This is the really worrying news from Europe


by Duncan Weldon    
2:52 pm - November 8th 2011

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Yesterday was another big day in the Eurocrisis – the Greek government looks set to fall, Italy’s is tottering on the edge and France announced (another) austerity package.

With Italian yields approaching the crucial 7% level at which a ‘bailout’ was required in Greece, Ireland and Portugal the situation looks pretty grim.

But for me the real news yesterday wasn’t the stuff which made most of headlines. Instead it was a much less reported debt auction by the European Financial Stability Fund (EFSF).

As CNBC report this auction was meant to take place last week and aimed, initially, at raising €5bn. Instead yesterday’s auction only raised €3bn and at a much higher rate than previously. The ten year bond will yield 3.59% against German borrowing costs of only 1.8%.

Poor demand is one factor, but others are pointing to concerns that France may eventually lose its AAA-rating. The EFSF is itself guaranteed by Germany and France (mainly), so if France is downgraded the EFSF could also be downgraded. That would make the cost of bond issuance prohibitive.

But it’s already getting prohibitive.

As recently as June the EFSF could borrow for 0.8% less.

This matters hugely. The EFSF is the Eurozone’s proposed ‘big bazooka’ but only if it can ‘leverage up’ – i.e. only if it can itself borrow cheaply to provide support to struggling sovereigns.

As Michael Pettis has noted China and other emerging economies are not especially interested in supporting it – for entirely understandable reasons.

If European leaders hope that China will lend large amounts of money directly to those borrowers, I say good luck to them but they shouldn’t expect too much. Why should China lend to someone who won’t repay?

One Morgan Stanley economist has already noted:

The leveraged EFSF may still turn into a bazooka but so far it looks more like a water pistol.

If there is little investor demand for EFSF bonds then the whole Eurozone rescue plan – in as much as there is one – is in great jeopardy. Grim news indeed.


Cross-posted from Touchstone blog

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About the author
Duncan is a regular contributor. He has worked as an economist at the Bank of England, in fund management and at the Labour Party. He is a Senior Policy Officer at the TUC’s Economic and Social Affairs Department.
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Reader comments


1. Luis Enrique

Am I right in thinking that the ECB is really the organization to be doing this, but is prevented from doing so by its constitution? Is there any prospect of the rules being changed, or a work-around found, so that the ECB can do what the European governments are incapable of?

[I know there are arguments why central banks should not take on that sort of risk, but imho look like least worst option].

So what you are saying here is that it is not Greece, Italy or Ireland that is the problem, it is Europe itself that is bankrupt.

Rather what I’ve suspected for some time.

3. Luis Enrique

Try Paul De Grauwe on: The Governance of a Fragile Eurozone
http://www.econ.kuleuven.be/ew/academic/intecon/Degrauwe/PDG-papers/Discussion_papers/Governance-fragile-eurozone_s.pdf

Prof De Grauwe makes the case that: Only the ECB can halt eurozone contagion, in an article for the FT on 3 August 2011. He explains why the ESFS will never be enough to prevent contagion spreading and makes a convincing case that the ECB must take on the traditional role of a central bank as the lender of last resort. His advice has been studiously rejected so far – after due regard to acknowledge his expertise in the economics of monetary union.

IMO we are left wondering about undeclared motives for rejecting his advice. Could it be that if several Eurozone countries are forced into default, businesses in those countries will become cheap to acquire?

On that thought, I recalled that Spectator interview with Nicholas Ridley on 14 July 1990 after which he was forced to resign as DTI minister just a few months before Mrs T went having lost the confidence of most of her cabinet. Ridley had described the proposed Economic and Monetary Union in Europe as “a German racket designed to take over the whole of Europe”. On 8 November 1991, Ridley advised people to vote for anti-European candidates regardless of their parties.

5. Leon Wolfson

@2 – Given fiat currencies are faith-based, you mean you’re part of the crisis of capitalism. Right.

No this is not worrying, what would have been a cause for worry is investors accepting the ESFS.

7. Luis Enrique

“fiat currencies are faith-based”

I read that a lot. Lord knows what people mean by it. As if exchanging little bits of yellow shiny metal for goods has any firmer basis.

You still have to believe that tomorrow people are going to be willing to swap things for your currency, fiat or not.

On current Eurozone woes in the news and the risks of contagion spreading, it seems that Cameron and I have been thinking along similar lines:

The Prime Minister said it was difficult to understand why the European Central Bank, which relies largely on German funding, was not doing more to help beleaguered nations.
http://www.telegraph.co.uk/finance/financialcrisis/8875646/Why-isnt-Germany-doing-more-for-the-euro-asks-David-Cameron.html

Yes, they cancelled a 3 billion euros EFSF auction last week for the Irish, citing market turbulence. The same EFSF facility that the Europeans trumpeted as having firepower of 1 trillion euros. Completely typical European smoke and mirrors, even if they could leverage the EFSF up to 1 trillion, it is not enough. If they are struggling to raise 3 billion it is an indication that the market does not trust the structure. The whole point of a liquid security such as government bonds is they are liquid in all market circumstances. Yet, they cancelled an offering for 3 billion because of turbulence.

Think about how ridiculous this situation with the EFSF really is in reality. Italy can only borrow at rates approaching 7%. Yet, they are effectively lending their credit to the EFSF as one of the nations standing behind the EFSF bonds. So, Italy are effectively borrowing at 6.5% to lend to the EZ periphery at 3.5%. They may not be making a transfer like that, but that is the reality of the math. You can’t have one of the major states standing behind the bonds being squeezed out of private debt markets credibly guaranteeing the EFSF bonds.

If France’s triple A goes like it should. The only large triple A creditor left standing behind the EFSF bonds would be Germany. Even Germany’s credit would not be enough for the EFSF itself to retain triple A. That is why France are now desperately trying to cut themselves to credibility to retain triple A. This is not going to end well. The EZ is heading into a recession that will only make things worse.

10. Leon Wolfson

@ 9 – And we’re headed for a depression, and we haven’t been AAA for year. And yet the ratings agency people remain out of jail. Funny that.

@7 – If you really don’t understand, I suggest you turn your cash into trade goods.

It is not uncommon for a single sale of bonds to find the market difficult and not to achieve the results that the vendors wish.

I agree that we need to monitor this, but you cannot draw any conclusions from a single apparently difficult sale. It is the trend that needs to be watched.

Interestingly, this was a mistake that the press and critics of the last Government made after one sale of 10 year bonds found the market difficult. The next week, Government bond market made a sale easily but no-one appeared to notice!

12. gastro george

@1 Luis

I think that’s correct.

Given that the eurozone as a whole has a lower debt than the UK or the US, for example, this is rapidly become somewhat farcical. The way out if they want to preserve the euro is not simple politically, nor ideologically, but is transparent. The ECB, as the currency issuer, must itself underwrite euro-debt (I mean would would find taking bonds from a bailout fund attractive?).

And the Germans (and others) must accept medium-term fiscal transfers to the Mediterranean – in the same way that we need to subsidise South Wales. Otherwise they might find the sales of VWs and Boschs dropping rather rapidly.

Imagine what reaction you’d get if you decided that the pension and benefit rate in Hartlepool should be half that of London. [I know, masturbatory ecstasy amongst the right-wing trollsters ...]

