Devaluation is austerity done right
slate.com
slate.com
What we're seeing and why the $ and € don't fluctuate much (even though Europe is in such a mess) is both Europe and the US (and all the others) are devaluing their currency one after another. It's called Currency Wars: "Currency wars are one of the most destructive and feared outcomes in international economics. At best, they offer the sorry spectacle of countries' stealing growth from their trading partners. At worst, they degenerate into sequential bouts of inflation, recession, retaliation, and sometimes actual violence. Left unchecked, the next currency war could lead to a crisis worse than the panic of 2008. http://www.amazon.com/Currency-Wars-Making-Global-Portfolio/...
Here's a nice video explaining it using a comic from the '50's! http://www.youtube.com/watch?v=bFxvy9XyUtg
The dollar has been absurdly overvalued for a long time, destroying our exports and causing us to import excessively, leading to trade deficits and more debt.
Not that savers won't be hurt unfairly, but they will be hurt even more by the accumulation of capacity loss caused by the lost potential output of austerity philosophies. Unless they are retired, and don't plan to participate anymore - then they're just screwed. Unless we decide not to eviscerate Social Security and Medicare, that is.
The most important thing is not to have people who want to work sitting idly, especially people who are newly entering the workforce. This destroys the future more than debt ever could. We either need to lower nominal wages or devalue the currency to the same effect - or let massive unemployment become the new normal. Good luck lowering nominal wages: It's really a choice between the last two options.
I'm not sure what the conservative saver horde expects will happen to its savings over the long term if interest rates stay at 0% or negative indefinitely. Maybe pour all of their money into something else dumb like dotcoms or real estate and become the whiners of tomorrow?
Iceland did almost everything right. They stiffed the bank creditors to avoid aggravating the moral hazard problem, just like the textbooks recommend. In the eurozone the bank creditors are being bailed out. They relied of fiscal policy to address S/I and debt issues, and let monetary policy address AD, just as the New Keynesians were recommending in the 1990s. In the eurozone they combined tight money with reckless deficits. And now Iceland is growing fast and the eurozone is stagnating. http://www.themoneyillusion.com/?p=14895
The point being -- the world economy can (and did) withstand the default and destruction of the Icelandic finance system.
Could it have survived the default and destruction of the American finance system? Or would our incredibly interlinked, globalized finance system bring down the world economy with it?
There is a book about that: "Too Big to Fail: The Hazards of Bank Bailouts"
http://www.amazon.com/Too-Big-Fail-Hazards-Bailouts/dp/08157...
or maybe better for most people a podcast with the auther:
http://www.econtalk.org/archives/2009/10/gary_stern_on_t.htm...
It was acctually the feds intervention (paying banks to hold reserves) not the fall of leeman that froze the holesale lending market.
Iceland acctually said (around 2001 I would have too look) that they will bailout there banks unlimted. They acctually tried to bail out there banks but faild, because knowbody was dumb enougth do currency swaps with them.
They would have been hit so hard if they would have made that garantee (there banks where so badly overleveriged its unbelivable).
The inflation they produced whas just because they tried to bail out with krona, it was not smart NGDP targeting that Scott would want.
They did good by accident but we can learn from it anyway.
What Im not sure about is if the default of the country itself was necessey if they would have helped the banks and other special intresst.
Also, getting a 5% reduction in your pay through prices going up is a lot easier, psychologically speaking, than trying to actually negotiate a 5% pay reduction with all workers.
Yet those countries are not obligated to do so. In the good old days of having your own currency you would just soak your own populace and foreign investors. With a joint currency your attempting to soak another countries people as a whole and that idea is not palatable to many.
Then there is this whole term of austerity. It certainly doesn't mean what it used too. Most of those countries whom activist and wanna be economist claim are being harmed by austerity are in fact being harmed by still increasing government spending.
Apparently austerity now means not spending as fast as before but it certainly does not mean spending less.
