Back to the Deutschmark

The debt crisis has upended lots of my assumptions about European politics, so it’s perhaps not surprising that I find myself agreeing with just about everything in this piece from The Telegraph by Mehreen Khan, advocating a German exit from the euro. Less surprisingly, I also agree in general with this NY Times article by Shahin Vallee, who also concludes that the (virtually inevitable) breakup of the euro would be better achieved by an orderly German departure.

One point made clear by the Greek disaster is that the mechanics of exit from a currency union are feasible only if the new (or, in this case, revived) currency is stronger than the old one. So, the appropriate way to break up the euro is for Germany, and other countries that want to remain in a German currency union, to switch to the Deutschmark. That way, existing euro-denominated contracts and accounts stay in euros, which can be freely exchanged for marks. Since the mark is expected to appreciate, there’s no reason for a run on banks in advance of the switch.

All this assumes that a breakup of the euro is desirable. In my view, the euro has failed on every count.

* The euro has failed in the aim of creating an Europe-wide currency union. The countries still outside are counting their blessings, and will almost certainly never join.

* The fallback position, based on the idea of the eurozone as the core of “two-speed” Europe has also failed. This idea was always based on the assumption of a vision shared between France and Germany, an assumption that has been destroyed, in large measure, by the euro. Far from being a unifying force, the euro has gone a fair way to reviving the demons the EU was created to keep at bay

* Economically, the euro has been a disaster, producing a deep depression in most of Europe and not even doing much for Germany. It’s an open question whether this was an inevitable consequence of a common currency, or the result of ECB mismanagement in the crucial years after the crisis, but either way, this is a failed experiment.

86 thoughts on “Back to the Deutschmark

  1. I have a question related to this topic. It is about debt and Australia’s Net International Investment Position (NIIP).

    In this table in Wikipedia “Net International Investment Position in absolute terms; OECD Countries, 2013? you find as of 2103;

    1. The USA was the largest DEBTOR nation with US$ – 5.382000997 Trillions.

    2. Spain was the second largest debtor with US$ -1.389621918 Trillions.

    3. Australia was third largest debtor!!! with US$ -743,491.296 Billions.

    4. Italy was fourth largest debtor with US$ -643,874.027 Billions.

    5. Mexico was fifth largest debtor with US$ -433,000.527 Billions.

    6. France was sixth largest debtor with US$ -433,000.527 Billions.

    and so on.

    This looks bad for Australia, however probably more relevant is the figure NIIP as a percentage of GDP. A table of this can be found at;

    https://en.wikipedia.org/wiki/Net_international_investment_position

    On this table Cyrpus is worst and Greece second worst. There are no surprises there. Australia comes in at 12th worst with a NIIP that is 64.3% of GDP.

    Now for the question. Is this of concern? Is it sustainable and payable? What does it mean for Australia’s economy? Have we built the productive infrastructure to help pay these debts or have we used the borrowings (which must be paid back) to fuel assets bubbles like our housing bubble?

    Bear in mind a country in the negative is paying “rents” (in the rentier sense) to the rest of the world. A country in the positives is receiving rents.

    When you look back at the positives in absolute terms in US dollars (the other table of Net International Investment Position in absolute terms; OECD Countries, 2013), Japan is receiving the greatest absolute rents from other countries and Germany the second greatest. The great rentier nations currently are Japan and Germany. Relative to their small size, Switzerland, Norway, Netherlands and Belgium are also great rentier nations. It gets curiouser and curiouser does it not?

  2. Correction to a sentence in the above. I should have written;

    “Australia comes in at 12th worst with a NIIP that is -64.3% of GDP.”

    Note: The minus means Australia is in a net debt position.

  3. @Megan

    I wouldn’t know Megan, I can’t afford a BMW. I have a 2006 Mazda 3 I bought second-hand. Actually, Mazda cars of that era are very reliable in my experience but then I don’t do a lot of kilometers.

  4. @Ikonoclast
    Yes it is of concern. It is payable with pain. It means bad things for the economy. Productive infra? -to support more people eg utilities, and to support extraction, not infra that will earn exports outside of tourism and resources.

  5. @Stockingrate

    I should have said “productive industries and infrastructure”. That would have been a more accurate description of how we needed to spend the borrowed money. But if we have just borrowed to fuel an asset price boom on relatively unproductive housing (it does produce domestic housing services) then I think we are in trouble when the bubble bursts.

