Independence Day for Greece!
Instant reactions to complex economic shocks are almost always wrong, but that’s never stopped me before. Much to my surprise, it has been reported that the No votes won by an overwhelming majority. This means:
1. The Greek government obviously cannot accept the EU deal, even with minor tweaks.
2. It’s hard to imagine the EU offering dramatically better terms, although I suppose anything is possible. The fate of Podemos in Spain depends on whether the EU caves. If they do, Podemos is the next government of Spain. If they don’t, Podemos is in deep trouble. Keep in mind that Eurozone governments are among the major financiers of ISIS. If they are willing to finance terrorists, is it really so hard to believe they’d cave in and finance communists?
3. Does the Greek government secretly want to leave the eurozone? That seems like the most plausible explanation for their erratic behavior, although I can’t be certain.
4. Even if Syriza secretly wants to leave the eurozone, they clearly prefer to stage-manage things so that it looks like they were pushed out. And if the Germans secretly want Greece out, they’d prefer to stage-manage things so that it looks like Syriza is to blame. This may take a while to play out.
5. Is it possible that Greece will remain in the euro, despite all of this? In Europe, anything in possible. Keep in mind that in macroeconomic terms “leaving the euro” means changing to a different medium of account. As long as the euro is Greece’s medium of account, it’s still in the eurozone in a macroeconomic sense. It doesn’t really matter whether the Bank of Greece no longer has a seat at the table. Thus issuing “script” won’t do much to help their labor market recover, unless it takes the form of disguised wage cuts. (Greece may join its neighbor to the north Montenegro in being a de facto euro member, but not a de jure member.)
6. Although I would have voted yes no, I certainly wish them well. Leaving the euro would certainly produce one undeniable benefit—more NGDP! The truly nightmare scenario is that Greece stays in the euro and becomes increasingly statist—a failed state. In my view leaving the euro with Syriza in charge is worse in the short run, better in the medium run, and worse in the long run (as in Argentina), as compared to a yes vote.
7. This slightly increases the risk of Brexit, as the eurozone will increasingly resemble a failed project.
8. European leaders have been saying a no vote means Grexit. If on Monday they are saying something different, they will look like complete fools.
This is the best one paragraph explanation of what this is all about that I’ve seen so far:
And for those in the euro, exit may not be a palliative. Spain has already improved its competitiveness through wage and price cuts. A euro exit could bring with it populist polices that hurt long-term growth. “You do not leave the euro to become a market-friendly Switzerland. You leave the euro to become Argentina,” says Jesús Fernández-Villaverde of the University of Pennsylvania.
If this spreads across Europe, you could eventually end up with a sort of (non-violent) civil war. Neoliberal northern Europe against statist southern Europe. The best way to predict global events over the past 20 years is to assume that countries will have governments that increasingly reflect their cultural characteristics. Thus as China and Denmark becomes more capitalist, Argentina and Greece becomes more statist.
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5. July 2015 at 11:28
I think you meant in #6 that you would not have voted no.
5. July 2015 at 11:30
Thanks David, I wrote that too fast.
5. July 2015 at 11:43
“It’s hard to imagine the EU offering dramatically better terms”
Not for Greeks, apparently 🙂 They seem to be delusional dupes – Tsipras told them their position will improve and they believed him. And now they’re celebrating. That’s gonna be some rough “morning after” couple of months from now.
Btw. 5 per cent of votes so far are invalid – how hard is it to tick a box and put it in an envelope? Technically similar voting in Czech rep. usually produces 0,5-1 % of invalid votes, 5 per cent is amazingly large, isn’t it?
5. July 2015 at 11:57
I agree with Scott. After a default, whether in the Euro or not, it seems very unlikely that Syriza or whoever follows them in government will suddenly go free-market. It is the back-sliding on reforms that has killed Greece in the last five years. Why would they do them now voluntarily, having rejected them under pressure from their lenders?
Back in the mists of time, Britain got into hot water and called in the IMF. The IMF told the very left-wing government to do various things, and the very left-wing government did them. It was incredibly tough, and lost the very left-wing party the election.
More recently Germany was the sick man of Europe. The social democratic government knew that to prosper in the Euro it needed to do lots of structural reform. It knew that it would be tough, and that the reforms were likely to lost the social democrats the election. They did.
When was the last time Greece had even a vaguely centrist government, willing to sort stuff out, let alone a centre-right one??
5. July 2015 at 12:18
Gallego, Like everything else this government has done, the vote was handled in an incompetent fashion. But the wide margin of victory leaves little doubt that “no” is the will of the people.
5. July 2015 at 12:26
#5
5. July 2015 at 12:58
I still think everyone is being too premature in calling what will actually happen now. The Greek’s have made their voice loud and clear, the ball is now back in the Troika’s court, it’s very hard to say what they’ll do now, it all rests on whether they offer them a new program with debt restructuring and relief (like they should have done years ago) or force(let?) them out of the Euro.
5. July 2015 at 12:59
About #5:
I think scrip can help labor market recovery as well, but only if the government passes a law that employees are allowed to use the scrip to pay their workers having euro-denominated labor contracts (and payment will be 1:1, i.e.in euro face-value). This would make the scrip kind like a second legal tender. And of course Gresham’s law tells us that in this case all employers will only use scrip from then on to pay their workers, and since the government is free to issue as much scrip as it likes, employment would soar.
Allowing banks to redeem all euro-denominated deposits in scrip would also help fixing all banks by one stroke.
Note that in this system, the medium of account is still euro. Only the redemption of euro-denominated contracts within greece gets stretched a lot, but most people (and I think even most of the media) will not recognize that euro-denominated prices in greece and those of other countries aren’t comparable anymore, because only in greece will it be possible to avoid using real-euros.
From a political perspective, it might be important that the government avoids calling this new money drachme, but keeps insisting that the country’s official currency is still the euro.
5. July 2015 at 13:06
About my last post:
Since the scrip money would of course have a very low exchange rate on the scrip euro market, this would of course imply that all imported goods will get a lot more expensive.
While we economist do of course know that this might be a good think, the possible rage of the typical greece could be the reason why the government will not dare doing this.
5. July 2015 at 13:10
Brazil’s Independence Anthem says,
“The chains that forged for us
Perfidy’s astute slyness,
There was a most powerful Hand,
Sneered on them Brazil.”- https://en.m.wikipedia.org/wiki/Hino_da_Independência
Clearly it is how the Greek people feels about the whole story, they see themselves as the bound Prometheus, tortured by (mainly) German eafles. Syriza is the Heracles they got, maybe not the Heracles they deserve, and any port in a storm…
As Mr. Churchill said,”Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.” Greeks and the rest have no common interests except maybe trying to avert the disaster each one thinks the other is trying to produce.