People say that is not possible because of the Euro but that is BS, even on the gold standard countrys defaulted.
The reason that greek can not just default is because of EU regulation not the Euro per se (or any common currecny).
The defaulting country would have to default, balance the buded and start again (update there democracy and constituion would be a plus). Real wages would have to go down, lifing standards would go down, government handouts would have to go down but it would set a sound platform for recovery. The EU could help with Aid for the people that got hit hardest.
They should have done that in 2008, like iceland they would be much better of now.
On the Euro: Either closer fiscal union or end it. If the member state's debt can't be backed by a proper central bank, it's just a mechanism for shipping wealth from the periphery to the core.
Increasing taxes on "the rich" and companies are good to some extent, but they will only take you so far.
The kind of austerity that involves taking away allowances and tax credits for the poor and middle classes is idiotic. Devaluation certainly does affect the innocent, but overall it is much more equitable (and workable).
It punishes the careful savers and rewards the profligate, and sends a signal that living high on credit is good, while those that save and live within their means are idiots.
EDIT: also, are you referring to people who have their savings in cash, or investments?
People would be less likely to take their money out of the country. Foreigners would be more likely to invest.
If as a saver you invest in local businesses and property, you should do well for yourself.
It's the coward solution, and if you're not gonna pay 100% of the owed value, just do that instead of making old money worth more than new money.
Suppose I'm a retired gentleman in Ruritania with one million Ruritanian rurs in the bank. The King of Ruritania has got himself into some deep debt problems with foreign creditors due to his addiction to racing and eating greyhounds. He can either say:
a) "Guess what? I'm only going to pay back 10% of my debts! Suck it, creditors!", or
b) "Ohhhh, suuure, I'll pay back all my debts. Oh, did I mention that a Ruritanian rur henceforth has one tenth the value it used to? Heh, cool."
In the latter case my savings are completely wiped out, as are the savings of everyone else in Ruritania [while mortgageholders suddenly become very rich]. In the former case, while there'll probably be some damage to the currency my savings aren't affected so badly.
If everything in Ruritania is "worth" 10% of what it was, then nothing has changed. It's only foreign goods that have become more expensive, and your exports have become cheaper.
It's the coward solution
Then you can take it one step further: If you indebted in cash or cash equivalents to buy productive assets you get to double-dip: your debt gets reduced by inflation and your productive assets aren't any less productive and their income/growth will adjust. Your overall buying power will greatly increase.
So it's a transfer from the rich to the poor. It looks just right.
Do you really believe that to be the case? If so, why should you disregard other factors like why people got into debt in the first place or how much savers had to sacrifice in their own lives to achieve their savings?
No, actually it's the fruit of some thinking the structure of our ageing western societies, and the fact that the most egalitarian societies are the happiest.
> Do you really believe that to be the case?
More than ever.
> If so, why should you disregard other factors like why people got into debt in the first place or how much savers had to sacrifice in their own lives to achieve their savings?
You know, I'm part of the 0.1% richest people on this planet (and you too, I suppose). However, I don't like to comfort myself thinking that I worked hard and deserved it, because I'm perfectly conscious that I never did work that hard (like digging shit in some hole) and I didn't really deserve it because my parents, and their parents before were doing pretty well already. I was lifted with the flow and not much else.
It's pretty easy to be under the illusion that as you didn't need that much effort to be what you are, whoever is below you must be a lazy ass, or stupid as a brick. Most of the time, however, they were just less lucky (OK they may be less gifted, or less intelligent, but that shouldn't make anyone deserving a lesser part of it all).
I've heard this song before of "lazy poor" and "hard working risk taking rich", about 1 billion times, and it always comes from people who had it easy. I don't really feel like beating this old horse more.
It's like when I used to discuss religion with my mother-in-law. When she first declared "There isn't a single error in the Lord's Bible", I really should have just smiled and walked away. Anyone who had lived 55 years on the planet and not absorbed the fact that the earth is demonstrably and astoundingly older than 6,000 years wasn't going to be listening to the rest of my so-called "logic".
