Catching up with Krugman

Here’s Paul Krugman on Finland:

Why can’t Finland recover this time? Debt is not a problem; borrowing costs are very low. But it’s all about the euro straitjacket. In 1990 the country could and did devalue, achieving a rapid gain in competitiveness. This time not, so that there is no quick way to adjust to adverse shocks:

[Graph]

This shouldn’t come as a surprise; it’s the core of the classic Milton Friedman argument for flexible exchange rates, and in turn for the tradeoff at the core of optimum currency area theory. The trouble in Finland is what everyone expected to go wrong with the euro.

What’s going on in Greece represents a whole additional level of hurt, which nobody saw coming. But it’s important, I think, to realize that even countries that didn’t borrow a lot, didn’t experience large capital inflows, basically did nothing wrong by the official criteria, are nonetheless suffering in a major way.

Krugman’s right that for the most part  (excluding Greece) the euro is failing in exactly the way people like Krugman and Friedman expected it to fail.

Here’s an interesting Krugman observation on Grexit:

But the bigger question is what happens a year or two after Grexit, where the real risk to the euro is not that Greece will fail but that it will succeed. Suppose that a greatly devalued new drachma brings a flood of British beer-drinkers to the Ionian Sea, and Greece starts to recover. This would greatly encourage challengers to austerity and internal devaluation elsewhere.

This is the problem the gold bloc faced after Britain left gold in 1931.  I have a similar view, although I’m a bit less worried about Greece leaving the euro than Krugman, but partly because I think an “experiment” would be useful.  Unfortunately the new Greek government is so incompetent I’m not even sure that devaluation would help, but it’s worth a shot.  (Just to be clear, at this late date I believe Greece would be much better off doing structural reforms and staying within the euro.)

Here’s Krugman (implicitly) discussing the never reason from a price change problem:

In the left panel, you see the Fed funds rate seesawing as the Fed tried to grapple with inflation “” and you see housing starts move strongly in the opposite direction, plunging when rates rose and soaring when they fell. In the right panel, however, you see housing starts and interest rates moving in the same direction “” plunging together. So is there no relationship?

Bad answer. The situations are different in a fundamental way. In the 80s interest rates were being driven by fear of inflation; from the point of view of the housing market, they were more or less endogenous. In the post-2006 period they were being driven largely by the housing bust itself. So the 80s experience was a sort of natural experiment in the effects of rate changes, whereas more recent events are an illustration of reverse causation.

And I’ve been arguing for a long time that there was a regime shift in the late 1980s, that as inflation fears were replaced by the Great Moderation, we entered an era of postmodern recessions in which monetary policy was trying to clean up after bubbles rather than curb inflation.

The point, then, is that when you look for the effects of monetary policy, it’s often important to distinguish between eras when interest rates are a cause and eras when they’re an effect “” and it’s not that hard to know which eras we’re talking about.

My only quibble is that instead of saying it’s only OK to reason from a price change in certain occasions, I prefer saying never reason from a price change—always reason from the thing that caused the price to change (such as tight money in 1981.)  Tight money depressed housing in 1981, no need to even mention interest rates.

PS.  I have a new post on current Fed policy over at Econlog.


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41 Responses to “Catching up with Krugman”

  1. Gravatar of Scott Freelander Scott Freelander
    2. June 2015 at 10:10

    Scott,

    Why are you against Greece leaving the Euro now? They continue to be victims of tight monetary policy and it’s surely still a bad idea to share a currency.

  2. Gravatar of Blue Eyes Blue Eyes
    2. June 2015 at 10:18

    Hi Scott, what do you make of this?

    http://www.telegraph.co.uk/finance/economics/11644471/Britain-can-afford-to-live-with-high-debt-forever-says-IMF.html

  3. Gravatar of collin collin
    2. June 2015 at 10:27

    If Grexit did happen shouldn’t they also get the debt restructured as well? Can’t they pull an Argentina and tell German banks they will pay ~70% of the Euros? Leaving aside debating the hard/soft money, is that the other key is have more open borders for all workers. So all the unemployed Greeks or Spanish could get jobs in the much tighter labor market Germany. (Who is bordering on a Japan Demographic Spiral issues…although it was Ukraine that got hit with it first during the Great Recession.)

