On welcoming hatred

Greek finance minister Varoufakis got a lot of attention a few months back with this tweet:

FDR, 1936: “They are unanimous in their hate for me; and I welcome their hatred.” A quotation close to my heart (& reality) these days

There are indeed a number of striking similarities between FDR and Syriza.  The one I’ve been thinking about most recently occurred in June 1933. FDR’s representatives had been in Europe trying to negotiate a restoration of fixed exchange rates at the World Monetary Conference.  They were getting close to agreement when FDR issued a shocking statement favoring flexible rates that undercut his representatives and blew apart the conference.  Sound familiar?  FDR took pleasure in outraging the VSPs of his day.  Yes, in temperament Varoufakis is something like FDR.

I’m a big fan of FDR’s policy of devaluation, so why am I not a big fan of Varoufakis?  My critics think it’s all mood affiliation.  Maybe so, but recall that I am also a market monetarist.  And the “market” part refers to the fact that I believe markets provide the best indicator of the likely effect of policy shocks.

In 1933 the Wall Street elite were horrified by FDR’s replacing the gold dollar with a “rubber” dollar, having a flexible value.  And yet US stock prices soared on each and every outrageous statement by FDR, such as when he torpedoed the WMC in late June.  The Greek stock market was closed during the recent vote (and remains closed) but both Greek and European stocks responded negatively to information suggesting that Syriza was unwilling to deal during the month of June, and then rose on hopes for an agreement.  Those contrasting market reactions are probably telling us that there are small but important differences between the US in 1933 and Greece today.

To end on a fair and balanced note:

1.  The market would probably also welcome more European flexibility in striking a deal.

2.  The fact that FDR was right when all the VSPs thought he was wrong should make us cautious about judging the Greek situation.  It’s certainly possible that Varoufakis is right and I am wrong.

PS.  Between mid-April  and mid-July 1933, US stocks were even rising sharply in gold terms, despite rapid depreciation of the US dollar against gold.


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19 Responses to “On welcoming hatred”

  1. Gravatar of Jerry Brown Jerry Brown
    8. July 2015 at 11:58

    Scott, one of these small but important differences has to be that the U.S. in 1933 had the U.S. Dollar as its currency. And Greece uses the Euro, over which it has little to no control over. The U.S. could have its own monetary policy, Greece can’t.

  2. Gravatar of Gordon Gordon
    8. July 2015 at 12:21

    A couple of months ago, Varoufakis said he was opposed to the ECB’s QE program. My jaw dropped when I read this. You would think that he’d favor even more QE. And when the bank run started when the referendum was announced, Varoufakis said that capital controls were not necessary. This makes me wonder whether Syriza finally recognized that he wasn’t the right man for the job and wanted him gone.

  3. Gravatar of Christian List Christian List
    8. July 2015 at 12:54

    I think one major difference between the US in 1933 and Greece in 2015 is manufacturing assets. Name one major Greek manufacturing company. Zero results. Name one major Greek company at all. There is none.

    The other major difference is indeed currency. As we all know: Greece does not have its own currency. Greece has to compete with countries like Germany. Because of the euro, nepotism, corruption and strong trade unions.

    Rise the costs of living in Greece are oftentimes even higher than in Germany for example. This perversion can only be sustained by permanent money transfers from Germany to Greece.

  4. Gravatar of Christian List Christian List
    8. July 2015 at 12:57

    I think one major difference between the US in 1933 and Greece in 2015 is manufacturing assets. Name one major Greek manufacturing company, you know. Name one major Greek company at all. There is none.

    The other major difference is indeed currency. As we all know: Greece does not have its own currency. Greece has to compete with countries like Germany. Because of the euro, nepotism, corruption and strong trade unions.

    Rise the costs of living in Greece are oftentimes even higher than in Germany for example.

    This way of life can only be sustained by permanent money transfers from countries like Germany to Greece.