@12: “And the Germans (and others) must accept medium-term fiscal transfers to the Mediterranean – in the same way that we need to subsidise South Wales. Otherwise they might find the sales of VWs and Boschs dropping rather rapidly.”

What you are saying – properly so IMO – is that monetary unions will be unstable unless associated with fiscal unions to support countries – or regions – with chronic trade deficits if those regions are no to be subject to perpetual depressing pressures creating mounting unemployment.

This was one of the warnings made about the prospect of monetary union in Europe by the late Rudi Dornbusch in his article: Euro Fantasies for the periodical Foreign Affairs in September 1996 – essentially the same analysis is presented in later revisions of his popular text on Macroeconomics (McGraw-Hill). Rudi Dornbusch was born a German national and in the course of his career became professor of international economics at the (highly regarded) MIT.

Any readers might reasonably expect warnings like that, from such a source, to be taken seriously in the EU. But he was simply ignored – as were other ranking economists who published early criticisms of monetary union in Europe. Politics of European integration trumped the economics of monetary union. The chickens are now coming home to roost. Another fact is that only Luxembourg was eligible to enter the Eurozone according the the eligibility tests set out in the Maastricht Treaty. It’s not as though the indebtedness of Greece and Italy were unknown.

14. gastro george

@13

Exactly. The Germans, and other “northerners” can’t have their cake and eat it. They need to learn from the absorption of East Germany (maybe some feel they are a little scarred by that?). For stability and progress they have to pay what might seem to be over the odds, at least in the medium term. I can’t imagine that halving the living standards of the Ossies would have led to social stability, so why expect the Greeks to just knuckle under?

Of course the German working and middle classes have seen little of the eurozone export boom in their pockets, which is why it’s a hard political sell right now.

Gideon Rachman in Tuesday’s FT is saying that saving the Euro is the wrong goal if it brings increasing economic misery rather than prosperity. Instead, European leaders should be planning for the break-up of the Eurozone:
http://www.ft.com/cms/s/0/9542474a-0937-11e1-a20c-00144feabdc0.html#axzz1d9Ct1r5L

Amen to that.

16. Leon Wolfson

@15 – Of course, the hard right want to break up the EU. More, I’m sure many of them are salivating about the possibility of resource wars for their pocket.

@12 – well, it’s apparently been decided that pension and benefit rates are twice as high as they should be…

The ECB stepping in as a lender of last resort is a solution of sorts. However, the ECB are already buying in the secondary market. The legality of that just passed the German constitutional court because the purchases are sterilised. A few German law professors contend that the buying violates various ECB articles and treaties. Moreover, there is a limit to how much can be sterilised.
http://ftalphaville.ft.com/blog/2011/11/08/732761/ecb-bond-buying-metaphors-in-motion/

Open-ended ECB purchases from the primary market or unsterilised bond buying would probably be declared unconstitutional by the court. They would then have the power to order the German government to withdraw from the EZ. Apparently the UK and U.S. government are pushing for the ECB to go down this route, but it is difficult to see how it could survive a challenge in the German constitutional court.

Bailing out Eurozone economies from the prospect of imminent default, whether by the ESFS or by the currently barred ECB acting as lender of last resort, will not, by itself, solve the fundamental problems generated by chronic trade deficits as the result of diverging competitiveness of national economies. As Mervyn KIng was saying recently in the speech he made in Liverpool:

“It is crucial to the health of the world economy that we find ways of allowing competitiveness to adjust so that trade imbalances, and hence the present scale of indebtedness, can be reduced. Neither liquidity nor austerity are answers to the question of how to restore a loss of competitiveness.”
http://www.bankofengland.co.uk/publications/speeches/2011/speech523.pdf

Exchange rate flexibility is a much less socially painful way of resolving diverging competitiveness than by austerity measures to depress the economies of chronic deficit countries – especially since chronic surplus countries are often unwilling to act as counter-parties to correct for trading imbalances by compensating expansions of their domentic demand. The implication of that unwillingness is that the burden of adjustment falls disproportionately on the chronic deficit countries which are forced into applying even tougher austerity measures.

Gideon Rachman – and Paul Krugman – are absolutely bang on correct IMO in suggesting that the break-up of the Eurozone is the better course. Of course, Mervyn King dare not say that.

19. So Much For Subtlety

7. Luis Enrique

I read that a lot. Lord knows what people mean by it. As if exchanging little bits of yellow shiny metal for goods has any firmer basis. You still have to believe that tomorrow people are going to be willing to swap things for your currency, fiat or not.

That is not the faith you’re required to have. You are required to have faith that the government will not print a trillion euros over night. You have to have faith that the government will be a trustworthy manager. You don’t with shiny yellow bits of metal. You only need to believe that we will not discover a huge planet made of gold or something like it. Potosi perhaps. That is a reasonable assumption. That the government is trustworthy is not. All fiat money ends in tears. We simply distinguish between the incompetence of the British government and the incompetence of the Zimbabwean government by the speed with which they utterly mismanage the currency. The only people who have shown any signs they can be trusted with a fiat currency are the Swiss.

20. Leon Wolfson

@19 – Oh, so you’re only confident of the Swiss as a tax haven. Otherwise, you might actually have to pay your taxes. Right.

@16: “Of course, the hard right want to break up the EU. More, I’m sure many of them are salivating about the possibility of resource wars for their pocket.”

Paul Krugman is saying: Europe Better Off if Euro Collapses Now
http://www.moneynews.com/StreetTalk/Krugman-Europe-Euro/2011/10/24/id/415535

Krugman will be greatly amused, I feel sure, to be called “hard right”, as will all those Republicans he enrages by those Op-ed pieces he writes for the NYT.

22. gastro george

@18

“… the fundamental problems generated by chronic trade deficits as the result of diverging competitiveness of national economies.”

There’s no doubt that there are fundamental problems, but as I said in my previous post “if they want to preserve the euro”, then they those problems to be confronted.

You could also say that there are similar problems in the US – some states are massively more competitive than others. You could also say that the US government is rather less than successful at managing those problems, ask anybody in Detroit these days. That doesn’t mean to say that it can’t be done.

23. So Much For Subtlety

12. gastro george

Given that the eurozone as a whole has a lower debt than the UK or the US, for example, this is rapidly become somewhat farcical.

I find that hard to believe. Do you have a source?

And the Germans (and others) must accept medium-term fiscal transfers to the Mediterranean – in the same way that we need to subsidise South Wales. Otherwise they might find the sales of VWs and Boschs dropping rather rapidly.

So what if they did? South Wales would be better off without our transfers. It has kept the North and Wales in a condition of dependency for too long. What is more, there is nothing remotely medium term about it. We have a long term problem. The Germans are utterly right to insist that they will not pay to keep people idle. Nor should we.

Imagine what reaction you’d get if you decided that the pension and benefit rate in Hartlepool should be half that of London. [I know, masturbatory ecstasy amongst the right-wing trollsters ...]

People are dying in British hospitals because we can’t pay nurses more in expensive areas than we do in cheap ones. That means places like London cannot get or keep experience nursing staff and so patients die.

gastro george

Exactly. The Germans, and other “northerners” can’t have their cake and eat it. They need to learn from the absorption of East Germany (maybe some feel they are a little scarred by that?). For stability and progress they have to pay what might seem to be over the odds, at least in the medium term. I can’t imagine that halving the living standards of the Ossies would have led to social stability, so why expect the Greeks to just knuckle under?

