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Stupid or evil?

by kcurie Tue Jan 11th, 2011 at 03:13:06 PM EST

I wrote down this great (oh yeah great) comment in the Krugman site regarding the Portugal DOS attack.



Being an Spaniard you may guess how sad I am watching the end of the euro unravel.

So, only a small point, it is impossible to deflate when you have a private debt load as Spain has... plus, wages representing only 15% of total production costs (please , do check it). So deflation should come by a strong reduction in capital capture of the revenue stream. Tell me how you are going to convince the rich industrial capitalists in Spain to do it, and if they do it, how are they gonna pay the huge debt they have.

We should default private debt and get out of the euro unless the ECB does not start buying large /huge amount of Spanish (and Portuguese and Irish) public debt now, so that the private debt can be paid via large amounts of public demand for Spanish products... that , of course would break roughly a hundred of European laws, but NO, it will not create inflation (we are in a liquidity trap for Xsakes).

And I close with a question, When Germany forces upon us a destructive monetary policy. Is Germany stupid or evil? I bet evil. They want Europe to be their appendix. Germany in a tower surrounded by destruction.

Nice comment (my ego would say), but I am not sure I am right. I would really like to know what is your take. Is German pure and plain evil using a monetary policy as a "destruction of competition" tool (see the example of Ireland), or it is just plain stupid and has not thought thoroughly the consequences clearly, as the new purchase of bonds by the ECB shows.

So being 10 a pure evil where "Germany is playing chess trying to knock out all Europe so that they can be the unique geopolitical player" and 0 being "Germany is scared of the past, they believe hyper-inflation religion and would destroy, eliminate and erase anything which can affect a euro-gold monetary policy" stupid.

What would your german grade be?
I really would like to know.

Note: By Germany I obviously mean the average masters of the universe with German residence. And W.Munchau does not count even if he has a FT column and lives still in Germany. Any other German who is neither stupid nor evil does not count either. We know there are a bunch of them.

Display:
My grade for German performance? Perhaps a 3 or a 4. My characterization: Short-sighted, self-centered and arrogant, much like their post WWII ego-ideal -- the USA.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Jan 11th, 2011 at 04:14:27 PM EST
Yes, that's a point, self-centered does not mean evil, it means bad.. it will be 6 in the scale.

But the attack on Ireland...difficult to square with a purely self-centered view of the world. And still...

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Wed Jan 12th, 2011 at 04:45:07 AM EST
[ Parent ]
But the attack on Ireland...

"If we don't do it you know somebody else will." and "While the music is playing you have to dance." That is high amongst the evil elements -- the entire business context in which they operate. And that environment was purchased at great expense and effort with significant amounts of their money. Unless it is somehow different in Germany. So, back to a three or a four.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jan 12th, 2011 at 09:18:51 AM EST
[ Parent ]
In my experience, Germans are people who stop and wait for streetlights to change in the middle of the night when no one else is around to see them cross on a red light.  Living within one's means and following rules are core moral values and narratives that motivate collective action in ways that aren't as important as in other societies. "Stupid," therefore, isn't the right word -- perhaps naive adherence to self-imposed rules for their own sake might be better -- but I give it a 3 or 4 on your scale.

Oddly enough, the largest population of ethnic Germans isn't in Germany at all. It is the United States, where about 42% of the population (129 million people) are of predominantly German ancestry. (As recently as a century ago, some states in the upper Midwest spoke German mostly, and not English.)   This map is interesting for the political economy connections one can ponder.

by santiago on Tue Jan 11th, 2011 at 05:22:11 PM EST
Since Swedish and Norwegian are not included in the list of languages on your map and constitute a majority or near majority of the ancestry of Minnesota and the Dakotas, I presume they are subsumed under "German".

