
Devaluation is austerity done right - tankenmate
http://www.slate.com/blogs/moneybox/2012/06/13/devaluation_is_austerity_done_right.html
======
digitalengineer
Not correct, this is helping the debtors (like our government) while extremely
hurting the savers, people on fixed income, people with a pension and low
income. As most western-european countries import more than they export
(especially energy and food, when their currency goes down, what they can
afford to import goes down as well.

What we're seeing and why the $ and € don't fluctuate much (even though Europe
is in such a mess) is both Europe and the US (and all the others) are
devaluing their currency one after another. It's called Currency Wars:
"Currency wars are one of the most destructive and feared outcomes in
international economics. At best, they offer the sorry spectacle of countries'
stealing growth from their trading partners. At worst, they degenerate into
sequential bouts of inflation, recession, retaliation, and sometimes actual
violence. Left unchecked, the next currency war could lead to a crisis worse
than the panic of 2008. [http://www.amazon.com/Currency-Wars-Making-Global-
Portfolio/...](http://www.amazon.com/Currency-Wars-Making-Global-
Portfolio/dp/1591844495)

Here's a nice video explaining it using a comic from the '50's!
<http://www.youtube.com/watch?v=bFxvy9XyUtg>

~~~
pessimizer
Don't forget the debtors that aren't the government, the vast majority of the
population.

The dollar has been absurdly overvalued for a long time, destroying our
exports and causing us to import excessively, leading to trade deficits and
more debt.

Not that savers won't be hurt unfairly, but they will be hurt even more by the
accumulation of capacity loss caused by the lost potential output of austerity
philosophies. Unless they are retired, and don't plan to participate anymore -
then they're just screwed. Unless we decide not to eviscerate Social Security
and Medicare, that is.

The most important thing is not to have people who want to work sitting idly,
especially people who are newly entering the workforce. This destroys the
future more than debt ever could. We either need to lower nominal wages or
devalue the currency to the same effect - or let massive unemployment become
the new normal. Good luck lowering nominal wages: It's really a choice between
the last two options.

I'm not sure what the conservative saver horde expects will happen to its
savings over the long term if interest rates stay at 0% or negative
indefinitely. Maybe pour all of their money into something else dumb like
dotcoms or real estate and become the whiners of tomorrow?

~~~
smutticus
Please provide evidence for overvaluation of the USD.

~~~
pessimizer
[http://www.washingtonpost.com/business/us-current-account-
tr...](http://www.washingtonpost.com/business/us-current-account-trade-
deficit-grew-to-1373-billion-in-first-quarter-largest-
since-2008/2012/06/14/gJQArwQEcV_story.html)

Historical Notes:
[http://articles.marketwatch.com/2008-01-29/news/30807755_1_s...](http://articles.marketwatch.com/2008-01-29/news/30807755_1_strong-
dollar-dollar-weakness-senior-currency-strategist/2)

------
Symmetry
Iceland was one of the countries that was hurt the worst by the financial
crisis, remember the joke "What's the capital of Iceland? About a buck fifty".
But since then its done very well recovering. To quote a blog:

 _Iceland did almost everything right. They stiffed the bank creditors to
avoid aggravating the moral hazard problem, just like the textbooks recommend.
In the eurozone the bank creditors are being bailed out. They relied of fiscal
policy to address S/I and debt issues, and let monetary policy address AD,
just as the New Keynesians were recommending in the 1990s. In the eurozone
they combined tight money with reckless deficits. And now Iceland is growing
fast and the eurozone is stagnating._
<http://www.themoneyillusion.com/?p=14895>

~~~
betterth
Question I wonder is: Iceland is tiny. Like TINY tiny kind of tiny. Their
National GDP is $12.57 billion USD. America spends about $20.2 billion a year
on air condition in Afghanistan.

The point being -- the world economy can (and did) withstand the default and
destruction of the Icelandic finance system.