5. July 2015 at 13:14
And here I thought after centuries of failing with the military, Germany finally devised the master plan of European domination through hard money central banking!!! I think the vote is simply Syriva are F***-Ups but they are at least our F***-Ups. Maybe Germany and other Euros, especially the East European who were poorer than Greece, are tired enough of Greece and figure it is better let them leave than give in to the moral hazhard. Sometimes the course of action is a divorce.
Now can we start panicing on the Chinese Stock Market? Which is still 70%+ higher than one year ago….Although all the moves by the Chinese government to stop to panic is more concerning than the actual stock market drop in my books. It tells me the Chinese know something I don’t know.
5. July 2015 at 13:23
Collin, I realise you are joking, but it’s a joke that lots of people take seriously. Germany did not instigate the Euro, France did. France thought that a single currency would keep a resurgent re-unified Germany from dominating the continent………..
5. July 2015 at 13:43
Scott, You said, “Keep in mind that Eurozone governments are among the major financiers of ISIS.”
Cite?
5. July 2015 at 13:53
Scott,
This referendum, and the inconsistent messages to Greeks coming from Syriza and the troika about its meaning, make me think it means little or nothing, at least in terms of Greek opinion relevant to the actual issues at hand. I can’t help, but think this this past week may have all be a waste, except for exposing the limits of each side in terms of their bluffing/versus willingness to take stands.
I expect the troika to soon offer a deal that will include allowances for the further deterioration in the Greek debt situation and economic growth, and perhaps a compromise on pensions, at the very least. It may also offer a slower path to privatization. I think they will try to balance what’s on offer against the suffering and risk Greece took to win it.
If they take this path, which is obviously a partial capitulation, I suspect they might still be able to keep other Euro members from demanding significantly better deals, even if some conditions have to be loosened across the board.
Whether Syriza will accept is anyone’s guess(they may not know either), but I think it would be in their interest to now push for a much more permanent resolution to their debt woes, rather than kicking the can down the road for 5 months or so. That is, unless, they want to leave the Euro zone, which I hope they do.
5. July 2015 at 14:14
I was just watching TV and I think that I heard the Greek finance minister ask for money from the USA government with a threat! Wow!
5. July 2015 at 14:26
Regarding #8
Vice-Chancellor of Germany Sigmar Gabriel just said that “with the rejection of the rules of the eurozone negotiations about a programme worth billions are barely conceivable.” And that Mr Tsipras has “torn down the last bridges on which Greece and Europe could have moved towards a compromise.”
Since German leaders have been saying things like this for years, I bet that next week they are saying something completely different again and will therefore look like complete fools indeed.
But is this really news? Maybe the Germans look like fools all the time, because they are fools? Isn’t this the most plausible assumption? If it looks like a fool and smells like a fool and tastes like a fool, it is most likely just that.
5. July 2015 at 14:27
Apparently the Greek central bank is able to print €20 notes. Now we know what the scrip currency will look like.
5. July 2015 at 14:31
@David R. Henderson
France, Germany, Spain and Italy pay ransome all the time. It’s an open secret. Only the US and the UK don’t usually pay.
We are talking about tens of millions of dollars here. Each year. It’s hardly their major source of funding now, but it was very crucial for IS in the beginning.
5. July 2015 at 15:11
David:
http://www.nytimes.com/2014/07/30/world/africa/ransoming-citizens-europe-becomes-al-qaedas-patron.html?_r=0
http://abcnews.go.com/Blotter/fullpage/inside-terrorist-hostage-negotiations-price-freedom-25114240
http://www.npr.org/2014/09/19/349883335/should-the-u-s-pay-ransom-for-isis-hostages
http://www.theguardian.com/world/2014/sep/02/british-government-dilemma-refusing-pay-hostage-ransom-isis
http://www.independent.co.uk/news/world/politics/isis-hostage-threat-which-countries-pay-ransoms-to-release-their-citizens-9710129.html
5. July 2015 at 15:16
Scott, You said:
“I expect the troika to soon offer a deal that will include allowances for the further deterioration in the Greek debt situation and economic growth, and perhaps a compromise on pensions, at the very least.”
If that occurs I will change my mind, in that case “no” clearly was the right vote for the Greeks.
Christian, That’s right. One of the sources linked to above says that European governments are ISIS’s second largest source of funding.
5. July 2015 at 15:16
This is how Dijsselbloem, president of the eurogroup, reacts today, after the landslide “No”:
“This result is very regrettable for the future of Greece.”
One would almost think the guy’s not interested in a compromise.
http://www.consilium.europa.eu/en/press/press-releases/2015/07/05-statement-eurogroup-president-following-referendum-greece/
5. July 2015 at 15:21
For a number of years I have been telling anyone would would listen that my preferred solution is two currencies a northern and southern euro. That would compensate for the cultural differences Scott correctly mentions.
5. July 2015 at 15:24
“Thus as China and Denmark becomes more capitalist, Argentina and Greece becomes more statist.”
Argentina is actually finally becoming more capitalist, it will hold elections in October and all three candidates with a realistic shot favor a more open economy: http://thehill.com/blogs/pundits-blog/international/239600-light-at-the-end-of-the-tunnel-in-argentina
As an Argentine, I’m doubtful of this “Argentina turned from neoliberal to socialist, so Greece will too” analysis I have seen elsewhere. In Argentina the 90s were a decidedly neoliberal decade which exploded in spectacular fashion, the populace equated the crisis with the neoliberal reforms and as a result the whole country turned to the left until now.
In Greece the parties responsible for the current situation are from the center right and left, and the ones in power now is a coalition of radical leftists AND (the oft forgot) neo-nazis who only agree on the need to stop austerity. If Grexit happens, NGDP expands, and austerity disappears it’s hard to see this coalition remaining in place. I suspect Greek voters won’t blame neoliberalism for their state’s failures, though, but rather the corruption in the big parties, and as such will not be as averse to market-based policies as Argentina has been recently.
5. July 2015 at 15:43
Simon, Just imagine that after telling the Greeks “If you vote no you are out of the euro” the EU turns around and says “actually you can stay, and we’ll also give you debt relief.” Podemos would likely be the next government in Spain, Italy might also fall, and then the entire EU could crash and burn.
Mike, Bagehot made that suggestion 150 years ago.