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Jan 11th, 2011 at 09:45:23 PM EST
[ Parent ]
Actually, they are the #2 or #3 behind German in those states too, Lake Wobegon notwithstanding.  My paternal grandmother, born in Fargo, ND in 1899 spoke only Swedish at home, but she had to learn German when she went to school because it was the language spoken in the Fargo area schools at the time. She switched to English when she finally moved to Minneapolis after WWI. German language daily newspapers in those states had the highest circulation of all print media until WWI when English was compelled on everyone in an orgy of frontier nationalism.
by santiago on Wed Jan 12th, 2011 at 10:31:49 AM EST
[ Parent ]
naive adherence is a good way to put it. But those self-imposed rules seem to be clearly designed for their own good. I would say that they are stupids if these rules and believes will go against one-self interests in the long-run.

And given that it is difficult to know how something will turn out in the long run... I think is always more about egoism than pure evil or stupid.. but it is still evil, in a sense.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Wed Jan 12th, 2011 at 04:43:50 AM EST
[ Parent ]
Nietszche was German.

He always said that the errors win out. The strongest type of thinking is incorrect thinking. That's what rules are. Bad ideas win precisely because they are used as a cudgel by the weak over the strong. He was a social Darwinist but his version contained ironic twists. The strong are a product of their stupidity.

by Upstate NY on Fri Jan 14th, 2011 at 10:37:03 AM EST
[ Parent ]
santiago:
(As recently as a century ago, some states in the upper Midwest spoke German mostly, and not English.)
This was all but erased during WWI. Towns were renamed, frankfurter sausages became hot dogs...

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Jan 12th, 2011 at 07:14:30 AM EST
[ Parent ]
So you're saying there is still a chance for freedom fries?
by Upstate NY on Fri Jan 14th, 2011 at 10:37:29 AM EST
[ Parent ]
Of course, just wait for the Teabaggers to capture the Presidency and both houses of Congress...

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Fri Jan 14th, 2011 at 10:47:45 AM EST
[ Parent ]
Krugman says:
the Portuguese macro story is harder to tell than those of Greece, Spain, and Ireland. Greece was excessive government borrowing; Ireland and Spain, housing bubbles. Portugal, by contrast, wasn't all that bad fiscally -- debt/GDP on the eve of the crisis roughly comparable to Germany. But it also didn't have surging house prices. There was a lot of private-sector borrowing, but it's not that easy to explain exactly why.
Of course, within NCE, even the saltwater version that Krugman professes, there's no way to explain it. But it's becoming clear to my why it happened and the fact that Protugal is such a blurry case is good for my theory, since no other can explain it :P

So, here it goes.

Portugal has a structural negative trade balance with the rest of the Eurozone, and is attempting like everyone else to grow it nominal GDP at a moderate rate. Now consider, if the economy is leaking money through trade and it wants to increase GDP, where is this going to come from? A combination of public and private deficit:

(trade deficit) + (GDP growth) = (public deficit) + (new public debt) + (new private debt)

If the public sector is limited to 3% of GDP for deficit and debt is limited to 60% of GDP and you're keeping it even lower by policy choice, the trade deficit and GDP growth must be financed by private sector debt. If the economy is not bubbly the debt will be spread out and there won't be a single culprit that can be blamed for profligacy. But the aggregate public and private debt will continue growing as long as the Growth and Stability Pact is in force.

The Eurozone policy framework focused entirely on monetary variables, both in the 1990's "convergence to the Euro" and in the decade or so since it was introduced. There was no attempt to include a convergence of current account or trade balances in the policy mix, while at the same time selling to the public that "growth and jobs" would happen and in any case should be pursued. If Portugal hadn't accumulated private debt over the past 20 years, it would probably have been in recession for most of that time. Also, Krugman shows that focusing exclusively on public debt in the GSP was a mistake. The core flaw come from the same cause as the Bretton Woods mistake of not implementing Keynes' international clearing union: large net exporters will use their political weight to block any attempt to introduce negative feedback loops on trade balances, since they benefit from them.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Wed Jan 12th, 2011 at 06:09:52 AM EST
My comment, as now posted to Krugman's blog:
You say "the Portuguese macro story is harder to tell than those of Greece, Spain, and Ireland. ... There was a lot of private-sector borrowing, but it's not that easy to explain exactly why."