Could it have survived the default and destruction of the American finance
system? Or would our incredibly interlinked, globalized finance system bring
down the world economy with it?

~~~
nickik
Acctually it is very, very unlickly that the American finance system would
have blown. Everytime the US has bailed out banks unter the premis 'to big to
fail' later analysis has shown that the impact would have been much smaller.

There is a book about that: "Too Big to Fail: The Hazards of Bank Bailouts"

[http://www.amazon.com/Too-Big-Fail-Hazards-
Bailouts/dp/08157...](http://www.amazon.com/Too-Big-Fail-Hazards-
Bailouts/dp/081570304X/ref=tmm_pap_title_sr)

or maybe better for most people a podcast with the auther:

[http://www.econtalk.org/archives/2009/10/gary_stern_on_t.htm...](http://www.econtalk.org/archives/2009/10/gary_stern_on_t.html)

It was acctually the feds intervention (paying banks to hold reserves) not the
fall of leeman that froze the holesale lending market.

------
AndrewDucker
Completely correct. It means that people have time to adjust, as their
existing contracts come to an end and new ones come in at new prices, and it
gives a boost to the export industry.

Also, getting a 5% reduction in your pay through prices going up is a lot
easier, psychologically speaking, than trying to actually negotiate a 5% pay
reduction with all workers.

------
Shivetya
and for whom does he propose this solution? Devaluation will only help
countries who have their own currency, countries which bought into the Euro
gave up that option and are nearly wholly dependent on more fiscally
responsible member countries to bail them out.

Yet those countries are not obligated to do so. In the good old days of having
your own currency you would just soak your own populace and foreign investors.
With a joint currency your attempting to soak another countries people as a
whole and that idea is not palatable to many.

Then there is this whole term of austerity. It certainly doesn't mean what it
used too. Most of those countries whom activist and wanna be economist claim
are being harmed by austerity are in fact being harmed by still increasing
government spending.

Apparently austerity now means not spending as fast as before but it certainly
does not mean spending less.

~~~
pessimizer
Not more "fiscally responsible countries", just richer ones. Unless you're
arguing that it is fiscally responsible to loan massive amounts of money to
other countries to buy your exports. If I loan money to Bob the unemployed guy
to buy a car from me, and it turns out that he can't pay me back on time, do I
get to call myself fiscally responsible?

On the Euro: Either closer fiscal union or end it. If the member state's debt
can't be backed by a proper central bank, it's just a mechanism for shipping
wealth from the periphery to the core.

------
givan
Why should everyone pay for the speculators?

~~~
bornhuetter
Because like it or not, a lot of the money is simply gone. Sure we need better
regulated financial markets and less corruption in politics and the media, but
in the mean time something needs to be done to get economies back on track.

Increasing taxes on "the rich" and companies are good to some extent, but they
will only take you so far.

The kind of austerity that involves taking away allowances and tax credits for
the poor and middle classes is idiotic. Devaluation certainly does affect the
innocent, but overall it is much more equitable (and workable).

~~~
bahadden
Devaluation is the easiest solution from a political point of view, but it is
basically a transfer of value from those with savings/creditors to those in
debt (including all of us with large credit card debts and mortgages).

It punishes the careful savers and rewards the profligate, and sends a signal
that living high on credit is good, while those that save and live within
their means are idiots.

~~~
raverbashing
And that's exactly why I disagree devaluation is good

It's the coward solution, and if you're not gonna pay 100% of the owed value,
just do that instead of making old money worth more than new money.

~~~
bornhuetter
Are you arguing that it's actually ineffective, or just that it's not
gentlemanly toward foreign investors?

~~~
planetguy
Well, it's not gentlemanly towards anyone, particularly savers in your own
country.

Suppose I'm a retired gentleman in Ruritania with one million Ruritanian rurs
in the bank. The King of Ruritania has got himself into some deep debt
problems with foreign creditors due to his addiction to racing and eating
greyhounds. He can either say:

a) "Guess what? I'm only going to pay back 10% of my debts! Suck it,
creditors!", or

b) "Ohhhh, suuure, I'll pay back all my debts. Oh, did I mention that a
Ruritanian rur henceforth has one tenth the value it used to? Heh, cool."

In the latter case my savings are completely wiped out, as are the savings of
everyone else in Ruritania [while mortgageholders suddenly become very rich].
In the former case, while there'll probably be some damage to the currency my
savings aren't affected so badly.

~~~
bornhuetter
I think you're confusing price inflation with currency devaluation.