Alfred, You said:
“In Argentina the 90s were a decidedly neoliberal decade which exploded in spectacular fashion, the populace equated the crisis with the neoliberal reforms and as a result the whole country turned to the left until now.”
That’s exactly my view.
I hope you are right about the next government.
5. July 2015 at 15:46
Selgin at Alt-m has pointed out some sort of “swap lines” exist between the Fed and Europe.
Greece should Grexit. The Fed should gin up $300 billion and wipe out Greek debt, no strings. A Greek central bank should print drachmas to the moon thereafter.
I doubt people will lend money to Greece soon, so the moral hazard question is somewhat mooted. The $300 billion in new US cash will hardly cause an inflationary ripple–QE was $4 trillion, remember?
The US should do this for its own self interest. A collapsed Greece and weakened Europe is not a good outcome for the US.
This almost makes me fond of the Cold War days.
Back then somebody would have said we do not want Greece going into Soviet orbit and so we would have helped Greece.
The US spent or incurred obligations of $6 trillion in Iraqistan. Moral hazard? Evidently spineless and completely corrupt cultures were nurtured. No one cares about the $6 trillion.
We might actually see some good from helping out Greece. Yes, the Greeks need to go free markets…but that is hard to do in a depression.
Did the US go to free markets in our Depression or even recent recession?
5. July 2015 at 15:55
As a Dutch millennial, I am glad with this result and I think Krugman said it best: Europe Wins: democracy matters more than any currency arrangement.
I guess I don’t really see eye-to-eye with Scott, and I especially cringe at remarks such as “countries will have governments that increasingly reflect their cultural characteristics”.
Though I admire your willingness to speak your mind.
In the end, all of this could have been prevented if the ECB had interpreted its mandate to guarantee at least 2% inflation in every member country. Allowing disinflation and outright deflation in Greece has been the root of the problem.
We were warned in the 90s that this would happen if we chose the Euro. We never should have implemented it. Once it was implemented, we should have ensured it was never too tight to cause disinflation in the weakest countries.
The ECB under Trichet pushed the weakest countries off the cliff and instead of fixing bad monetary policy back in 2010, we ended up with this fiscal and political tragedy.
5. July 2015 at 16:00
Scott,
Although I follow your blog for NGDPLT insights.
For the Eurozone crisis, Paul DeGrauwe seems to be making the most sense to me, as an educated layman.
His column Friday makes sense and if European leaders would be rational, they should follow his advice. Varoufakis’ growth indexed bonds seem like a good vehicle to ensure economic growth in Greece.
“Greece’s debt is 180% of GDP, which seems to make it insolvent without large primary surpluses. This column argues that since restructuring lowered the interest burden to just 2% of GDP, Greece is solvent – or would be with nominal GDP growth of just 2%. The ECB’s misdiagnosis has caused an unnecessary banking crisis. The solution is to accept that Greek debt is sustainable, so the austerity programme can be relaxed and liquidity support provided to the Greek banking sector.”
5. July 2015 at 16:17
The whole point of the EMU was to foster shared destiny, not distrust and distrust amongst (formerly warring!) nations. Merkel has been and perhaps still is focused on the wrong kind of hazard.
In any case, the roulette wheel has now been spun, and the EU (and the rest of us) must cross our fingers and wait to see what happens next.
5. July 2015 at 16:18
**distrust and disgust**
5. July 2015 at 16:49
“The $300 billion in new US cash will hardly cause an inflationary ripple-QE was $4 trillion, remember?”
QE was in US Treasuries and Agency MBS. A $300 billion gift to Greece, or really European creditors, is completely different. It’s fiscal policy.
The European governments will get that windfall of dollars and want to trade it for Euros, which will create inflation. The Fed can sell enough treasuries and Agency MBS to offset that inflation, but the net effect will be wealth transfer from previous US holders of cash to the European creditors.
Maybe it’s the right thing to do (though I doubt it), but it will be a $300 billion fiscal expense rather than monetary policy.
5. July 2015 at 17:18
The reason it is immoral and destructive for a population of predominantly Greek speaking people in the geographical territory most people call “Greece” to be forced under a foreign coercion-based monopoly issuer of currency, is the same reason it is immoral and destructive for any sized population who speak any language who live on any sized geographical territory to be so forced.
Only individuals protected of their property rights can tell us what the “optimal currency areas” are in the world. Not arm chair tinpot dictator wannabes with delusions of grandeur sitting at their desks in their windowless basement offices in economics departments.
5. July 2015 at 17:23
Matt Waters:
The differences between monetary policy and fiscal policy are dwarfed by the similarities.
The decision on WHAT the central bank is to buy, and from WHOM, are in themselves “gifts”, and there is free value being given to those parties.
Worthless agency MBS does not turn a gift into a trade, don’t kid yourself.
5. July 2015 at 17:29
Scott,
The EU said they’d negotiate with Greece even after a “No” vote before the referendum, so they already capitulated. The only question now is one of degree. I think it’s possible for them to try to limit the damage, but if Syriza overplays its hand, which is perhaps likely, or wants exit, then obviously the crisis continues.
5. July 2015 at 17:40
Blue Eyes even if the original euro ideas was from the French it sure hasn’t stopped Germany from dominating the continent but merely given them a new means: this time from a euro much cheaper with Greece than otherwise.
Without the euro German trade would be hit hard.
5. July 2015 at 17:43
Matt Waters: you are correct it would be mostly European governmental bodies that would receive the bulk of the $300 billion if the Fed simply counseled Greek debt.
Would be European governments swap the dollars for euros, thusv slightly reducing the value of the US dollar? Maybe so…although that would help US exports.
My plan will not happen anyway. But I have to say, I see no cost to my plan and plenty of benefits for Europe. And those benefits would spill over to the US.
Again, compared to the $6 trillion wastedbin Iraqistan, or our annual $1 trillion “national security” bill, what’s $300 billion for Greece? They are running out of food and medicine and banks are closed.
The ECB and Greek socialists have created a third world nation in Europe.
5. July 2015 at 17:52
The Fed and monetary socialists are bringing this country to third world status.
5. July 2015 at 18:05
JL, I agree with much of what you have to say. The euro never should have been created. Once it was created the ECB should have done a more expansionary policy. (They haven’t even hit their 1.9% target.) Had they done so, the crisis would have been much milder.
But it’s absurd to call this a victory for democracy; the government didn’t even follow Greek law in the referendum. They did not have the minimum two weeks, and the wording of the question was badly botched. I read that the European election watchdog criticized the election. (Not that the outcome would have been different with a correctly done vote, but the procedures were very sloppy.)
