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That would make Ireland the lipstick on the pig, no?
by Colman (colman at eurotrib.com) on Wed Sep 7th, 2011 at 07:41:07 AM EST
[ Parent ]
That is not really much of an answer, right?
by IM on Wed Sep 7th, 2011 at 07:47:49 AM EST
[ Parent ]
Ireland was a debt crisis. A private debt crisis. Which should not be news to anybody reading these pages.

And while the Irish private debt crisis was not a currency crisis on the Continental model, I do note that the ECBuBa did not precisely cover itself with glory in Ireland. To put it very delicately.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Sep 7th, 2011 at 08:09:14 AM EST
[ Parent ]
But that is my point. Not a currency crisis. Doesn't fit your narrative.
by IM on Wed Sep 7th, 2011 at 08:30:51 AM EST
[ Parent ]
Because clearly an Irish debt crisis prevents Spain from having a currency crisis.

That is a novel and interesting analysis. Blatantly false, but novel and interesting.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Sep 7th, 2011 at 08:46:26 AM EST
[ Parent ]
No. You have a analyses fitting for Spain and Portugal -current account deficits - and then you force the other countries with a current account surplus or small deficit in this box.

That is my point. Don't build a straw man.  

by IM on Wed Sep 7th, 2011 at 08:52:41 AM EST
[ Parent ]
All the countries under attack or being ECB'ed (except Ireland which it has been duly noted innumerable times is a different story) are internal CA deficit countries.

That their deficits are "small" (by what metric?) does not matter when nominal growth has flatlined. In the absence of nominal growth, any CA deficit is unsustainable.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Sep 7th, 2011 at 08:56:36 AM EST
[ Parent ]
In the absence of nominal growth, any CA deficit is unsustainable.

A tall claim. Do you really think a CA deficit of 1.0% gdp is unsustainable?

Germany e. g. did run a small CA deficit for most of the second half of the 20th century. That did include years without growth. Wasn't really unsustainable.

Perhaps more to the point Italy has now run a small CA deficit and very low growth for twenty years. After twenty years can you really still say unsustainable?  

by IM on Wed Sep 7th, 2011 at 09:05:36 AM EST
[ Parent ]
A tall claim. Do you really think a CA deficit of 1.0% gdp is unsustainable?

Which part of "in the absence of nominal growth" did you find it difficult to parse?

Of course having a 1 % deficit is unsustainable if you have 0 % growth.

Germany e. g. did run a small CA deficit for most of the second half of the 20th century. That did include years without growth. Wasn't really unsustainable.

It most certainly did not. Nominal growth was never below 4-5 per cent per year between 1950 and 1980 - and usually it was somewhat above that level.

And in any event there is a major difference between a year of flatlining nominal growth and a decade of same. Which is what we're looking at if governments don't start spending money to prop up employment.

Perhaps more to the point Italy has now run a small CA deficit and very low growth for twenty years. After twenty years can you really still say unsustainable?

Yes.

Past performance is not a guarantee of future performance. We have been extracting and burning oil on an industrial scale for nearly fifteen decades. Nobody of sound mind would presumably argue that this is sustainable.

In the absence of negative feedback loops on CA surpluses, current accounts imbalances continue right up until they don't. And then you have a crash.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Sep 7th, 2011 at 09:18:16 AM EST
[ Parent ]
 "Nominal growth was never below 4-5 per cent per year between 1950 and 1980 - and usually it was somewhat above that level."

I was more thinking of the years past 1980.

 "And in any event there is a major difference between a year of flatlining nominal growth and a decade of same."

Now you are shifting the goalposts a bit.

Is there even zero nominal growth in any european country?

So if assume zero nominal growth for  a decade, then even a small current account deficit year after year is not sustainable. But that rest on two assumptions. How is this relevant regarding France or Belgium or even Italy?

by IM on Wed Sep 7th, 2011 at 09:26:59 AM EST
[ Parent ]
I was more thinking of the years past 1980.

Germany no longer had a CA deficit by then.

Now you are shifting the goalposts a bit.

No. If conditions change, what is unsustainable can become sustainable, and vice versa. But given no growth, any CA deficit is unsustainable.

