Monthly Archives: July 2015

Why Greece should leave the Eurozone

The Quest For Knowledge: Shrey's Finance Blog

A brief glimpse into the problems that the Euro is presenting for the Greek people. A brief glimpse into the problems that the Euro is presenting for the Greek people.

The debate over Greece leaving the Eurozone has been raging for a matter of years now. Some believe that Greece staying in the Eurozone is axiomatic, in that a Greek exit from the Euro would ravage the economy, perhaps causing hyperinflation. Others argue to look at the other side of the coin, and propagate the idea that a Greece exit would attenuate the suffering of the Greek people, as they might only have to suffer for the next 10 years, rather than the next 50. Personally, it is my firm belief; my avowal, if you will, that Greece should leave the eurozone, and start a new era, having ended the old era of economic pain.

Almost at the very command of Angela Merkel, the Greek Prime Minister Alexis Tsipras was forced to impose harsher austerity members than the previous…

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The MIT gang

Prof. Krugman writes in NYT on how in 1970, in the shadow of  stagflation, when Keyensian Economics was loosing its charm, the MIT economics depertment produced wonderful economist.

It’s actually surprising how little media attention has been given to the dominance of M.I.T.-trained economists in policy positions and policy discourse. But it’s quite remarkable. Ben Bernanke has an M.I.T. Ph.D.; so do Mario Draghi, the president of the European Central Bank, and Olivier Blanchard, the enormously influential chief economist of the International Monetary Fund. Mr. Blanchard is retiring, but his replacement, Maurice Obstfeld, is another M.I.T. guy — and another student of Stanley Fischer, who taught at M.I.T. for many years and is now the Fed’s vice chairman.

These are just the most prominent examples. M.I.T.-trained economists, especially Ph.D.s from the 1970s, play an outsized role at policy institutions and in policy discussion across the Western world. And yes, I’m part of the same gang.

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Greece, the sacrificial lamb

Joseph E. Stigletz in NYT has a wonderful piece on how wrong the new proposal is.

or now, the Greek government has capitulated. Perhaps, as the lost half decade becomes the lost decade, as the politics get uglier, as the evidence mounts that these policies have failed, the troika will come to its senses. Greece needs debt restructuring, better structural reforms and more reasonable primary budget surplus targets. More likely than not, though, the troika will do what it has done for the last five years: Blame the victim.

Commodity Money is not the solution

Prof.  Paul Krugman (NYT) has a very nice take on Ron Paul’s new video.

Prof. Krugman argue against of coming back to the commodity money, an idea by late Nobel laureate Fredric Hayek. the main argument is the way silver has fluctuated.

One important characteristic of a medium of exchange is that its supply can be controlled in way that allows shocks to the supply and demand for the medium of exchange to be offset. Otherwise, the value will potentially vary quite a bit over time. (E.g. the price of silver went from around $10 near the end of 1972 to over $100 at the beginning of 1980, followed by a large fall back to around $10 at the beginning of 1990. In 2001 it fell to around $6, then spiked to around $50 by 2011, then fell again to around $15 today, and all indications are that it will fall further.) Such large variations in purchasing power of the medium of exchange are highly undesirable — this is what the gold and silver bugs object to, periods of rapid inflation and deflation (in addition to the variation in purchasing power, it creates considerably uncertainty about the future — what will be the value of the medium of exchange when loans are repaid? — and harms future investment).

So the choice is to have a medium of exchange whose value can vary significantly, suddenly and unexpectedly, or have a central authority intervene to stabilize the price (by stockpiling or selling the medium of exchange to offset shocks to the supply and demand for the commodity). The point is that if changes in the value of a medium of exchange is the concern, as it appears to be, then switching to a commodity money does not solve the problem of needing a central authority to keep the value stable.

Indeed

The Mirage of the Financial Singularity- Prof. Shiller

Prof Shiller reacts to a new book The Incredible Shrinking Alpha, Larry E. Swedroe and Andrew L. Berkin describe an investment environment populated by increasingly sophisticated analysts who rely on big data, powerful computers, and scholarly research. There might come a time when computer might replace human being.

He argues such a time will never come and people like legendary investors like Warren Buffet are here to stay in market.

Greece and Europe: Is Europe holding up its end of the bargain? – Bernanke

Former Fed Chairman and one of the most respected voice in economics writes on Greece on his Brookings Blog.

Since the global financial crisis, economic outcomes in the euro zone have been deeply disappointing. The failure of European economic policy has two, closely related, aspects: (1) the weak performance of the euro zone as a whole; and (2) the highly asymmetric outcomes among countries within the euro zone. The poor overall performance is illustrated by Figure 1 below, which shows the euro area unemployment rate since 2007, with the U.S. unemployment rate shown for comparison.1

In late 2009 and early 2010 unemployment rates in Europe and the United States were roughly equal, at about 10 percent of the labor force. Today the unemployment rate in the United States is 5.3 percent, while the unemployment rate in the euro zone is more than 11 percent. Not incidentally, a very large share of euro area unemployment consists of younger workers; the inability of these workers to gain skills and work experience will adversely affect Europe’s longer-term growth potential.