They have learnt from the experience of the East. Which shows you can spend billions but you can’t make the welfare dependent into West Germans. And think of the scale – East Germany was a tiny country. Greece is too. But Italy and Spain are not. The Germans nearly went broke over the East. How can they afford to pay out the South too? They paid out and they did not get either stability or progress. They got a blighted wasteland of a post-industrial landscape inhabited by neo-Nazi thugs. They did not halve the living standard of the Ossies. They doubled them. That was the mistake. In the East and in Greece. You cannot insist that the Ossies are the same as the Westies – and deserve the same level of wages if they do not have the same level of productivity. Just as you cannot pay the Greeks the same as the Bavarians. The mistake was to abolish the Ost-Mark or at least to exchange it at 1-1.

Bob B

Exchange rate flexibility is a much less socially painful way of resolving diverging competitiveness than by austerity measures to depress the economies of chronic deficit countries

Yes but it is a short term fix. What countries need to do in the long term is be competitive. That means carrying out the necessary economic reforms and restructuring. A devaluation impoverishes a country in the long term. Nations need to accept the pain and take the hit for their long term health.

24. So Much For Subtlety

22. gastro george

You could also say that there are similar problems in the US – some states are massively more competitive than others. You could also say that the US government is rather less than successful at managing those problems, ask anybody in Detroit these days. That doesn’t mean to say that it can’t be done.

I am not so sure the US government can be blamed for Detroit. That looks more of a local issue with anti-White racism by the Detroit government being to blame. What precisely should the Feds do about that? And the Unions of course.

The US has one advantage the Europeans do not. People are ready and willing to move. The EU has tried this, but in reality most people are not willing to go. The barriers of culture and language are too high. So there are three ways to fix a problem like Greece – they can undertake sensible economic reform, they can get massive transfers of cash from the North, or their population can leave. Or they could just bring back the Drachma. The US government is not really in charge of any of these. It holds the ring, it does not tell the Elephants how to dance. But it does prevent local currencies.

25. Leon Wolfson

@21 – Krugman’s been wrong on every significant point since the start of this.

Post-Nobel Syndrome, for sure.

At this point, I’m comforted by his opposition. And simply because thugs can agree with him doesn’t mean he’s a thug, just that he’s wrong and a convenient hat-stand for the thugs.

gastro george: “You could also say that there are similar problems in the US – some states are massively more competitive than others”

Right – but the US has a fiscal union, with some compensating mechanisms, to support its monetary union. In Britain, we have a monetary union and we also have a fiscal union and regional policy, such as the new regional and sub-regional partnerships. Pre-the financial crisis in 2008, Oxford Economics estimated that only the London and South-East regions were making net fiscal contributions to the national exchquer. For other UK regions and territories, identifiable public spending exceeded tax revenues.

So Much For: “Yes but it is a short term fix. What countries need to do in the long term is be competitive. That means carrying out the necessary economic reforms and restructuring. A devaluation impoverishes a country in the long term. Nations need to accept the pain and take the hit for their long term health.”

When the Pound was forced out of the European Exchange Rate Mechanism (ERM) in September 1992, it depreciated by about 25pc. By the final quarter of 1995, Britain’s standardised (ILO) unemployment rate was lower than that of France, Germany or Italy and the employment rate of working-age people was higher.

Through to 1998, Britain’s terms of trade (export prices / import prices) remained about steady – I was checking. On the evidence, dropping out of the ERM proved to be a blessing in disguise. It made good sense for Britain to opt out of EMU and its regime of rigidly fixed exchange rates hereafter – for the reasons @18.

In July this year, Sam Brittan was writing in the FT:

“The relative decline of the British economy in the century up to the late 1970s has been reversed. Since then, the UK has caught up with and even overtaken its principal trading partners. The previous two sentences are neither a typing mistake nor a daydream. They are the sober conclusions of the country’s leading quantitative historian, Prof Nicholas Crafts”
http://www.samuelbrittan.co.uk/text399_p.html

Btw Milton Friedman, of monetarist fame, advocated flexible exchange rates. Improving national competitiveness with rigid exchange rates by austerity measures is socially painful and may not work at all.

27. Luis enrique

Wow, Leon is going all in with monetary union denialism. If Leon in spirit is long euro, that is itself a massive contra indicator once the bunga bunga rally fades.

Try this illuminating late night news report on Tuesday of the constraints preventing the ECB from acting as lender of last resort:

ECB stymied on debt crisis without fiscal union

Germany’s top banker has vehemently rejected demands from David Cameron and other world leaders for drastic action by the European Central Bank to stop the eurozone crisis spiralling out of control
http://www.telegraph.co.uk/finance/financialcrisis/8877818/ECB-stymied-on-debt-crisis-without-fiscal-union.html

30. So Much For Subtlety

26. Bob B

Pre-the financial crisis in 2008, Oxford Economics estimated that only the London and South-East regions were making net fiscal contributions to the national exchquer. For other UK regions and territories, identifiable public spending exceeded tax revenues.

Which is just wrong. Everyone ought to be making a contribution.

When the Pound was forced out of the European Exchange Rate Mechanism (ERM) in September 1992, it depreciated by about 25pc. By the final quarter of 1995, Britain’s standardised (ILO) unemployment rate was lower than that of France, Germany or Italy and the employment rate of working-age people was higher.

Yes, that was nice, but that is probably the wrong period to look at. Since WW1 no British government had the courage to make the tough decisions – the old declining textile industries, for instance, should have been shut. Instead we tried a variety of protectionist measures and when they did not work, we devalued. It would have been better to bite the bullet and do what Thatcher did – let the old dead industries die. Support the new. But we didn’t. We paid a terrible price for that between 1919 and 1980. Devaluation may give a short term boost, but it undermines savings, investment and it makes everyone used to the idea of more short term fixes. The solution is not to devalue wages to Third World levels but to move those industries to the Third World and open up new industries.

Btw Milton Friedman, of monetarist fame, advocated flexible exchange rates. Improving national competitiveness with rigid exchange rates by austerity measures is socially painful and may not work at all.

Friedman wasn’t right about everything. Germany has just done it. It works for them. It works for most people.

So Much

I have to say most of that post @30 is just nonsense.

“Everyone ought to be making a contribution”

That sounds uplifting but it is challenging to achieve that with the dominance of the financial services sector in the British economy, which is largely – although not entirely – concentrated in London, one of the top three global financial centres.

Many political activists – including Labour in opposition before 1997 – have said more must be done to improve vocational training opportunities to alleviate skill shortages in industry but precious little has been done to bring that about. The British education system has continued to focus mainly on the needs and aspirations of the academic elite. By the end of the Major government about 18pc of young people were going into higher education. That percentage is now more than 40pc.

“Since WW1 no British government had the courage to make the tough decisions – the old declining textile industries, for instance, should have been shut. Instead we tried a variety of protectionist measures and when they did not work, we devalued. It would have been better to bite the bullet and do what Thatcher did – let the old dead industries die. ”

That is full of glaring factual errors. Going back to the Gold Standard at the pre-war parity in 1925 was a tough but wrong decision – as was the sensible decision to abandon the Gold Standard in September 1931.

In comparison with other leading industrialised economies, Britain did relatively well during the 1930s, or rather the southern, eastern and midland regions did well while the north, Wales and Scotland remained depressed. The fact is that the Thatcher governments spent billions propping up the car, coal mining and textile/clothing industries.