  6. I suppose you could say that the EMU has been a disaster but compared to what? The U.S. achieved Union after massive slaughter and the Russian led Union fell apart, despite a similar slaughter. The UK are now getting cold feet over a deeper union with Europe but their own experience has not been exactly plain sailing.

  7. Ikonoclast
    Creditors also have a responsibility to keep crediting debtors, this is the nature of international finance. Look at the greek debt, why they keep refinancing and loaning evermore to Greece?
    Nothing is black and white regarding NIIP position.

    Total amount of NIIP is irelevant to a national economy, what matter is a political standing of a country, is it politically with allies that credit it? They will keep crediting a debtor country without economic questioning. Greece elected an openly leftist party and it had to be crushed. Ukraine is in much much worse financial position then Greece but got credited, no questions asked as long as they fight their “enemy” Putin.

  8. @Stockingrate
    “Yes it is of concern. It is payable with pain.”
    That is why no country ever does it. Can you find a country that ever lowered its nominal debt? No country can do it but by defaulting.
    It is quite impossible for a country to lower its nominal debt, so no country even attempts to do it except if creditors decide to destroy a country in order to control it and then openly colonise it.

    The nature of agregate debt is to keep growing. Agregate private debt has to grow, agregate public debt has to grow. If one side stops growing then other one has to pick up a slack, otherwise an economy will enter recession. If both sides, private and public debt stop growing, economy is in depression.

    Old debts can be payed off only with new debts or liquidity will dry up. It is why Moses ordered debt jubilees every 7 years 5000 years ago. He learned it from egiptians where he was educated.
    And it is the reason Gold Standard was abandoned.

  9. @Ikonoclast
    I think that your definition of a bubble using productive and “unproductive” use is a side issue. A bubble is when debt grows but income that is used to service the debt does not grow. What debt is used for is irelevant, but supporting income has to grow and the bubble will not be visible.

    You going into debt to pay for housing, or for you kids wedding or gambling loses is irrelevant as long as your income is growing. You will pay off your debt. If you keep taking more debt and your income is flat, you will enter a bubble that will burst. It is mathematics. Uses for debt are irelevant.

  10. “Can you find a country that ever lowered its nominal debt? ”

    Yes. Consult readily available data bases.

  11. @Ikonoclast
    You were clear. I agree we have borrowed etc to boost housing, and also for infra to support a larger population (but a larger pop is a net negative for per per capita wealth), and to live too well. Outside of tourism and extractive industries and maybe ag, I cannot think of a large profitable productive and internationally competitive industry sector we have substantially increased investment in- not cars at any rate, maybe “education” but that is has a substantial visa sale/pop growth component.

  12. @Ernestine Gross

    I do think the Net International Investment Position (NIIP) matters. Precisely how it matters and how much it matters, I am not certain in detail, so I am hoping a trained economist will tell me.

    The Europa (European Commission) site states;

    “The Net International Investment Position (NIIP) is the stock of external assets minus the stock of external liabilities. In other words it is the value of foreign assets owned by private and public sector of a country minus the value of domestic assets owned by foreigners. NIIP is usually expressed in relation to an economy’s size – NIIP to GDP ratio.”

    It further states;

    “NIIP is a sum of past current account deficits or surpluses adjusted for regular valuation changes, i.e.:

    – the non-performing debt sometimes needs to be written off;
    – the value of equity (stocks) is revalued upwards or downwards depending on the
    performance of individual stocks on the stock market;
    – valuation is also affected by changes in an exchange rate between domestic and foreign
    currencies.

    Financial investors use NIIP to GDP ratio to gauge the creditworthiness of a country. The more negative the NIIP to GDP, the more country becomes vulnerable to volatility in international financial markets. Many countries that accumulated a large negative NIIP in the run-up to the crisis lost access to financial markets when the crisis struck and needed to accept international financial assistance to cover the deficit in their budgets.”

    Here is a link to the page I am looking at;

    http://ec.europa.eu/economy_finance/graphs/2014-12-08_net_international_investment_position_en.htm

    The graph on the page is worth looking at.

    It is clear the European Commission is concerned by the countries with large negative positions. They say: ” To reduce the NIIP to safer levels over the next decade, moderate to relatively large surpluses is necessary are all these countries.” (sic).