Maybe the Portuguese case will illustrate that the cause is exactly the same in all cases, and a structural flaw of the Eurozone.

The Eurozone was built on monetary parameters, both in the 1990 "convergence criteria" (inflation, interest rates, exchange rates, debt and deficit) and since its creation with the "Growth and Stability Pact" (public debt and deficit). Add to this the "Lisbon Agenda for Growth and Jobs" and the EU's outlawing of state-funded industrial policy ("Illegal State Aid Rules") and you have an explosive cocktail.

Portugal, like any other net importer within the Eurozone, needs to fund its GDP growth and its trade deficit. There's no way to do this but deficits and debt. If public deficits and debt are constrained, the private sector will have to accumulate deficits and debt. In the case of Portugal there is not a single "bubble" that can be blamed for it, so there's no clear-cut culprit. But the pressure for private indebtedness was inexorable. The alternative would have been a prolonged recession until the terms of trade with the Eurozone's net exporters (chiefly Germany) improved. Which Germany wouldn't have been very happy about - or the Portuguese people, for that matter.

So, the core flaw of the Eurozone is the same as that of Bretton Woods: no negative feedback loops on trade balances including the absence of floating exchange rates. Keynes warned about this at Bretton Woods but was spurned by the 1940's exporter of last resort, the US. Germany did the same to the Euro and continues to do it in its management of the crisis. China also in the ongoing "savings glut"/"currency war" kerkuffle with the US.

The fact that the Growth and Stability Pact only constrained public debt and deficit and not private debt meant that as long as economic stability reigned, European net importers would inevitably accumulate private debt (even France has a housing bubble, see the work of Jacques Friggit). For the private sector, supposedly, "the market would provide" but it obviously didn't. The market doesn't do feedback loops, it does bubbles and crashes.

As long the EU continues to refuse to acknowledge that it has an internal trade imbalance problem, the Euro will continue to see crises.



Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Jan 12th, 2011 at 06:27:48 AM EST
[ Parent ]
I posted before seeing this other Reader' Comment
People forget to mention that under the euro the deficit problems can only get worse.

Portugal had practically zero net foreign debt and a balanced current account in 1995 - when it started adapting its economy to the single currency. Convergence to the euro with a common monetary policy (meaning easy credit with low interest rates) completely transformed the situation in the following decade. Net Foreign debt is now about 100% of GDP and this is only the accumulated stock. In 2010 this stock has probably increased by some 10 to 12% of GDP, which is the estimated amount for Portugal's current account deficit last year.

The basic accounting identities tell us that a foreign deficit implies either private sector or public sector deficits - or both. It´s amazing yet revealing that the euro zone convergence criteria concentrated on only one variable of this identity (public deficits) while forgetting the other two. Thus a revolutionary process that eliminated monetary sovereignty for the participating states was founded on a misconception of basic accounting concepts!

Most of the Portuguese foreign debt is owed to banks in the core euro zone plus Spain. No wonder then that France and Germany are pressuring Portugal into accepting the intervention of the EFSF. This would mean Portugal would change creditors - not private banks anymore (they would have guaranteed payment of their credits via the EFSF) but a sovereign Euro zone fund instead. The French and German governments would thus be absolved from injecting hundreds of billions of Euros to save their imprudent, lending-happy private banks. For Portugal, however, this solution would be less than attractive: History shows that Sovereign Institutions, contrary to private creditors, typically refuse to accept haircuts.

Portugal is thus rightly resisting the pressure to accept the EFSF "support". She does not want to be pushed into an Ireland-style package that will crush her with an impossible-to-pay debt burden maybe for decades to come - while at the same time tying the country's hands under a fixed exchange rate, no sovereign money regime that implies any adjustments will have to come through a 19th century style deflation.

It's simply unbelievable that Europe has reached this low point of forcing absurd aid-and-austerity packages plus inflexible fiscal and monetary policies on heavily indebted euro zone member states. These recessionary policies can only lead first the periphery countries and ultimately the core euro zone countries themselves into an economic cul-de-sac.