  5. Gravatar of Anand Anand
    8. July 2015 at 13:04

    One simple difference between US in 1933 and Greece in 2015 is power. US could tell the other countries to get stuffed, Greece can’t. This comes back to Thucydides’ maxim I quoted before.

  6. Gravatar of collin collin
    8. July 2015 at 14:07

    I thought FDR was not comfortable with removing the Gold Standard and the plan was to reset at some point. So I thinking he was trying Something! and it turned out make an impact. I have always rationalized FDR three keys of economic turnaround were the Gold Standard, Bank Holiday/FDIC, and ending Prohibition. Also, by 1933 things could not get any worse.

    Anyway, wasn’t FDR strength as President was temperment in which was best as controling his impulses and decisions? He was careful to reserve his attacks at the right moments of his Presidency where as Syriza government has been too quick to attack and panic. They were negotiating with Germany and starting calling them Nazis is not constructive. (And in many ways, I do believe Obama will be remember for his patience and temperment. I don’t has done that much well in his 7 years but his national and foreign enemies seem to make the mistakes.)

  7. Gravatar of Andrew_FL Andrew_FL
    8. July 2015 at 15:17

    @collin-One other thing FDR did amongst a great many bad things that was actually good that you didn’t mention, was to begin to re-liberalize trade after Smoot-Hawley:

    https://en.wikipedia.org/wiki/Reciprocal_Tariff_Act

  8. Gravatar of Ray Lopez Ray Lopez
    8. July 2015 at 15:25

    I think Sumner and his supporters mistake the negotiating tactic of getting rid of V* with economic theory. Syriza leaders don’t know much about economics. V’s successor is apparently more of a Marxist (aka Ricardian theory of value supporter) than V* was.

    As for FDR and getting off the gold standard, this singular fact is used to support the hypothesis that gold was bad, but only the UK and the USA saw a rebound after leaving the gold standard. Other countries stayed on the gold standard and saw a rebound later. Unless you wish to assume the 5% of GDP in world trade at that time was responsible for dramatic changes in domestic GDP, you have to conclude it was just a coincidence that the world’s GDP improved after the US/UK left the gold standard. I’m sure Sumner disagrees.

  9. Gravatar of Larry Larry
    8. July 2015 at 16:49

    Varoufakis talked about his enthusiasm for game theory. Was that what he was employing here? If so, it seems as if he misread his hand and his opponent rather badly.

    Still convinced that Grexit is the best outcome for both parties, and the sooner the better.

  10. Gravatar of benjamin cole benjamin cole
    8. July 2015 at 16:49

    Is an orderly Grexit possible? What are the right procedures and policies for the smoothest transition out?
    What are the immediate costs of a Grexit?
    Long run it would appear an upside…I hear doom stories abour a Grexit…but why?

  11. Gravatar of ssumner ssumner
    8. July 2015 at 18:04

    Gordon, Yes, I had forgotten about that weird statement on QE.

    Collin, FDR opposed FDIC, but went along reluctantly.

    Andrew, Good point.

    Ray, I don’t even know what you are talking about. Countries left later and rebounded later. And the point is?

    Larry, Read the new Evans-Pritchard story on Greece, it’s a bombshell.

  12. Gravatar of Anand Anand
    9. July 2015 at 00:32

    (the interface ate my reply, so posting in the correct place, sorry if it ends up double posting)

    That Ambrose Evans Pritchard article is very interesting. While I cannot fathom how one can read the mind of someone saying they actually wanted to lose, while campaigning very hard to win, (and he offers scant evidence), the other details are interesting.

    As I mentioned in my comment on the other post, Tsakalotos released a note on the breakup of the talks. The article confirms what Tsakalotos wrote: the troika changed their stance on the last day, and insisted on VAT hike on hotels (that will certainly lead to a tourism boom, right?), insisted on a pension cut for poorer pensioners, insisted on a high primary surplus and offered no debt relief. Is it fair, under these circumstances, to hold that Syriza is one to blame for walking out of the talks?

    I agree with his overall conclusion though. The forces unleashed right now might well prove impossible to control.