    I still think the three reasons the US bounced back quicker than Europe was we went full TARP day one, flexible workforce and energy mining.

  4. Gravatar of ssumner ssumner
    2. June 2015 at 10:44

    Scott, Most of the damage from the tight money has already been done, and leaving might trigger a horrendous Greek debt crisis.

    But what you say is also correct, it MIGHT be a good idea for them to leave, I’m actually not sure. BTW, don’t Greek stocks rise on rumors of an agreement?

    Collin, The northern Europeans would not be in the mood to negotiate favorable terms for Greece, it would be quite a mess. Think about the target program which has covered all the Greek transfers of money into German banks. Who pays for that?

  5. Gravatar of ssumner ssumner
    2. June 2015 at 10:52

    Blue eyes, Barro’s debt model where you try to smooth MTRs still seems right to me. Yes, you need higher taxes to pay down debt, but once you’ve done that you have lower taxes forever, as you no longer have to serve that debt. Maybe the paper answers that objection, I haven’t read it.

    Collin, You said:

    “I still think the three reasons the US bounced back quicker than Europe was we went full TARP day one, flexible workforce and energy mining.”

    Europe also bailed out its banks, the key was Fed policy and more flexible labor markets.

  6. Gravatar of Blue Eyes Blue Eyes
    2. June 2015 at 10:57

    But if a government cuts spending/raises taxes doesn’t monetary offset kick in?

  7. Gravatar of TallDave TallDave
    2. June 2015 at 11:42

    O/T: This short summary is a really interesting read, I’ll have to find a book on Panics of the 1800s.

  8. Gravatar of Scott Freelander Scott Freelander
    2. June 2015 at 12:24

    Scott,

    But, what about the next downturn for Greece? What if there’s a real shock specific to their country, such that they get no help addressing the nominal effects? Or what about just another fairly wide Euro area downturn?

    Yes, monetary policy under Draghi has improved, but it is still woefully inadequate for Greece and other southern Euro countries.

    I think you’re being too timid. If I recall correctly, you were on the fence about Greece leaving in ’09, and now look. Better for Greece, and Spain, Italy, Portugal, and, yes Ireland to leave. A system this bad shouldn’t be preserved.

    That is, unless there’s far more fiscal and other integration, which seems unlikely.

  9. Gravatar of marcus nunes marcus nunes
    2. June 2015 at 12:27

    Interest rates are a ‘placebo’:
    https://thefaintofheart.wordpress.com/2015/05/22/the-ff-target-rate-is-just-a-placebo-but-it-can-be-toxic-if-too-much-is-ingested-at-a-low-level-of-stamina/

  10. Gravatar of ssumner ssumner
    2. June 2015 at 13:08

    Blue eyes, Yes, but I assumed they were looking at it from a long run–supply side perspective, where monetary offset is irrelevant.

    Scott, In retrospect they should have left in 2009. But again, you can’t put the toothpaste back in the tube, and I’m not sure whether the very real turmoil from leaving would be worth it at this point. It also depends on whether the Greeks plan to reform their economy. If they do not, then they should leave.

    But don’t assume that Greece’s problems are merely due to the ECB, they are mostly due to other factors. Austria faces the same monetary policy as Greece, and is doing OK.

    As far as being “timid” I’m probably more OK with Greece leaving the euro than almost any other economist you could find. But it is a risky move, and that’s why I asked about the Greek stock market—what do they think?

  11. Gravatar of Eliezer Yudkowsky Eliezer Yudkowsky
    2. June 2015 at 13:10

    This whole time you’ve been saying “never reason from a price change”, I’ve been a bit confused about the underlying message. Now I understand. “Never reason from a price change, reason from the event that caused the price change” is a much clearer slogan.

  12. Gravatar of ssumner ssumner
    2. June 2015 at 13:13

    Talldave, Depressions in the odd decades.

    Marcus, Yellen’s comments suggest overconfidence.