Stock futures are falling all over the world. I expect the net effect of today’s vote will be fewer jobs in Europe.
Also keep in mind that Krugman’s argument was premised on Greece leaving the euro. If Greece doesn’t leave now, his rationale for a no vote will collapse.
Obviously I have no problem with a restructuring using NGDP bonds, but first you’d need a new Greek government—Syriza has shown they are too unstable to trust.
Scott, You said:
“The EU said they’d negotiate with Greece even after a “No” vote before the referendum, so they already capitulated.”
That’s just silly. Of course they said they’d negotiate, what else would they say? They also said the original offer is no longer on the table. My point is that if they now give a better offer, then they’ll look like fools. It will confirm that the Greeks made the right decision to vote no. Syriza is the other wild card, they may want to exit the euro—in which case there’ll still be no deal.
Mike, You said:
“Without the euro German trade would be hit hard.”
This is wrong, German trade did just fine with the DM.
5. July 2015 at 18:25
It hasn’t benefitted with the lower euro? Tuns out monetary policy is not so important after all if the German exporters don’t benefit from a cheaper euro. Whether or not it ‘did fine’ under the DM it’s doing a lot better under the euro.
This piece by your fellow Market Monetarist seems to strongly suggest otherwise.
“The Germans, he said, understood how beneficial to them membership in the euro zone has been. Without it, the gentleman said, the value of the Deutschemark would be 50% or 75% higher than it is under the euro. “German industry would be wiped off the map.”
https://thefaintofheart.wordpress.com/2015/07/02/germans-we-have-them-greeks-and-the-other-lot-by-the-balls/
Also see this piece by Fortune.
http://fortune.com/2011/11/14/why-germany-needs-the-euro/
5. July 2015 at 18:31
With all due respect you’re surprised that Greece voted no and I’ve been predicting they would do just that all week.
Now you claim that Germany doesn’t benefit from a cheaper euro. In your mind it’s incomprehensible that the European leaders won’t kick out Greece now but I think it’s quite likely if you keep in mind how much German exporters benefit from the weak euro thanks to Greece.
You could argue that the harder hit are the Greeks the better it is for the German exporters.
http://diaryofarepublicanhater.blogspot.com/2015/07/the-eu-and-tsipras-battle-over-framing.html
http://diaryofarepublicanhater.blogspot.com/
If you’re right and Germany doesn’t benefit from Greece being in the euro then it ought to be easy to kick them out. Let’s see if that proves correct unlike your previous sense that Greece would vote yes.
5. July 2015 at 18:38
Mike, You said:
“In your mind it’s incomprehensible that the European leaders won’t kick out Greece now but I think it’s quite likely if you keep in mind how much German exporters benefit from the weak euro thanks to Greece.”
You really are a moron. I think it’s very “comprehensible” that the EU won’t kick the Greeks out.
And trade balances are determined by Saving/investment imbalances, not monetary policy.
5. July 2015 at 19:01
Ok I’m a moron. Whopee. Are you going to call Marcus Nunes a moron who I quoted above?
Nope, you’ll do what you do best-sidestep questions you can’t answer with snarky second grade talk.
5. July 2015 at 19:18
By the way did you used to call your students at Bentley morons? if so it’s a good thing Ken Duda got you out of teaching.
5. July 2015 at 19:46
“But I have to say, I see no cost to my plan and plenty of benefits for Europe.”
That’s what’s absurd about it. I mean $300 billion is $300 billion, despite how much more we have spent on defense. And that $300 billion is a real cost. QE is buying something on the open market for its market value. Making Greek debt whole would pay far more than the current market value of Greek debt, especially Greek debt with zero recovery.
It’s also a $1,000 dollars per citizen. I can give you a bank account to wire $975 to, with a $25 fee to the Fed. You pay roughly $2,000 a year for defense and paid 10’s of thousands for Iraq/Afghanistan, so $1,000 is not that much in comparison.
Sorry for the snark, but you do know how crazy this is?
5. July 2015 at 19:53
Mike, you’re quoting Marcus quoting someone else. From the tone of the piece, it actually seems like Marcus disagrees with that sentiment.
5. July 2015 at 19:58
If you read the entire piece I don’t believe that’s correct. The piece he was quoting was from Fortune magazine.
Again, what I’m looking for is someone who can show why that’s wrong-not who really said it.
5. July 2015 at 20:14
It might be in everyone’s interests if the EU used this opportunity to establish a mechanism whereby a country could leave the Euro, stabilize its economy, introduce reforms of its own choosing to improve productivity and service debt, and then rejoin.
5. July 2015 at 22:01
Matt Waters–
Well $6 trillion for Iraqistan was (and is) $20,000 per resident, more per taxpayer. We did create the greatest narco-state of all time in Afghanistan, so there were some accomplishments.
Besides, $300 billion to Greece is not fiscal policy. It is just digitizing money. A boost in AD when Greece, the ECB and the USA need one.
Maybe I am crazy….but far less crazy than the Iraqistan follies. My plan also fails the federal foreign policy standard: it is not assured to have the reverse Midas touch.
We will pour trillions of dollars into Iraqistan to create and ISIS or a narco-state, but we cannot help Greece?
5. July 2015 at 22:13
Scott,
Yes, the troika will look like fools when they begin to capitulate, but then they are fools. They helped let Syriza out of the corner it painted itself in, with the untimely release of the IMF analysis on Greece, to the leaks about France wanting to compromise, to Germany saying they’d negotiate even in the event of a “No” vote.
Or, one could say that instead of being fools, their opinions about the likely outcome of the referendum changed, and they decided to change the nature of the question being voted on, so that a “No” vote no longer automatically means exit.
Either way, the troika’s already capitulated in my view and more is just a matter of how much and how much Syriza really wants to compromise.
5. July 2015 at 22:32
Professor,
I try and read your blog from time to time. Used it read it more often earlier.
I am quite intrigued by your claim reg the ISIS / IS / Daesh being sponsored by EU govts. Is there some links you could point to?
Coming to the Greek viewpoint, I’m afraid my thought process is closer to Krugman’s and I am happy that the Greek people took it in their hands and (hopefully) did the right thing.
5. July 2015 at 23:35
Scott,
I find your comment that this was not a “victory for democracy” strange. You say that the outcome would not have been different even if the proper procedures were followed, yet you still think this? By the way, the Greek High Court ruled on the validity of the referendum. It might not have been perfect, but it was certainly not deeply flawed.