I'm still curious when I see people express opinions like yours, though.
With all those preconceptions, what kind of affinity would you have with a site like Hacker News that glorifies the success of the entrepreneur? Are you just observing us in preparation for an invasion? :)
Hard work and good decisions are important of course. But there are good "data points" showing that people struggling with difficulties can't make good decisions. And to do hard work, you need to have an environment that allows it; for instance think about these American travellers of the 19th century shocked by Japanese laziness: we quite well know now that Japanese are hardly lazy, but in the 1840 there was simply nothing effective to do. At the individual level, hard work and good decisions matter; at the society level, not that much.
> I'm still curious when I see people express opinions like yours, though.
I find less surprising that people express such opinion as yours, because they usually attribute their own feelings a bit too literally onto others.
> With all those preconceptions, what kind of affinity would you have with a site like Hacker News that glorifies the success of the entrepreneur?
I'm a successful enough entrepreneur (depends upon your metrics of course). And I'll keep my misconceptions rather than John Galt's, if you don't mind.
A single individual's hard work and good decisions don't contribute that much to their individual well-being. Our thriving is largely predicated on millions of people making good decisions and working hard over hundreds of years.
We're seeing the consequences of morality-driven economics today in Europe. Are we really worried that people that save and live in their means are going to start snorting cocaine off strippers' bellies because of devaluation?
The current economic problem is a lack of aggregate demand. Too many people are cutting their spending to pay down their debts, which cuts economic activity, which puts more people out of work contributing to the lack of demand, dragging on the economy more, etc.
This means that many careful savers are finding themselves in the same boat as the profligate simply because the drop in demand cost them their jobs. We might judge individuals for not doing more to get new jobs, but market-wide, they can't all try harder and win the few remaining jobs. There simply do not exist enough jobs and some careful savers will unavoidably find themselves in the same boat as careless spenders.
Consider an allegorical ant who worked just as diligently as any other, rudely ejected from the ant hill on the onset of winter because the others decided the hill simply didn't need to be as big as it was the day before. This now-homeless ant would suddenly need to dig his own shelter, preventing them from gathering further food, costing them food to the elements and ultimately leaving them in much the same boat as any grasshopper who played the summer away and never stored a thing. Is it truly fair to judge such an ant no differently than a grasshopper?
Also, the cause of this economic problem is largely one of a supposedly-regulated and free-from-fraud industry enjoying regulatory-capture and left to run amok. Many careful savers are finding themselves in the same boat as the profligate, because they were defrauded by lenders and/or brokers. Lenders and brokers who are facing no punishment for their crimes. No return to effective regulation to prevent it from happening again. No dissolution to prevent "too big to fail" institutions from holding the economy hostage. [1]
Consider another allegorical ant who worked all spring summer and fall, as hard as any other, who wakes up one day to find that the food he'd saved has mysteriously disappeared, despite him taking no less precautions than any other, perhaps simply because his pile happened to be protected by an incompetent or possibly corrupt guard who let or helped others steal it away. And this ant now finds himself being ejected for not having anything to contribute to the hill. Should we also judge this ant no differently than a grasshopper?
You are certainly free to cast judgment and aspersions on these formerly-careful-savers for not having years and years worth of living expenses set aside. And/or for trusting that a protected-from-fraud industry actually was.
But it seems to me that they were punished for these things largely by chance -- not everyone who saved as much/little as they, or stored their money in the same ways, or researched as much/little on their investments, woke up to find themselves cast out by society and treated no differently than a degenerate check-to-check gambler.
And as such, your moral judgment strikes me as terribly myopic, hollow and false.
[1] It's debatable that these fraudsters were even directly rewarded from the bailouts on a far more massive scale than the profligate would be by a few years of modest inflation.