There is no light at the end of the tunnel under the present framework. The European leaders must decide as soon as possible on one of two possible exit scenarios. Either full integration by implementing a single European budget with receipts and expenses at a level of about 30% of the Euro zone's GDP (admitting this is politically feasible)- or else get back to the old system of national currencies that served Europe rather well from 1945 to 1999, at any rate much better than the ill-conceived Euro project.


Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Jan 12th, 2011 at 08:44:32 AM EST
[ Parent ]
Doesn't seem too hard for Brazilians to understand three sector national accounting. But it seems impossible for the beneficiaries of the imbalances generated by ignoring this form of accounting to understand something that has been at the core of business practice for over half a millennium.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jan 12th, 2011 at 12:33:18 PM EST
[ Parent ]
You can apparently be a former ECB Chief Economist and work for Goldman Sachs, and profess in public to not understand it
"With the failure to make sovereign states' fiscal policies consistent with the conditions for the single currency area, policymakers not only have weakened the functioning of monetary union, but have also called into question its very survival," Mr Issing declared.
As Upton Sinclair said, it is difficult to get a man to understand something, when his salary depends upon his not understanding it.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Jan 12th, 2011 at 12:45:25 PM EST
[ Parent ]
I did have the Upton Sinclair quote in mind as I composed the comment. :-)

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jan 12th, 2011 at 08:56:10 PM EST
[ Parent ]
When Krugman says
the Portuguese macro story is harder to tell than those of Greece, Spain, and Ireland. Greece was excessive government borrowing; Ireland and Spain, housing bubbles. Portugal, by contrast, wasn't all that bad fiscally -- debt/GDP on the eve of the crisis roughly comparable to Germany. But it also didn't have surging house prices. There was a lot of private-sector borrowing, but it's not that easy to explain exactly why.
he's confusing why with how.

The why is, in all cases, the Euro Convergence Criteria, Growth and Stability Pact, and Illegal State Aid rules.

The how is excessive government borrowing, housing bubbles, incompetent banking, or nothing much obvious.

The how reflects the core flaws of each country's political economy. In Greece's case it appears to be tax corruption since the leading industries (shipping and tourism) don't pay much by way of taxes (with Government assent) and the underground economy is large. Is Spain's case it was corruption of a different kind, where the government and construction companies are joined by the hip and all Spain knows to do to generate economic activity is lay bricks, asphalt or concrete, with lots of kickbacks between local governments and construction firms. In Ireland's case it was corruption between the government and the banking sector, comparable to Iceland's. In the case of Portugal... Well, Portugal may have been the healthiest political economy of all since there's no obvious culprit and hence no dominant corruption mode.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Wed Jan 12th, 2011 at 06:44:53 AM EST
[ Parent ]
Satyajit Das: European Death Spiral - Communicable Diseases « naked capitalism
Russian writer Leo Tolstoy wrote that: "All happy families resemble one another, every unhappy family is unhappy in its own way." The same applies to beleaguered European countries.

Greece had a bloated public sector and an uncompetitive economy sustained by low Euro interest rates. Ireland suffered from excessive dependence on the financial sector, poor lending, a property bubble and an increasingly generous welfare state. Portugal has slow growth, anaemic productivity, large budget deficits and poor domestic savings. Spain has low productivity, high unemployment, an inflexible labour market and a banking system with large exposures to property and European sovereigns. Italy has low growth, poor productivity and a close association with the other peripheral European economies. Italy has recently started to rein in its budget deficit. The Italian banking system is relatively healthy but exposed to European sovereign debt. Belgium is really two ethnic groups that share a king and high levels of debt (about Euro 470 billion, 100% of GDP).

Portugal, Ireland, Greece and Belgium are also small, narrowly based economies which increases investor's risks. The countries have in common, very high and potentially unsustainable debt levels. They also have in common a reliance on foreign investors to purchase their debt.



Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Jan 12th, 2011 at 10:59:56 AM EST
[ Parent ]
That akes a LOOOOOOT of sense...

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Wed Jan 12th, 2011 at 11:11:56 AM EST
[ Parent ]
I don't like this equation:

(trade deficit) + (GDP growth) = (public deficit) + (new public debt) + (new private debt)

At a minimum, new public debt and public deficit are the same thing, so they should not be counted twice.

And while it captures the relevant processes, I think it's missing some terms. Though I can't at the moment cast it in a way that I find more compelling.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jan 12th, 2011 at 07:34:15 AM EST
[ Parent ]
You're right...

A better version could be constructed from the equation here

In the absence of strong economic growth, inflation and a massive devaluation, the peripheral economies, such as Ireland and Greece, may be unable to shrink themselves to solvency.

A simple relationship demonstrates the unsustainable position:

Changes In Government Debt = Budget Deficit + [(Interest Rate - GDP Growth) X Debt]

In order to restore solvency, overburdened borrowers must stabilise debt and begin to reduce the level of borrowing. This requires GDP Growth exceeding interest rates, a budget surplus (through spending cuts and/or tax cuts) or a combination of these.

EU/ IMF assistance to Ireland was designed to address the high yields on Irish bonds, which curtailed the State's ability to borrow. But the 5.80% cost of the bailout debt requires an equivalent growth rate and a balanced budget simply to stabilise debt at current very high levels.



Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Jan 12th, 2011 at 08:33:12 AM EST
[ Parent ]
I really do not udnerstand these accounting identities, regading nterest rates and solvency.

I have some idea about the accounting identities regarding debt, GDP, imports and export... but I do not get how they mix together.

I think the standard is GDP=Cons+Inv+Export-Imports but some people are including rate of increase in debt

GDP=Consumption+Investent+rate of change in debt+Exorts -Imports

Which one is right?

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Wed Jan 12th, 2011 at 11:15:09 AM EST
[ Parent ]
I think it should be change in debt rather than rate of change in debt for yearly national accounting. Keen showed that unemployment closely tracked rate of change in debt.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jan 12th, 2011 at 12:35:52 PM EST
[ Parent ]
Portugal has a structural negative trade balance with the rest of the Eurozone, and is attempting like everyone else to grow it nominal GDP at a moderate rate. Now consider, if the economy is leaking money through trade and it wants to increase GDP, where is this going to come from? A combination of public and private deficit:

And the U.S. says, "I call him 'Mini Me'."

by rifek on Wed Jan 12th, 2011 at 08:51:21 AM EST
[ Parent ]
of the rest of Europe is nothing new, and it would be a mistake to suggest that they are blind rule followers since they themselves have broken the rules in the past as regards the deficit ceiling imposed by the GSP.

Germany put the rest of Europe into a long recession in the early 1990's due to the debt it incurred to reconstruct the east and to pay for its policy of trading DM for OM at par. The Buba raised interest rates and due to monetary convergence criteria at the time, everyone else had to as well (or, like the UK at the time, be ejected from it). The debt Germany incurred paid for re-unification, it can be argued, but it is also true that Germany externalised a large portion of that cost via higher borrowing costs and a deep recession for the rest of Europe (one which for working people lasted most of the 1990's here in France...).

What is now happening is that Germans, having forgotten that we all paid a price for their re-unification, are now imposing upon the rest of Europe, and in particular its workers, a further cost of paying for the deflation of a bubble that its banks and chronic current accounts surplus (which they refuse to remedy via higher wages or support for inter-European solidarity funds) in large part drove.

And it's important to note that not all of us were for German re-unification, I certainly wasn't, not under the terms agreed between the Mitterand gov't and the Kohl régime. And let's not forget the political  scandals which were largely related to this agreement, involving Elf Aquitaine getting first dibs on East Germany's national oil company.