    It seems clear to me, from the context, that they are talking about current account surpluses not government budget surpluses though these might be involved too. Am I right in thinking that?

    Also they say;

    “However, a mere stabilisation of external indebtedness may not be enough to restore full confidence, in particular for countries where the large NIIPs essentially reflect high level of debt (as opposed to countries where large negative NIIP is driven by significant inflows of FDIs).”

    What is FDI? Is it Foreign Direct Investment? Why is it not considered so much of a concern? My guess is that it at least drives wages and production in the country concerned. As opposed to borrowing to buy imports or borrowing to create a domestic asset bubble. The issue of assets bubbles continues to come to my mind when I think about contemporary Australia. Our house prices for example are absurd IMO and I believe are out of kilter with fundamentals like average household income.

  13. I have a comment in moderation. Please oh please can a reply to someone in this blog not count as a link?

  14. Blow it, I will re-post without linking it as a reply to anyone.

    I do think the Net International Investment Position (NIIP) matters. Precisely how it matters and how much it matters, I am not certain in detail, so I am hoping a trained economist will tell me.

    The Europa (European Commission) site states;

    “The Net International Investment Position (NIIP) is the stock of external assets minus the stock of external liabilities. In other words it is the value of foreign assets owned by private and public sector of a country minus the value of domestic assets owned by foreigners. NIIP is usually expressed in relation to an economy’s size – NIIP to GDP ratio.”

    It further states;

    “NIIP is a sum of past current account deficits or surpluses adjusted for regular valuation changes, i.e.:

    – the non-performing debt sometimes needs to be written off;
    – the value of equity (stocks) is revalued upwards or downwards depending on the
    performance of individual stocks on the stock market;
    – valuation is also affected by changes in an exchange rate between domestic and foreign
    currencies.

    Financial investors use NIIP to GDP ratio to gauge the creditworthiness of a country. The more negative the NIIP to GDP, the more country becomes vulnerable to volatility in international financial markets. Many countries that accumulated a large negative NIIP in the run-up to the crisis lost access to financial markets when the crisis struck and needed to accept international financial assistance to cover the deficit in their budgets.”

    Here is a link to the page I am looking at;

    http://ec.europa.eu/economy_finance/graphs/2014-12-08_net_international_investment_position_en.htm

    The graph on the page is worth looking at.

    It is clear the European Commission is concerned by the countries with large negative positions. They say: ” To reduce the NIIP to safer levels over the next decade, moderate to relatively large surpluses is necessary are all these countries.” (sic).

    It seems clear to me, from the context, that they are talking about current account surpluses not government budget surpluses though these might be involved too. Am I right in thinking that?

    Also they say;

    “However, a mere stabilisation of external indebtedness may not be enough to restore full confidence, in particular for countries where the large NIIPs essentially reflect high level of debt (as opposed to countries where large negative NIIP is driven by significant inflows of FDIs).”

    What is FDI? Is it Foreign Direct Investment? Why is it not considered so much of a concern? My guess as a non-economist is that it at least drives wages and production in the country concerned. This is as opposed to borrowing to buy imports or borrowing to create a domestic asset bubble. The issue of assets bubbles continues to surface in my mind when I think about contemporary Australia. Our house prices, for example,,are absurdly high. I believe they are much out of line with fundamentals like average household income.

  15. Correction to the above: The fundamental in this case would be median household income not average household income.

  16. At the risk of over-posting, here is Australia’s NIIP as per the ABS.

    http://www.abs.gov.au/ausstats/abs@.nsf/mf/5302.0

    This looks decidedly unhealthy. Neither major party talks about Australia’s foreign debt any more. That is interesting. They used to argue with each other all the time about it. Now, one hears nary a peep about it. It’s probably because it is so bad and they might have to admit our asset bubbles and high household debt have something to do with it.

    Now, they just argue about the government budget surplus or deficit. A budget surplus might help the NIIP a little but not if the policy settings encourage excessive private borrowing overseas. And a government budget surplus might even damage the NIIP position as people borrow overseas to make up the shortfall of government spending. Governments with a fiat currency can run deficits up to a point IMO without borrowing. That is to say, they can “print money”. Printing money could help I believe if there is capacity under-utilisation and until bottlenecks in the economy come into effect. I don’t support wild money printing but we could try more deficit budgeting and tolerate a little more basket inflation and a lot less asset inflation.