If you're concerned about sending a message that people who follow the rules are an idiot, your complaining about modest inflation rather than the bailouts is akin to complaining that a burglar tracked mud through your house while taking your valuables and your insurance policy leaves it up to you to pay for a carpet cleaning. Sure, that's also unfortunate, but it pales in comparison to having been burgled in the first place.
This just half-gelled a different viewpoint for me. There's nothing inherently noble about saving, because the demand doesn't vanish—that money still represents a claim on some fraction of society's resources, only they plan to consume in the future rather than now. Well, we have to align both present and future supply and demand. We can't have everyone expecting to consume all their resources in the future, because then we're wasting our capacity to produce resources in the present.
Very true.
That said, there is something inherently noble about saving. Life is unpredictable and retaining your ability to weather some reasonable fraction of bad times on your own is the most base expression of a person's ability to contribute positively to a cooperative society.
If someone can't save to a reasonable degree, they simply can't be trusted to engage society in good faith. To vote responsibly, to participate without causing undue costs on everyone else, etc.
This isn't to say that more savings is equivalent to more nobility. Nor anything like that. But there is a reasonable level of saving that, when the drive isn't present, is of very real social concern and should not be allowed to pass as a neutral behavior.
To clarify: this isn't to say that low net savings at some given point is a fault. Again, life is unpredictable and a bad hand may have been dealt early in the game, or a string of bad hands beyond any reasonable expectation. It's the desire and effort and discipline expended toward (re)building that reasonable level of savings that society should incent and recognize as noble and good.
Back before this Depression, the notion that a responsible person could or should hold two or three years of living expenses as liquid savings was absurd. Saving that much was hoarding, and prevented you from building up savings for your long-term goals or capital for your ventures.
Now every 6-month ant is suddenly being lectured on their grasshopper-hood by 3-year ants? Bullshit.
An ant wakes up one morning to find that the queen of his anthill has outsourced food production to another hill of smaller ants who eat less. He is now told that he can eat as little as them, and keep receiving food, or he can be cast out and go hungry entirely. He knows winter is coming, but no longer has enough food to feed himself and save.
Winter comes, he is cast out, and the other ants in the hill laugh at the idiot who didn't save anything for winter.
No, the kind of profiligacy that allows the existence of allowances and tax credits for the poor and middle classes is idiotic.
The poor are a different argument, but there's no way the middle classes should be dependent upon government welfare. Let the middle classes earn their own money and pay a modest share in taxes, not become welfare recipients themselves.
Every European country has a lot of government spending and employees and programs that they need to eliminate, first, before they think about raising taxes.
My point is that when governments say that the best short-mid term solution to the debt crisis is to cut benefits and raise taxes on pensioners they are either lying or crazy.
In short, don't the final numbers matter more than whether we reach them with or without a tax credit?
Besides the general market efficiencies that speculation has been shown to provide, sometimes the speculators drive prices down very sharply in anticipation of commodity devaluation. No one ever seems to complain about that.
Saying that the financial sector provides no benefits to society is ill-judged, but saying that everyone should be absolved of wrong-doing just because the sector as a whole provides some benefit is equally ill-judged.
Generalizing the evil "speculators" without calling out specific sub-groups or behaviors was exactly what the OP did and why I was pointing out the reason we tolerate and encourage speculation in the first place.
>but saying that everyone should be absolved of wrong-doing just because the sector as a whole provides some benefit is equally ill-judged.
I certainly didn't say that or even mean to imply it if that's how you read it.
This privatization of profits and socialization of risk is what's at stake. If actual accountability (even if it's not entirely symmetrical) existed, I doubt anyone would care.
Right now, it's heads==they win, tails==we lose. That's a fools game, and we're the fools.
I spent some time doing futures trading a couple of years ago, so I was an evil "speculator". I could have sworn that the money that I lost when I placed a series of bad trades was my own. I really have to learn how to hedge my futures trades with options before I get back into it. :)
> This privatization of profits and socialization of risk is what's at stake.