This among other items we don't necessarily know about (there was also a campaign finance scandal which took the Kohl government down) probably greased Mitterand's acceptance of the deal, and in so doing screwed workers througout France as the unemployment rate shot up from under nine percent at the beginning of the decade to over 12% by the end of 1992 (and don't forget the wage impact of this), rate at which it largely remained until the end of the decade. (Even more flagrant than the headline unemployment rate was the rate among younger workers, where the rate shot up from 17% to 25% very quickly and again stayed there most of the decade. In essence, Mitterand arguably sacrificed a generation of young workers in order to support German unification while French industry profited (and ultimately, French Capital, given that Elf Aquitaine was in the process of being privatised by the Mitterand government at the time). Nice work for a socialist, if you can get it...

 

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Wed Jan 12th, 2011 at 06:15:05 AM EST
This Readers' Comment on Krugman's post is for "somebody is evil".
This is indicative that some market agents have been so busy in bringing the 10-year yields higher (because they're the reference yields) - so that the media can publish that, and speculate - that they forgot to bring the other ones up, thus distorting what should be an otherwise normal bond yield curve. 30 year bond yields are below 7%.

There is a clear will amongst certain market agents to force Portugal into a bailout.

It is my belief that they artificially caused the spike n the 10-year benchmark yields last week. The yields have since returned to its normally market priced value.


Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Jan 12th, 2011 at 08:39:21 AM EST
The two are not mutually exclusive.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jan 12th, 2011 at 09:55:49 AM EST
Economics and Morality - NYTimes.com

Mark Thoma directs me to Eric Schoeneberg, who argues that the right is winning economic debates because people believe, wrongly, that there's something inherently moral about free-market outcomes. My guess is that this is only part of the story; there's more than a bit of Ayn Randism on the right, but there's also the appeal of simplicity: goldbuggism is intellectually easy, Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it.

Still, Schoeneberg is right about the tendency to ascribe moral value to market values, and the need for a counter-narrative. I'm going to think about that



Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Jan 12th, 2011 at 10:31:48 AM EST
[ Parent ]
In this I disagree with Krugman.. for me gold-nonsense was intellectually hard... on the other hand the Keynessian feedback loop where activity is reduced by the reduction in cosnumption which reduces activity...leading to a large multiplier in the aggregate demand was dead easy to understand.

Actually, when I started reading macro, anything which was not Keynessianism was extremelly difficult for me to get... on the other hand...Keynnes was dead easy.

Then, I agree that understanding what money is nor easy at all , and the interaction of money, goods and inflation is much more complex that what even Krugman suggests. Liquidity trap is a good model , but the fact that there is no inflation in printing money seems general under certain general conditions.

For example, imagine that you print money purely to demand something which is made in two or three factories which are working at 50%  because there is not enough demand ..because people are making a shift in their customs. I will bet that this will not create inflation at all in any sector if the unemployment is not too low. Actually, even if unemployment is low or high, it would depend on the "unemployment-employment" on the market of people with the skills necessary to run the factory.

For example, I am not sure if printing money and transfering this money in the form of food stamps can create inflation. the food market right now has a huge amount of products which are not consumed, disregarded and a lot of possible iddle production. I would bet that food stamps would only put those idle resources at use with possible a reduction in the price of food. just think of a market where there is a barrier to increasing the production but once you cross that barrier, then the costs actually goes down faster than before.

I know I know.. this sound like physics, but I think this is how a lot of European microeconomy works.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Wed Jan 12th, 2011 at 11:32:04 AM EST
[ Parent ]
There are different kinds of thinkers... people like you and I gravitate to seeing systems... and for us, Keynes ideas make instinctive sense.

Other people think in a different way and for them Keynes is hard, where the notion that keeping money "fixed" as gold appeals to them.

by Metatone (metatone [a|t] gmail (dot) com) on Tue Jan 18th, 2011 at 06:27:20 AM EST
[ Parent ]
If you're 18 and think in systems you're not going to study economics, you're going to study physics or engineering.

