Devaluation is austerity done right

http://www.slate.com/blogs/moneybox/2012/06/13/devaluation_is_austerity_done_right.html

by tankenmate • 14 years ago

48 60 14 years ago

Completely correct. It means that people have time to adjust, as their existing contracts come to an end and new ones come in at new prices, and it gives a boost to the export industry.

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.

givan• 14 years ago

Why should everyone pay for the speculators?

bornhuetter8• 14 years ago

Because like it or not, a lot of the money is simply gone. Sure we need better regulated financial markets and less corruption in politics and the media, but in the mean time something needs to be done to get economies back on track.

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).

bahadden2• 14 years ago

Devaluation is the easiest solution from a political point of view, but it is basically a transfer of value from those with savings/creditors to those in debt (including all of us with large credit card debts and mortgages).

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.

planetguy3• 14 years ago

"The kind of austerity that involves taking away allowances and tax credits for the poor and middle classes is idiotic"

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.

crusso6• 14 years ago

Aren't the "speculators" a bit of a boogeyman? Nobody complains when the speculators provide economic benefit (which studies say they do).

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.

bornhuetter8• 14 years ago

You're being very unspecific about who these "speculators" are, and lumping a huge group of people and companies into one bucket.

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.

r00fus• 14 years ago

The major problem is the speculators risk OUR MONEY for THEIR PROFITS. If they win, they take their captured marbles home, if they lose, well, they were playing with other people's marbles.

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.

nickik7• 14 years ago

What people dont understand specially the ones that are against all inflation is this:

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.

crusso6• 14 years ago

So really the original article for this thread and you are just saying, "Stop playing currency games to fight strong economic forces. Take your lumps and move on. You'll be better off in the long run."

nickik7• 14 years ago

Well I don't like the word 'devaluation'. A lot of comentors just go 'Well lets devaluate away balbalb better exports blabla' is very unreflectiv talk. Many of the people that call for devaluation do not want to set the price of the currency to what it is worth, they just want devalution 'because it boosts exports' these are the people that want to have inflation all the time and think its a good thing.

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).

arjunnarayan• 14 years ago

Nitpick, when you say "When central banks target inflation (say 2%) and the economy is growing around 2% (thus 2% deflation) they acctully produce 4% inflation in real terms"

You mean "actually produce 4% inflation in nominal terms"

nickik7• 14 years ago

Yes right. I will change it. Thx.

nhaehnle• 14 years ago

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.

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-...

nickik7• 14 years ago

I'm not sure where mixing something up.

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.

digitalengineer• 14 years ago

Not correct, this is helping the debtors (like our government) while extremely hurting the savers, people on fixed income, people with a pension and low income. As most western-european countries import more than they export (especially energy and food, when their currency goes down, what they can afford to import goes down as well.

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

spot• 14 years ago

that may or may not be a problem (a kind of moral hazard) depending on your perspective but it's not an argument about devaluation vs piecemeal austerity, it's a separate issue. maybe that video explains it but i didn't have patience for more than a couple minutes of it. do you have a written argument?

pessimizer3• 14 years ago

Don't forget the debtors that aren't the government, the vast majority of the population.

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?

smutticus• 14 years ago

Please provide evidence for overvaluation of the USD.

Symmetry4• 14 years ago

Would savers be better off if the banks they invested their money in collapsed, or if pensioners saw the government cut their pensions because it could no longer pay them? When a small country sees a big sector in their economy collapse like Iceland and their banking sector, there's going to be pain no matter which way you slice it. What the route Iceland has chosen does is spread the pain evenly between retirees who see their savings lose value and workers who see their paychecks love value. And you avoid the mass unemployment you tend to get through other methods, which further decreases the size of the real economy in a sub-critical positive feedback loop.

aptwebapps2• 14 years ago

I could be wrong but aren't most pensions linked to inflation? I guess they could lag a bit, though. I'm also not sure there are that many people, in the US at least, on an actual fixed income. As for people with low income, if unemployment is high, then there's a decent chance they're out of the job without devaluation (according to this point of view) so overall there may be more economic hardship without the devaluation.

Shivetya• 14 years ago

and for whom does he propose this solution? Devaluation will only help countries who have their own currency, countries which bought into the Euro gave up that option and are nearly wholly dependent on more fiscally responsible member countries to bail them out.

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.

nickik7• 14 years ago

I agree that most countrys dont acctually do Austerity but I think some of these countrys are to far for austerity to work, they have to default.

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.

pessimizer3• 14 years ago

Not more "fiscally responsible countries", just richer ones. Unless you're arguing that it is fiscally responsible to loan massive amounts of money to other countries to buy your exports. If I loan money to Bob the unemployed guy to buy a car from me, and it turns out that he can't pay me back on time, do I get to call myself fiscally responsible?

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.

Symmetry4• 14 years ago

Iceland was one of the countries that was hurt the worst by the financial crisis, remember the joke "What's the capital of Iceland? About a buck fifty". But since then its done very well recovering. To quote a blog:

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

betterth• 14 years ago

Question I wonder is: Iceland is tiny. Like TINY tiny kind of tiny. Their National GDP is $12.57 billion USD. America spends about $20.2 billion a year on air condition in Afghanistan.

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?

nickik7• 14 years ago

Acctually it is very, very unlickly that the American finance system would have blown. Everytime the US has bailed out banks unter the premis 'to big to fail' later analysis has shown that the impact would have been much smaller.

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.

Symmetry4• 14 years ago

Good question, but I think the important thing to reduce moral hazard is that the bank's investors or creditors take it on the nose, not that we allow the bank itself to collapse. Still, it is a more complicated question for the US than for Iceland.

nickik7• 14 years ago

I agree with scott on most things but he only looks at what happens not how it happend.

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.

Devaluation is austerity done right

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