“Devaluation may give a short term boost”

For the reasons shown @26 at length, being forced out of the ERM in September 1992 proved to be a blessing in disguise – on the evidence of what really happened.

Many economists besides Friedman have advocated flexible exchange rates precisely because alternative adjustment mechanisms for structural trade deficits are more socially painful.

“Germany has just done it. ”

Different economies have different structures and institutions and their peoples have different embedded expectations and apprehensions. Somehow in the 1980s, the Netherlands managed to constrain the growth of average real incomes to under 1pc a year to improve competitiveness but it is very doubtful that the larger economies in Europe could do that.

The fact is that the EU national economies manifestly haven’t converged and the economies don’t respond in the same ways to policy levers – a factor which Walter Eltis makes much of in his book: Britain, Europe and EMU (Palgrave 2000).

32. Leon Wolfson

@31 – The percentage of students going to University in the UK is low for a developed country, and has been falling for some years. The Coalition are currently devastating the University system, which is going to leave a massive skills gap which EU nationals will fill, in part, and companies will depart to find, in part.

33. So Much For Subtlety

27. Luis enrique

http://www.pkarchive.org/cranks/goldbug.html

Yes. Interesting. But he doesn’t really address the issue does he? And in so far as he does he tends to agree with me. The faith that is required in the fiat currency is, in his own terms, faith in the responsibility of the people who control the printing presses. I do not share that faith considering what a poor job they have done of it up to now. A dollar today is worth about 12 cents in 1950s terms. Or a dollar in 1950 is about 12 dollars now. That is not a disaster, but it is not sound money management either. The pound is even worse – one pound in 1950 is about 24 pounds now.

Naturally as someone who is in charge of, or close to it, those printing presses, he is likely to be more sanguine about his own competence.

Nor can you really compare the behaviour of gold as a metal with what it might have been as a currency.

34. So Much For Subtlety

31. Bob B

That sounds uplifting but it is challenging to achieve that with the dominance of the financial services sector in the British economy, which is largely – although not entirely – concentrated in London, one of the top three global financial centres.

No it isn’t. It is simply a matter of not allowing passive welfare. We have unemployment because people choose to be unemployed. We could do a few minor things to help. I think Scotland and Wales (and perhaps the North) should have their own pounds, tied one-to-one to the British pound. That would help. More local control over their economies. That sort of thing. National wage deals in any industry ought to end.

Many political activists – including Labour in opposition before 1997 – have said more must be done to improve vocational training opportunities to alleviate skill shortages in industry but precious little has been done to bring that about.

British yoof are uneducatable. There is no point. Not that abolishing the Pollys helped. Third rate sociology degrees don’t count as opportunities.

The British education system has continued to focus mainly on the needs and aspirations of the academic elite. By the end of the Major government about 18pc of young people were going into higher education. That percentage is now more than 40pc.

Thanks to the Left and the education unions.

That is full of glaring factual errors. Going back to the Gold Standard at the pre-war parity in 1925 was a tough but wrong decision – as was the sensible decision to abandon the Gold Standard in September 1931.

That is arguable and it is irrelevant to what I said.

The fact is that the Thatcher governments spent billions propping up the car, coal mining and textile/clothing industries.

As did everyone before her for generations. Until she had enough.

Different economies have different structures and institutions and their peoples have different embedded expectations and apprehensions.

Or to put it another way, southern Europe is fiscally incontinent with strong radical Unions with no sense of the national good. With no strong collective spirit, it is hard to stand up to powerful forces like the Unions. Although, of course, Fascism and military dictatorship proves that these countries can do this if they so want. Greece was left in an excellent economic position by the Colonels, at least in terms of balance of payments and the strong drachma. As were Portugal and Spain by their local Clerico-Fascists. It is not structures, it is competence and courage.

Somehow in the 1980s, the Netherlands managed to constrain the growth of average real incomes to under 1pc a year to improve competitiveness but it is very doubtful that the larger economies in Europe could do that.

I disagree. And isn’t that what Germany has been doing anyway?

35. Luis enrique

Smfs @19

Concerning the need for faith in non fiat currencies …

“gold standard only works when everybody believes in the overall fiscal and monetary responsibility of the major world governments and the relative price of gold is fairly stable. And yet a lack of such faith was the precise reason the world returned to gold in the late 1920′s and the reason many argue for a return to gold today. Saying you’re on a gold standard does not suddenly make you credible. But it does set you up for some ferocious problems if people still doubt whether you’ve set your house in order.”

From
http://www.econbrowser.com/archives/2005/12/the_gold_standa.html

And if you really want to understand why the gold standard does not solve the problems those who disparage fiat currencies imagine it world, read this.

http://nationalinterest.org/article/critique-pure-gold-5741?page=show

A key point

“Proponents of the gold standard thus face a Goldilocks problem: the porridge must be neither too hot nor too cold but just right. What temperature exactly, pray tell, might that be? And even if we are lucky enough to get it right at the outset, consider what happens subsequently. As the economy grows, the price level will have to fall. The same amount of gold-backed currency has to support a growing volume of transactions, something it can do only if the prices are lower, unless the supply of new gold by the mining industry magically rises at the same rate as the output of other goods and services. If not, prices go down, and real interest rates become higher. Investment becomes more expensive, rendering job creation more difficult all over again.”

In my experience, people who go about making remarks about faith based fiat currencies invariably have no clue how currencies work, nor of the history of non- fiat currencies

And Here we go……thank the political system you all love – they created this.

@34: “No it isn’t. It is simply a matter of not allowing passive welfare. We have unemployment because people choose to be unemployed.”

That’s garbage for starters – so it’s not worth reading further in your posting.

Just reflect on why economies can get stuck at times with persistently high unemployment and why economic depressions tend to be internationally contagious.

Other readers may be interested in this Krugman blog:

“what we have here is a classic example of the Mundellian impossible trinity, aka the trilemma, which says that you can’t simultaneously have free movement of capital, a stable exchange rate, and independent monetary policy”
http://krugman.blogs.nytimes.com/2011/05/09/currency-wars-and-the-impossible-trinity-wonkish/

In the bottom right corner of that website, there’s a menu to an archive of other Krugman blogs on bits of relevant macroeconomics which are worth reading IMO.

The Euro(zone) and the whole EU is trapped in a downward spiral.
EFSF doesn’t really exist.
ECB cannot move -should it? Well, I have mixed feelings.
But it’s OK: Papandreou just called Sarkozy to inform him a new government will be in place, probably led by… an ECB man. Berlusconi is on the way out, and should be replaced by another Europeist (or a banker, maybe?).
And people have no say.
Another thing almost unnoticed: almost 60% of Germans would like to return to the Mark, while the same percentage of Greeks would like to stick to the Euro!

39. Leon Wolfson

@34 – Erm…Scotland DOES have it’s own pound.

The rest of your post is about as accurate.

@36 – More proof Post-Nobel Syndrome is a terrible thing.

The LCH margin calls have pushed Italy through 7% and into death spiral territory. When it comes down to it who can bail Italy? The ECB are already in the market and they can’t hold rates down. Unless the ECB make a commitment to unlimited lender of last resort the EZ is toast, just a matter of when. Load up the popcorn and just watch capital flight from Italy now begin in earnest.