Is there even zero nominal growth in any european country?

On average over the past half decade? Yes.

But of course the peak-to-trough part of the business cycle is an outlier...

So if assume zero nominal growth for  a decade, then even a small current account deficit year after year is not sustainable. But that rest on two assumptions. How is this relevant regarding France or Belgium or even Italy?

It's relevant because you have an implicit assumption of zero interest rates stuffed in there. The actual sustainability condition is that total hard currency liabilities normalised to GDP must not diverge when time goes to infinity. It is not difficult to derive the sustainable CA deficit given exogenous nominal growth rates and nominal interest rates, but I have a train to catch now so I'll leave the algebra to the reader.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Sep 7th, 2011 at 09:35:53 AM EST
[ Parent ]
Germany no longer had a CA deficit by then.

Germany had a CA deficit until a few years ago. (unification).

by IM on Wed Sep 7th, 2011 at 09:44:55 AM EST
[ Parent ]
Far as I can understand Germany's Current Acccount was mostly balanced in the 70ies, deficit in early 80ies, surplus in late 80ies, deficit in 90ies and surplus in 00ies. Not that I am sure what either of you is trying to prove, but I figured you should at least have the right numbers.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Wed Sep 7th, 2011 at 03:26:03 PM EST
[ Parent ]
Is not the immediate issue here that a CA deficit, under EMU rules (and with an ECB ready to destroy the economy or if they are not allowed to do that attack the banking system), creates a target for attack by the financial heavyweights?

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Wed Sep 7th, 2011 at 03:30:12 PM EST
[ Parent ]
That is the immediate question. I say that isn't the case and Jake tries to disprove this by talking about what happens with a CA deficit and no nominal growth in infinite time period.

A straw man, since I am talking about right now. And of course a small CA deficit is sustainable about a long time period. The data you researched regarding Germany show that Germany had a CA deficit from 1990 until 2002 without any trouble.

So my thesis is that a moderate CA deficit like France or Slovakia or Italy is no reason for worry.      

by IM on Wed Sep 7th, 2011 at 06:33:50 PM EST
[ Parent ]
That is the immediate question. I say that isn't the case and Jake tries to disprove this by talking about what happens with a CA deficit and no nominal growth in infinite time period.

It would really make this discussion a lot easier if you would make the effort to recall the chain of reasoning back more than three posts when you play these annoying "gotcha" games.

A straw man, since I am talking about right now.

Which just proves you don't know the first thing about how to look at macroeconomic data. To obtain an estimate of the structural surplus/deficit, you have to average over at least a couple of business cycles.

You are arguing like a climate change denier who says "but we had a really cold winter in 1992, so global warming isn't happening!"

And of course a small CA deficit is sustainable about a long time period. The data you researched regarding Germany show that Germany had a CA deficit from 1990 until 2002 without any trouble.

From 1991 to 2001, actually. And that's not a long time period. It's the trough-to-peak of the 1990s business cycle.

It would also be more informative to look at the CA position of the former West Germany only, since there was a considerable exodus of industry from the former Eastern Bundesländer under the Kohl Ostmark peg that strongly resembles the exodus from the European periphery under the Schröder Drachma peg.

So my thesis is that a moderate CA deficit like France or Slovakia or Italy is no reason for worry.

And since France and Italy are already under attack, your hypothesis was falsified even before you proposed it.

As fail goes, that's a really impressive example.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Sep 8th, 2011 at 02:30:02 AM EST
[ Parent ]
Under attack? Define that. You use such a loose word that you can prove anything with that.

And you are destroying your own argument. I won't even mention that as usual you don't know the slightest thing about german economic history. If we look at structural deficits and surpluses, the german CA surplus you obsess about vanishes. More importantly, there isn't much of a CA deficit in France or Italy. Or Ireland.
And before you start again babbling - climate science? Case of physics envy? -  if we are only talking about six or seven countries, two or three countries are more then an isolated data point.

by IM on Thu Sep 8th, 2011 at 04:36:20 AM EST
[ Parent ]
Under attack? Define that.

Where have you spent the month of August?

