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What is the difference with what happened through devaluations in the past?

From Jake

Inflation is a tax on net creditors and those wage-earners and benefits claimants that are in a weaker political position than they were when their wages and benefits were originally instituted (due to the high downward rigidity of nominal wages and benefits). It is a subsidy to net debtors and employers who are in a stronger bargaining position than they used to be. That makes it a net loss for the financial sector, lazy money and weakly organised labour, and a net gain for the industrial sector and homeowners.

Devaluation or depreciation is a tax on imports and a subsidy for exports. Overall that translates to a net benefit for people associated with primary or manufacturing industries and a net loss for people associated with the financial or service sectors.

Contractionary interest rate policy is a tax on the future and a subsidy to the present. Homeowners and the industrial sector lose, because they are capital intensive; lazy money and the financial sector win because they are capital-extensive.

Contractionary fiscal policies are a tax on labour and the industrial sector, both of which are sensitive to the state of demand.

Inflation and devaluation (which tend to go together) were bad for the financial sector (the domestic one, presumably) and good for price-sensitive export-oriented industries, but beyond that, we see that there's nothing that could not be dealt with through re-distributional policies - and with right wing (or equivalent) governments, devaluations also end up hurting labor.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Thu Jun 2nd, 2011 at 09:05:21 AM EST
[ Parent ]
Devaluations are a recurrent feature of fixed exchange rate regimes without surplus recycling mechanisms.

The Euro is a currency union without a surplus recycling mechanism, and with the "no bailout, no default, no exit" clauses it is simply a macroeconomic impossibility.

The European Union's industrial policy is to deindustrialise accession countries to protect core industries, which only strengthens the trade imbalances and is the reverse of what a suplus-recycling mechanism would induce.

The Gold Standard failed, Bretton Woods failed, the European Exchange Rate Mechanism failed and the Euro has failed, all for the same reason. The refusal of gold bugs in surpus countries to countenance the idea that they, too, are responsible for setting up negative feedback loops on trade imbalances.

Critics of the Euro used to say it would not withstand an asymmetrical shock. The fact is that the Euro manufactures asymmetrical shocks and then fails to withstand them. So the Critics of the Euro were right all along.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Thu Jun 2nd, 2011 at 09:26:57 AM EST
[ Parent ]
But the original sin was that Italy and the others begged to be let in.

Germany did not want them in, because the Germans did not expect the Italians and other peripherals to be able to live with the euro - and in that they were not wrong.

And even back then, more than 20 years ago, they were not willing to make the political arrangements that would have made a currency union with structural deficit countries possible.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Thu Jun 2nd, 2011 at 09:44:06 AM EST
[ Parent ]
Italy and the others were already in the Exchange Rate Mechanism.

The poriphery's political commitment to European integration amounts basically to a Stockholm syndrome in the case of monetary policy.

It appears Germany of all countries has no political commitment to European integration, of which maybe France is to blame as they managed to prevail over Germany in the first EEC constitutional crisis, in which Germany was Federalist and France Nationalist.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Thu Jun 2nd, 2011 at 10:02:59 AM EST
[ Parent ]
Homeowners and the industrial sector lose, because they are capital intensive

Homeowners are not capital intensive. Buildings are slowly turning capital and the production cost are low. Small apartment costs less than a small car.

by kjr63 on Thu Jun 2nd, 2011 at 10:27:50 AM EST
[ Parent ]


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