First, on Greece. They need deflation, or they need everyone else to inflate (see Krugman’s graph). With their own currency, they can’t become more competitive any other way – the natural way being to devalue.
Two clever ideas have come out. Martin Feldstein suggested them going back on the drachma, with a commitment to return to the euro at a lower rate:
More specifically, Greece would shift its currency from the euro to the drachma, with an initial exchange rate of one euro to one drachma. Bank balances and obligations would remain in euros. Wages and prices would be set in drachma. If the agreement called for Greece to return at an exchange rate of 1.3 drachmas per euro, the Greek currency would immediately fall by about 30 per cent relative to the euro and other non-euro currencies. If there is little or no induced inflation in Greece, Greek products would be substantially more competitive in both domestic and foreign markets.
Charles Goodhart and Dmitrios Tsomocos suggest a Californian solution. Discussing Portugal (it could be Greece):
When a subordinate state in a federal monetary union has severe fiscal problems and runs out of money, what does it do? It issues IOUs. Think California or the Argentine provinces before 2000. For example, in Portugal, we could coin a phrase and call such IOUs escudo. Essentially the government passes a decree that states that such escudo IOUs would be acceptable for all internal payments, except tax payments, between Portuguese residents, but not for any external payments between Portuguese residents and foreign residents
I doubt either would work; the same workers protesting against deflation (wage cuts, basically) would surely protest about being given what looks like monopoly money, that lowers their ability to purchase international goods. Against Feldstein’s idea Eichengreen has what looks like insuperable objections.
Reintroducing the national currency would require essentially all contracts – including those governing wages, bank deposits, bonds, mortgages, taxes, and most everything else – to be redenominated in the domestic currency. The legislature could pass a law requiring banks, firms, households and governments to redenominate their contracts in this manner. But in a democracy this decision would have to be preceded by very extensive discussion.
While I’m writing, other useful cleverness: if you want to understand the Fed’s actions of the last two years, read this by James Hamilton. You will need a colour monitor.
And on efficient market hypothesis: I see this post about the Invincible Markets Hypothesis as dealing with Sumner’s EMH views, which are all about how difficult it is to beat the market. Sure. It’s also difficult to predict how a drunken donkey will cross a motorway. That doesn’t mean the donkey is a good guide to how to allocate cash.