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.


8 thoughts on “Some very clever ideas, mostly from Americans

  1. Giles,

    I just discovered this gigantically clever person (probably an American too)

    you might like ’em too.

    I know I’ve posted this link before, but, on subject of Robin Hood (wrong thread) the argument I find most interesting is this one. This perhaps relates mo to the FT arguments in t’other thread.

    here’s some off the scale cleverness (and look at the date)

    1. I will definitely have to take that angle into account. As an ex market chappie, I have to be realistic about the way they work. I saw the dotcom nuttiness afterall

  2. Barry’s objections are no more insuperable than many things that have been overcome in the past. If the alternative to reneging on debts to foreign banks is ten years or more of no growth, then the objections look pretty minor to me, particularly from a Greek perspective. Those countries that quit the gold standard quickly in the interwar era did best. The sooner Greece quits the Euro, the better it will be for Greece. The Euro is only suited to countries whose inflationary expectations are similar to Germany, or whose labour markets are extremely flexible. I suggest Benelux, Denmark, Austria, Switzerland and perhaps France, the UK and Sweden are the only plausible candidate countries.

  3. M aking the “escudo” valid for all internal payments EXCEPT TAX PAYMENTS is simply government passing a law saying that everybody else will accept the “money” they print but they won’t. I do not se that inspiring confidence. Perhpas they could raise taxes 20% & say that this portion could be paid in escudos. Perhaps they could just cut government parasitism by 20% & avoid the whole rigmarole.

  4. I don’t think Greece should leave the euro, devalue. But I’m not convinced people really protest against devaluation – the UK has suffered an enormous devaluation and hardly anyone is complaining about their loss of purchasing power – most of the right (think Tim Worstall or AEP) think it’s brilliant.

    I have a question for you on that. If a country devalued by 50% (say) then it seems clear living standards are reduced – this is certainly true when one goes abroad. But how does that show up in GDP or is GDP the wrong measure? I don’t mean the knock-on effects on GDP growth, just simply in GDP itself. In short, does 2% gdp growth in real sterling terms when the pound has been steady mean different things from 2% gdp growth when the pound has collapsed by 50% or should that already be captured in the GDP numbers?

  5. Blimey, good question. I started penning an answer then got confused. SOrry, I need to do a meeting. Maybe later.

    I think GDP in PPP terms might be the most useful tool at this juncture.

  6. I think looking at PPP would suggest (as they move slowly with relative inflation rates) that it makes no difference.

    But I suppose to try and simplify my question – if two countries have the same GDP per capita and then both grow at 0% over the year (in nominal terms, but inflation is zero in both countries too), but one’s currency devalues by 50% against the other, are people in the devalued country any worse off than in the revalued country?

    It seems that they must be but i can’t quite explain why. I assume that (let’s call them UK and France) that in the UK our import bill of (say) £500bn now buys 50% less than it did, but is that right? And shouldn’t this show up in some measure of per capita welfare?

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