  17. @Ernestine Gross

    Arround 600k right now. Much to the despair of economists who insist VW should be more like Toyota and outsource at least 300k of those (flexibility! Cost savings!).

    Anyway, unfitting for the thread a little excourse in semi-seriousness. VWs art is product differentiation. They got those cars that are bascially the same they sell as Audis, VWs and Skodas. Also, their main brand VW is positioned significantly above your run-the-mill massmarket car.

    Thats not a personal value judgment, i drive a small Honda.

  18. Ikon:
    Please oh please can a reply to someone in this blog not count as a link?

    Just do it like this; if people want the ref they can ctrl-F for it.

  19. Ernestine Gross
    It is obvious that saying an absolute like i used it is absolutly incorrect.but it is also obvious that you did not consult “readilly available data”. Historic nominal debts vary from site to site and you can find one year or two of lower nominal debt then previous years and then soon it shoots up back above. Governments refuse the pain that lowering nominal debt creates and go back to trend of everincreasing nominal debt.

  20. Jordan from Croatia,

    In short, the answer I gave to your first question is correct.

  21. @Ikonoclast

    Lets take it in steps, starting with your clear question on what is DFI (direct foreign investment).

    In terms of the national accounts, foreign investment involves 2 broad categories: Direct foreign investment and portfolio investment.

    Direct foreign investment in country A involves non-residents of country A buying existing physical assets or the right to build phyisical assets on land, either bought or leased, in country A. For example, if a foreign corporation buys an existing Australian corporation then this transaction is recorded as a decrease in NIIP for Australia, assuming nothing else is happening during the same accounting period.

    Foreign portfolio investment involves non-residents of country A buying financial securities issued by residents (registered organisation) in country A. Financial securities are shares, which may or may not be traded on a stock exchange, bonds issued by private or public sector organisations, various types of bank deposits (eg term deposits, cash accounts, savings accounts), and hybrids (eg combinations of debt and equity). (We’ll set aside derivatives because they don’t fit into the balance sheet model of money). For example, if an Australian superfund acquires shares or bonds or both issued outside Australia then the NIIP of Australia increases, assuming nothing else is changing during the accounting period.

    So we are talking about the transfer of ownership of physical and financial ‘assets’ between non-residents and residents of ‘country A’. A negative NIIP for country A says that foreigners have a higher ownership share of country A’s monetary transactions, as measured in GDP, then the residents of country A have in the rest of the world’s GDP. By implication, foreigners have a relatively higher share to the returns from their investments in country A, which of course may also be negative.

    This data does not tell you how the foreign purchases of ‘domestic assets’ (our country A) are financed.

    There are two basic types of financing: equity and debt. For illustrative purposes, a foreign corporation may directly invest in country A, paying for the acquisition of physical assets with money borrowed from a bank in country B. Similarly, a foreign ‘investor’ may acquire financial securities, issued in country A, paying for the acquisition with money borrowed from a bank in say country C. (It doesn’t mean that the respective banks in country B and country C lend the money they have sitting in a safe somewhere; it means that the banks sell a security, called a loan contract, to the buyer of the security, called the borrower. How many such securities the banks in countries B and C can sell depends on the regulatory framework of the countries and on the degree of risk aversion of ‘the management’ of these banks as well as their shareholders.

    Now I am asking you to go back to my post #38.

    The data from Eurostat is interesting. I’d like to comment on this separately, after receiving a reply from you.

  22. @Ernestine Gross

    I am feeling obtuse because there is still something here I don’t understand. When I go to the Wikipedia “List of countries by external debt” (the best easy source I have as a non-academic), I see that all countries have listed a positive number with the US listed first as having the highest external debt. All debts are listed in US dollars.

    This suggests to me that this is Gross External Debt owed “outwards” and it takes no account of debt owed “inwards” to each country so it is not a net position.

    However, the data you linked to shows every country listed as having positive external debt except for UK and USA which are most remarkable outliers with very high negative external debt which I assume means they are big creditors as you say. This could only occur if this is a net position (I am guessing).

    I don’t understand the discrepancy between these two tables. This is leaving aside the fact that the Wikipedia table is in US dollars and the other table is in domestic currencies. That affects the size of the number but not its sign. Why does one table say that the USA has huge external debt and the other table say that the USA is huge international creditor nation?