I think the Chinese have it right about much of Europe
http://www.aljazeera.com/programmes/talktojazeera/2011/11/2011114434664695.html

@39: “Erm…Scotland DOES have it’s own pound. ”

The Scottish Pound notes are backed by BoE Pound notes and changeable at parity on demand so there is no question of an independently floating Scottish pound.

The printed Scottish notes are really just a bit of vanity. Effectively, Britain has both a monetary union and a fiscal union. By the last estimates I saw, identifiable public spending per capita in Scotland was c. 20pc higher than the average for England – plainly, there is a massive fiscal transfer from the national exchequer to Scotland.

The big worry about greater fiscal autonomy for Scotland is that we’ll end up with a situation which brought about the Act of Union in the first place – the state of Scotland went bankrupt and had to be bailed out from the horrendous losses caused by large investments in the ill-fated Darien Scheme – for details, try the entry in Wikipedia.

Compare the losses of the Royal Bank of Scotland (RBS) and HBOS – both with headoffices in Scotland – which comprise a very large part of the cause of the banking crisis in Britain in 2008.

43. Leon Wolfson

“plainly, there is a massive fiscal transfer from the national exchequer to Scotland.”

While there IS, that’s not a correct assumption to make. If the average income was higher in Scotland, this would not necessarily be true.

And RBS and HBOS both lost their cash in the City. To try to link it to Scotts-bashing is…worthy only of you.

@40 – In good part because scum like you have pushed it. Yea, “load up”, YOU’LL be fine, never mind the people it hurts!

“And RBS and HBOS both lost their cash in the City. To try to link it to Scotts-bashing is…worthy only of you.”

ROFL ! That’s more rewriting of history.

RBS and HBOS made huge losses as the result of the bad investment decisions that those banks made – just as the as the Act of Union was necessary to bail out the bankrupt Scottish state.

45. Luis Enrique

43. Leon Wolfson

” In good part because scum like you have pushed it. Yea, “load up”, YOU’LL be fine, never mind the people it hurts! ”

Oh dear, Leon. That is not very pleasant is it? Try blaming the architects who despite all the advice chose vanity. Hey, they could still go nuclear and rescue the situation to give the periphery some breathing space. Arrogance prevents them. I would recommend trying them at The Hague for their crimes against the people of Europe. What do you think?

47. Leon Wolfson

@45 – Sure, of course you’re going to advocate nuclear weapons. On Iran right?

@44 – Oh, so they didn’t base their traders in the city? Wait, they did, you’re lying your ass off again.

Leon, you are a funny dude.

49. Leon Wolfson

@47 – Ah yes, because you’re advocating nuking people, I’m “funny”. Gee.

No, I’m quite serious. Let’s start with the punitive tax on gold and tossing the bankers into jail, and proceed from there with actions as-necessary to deal with the problem, capitalism.

This kid is brain damaged..

Leon, the nuclear option does not mean bombing anyone.

You appear to have developed quite an authoritarian streak in recent weeks. When people used to rant about bankers it was really an anti-Semitic code for Jews. In the U.S. it still nearly always is an anti-Semitic code for Jews. Something for you to bear in mind as you metaphorically join the baying mob.

52. Leon Wolfson

@51 – Really, ask Iran that when they were researching how to make nuclear weapons lately. Strangely, I have no sense of humour right now, when a gang of thugs is threatening to maim people on the streets of this country who are exercising their legal rights, and when your banker friends are causing misery on a massive scale

And hello, you just implied a Jew is anti-Semitic. Now, why might that might be, peanut gallery? Ah yes, the usual reason is a *conspiracy theorist*.

So: Do you now or have you ever believed in the Zionist Occupation Government?

(And yes, I am QUITE aware of the genesis of the form, thank you.)

No, when I say bankers, I mean investment bankers. And their ilk, the gamblers who are destroying civilisation. Capitalism IS crisis, and they’ll bring the market down with it at this rate. How much more damage will you endorse?

53. Leon Wolfson

@49 – Yes, and as a social darwinist do you advocate, for the record, segregation into mental institutions or euthanasia for the “mentally deficient”? Let’s hear your real views, here and now.

Well?

@ 51

Just wow.

55. So Much For Subtlety

35. Luis enrique

“gold standard only works when everybody believes in the overall fiscal and monetary responsibility of the major world governments and the relative price of gold is fairly stable. And yet a lack of such faith was the precise reason the world returned to gold in the late 1920?s and the reason many argue for a return to gold today.

For good reason. Because if the government does not have the monetary responsibility to manage the relatively simple gold standard, why would anyone believe they have the competence and discipline to maintain a fiat standard.

And indeed they have not.

The faith in gold is not faith in gold as such. It is a lack of faith that the government will manage monetary policy properly. As it hasn’t.

Saying you’re on a gold standard does not suddenly make you credible. But it does set you up for some ferocious problems if people still doubt whether you’ve set your house in order.”

Which I think was my earlier point – those countries that lacked a culture of proper fiscal discipline did poorly on the gold standard. But then they did poorly with the fiat currencies as well. The French, for instance, did not face many serious problems in their economy post-1945. Nothing like World War Two for instance. Yet the Pound was worth 480 Francs in 1945, about 1400 in 1960 when the New Franc was introduced and about 110,000 Old Francs when the Euro was introduced. This is not sound monetary policy.

“Proponents of the gold standard thus face a Goldilocks problem: the porridge must be neither too hot nor too cold but just right. What temperature exactly, pray tell, might that be? And even if we are lucky enough to get it right at the outset, consider what happens subsequently. As the economy grows, the price level will have to fall. The same amount of gold-backed currency has to support a growing volume of transactions, something it can do only if the prices are lower, unless the supply of new gold by the mining industry magically rises at the same rate as the output of other goods and services. If not, prices go down, and real interest rates become higher. Investment becomes more expensive, rendering job creation more difficult all over again.”

Well ideally we would get it exactly right. But even if we didn’t, well, the economy will adapt if you have the determination to tough it out. Or it should if it is flexible enough. After all money is just a symbol, a convenient tool. Nothing more.

If the economy grows, the value of gold goes up. Basic economics tells you that so will mining. It is a lagging indicator, but mine output will increase. So you would think that the supply of gold is quite likely to rise at the same rate as the output of other goods and services. In fact it would be quite surprising if it didn’t. The threat to the gold standard is something like another Potosi and I don’t think that is likely. Compare it with a fiat currency where the only thing stopping rises is the monetary discipline of people who want to be re-elected in three years time. Thus our currency has been debauched. We should have stayed on gold in the 1920s. We should have restructured our economy then. We would have shown investors that we had the discipline to do so. The economy would have been better off in the long run. Instead we went on a 50 year devaluation spree where we tried to copy the worst of the Third World – with all the resulting problems of an investment strike, a refusal to invest in new industries and economic decline.

In my experience, people who go about making remarks about faith based fiat currencies invariably have no clue how currencies work, nor of the history of non- fiat currencies

That may be true. But I am right about the record of fiat currencies. They have all failed in the medium term. As the pound has failed since 1945. People too incompetent to manage the pound, so incompetent they out sourced their monetary policies to the Germans, don’t fill me with faith.

