Eighty years ago

In my research on the Great Depression, I noticed that an interesting correlation developed in the middle of 1931.  But first a bit of background.  Germany had major debt problems after WWI, partly due to the unfortunate Allied decision to impose large war reparations.  After a series of negotiations, Germany issued “Young Plan Bonds” in 1929 to help finance these debts.  There was initially a high level of confidence in these bonds.  However as the Depression worsened, Germany’s manufacturing sector was hit quite hard.  Banking trouble developed.  And the Nazi party began to make political gains, partly due to its opposition to war debts.

In the middle of 1931 the price of Young Plan bonds suddenly became highly correlated with the US DJIA.  Indeed the actual correlation was even stronger than estimated in the table below, as the markets closed at different times.

Table 5.1  The Relationship Between Variations in the Dow Jones Industrial Average (DLDOW), and the Price of Young Plan Bonds (DLYPB), Sept. 1930 – Dec. 1931, Selected Periods, Daily.

Dependent Variable – DLDJIA

Sample                       Number of     Coefficient                       Adjusted     Durban-

Period                      Observations    on DLYPB   T-Statistic   R-squared   Watson

1.   9/14/30 – 9/30/30        14             .5492            2.18           .225          2.69

2.   12/31/30 – 3/20/31      65             .1202            0.71          .000          2.19

3.   3/20/31 – 5/1/31          35             .5714             2.12          .094           2.59

4.   5/1/31 – 6/19/31          41            -.1084           -0.54          .000          1.94

5.   6/19/31 – 7/30/31        34             .4559             5.05          .426           1.96

6.   7/30/31 – 9/17/31        40             .3554            3.78           .254           2.39

7.   9/17/31 – 11/6/31        41              .2888            3.85          .257           2.40

8.   11/6/31 – 12/30/31      43             .2801            3.72          .234           2.33

9.   12/30/31 – 3/31/32      75              .2617            4.03          .171          1.80

10.  3/31/32 – 6/30/32       77             .3152             3.75          .147           2.30

11.  6/30/32 – 9/30/32       76             .0799             0.66          .000           1.92


Those R2 figures for late 1931 and early 1932 may not look that impressive, but they are actually extraordinarily high, especially for daily first differences of asset prices.  If you read the NYT year end report on stocks, by month, there is no discussion of Germany in the first 6 months.  In the final six months Germany is mentioned in every single monthly summary.  People saw what was happening.  Furthermore, the correlation tended to jump up at times with heavy German news, further evidence of the direction of causation.  So that’s not really at issue, the dispute is over why German debt problems impacted US stock prices.

Those who don’t believe monetary shocks are important would point to German debt held by US banks, or the fact that Germany is an important export market of the US.  But then why did the correlation suddenly jump up when the debt crisis began to coincide with stresses on the international monetary system?

My view is that the German crisis led to a loss of confidence in their currency and perhaps other currencies as well.  This led to gold hoarding, as gold was the ultimate source of liquidity, the medium of account in most major economies.  More demand for gold means a higher value of gold, and that means deflation for any country on the gold standard.  And according to the supposedly “discredited” Phillips Curve, deflation means job losses and lower stock values, even in real terms.

How could we test this theory?  Ideally you’d want a country that’s way too small to have any direct real effects on the world economy.  But big enough where it might cause a chain reaction, which would lead to an increase in demand for the ultimate source of liquidity in the 21st century world economy.  Which is, of course, the US dollar.  Ideally it would be a tiny country of no more than 10 million people, containing little villages with donkeys walking down the street.  Not a big industrial powerhouse like Germany, which might have important real effects.

Then you’d want to see if financial turmoil in that small country could dramatically impact stock values in the US, even though US banks held relatively little of that country’s debt.  And dramatically impact stock prices in East Asia, which is part of the dollar bloc but has even less of that country’s debt.  In other words, a country like Greece.

As far as I’m concerned, my conjecture as to what happened in 1931 is now pretty much confirmed.  When I see daily reports of the effects of Greece on the world economy, it seems just like Germany in July 1931.  When I see it spread to Italy, it seems just like Britain, in September 1931.  When I see daily reports of Italian bond yields in the US media, it seems just like news of the Young Plan bonds, which was reported almost daily in the US financial press during 1931.  Yes, it’s 1931 all over again.