    That confusion explains why I turned to the NIIP as net position. I thought: “Well what counts is the net position. If I owe entity A $100,000 and entity B owes me $100 then I am clearly a debtor owing $99,900.”

    So, in summary, I just do not understand the table you linked to. How can UK and USA be creditor nations when their NIIP position is negative?

    One Wikipedia entry gives me a hint perhaps under its definition of external debt or foreign debt:

    “Note that the use of gross liability figures greatly distorts the ratio for countries which contain major money centers such as the United Kingdom due to London’s role as a financial capital. Contrast net international investment position.”

    Is the table you linked to a gross liability figure? I just don’t know. As I say, I am confused. I can understand NIIP and that would seem to me to be the figure that matters. I don’t understand the discrepancy between the table you linked to and the Wikipedia table “List of countries by external debt”.

  23. Ernestine Gross
    All i am trying to do is to get everyone to check the reality and see for themselves to learn that public debts are never paid back, that our children wil not pay for government spending as such narative is strong in shaping our beliefs about finance and money.
    Did you check it for yourself?

  24. @Ikonoclast

    Wikipedia is a double edged sword in many respects. On the one hand one can get basic information on say medicine or law. On the other hand one can’t do much with it. It is not only Wikipedia which is a double edged sword, but so are many other data sources, including the one I linked to.

    The information regarding the NIIP concept (as distinct from measurement problems) is identical to what I wrote twice, the first time in short hand, the second time in a longer hand to answer your question on direct foreign investment.

    Please accept that a negative NIIP for ‘country A’ is NOT debt owed by ‘country A’ to ‘foreigners’. National accounting data does not include banking and finance data. You cannot find in the data in these accounts which is not in it.

    The banking and finance data is partially collected by monetary authorities, national as well as international.

    As can be seen from the following paper by the Bank of International Settlement (BIS), there is no satisfactory data collection system even after the global financial crisis, although some efforts are being made to improve the data collection system.

    Click to access r_qt1212h.pdf

    There is no need for me to summarise this paper. It should be read in one piece. I draw particular attention to the difference between the English law on debt and the Greek law on debt. It was the former which prevented a write-down of privately held debt.

    So, why did I introduce a link which caused great consternation for you? There are several reasons. The most important being my hope it would raise questions in the minds of those who were so sure as to what is the nature of the problem with Greece and the EUROzone. I do hope the paper by the BIS challenges pre-conceived ideas and the uselessness of debates based on these ideas.

    The link to the Eurostat data surely should raise questions in the minds of the same people who were so sure as to what the nature of the problem with Greece and the EUROzone is. The arguments directed toward Germany (not only by blog commenters but also by a quite vocal Nobel Laureate would seem to pertain more to Luxemburg. No? May I suggest you look up the current account data for Luxemburg. You’ll find tiny numbers, relative to those of other EU countries. So, what is going on?

    The ‘global economy’ is now very different to what is was during the Bretton-Woods international monetary system. IMO, the entire discussion of Keynesian stimulus policy vs Austerity is caught up in an outdated mental model. Why? Because the relevant data is not recorded in the national accounting data framework that evolved during the Bretton-Woods era. The relevant data I am talking about are financial contracts, called financial securities. There are many types. Who issues which type under which juristiction and in which currency unit and bought by whom in which juristiction at what price in which currency unit, traded where and redeemed under which conditions are questions that cannot be answered satisfactorily as yet, as per the experts, the BIS. We live in a partially segmented global economy with multinational firms, including banks, and an incredibly fast communication system. And the problem is, there is no natural limit on the amount of financial securities that can be generated (as per Radner’s mid-1970s theoretical model)

  25. Ikonoclast, my reply to your last post is in moderation. I’ll copy it below to overcome the apparent 2-links restriction.

    Wikipedia is a double edged sword in many respects. On the one hand one can get basic information on say medicine or law. On the other hand one can’t do much with it. It is not only Wikipedia which is a double edged sword, but so are many other data sources, including the one I linked to.

    The information regarding the NIIP concept (as distinct from measurement problems) is identical to what I wrote twice, the first time in short hand, the second time in a longer hand to answer your question on direct foreign investment.

    Please accept that a negative NIIP for ‘country A’ is NOT debt owed by ‘country A’ to ‘foreigners’. National accounting data does not include banking and finance data. You cannot find in the data in these accounts which is not in it.

    The banking and finance data is partially collected by monetary authorities, national as well as international.