  13. Gravatar of Blue Eyes Blue Eyes
    2. June 2015 at 13:27

    Ok thanks 🙂

  14. Gravatar of ssumner ssumner
    2. June 2015 at 13:28

    Eliezer, Yes, but longer. 🙂

  15. Gravatar of James Hanley James Hanley
    2. June 2015 at 13:51

    Is “never reason from a price change” just a specific form of a more general principle that one should never argue from an effect, only from a cause?

  16. Gravatar of Ray Lopez Ray Lopez
    2. June 2015 at 14:51

    Sumner on the Blanchard IMF paper that says you can have high debt forever: “Blue eyes, Barro’s debt model where you try to smooth MTRs still seems right to me. Yes, you need higher taxes to pay down debt, but once you’ve done that you have lower taxes forever, as you no longer have to serve that debt. Maybe the paper answers that objection, I haven’t read it.”

    This type ‘rational expectations’ thinking ignores that markets can turn irrational longer than you can stay solvent, like Keynes wrote. While it’s true the UK had a debt-to-gdp ratio of over 200% in the early 1800s, they were saved by their colonial empire and the Industrial Revolution. Where is the equivalent for the US today? What happens when the world loses faith in the US dollar if high debt ratios increase for the US?

    As for gold and the UK leaving the gold standard in the early 1930s, notice that did not help the UK escape depression until a pickup in demand in the 1940s. Devaluation is not a cure. It’s probably not even a temporary relief; other countries did not leave the gold standard until much later in the 1930s and they recovered anyway (Italy, Belgium, France to name a few). Money is neutral everywhere and always.

  17. Gravatar of Matt Waters Matt Waters
    2. June 2015 at 15:02

    As for Greece vs. Austria, I’m reminded of how South Carolina saw particularly high unemployment rates after 2008. Unlike other states with construction sectors, South Carolina suffered from having a large, cyclical manufacturing sector. The cyclical manufacturing sector spilled over to local services, including government services due to balanced budgets.

    I did some light research on Greece’s and Austria’s components of GDP. Both countries rely a lot on tourism, more than I expected. But Greece is twice as reliant on tourism, with 20% of GDP vs. 10% of GDP. Greece also had a lot of GDP from shipping.

    Greece does have structural problems too that Austria or South Carolina do not have. Their unemployment went to a low of 7% before going to 27% now. With unemployment of 7%, why wouldn’t unemployment have remained high with higher NGDP instead going to employed workers? Theoretically, structural unemployment should be high regardless of levels of NGDP.

    It’s interesting too how NGDP declines can affect some industries more than others. In a world with perfect markets, the size of industries should not be affected by nominal factors. Let’s say construction is 10% of NGDP. If no real factors change, but NGDP goes down by 5%, then construction should still be 10% of GDP. Why would construction or tourism go down as a percentage of GDP?

    In layman’s terms, we of course equate decline in NGDP with “tough times” where we cut back on trips and flat-screen TV’s, but not on trips to the doctor. But if markets were perfect, the economy would buy the same number of doctor hours and construction worker hours in 2007 and 2009. It should only change in real supply or demand-side factors, such as a change in consumer tastes. I guess the decline in real income due to sticky wages does, in itself, change consumer tastes.

    I can’t figure it all out. Does Greece have structural issues which amplify cyclical factors rather than existing on their own? Did all the money spent from debt in 2001-07 go to that 20% of workers and go to skills no longer in demand?

    In any case, it all makes me think that Greece would be better in a few years with leaving the Euro. Greek stocks could be hurt by the possibility of leaving due to liquidity and legal issues, but Greece as a whole could be better off.

  18. Gravatar of benjamin cole benjamin cole
    2. June 2015 at 15:58

    Krugman is smart and he gets a lot of it.

  19. Gravatar of Major_Freedom Major_Freedom
    2. June 2015 at 18:04

    Sumner wrote:

    “My only quibble is that instead of saying it’s only OK to reason from a price change in certain occasions, I prefer saying never reason from a price change””always reason from the thing that caused the price to change (such as tight money in 1981.) Tight money depressed housing in 1981, no need to even mention interest rates.”

