Aside from Argentina, that I've discussed here, the most popular empirical example used to argue that Greece and other weak euro area countries would benefit from ditching the euro and introduce devalued national currencies, is the experience of the 1930.
Though there are differences between the euro and the gold standard, they are similar in the sense that both means fixed exchange rates and the inability to devalue/depreciate the currency.
And the empirical record of the 1930s is pretty clear. The faster countries got off the gold standard the faster they recovered. Britain and Sweden that devalued first recovered first, the United States devalued somewhat later and recovered somewhat later, while France and Belgium that held on to the gold standard the longest recovered latest of all countries.
This strong correlation was in fact mostly causal. The reason was that bank panics had caused wide scale collapses of fractional reserve banks creating in turn what Hayek called secondary deflation in very high doses, often as high as 10% per year, something that given the inability of nominal interest rates to go below zero meant that real interest rates was as high as 10%-far above the natural interest rate, causing not only malinvestments but also fundamentally sound investments to be liquidated. And when other countries devalued this helped aggravate this secondary deflation.
When those unnaturally high real interest rates were dramatically lowered after the gold standard was abandoned, this caused the economies to recover.
However, in the euro area today we see no secondary deflation. Price inflation is well above 2.5% in the euro area, and even in Greece it is still 1.5%. That is why we can't expect a similar development if Greece or others re-introduce their currencies. Eventually at some point during the coming years they will almost certainly see some form of recovery, but that will happen regardless whether they stay in the euro are or not.
The baltic countries have seen their economies recover strongly ( Estonia's GDP have increased a cumulative 13.9%, Latvia's by 10.5% during the last two years), albeit from a very depressed level, despite not devaluing while Britain and Iceland failed to see any recovery following the dramatic drop in the value of their currencies in 2008, illustrating that devaluations only work if it is made in the context of secondary deflation.
Both the French presidential and the Greek parliamentary elections yesterday were pretty bad. The Greek election meant a choice between on the one hand incompetent and corrupt incumbents that have wrecked the country and on the other hand extreme left wing parties and an outright neo-Nazi party who promises that Greece as a nation will continue to be able to live at the expense of other nations.
The French election meant pretty much the same choice, except that Sarkozy wasn't as bad as the Greek incumbents and Hollande isn't as bad as the Greek opposition of left-wing extremists and neo-Nazis. In both cases, a majority of voters decided to throw out the incompetent incumbents and instead go for the even crazier opposition. In a way that is understandable. As one commenter put it, it was basically insolent for Greece's two leading (until this election) parties, New Democracy and Pasok, to ask voters to give them power again after the problems they've caused. And though France has performed much better than Greece in recent years, the French economy has still been quite weak.
But just because the incumbents are incompetent fools who have wrecked the countries, doesn't mean that the opposition is better, as the people of Germany (and the rest of the world) experienced after they voted out the incompetent and corrupt Weimar German establishment and voted in the National Socialist German Worker's Party (the NSDAP in its German abbreviation) into power in 1932.
And while particularly the French but to a lesser extent the Greek opposition are nowhere near as bad as the German opposition in 1932, the fact remains that they represents even crazier policies than the incompetent incumbents, as they cling to the illusion that it will continue to be possible for everyone to use the state to live at the expense of others, as France's greatest economist of all time would have put it.
This means that unless the electoral winners break the promises they made to the voters, the European economic crisis is about to become a lot worse because of yesterday's election results.
Most names, including "Stefan" and "Karlsson", are either exclusively first names or last names, but there are also names that could be either. One example of that is "Paul", as is illustrated by the names "Ron Paul" and "Paul Krugman". The two faced off in a debate that one can call "Paul vs. Paul" or "the battle of the Pauls".
Ron Paul managed to hit Krugman good with several of his arguments, including pointing out that late 19th century cyclical slumps are an indictment of the absence of central banks then the inflationist policies of later Roman emperor's that led to the Empire's collapse is an indictment of inflationary policies, an argument that Krugman clearly didn't anticipate, as he simply responded that he didn't endorse Emperor Diocletian's policies.
Krugman also falsely claimed that there was no coercion in the use of currency, being either ignorant of deliberately dishonest about the existence of "legal tender laws".