So what is the solution?  I hate to tell you this, but the problem is even harder to solve today than in 1931.  Yes, most countries were tied down by gold in 1931 (what Barry Eichengreen called “golden fetters.”)  But at least they had their own currencies, which could be easily devalued.  Now even that option is gone.  And despite all the pain, 70% of Greeks oppose giving up the euro.  This crisis isn’t ending anytime soon.

And I really don’t even know what the optimal solution is.  In isolation, you could argue that Greece should leave the euro, just as one could recommend that the UK devalue in 1931.  But the British devaluation made things much worse for those countries still on the gold standard.

So maybe Greece should just tough it out.  But then in retrospect the attempt of the major countries to “tough it out” in the 1930s was what made the Great Depression so great.  Most economic historians think the optimal solution was for them all to have devalued right away.  But if even Greece is highly reluctant to devalue, just imagine those countries that are still nowhere near in as bad shape.

The real lesson of 1931 is like that old joke about the guy who asks directions to Dodge City, and is told “first of all, if you want to go to Dodge City you shouldn’t be starting from here.”  The best solution to the euro crisis is to not set up a single currency in the first place.

Tyler Cowen has recently done some very depressing posts discussing the way the euro crisis is likely to play out.  I don’t have a strong opinion on this issue, because every alternative seems unacceptable.  But I will say that his scenario is not all that unlike the way things actually did play out in Europe during 1931-36, as the first to leave were the weakest countries, but by 1936 even France devalued.  In monetary terms, France was the Germany of the 1930s.  French hoarding of gold made the gold standard crisis worse, just as German demands for tight money at the ECB are making the euro crisis worse today.  By 1936 the deflationary effects of French policy rebounded against France herself, in a weird sort of cosmic justice.  Something to think about in Berlin.

PS.  I don’t want to push the comparison too far.  The Greek government really did behave recklessly in the years leading up to the 2008 crisis, hiding the scale of their debt problems.  And Italian voters kept electing Berlusconi, with predictable results.

PPS.  I apologize if I haven’t answered your email.  Still very busy, but feel a need to keep posting.



35 Responses to “Eighty years ago”

  1. Gravatar of marcus nunes marcus nunes
    1. November 2011 at 17:38

    Scott. Not easy to make something complex (and that´s true just by looking around and seeing some many brilliant people utterly lost)understandable and inginuously crafted like in a well made “falsh back movie”. Congrats

  2. Gravatar of marcus nunes marcus nunes
    1. November 2011 at 17:41

    PS Don´t you just love history. I know there´s evolution, technical progress and all, but there´s also something in our (humans) DNA…

  3. Gravatar of Doc Merlin Doc Merlin
    1. November 2011 at 18:07

    Similar stuff happening now… the correlations are completely off the charts across asset classes.

  4. Gravatar of dwb dwb
    1. November 2011 at 18:25

    I am sick of the slow motion suicide. its ugly, brutal, and frankly at this point i dont even care how it ends – its gonna be bad no matter what. greece, italy, spain, portugal, maybe they are all doomed to leave the euro. maybe we get a deutchmark and “everybody else,” or maybe 17 different currencies and nationalized banks. I will be relieved when its finally over, regardless of which of a thousand awful scenarios play out.

  5. Gravatar of Greg Ransom Greg Ransom
    1. November 2011 at 18:32

    Niall Ferguson, in The Pity of War, points out that Germany’s big problem was an out of control commitment to public works spending, high public sector and public utility and uninon wages and pensions, and other expenditures financed with borrowing from the U.S. and elsewhere — a lot like Greece’s funding strategy for the government and union worker sector.

    Without _this_ spending and borrowing problem, the reparations debt wouldn’t have represented that big of a burden — and as Ferguson points out, German never actually paid off but a tiny fraction of the reperrations debt.

  6. Gravatar of Becky Hargrove Becky Hargrove
    1. November 2011 at 18:36

    There was a really good map online recently that showed the interconnectedness of the European countries, and I was suprised at the overexposure France had to the countries in the worst shape.

