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We want devaluation. Devalutation means lower real wages.

True, but misleading. Suppose that price levels are 34 % above where they need to be for balanced trade. Wages are approximately 67 % of GDP. Assuming an import quota of 1/3, achieving balanced foreign trade through wage suppression alone means that nominal wages have to drop by just a hair over 50 %, of which a quarter or so is recouped by the deflationary impact, for a real wage drop of 30-35 %. Add to this the total homeowner and business insolvency that is virtually guaranteed all debt loads are suddenly increased by 34 % in real terms.

For a country which imports to the tune of 1/3 of its GDP, depreciating your way out of a 34 % price level gap reduces real wages by something on the order of 15-20 %. However, the debt load is lightened in compensation, by approximately a full third of the previous real value.

So just in the real wage reduction depreciation is a full 15 percentage points better in this example. And the way the debt load behaves under the two scenarios reinforces this conclusion. And this is before the higher-order costs of imposing a generalised industrial depression are booked to the "wage suppression" option.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Feb 20th, 2012 at 02:24:48 PM EST
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