drachmas. Those drachmas are going to be swiftly devalued to about 1/3 or so of their original value. In addition, it's a good bet there will be capital controls and exchange controls, so you can't get money out of the country or buy things with euros."<br /><br /> If there weren't exchange controls, would there be a problem? I would wake up with 10,000 drachmas, and I'd predict there would be drachma inflation, but the interest rate on drachma deposits would equilibrate at 50% or so and I'd be content. (Except, I guess, that drachmas would be a risky asset because of uncertain inflation--- but the interest rate would include a risk premium for that.)Eric Rasmusenhttps://www.blogger.com/profile/01609599580545475695noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-61144670207426701832012-06-16T10:48:19.768-05:002012-06-16T10:48:19.768-05:00I was just at a conference listening to a paper on...I was just at a conference listening to a paper on how France caused the Great Depression by soaking up so much of the world's gold supply, thus causing a worldwide monetary contraction. <br /><br /> Could something similar happen in Europe? If all those Euros are leaving Greece, they're going somewhere else, increasing the money supply elsewhere. Of course, Greece is small and the ECB can reduce the monetary base to compensate, but I wonder if anybody is thinking about that.Eric Rasmusenhttps://www.blogger.com/profile/01609599580545475695noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-4580803639571053572012-06-16T10:27:24.357-05:002012-06-16T10:27:24.357-05:00Good point. "ECB base money is jointly and s...Good point. "ECB base money is jointly and severally guaranteed eurozone public debt." That should be carved in stone on the front of the ECB. The eurobonds have been issued. They're called euros. <br /><br />So, the ECB prints up a trillion euros and buys sovereign debt. Then the sovereign debt defaults. In principle, you are right: At this point, the ECB calls up the member states and says "we need a trillion euros more capital. Pony up." At that point, Germany is supposed to pay the bill and validate the bailout. But that is a straight fiscal transfer. They have to get the euros from tax revenues. Or the euros stay outstanding and lead to inflation. I was implicitly ruling out the former and implying the latter, but the former is possible, as you say.John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-82998532679487723672012-06-16T09:11:10.126-05:002012-06-16T09:11:10.126-05:00I don’t follow the analysis in your third option.
...I don’t follow the analysis in your third option.<br /><br />"The ECB buys up the sovereign debt, or lends to banks on sovereign 'collateral,' effectively doing the same. By turning trillions of debt in to money, we get inflation.”<br /><br />ECB base money is jointly and severally guaranteed eurozone public debt. Swapping base money for national sovereign debt does not change the amount of consolidated eurozone public sector debt. Monetization by itself, therefore, does not lift the price level. <br /><br />Do you assume that monetization implies to more rapid growth in eurozone public sector debt? It’s in order to prohibit this that the Germans insist on an explicit fiscal union as a precondition for further ECB interventions in sovereign debt markets.<br /><br />Do you think that the current level of eurozone public debt already is too large relative to what one can expect of future real primary public surpluses, so that the eurozone is set for fiscal inflation, and that monetization will speed up the price level shift by cutting the duration of the public debt?Anonymoushttps://www.blogger.com/profile/06879218265946459754noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-86286252992314181412012-06-16T00:41:52.225-05:002012-06-16T00:41:52.225-05:00Strange standards there, Absalon. Krugman regularl...Strange standards there, Absalon. Krugman regularly depicts republicans as evil (a position you seem to accept). Why focus so intensely on that particular example? Few politicians are forthcoming with details that will inevitably be wildly unpopular (mostly libertarians. That's why libertarians don't get elected). That hardly makes them evil. Krugman goes much further, however, and uses his articles primarily to propagate the fiction that republicans are interested only in protecting their own interests, or only the interests of the wealthy. This depiction is basically blood libel, and serves no purpose other than to stifle honest discourse. Supporters of free markets may well be wrong (although all the evidence seems to indicate that they're correct), but there is no indication that they are less altruistically motivated than statists like yourself. Also, various republicans might not actually advocate for free markets (mostly because they support the privilege of their constituents), but playing to special interests is a charge that could be leveled at least as much at Obama as Ryan or Romney.<br /><br />Double standards and ad hominem attacks just prevent us from having an informed, reasonable discourse on policy. Why do you read this blog if you're not willing to engage with an open mind or on a reasonable level?Jason Weinmanhttps://www.blogger.com/profile/11211087552762790514noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-56908058970591455142012-06-15T23:29:36.937-05:002012-06-15T23:29:36.937-05:00[Paul Krugman's] article is for once about eco...<i> [Paul Krugman's] article is for once about economics, not the evil character of Republican politicians ... </i><br /><br />I am still waiting for you to prove that Krugman was unfair in calling Romney and Ryan fakers by you posting the list of the specific tax deductions that Ryan and Romney are proposing to eliminate. Until that comes out, "evil character" is a fair, if unstated, summary.Absalonhttps://www.blogger.com/profile/09131268683451462949noreply@blogger.com