I agree to the extent that the whole notion of "too big to fail" and government bailouts is socializing the losses. I would really prefer if we would let the free market work and allow the financial institutions that are that bad to just go out of business.
There is natural and artefical inflation and deflation. You get for example natural inflation when you have supplyshocks (If somebody blow up intel CPUs would be more expensiv) you get artefical inflation when you print money. The first is just the market reacting to 'something'.
The same goes for deflation, you have natural (good) deflation when you become more productive (you can see this for example in times of the (real) gold standard when moneysupply was almost constant.
Bad deflation is when you activly contract the money supply (this is the great depression story and the reason why people think deflation is generally bad).
What can we conclude out of this?
The shock to the economy was pretty big, we shuld have seen natural inflation happening, this is however still represt since the ECB pushes that down by creatning bad deflation (in real terms). In nominal terms this means 2% inflation, in real it is deflation.
When central banks target inflation (say 2%) and the economy is growing around 2% (thus 2% deflation) they acctully produce 4% inflation in nominal terms. This is all works out relativly good and is not to harmful as long as the real terms are not to big. If the become big (say a economy that is shrinking 10% or more) targeting inflation can be very harmful.
The price level should reflect the economy and not what some guy think is the right growth of the price level.
The idea would be to target NGDP or in terms of the formula MV=Py, it would mean holding MV constant (or let it grow 3-7% depening on your opinion on some other matters).
The school that supports this would be: http://en.wikipedia.org/wiki/Market_monetarism
This would mean that the ECB should look at the grow/contraction of the economy and setting the price level accordingly. That would mean in the current case that they would have do QE to hit the 'right' pricelevel.
I would recomend this book: Less Than Zero: The Case for a Falling Price Level in a Growing Economy http://mises.org/books/less_than_zero_selgin.pdf
Edit: I just found a nice post that shows a nice example of a case in history when central banks tried to recontract after the had inflated befor, this is in many ways simular with what we have today:
Danish and Norwegian monetary policy failure in 1920s – lessons for today
http://marketmonetarist.com/2012/06/12/danish-and-norwegian-...
Edit: Correction of a error point out in comments.
Im very much against that, the productivity norm (what is discribed in the less then zero book) would acctually produce devlation most of the time. If you want it in the 'proper' terms it would mean just setting a constant MV and let Py jump around as much as it wants.
But generally I agree with out, the post is on to something. Specially about defaulting. It is better to default, start fresh. This way the people that badly invested get punished and you get the chance (see iceland) to implment a more modern govermnet (iceland got a new constitution).
You mean "actually produce 4% inflation in nominal terms"
You're mixing up two different notions of inflation here.
There is the old-fashioned definition of inflation which calls any expansion of the "money supply" inflation. (With "money supply" in scare quotes because it's a pretty arbitrary concept, considering the multitude of very different definitions that exist.)
Then there is the modern definition of inflation, which is simply a different word for aggregate changes in the price level.
Those two notions of inflation are only superficially linked, and arguably, the modern definition makes more sense because it is what people are really interested in outside of economics.
On the topic of NGDP targeting, the blog Unlearning Economics has two enlightening posts: http://unlearningeconomics.wordpress.com/2012/05/08/on-the-l... http://unlearningeconomics.wordpress.com/2012/05/12/more-on-...
If the central bank targets 2% price level inflation, the economy grows 2% (witch would mean 2% of deflation in prices under the productivity norm) the central bank then has to go on and print enough money that it in a non growing economy would have hit 4% nominal inflation.
I don't see where I mix up the concepts I am always talking about price inflation.
Edit: On the blogpost, I don't think the autor really understands what NGDP targeting is about. Its about the CB not distorting relative prices, its seeing whats going on in prices. With IT you mess up the function of the price system, Hayek teaches us that prices are information. The productivity norm is basically what would happen without a central bank.