Yes, quite

Yet the underlying tale of Ireland and Iceland, and the tale of the 1930s, is that a devaluation shock may cause a violent crisis – that looks and feels terrible while it happens – but the slow-burn of policy austerity and debt deflation does more damage in the end.

As I\’ve been saying, Iceland is going to come out of this better than Ireland.

And as I\’ve also been saying, here and there, one of the important points about this \”free market\” stuff (you can call it capitalism if you wish) is how it deals with failure.

No one aims for failure, no one desires it, of course: but what do you do when it inevitably happens? Bankruptcy, that\’s what.

No, no money left, sorry. So accept that there\’s no money left, write down the debts and try not to make that mistake again in the future.

True of individuals, companies, banks and countries.

As I\’ve commented over here, what\’s going on in Ireland isn\’t \”free market\” in any relevant sense of the phrase. Corporatist perhaps, statist even (the pressure from the EU seems to be that \”while your banks are bust we\’re not going to allow that to make our banks bust\”…..even if because the Irish banks are bust some of the European ones are, if not bust, at least close to it), but not free market.

And as I\’ve also been saying for 15 years now, ever since I discovered Usenet, there must be flexibility in an economy. That\’s why we like things like separate exchange rates (and separate interest rates). So that when, as inevitably will happen, there is a fuck up, it\’s possible to change just one of the prices in an economy (that exchange rate) instead of having to change all of them individually: that slow-burn policy of internal devaluation.

Finally, as I\’ve also been saying, a fuck up was inevitable. It didn\’t have to be banks going wild in a low interest rate environment, as did and would happen in a fast growing country with negative real interest rates. It could have been the other way around: imagine Germany had been growing quickly and getting a bit of inflation. Euro interest rates would have risen to kill that inflation and this would have pushed the peripheral countries, Eire, Spain (both of which have large percentages of the population on floating rate mortgages, as opposed to Germany\’s much lower owner occupation rates and those with mortgages on fixed rate loans) into near depression conditions anyway.

Just as happened with the EMS and the £ shadowing the DMark those 20 years ago. Interest rates, over such a wide area with such different fundamentals, will always provide such asymmetric shocks. And thus, in conclusion, we shouldn\’t have the same interest rates over such a wide area with such different fundamentals.

Thus we shouldn\’t have the euro.

For some such fuck up was bound to happen with the existence of the euro. It happened to be low interest rates in a boom that did it: but over a couple of decades, whether interest rates were too high or too low in the periphery, a fuck up there was going to be.

And yes, I did tell you so.

11 thoughts on “Yes, quite”

  1. I don’t really see what saving or letting banks go under has to do with the euro, but since the start of the euro, Iceland’s GDP in euros is 7.8% higher, and Ireland’s 93.5% higher, so I think it take some time to come to the conclusion it was a disaster.

  2. ……Iceland’s GDP in euros is 7.8% higher, and Ireland’s 93.5% higher….

    Almost completely due to currency fluctuations. A weak Icelandic currency is what will allow Iceland to recover. Its not a flaw, its the solution.

  3. “Interest rates, over such a wide area with such different fundamentals, will always provide such asymmetric shocks. And thus, in conclusion, we shouldn’t have the same interest rates over such a wide area with such different fundamentals.”

    Also true of “such” a wide area as the US, and “such” a wide area as the UK.

    Better define “such”, so you can show why the conclusion you want is good, and the one you don’t, is bad.

  4. “That’s why we like things like separate exchange rates (and separate interest rates).” … we could take that further and suppose that we would all be better off if everybody had their own individual currency which could be adjusted to suit personal circumstances.

    Exchange rate changes are a “beggar thy neighbour” technique – it is not reasonable to suppose the world a better place with multiple independent currencies, there may be benefits here and there to certain countries in certain circumstances but over the long term, different independent currencies are bad, not good.

    We need more currency, fiscal, and legal convergence not less.

  5. ……Exchange rate changes are a “beggar thy neighbour” technique……

    No they are a reflection of reality and they have a cost.

  6. Johnny, I don’t understand why you think that overall independent currencies are bad. Yes, a rising exchange rate does suppress a bit economic growth in the countries that face an exchange rate increase, but given that people seem to be loss-adverse, that’s a bit like insurance – you pay a bit in good times for a bit of help in bad times.

    And, you say we need more currency, fiscal and legal convergence. But the classic problem in monetary policy is that we can have only two of the following three things: “free capital movement, a fixed exchange rate, and an effective monetary policy”. I suppose we could fit into your world if there was no free capital movements, I don’t know what you mean by legal convergence. But no capital movements is a problematic world.

  7. My fundamental point is that individual countries manipulating their exchange rates to suit their own circumstances is not likely to be optimal for the everybody else.

    Absolute exchange rate stability (single currency) is more likely more optimal for more people on more occasions than a currency free for all.

    Tim adds: An exchange rate is just a price. And I would agree that general price stability would be a good thing for everyone. But relative price stability (wheat is the same price as it was 2,000 years ago, cars the same price as they were 100 and computers the same as 20 ago) would be an absolute bloody disaster.

    And currencies are more like the second sort of price than the first.

  8. A 20% devaluation is almost identical in its consquences for wellbeing and growth as a 20% subsidy of exports funded bya 20% tax on imports. Small exchange rate movements are one thing, desiring (and effecting, as it is quite easy) a huge great big devaluation is rather different.

    Tim adds: no, it ain’t. Do you not understand the difference between a change in market prices and a change in prices determined by politicians?

    Seriously? You think they are the same?

  9. Er..that’s the point I make. I think one of the surprising things about your view on this is that you have moved from advocating floating rates to broadly supporting deliberate devaluations. Govts are monopoly providers of their own currency, they don’t find it particularly hard to devalue it.

    Tim adds: We can also look at this the other way arouond. Currency is equity in an economy (from the point of view of investors). So, when the economy is near bankrupt, the equity will naturally fall in price.

    Iceland, for example, did not deliberately devalue their currency, they just allowed the market to price it.

    If Eire left the euro (ie, stopped forcing the currency to be above the market price) then it would quickly fall to the market price.

  10. I don’t understand the concept of currencies being ‘equity’ in an economy – you’ll have to explain it futher. On the face of it, it seems a mercantilist error.

    You say Iceland did not deliberately devalue their currency as if countries with floating rates can’t do this but in another post (on the UK) you said ‘the sort of policies the UK is adopting…devalue the currency’.

    Put another way if decide to print billions of your currency, that isn’t direct intervention in the forex market to lower its external value, but it would bea bit weird to say ‘it had nothing to do with us, its the forex markets’ view’.

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