    You only say this because you want to push your preferred socialist money plan on everyone else, by way of attempting to convince people that contradictory beliefs are OK, as long as the actions are towards NGDPLT.

    For using Sumner’s logic:

    “My only quibble is that instead of saying it’s only OK to reason from a price spending change in certain occasions, I prefer saying never reason from a price spending change””always reason from the thing that caused the price spending to change.”

    Sumner does not practice what he preaches. He says to reason from what causes a change. But he not only refuses to do so with cash holding preference changes (same thing as spending change), but he wants people to believe it even isn’t important.

    Of course some of us know the reason for why he does not address the causes for why cash holding for so many people would at the same time increase so significantly, catching the Fed off-guard (according to Sumner). It is because he knows, or at least suspects, that the cause for why cash holding increased so much 2007-2008 is because of past Fed inflation that Sumner is left with having to say is “pretty good” or some other positive sounding term to distinguish it from 2007-2008.

    Structural problems caused by the very “stable” inflation Sumner advocates is something his theory will never enable him to understand.

    Good thing so many people, and more every day, are coming to learn how economic coordination takes place and what it requires. It is for example why so many people are not getting fooled again, which is to say why so-called “velocity” is at all time lows.

    The Fed can print and print all it wants, and cash will pile up to the ceiling. More and more people are learning of the evils of socialist money. The more the Fed tries to fight this, it is only the more rapid will we get to the point where massive skepticism and refusals to spend like crazy turns into loss of confidence in the currency.

    THIS is why interest rates are so low. Cash savings are so high because the Fed isn’t fooling people. That could change again, of course, but with the internet allowing good economics knowledge to wipe the floor with the traditional gatekeepers (Monetarists and Keynesians). Feels good to know superior theory is usurping inferior theory.

  20. Gravatar of Major_Freedom Major_Freedom
    2. June 2015 at 18:17

    James Hanley:

    “Is “never reason from a price change” just a specific form of a more general principle that one should never argue from an effect, only from a cause?”

    Oh you, thinking all logically like that. How passe.

    No no no. On this blog, you both should and should not reason from an effect. It depends on your political views on money.

    If you want to be a political advocate for NGDPLT, then you have to say it is wrong to reason from all effects, save of course NGDP, which is an effect. Then it is OK to reason from an effect.

    But if you are a counterrevolutionary, a turncoat, a fighter against the tide of history, and you reason from a price change, which are also effects (and causes as well, but that is not important here), then you have committed treason, you have sinned. You aren’t told this of course. No, you are given a sterile economics argument that on the face of it appears to be an application of a sound general principle, such as avoiding reasoning from effects, but rather reasoning from causes.

    It is a bait and switch.

    Sumner is just telling people that reasoning from prices on the basis of prices being an effect is wrong, because prices is what the political establishment is focusing on. He wants to trick economists into accepting NGDPLT by telling them that it is wrong to reason from effects, even though that is precisely what Sumner himself does with pushing market monetarism on others. It is OK to reason from effects, as long as those effects are NGDP, NGDP, and NGDP.

    It is why Sumner is known as the “NGDP guy”.

  21. Gravatar of Morgan Warstler Morgan Warstler
    2. June 2015 at 19:55

    “But the bigger question is what happens a year or two after Grexit, where the real risk to the euro is not that Greece will fail but that it will succeed. Suppose that a greatly devalued new drachma brings a flood of British beer-drinkers to the Ionian Sea, and Greece starts to recover. This would greatly encourage challengers to austerity and internal devaluation elsewhere.”

    I’m proud of Krugman for admitting that if Grexit crushes Greece back into being Turkey or Venezuela, the other PIIGS willbe FROG MARCHED into American free market capitalism to compete against Germany.

    This is a HUGE give up by Krugman.

