George Soros nails it

Two months ago I quoted Soros as follows:

To be a little more specific, let me suggest the outlines of a European solution to the euro crisis. It involves a delicate two-phase maneuver, similar to the one that got us out of the crash of 2008. When a car is skidding, you first have to turn the steering wheel in the direction of the skid, and only after you have regained control can you correct your direction. In this case, you must first impose strict fiscal discipline on the deficit countries and encourage structural reforms; but then you must find some stimulus to get you out of the deflationary vicious circle””because structural reforms alone will not do it. The stimulus will have to come from the European Union and it will have to be guaranteed jointly and severally. It is likely to involve eurobonds in one guise or another. It is important, however, to spell out the solution in advance. Without a clear game plan Europe will remain mired in a larger vicious circle in which economic decline and political disintegration mutually reinforce each other.

Here’s how I responded:

Here’s what Soros is right about:

1.  He’s right that countries like Greece must tighten fiscal policy as they are running out of investors willing to lend them money and not be repaid.

2.  He’s right that the eurozone desperately needs stimulus.

What’s the obvious solution?  They need tighter fiscal policy in the periphery and strong monetary stimulus from the ECB to sharply raise NGDP growth in Europe.  But there is no mention of monetary policy at all.  And yet his diagnosis virtually cries out for a market monetarist solution.

Instead Soros seems to imply the deus ex machina of eurobonds saving the day.

Now commenter Steve sent me a new interview, where he does exactly what I suggested:

And he warned that the euro zone fiscal compact, an agreement by 25 EU leaders to prevent another debt crisis and restore confidence, was pushing in the wrong direction because it obliged governments to balance budgets and reduce indebtedness at a time of inadequate demand.

He said that because fiscal stimulus was ruled out, monetary policy remained the only tool available.

I started my blog with a focus on US policy, but I’m actually seeing more signs of market monetarist influence in Europe than the US.  That’s probably because although fiscal stimulus won’t work in either region, the impossibility of fiscal stimulus is more obvious in Europe.  Hence money is the only game in town.

Soros is a HUGE name in Europe—another big win for market monetarism.



14 Responses to “George Soros nails it”

  1. Gravatar of Benjamin Cole Benjamin Cole
    17. April 2012 at 09:07

    Excellent blogging.

    Actually, I don’t believe sovereign nations should ever give up the power of the currency press, and Greece has done that. They need to print lots of money and balance their budget. But it is hard to balance the budget in a depression—and they can’t print money.

    Some economists have devised a purgatory for the Greek population.

  2. Gravatar of Steve Steve
    17. April 2012 at 09:10

    “That’s probably because although fiscal stimulus won’t work in either region, the impossibility of fiscal stimulus is more obvious in Europe.”

    I may be a hopeless cynic, but there’s one exception here. If the US will fund the IMF, the IMF can fund Spain, Spaniards can buy BMWs, and Germans can buy US Treasury bonds.

  3. Gravatar of Morgan Warstler Morgan Warstler
    17. April 2012 at 09:46

    Over and over…

    IF you buy the premises of MM, “fiscal not needed” isn’t really optimal.

    The real optimal fiscal policy under NGDPLT is “cut spending to match revenue”

    If we can trust the CB to keep the NGDP on track it can do it just as well while we are firing public employees (increasing public worker productivity)

    Check out how awesome Estonia is doing:

  4. Gravatar of Cthorm Cthorm
    17. April 2012 at 10:18

    I’m glad to see you paying attention to Soros. He did an interview a few months ago with Bloomberg TV (I think this was during Davos) about his funds’ large buy of Italian sovereign bonds. His response: “Deflation and a 7% yield is a steal. If I was managing the fund I would have bought more [than $2 billion]. If Italy is allowed to default then there is no longer a European Union.” Italian yields have since moved +200 bps in his favor.

    It’s funny to me that left/right partisans are so droolingly mad about Charles & David Koch/George Soros. They are wealthy, intelligent, philanthrophic, and partisan. It is strange to make a bogeyman out of any of them.

  5. Gravatar of ssumner ssumner
    17. April 2012 at 10:33

    Ben, Agreed.

    Steve. I’d say you were a “hopeless optimist.” 🙂

    Morgan, They are doing well becaise of their free market policies. But the euro peg has held down growth in Estonia since 2008.

    Cthorm, You said;

    “I’m glad to see you paying attention to Soros.”