  7. Gravatar of Lars Christensen Lars Christensen
    1. November 2011 at 20:10

    Scott, I find the comparison with 80 years ago very correct. In fact I have done a couple a posts on this issue on my blog. Here is my take on what happened 80 years ago and how it is very similar to the situation today:



  8. Gravatar of Steve Steve
    1. November 2011 at 20:15

    Scott, this post is good yet somewhat ironic. Why ironic? Because you didn’t suggest what I am about to:

    I happen to believe that if the ECB level targeted 5% NGDP in the Eurozone the peripheral countries would do just fine. First of all, given Europe’s dismal population trends, this would probably lead a period of 5% inflation followed by 3-4% longer term inflation. The inflation would disproportionately benefit the debtor countries and hurt Germany. It would create a hot potato effect whereby Germans would feel motivated to spend their savings or retire early to Greek villas. Higher German labor costs would reduce some of the competitive advantage Germany currently enjoys vis-a-vis its European peers. But a weaker Euro means Germany might remain competitive relative to China and Japan. German bond yields would probably rise to 5%, but Italian bond yields would remain unchanged around 6%. In real terms, Euro rates would be similar to real US rates! Sure, Greece would probably still need to engage in some austerity (or at least collect taxes), but this would be easier if the people could see a future (perhaps making stuff for Germans).

    The problem today is that Germany wants to have its current account surplus and eat it too (through high real rates). It won’t work.

  9. Gravatar of 80 years ago – history keeps repeating itself « The Market Monetarist 80 years ago – history keeps repeating itself « The Market Monetarist
    1. November 2011 at 20:16

    […] Sumner has a excellent post events 80 years ago and the comparison with the situation […]

  10. Gravatar of Bob Murphy Bob Murphy
    1. November 2011 at 21:06

    Scott wrote:

    Yes, most countries were tied down by gold in 1931 (what Barry Eichengreen called “golden fetters.”) But at least they had their own currencies, which could be easily devalued.

    So let me get this straight: Right now we have stronger gold fetters than when the world was actually on the gold standard? Man that tight money is more devious than I realized.

  11. Gravatar of Alex Godofsky Alex Godofsky
    1. November 2011 at 21:22

    Bob: he’s referring to the Eurozone countries, not the USA. They really DO have stronger euro fetters than the old countries had golden.

  12. Gravatar of Lorenzo from Oz Lorenzo from Oz
    1. November 2011 at 23:38

    Marcus: The big divide between the Sceptical Enlightenment and the Radical Enlightenment is that the former believes in a constant human nature, so history provides lessons, and the latter believe in a malleable human nature (either in the sense of a “true” nature which is being horribly distorted or a “better” nature which can be created) so history has no lessons, it is merely a legacy of oppression and failure to be transcended. The Glorious and American Revolutions were Sceptical Enlightenment Revolutions, and succeeded. The Jacobin French Revolution (and its descendants) were Radical Enlightenment Revolutions, and so failed.

    Mainstream economics is very, very Sceptical Enlightenment, since a constant human nature is taken as a fundamental premise. But something to keep in mind about radical critiques of economics is that such folk typically believe in malleable human nature–which is part of what offends them about mainstream economics: it “celebrates” things which (allegedly) block positive human transformation.

    But one reads history very differently if one views human nature as constant than if you believe it to be malleable. (‘Constant’ meaning ‘have enduring structures and patterns’, even if beliefs, framings and expectations can vary widely–such as, between those who view human nature as constant and those who view it as malleable.)

    Viewing human nature as malleable also leads naturally to demonisation of those who disagree (they are “blocking history”) and massive discounting of existing human preferences (they are pre-transformation).

    Which makes me wonder about the Euro project. Is it pushing the envelope of “transforming people”? Or are we in a form of Counter-Enlightenment, where faith, emotion & will trump reason? Maybe it is just a form of Machiavellian arrogance: create a structure which can only work with full political union so that people are driven to go all the way. Or possibly it is just the continuing consequences of a flawed conception of European history.

  13. Gravatar of marcus nunes marcus nunes
    2. November 2011 at 03:19


  14. Gravatar of marcus nunes marcus nunes
    2. November 2011 at 03:20

    …you frighten me!

  15. Gravatar of StatsGuy StatsGuy
    2. November 2011 at 03:47

    Some specific points:

    “But at least they had their own currencies, which could be easily devalued. ”

    Not so true of Germany – foreign debt was denominated in foreign currencies, so excessive devaluation merely cost foreign exchange revenue. This is similar to Euro-denominated debt in Greece. The role of debt obligations that cannot be devalued is rarely given enough weight in understanding hyperinflations.

    I also think you understate the impact of Greece in one sense – it’s impact on the financial system, and its precedent for other periphery nations. Notably, greek debt is owned by EU banks and some US banks through exposure to EU banks. The whole debt load isn’t huge, but the ECB refuses to absorb the shock, and is insisting that instead taxpayers in core states absorb it completely through debt issuance. Honestly, Greece leaving is the BEST thing that could happen. THe banks will be threatened, and that seems to be the only thing that motivates the ECB to intervene. If Germany keeps pledging more and more of its GDP to the ECB, debt loads get worse.

