Sunday, 5 July 2015
The central problem with a common currency is that when a country loses competitiveness, it has to solve that problem by cutting costs. I.e it has to undergo a period of deficient demand or “austerity” in order to get its costs down. That is not ideal, to put it mildly.
An alternative is for a country to have its own currency, which means that given a loss of competitiveness, it can devalue its currency. That means that, at least in theory, full employment can be maintained while competitiveness is restored.
That’s not an entirely free lunch: that is, the price of imports rises which hits living standards in the relevant country. But what’s wrong with importing less food and growing more of it yourself? What’s wrong with importing fewer foreign cars, and making more of them yourself? Not much.
A third alternative, is to implement import tariffs. That has the same effect as having your own currency and devaluing. So the advantage for Greece would be that it could revert to full employment. It would grow more of its own food: and note that Greece does import an awful lot of its food. See this article entitled “Why does Greece import so much food?”
Of course tariff reduction and abolition is one of the basic purposes of the European Union. But desperate times call for desperate measures, as the saying goes.
Allowing a country in a Greek type situation to impose import tariffs would be a sort of “last chance saloon”: a final chance to get their house in order before being forced out of the Eurozone.
And that's not to suggest that having your own currency and devaluing, or import tariffs would necessarily solve the problem. It's widely appreciated that the elasticity of supply and demand for a country's exports and imports can be such that devaluation does not work. And in that case the country is done for, or at least "semi-done for". I.e. the only solution is for a proportion of the country's citizens to quit the country and get jobs elsewhere. And in fact that's to some extent been the solution adopted by Greece for a century or so: there is large Greek diaspora in the US and elsewhere.
But the import tariffs are worth a try aren't they? Why is no one discussing import tariffs? Darned if I know.
Saturday, 4 July 2015
According to this Telegraph article, “Businesses in Thessaloniki and other parts of the country are already creating parallel private currencies to keep trade alive and alleviate an acute shortage of liquidity.” That’s not the first time that’s happened.
In Ireland there have been two bank strikes since WWII during which the country ran short of official money. (That was prior to Ireland joining the Euro). What people did was to use cheques and endorse them and pass them from hand to hand.
Same thing happened in the initial stages of the Arab Spring two or three years ago. That is, banks closed, so people started creating and exchanging their own IOUs.
And at one stage in the 1800s there was a shortage of government issued coins in Britain. So British metal bashers turned out their own coins!
Of course that sort of unofficial money is nowhere near as efficient as money created by central banks or large commercial banks. In fact it is so inefficient that that sort of unofficial money possibly does not count as money. But it’s better than nothing.
Friday, 3 July 2015
I read somewhere that if you try begging or busking in some of the smarter parts of London, you’re likely to be moved on by some heavies. And those heavies are not employed by the police or any other law enforcement agency: they are employed by cartels which have carved out the more lucrative busking locations between themselves. I.e. busking and begging can be profitable particularly in wealthy areas.
The song and dance made by Greeks about their alleged poverty has got most of the Western world fooled. But the song and dance doesn’t quite wash.
According to this source, Greek GDP per head (in real, i.e. inflation adjusted terms) while it has clearly fallen significantly over the last five years or so, has still not fallen to the level that pertained in the 1990s. So why wasn’t everyone screaming blue murder about Greek poverty then? Reason is that doing so wasn’t flavour of the month at that time. Fashion trumps logic every time.
Moreover, Greece is in the top 25% of countries on the GDP per head scale. Why is Greece getting ten times as much sympathy as the 75% of countries which are below Greece on that scale?
In short, Greeks have worked out that rather than earn your keep, it can be much more profitable to locate yourself in a rich area and then broadcast sob stories about your allged poverty relative to others in that area, just like those buskers in London.
In the case of Greece, the begging does not of course take the form of straight demands for cash: that’s too crude and too obviously a form of begging. Much better to “borrow”, second blow the money, and third blame everyone but yourself when you can’t repay the money.
P.S. For a Financial Times article along roughly similar lines to the above, see here.
