Bloomberg offers up this piece of not very surprising news:
European Union finance ministers pledged to stiffen sanctions on high-deficit countries and ruled out setting up a mechanism to manage state defaults, saying no euro country will be allowed to renege on its debts.
I view this as the number one policy question facing the global economy today. Do you favor patches to keep the current system up and running, or do you think we need an as-smooth-as-possible combination of defaults and devaluations? I fall into the latter camp and I believe that no such feasible patches exist. I believe that Hayek — not of The Road to Serfdom but rather the critic of rationalist constructivism — is being vindicated more and more every day. Do any current European leaders understand his perspective? We will see.
Which path shall it be? What's your call?
From Angus, here are some harsh words, but on spending I cannot say that I disagree. I am often a Keynesian methodologically, yet in practice I am usually quite skeptical of fiscal policy.
There’s an unholy alliance among those who wish maintain the status quo as long as possible consisting of current big (not small) business interests, politicians, and those who feel that society should never be inconvenienced by policy shifts.
As a result, we end up with an economic system that has becomes largely based on the false premise of unsustainable growth fueled by an over changing progression of one bubble after another.
It’s always the transition to a new way of working that is the most painful and against which entrenched interests fight so hard.
The brilliant solution is not to describe a better way of organizing society, but rather, crafting the tranistion phase such that the fewest interests are dinged in the process. That’s why a war makes the process so much easier to pull off.
Greece needs to default. A bunch of eurozone countries need to devalue. All that patches can do is delay these actions. The other thing that would help would be the ECB making a sincere attempt to inflate, so that real wages could fall in the countries that need that to happen, and that there might be enough growth to ease the pain, but there doesn’t appear to be much chance of Germany going along with that.
The unwillingness of the Fed and the ECB to even attempt to achieve their inflation targets during the past couple of years, much less increase them by a percent or two, has been the biggest surprise of the recession to me.
Well, I have a question.
Countries have been defaulting for as long as there have been countries. Only eight years ago, Argentina defaulted, with no apparent long-term ill effects to themselves or anyone else.
But now, for some reason, the threat sovereign default by even a pissant nation like Greece is enough to threaten the Global Financial System.
What changed, exactly, in the last eight years?
“Democracy is where everybody get’s what the majority deserves.” – H.L. Mencken
I don’t know about you blokes, but I find it hard to picture a new German blitzkrieg through the Balkans to teach Greece a salutary lesson. So “no euro country will be allowed to renege on its debts” seems to me to be evidence of a hysterical, unmanly political class.
On Hayek’s view, I believe Tyler is referring (in part?) to “Individualism: True or False” the first essay in Hayek’s “Individualism and Economic Order.”
All but the last few pages of the essay are available at Google books:
http://books.google.com/books?id=q1jn5nE3tsYC&lpg=PP1&dq=%22Individualism%20and%20Economic%20Order%22&pg=PA28#v=onepage&q&f=false
Back in 1987 a much younger Tyler wrote on the topic. But I, at least, found the writing the as a thicket:
http://www.thefreemanonline.org/columns/which-liberalism/
Let me add to my previous comment that all that I have said in comments to Tyler’s posts about separating a stock problem and a flow problem of a defaulting government is still relevant. In particular, the solution of the flow problem (a credible package of hard measures to generate soon a primary surplus) must precede the solution of the stock problem (the rescheduling and reduction of debt service). The only alternative is the Argentine one: hope for the best and forget about the worse. In the past seven years, the large increase in the world prices of commodities has been a major source of tax revenue via the export tax (a tax that was possible by abandoning “la convertibilidad” and devaluing the peso in January 2002).
@me above. Should have written “Individualism, True and False”.
I favor on defaulting on the debt to the Middle Eastern Countries. Cause what are they going to do about it?
Barkley, because he has been his party’s leader since his father died in 1996; his grandfather and his father were very much part of the problem; his party has been in power for too long (although as PM he succeeded a PM from the other party in October 2009); and because most people believe that he knew how serious the situation was before assuming last October (I’m not sure what he promised during the campaign). Greece’s socialist party needs a new leader with new ideas and no close relation to past policies and to traditional constituencies. It seems that the only good news for the Socialist Party is that the New Democracy Party also needs a new leadership.
@Thomas:
That’s the problem, you can’t compare Japan and Greece. First, the culture in Japan made patching things up there much easier than in Greece. The riots you see nowadays by government workers against government are only the tip of the iceberg. The second issue is the size of Japan compared to the EU. Japan had solitary control about their districts and thus could decide for all of them. Greece is dependent on the EU’s general will. The difference will show and make patching up things a lot harder.
The angry Greek public would become much angrier the instant their government proposed withdrawal from the Euro. The profligacy has been very good for the Greek public, pensions doubled (in a stable currency), wages raised a great amount. In order to devalue, the Greeks would have to act against its striking public, its creditors, its international partners. This is very hard to do.
Secondly, an Euro exit would be bad for any weak country contemplating it in the short term, as they all run big primary deficits, while the strong ones, such as Germany actually profit from the weakening of the Euro & the common market. That is, no country could exit without massive fiscal adjustments. When you couple that with the obvious long term advantages of the euro (larger market, smaller interest rate, a lot of debt is Euro-denominated) the point would be to exit temporarily with a medium-term perspective, then go back in. Export-led recoveries are not miracles, you know (No European democracy could out-devalue China). The benefits simply don’t justify the effort.
When the euro will get under 1$ (as 10 years ago), it will all sort out by itself.
“What European leaders will do is default on the obligations of unsecured creditors–their people–in favor of paying off the bonds to banks.”
Interesting, coming from you Bill, considering that the taxpayers are the most innocent party in the equation, and considering your recent supports for increasing taxes and collections (which is a form of increased taxes).
Barkley, would you appoint Madoff’s son to dismantle his scheme? GP has been in power or too close to power for the past 25 years. Read about his record as leader of his party and member of previous Socialist governments.
@Andrew, My comments are not at all inconsistent. Tax the banks for the underwriting risks assumed by the government, ala FDIC or some other vehicle, but don’t assume this risk without having private bondholders pay, and only if there is a systemic risk. I also do not view taxpayers as innocent parties if they vote for politicians who promise to cut their taxes and do not cut the expenditures. In the event the politicians do cut taxes, then it is only fair to recoup the taxes later from the same group that got the tax cut benefit if expenditures were not cut.
See, not so hard.
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