    At some point, worries are going to turn back to the US Debt load – which, btw, gets worse even though official Team Obama projections told us we’d be out of the woods by 2012.

  16. Gravatar of Becky Hargrove Becky Hargrove
    2. November 2011 at 03:53

    You responded to RP Long in a tactful way (on the I__ post) that I envy, as I got really angry at him and some others who had just trashed a blog that Bryan Caplan wrote about poor women. I can probably count the times on one hand that I invoked the wrath of God and that was one of them. But you told him he should think more like a libertarian in a way that he could respect, and my heart sank when I went to his Mises blog because I agreed with every word in it. (part of my disappointment too that is that he is Canadian and so this is not just a problem in the south.) A little background here, Arnold Kling had just mentioned in a class preparation the day before that libertarians are anti-women and I was already sore about that. (the comment was buried in his chalkboard scribbles – he respects women). I have to be careful about going to Mises blogs because some of those guys have the same blinders that made RP Long say he was not coming back here. What those guys don’t get is that the libertarian solutions that could turn this country around will never happen if they keep excluding women and the poor. Libertarian women have to find common ground with men, before they can even think about seeking common ground with other women.

  17. Gravatar of Becky Hargrove Becky Hargrove
    2. November 2011 at 04:21

    sometimes when I am frustrated I think this is why the Fed is being cowed into no further monetary policy. There are just too many who want to maintain the status quo: exclude the women and the poor.

  18. Gravatar of John hall John hall
    2. November 2011 at 05:48

    Scott, if I were doing this analysis, I would try to get the YTM on these bonds and calculate their spread over Treasuries. The problem is that the price of a bond is not time-invariant. Changes in YTM, on the other hand, are closer to invariants. I would only look at the spread to account for the fact that U.S. bonds were likely rallying at the same time, making the decision to hold the German ones even worse.

    I would then look at the log changes in the Dow or S&P vs. changes (or log changes) of this spread (probably with a time-varying copula after correcting the marginals for autoregressive, volatility clustering, and fat tail effects, but that’s probably a bit more work than you would want to do).

  19. Gravatar of JimP JimP
    2. November 2011 at 06:28


    And this is why fiscal doesn’t work. The govt cant spend the money fast enough – and when they do spend it they do so Chicago style – give it to the buddies of the politicians. Why Krugman would want more of this escapes me.

    Of course it doesn’t really escape me. He has his own spending favorites – and he wants to tax me to pay for them.

  20. Gravatar of Mike Sandifer Mike Sandifer
    2. November 2011 at 07:09

    As tragic as the resulting banks runs would be, isn’t the best option for Greece clearly what its PM is doing now? He’s sticking it to his domestic political opponents, and France and Germany and I think it’s great.

    If Germany and France don’t offer him a better deal, why not leave the Euro and take the pain now, rather than drag it out as the whole Euro zone implodes, with Greece having little or no control over its own fate?

    At this point maybe Greece should try to privately extort concessions from the rest of the EU and pressure them to, among other things, have the ECB actually step up and fully do its job.

  21. Gravatar of Mike Sandifer Mike Sandifer
    2. November 2011 at 07:15


    The only way I can think of to deal with a crisis like this is to smother it early with shockingly big, bold action. The ECB, Germany, and France should have pledged unlimited support for any and all Euro members when the crisis began in Greece. Instead, they’ve reluctantly gone in for an seemingly endless series of less-than-half-measures, all of which were clearly insufficient if you looked at anemic market reactions.

    Really, had the ECB been credible in its promise to buy unlimited amounts of PIIGS debt and had refrained from trying to sterilize it all, why would there ever have been a crisis?

  22. Gravatar of Mike Sandifer Mike Sandifer
    2. November 2011 at 07:19

    I should clarify and say that, even in fiscal policy terms, in absence of ECB action, France and Germany should’ve pledged unlimited, unconditional support for Greece when the crisis began there. That also may have been the end of any potential crisis.

    Naturally, that may have been politically toxic domestically, but we’re talking about chump change in terms of the size of Greek debt compared to the ability of the Euro zone to pay it off completely.

  23. Gravatar of JimP JimP
    2. November 2011 at 08:15

    Oh sure – like my pension plan should buy California or Illinois debt – so the moron politicians can keep on issuing it – till it becomes what it really is – worthless.