Ron Paul was however embarrased when he endorsed Milton Friedman, whose view of the depression is that it "should be blamed on the government" because the central bank wasn't activist enough, and also he falsely claimed that "debts were liquidated" after World War II. Perhaps the latter is meant to refer to some debts to Germany, but there was no liquidation, at least not in nominal terms, of the debts of Americans. Krugman however failed to point out Ron's inaccuracy on the latter point.
What is really clear is that Krugman himself believed he lost the debate, since he wrote a blog post arguing that such debates aren't the best way to settle such issues since one can't directly settle disputes over data. That's actually a largely valid point, such face-offs aren't the best way to settle theoretical disputes, but again illustrates that even though Krugman doesn't believe that his arguments were disproven, he does believe that Ron Paul did better in this particular debate.
There is one striking difference between the British and Spanish recession. Whereas Britain has had a drop in real wages by nearly 2.5% but has had stable employment, Spain has had stable real wages but a drop in employment by nearly 4%.
Note that in both cases, real aggregate labor earnings, which is a function of employment and average real weekly/monthly earnings, have declined more than GDP. In Britain GDP was unchanged compared to a year earlier while real aggregate labor earnings fell by nearly 2.5% while in Spain GDP fell by 0.4% while real aggregate labor earnings. There are 3 possible explanations for this:
1) GDP weakness is underestimated.
2) Labor market weakness is overestimated.
3) Corporate profits and other non-labor income is booming
There is no information available about 3) for the first quarter, but during Q4 2011 corporate profits was indeed rising in Spain so it is likely a partial explanation there, but in Britain profits actually fell meaning that this factor just makes the discrepancy even larger.
Particularly in Britain but also in Spain one factor is that the GDP deflator rose a lot less than the harmonized consumer price indexes. If you believe the GDP deflator is more accurate then that leads us to 2), but if you believe the CPI is more accurate then that leads us to 1). I personally more in the latter explanation for both.
In Britain it is also a factor that nominal labor earnings rose during Q4 2011 more than the labor statistics have reported, which is puzzling since in most countries data over labor earnings in the national accounts are based on the labor market reports. It would be interesting to know just what other data source the producers of the national accounts use.
Just as I expected, today's preliminary GDP number from Britain showed that it has entered a double dip recession as GDP has fallen two quarters in a row. Compared to a year earlier, real GDP was unchanged and compared to 4 years earlier, it is down by 4.3% If you take population growth into account, the numbers are even weaker.
Some have questioned the accuracy of the data, claiming that employment data and various "surveys" give a brighter picture. Starting with the employment data, it is true that they show an increase in the number of employed, but they also show a big drop in real wages, with average weekly earnings increasing only 1.1% from a year earlier, which given the 3.5% inflation rate implies a drop of 2.4% in real terms. Aggregate real labor income is thus in fact falling even more than GDP, so these data do not paint a brighter picture of the U.K. economy.
As for the surveys, it is true that they generally give a stronger picture, but since they are only just surveys of a small number of people, one should view them with even greater suspicion than other data.
One form of really hard data that is almost certain (assuming the government don't deliberately distort like they did in Greece), tax revenue, confirms that there is a recession, as tax revenues only rose in nominal terms by 1.3%, a real decline of more than 2% despite the fact that the first quarter was 1 day (February 29) longer this year compared to last year.
It is possible that to a small extent this weakness was the result of falling inequality (in a progressive tax system, tax revenues increase/decrease more than GDP if inequality increases/decreases), but since all revenue sources increased less than inflation for the quarter as a whole, that is only a minor factor.
The Economist has an article which argues that China deep future problems in its economy and society because of its low birth rate. That may perhaps indeed become true by 2050 or 2060 or so, but in the coming two or three decades, shortage of workers will certainly not prevent it from becoming the world's biggest economy.
First of all, I'm not sure whether The Economist has the fertility rates right. I can't find any official numbers from China, but in the United States it is more like 1.93 (in the link it is stated as 64.4 per 1000 woman in ages 15 to 44, so to get 1.93 you multiply 64.4 by 30 and then divide it by 1000) children per woman in reproductive age according to the latest official statistics, than the 2.08 The Economist claims it is.