  22. Gravatar of Scott Freelander Scott Freelander
    3. June 2015 at 03:28

    Scott,

    Obviously, out can be foolish to assume what others might say about any given situation, but I can’t help, but think rust Milton Friedman would favor breaking up the Eurozone even today, or perhaps

  23. Gravatar of Scott Freelander Scott Freelander
    3. June 2015 at 03:39

    Why would any country want to continue to subject itself to deeper than necessary recessions with extremely slow recoveries? The currency area is far from optimal for roughly half the countries in the Euro, at least.

    Greece can have a crisis for a year or two, but save themselves the kind of pain in the future that brought Syriza to power in the first place. As an added bonus, from your perspective, Syriza might not survive such a crisis.

    I think you’re being too narrow in your interpretations of market reactions in this case. Markets anticipate that leaving the Euro will mean a combination of high inflation and default, with bank runs, so of course the markets would be unhappy there for a while. It’s the same as an abused wife being initially sad after leaving her husband.

  24. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    3. June 2015 at 05:35

    We don’t have to speculate about what is going do happen to Greece if they leave the EZ, just look what happened to Argentina. And before you reach conclusions from the macro numbers, ask people who have been to Buenos Aires in 2000, and went back there some time in the last year or so …

  25. Gravatar of ssumner ssumner
    3. June 2015 at 05:44

    James, I wouldn’t go that far.

    Ray, You do realize that your comments on debt have nothing to do with anything I said. I did not agree with the view that large debts are no problem.

    Britain began recovering after they left gold in 1931, America, after we left gold in 1933, ditto for Germany. France began recovering after they left gold in 1936. Japan began recovering after they left gold.

    Matt, AS and AD are definitely entangled. If Greek stocks would not benefit, I doubt Greece as a whole would benefit.

    Scott, I’m pretty sure that markets are more rational and forward looking than the sort of abused wife you are thinking about. But yes, you might be right about Friedman, and about Greece.

    Keep in mind that there is no particular reason to assume that Greece would suffer more next time around. It’s very possible that in the next recession Germany suffers more than Greece. Germany suffered more than Greece in their 2004 recession.

  26. Gravatar of ssumner ssumner
    3. June 2015 at 05:45

    Jose, Argentina is exactly what I was thinking about, a very mixed picture.

  27. Gravatar of Scott Freelander Scott Freelander
    3. June 2015 at 06:34

    Scott,

    Markets in Greece aren’t necessarily being irrational to respond negatively to news that signals Euro exit might be more likely, even if the crisis that would follow only lasts a year or two and Greece then enjoys a rapid recovery.

    Of course a more acute crisis can, for example, hit corporate earnings much harder than their being hit now, but what’s going on now is a slow motion tragedy that’s already lasted almost 7 years, with no end in sight. Youth unemployment of around 30%?

    Scott, for all your brilliant commentary over the years, in this case your the equivalent of being on the fence about countries leaving the gold standard during the Great Depression. What if? What if? Just look at the reality now!

    And I’ll say that the election of Syriza indicates to me that there is simply not the Greek will for the kinds of reforms needed to give them any hope of making it in the Euro. Greece shouldn’t even be negotiating. They should just give the rest of Europe the finger, like Iceland did.

  28. Gravatar of Scott Freelander Scott Freelander
    3. June 2015 at 06:38

    Oh, and I will add that it isn’t irrational for abused women to resist leaving their abusive husbands due to the pain of missing them. At least, not from the perspective of passing genes. Normally, women in that situation are merely captive to the goal of passing their genes with a mate that, given how they perceive their reproductive options in the context of the world they perceive, is their best option.

    Our genes don’t care about us as people at all. Individual genes at times, though far more often, constellations of genes, merely use us as vessels for their ultimate, impersonal purpose.

  29. Gravatar of Ray Lopez Ray Lopez
    3. June 2015 at 07:00

    @ssumner: “Yes, you need higher taxes to pay down debt, but once you’ve done that you have lower taxes forever, as you no longer have to serve that debt” – this is Ricardo Equivalence, of Lucas kind. Your words. Then you claim: “Ray, You do realize that your comments on debt have nothing to do with anything I said. I did not agree with the view that large debts are no problem.” – I hope you see why I jumped to that conclusion.