    Nominal GDP targeting by the ECB is the only chance Europe has.

  24. Gravatar of Morgan Warstler Morgan Warstler
    2. November 2011 at 08:36

    “You responded to RP Long in a tactful way”

    note to self: be more abrasive.

    Becky, in no possible universe can libertarians be considered anti women and anti poor.

    ONLY technology improves lives. The refrigerator got women the right to vote. The washing machine bought them even more free time to do other things.

    That’s what technology does, it saves time.

    The less government you have the faster technology improves.

    The faster technology improves the less future human suffering there is.

    Scott just made this mistake with me in an email.

    IT MATTERS, in any utilitarian calculus if we get the Internet in 1993, 1980, or 2005.

    Technical evolution is not pre-determined. It is the one true god we can be certain demands free will.

    It is the only thing that REALLY matters, in the aggregate in the long run.

    And what we have is not a Great Stagnation, what we have are too many things in the way of system toppling innovators, because we have too many old people yes, but mostly because we are paying our public employees too much money.

    Without the $$$ from public employees Democrats have to move far to the right to raise corporate cash.

    And when Democrats have to become TRULY pro-business, we’ll finally get a split between government for big business and government for small business.

    That’s the next real fight.

  25. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    2. November 2011 at 08:38

    Tom Sargent interview 2010:


    Rolnick: What does the gold standard have to do with the euro in 2010?

    Sargent: The euro is basically an artificial gold standard. The fiscal rules in the Maastricht Treaty were designed to make explicit the present-value budget balance that was unspoken under the gold standard. In terms of the monetarist arithmetic, the rules made sense.

    Rolnick: So what’s the problem now?

    Sargent: Here is what went haywire. In the 2000s, France and Germany, the two key countries at the center of the Union, violated the fiscal rules year after year. Of course, an intriguing thing about the unpleasant arithmetic is that it’s about present values of government primary deficits, and not just deficits for one, two or three years. And remember that the overkill Maastricht Treaty rules are sufficient but not necessary to sustain present-value budget balance, adjusted for real economic growth, so maybe there was no cause for alarm at that time.

    But in hindsight, there was cause for alarm. The reason is that France and Germany lost the moral authority to say that they were leading by example. They lost the moral high ground to hold smaller countries to the fiscal rules intended to protect monetary policy from the need to monetize government debt.

    Rolnick: And so …

    Sargent: So, a number of countries at the European Union economic periphery””Greece, in particular””violated the rules convincingly enough to unleash the threat of unpleasant arithmetic in those countries. The telltale signs were persistently rising debt-GDP ratios in those countries. Of course, the unpleasant arithmetic allows them to go up for a while, but if that goes on too long, eventually you’re going to get a sovereign debt crisis.

    Rolnick: What could the European Central Bank do then?

    Sargent: Well, here is one thing that you can imagine the ECB doing (which it hasn’t). It could take the stance, “If the government of Greece wants to try to issue euro-denominated bonds, let them do it, or try to do it. And if investors want to hold euro-denominated bonds that are understood to be liabilities of the Greek government, and not of the ECB, let them do it. It’s not any of the ECB’s business. If those bonds threaten to go bad, if Greece just isn’t a good risk, that’s the bondholders’ problem. Let the investors bear that risk. And if Greece defaults or renegotiates, that’s the investors’ problem, not the ECB’s problem.”

    Rolnick: Of course, the ECB hasn’t said that, or at least not yet!

    Sargent: Well, one reason the ECB hasn’t said that yet is that after the financial crisis of 2008, what seemed to some European banks to be a promising source of higher-yielding instruments was sovereign debt in the form of euro-denominated bonds issued by countries like Greece. The banks located in the center of the euro area, France and Germany, hold Greek-denominated debt, so a threat of default on Greek government debt threatens the portfolios of those banks in other European countries. Because it is the lender of last resort, now it is the ECB’s business

  26. Gravatar of Morgan Warstler Morgan Warstler
    2. November 2011 at 08:51

    Patrick I suspect that the Greeks are going to hold their nose and vote yes.

    Simply because they know no one will lend them money if they leave the Euro.

    So THEY KNOW ultimately they are going to have to live on the taxes they raise – with or without the Euro.


    They may suspect that the Germans Euro will bend again, and this may be another round of that, but ultimately I think Greece CHANGES ITSELF, not because it is forced to by others, but because they choose to be in the Euro.

