For Hugo Hadlow

Who asks about my views on what actually should be done about the euro crisis.

OK, we have two entirely different things here, the short and the long term. They\’re all tied up with each other, of course, but they are different things and need different answers.

1) Short term.

A falling, at least a rapidly falling, money supply is a sufficient occurence to have a recession shading into a recession. It is not a necessary one, there are other ways that people can fuck up to cause these. It is however sufficient, even if not necessary.

Money supply in the periphery countries, in the Latin/Southern eurozone countries is falling rapidly. I\’ve seen numbers like 17% and 24% for Portugal and or Italy.

This will cause recession/depression, the implosion of the banking systems, vast and massive decreases in the living standards of the population.

This is, if you\’d like to label it, the Milton Friedman analysis of the Great Depression itself.

The solution is not to allow the money supply to fall. The central bank must, as the Fed and BoE did not last time around but have this, and as the ECB is still refusing to do, print money, hand it to any bank that asks and simply get on with it.

This is lender of Last Resort style stuff and is the reason that we actually have a central bank with the ability to print money.

Austerity, reining in government spending, all being good little Germans, none of these matter at this point, have any effect at all on what is happening. They\’re all irrelevant at the one to three month timescales we\’re talking about. As are politics, fiscal responsibility pacts, jury rigged eurobonds and all the rest.

2) Long term.

The euro simply is not an optimal currency area. It is possible that it could become one, in a few decades, if the southern/Latin/periphery countries all had the supply side revolutions they so desperately need. Fiscal austerity can get them there: depress living standards enough and even Italian pharmacists will allow a bit more free market.

Similarly, it is possible to deal with the alarming disparity in the productivity of labour. What the Germans did for example, a decade long grinding down of wages while investing heavily in the education/capital goods that increase productivity. Except that the gaps are large enough that this will take two to three decades.

It\’s even possible to do this through Keynesian stimulus (yes, I know, spit, spit) although not in the manner Keynesians think of it. Fiscal stimulus to bring about growth won\’t do it. Fiscal or monetary stimulus that increase German/Dutch/Finnish etc inflation, particularly and especially wage inflation, over and above Portuguese/Italian/Greek etc would do it. We\’d need a nice 2 or more % gap in that labour costs inflation rate (which will have to fight against the general tide of improving labour productivity anyway, so nominal will be higher than this) for a decade or two.

If anyone can think of how to engineer that please let everyone know, we\’d all love to hear it. Can\’t think of any mechanism that applies to all of the eurozone that will achieve this, specifically higher northern wage inflation than southern.

Or we could have full fiscal union, make the EU like the US Federal Government. That does mean being ruled by Brussels for evermore. It\’s also true that very serious US economists have estimated that it took the US some two centuries to become an optimal currency are by this method. Probably wouldn\’t take as long in a modern economy but think of having solved it this way by 2050 or so.


Or, break up the euro, return to national currencies and let the currency devaluation take the strain.

Of these long term solutions I personally benefit from the supply side/differential inflation/full fiscal union methods. I earn in $ and £  and the worse the economy gets the better off I get relative to those around me.

I very definitely lose from the break up the euro one. I own property in Portugal that would fall substantially in value were that to happen.

Thus my recommendations for policy action.

Get on with printing to sort out the short term money supply thing. Break up the currency to deal with the long term. On that latter, yes, it is indeed possible to find all sorts of economic orthodoxy to say that we shouldn\’t do that. And, quite frankly, fuck orthodoxy when you\’re going to condemn a hundred million or more to three decades of grinding austerity.

Economics, even economic orthodoxy, is a tool, not a Bible.

Thus sayeth The Worstall. Largely cribbed from Milton Friedman/Scott Sumner/Ambrose Evans Pritchard. Those  three roughly cribbing from the one previous in the list.

14 thoughts on “For Hugo Hadlow”

  1. And from my perspective as an ordinary Joe, this has been clear as the nose on my face for twelve months or more…

    But the is isn’t a financial crisis per se.. this is one of Political Hubris.

    It seems that the EU leadership simply wont, listen, or want to blame those nasty Anglo Saxon bankers etc.

    It seems to me that this wont change until Greeks are letting off bombs ion Brussels….

  2. Very good summary of the range of dreadful options.

    Re “If anyone can think of how to engineer that please let everyone know….” OK then. As you rightly say, the TIME needed to get the periphery competitive with the core is perhaps a decade or more, meanwhile austerity persists. Thus my preferred (i.e. least dreadful) option would a massive advertising campaign to drill it into the heads of periphery residents that a 30% cut in wages accompanied by a cut in periphery prices of about 30% would do the trick, but would NOT greatly cut living standards in the periphery: probably not by as much as austerity is currently cutting living standards.

    The above ENFORCED wage and price cut would be very expensive to administer and “engineer” within the space of a year or so, but all the other options are arguably even more expensive.