    As for countries leaving the gold standard and recovering, just look at the chart at Wikipedia under “Gold Standard” and judge for yourself how except for the US, the UK and a few other countries, the gold standard was irrelevant for recovery (and the graph ‘Ending the gold standard and economic recovery during the Great Depression.’ belies your claims about France and Japan, which recovered even while on the gold standard). In short, the case against the gold standard is based primarily on two countries, the USA and the UK. Hardly a robust sample size.

  30. Gravatar of Matt Waters Matt Waters
    3. June 2015 at 09:25

    “Scott, for all your brilliant commentary over the years, in this case your the equivalent of being on the fence about countries leaving the gold standard during the Great Depression. What if? What if? Just look at the reality now!”

    That’s what I was trying to say, in much poorer form. Paul Samuelson remarked about how the neoclassical economics he learned in the 30’s contrasted so much with the Great Depression outside.

    Greece is to that point now. It’s tough to explain “well, it’s structural and with reforms and internal devaluation youth unemployment may be only 20%.” Whatever the fallout from leaving the Euro, how much worse exactly can it get for a long-term unemployed Greek?

    Of course, Greek popular opinion is wrong about many things. Was American popular opinion right in 1932? Not really, FDR stumbled into leaving the gold standard. It wasn’t like he was elected on leaving the gold standard.

  31. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    3. June 2015 at 10:10

    What strikes me most about the leaving or not leaving the gold standard question is the following: a lot of people rely on the historical fact that some countries “did better” by leaving the gold standard than others. Ben Bernanke has a seriees of papers on that. The first thing I noticed when I read these papers is that although i get the idea that sustaining AD (NGDP) is very important, it looks to me that every country leaving the gold standard was able to do that via “competitive devaluation”. Now, what about the counterfactual that if avery country tid that AT THE SAME TIME, how would the results be? Look at what is going on right now: the US is already tightening, but Japan and the EZ are still printing. The US dollar strengtened against the Yen and the Euro, nominal growth in the US remained subdued, and some good signs from Japan and less so from Europe. My point is, what if we had concerted money printing, would the effects of this policies be effective at all ? We certainly would have NGDP going up everywhere, but, would RGDP change? My best guess is that we would have more inflation everywhere, and RGDP would stay more or less where it is …

  32. Gravatar of collin collin
    3. June 2015 at 10:58

    I always assumed the main problem of Grexit is the Euro now becomes a political (vs. economic) failure. Not the European nations really like each other that much but I assumed the Euro was suppose to turn Europe in to the United European States.

    In reality, I do assume in the next big recession there will be lots of risk to Germany which has followed Japanese demographics by ~10 years and loads of excess savings. (Ain’t funny the market reacts so much that the 10 year bund heads toward .9%!)

  33. Gravatar of Scott Freelander Scott Freelander
    3. June 2015 at 13:12

    Jose, you’re quite wrong. You’re confusing currency manipulation to merely boost trade with increasing the expected future path of the money supply. Monetary stimulus doesn’t work by boosting trade, but by addressing wage stickiness. Whether another country also devalues is irrelevant. The effects are domestic.

  34. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    3. June 2015 at 16:44

    @freelander
    I don’t have the answers, but I asked a question based on some (superficial, yes) anecdotal evidence. When EZ and Japan announced huge QE programs and their currencies fell from 25% to 33% against the US dollar, it is not unreasonable to expect some addition to AD coming from net exports (and expected net exports moving forward). Simultaneously these two countries posted better economic news (Japan more clearly) and the US, the country whose currency both the yen and the Euro fell, unexpected showed poor economic results. I have not looked into the numbers, but it is worth checking, isn’t it? Your answer is very assertive. Where is the data/data supporting your claim ?

  35. Gravatar of Scott Freelander Scott Freelander
    3. June 2015 at 19:49

    Jose,

    Even casual observation will reveal the interesting fact that you never hear of unit wages being cut during economic slowdowns. You either hear of hours being cut, or layoffs. If unit wages, and certain other prices, could fall in line with output, there’d be no unemployment problem associated with economic slowdowns. In fact, if wages and certain prices were complete ly flexible, monetary policy would have no real effects and Say’s law would hold true.

