Archive
Taubes on Fat
I haven’t listened yet but this Econtalk podcast with Gary Taubes is sure to be great. Anyone who thinks eating wheat is a good idea or bacon (constantly) a bad idea owes it to themselves to challenges their priors against Taubes’ arguments.
Maybe the 1% are not doing so well
Using Goldman Sachs as a proxy, it looks like finance people aren’t having a good year. From what I hear only compliance is hiring these days and that’s just due to new regulations.
Denmark needs a Soros moment
Anyone know a few hedge fund managers? Because Denmark is is desparate need of a speculative attack on its currency.
The OMX Copenhagen index has lost 21 percent this year, compared with a 12 percent decline in benchmark Norwegian stocks and 16 percent drop in Sweden’s main share index. The Euro Stoxx 50 index has lost 19 percent in the period. The yield on Denmark’s 10-year government bond eased four basis points to 2.02 percent.
How to undo the Euro
I think the most reasonable way to take apart the euro is to make it redeemable into a composite of national currencies. (I am sure someone else as thought of this, but I haven’t seen it yet.) You could think of it as turning each euro into a currency index ETF, with the index weightings given by a country’s share of 2011q1 Eurozone GDP. This would provide a way of ensuring that the pain is spread proportionally and take away the incentive to move deposits into Germany.
If you had a euro you could take it to the local bank and redeem it for 35 Deutsche Pfennig, 24 French centime, .006 Slovenian talar and so on-or rather your new national currency exchanged at the market rate of that basket of 17 currencies. This way everyone would get the same amount of new national currencies for their euro and it would just be a matter of moving that currency to its respective country through FX markets. As a result, there would be no rush to dump euro because everyone would be getting the same mix of Drachma and Deutsche Marks (DM). Indeed the euro could continue to be used day to day while currency was gradually redeemed. Trading in the new currencies would start at par between the re-empowered central banks who would start seed monetary bases. The monetary bases would grow ( proportionally shrinking the euro base) as euros were redeemed for national currency to pay taxes and wages.
So lets run through how the process would work for Greece, as if it can work there, it can work anywhere. Greek bank deposits would be converted just as anywhere else, Greeks would get about three Drachma for every hundred euro, 35 (or whatever it is) DM…. The Greek government would still have to reckon with its massive debt, the payments of which would be mapped through the composite weightings of the euro to new national currencies. That is, the drachma value of each coupon payment would be linked to the European currency index. The 3% of Greek savings denominated in Drachma would quickly depreciate as drachma were dumped for USD, DM, and gold. The upside for Greece is that its population would still be sitting on a portfolio of 35% DM and about 40% other reasonably stable currencies (Dutch guilders, Austrian Schilling &c). Greece would need to go through with the current bailout plan (payments converted to drachma), but their savings wouldn’t be affected any differently than the savings of German citizens. The readjustment of wages would take place within months rather than a decade. Starting wages in drachma could be paid at the market rate and in proportion to the composite mapping, as inflation rose drachma wages could be increased to clear the labor market.
This hardly solves Greece’s problems, they still need a bailout and partial default, but by not wiping out their national savings they have a fighting chance. Whats more, it allows the much needed opportunity to quickly adjust their export competitiveness. With new national currencies, each country would be able to offset needed fiscal austerity with expansive monetary policy. Because the burden of coming up with 35 DM for each 100 euro coupon payment (or previously signed contract) would strain the finances of sound but over valued countries like Finland, the Bundesbank would need to commit to a 5% or so inflation target for a few years. Lightening debt burdens through inflation is a dirty business, but because this scheme would undo the euro for good, the moral hazard is less odious than if the inflation target were boosted but the euro maintained.
I think the beauty of this strategy is that it provides a way of working through previous agreements in a fair and straightforward way. Everyone gives a little, German bond and contract holders get lower coupon payments, debtors with weakened currencies pay more but get the chance to finally stop the deflation. I think this is at least an idea on which to build.