As to your comment that stocks fell, therefore this will be bad for Europe: I know you are a market monetarist, but you can’t read the minds of investors as to why it fell. Perhaps it fell because the investors are unhappy with the way the troika was handling negotiations? And perhaps the falling reflects uncertainty about the future? I think it is way too simplistic to read the market reaction like you did.
And there is the point of breaking the cycle. If one is stuck in a cycle, it takes some effort to break out of it. Temporarily things may be worse, but they may be better in the long run. The point is that one doesn’t know if they will be better, because the outcome depends on politics. This is my layman understanding of EMH.
6. July 2015 at 00:57
I just saw your econlib comment on markets. That clarifies things a bit.
6. July 2015 at 01:32
Scott,
Again, you use words very differently than I do. For me, democracy is about about consent of the governed and accountability towards the governed. The referendum meets those criteria.
Minor procedural aberrations do not matter if they do not have a significant impact on the vote. Greek voters have had 7 years to make up their mind on this referendum. Falling short two days of two weeks is hardly significant.
On the other hand, the shutting down of Greek banks to instill fear in the populace in order to boost the Yes vote greatly did negatively impact the democratic process, even though the ECB acted 100% according to formal procedures. (though to be fair, I think it – perversely – was a good thing: it again showed the Greek people that they can trust their European ‘friends’ to quickly become hostile if they become too assertive in their democratic rights, which arguably made them better informed of the actual choices).
I think you misunderstand Krugman, but it’s not that important.
You have often said Syriza cannot be trusted, but personally, as a Dutch person, between Varoufakis and Dijsselbloem, I think Varoufakis is more trustworthy and capable.
To be blunt, I honestly think you have a low view of Greek culture and leftist politics and that is clouding your judgement of what would be politically and macro-economically the best course of action.
Which is why I find Paul DeGrauwe refreshing in his more sober treatment of the issues at hand.
6. July 2015 at 01:41
This really isn’t the big a deal.
The only way ECB turns on money to Greek ATMs is if public opinion in northern states changes – I see no polls to that effect, does anyone else?
No public opinion change in north = Greece issues IOUs.
The next part is this:
1. Perhaps, Greece gets on ok with IOUs and they spin out to new currency.
2. Perhaps, with no money, no jobs, no business, two weeks from now the Greeks change their mind / vote to stay.
So the two operable things to watch:
public opinion in North, and how successful is Greek IOU program?
6. July 2015 at 01:46
Note:
1. You can have a Republic without your own currency.
2. You cannot have a Democracy without your own currency.
It’s GREAT to have Greece vote to be a Democracy, BECAUSE we see how many others are CHOOSING to be Republic, instead of being a Democracy.
Republics out perform Democracies, because shared currency forces govt’s / cultures to compete.
6. July 2015 at 04:36
JL,
the DeGrauwe piece yoy refer to (http://www.voxeu.org/article/greece-solvent-illiquid-policy-implications) is perfect for showing how the greek side should have played it in the beginning of the year: Similarly to the Japonica NPV argument, Greece should have asked for lower or no surpluses, exactly because the debt is (was) sustainable. And this of course is because of the generous terms of the 2012 restructure. Which is the opposite argument of the government – now reinforced by the recent IMF paper – saying that the debt is unsustainanble.
In the beginning of 2015, the required small growth could be achieved with the help of ECBs monetary stimulus, the Juncker fiscal stimulus and the elusive structural reforms (had the been implemented). Forecasts for 2015 were already for small growth.
Now, the analysis is out-of-date. Recession is now a certainty. A primary deficit too, unless more austerity comes about, which is not of course expected to be offset by the ECB and will hurt growth even more. And the government is not so keen on structural reforms. So, no growth, no zero primary balance. The ship has sailed for 2015. What about 2016?
6. July 2015 at 04:48
Mike, I’ve told you many times that you are in way over your head. I’ve told you not to comment here. You seem completely unable to interpret simple sentences, and repeatedly misrepresent what I say. I’m actually being generous in calling you a moron; imagine the implications if you were doing this on purpose.
Winton, Yes, and this exit could be a useful experiment.
Vijay, Yes, I provided 5 links in this comment thread.
Anand, You said:
“Perhaps it fell because the investors are unhappy with the way the troika was handling negotiations? And perhaps the falling reflects uncertainty about the future? I think it is way too simplistic to read the market reaction like you did.”
The first sentence is not inconsistent with my claim. Regarding the rest, see my new Econlog post on this subject. Oops, I see you did.
Referenda are always supposed to allow at least 2 weeks for debate. The question should be clear. Neither of those procedures were followed. Do you agree? Again, it’s not a big deal in my view, as the result was unaffected, but it’s crazy to praise the procedures used here. (And I’m the biggest fan of referenda in the entire blogosphere, constantly praising the Swiss system.)
You said:
“Temporarily things may be worse, but they may be better in the long run.”
If that’s true stocks should go up, as stock markets take the long view. The US stock market rose when FDR blew up the World Monetary Conference in June 1932, the closest parallel I can think of.
JL, You said:
“To be blunt, I honestly think you have a low view of Greek culture and leftist politics and that is clouding your judgement of what would be politically and macro-economically the best course of action.”
Culture isn’t the issue here. I actually like Greece, it’s one of my favorite countries. I certainly don’t have a “low view of Greek culture.” But your second charge is completely correct, I have a low view of leftist politics, especially Maoism, and that does bias my view here. Left wing economics has been a disaster for Greece and for much of the world, and I make no apologies about opposing it as strongly as I can.
BTW, The ECB did not shut down the Greek banking system, the Greek government did. It’s time the Greek government stopped blaming other for their misfortune.
And even you would have to admit that it’s pretty sad when the argument in favor of Syriza makes absolutely no sense unless you assume they were lying to their voters in this referendum, and secretly want to exit the euro.
6. July 2015 at 05:33
lysseas,
The troika has been projecting growth since 2010, but it never happens, and their answer is always: “Ah, but you did not properly implement the reforms”. Sounds like a No True Scotsman fallacy to me.
I agree with you that Syriza ‘should have’ played it as you say.
But it takes two to tango and seeing as the Troika prefers to play the ‘our way or the highway’ game, macroeconomic reality be damned, Syriza has no choice but to engage in political posturing and power plays. Which they did quite well.
I would prefer both Greeks and other Eurozone countries would have chosen a sane policy in 2011, but bad choices were made and people (e.g. Schauble) are trying to save face instead of facing reality.