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Thu Sep 8th, 2011 at 04:38:35 AM EST
[ Parent ]
Under attack? Define that.

You are under attack when your risk-free secondary market spread against the lowest rate in the currency zone is statistically distinguishable from zero.

In a unified currency zone, all subunits should be operating under the same risk-free rate. If they aren't, there is an implied exchange rate risk.

I won't even mention that as usual you don't know the slightest thing about german economic history. If we look at structural deficits and surpluses, the german CA surplus you obsess about vanishes.

In which fictional alternative universe?

Try averaging over the last three business cycles and get back to me.

More importantly, there isn't much of a CA deficit in France or Italy. Or Ireland.

I never claimed that Ireland was a currency crisis, and you should fucking well know that by now if you are arguing in anything that remotely resembles good faith.

And France and Italy have structural CA deficits, which means, given that the ECBuBa is pursuing a long rate in excess of nominal growth, that they are vulnerable to Soros attacks.

if we are only talking about six or seven countries, two or three countries are more then an isolated data point.

But you only have one country. Not two, nevermind three.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Sep 8th, 2011 at 07:59:07 AM EST
[ Parent ]
"You are under attack when your risk-free secondary market spread against the lowest rate in the currency zone is statistically distinguishable from zero."

In other words, everybody is attacked.

"In a unified currency zone, all subunits should be operating under the same risk-free rate."
Why? What about default risk?

"In which fictional alternative universe?

 Try averaging over the last three business cycles and get back to me."

You really seem to think germanys economic history started in 2002. It hasn't. And prior to that the CA tended to be balanced.

"I never claimed that Ireland was a currency crisis, and you should fucking well know that by now if you are arguing in anything that remotely resembles good faith."
You can't handle dissent well. You claimed a perfect prediction record for your hypothesis, I pointed out that Ireland doesn't fit your hypothesis and you then grudgingly admitted that. Where exactly is the bad faith? You just omitted Ireland in your first comments.

by IM on Thu Sep 8th, 2011 at 08:19:41 AM EST
[ Parent ]
"You are under attack when your risk-free secondary market spread against the lowest rate in the currency zone is statistically distinguishable from zero."

In other words, everybody is attacked.

No. Finland is not under attack.

"In a unified currency zone, all subunits should be operating under the same risk-free rate."
Why? What about default risk?

Only relevant to the private part of the foreign debt, which is why I was talking about the "risk-free" rate.

"In which fictional alternative universe?

Try averaging over the last three business cycles and get back to me."

You really seem to think germanys economic history started in 2002.

"The last three business cycles" is 1985 to 2008 (approx.).

You do know what "business cycle" means, right?

"I never claimed that Ireland was a currency crisis, and you should fucking well know that by now if you are arguing in anything that remotely resembles good faith."
You can't handle dissent well. You claimed a perfect prediction record for your hypothesis, I pointed out that Ireland doesn't fit your hypothesis and you then grudgingly admitted that.

There was nothing grudging about that. I pointed out from the first day that Ireland and Greece were totally and fundamentally different. This is not a problem for my hypothesis, any more than the existence of suicide is a problem the prosecutor in a case against a suspected serial killer.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Sep 8th, 2011 at 08:39:21 AM EST
[ Parent ]
"In a unified currency zone, all subunits should be operating under the same risk-free rate."

Why? What about default risk?

1. What about the Eurozone's "no-default rule"?

You can't have your cake an eat it, too. The combination of the following is an example of having your cake and eating it, too:

  1. The GSP
  2. Growth and Jobs
  3. No default
  4. No bailout
  5. No fiscal transfer
  6. Beggar-thy neighbour neomercantilism
  7. Subordinating fiscal policy to the financial markets

Something has to give. The first thing to give was the GSP (violated by the Francogerman axis which then went on to convince the Council to change the rules) followed by "growth and jobs", then "no bailout" and "no fiscal transfers". Soon the "no default" rule will be breached, too. And then we may not have a Euro any more.

All of this could have been solved very simply and cheaply in February 2010 but it wasn't.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Thu Sep 8th, 2011 at 09:11:51 AM EST
[ Parent ]

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