    I’m not, he’s paying attention to me. He’s starting to say what I asked him to say. 🙂

  6. Gravatar of Adam Adam
    17. April 2012 at 13:39

    You can probably see it better than I, but really? What trickles through to me does not suggest any interest in Frankfurt for monetary accommodation. Are there people at the ECB who are capable of deeper analysis than “inflation bad!”?

    But I’ll grant you that there should be traction in your direction where fiscal policy just isn’t an option.

  7. Gravatar of Peter N Peter N
    17. April 2012 at 16:56

    There’s only one hope for Greece, and Willeb Buiter summed it up pretty well. Too make the numbers work.

    1) The entire national debt has to be written/paid off, and Greece needs a subsidy of around 2% GDP.

    2) Greece has to make enormous changes to its economy.

    It would have been a lot cheaper 2 years ago. The situation has deteriorated so badly that there’s a danger of Greece becoming a failed state. To make changes, a government needs legitimacy and at least some popular support. Government legitimacy is much thinner in Greece than other countries.

    After being attacked by the Italians, they were occupied by Germany. This led to 3 years of civil war and a resulting right-left split and instability. Then with US encouragement there was a military coup in 1973. The military government died of incompetence a few years later.

    This is the country Germany wants to colonize. It ain’t gonna happen. The politics is toxic. Germans to help with their tax collection? They’d be lynched.

    If the Greeks had been offered a fair deal (one which had some hope of actually working) they might have accepted receivership at the hands of the EU as a whole.

    What seems to be happening is that the ECB is stabilizing the banks. Its balance is exploding. The Germans fear inflation and oppose this.

    A monetary policy solution, if it’s politically possible will involve the ECB’s printing a few trillion more Euros. The problems with this are obvious.

    Germany has started plans to put all it’s bad debt in a “bad bank” backed by 480 billion euros.

    They’re preparing for the collapse of the Euro.

    Finally France is having an election. If the socialists win, God knows what will happen.

  8. Gravatar of D.Gibson D.Gibson
    17. April 2012 at 17:59

    Europe may have less fiscal wiggle room, but they have a single mandate (price stability). I expect them to follow that to the grave.

  9. Gravatar of MMJ MMJ
    18. April 2012 at 01:26

    Your “obvious solution” assumes that keeping the eurozone together is the right thing to do.

  10. Gravatar of Major_Freedom Major_Freedom
    18. April 2012 at 04:36

    The EU isn’t an optimal currency zone.

  11. Gravatar of MMJ MMJ
    18. April 2012 at 08:53

    “The EU isn’t an optimal currency zone.”

    More to the point, nor is the collection of countries using the euro.

    Further to that, the citizens of many of the countries using the euro did not want the euro. But far be it for a quaint notion such as “democracy” to get in the way of Soros’s/Sumner’s master plan.

  12. Gravatar of Peter N Peter N
    18. April 2012 at 09:02

    Why is the solution “obvious” when the obvious solution is to break up the euro?

    Because, in light of the known perfection of the works and foresight of man, the euro was designed with no mechanism for dissolution or withdrawal.

    Imagine dissolving the United States currency zone. I have a contract with a party in WV denominated in dollars. Will that be in the WV Wavy or the NY Wally? Are deposits in WV banks going to be paid in Wavys? If so, I’ll take my money out and put it in a NY bank or buy gold.

    This disaster would destroy most of the European banks, and any sovereigns defending them and destroy the ECB, unless the Fed bailed them out and people believed it had the ammunition to do it. This would take more than Chuck Norris.

    There’s a very good chance, the disaster would become a worldwide depression. A recession is pretty much guaranteed.

    The prospect is so hideous, that many people feel that the Germans can’t be so stupid as to believe they can build a firewall and escape this. The efficient part of the German economy, exports, would tank. The services part is a disaster, every bit as bad as Italy or Spain.

    Still the Germans are putting many times as much money into their firewall as they were balking at supplying to a eurozone stability fund.

    I think I’ll hedge my bets by trademarking “Merkelville” and “Merkeltown” in various European languages.

  13. Gravatar of ssumner ssumner
    19. April 2012 at 06:31

    Adam, We aren’t there yet, but the wheels are beginning to turn.

    Peter N, I’d strongly oppose a 2% of GDP subsidy to Greece. A much better option is Greece leaving the euro and devaluing sharply. That’s how they fixed these problems in the old days. Now it would be harder to devalue, but that’s better than being a welfare recipient.

    I agree the French election could be important.

    D Gibson, That may be correct.

    MMJ and MF, I agree that the euro was a big mistake.

  14. Gravatar of Morgan Warstler Explains Market Monetarism Morgan Warstler Explains Market Monetarism
    2. February 2017 at 08:44

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