    As can be seen from the following paper by the Bank of International Settlement (BIS), there is no satisfactory data collection system even after the global financial crisis, although some efforts are being made to improve the data collection system.

    Click to access r_qt1212h.pdf

    There is no need for me to summarise this paper. It should be read in one piece. I draw particular attention to the difference between the English law on debt and the Greek law on debt. It was the former which prevented a write-down of privately held debt.

    So, why did I introduce a link which caused great consternation for you? There are several reasons. The most important being my hope it would raise questions in the minds of those who were so sure as to what is the nature of the problem with Greece and the EUROzone. I do hope the paper by the BIS challenges pre-conceived ideas and the uselessness of debates based on these ideas.

    The link to the Eurostat data surely should raise questions in the minds of the same people who were so sure as to what the nature of the problem with Greece and the EUROzone is. The arguments directed toward Germany (not only by blog commenters but also by a quite vocal Nobel Laureate would seem to pertain more to Luxemburg. No? May I suggest you look up the current account data for Luxemburg. You’ll find tiny numbers, relative to those of other EU countries. So, what is going on?

    The ‘global economy’ is now very different to what is was during the Bretton-Woods international monetary system. IMO, the entire discussion of Keynesian stimulus policy vs Austerity is caught up in an outdated mental model. Why? Because the relevant data is not recorded in the national accounting data framework that evolved during the Bretton-Woods era. The relevant data I am talking about are financial contracts, called financial securities. There are many types. Who issues which type under which juristiction and in which currency unit and bought by whom in which juristiction at what price in which currency unit, traded where and redeemed under which conditions are questions that cannot be answered satisfactorily as yet, as per the experts, the BIS. We live in a partially segmented global economy with multinational firms, including banks, and an incredibly fast communication system. And the problem is, there is no natural limit on the amount of financial securities that can be generated (as per Radner’s mid-1970s theoretical model).

  26. @Ernestine Gross

    Thank you for your patience and long replies for a blog. I am now going to publicly eat crow. I mean at least as public as this blog gets. I didn’t know and I don’t know what I am talking about in this debate. I have displayed an egregious lack of knowledge and an outrageous smug certainty which existed in inverse proportion to my level of knowledge.

    “A little learning is a dangerous thing;
    Drink deep, or taste not the Pierian spring:
    There shallow draughts intoxicate the brain,
    And drinking largely sobers us again.” – Alexander Pope.

    I don’t understand all of what you put before me but I do understand enough from it to understand that I really know next to nothing on this topic.

    This raises some quasi-philosophical issues which I will touch on briefly and then bow out.

    1. It seems to me that the pace of innovation that is going on in this sphere is so great and the data collection issues so great that perhaps nobody really knows what is going on. This a slight over-statement perhaps. Some specialist economists and researchers (not to much the leading-edge innovators themselves) do perhaps know a portion of what is going on.

    2. The average layperson-citizen has not a hope in Hades of understanding anything about this. He must give up like a modern Candide (forsaking not the optimism illusion like Candide, for in the self-honest modern mind optimism is already dead, but rather forsaking even the knowledge illusion). The image of Candide “cultivating his garden suggests his engaging in only necessary occupations, such as feeding oneself and fighting boredom.”(*) To attempt more is the epitome of self-delusion.

    * Wikipedia.

  27. @Jordan from Croatia

    Asking of Germany to exit EU is akin to asking UK to exit India or South Africa.
    Isn’t it much easier to change the ECB to become a real Central Bank and solve EU and EZ issues?

    Not from the EU, only from the Eurozone.

    AFAICT, the main reason the ECB cannot be changed is Germany.

  28. Below is a link to an English translation of an article by Hans Werner Sinn, a German economist and head of a research organisation in Munich. The article is a reply to an article by Jeffrey Sachs. Jeffrey Sachs is a US economist who is well known and respected in general and specifically in the area of development economics including environmental and financial matters.

    I found the historical and institutional detail interesting and helpful.

    http://international.sueddeutsche.de/post/125998423130/exit-devaluation-and-haircut-for-greece

  29. @Ernestine Gross

    That raises some interesting points. But let me backtrack a little. Clearly, I admitted in post number 78 that I don’t know what I am talking about when it comes to the current Greek economic crisis.