Draghi and Syriza do not have this burden and I suspect Draghi will be quite significant in brokering a workable solution. He is one of the few capable minds that actually seems to grasp the situation in its entirety.
Scott,
I have read your blog since you started; I know you are anything but racist. You may have a high view of Greek culture in some respects, I feel safe in assuming you do not think they are capable of reaching German business efficiency.
Ironically enough, I agree (even if it may not be your actual view), but I think that without the Troikas disastrous policies, they currently would be somewhere around the wealth level that Italy has. Following one of your favorite analogies on culture: If Greek immigrants can be succesful in other countries, why wouldn’t Greece be a success?
I never understood your passionate hatred for Leftism, since, as a pragmatic Utilitarian, you should prefer FDR and Denmark to Thatcher and Reagan’s USA.
I am familiar with your arguments (some more convincing than others), but here too I think your admiration for Friedman clouds your ability to align your moral philosophy with your political views.
BTW, ECB policy implied the Greek government could only choose between closing the banks or letting them fail. In my book, that counts as the ECB shutting down Greek banks.
6. July 2015 at 05:52
JL
The forecasts showing growth for 2015, were not only of the Troika, but of everyone invlolved. They were a smooth projection of the confirmed forecasts for 2014, which as a whole was slightly lower, but with a recorded mild and accelerating improvement in the second half. But in any case, don’t you agree that the closing of the banks and the capital controls seriously hurt growth prospects (whichever they were)?
About the banks, I understand that the ECB has stretched their rules to the limit (and maybe even slightly beyond), as it is. And those limits had been repeatedly pointed out to the greek government, which repeatedly and emphatically assured that there was not a single chance of the banks closing, or of capital controls. Actually, in less than one day (after the referendum announcement), the (ex, as of today) Minister of Finance announced the capital controls in an interview, then denied he had said so and then imposed them.
6. July 2015 at 06:20
Regarding the ECB, it seems wrong to me to state that it was not the ECB who shut down the system but the Greek government. Recall that the ECB disallowed the use of Greek bonds as collateral in early February, and forced them to rely on the ELA channel. This was widely interpreted as a political decision to put pressure on Syriza to come to a deal. Did they have to do that? This was a major factor in the deal in late February which was reached, where Syriza capitulated on almost all its promises.
This matter finally came to a head before the bank holiday.
Further, Varoufakis points out in an interview with Bloomberg that the Europe has been making up rules as it goes along. The EFSF, Draghi’s “whatever it takes” speech, etc. weren’t in any rulebook. This is as much a political matter as it is about following rules.
6. July 2015 at 06:47
You never said don’t comment here before. If you can’t take it that’s fine. I did nothing but quote Marcus Nunes. So how can I be guilty of either stupidity or lying?
However, if you can’t take it then I won’t comment here anymore. That was the one thing I respected about you till now-you didn’t do what Cullen Roche did-though I agree with him on a lot of stuff I didn’t agree with him running from comments.
If that’s your game then you are even less worthy of respect than I thought before your last comment.
I’ll just point out that there is nothing every specific in your jibes. You claim I’m in way over my head but can’t show any examples or proof.
So ok we’ll just leave it here and admit the truth: you are an intellectual coward.
6. July 2015 at 06:51
Anand,
There are 2 kinds of cases: Those for which the are n o rules and in which cases they improvise (“whatever it takes”); and cases for which there a r e rules (which government bonds can be used as collateral). This is a big difference.
6. July 2015 at 07:12
lysseas,
I think Syriza coming to power and seeking confrontation with its creditors erased any hope of economic growth long before capital controls and bank closures happened. Nevertheless, it was the right thing to do. Better to bite the bullet now than to continue the failed policy of the past 5 years.
Obviously the ECB stretched its rules, but it stayed within it’s mandate. The could have kept Greek banks open another week if they wanted. The choice not to do this is, as I said, justified by their procedures, but undermines the idea of democracy and borders on fear mongering (or ‘terrorism’ as Yanis called it).
When implementing capital controls, officials always lie. They have to. Iceland did it too.
Anand,
Fully agreed.
6. July 2015 at 07:18
lysseas,
You are now making arbitrary distinctions to suit your own worldview.
There is no such thing as ‘two cases’. The ECB is a modern, independent central bank. They have a mandate and it is their own prerogative on how to implement that mandate. Any and all action that falls within the mandate is allowed.
Politicians can change the mandate or appoint different officials to the ECB.
Germans going to the German and European courts to try and strongarm the ECB into following a particular course is a disgrace to central bank independence, the rule of law, equality among European nations and democracy itself. Because you know they would be OUTRAGED if the Greek constitutional court had tried to legislate the ECB.
As a Dutch person, I am glad the European courts shut them down, hard. I also want them to relocate the ECB to Brussels to protect them from future German power grabs.
6. July 2015 at 07:50
Thanks, Scott. I don’t know if you realize that when you say that various governments are “financiers” of ISIS, one’s automatic reaction is NOT to think that the financing is by way of paying ransom. That was pretty misleading on your part.
6. July 2015 at 07:55
New Greek Finance Minister is a much more orthodox macroeconomist than Varoufakis. Section II, page 7, is quite good actually. Other sections are more usual socialist, anti-neoliberal, claptrap.
http://www.iippe.org/wiki/images/c/c6/CONF_GREEKCRISIS_Tsakalotos.pdf
6. July 2015 at 08:57
Scott, could you please explain the claim about the financing of ISIS?
6. July 2015 at 09:08
JL
No, creating a rule is not the same as breaking one. On June 30th 2 very specific important things happened. The program ended and a payment to the IMF became overdue. To ignore these two facts completely (the didn’t cut ELA, they did’t increase it) would be asking too much, especially since they had warned and they had nothing to work with.
As for the lying before the capital controls, if it was the first, or second, or third, or… time he contradicted himself, it would not be much of an issue.
On the one thing there is definetely justification to blame the Germans, monetary policy, he was totally indifferent to Greece being a part of the QE. He in fact stated that his advice to Tsipras would be to close the phone to Draghi.
But there is no point in going on.
6. July 2015 at 09:18
JL. You said:
“I think your admiration for Friedman clouds your ability to align your moral philosophy with your political views.”
I don’t think you give me enough credit for thinking for myself. I regard Denmark as the most free market economy on Earth, and would be thrilled if Syriza favored those sorts of economic policies. FDR did one very good thing (devaluation) but otherwise his polices were very unwise, and held back the recovery. To his credit he opposed FDIC, but signed the bill anyway.