The unevenness in economic outcomes among countries within the euro zone is illustrated by Figure 2, which compares the unemployment rate in Germany (which accounts for about 30 percent of the euro area economy) with that of the remainder of the euro zone.2

Currently, the unemployment rate in the euro zone ex Germany exceeds 13 percent, compared to less than 5 percent in Germany. Other economic data show similar discrepancies within the euro zone between the “north” (including Germany) and the “south.”

The patterns illustrated in Figures 1 and 2 pose serious medium-term challenges for the euro area. The promise of the euro was both to increase prosperity and to foster closer European integration. But current economic conditions are hardly building public confidence in European economic policymakers or providing an environment conducive to fiscal stabilization and economic reform; and European solidarity will not flower under a system which produces such disparate outcomes among countries.

He further goes on to explain how Germany is benefited by being in Euro.

The risks for the European project posed by these economic developments are real, no matter what the reasons for them may be. In fact, the reasons are not so difficult to identify. The slow recovery from the crisis of the euro zone as a whole is the result, among other factors, of (1) political resistance that delayed by many years the implementation of sufficiently aggressive monetary policies by the European Central Bank; (2) excessively tight fiscal policies, especially in countries like Germany that have some amount of “fiscal space” and thus no immediate need to tighten their belts; and (3) delays in taking the necessary steps, analogous to the banking “stress tests” in the United States in the spring of 2009, to restore confidence in the banking system. I would not, by the way, put “structural rigidities” very high on this list. Structural reforms are important for long-run growth, but cost-saving measures are less relevant when many workers are already idle; moreover, structural problems have existed in Europe for a long time and so can’t explain recent declines in performance.

What about the strength of the German economy (and a few others) relative to the rest of the euro zone, as illustrated by Figure 2? As I discussed in an earlier post, Germany has benefited from having a currency, the euro, with an international value that is significantly weaker than a hypothetical German-only currency would be. Germany’s membership in the euro area has thus proved a major boost to German exports, relative to what they would be with an independent currency.

Nobody is suggesting that the well-known efficiency and quality of German production are anything other than good things, or that German firms should not strive to compete in export markets. What is a problem, however, is that Germany has effectively chosen to rely on foreign rather than domestic demand to ensure full employment at home, as shown in its extraordinarily large and persistent trade surplus, currently almost 7.5 percent of the country’s GDP. Within a fixed-exchange-rate system like the euro currency area, such persistent imbalances are unhealthy, reducing demand and growth in trading partners and generating potentially destabilizing financial flows.Importantly, Germany’s large trade surplus puts all the burden of adjustment on countries with trade deficits, who must undergo painful deflation of wages and other costs to become more competitive. Germany could help restore balance within the euro zone and raise the currency area’s overall pace of growth by increasing spending at home, through measures like increasing investment in infrastructure, pushing for wage increases for German workers (to raise domestic consumption), and engaging in structural reforms to encourage more domestic demand. Such measures would entail little or no short-run sacrifice for Germans, and they would serve the country’s longer-term interests by reducing the risks of eventual euro breakup.

Proposal he suggest

I’ll end with two concrete proposals. First, negotiations over Greece’s evidently unsustainable debt burden should be based on explicit assumptions about European growth. If European growth turns out to be weaker than projected, which in turn would make it tougher for Greece to grow, then Greece should be allowed greater leeway after the fact in meeting its fiscal targets.

Second, it’s time for the leaders of the euro zone to address the problem of large and sustained trade imbalances (either surpluses or deficits), which, in a fixed-exchange-rate system like the euro zone, impose significant costs and risks. For example, the Stability and Growth Pact, which imposes rules and penalties with the goal of limiting fiscal deficits, could be extended to reference trade imbalances as well. Simply recognizing officially that creditor as well as debtor countries have an obligation to adjust over time (through fiscal and structural measures, for example) would be an important step in the right direction.

No doubt, this is precisely what need to be done. But the issue here is not of economics. It is of politics. And the unanswered question at the time of creation of Euro are coming and will come back again. Germans are not ready to shoulder any further load. And given Euro is not a banking fiscal or political union, it is difficult for the the politicians to convince people back home. Policy makers must be hoping for some divine intervention, otherwise what is this kicking the can down the road for!!!!!!!!!!!!!!!!!!!

Are the really problem addressed in Greek Issue

Shishir Asthana puts his prespective in BS.

Greece gets the humiliating deal. But the real problem is growth. The economy has shrinked by one-fourth in last five years. And that make debt-to-gdp ratio even more dangerous. The deal pretty much squeezes the space for Greece to grow. And if this was not enough greek assets worth  50 B Euro to a holding company which will either sell or generate cash from them, is like rubbing salt in the wound.

Analysts in Europe too have called the deal harsh and one that will do more harm to Greece than good. Commenting on the deal Marc Ostwald, strategist at ADM Investor Services International saidthat the “highlights of the deal are that there is no long-term future for the Eurozone and the desire on the part of Eurozone creditor nations to completely destroy the Greek economy — it can certainly be asserted that this is indeed a worse deal than the 1919 Treaty of Versailles”.
 
For the world markets, Greece will be a local issue and not hog the limelight, till the next time it is ready to default.