56. Luis enrique

Smfs

I don’t think the pound has failed, or the dollar. The failure of the Euro has more to do with the ECB refusing to print money, the converse of what you worry about

57. So Much For Subtlety

56. Luis enrique

I don’t think the pound has failed, or the dollar. The failure of the Euro has more to do with the ECB refusing to print money, the converse of what you worry about

Well it is a relative sort of failure. It has not failed as badly as the Zimbabwean currency, but 1 pound in 1950 is worth 24 pounds now. As a medium of storing value, that is pretty pathetic. Thus it has failed in its main task – maintaining value over time. It also means that people who did the right thing and, for instance, bought war bonds simply had all their money stolen. As did a lot of pensioners and so on.

Not good.

At the moment, the problem is deeper seated than that. The cheapest way out seems to be for the ECB to unleash another burst of inflation. But it is a short term fix, not a long term one. Would the Gold Standard have got us into this mess? I would like to think not. If Europe had a single gold currency, perhaps. But suppose that everyone was on gold fixed at a one-to-one ratio. One New New French Franc was worth one Gold Mark which was worth one New Drachma. We would have the advantages of being able to spend across Europe without any trouble – no reason why the German currency would be rejected in Greece. But each country would have its own interest rate. If the Greeks consistently over spent, they would pay for it with a flow of gold. They would have faced much higher interest rates a long time ago which would have brought their bubble down.

58. Leon Wolfson

@56 – The pound’s dead if the Eurozone is anyway. Our austerity-brittled economy can’t take the shock which will be transmitted here. The anti-EUites are ignoring this, as ever.

@57 – The gold-producing nations are no longer colonies. You want to hand them control of the world.

@54 – Do you now or have you ever believed in the Zionist Occupation Government?

59. Luis enrique

Smfs,

But the job of a currency is not to maintain a fixed price level over 50 year spans. If you want to store value, put your money in a savings account. It’s only a problem if the nominal interest rate is lower then the rate of inflation, which happens periodically but certainly not over long time spans.

Did you read all of that Eichengreen article? It’s actually useful to have a currency that is more flexible and permits some money printing and some inflation. Economies did better when they came off the gold standard. There are far more important things to worry about than obsessing over whethe a loaf of bread still costs the same as it did in 1950.

I don’t see how the gold standard would have prevented the Euro crisis.

60. Luis enrique

Smfs,

Look at it this way. If absolute price stability was so important, why don’t central banks target zero inflation? They way you see to see things, you’d be calling a currency a failure even if the CB kept hitting its inflation target.

@ 57. So Much For Subtlety

Putting a pound under a mattress in 1950 was not a very sensible way to store value. Exchanging the cash for a financial asset would store value over the period. The only people who hold large amounts of money as cash are criminal and international drug dealers etc. The infamous fixed-income widow bogeys hold bonds and interest bearing accounts. Currency is an asset class. Holding currency is no different to buying a BP share and there is no reason why the value of currency should receive any more special protection compared to a BP share. Moreover, the nominal exchange rate vis-a-vis other currencies is not very meaningful. The real exchange rate that can be expressed in purchasing power parity in the respective economies is more meaningful. Over time productivity becomes income, not nominal exchange rates.

People work in exchange for money. Therefore, what they can buy in exchange for the money that they earn is really all that matters. An hours work in 1950 would probably buy more housing than now. Thank the nation of NIMBYs for that outcome. An hours work in 1950 would not buy you much computing power compared to 2011. Calories that could be bought with an hours work in 1950 was derisory compared to the calories that the money from an hours work would now buy. Energy and transport was cheaper so that portion of money bought more. Household appliances etc went the other way. Overall, for what most people use money to purchase it buys them more than in 1950.

58. Leon Wolfson

” The pound’s dead if the Eurozone is anyway. Our austerity-brittled economy can’t take the shock which will be transmitted here. The anti-EUites are ignoring this, as ever. ”

Just as well I am pretty much 80% of my wealth long Canada. Any predictions for B.C., Leon?

@54 – ” Do you now or have you ever believed in the Zionist Occupation Government? ”

I do not have a clue what you are on about, Leon.

Merkozy prepares the ground to exit France and Germany from the EZ, or push others out.

http://www.reuters.com/article/2011/11/09/us-eurozone-future-sarkozy-idUSTRE7A85VV20111109

Reality has dawned.

The news on Wednesday night is that France and Germany are preparing the funeral rites for the present Eurozone:

European debt crisis spiralling out of control

Reports that Germany and France have begun talks to break up the eurozone amid fears that Italy will be too big to rescue
http://www.guardian.co.uk/business/2011/nov/09/european-debt-crisis-eurozone-breakup?newsfeed=true

65. So Much For Subtlety

59. Luis enrique

But the job of a currency is not to maintain a fixed price level over 50 year spans. If you want to store value, put your money in a savings account. It’s only a problem if the nominal interest rate is lower then the rate of inflation, which happens periodically but certainly not over long time spans.

Isn’t it? I tend to think it is. Most people tend to agree with me because if given a choice, they will put their money in the currency with the lower level of inflation. As in Turkey where I have seen people queue to exchange their wages as soon as they got them for dollars. What is the purpose of money? A medium of exchange is only useful if it is stable. After all, inflation is taking money from some people and giving it to others. In ways that are hard to predict. Are you asserting that this does not take place? That it doesn’t matter if it does? What?

It’s actually useful to have a currency that is more flexible and permits some money printing and some inflation. Economies did better when they came off the gold standard. There are far more important things to worry about than obsessing over whethe a loaf of bread still costs the same as it did in 1950.M

Useful is an interesting word. Useful to whom? Economies did better in the short term. The Pound ceased to be the major World currency when we came off Gold. We showed that we could not be trusted. The pound has declined ever since in terms of prestige. It had a flow on effect into investment as well. The British economy may have been saved for the next election cycle but for the next three generations, it was boned. Certainty is an important feature of any currency. And I think we can say one thing – stability is a major feature of being a Reserve currency. Size matters too, but size is not enough. Price stability matters. As you can see by the fact that Central Bankers do not choose the Chinese Yuan as a major reserve currency, despite its size. Nor the Indian rupee. They did with the pound before we came off gold. They do with the dollar. They even like the Swiss currency.

I don’t see how the gold standard would have prevented the Euro crisis.

It would have been much harder for Greece to over spend and get itself into this sort of trouble. But I agree. It would depend on the nature of the gold standard that was implemented. I think the main point is that Gold would have forced the Greeks into the sort of fiscal discipline that would have made this sort of culture of fiscal incontinence impossible.

Luis enrique

Look at it this way. If absolute price stability was so important, why don’t central banks target zero inflation? They way you see to see things, you’d be calling a currency a failure even if the CB kept hitting its inflation target.

Well there has been a trend to make Central Banks do so. More now than in the 1950s. Because people think it is more important now. The answer is simple – politicians care about getting re-elected. Not the next generation. So they are happy to trash the pound if it helps them get re-elected. To do that they need a co-operative Central Bank.

Richard W

Putting a pound under a mattress in 1950 was not a very sensible way to store value. Exchanging the cash for a financial asset would store value over the period. The only people who hold large amounts of money as cash are criminal and international drug dealers etc. The infamous fixed-income widow bogeys hold bonds and interest bearing accounts.

Sorry but this is verging on a strawman. All sorts of people are affected by inflation, whether or not they hold cash under the mattress. The point about inflation is that it is not predictable. So inflation leads to uncertainty and when it happens, it leads to all sorts of people getting screwed. People who have cash, certainly. But people who have bonds. People who have fixed term savings accounts. People who have lent other people money. People who have signed contracts under the wrong assumption about inflation. Those widows are not bogeys. I guess it is just too long since Britain had decent inflation.