As far as leftism, I oppose their economic views, but I am certainly on the left on social issues, foreign policy issues, immigration, etc. I happen to think that countries high up on the economic freedom rankings (Singapore, Switzerland, Australia, Denmark, etc) do better than those well down the list (greece, Argentina, Brazil, etc.)
I would also point out that 240 Greek economists signed a letter favoring the yes vote–I don’t think they are anti-Greek.
Anand, There were reports a couple weeks ago that the two sides were very close to a deal. So if the Greeks had chosen to finish off the deal instead of blowing up the negotiations, they could have done so. Even Tsipras said they were very close. So I blame Syriza for the bank shutdown.
Yes, either the US or EU could have prevented a shutdown with more loans to the banks, but I don’t consider the US or EU to be to blame for the shutdown.
Mike, I’ve told you many times not to comment here.
David, No, I didn’t realize it was misleading. I assumed that people knew that the EU was ISIS’s second largest source of funds, and would understand the implied criticism (or sarcasm) in that characterization. If they didn’t know that, then yes, it would be somewhat misleading. As you can see from the links, it’s been all over the mainstream press. I don’t know the exact definition of “financier” but supplier of money used to operate an organization seems pretty close. Just because it’s money for ransom doesn’t make it any more ethical, indeed it’s arguable less ethical, as it encourages more kidnappings.
Thanks James, It’s hard to imagine he could have been any worse.
6. July 2015 at 09:24
@Scott,
Ok. Thanks. I disagree about the ethics. When someone charges me ransom so that he can use the money for evil, my paying that ransom is much more ethical than my voluntarily giving him non-ransom money.
6. July 2015 at 10:14
Scott,
What frustrates me most is how we can be so similar in outlook and analysis and still reach opposite conclusions.
Denmark and Australia are my preferred type of country, too.
Considering there seems no realistic plan to transform Greece into Denmark without quite literally destroying their economy and ruining peoples lives, the only option I can morally stomach is to let them develop into Italy.
Perhaps we just have different tolerances for human suffering.
6. July 2015 at 10:23
David, I’m a utilitarian, so naturally I disagree. But I do understand that the overwhelming majority of people agree with you. I’m stunned at how little outrage there is about the Obama administration’s recent policy shift on negotiations.
JL, As I said, my first choice would be Grexit plus neoliberialism.
I would add that southern Italy is a failed state, kept afloat by the north. All of Italy will fail if they don’t reform. Fortunately there are some positive signs, I seem to recall that some major Italian privatizations were announced today. Is that correct? Also note that the economic disaster of southern Italy was not caused by the euro; the situation there was bleak even back in 2007.
6. July 2015 at 10:29
CA, See all of my replies to David.
6. July 2015 at 11:16
“If that’s true stocks should go up, as stock markets take the long view. The US stock market rose when FDR blew up the World Monetary Conference in June 1932, the closest parallel I can think of.”
I would say there is a big difference. However the valuation of the dollar changed, US stock investors still knew they could take their money out at any time. There are big liquidity issues with any assets in Greece possibly being subject to capital controls.
The interaction of liquidity premiums and true fundamental value is interesting. LTCM lost money trying to go long on “off-the-run” Treasuries and go short on “on-the-run” Treasuries. A Treasury maturing in 9.5-10 years will be valued more than 9-9.5 year maturity Treasuries. The only reason for the valuation difference is the 10-year market is more liquid.
At LTCM, this liquidity premium just didn’t make sense to the traders. I’ll admit it doesn’t make much sense to me either. Shorting the on-the-run Treasuries should provide significant capacity to arbitrage the difference for somebody like Warren Buffett or the Yale endowment. Even setting aside a tremendous amount of money for margin calls, the return on capital could be significant, shouldn’t it?
Doing such a transaction is tougher in reality, I suppose, because the liquidity premium exists and went up after Russia’s default.
Anyway, a closer parallel due to the liquidity concerns may be Argentina’s stock market. Here is Argentina’s stock market in dollars.
https://prezi.com/mznnj4nzi2xx/merval-index-in-usd-since-1989/
It truly went on a wild ride. Starting in roughly 1998 to 2003, it went from 900 to 400 to 600 to 100. Then it went to 800 from 2003 to 2007, before again going down to 300 in 2008.
It’s tough to say a large number of market participants dispassionately process new information for each of those changes, with each point in time representing all publicly available information available at that point in time. But perhaps those prices DO reflect all public information, including information in 2003 that Argentinian government could very well expropriate assets.
But expropriating assets and liquidity issues do not say much for whether the economy will improve in the medium term. Argentina’s economy did improve significantly, at least in the medium term. The RGDP/capita roughly tracked Chile since the default, which surprised me.
So, for various reasons, the stock market for Greece may not reflect how the general Greek economy does.
6. July 2015 at 11:44
Unfortunately, they’re probably going to get a LOT more NGDP. Like, 20-50% or more annually.
http://www.tradingeconomics.com/greece/inflation-cpi
Greek inflation reached 25% as late as 1992, and was never below 10% between 1974 and 1996.
It’s entirely possible Greece could avoid inflation by reining in spending and setting credible monetary policy. But this is a country that just defaulted twice in five years. There will be very little trust.
The people forced to accept drachmas and exchange them for euros are going to expect them to be worth a lot less in 5-10 years. There is no trust right now.
6. July 2015 at 11:51
lysseas, thanks for your comments. This is going to be very tough for you guys in the short-term, I hope there are some long-term benefits.
6. July 2015 at 12:31
[…] 6. Scott Sumner comments. […]
6. July 2015 at 13:14
I am puzzled by James’s comment. From what I can see, Tsakalotos makes exactly the same point in section II as Varoufakis. He thinks that the Euro created regional imbalances and the problem since 2008 is the lack of a surplus recycling mechanism. Varoufakis says exactly this: he even wrote a book on this, The Global Minotaur.
From reading the whole section II, this could easily have been written by Varoufakis. (I used to read him for more than a year before he became minister)
By the way, Ambrose Evans Pritchard says that Tsakalotos is in some ways more hardline than Varoufakis. Keep in mind that Varoufakis was earlier associated with PASOK (though he broke with them on the debt issue), while Tsakalotos has been a Syriza member for a decade.
6. July 2015 at 16:22
“So ok we’ll just leave it here and admit the truth: you are an intellectual coward.”
First thing Mike said I agree with.
6. July 2015 at 16:53
Matt, LTCM had a nice theory that the EMH doesn’t hold true, and lost a ton of money. How should that affect our view of the EMH?
