Ritchie and macroeconomics

I\’ll admit openly, as I have done a number of times, that I\’m not all that good at macroeconomics. Mostly because I tend to regard it as akin to voodoo: as the man didn\’t say, in the long run it\’s all microeconomics.

However, I am still able to spot the occasional error in macro elsewhere.

That’s what’s happening in Ireland.

That’s what could happen here.

Umm, no, you see there\’s this rather important point, rather important difference, between Ireland and the UK. One which Ritchie is usually quick to point to.

You see, we have our own currency, Ireland does not.

That means that we have open to us other methods of stimulating the economy, other than simply turning on the spending firehose.

As Keynes, who was after all at root a monetary economist, would have pointed out. Did in fact. It\’s only after you\’ve tried all the monetary tricks available to you and found that they don\’t work that fiscal expansion becomes the only thing that you can do.

So, what might you do if you have your own currency?

Allow the currency to depreciate, that\’s a good start. We\’ve done that, haven\’t we? This makes our exports to others cheaper in their eyes and increases demand for them. It also makes their exports to us, our imports, more expensive in our eyes and thus reduces our demand for the (after the inevitable J Curves) and the two of these together are indeed expansionary.

Having your own currency also means that you\’ve got your own monetary policy, if you should so wish. So you can go out and buy your own debt, increasing the money supply substantially. As we have done with quantitative easing.

Ireland can\’t do either of these because they\’re locked into the insane euro-project. Nor can Spain or Greece. And that\’s why they\’re fucked of course, because they cannot do exactly what Keynes and every other rational economist would tell them to do in the middle of a deep slump. Devalue the currency and increase the money supply.

2 thoughts on “Ritchie and macroeconomics”

  1. I’m curious to mknow why the “dollar” project has not yet blown up – after all it consists of many different ecnomies such as California, Alaska etc that set their own taxes but are locked into the same currency. Is there some kind of stabilisation mechanism inthe USA that the Euro-zone does not have?

    Tim adds: Yup. Two in fact. Much higher internal migration and Federal Govt spending. Texas gets taxed to keep Michigan afloat. Which is exactly what the euro supporters would like to introduce here. That Germany get taxed to keep Greece afloat.

  2. It’s worth pointing out that the advantage of trade is imports – exports are the cost of doing so. A deliberate devaluation is essentially the same thing as paying for export subsidies through applying import tariffs. It’s not a route to prosperity.

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