    However, a backtrack and admission that I don’t know something is not the same as an admission that I think others know. All I can honestly say now is that I don’t know what the causes and cures of Greece’s economic crisis are and that I don’t know if others know. My general scepticism leads me to think nobody else knows either.

    It sometimes seems a reasonable assumption that if we know what is going with something then on we can fix it. This however is not always the case. Medical doctors can know someone has a certain kind cancer and how it is progressing but it may be untreatable with current knowledge.

    Roughly similar analogies may be applied to the Greek crisis. Do we;

    (A) Not know what is going on and thus not know how to fix it?;
    (B) Know what is going but still not know how to fix it?; or
    (C) Ignore and maginalise those who do know?

    One could pose other questions.

    The only consistent position I feel I can take now is the overall position that we do not understand our economy. We have generated it but we don’t understand it. I mean that in the sense that we don’t know enough. One does not need perfect knowledge, just good enough knowledge, for knowledge to be effective in practice. The evidence is that our knowledge about our own global economy is not sufficient to be effective in certain kinds of crises of which the Greek Crisis is one. Or if some economists have the right theories (meaning right enough) they are not recognised and/or these prescriptions are not put into practice by the mainstream. However, any prescription must be just a theory. Until the theory is fully tested we could not be sure the theory was correct.

    Short version of above? I now tend to the view that there is a high probability that nobody knows what is going on nor how to correct it.

  30. @John Quiggin

    I would have thought that there is only benefit if currency depreciation is relative. If many countries depreciate there is no benefit.

    This could set off a race to the bottom. Why would Germany (an exporter) maintain its currency value if all around them are collapsing theirs?

    If contracts are written in US dollars, it makes it harder for depreciating currencies to pay off US dollar debts. It also makes it easier for foreigners to compete for local housing assets.

    It seems to me that depreciation is only good for exporters as a quick hit.

  31. @Ikonoclast

    IMHO, Jeffrey Sachs is the economist among the big name US economists whose writings on Greece is informed by economic theories (not schools of thought and not limited to macro-economics) and by empirical observations as well as practical experience. To the best of my knowledge Jeffrey Sachs is not a political economist. Given your interest in environmental matters, his work may be of interest to you beyond matters concerning Greece.

    There are many EU economists, not known in the Anglo-Saxon press, who nevertheless have the same theoretical knowledge as their US counterparts, but much more detailed empirical and institutional knowledge about the Eurozone and the EU.

  32. @Ernestine Gross

    Second reply…

    I have some questions though. In a post some way above, you mentioned that Keynesian economics no longer applied to the world economy (or words to that effect). I assume you mean, in total or in part, that Keynesian stimulus economics no longer apply due to the different ways the currencies and finances work post Bretton Woods and post financial deregulation.

    This is an interesting thought. I wonder if you are referring to the difference that (rampant) credit money creation makes to the system? Now don’t stop reading. I am going to mention MMT in a critical way not a credulous way.

    MMT makes a big song and dance about national accounting identities or axioms. You know what I mean. One thing it says is the government must print money (create money ex nihilo) for the private sector to be able to net save in the fiat currency. This is perhaps technically true but to my mind it does not take account of credit money creation in the time dimension. Whilst creation of credit money does not technically increase the overall net savings (the debt equals the credit and they cancel out in accounting terms), the creation of credit money does increase the extant circulating money supply. I mean, so far as I can see it does.

    The thing about debt money creation is the time lag between when the money is created (loaned) and when it is extinguished (paid back). In the time space of that lag it increases money supply so far as I can see. And if loans are growing over time (expanding economy and/or expanding loan books) then the money creation from loan making will expand faster and faster compared to money destruction from loan extinguishment. This could go on for decades at least one would think or even until a GFC style recession in a long-ish cycle.

    Thus my questions are: Does this form of relatively uncontrolled and deregulated money supply expansion obviate the standard considerations of, and assumptions behind, Keynesian stimulus? Is the credit money expansion something that now outstrips Keynesian stimulus even if Keynesian stimulus is supplied? If this is true, how do we explain continued capacity under-utilisation (unemployment, some idle capital equipment etc.)? In particular, how do we explain this capacity under-utilisation running parallel to excessive asset inflation while on the third track, so to speak, goods and services inflation (outside of certain asset inflations) is very mild?

    It seems to me there are number of conundrums here. I honestly can’t figure it out. Are there any explanations extant which cover this particular conglomerate of economic phenomena?

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