  3. Let’s recall the original prospectus:

    1. The euro will boost growth.
    No, it boosted debt, not the same thing.
    2. The euro will stop war.
    No, NATO did that.
    3. The euro will bring harmony.
    Intra-Europe migration remains low.
    4. The euro will raise living standards to German levels.
    No, it hasn’t.
    5. The euro is the capstone of “the construction of Europe”.
    No, Europe is not a building, and it’s only a “construct” in the Marxist false consciousness sense.
    6. The euro will promote free trade.
    Is trade freer with more regulation?
    7. The euro will ease cross border transactions and lower costs.
    No, foreign exchange markets are highly efficient.
    8. The euro promotes innovation and competition.
    What, like the Coal and Steel Agreement, a cartel to defraud the public?
    9. The people were demanding vision and boldness from their politicians.
    No, people mostly want politicians to leave them alone.
    10. People would soon forget their old currencies.
    They haven’t.

    We got, in short, a false prospectus. Even if it costs me, I say throw the damn thing on the dunghill of history.

  4. Thanks Tim. What about the UK then? Are the Tories too much, too little or just right?

    Tim adds: Hey, only one difficult question a day!

  5. The thing with the printing (which I agree with in principle) is the practice – how do you keep politician’s grubby mitts off the printing presses? Who do you give the power to say STOP and it be legally binding on everyone thereafter, however much the politicians scream and shout for more (and it has to be said however much the electorates vote for more)?

    Because we all know printing money is a very seductive policy tool, and the temptation for just a few billion more is hard for mere mortals to resist. And the consequences of overdoing it are as catastrophic as not doing it in the first place.

  6. and while the Euro zone sorts itself out, what will be happening in the BRICs? How long will it be before Indian income per head is equivalent to that in Portugal? Euroland does not have 50 years to sort itself out.

  7. JustAnotherTaxpayer

    Unclear what you mean by “last time” Tim. The Sumner analysis is of course that the Fed/BOE did *not* do enough to offset falling money supply and falling velocity in 2008, allowing nominal spending to fall well below trend. The BOE is trying to avoid the same thing happening in 2011.

  8. Jim – by having independent central banks. The Fed in the US, the Reserve Bank in Australia, the Bank of England. The decisions on printing money are made by those boards, members of which are appointed by government but have long terms and can’t easily be removed because politicians don’t like their decisions.

    It’s very similar to the idea of an independent judiciary adjudicating on laws passed by elected politicians. Checks and balances as opposed to rule by the demos.

    The ECB is resisting that role for some reason, and I haven’t read up enough to know why.

  9. @Ltw: so you are of the opinion that the current members of the monetary policy committee are doing their utmost to reduce inflation to the 2% target then?

    Or are they in fact doing what they have been told by the politicians – let inflation rip as its one of the ways of stealing money from those who’ve saved it, and reducing the burden on those who’ve borrowed it? Which they are doing because they know if they stuck to the letter of their remit, the politicians (and probably the public) would be denouncing them as destroying the economy in order to get lower inflation?

    Which is precisely the position we would be in down the line if they were in charge of money printing – democratic forces in favour of ‘free money’ will always trump technocratic direction of the economy. If the choice is ‘Pain now’ or ‘A bit more money printing’, however necessary the ‘Pain now’ is, electorates, and therefore their representatives, will always choose ‘More money printing’

    Hence my question – how does one square that with TW’s suggestion (probably technically correct) that we need to boost the money supply by printing to prevent a repeat of the 1930s?

  10. All I can say Jim is that so far, it works pretty well in Australia. The Reserve Bank gets to set monetary policy, and the PM/Treasurer gets to act all hurt by their decisions, thus pleasing the electorate. Effectively the politicians get plausible deniability. When tightening is required, the Reserve Bank gets to take the blame. A few years ago they raised interest rates in the middle of an election campaign, which had never been done before (one of those “it’s just not cricket” conventions).

    So I suppose the answer to your question is that an independent central bank can decide to print money to avert catastrophe along the lines that Tim suggests, then can divert the blame in the later tightening.

    Of course, I can think of many bad outcomes too (Japan springs to mind). Like I said, I don;t know much about the ECB – aren’t they constrained to hew to the inflation target? In which case they’re not really independent.

    Anyway, you seem a little confused – do you think Tim’s policy of printing money to avert recession is correct, or is it “let inflation rip as its one of the ways of stealing money from those who’ve saved it”? Aren’t they the same thing? Isn’t it exactly what the ECB is not doing?

  11. Ltw: The point I’m making is that the UK has an ‘independent’ central bank, and it has a remit – to keep inflation at 2% (+/- 1%). It could easily achieve that aim if it wanted, but it isn’t because its being told what to do (effectively) by the politicians – to maintain economic stability as a whole, and damn the torpedos as far as inflation is concerned.

    So if the ‘independence’ of a central bank cannot be relied on when given a relatively simple aim (to maintain a steady inflation rate), how much could it be relied on when the stakes are even higher – being given the power to decide when to print money and inject it into the economy?

    There will always come a time when the technocrat central banker decides that enough has been done to stabilise the system, but there remains plenty of pain in society, rather like we are now. The lure for politicians then is a bit more QE every time the economy slows back down a bit. We are already on QE2 – how many more are we going to get?

    I admit that I dislike the current policy of QE and the tacit agreement with higher inflation as a way of ameliorating the situation, but ultimately I think that is the only way out of our predicament that doesn’t involve society collapsing in on itself in some way. I just wish they would be honest with people that is what they are doing so people had the facts at their fingertips to decide whether that is what they actually want or not. As it is we are getting this policy imposed on us by stealth rather than a democratic choice.

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