Currency is an asset class. Holding currency is no different to buying a BP share and there is no reason why the value of currency should receive any more special protection compared to a BP share.

Except currency is a promise. I don’t think comparing it to a share is sensible as a share is an agreement to take a shared risk. Comparing it to a certain type of bond may be. If BP issues a promissory note that says they will give me £1 next year and instead they give me 80 pence, I would be right to be annoyed. I could, and would, sue. I would win too. But for some reason the government is allowed to do this.

Moreover, the nominal exchange rate vis-a-vis other currencies is not very meaningful. The real exchange rate that can be expressed in purchasing power parity in the respective economies is more meaningful. Over time productivity becomes income, not nominal exchange rates.

In the short term is the nominal exchange rate meaningful? Well it does help the economy. If the nominal exchange rate drops, people get poorer. Especially in countries where a lot is imported or exported. In the long term, you are right, it is productivity that matters. But you aren’t going to get that productivity without stable currencies. No one will invest.

People work in exchange for money. Therefore, what they can buy in exchange for the money that they earn is really all that matters.

I think we are moving away from the point. This is true.

The central banking institutions of the US, Britain and the Eurozone – as well as many other central banks – are applying monetary policies intended to maintain low stable rates of inflation, but not a zero rate of inflation.

In the jargon, this is called inflation targeting. The position with the US Federal Reserve is a bit more complicated in that it has a statutory remit to also consider in unspecified ways unemployment and output.

Simply put, the reason why the central banks – or their respective statutory remits – have not opted to aim to maintain zero inflation is because empirical studies suggest that the social costs from lost GDP and the higher unemployment rates needed to achieve zero inflation would be too high.

” As you can see by the fact that Central Bankers do not choose the Chinese Yuan as a major reserve currency, despite its size. Nor the Indian rupee. They did with the pound before we came off gold. They do with the dollar. They even like the Swiss currency. ”

They do not choose the RMB because China does not have an open capital account. You can’t be a reserve currency without an open capital account. The central banks do not hold their foreign reserves in currency, they hold the government bonds of that country. Sterling world primary reserve currency status began to decline at the outbreak of WW1. Yes, we also came off gold at the beginning of WW1. However, the process of being superseded by the USD took forty years. It was nothing to do with coming off gold and everything to do with the U.S. economy had become much larger than the UK. We were not large enough to provide the world with sterling reserves to facilitate trade. Initially the U.S. were reluctant to assume the role because the benefit is overstated. After WW2, they seen it as a way to get entry to the foreign trade markets that the UK dominated. It goes without saying that the treacherous UK Foreign Office let them.

Sterling is still a reserve currency, albeit not the primary reserve currency. It is the third most held foreign reserve after the USD and Euro. They might like the Swiss CHF, just not enough to hold it as a reserve because sterling is well ahead of CHF as a reserve.

I don’t see why you think it is a strawman. Comparing a pound in 1950 to now has only lost someone value if they stored it under a mattress. Every other way of storing the pound would have retained its value through the magic of compound interest rates. For example, one penny invested at 4% interest at the birth of Christ would have bought a ball of gold 8,190 times the weight of the Earth in 1990. The magic of compound interest rates. So it matters not that a pound is devalued in terms of goods when you have more pounds.

Inflation is a meaningless term. Which inflation? It depends what you are seeking to measure. It is not a thing of itself, it is just an index that we choose. If we choose another index the numbers would be different. Scott Sumner said we should ban the word.
http://www.themoneyillusion.com/?p=11607

“All sorts of people are affected by inflation, whether or not they hold cash under the mattress. ”

Very few are adversely affected by moderate inflation, they just think they are because they suffer from money illusion. I would agree high inflation is very damaging and harmful. We say UK headline inflation is currently 5.2%. Well it is if you buy everything in the index according to their weighting. The 5.2% includes student tuition fees, so that rules out everyone not paying tuition fees. Air fares increased in price pushing up the CPI index, so that rules out everyone who did not purchase an airline ticket. Next year pensioners will get a pension increase based on the 5.2%, it is unlikely they paid tuition fees. For all I know the things most pensioners spend money on has gone up even more than 5.2%. It may be less. However, there is no definitive inflation rate.

” The point about inflation is that it is not predictable. ”

Core inflation is predictable. The financial markets accurately predict it all the time through the implied forward yields on index-linked gilts.

” So inflation leads to uncertainty and when it happens, it leads to all sorts of people getting screwed. People who have cash, certainly. But people who have bonds. People who have fixed term savings accounts. People who have lent other people money. People who have signed contracts under the wrong assumption about inflation. ”

High unexpected inflation would do all those harmful things. There are always two parties in every transaction. One would lose and the other would gain offsetting the loss.

” Those widows are not bogeys. ”

I meant it in the sense that the poor widow is regularly dragged from the cupboard to support an assertion.

” I guess it is just too long since Britain had decent inflation. ”

I don’t support inflation per se. I support policies to keep nominal incomes growing at a steady rate. If that means incomes are growing at 3% and the price level 2%, then I would settle for that steady state of affairs.

” If BP issues a promissory note that says they will give me £1 next year and instead they give me 80 pence, I would be right to be annoyed. I could, and would, sue. I would win too. But for some reason the government is allowed to do this. ”

The price of a £1 is always exactly 1. One pound is always worth another pound. If someone promised you £1 and only gave you 80p, you would be quite right to be angry. However, that is not happening. I would maybe sue Leon for the 20p, but others I would let off.

” If the nominal exchange rate drops, people get poorer. Especially in countries where a lot is imported or exported. ”

In the short-run they do get poorer. However, in no meaningful way are they poorer by the same percentage as the nominal exchange rate depreciation. That is the exchange rate dong its job making them poorer. the exchange rate does the same job as a shock absorber in a car. Rigidly fixed exchange rates are like driving a car with no shock absorbers. Moreover, they will import less and export more, that is what the nominal exchange rate depreciation is telling them to do. In the longer-run the Balassa–Samuelson effect will apply to their tradable goods.

http://en.wikipedia.org/wiki/Balassa%E2%80%93Samuelson_effect

” In the long term, you are right, it is productivity that matters. But you aren’t going to get that productivity without stable currencies. ”

Good productivity will lead to a stable or appreciating currency. However, just fixing the currency will not necessarily lead to good productivity.

” No one will invest. ”

Depends what you mean by no one. The assets of a country who has had a nominal exchange rate depreciation is suddenly very attractive because they are cheaper for foreign investors. For example, since the 2008 sterling depreciation the Canadian teachers pension fund has been buying UK low risk assets. Their Loonie buys a lot more in sterling than it could in Canada. So they have been buying water assets and shopping centres.

68. So Much For Subtlety

67. Richard W

Sterling world primary reserve currency status began to decline at the outbreak of WW1. Yes, we also came off gold at the beginning of WW1. However, the process of being superseded by the USD took forty years.

It took a while for people to lose faith in the British government.

It was nothing to do with coming off gold and everything to do with the U.S. economy had become much larger than the UK.

The US economy was larger in 1914 as well.

Comparing a pound in 1950 to now has only lost someone value if they stored it under a mattress. Every other way of storing the pound would have retained its value through the magic of compound interest rates.