    Frankly, the Euro has done IMMENSE good across the continent – it’s essentially the same as the US adopting a Balanced Budget Amendment…. suddenly without the Federal deficit spending flowing to poor states, poor states are going to have to deeply and fundamentally change…. they will have to become more competitive.

    For ten years we have been treated to seeing far more fiscally conservative, pro-business changes in Europe, and there are more coming.

    Now personally I’d both respect Greece for making a go of quitting, and if they leave, the ECB ought to hold out very clear, you can come back IF X, Y, Z…

    And let them be a stunning example to the other Southern states about trying to have a free lunch.

  27. Gravatar of JimP JimP
    2. November 2011 at 09:04

    And I think Greece votes to leave – and thus to have the wonderful pleasure of watching the Euro entirely collapse. Greece is doomed anyway – so why shouldn’t they take the Euro and especially Germany with them.

    Unless the ECB and its German masters agrees to do NGDP targeting in Europe. To do something that leaves Greece some chance for a life of something other than endless depression and getting yammered at by the Germans.

  28. Gravatar of Mike Sandifer Mike Sandifer
    2. November 2011 at 09:42


    I think the promise of unlimited, unconditional fiscal support for Greece was worth a try early on. It’s not guaranteed it would work, and such a guarantee couldn’t be applied to all the PIGGS, but it might have at least signaled that France and Germany were more serious about ending the crisis.

  29. Gravatar of Mike Sandifer Mike Sandifer
    2. November 2011 at 09:46


    You wrote: “Oh sure – like my pension plan should buy California or Illinois debt – so the moron politicians can keep on issuing it – till it becomes what it really is – worthless.”

    No, it’s more like allowing Greece to stimulate its economy during a downturn without going bankrupt. I wouldn’t agree with help for Greek debt during normal economic times.

  30. Gravatar of Mike Sandifer Mike Sandifer
    2. November 2011 at 09:50

    I guess I should say that there should’ve been a general Euro wide fiscal stimulus policy, as opposed to focusing on debt, which then would’ve actually addressed the problem.

  31. Gravatar of Morgan Warstler Morgan Warstler
    2. November 2011 at 11:36


    In that case, ECB would be smart to say if Greece leaves, we’ll cover X% of their debts to the bondholders.


  32. Gravatar of ssumner ssumner
    3. November 2011 at 18:10

    Marcus, Yes it’s weird how you see the same patterns, sometimes even the same countries. The UK was the first out of the gold standard, and Sweden had a very innovative monetary policy in the 1930s.

    Doc, Yep, that means an AD problem.

    Greg, Yes, but the massive fall in AD would have been devastating to Germany, even without that borrowing. Unemployment brought the Nazis to power, not debt problems.

    Becky, Good point.

    Lars, Thanks, I agree with you–thanks for those links.

    Steve, It would help, but Greece would be in trouble regardless, they have (had) a massively irresponsible government.

    Bob, You said;

    “So let me get this straight: Right now we have stronger gold fetters than when the world was actually on the gold standard? Man that tight money is more devious than I realized.”

    In some ways it’s worse because it’s harder to devalue. Of course the deflation back then was much worse.

    Lorenzo, Interestingly, the skeptical enlightenment was concentrated in the UK. Which stayed out of the euro.

    Statsguy, But the German hyperinflation was the early 1920s, not the early 1930s.

  33. Gravatar of ssumner ssumner
    3. November 2011 at 18:33

    John Hall, You may be right, but none of that would make any difference. T-bonds weren’t doing much, especially on a daily basis. So the price change on YPBs was almost 100% change in perceived default risk.

    Mike, I agree on the Greek vote, but am not so sure about the unlimited bailout. Greece would have stole 100s of billions from Northern Europe. At some point you have to put your foot down. Faster NGDP growth is a much less bad option.

    Patrick, Thanks for the interesting Sargent interview.

  34. Gravatar of Greg Ransom Greg Ransom
    3. November 2011 at 20:27

    Incontinent spending in Germany was eventually financied via hyperinflation, which wrecked the German economy, producing massive economic coordination problems, eventualing in massive unemployment.

    The economic way of thing helps us understand the situation, “AD” obscures real causal pathways with fantasy / magical / fake causal relations between “given entities” which don’t exit — meaning, as interacting “objects” they are infinitely more imaginary than “inflation”.

  35. Gravatar of ssumner ssumner
    4. November 2011 at 18:16

    Greg, Totally wrong. After the hyperinflation ended, Germany returned to normal growth. It is deflation which causes high unemployment.

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