Keynes was a mathematician by training.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman

by Migeru (migeru at eurotrib dot com) on Tue Jan 18th, 2011 at 06:49:43 AM EST
[ Parent ]
Krugman has the best possible answer to kcurie's headline question: Notes to Commenters
Get your insults right. There is, I believe, a fair bit of evidence against the hypothesis that I'm stupid. What you mean to say is that I'm evil.


Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Jan 12th, 2011 at 10:53:50 AM EST
Hidebound, self-seeking, calculating, but shortsightedly. That doesn't add up to an evil plot to reduce the other European countries to slavery. So 3 or 4 on your scale.
by afew (afew(a in a circle)eurotrib_dot_com) on Wed Jan 12th, 2011 at 11:05:11 AM EST
And now for the inevitable: finance ministers to discuss raising of EFSF ceiling

Issing warns against political union through the back door

This is a news story about a comment - which is not yet published - so it may not contain all the relevant bits, but it is clear from the quotes published in, among others, the Financial Times that Otmar Issing is seriously concerned about the future of the euro. He warns against the adoption of a political union through the backdoor of a monetary union, and what he see a development towards a transfer union, in which governments remain independent, and able to conduct bad policies, while Germany would have to subsidise them on a quasi-automatic basis. It seemed he was reeling against the decision to make the implementation of the stability pact rules only semi-automatic.

Otmar Issing - Wikipedia, the free encyclopedia

Otmar Issing (b. 27 March 1936 in Würzburg) is a German economist, former member of the board of the Deutsche Bundesbank (1990-1998) and of the Executive Board of the European Central Bank (1998-2006). He developed the 'two pillar' approach to monetary policy decision making that the ECB has adopted.

Otmar Issing is advisor for Goldman Sachs.



Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Jan 12th, 2011 at 11:19:56 AM EST
FT.com / Brussels - Issing warns debt crisis threatens euro
Mr Issing, writing after last year's international financial rescue operations for Greece and Ireland, which amounted to almost €200bn, said: "The present seemingly unstoppable process towards further financial transfers will generate tensions of an economic and especially political kind. The longer this process is characterised by unsound conduct of individual member countries, the more these tensions will endanger the existence of Emu.

...

Mr Issing, 74, served for eight years as the ECB's chief economist, from 1998 - the year before the euro's birth - to 2006. He remains one of Germany's most respected economists, ensuring that his views on the euro carry weight with German policymakers and public opinion.

...

While he cautioned against simplistic predictions that "doomsday is inevitably approaching", Mr Issing said proposals that Emu should be expanded into a "transfer union" - the transfer of funds from Germany and other financially strong states to weaker, highly indebted states - were wrong.

"This would wholly change Emu's character," he said.

Is Issing answering kcurie's question for us?

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Jan 12th, 2011 at 11:22:33 AM EST
[ Parent ]
Evil crystal clear... or just pure egoism?

In any case, this sets Germany from 5 to 10.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Wed Jan 12th, 2011 at 11:34:23 AM EST
[ Parent ]
He warns against the adoption of a political union through the backdoor of a monetary union, and what he see a development towards a transfer union, in which governments remain independent, and able to conduct bad policies, while Germany would have to subsidise them on a quasi-automatic basis.

Why, yes. That's the whole point.

If you don't want to subsidise deficit countries, don't run a mercantilist inflation policy.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jan 12th, 2011 at 11:43:29 AM EST
[ Parent ]
Don't set up a monetary union either.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Jan 12th, 2011 at 11:51:40 AM EST
[ Parent ]
No, you can set up a currency union just fine if you cease your mercantilist inflation policies.

Or you can insist on mercantilist inflation policies, in which case you can't have a functioning currency union.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jan 12th, 2011 at 12:04:44 PM EST
[ Parent ]
Or you can have a currency union and be as mercantilist as you want, as long as the currency union includes fiscal transfer mechanisms.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Jan 12th, 2011 at 12:06:25 PM EST
[ Parent ]
Currency union; no unilateral transfers to deficit countries; low inflation.