If everything in Ruritania is "worth" 10% of what it was, then nothing has
changed. It's only foreign goods that have become more expensive, and your
exports have become cheaper.

------
nickik
What people dont understand specially the ones that are against all inflation
is this:

There is natural and artefical inflation and deflation. You get for example
natural inflation when you have supplyshocks (If somebody blow up intel CPUs
would be more expensiv) you get artefical inflation when you print money. The
first is just the market reacting to 'something'.

The same goes for deflation, you have natural (good) deflation when you become
more productive (you can see this for example in times of the (real) gold
standard when moneysupply was almost constant.

Bad deflation is when you activly contract the money supply (this is the great
depression story and the reason why people think deflation is generally bad).

What can we conclude out of this?

The shock to the economy was pretty big, we shuld have seen natural inflation
happening, this is however still represt since the ECB pushes that down by
creatning bad deflation (in real terms). In nominal terms this means 2%
inflation, in real it is deflation.

When central banks target inflation (say 2%) and the economy is growing around
2% (thus 2% deflation) they acctully produce 4% inflation in nominal terms.
This is all works out relativly good and is not to harmful as long as the real
terms are not to big. If the become big (say a economy that is shrinking 10%
or more) targeting inflation can be very harmful.

The price level should reflect the economy and not what some guy think is the
right growth of the price level.

The idea would be to target NGDP or in terms of the formula MV=Py, it would
mean holding MV constant (or let it grow 3-7% depening on your opinion on some
other matters).

The school that supports this would be:
<http://en.wikipedia.org/wiki/Market_monetarism>

This would mean that the ECB should look at the grow/contraction of the
economy and setting the price level accordingly. That would mean in the
current case that they would have do QE to hit the 'right' pricelevel.

I would recomend this book: Less Than Zero: The Case for a Falling Price Level
in a Growing Economy <http://mises.org/books/less_than_zero_selgin.pdf>

Edit: I just found a nice post that shows a nice example of a case in history
when central banks tried to recontract after the had inflated befor, this is
in many ways simular with what we have today:

Danish and Norwegian monetary policy failure in 1920s – lessons for today

[http://marketmonetarist.com/2012/06/12/danish-and-
norwegian-...](http://marketmonetarist.com/2012/06/12/danish-and-norwegian-
monetary-policy-failure-in-1920s-lessons-for-today/)

Edit: Correction of a error point out in comments.

~~~
nhaehnle
_When central banks target inflation (say 2%) and the economy is growing
around 2% (thus 2% deflation) they acctully produce 4% inflation in nominal
terms._

You're mixing up two different notions of inflation here.

There is the old-fashioned definition of inflation which calls any expansion
of the "money supply" inflation. (With "money supply" in scare quotes because
it's a pretty arbitrary concept, considering the multitude of very different
definitions that exist.)

Then there is the modern definition of inflation, which is simply a different
word for aggregate changes in the price level.

Those two notions of inflation are only superficially linked, and arguably,
the modern definition makes more sense because it is what people are really
interested in outside of economics.

On the topic of NGDP targeting, the blog Unlearning Economics has two
enlightening posts: [http://unlearningeconomics.wordpress.com/2012/05/08/on-
the-l...](http://unlearningeconomics.wordpress.com/2012/05/08/on-the-lousy-
reasoning-behind-ngdp-targeting/)
[http://unlearningeconomics.wordpress.com/2012/05/12/more-
on-...](http://unlearningeconomics.wordpress.com/2012/05/12/more-on-ngdp-
targeting-and-bubbles/)

~~~
nickik
I'm not sure where mixing something up.

If the central bank targets 2% price level inflation, the economy grows 2%
(witch would mean 2% of deflation in prices under the productivity norm) the
central bank then has to go on and print enough money that it in a non growing
economy would have hit 4% nominal inflation.

I don't see where I mix up the concepts I am always talking about price
inflation.

Edit: On the blogpost, I don't think the autor really understands what NGDP
targeting is about. Its about the CB not distorting relative prices, its
seeing whats going on in prices. With IT you mess up the function of the price
system, Hayek teaches us that prices are information. The productivity norm is
basically what would happen without a central bank.