    Why are wages sticky? Well, there’s money illusion, and if an employer cut wages across the board, to keep all their employees working the same number of hours, competitors would have an incentive to lay off even more out their less productive employees and hire away the best employees who had their unit wages cut, leaving the firm that tries to keep everyone employed at a lower rate at an obvious disadvantage.

  36. Gravatar of ssumner ssumner
    4. June 2015 at 05:40

    Scott, I’d favor Greece leaving the gold standard if it could. I would favor Greece devaluing if it could. Greece’s problem is that the euro is far more constraining than the gold standard. When the US left the gold standard our debt/GDP ratio fell. If Greece left the euro its debt/GDP ratio would soar much higher.

    Again, I think there’s a good case to be made for Greece leaving, but I’d prefer Greek structural reforms combined with staying in the euro, to no structural reforms and leaving. And I don’t buy your stock market argument, stock investors take the very long view on what’s best for their company.

    I do not think the Greek election tells us anything about the Greek public’s interest in structural reforms. That’s not what the election was about.

    Ray, Add Ricardian equivalence to the list of things you know nothing about. That issue relates to expectations, which play no role in my debt analysis.

    And you are wrong about the 1930s. I’ve spent most of my life researching the gold standard during the 1930s, and you’ve looked at a Wikipedia page.

    Matt, It’s weird I’m getting criticized from this angle, as I’m probably more sympathetic to Greece leaving than any other blogger I know.

    Again, at this point Greece’s problems are mostly structural, although a demand boost would certainly help.

    Jose, You said:

    “My point is, what if we had concerted money printing, would the effects of this policies be effective at all ? We certainly would have NGDP going up everywhere, but, would RGDP change? My best guess is that we would have more inflation everywhere, and RGDP would stay more or less where it is …”

    It depends whether there is slack in the economy. Where there is slack (like Europe) you’d get faster RGDP growth.

  37. Gravatar of Scott Freelander Scott Freelander
    4. June 2015 at 07:37

    Scott,

    Even if their debt/GDP ratio soars, they can, and probably would have some measure of default and inflation could take care of the rest. And yes, this could force cuts to government spending, at least temporarily, until they are able to borrow again. Does anyone think they aren’t going to default to some degree now? Does anyone really think they’re going to pay off their debt?

    Yes, leaving the Euro would create a crisis that might be worse than ’08 and ’09 for them for a year or two and of course there are risks, but how does this story turn out well if they remain in the Euro? That’s the missing element of your story for me.

  38. Gravatar of Scott Freelander Scott Freelander
    4. June 2015 at 07:42

    Scott,

    And are you saying then that if markets expect Greek default upon Euro exit and/or much higher inflation, along with bank runs, followed by something like a slow Icelandic recovery, that market prices wouldn’t reflect negatively? Maybe I’m imagining the equations wrong in my head, but I wouldn’t want to hold Greek stock if I expected that outcome, even with the vast relative improvement to begin within a couple of years.

  39. Gravatar of ssumner ssumner
    4. June 2015 at 18:00

    Scott, I don’t know if they could default and still stay in the EU, so that raises issues I’m not qualified to address. Iceland’s economy was radically different from Greece (more efficient, flexible, etc.), so I would not make that comparison. But I’ll keep an open mind on this.

  40. Gravatar of Eliezer Yudkowsky Eliezer Yudkowsky
    4. June 2015 at 20:15

    Scott, I know it’s longer, but previously I just had a vague impression of “Don’t talk about price changes” whereas the longer version tells me “You’ve got to talk about whether the price change occurred due to a supply shift or a demand shift because these have totally different implications and correlate to totally different things.” So I worry that the slogan just doesn’t work in its shorter form. “Reason from supply or demand changes, not price changes!” might be even pithier.

  41. Gravatar of ssumner ssumner
    5. June 2015 at 05:30

    Eliezer, You may be right. I used to use the longer formation more often, but switched to the shorter version out of laziness. Perhaps I should return to the longer version. I’ll try to remember that point.

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