The Euro good for Ireland? Not so sure…
I saw this Bloomberg article yesterday morning. The gist is that the Irish are really serious about proving to the world that they are tough blokes who just know that Deutsch Geldpolitik will be best in the long run. Of course the long run might take longer to arrive than anyone thinks.
Here is a quote:
“We’re too small a country to stand alone,” Brendan Hanratty, 65, a semi-retired farmer, said in Dublin. “For a small country, I don’t think they would be able to run the country without the euro. If Europe hadn’t given us the cash, we wouldn’t have the roads or the motorways, we’d have nothing.”
Sigh. The euro is the ultimate manifestation of lazy platonic thinking and the EU has had great success in convincing people of this line of thinking. Monetary sovereignty is not isolationism though I understand why the man in the street might think so. Monetary policy is at first hard to wrap one’s head around and people deffer to their politicians. Never mind that Ireland was already growing quickly by 1998 or that its tax haven status success might have more to do with its success tax haven status than EMU membership. Never mind that wealth (infrastructure) is determined by real factors, not monetary policy. Otherwise USD using Panama would be as rich as Mississippi.
Globalization is cited as a reason why countries like Ireland need the Euro. The claim is that if a country uses a widely traded currency with deep capital markets, then trade will flow and firms need not take the risk of borrowing in a foreign currency. But could it be that globalization actually increases the benefit of a flexible currency? A flexible currency allows a small country to quickly adjust its “national wage” to the unpredictable shifts in demand for its exports, and if exports are a rising share of GDP, wouldn’t that mean that adjusting “national wages” would become increasingly important? Hong Kong comes to mind. The USD peg worked pretty well for a while, but as Hong Kong becomes more and more Asia centric, the need for a flexible exchange rate (tighter money in this case) has become clear.
No one likes exchange rate volatility in and of itself but with modern currency hedging and ubiquitous debit cards many of the old transaction costs are less of an issue. I traveled all around Europe using a Swedish debit card without a glitch. Hell I used an American card in Ulaanbaatar a few years ago. The primary cost at least for tourism is the mental strain of multiplying and dividing by decimals.
A flexible exchange rate does impose a cost to business, as some marginally profitable transactions wont take place, but a flexible exchange rate is insurance and coverage is never free. A world of many currencies lowers the probability that all trading partners will make monetary errors at the same time, which softens the blow to those countries which do allow NGDP to fall 12% below trend. Imagine if China had continued tightening during the Great Recession.
I can’t recall who uttered the sentiment, but I subscribe to the notion that monetary policy is too important to leave to central bankers. It follows that monetary policy is too important to over optimize. If a central bank screws up once every seventy years, and monetary errors are only weakly correlated across central banks, then it follows that output will be less volatile in a trading block divided into many currency areas. With a high degree of trade, a big contractionary error in one currency area will be partly offset by easier money in other areas and the sum of output and employment across the trading block while perhaps more slowly growing in the long run, would not be prone to seventy year swings in the way any given currency area would be.
I wish I had the time to run some alternative policy simulations, but I think my point still stands. Can anyone honestly say that a monetarily divided Europe would have been in aggregate more contractionary than the Bundesbank dominated ECB during the last four years? If not, then doesn’t this mean that the EMU has cost millions of jobs and I don’t know… a half trillion EUR in lower output? Doesn’t the example of Sweden, with its currency moving closely with the euro during normal times but depreciating when needed, make a strong case that a small country can stand on its own? Why couldn’t Ireland manage its own currency in the way that comparably small New Zealand does?
Certainly we need to reckon with the facts: Euro using/linked Ireland is in a depression, Denmark and Finland are underperforming and I need not mention the Mediterranean countries. Small trading economies with floating currencies (Norway, Sweden, Switzerland, Australia, Canada &c) however are slowly growing. It is time to take the Euro apart. This is unlikely outside of Greece leaving, but let’s not pretend that the euro is key to Ireland’s success, or that is has been anything but the worst and most intractable economic blunder in post war history.