You said:
“So, for various reasons, the stock market for Greece may not reflect how the general Greek economy does.”
I agree, and also agree that Greece will do well in the medium term if they devalue. But I still view the markets as the least bad way of forecasting the effect of shocks.
Anand, I’m no expert, but the FT reported that Varoufakis was quietly pushing for Grexit, and that Tsipras and Tsakalotos were more willing to do a deal. But again, that’s just reports I read.
7. July 2015 at 01:14
@ssumner
“JL, As I said, my first choice would be Grexit plus neoliberialism.”
“The more liberal economies, that have taken neo-liberalism most to heart, have witnessed incredible increases in inequality of income and wealth. To give just one statistic, of every dollar of real income growth that was generated in the US between 1976 and 2007, 58 cents went to the top 1 percent of households (Rajan, 2010).”
http://www.iippe.org/wiki/images/c/c6/CONF_GREEKCRISIS_Tsakalotos.pdf
7. July 2015 at 02:23
Fair enough Scott. I won’t comment here anymore if you can’t handle it. But even this claim of yours is belied by the fact that you have answered my comments day after day for years.
If you had really told me this many times you were going about stopping my comments in a strange way.
I hope you enjoy speaking to only people who agree with you.
7. July 2015 at 03:41
“LTCM had a nice theory that the EMH doesn’t hold true, and lost a ton of money. How should that affect our view of the EMH?”
It is to be expected that those who hold anti-EMH views will at some point lose money, as others who also hold anti-EMH views, outsmarted them with superior skill and foresight.
Anti-EMH is not “Do this and you will never lose money.”. It is not “Invest according to this formula and you will always beat the market.”
Anti-EMH is literally just an identification that EMH is internally flawed when subjected to better logic and better deductions than what leads to the belief in EMH. That is all it is.
Now in the positive sense, of how markets actually work, instead of merely how they don’t work, does not need a name, and does not have a name, which is why pro-EMH people believe that anti-EMH people don’t have anything better. The pro-EMH people are waiting to be given a name, with a short explanation, which they will never get.
7. July 2015 at 05:17
Postkey, Greece is the least neoliberal of all the developed economies. How’s that working out for Greece? I’d much prefer inequality to Depression. And note that there are some highly neoliberal economies that are quite equal (such as Denmark.)
Mike, You said:
“I won’t comment here anymore if you can’t handle it.”
Oh, I can “handle” it fine, that’s why I never ban commenters. I started by politely telling you that you didn’t understand economics and were in way over your head. But you paid no attention.
7. July 2015 at 07:46
“And trade balances are determined by Saving/investment imbalances, not monetary policy.”
1. How could a country have more investment than saving without a trade deficit? It´s not the one that determines the other, they are just the same thing. It´s an accounting identity.
2. Do you think that monetary policy cannot influence the trade balance (thus also saving/investment)?
7. July 2015 at 09:41
“Greece is the least neoliberal of all the developed economies.”
And yet they had the largest increase {of the Euro area countries} in per caput income {measured in US$’s} between 1999 and 2008.
7. July 2015 at 17:13
And when you had said that what had been my response? I said ok-if I don’t understand economics point out to me specifically what I don’t get.
I think that’s a pretty polite response if someone hits you by attacking your basic intelligence.
For whatever reason you never seemed to want to tell me specifically what I don’t get.
I mean surely if someone says something that is dead wrong you can say what makes it wrong. I told you to enlighten me in that case.
Even now I’m willing to listen.
Again, if you want me to never comment here again I will respect that. But even as I never bother you with a comment again you could maybe at least specify what I’m failing to understand.
7. July 2015 at 23:34
“Matt, LTCM had a nice theory that the EMH doesn’t hold true, and lost a ton of money.”
Yeah, I thought of making some comments regarding EMH and LTCM. There is a fundamental stumbling block with the EMH that doesn’t apply to other economic theories. AD/AS, elasticity, balance of payments, etc. all describe economies as they exist.
For EMH, a 100% adoption of the EMH also invalidates the EMH. If the EMH is only 50% adopted, then many investors irrationally chasing the EMH makes the market efficient. As far as I know, the EMH is the only theory which becomes less true as more people believe it.
No explanations of this contradiction have ever really satisfied me. All the evidence points to two different facets of efficient markets:
1. Markets ARE efficient looking at prices in the <1 year range.
2. Markets have had many inefficiencies with prices in the multiple year range.
LTCM's leverage meant its models not only needed to be right for the true fundamental value, the models had to correctly predict the intermediate market price. Any investment managers who has exposure to either margin calls or the exit of their investors face exposure to the intermediate market prices. Investment managers in that category can only try to become coin-flipping champions.
But mispricings do often exist on a multi-year horizon. Not just bubbles, but more fundamentally the "equity premium puzzle." Scott, you posted an article which purported to "explain" Buffett's success. Buffett did use moderate and cheap leverage through insurance float to leverage purchases of "low-Beta" stocks.
But the fact insurance float has been cheap for Buffett overall and low-Beta stocks generally have higher return both contradict basic principles of the EMH. The inverse correlation of Beta versus return is opposite of risk-adverse behavior. Also, the nature of insurance float means underwriting losses should roughly match interest rates on an equivalent loan. If interest rates are 5%, then a policy which will pay out on average $105 in claims a year later should only have a premium of $100. Buffett has had some bad years with underwriting losses, but overall the underwriting losses have been far less than equivalent interest.
Theoretically, short-term price efficiency could lead to long-term valuation efficiency, but that requires short-term price movements to thoroughly match long-term valuation. Sometimes the two match, but the short-term prices also have a lot of variability that long-term valuation does not have.
8. July 2015 at 02:53
Matt Waters wrote:
“For EMH, a 100% adoption of the EMH also invalidates the EMH. If the EMH is only 50% adopted, then many investors irrationally chasing the EMH makes the market efficient. As far as I know, the EMH is the only theory which becomes less true as more people believe it.”
Assuming this is correct, though, then the incentive to invest actively should rise as the proportion of active investors falls. So in practice you probably never get anywhere near 100%. I don’t see this as being all that different from other macro theories.
8. July 2015 at 18:30
Jan, Not in the long run–money is neutral in the long run. Even in the short run it’s not clear whether easy money raises or lowers the trade deficit–there is evidence both ways.
Postkey, That’s right, and at the time it puzzled me.
Matt, I agree that the EMH is not 100% true, but then no economic model is. Not even supply and demand, which assumes firms are price takers.