It’s good to see the European Union trying to force member states to stop subsidising banks. That’s according to this Reuters article. Given half a chance, bankster / criminals will always try to offer local politicians large wads of cash in brown envelopes in exchange for bank friendly legislation, including the bail out of banks with taxpayers’ money.
This must stop.
Those depositing money in banks should have to face reality. If they want to have their money loaned on to mortgagors, businesses, Greece etc then those depositors should carry the risk, not taxpayers. I.e. if the relevant bank goes belly up, then depositors, bondholders etc can get stuffed, far as I’m concerned. And it’s good to see the EU agrees with that.
Alternatively, if depositors want a chunk of their money to be totally safe, then they’re entitled to that safety. In the UK depositors can already obtain total safety by depositing money with National Savings and Investments. However, there’d be nothing to stop every high street bank I the UK offering totally safe accounts where relevant monies are simply lodged with the Bank of England.
P.S. Having done a bit more digging, it looks like the EU will not bail in depositors with up to €100k. So to that extent, the EU proposals are not a move towards full reserve. However, in that sums above €100k will be bailed in and in that bank bondholders will be bailed in, the EU proposals do constitute a move towards full reserve.
Thursday, 2 July 2015
Simon Wren-Lewis (Oxford economics prof) claims that more demand inside Greece will enable the Greek government to collect more tax and thus repay creditors. (Para starting “From a macroeconomic viewpoint…”) Nope. More demand inside Greece would suck in imports which would make Greece even more indebted to other countries or to banks and non-bank entities in other countries.
The extra demand would of course enable the Greek government to collect more tax off the Greek private sector as SW-L says, but that’s just a re-arrangement of wealth or money WITHIN Greece. And the Greek government can do that anytime simply by raising taxes and/or cutting public spending.
But that’s not to dispute SW-L’s other points, e.g. he argues (and has done so for some time) that a relatively long period of mild austerity is better than a shorter period of extreme austerity. That point might be valid. The logic there is that the basic purpose of austerity (internal devaluation) might take place at much the same speed under the two scenarios. But of course the latter ploy requires patience by Greece’s creditors, and those creditors are rapidly running out of patience.
I was delighted to see this phrase in a recent article by Paul Krugman: “If we think that normal times involve 2 percent growth and 2 percent inflation, a deficit of 4 percent of GDP would be consistent with a stable debt/GDP ratio..”.
The significance of that phrase will be lost on the UK’s finance minister, George Osborne. It will also be lost on many others who write about the debt and who have no grasp of the basic and very simple maths involved: e.g. Kenneth Rogoff, Niall Ferguson, etc.
Anyway, the significance is thus.
As I explained here some time ago, if the inflation target is X% and that target is being met (or at least if inflation over several years AVERAGES X%), then the value of the national debt in real terms (i.e. inflation adjusted terms) will fall at X%pa, all else equal.
Ergo if the if debt is to be maintained at a constant percentage of GDP (and that constant percentage actually is maintained over the very long term – a century or so) then the national debt has to be topped up. And that can only be done via a deficit.
Moreover, the same point applies to the monetary base.
And if the economy grows in real terms at say Y%pa, then even more “topping up” will be required to keep “base plus debt” constant relative to GDP.
To summarise, if “base plus debt” is to be maintained at Z% of GDP then the deficit will have to be (X+Y)%xZ% of GDP. Or taking the 2% growth and 2% inflation assumed by Krugman, then a deficit that is 4% of GDP would maintain “debt plus base” at a constant 100% of GDP.
But note that Krugman said nothing about exactly what the debt:GDP ratio is. That’s his slip up.
Put another way, suppose there is no debt or base at all and that inflation is 2% and growth is also 2%, then if the state runs a 4% deficit, “debt plus base” will eventually stabilise at 100% of GDP. Or if the deficit is 2%, then eventual stabilisation will be at 50% of GDP.
So far Krugman is the only economist I’m come across who is aware of the above simple mathematical reltionships. And just confirms that most of those writing on this subject are clueless.