  13. Gravatar of Ray Lopez Ray Lopez
    9. July 2015 at 03:08

    Sumner: “Ray, I don’t even know what you are talking about. Countries left [the gold standard] later and rebounded later. And the point is?”

    Go to Wikipedia, type “Gold Standard”, hit enter, then see the chart captioned ‘Ending the gold standard and economic recovery during the Great Depression’.

    Now consider: Argentina and Germany left the gold standard yet their economy continued to decline, while Belgium, France, and Italy left the gold standards *after* their economy was already rebounding.

    Granted, the US/UK were big examples of leaving the gold standard and having a huge rebound shortly or simultaneously thereafter.

    Conclusion: gold standard and dropping thereof a bit of a red herring, at least on a non-weighted average sampling.

  14. Gravatar of ssumner ssumner
    9. July 2015 at 04:01

    Anand, I recall Tsipras supporters like Scott Freelander throwing up their hands half way through the campaign, complaining that Tsipras was acting like he was trying to lose. That would explain a lot.

    Ray, So you prefer wikipedia over Barry Eichengreen. Okay . . . .

    And when did Germany devalue the mark? Give me the date.

  15. Gravatar of Anand Anand
    9. July 2015 at 14:45

    Greece simply folds. Next up is Golden Dawn.

  16. Gravatar of Ray Lopez Ray Lopez
    9. July 2015 at 23:22

    Sumner: Ray, So you prefer wikipedia over Barry Eichengreen. Okay . . . .

    Ray: Yes, I’ve read Eichengreen’s “Golden Fetters” and it’s biased. Data don’t lie.

    Sumner: “And when did Germany devalue the mark? Give me the date.”

    Ray: Mystery writing noted. You want to say something about Germany? That perhaps they devalued before coming off the gold standard? Then say so please. Anyway I agree Germany may be a special case since the Nazis had capital controls. But what about the other countries?

  17. Gravatar of ssumner ssumner
    10. July 2015 at 08:40

    Ray, I asked you when they devalued, answer the question!

  18. Gravatar of Ray Lopez Ray Lopez
    11. July 2015 at 09:55

    @Sumner – “Ray, I asked you when they [Germany] devalued, answer the question!” – OK if you’re still reading this, I found out that Germany never devalued (source: Economic Lessons of the 1930s By H. W. Arndt, found in Google Books). Germany went off the gold standard in 1931 shortly (about half a year) *before* they hit rock bottom in industrial output in 1932 (source: Eichengreen’s 1992 Origins of the Great Slump, Fig. 5). These two facts prove my point, not yours. Finally, only the USA and UK show a clear rebound in GDP output after abandoning the gold standard. So back at you. Are you prepared to say the UK and USA were somehow ‘engines’ that exported either misery or prosperity around the world? Hence those two countries coming off the gold standard somehow increased AD and/or stopped the Great Depression from getting worse? Is that how you characterize coming off the gold standard and devaluation of currencies as a form of monetary stimulus? When trade back in those days was probably (guessing) 5% or less of GDP, vs today’s 15-20%? Charles Poor “Charlie” Kindleberger (October 12, 1910 – July 7, 2003) once made this type ‘contagion’ argument about Austria influencing the world when they had a credit crisis at the start of the Great Depression. Sounds like Lucas-type expectations metaphysics to me. BTW I’m not checking this thread often so catch you in another thread. You need to update this site to Simple Machines forum software. Goodbye.

  19. Gravatar of Ray Lopez Ray Lopez
    11. July 2015 at 10:02

    @myself – just in case you’re going to say that devaluation and going off the gold standard are the same thing, they are not, and the literature makes this distinction. Having a fixed ratio of currency to gold is not the same thing as fixing how many German marks you get for every dollar (unless everybody is on the gold standard, but in the 1930s they were not). The Nazis had a fixed currency ratio that over-valued the mark, and resulted in currency controls, but this is different from going off the gold standard.

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