Sorry but that is not true. A lot of people lost value. If they were raised in a pre-inflation world and they did not expect whatever bout of inflation they got, they would be screwed. Inflation only affects currency alone if everyone can work out what it is going to be. In which case they may as well agree not to have any.

Inflation is a meaningless term.

That is one of the more unusual arguments I have seen for a long time. Death can be defined in different ways too. Doesn’t mean it doesn’t exist or that you might like to try it some time soon.

Very few are adversely affected by moderate inflation, they just think they are because they suffer from money illusion. I would agree high inflation is very damaging and harmful.

Can you please explain why some is fine but a lot is not? Where is the tipping point? What does high inflation do that moderate does not?

For all I know the things most pensioners spend money on has gone up even more than 5.2%. It may be less. However, there is no definitive inflation rate.

Which doesn’t mean it does not exist. And again you show the problem with inflation, even moderate inflation. Parliament has chosen a reasonable rate at which to support pensioners. Inflation will either make them better off, if the things they do buy rise by less than the government headline rate – which is unfair to everyone else – or it will make them worse off, if the things they buy rise by more. They don’t know. We don’t know. No one knows. It is a semi-random victimisation. Better to have no inflation so that pensioners get what we have decided to give them. No more and no less.

Core inflation is predictable. The financial markets accurately predict it all the time through the implied forward yields on index-linked gilts.

They guess. They don’t know.

High unexpected inflation would do all those harmful things. There are always two parties in every transaction. One would lose and the other would gain offsetting the loss.

There are two parties to every mugging. This sort of quasi-random re-distribution is a bug not a feature. It is not good. We don’t want to do it. If someone is worth their fee, they should get their fee. Not their fee plus or minus whatever uncertainty inflation introduces into the situation. It fundamentally undermines business confidence if the terms you agree are not the terms you have to pay.

I don’t support inflation per se. I support policies to keep nominal incomes growing at a steady rate. If that means incomes are growing at 3% and the price level 2%, then I would settle for that steady state of affairs.

If inflation is so predictable, why not just ignore it and let incomes grow at 1%? The situation for most people is the same except they are not subjected to this quasi-random redistribution of their income plus all the uncertainty.

The price of a £1 is always exactly 1. One pound is always worth another pound. If someone promised you £1 and only gave you 80p, you would be quite right to be angry. However, that is not happening. I would maybe sue Leon for the 20p, but others I would let off.

Now that is a monetary fallacy. A pound is worth what it can buy. It is not always worth a pound.

In the short-run they do get poorer. However, in no meaningful way are they poorer by the same percentage as the nominal exchange rate depreciation.

I am not sure that would be a comfort to them.

Rigidly fixed exchange rates are like driving a car with no shock absorbers. Moreover, they will import less and export more, that is what the nominal exchange rate depreciation is telling them to do.

They would have to import less and export more with the Gold Standard. I agree that flexible rates are a good way to hide what is being done but that is part of the problem. It is too easy to do so. Again and again and again. It is better in the long run that people accept the short term pain and restructure their economy. I have posted the comparison between Barbados and Jamaica before. Barbados toughed it out and is now richer than Jamaica which devalued.

Good productivity will lead to a stable or appreciating currency. However, just fixing the currency will not necessarily lead to good productivity.

But it is not a bad first step. As you can see with countries like China which has opted for a de facto peg to the US dollar. Sure a lot more needs to be done, but no one will invest if they lack faith in the management of the currency.

The assets of a country who has had a nominal exchange rate depreciation is suddenly very attractive because they are cheaper for foreign investors.

If people think it is a one-off and the long term stability of the economy is guaranteed.

More worrying -yet logically- by the day:
“Reports emerging from Brussels said that Germany and France had begun preliminary talks on a break-up of the eurozone,” writes The Guardian: http://www.guardian.co.uk/business/2011/nov/09/european-debt-crisis-eurozone-breakup.; So the next (well, coming soon) question will be: Who should be part of the “core” eurozone? And my bet is that it will not work either. Because France cannot simply follow suit, I mean follow Germany.
Fasten your seat belts!

Well, according to the bond market, prospects aren’t absolutely assured for France in the current EZ crisis. Try this:

The interest rate on 10-year French bonds is up to 3.4 per cent. The spread against German bonds – essentially the difference in the two countries’ borrowing costs – has reached 161 basis points, another euro-era high.

It would be premature to say that France is the next domino to fall. Its bond yields are a long way from the crucial 7 per cent mark, and much lower than Spain’s. But it doesn’t look good.
http://www.thisismoney.co.uk/money/news/article-2060253/French-bond-yields-30-second-guide.html?ito=feeds-newsxml

71. Leon Wolfson

@67 – And if you raped a baby, I’d report you to the police.

“Core inflation is predictable.”

Of course, that’s why targets are missed over and over and over. They’re predictable, like your non-accusations of crime. Well, have some non-accusations back.


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  1. Liberal Conspiracy

    This is the really worrying news from Europe http://t.co/uXIIixFK

  2. Owen Blacker

    Oh shit. 's not Greece/Italy we need to worry about, 's France… RT @libcon This is the really worrying news from Europe http://t.co/O2fT15jG

  3. Richard Garside

    This is the really worrying news from Europe http://t.co/uXIIixFK

  4. sunny hundal

    Ohhh shi! @DuncanWeldon says Europe's "big bazooka" plan is collapsing http://t.co/3qH0RfnQ << very, very troubling

  5. Nafeez Ahmed

    Ohhh shi! @DuncanWeldon says Europe's "big bazooka" plan is collapsing http://t.co/3qH0RfnQ << very, very troubling

  6. David W Edwards

    RT @libcon: This is the really worrying news from Europe http://t.co/io3sHbyb

  7. Janet Graham

    Ohhh shi! @DuncanWeldon says Europe's "big bazooka" plan is collapsing http://t.co/3qH0RfnQ << very, very troubling

  8. Len Arthur

    This is the really worrying news from Europe http://t.co/uXIIixFK

  9. Molly

    This is the really worrying news from Europe http://t.co/uXIIixFK

  10. Gareth Winchester

    In other words "I can't think of reasons why, so it *must* be malice/an ulterior motive"… http://t.co/spBBRm1j

  11. Only cutting the right head off the Eurozone Hydra will kill this crisis « Crash Bang Wallace

    [...] just look at the trouble the EFSF is having raising money from the international markets. As Liberal Conspiracy point out, it is now paying 4 times as much to borrow as it was in June. It isn’t just Greece and Italy [...]

  12. Alex Braithwaite

    This is the really worrying news from Europe | Liberal Conspiracy http://t.co/VAhN0FxK via @libcon

  13. Billy_Green

    This is the really worrying news from Europe | Liberal Conspiracy: Yesterday was another big day in the Eurocris… http://t.co/BGEJ4A4T

  14. Frances Coppola

    This is the really worrying news from Europe | Liberal Conspiracy http://t.co/hhbLKVgl via @libcon #eurocrisis #gfc2

  15. Eloina

    This is the really worrying news from Europe | Liberal Conspiracy http://t.co/hhbLKVgl via @libcon #eurocrisis #gfc2

  16. Sam hussain

    This is the really worrying news from Europe | Liberal Conspiracy http://t.co/hhbLKVgl via @libcon #eurocrisis #gfc2

  17. Oscar Kent

    "The leveraged EFSF may still turn into a bazooka but so far it looks more like a water pistol." http://t.co/vvXRUNlQ via @Frances_Coppola





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