Pick any two.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jan 12th, 2011 at 12:12:36 PM EST
[ Parent ]
It's even worse than that: elsewhere in this thread:
Portugal had practically zero net foreign debt and a balanced current account in 1995 - when it started adapting its economy to the single currency. Convergence to the euro with a common monetary policy (meaning easy credit with low interest rates) completely transformed the situation in the following decade. Net Foreign debt is now about 100% of GDP and this is only the accumulated stock. In 2010 this stock has probably increased by some 10 to 12% of GDP, which is the estimated amount for Portugal's current account deficit last year.
The Euro Convergence Criteria and the Growth and Stability Pact have turned healthier economies into basket cases. This should rightly be laid at the feet of Germany since those institutional constraints were designed by them as the nonnegotiable price of their joining the Euro.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Jan 12th, 2011 at 12:02:17 PM EST
[ Parent ]
what is a mercantilist inflation policy?

You are joining two ideas that I have in two different compartments...

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Wed Jan 12th, 2011 at 01:38:49 PM EST
[ Parent ]
Mercantilism is the strategic doctrine of maintaining a positive foreign balance in order to accumulate ForEx reserves. In a fixed-rate ForEx framework, you can improve your competitiveness by running lower inflation than the other participants in the framework. When a country with a persistent foreign surplus insists on running a lower inflation than its trading partners in a fixed-rate currency framework, it is hard to call it anything other than a mercantilist policy.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jan 12th, 2011 at 01:58:30 PM EST
[ Parent ]
But wouldn't that be a mercantilist deflation policy?
by gk (gk (gk quattro due due sette @gmail.com)) on Wed Jan 12th, 2011 at 02:05:58 PM EST
[ Parent ]
Yes, and the ECB, like the bundesbank it inherited its brain form, has a well-known deflationary bias.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Jan 12th, 2011 at 02:14:05 PM EST
[ Parent ]
Hey, at least it's in pristine condition. There's no evidence it's ever been used...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jan 12th, 2011 at 02:20:18 PM EST
[ Parent ]
The brain you mean, not the deflationary bias.
by Bernard on Wed Jan 12th, 2011 at 04:51:14 PM EST
[ Parent ]
Well, it's an inflation policy in the same way that unemployment policy is (hopefully) about preventing unemployment and the theory of relativity deals mostly with the things that aren't relative. English is funny that way.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jan 12th, 2011 at 02:25:24 PM EST
[ Parent ]
Don't blame the latter on English: Einstein wrote his papers in German....
by gk (gk (gk quattro due due sette @gmail.com)) on Wed Jan 12th, 2011 at 02:29:18 PM EST
[ Parent ]
It is a mercantilism that generates deflation and pain and destroy the framework or the countries in the framework. You can not have a single monetary unit when there are very different inflation structures.

A question: Can it destroy all the participants in the framework, including the one pursuing the mercantilist policy?

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Wed Jan 12th, 2011 at 02:27:12 PM EST
[ Parent ]
I can't see why it shouldn't. Mercantilist deflation exports part of the pain of deflation to the deflating country's trading partners. When they can no longer absorb this pain, there's only one place for it to go.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jan 12th, 2011 at 02:40:11 PM EST
[ Parent ]
can they survive with exports to other developing countries, or not?

And I still do not get the flux identities....except one, a trade deficit between two countries using the same coin and with no creation of money must generate either public or private debt... simple balance of flux.

But.. the truth is that money is created by the banking system, which is also useful to start and increase the monetary mass in an expansion.. so, it is just a part of that debt which comes from trade deficits.. so it is:

trade imbalance= increase in the net private and public debt.

I think. So

Trade Imbalance= private+public debt is wrong, isn't it?

You can indeed have no trade imbalance and still create debt to finance some projects.. to generate money which will remain in circulation if the productivity or a new object is produced.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Wed Jan 12th, 2011 at 04:09:31 PM EST
[ Parent ]
A graphic perspective:

Who owns that much debt? Why spending on debt service is a sacred priority compared with social defaults of the governments?

by das monde on Thu Jan 13th, 2011 at 09:58:47 PM EST


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