More importantly, the absolute number of births was still 16.04 million in China, slightly more than four times the 3.98 million in the United States. This means that the number of native born 25-year olds in China will be slightly more than 4 times more compared to the United States in 2036. The difference in the total number of 20-year olds in 2031will probably be somewhat smaller because the U.S. is likely to have some net immigration while China probably won't , but China will still have a nearly 4 times bigger working age population as late as 2036.
Ironically, though the paper money standard that replaced the gold standard was originally meant to empower governments, it now seems that paper money is perceived as an obstacle to unlimited government power for three reasons:
1) When people make cash payments, their purchases aren't tracked, giving them privacy from government surveillance
2) If payments are made in cash, it will enable them to make payments without paying taxes.
3) The existence of physical cash makes it impossible to lower nominal interest rates below zero because if they are below zero then people will withdraw their money from banks.
So, while paper money isn't as big impediment to government power as the gold standard was, it is nevertheless an impediment compared to a society with only electronic money. Because of this, the more ardent statists favor the abolition of paper money and a monetary system with only electronic money and electronic payments. The latest statist to advocate the abolition of paper money is leftist Salon-writer Matthew Yglesias.
What bothers Yglesias isn't however so much points 1) and 2), but 3). Yglesias entitles his article "How eliminating paper money could end recessions" and argues that if only interest rates could be lowered sufficiently below zero, people would want to stop holding money and buy more, ending any and all recessions according to Yglesias.
It is certainly true that if money loses value, people will be more inclined to make purchases rather than hold on to money. But that needn't increase production, it is more likely to simply raise prices. Indeed, by lowering the incentive for earning money it is more likely to lower production.
After all, what matters for the demand to hold money isn't just nominal interest rates on money but also expected inflation, or in other words what matters is real interest rates. And we've had societies where real interest rates have been extremely negative, impoverishing anyone who holds on to money for too long. The most extreme and (in)famous examples of this was Zimbabwe in 2009 and Germany in 1923. Last time I checked, Zimbabwe in 2009 and Germany in 1923 wasn't examples of booming economies "despite" the fact that real interest rates in those countries were close to -100% (the lowest possible level)
After falling for several months, the yearly consumer price inflaion in Britain rate increased again in March , from 3.4% to 3.5%..
So-called analysts however assure us that this is just "temporary".Bank of England Governor Mervyn King said in February last year after several years of inflation at 3% or more similarly that the high inflation then was just "temporary", and in February 2010 he similarly assured us that high inflation then just reflected "short-run factors".
English may only be my second language, but I am quite certain that "temporary" and "short-run" means in English that something will only last for a short period of time. Yet here we have Mervyn King and other Keynesians telling us year after year that high British inflation will only be "temporary".
The failure of British inflation to fall despite the fact that growth is stagnant or slightly negative is of course something that contradicts the Keynesian dogma that a weak economy must mean that inflation will be low (and that high inflation must create an economic boom). It is probably because the Keynesians refuse to believe that their theories true that they year after year embarrass themselves by calling something that has persisted for years and shows no sign of disappearing "temporary".
Recently, a number of Keynesians, including of course Paul Krugman, have argued that the key to a quick economic recovery is higher price inflation. Just how high they want it go depends on which one you ask but Krugman for example argued that sustained inflation at 3-4% would "almost surely help the economy".
Now, it should be conceded that higher monetary inflation can stimulate short-term economic growth to the extent the new money enters the economy according to the scenario described by the Austrian business cycle theory. The recent slight acceleration of growth in the United States does reflect this. But this will only pave the way for future problems, as Greenspan's "successful" attempt to revive the economy after the "dot com bubble" by creating a housing bubble illustrated.
Moreover, if inflation happens in other ways it will not revive real economic growth. It will boost nominal growth but the higher price inflation will mean that real economic growth won't increase. An example of this is Britain, who have had sustained inflation of 3-4% (though VAT changes have sometimes pushed it below or above that range, but the average has been about 3.5%) for the latest 5 years, yet have seen unemployment rise and real average pay for people with jobs drop by a total of 10%.
But perhaps Krugman was too timid in his recommendation for inflation of 3-4%. How about 9.2%? That is in fact what they've had in Iceland on average between 2008 and 2011. If higher inflation was a miracle cure, then surely 9.2% would be good enough.
Yet though Iceland's economy recovered slightly in 2011, by 1.5% adjusted for terms of trade changes, it remained a full 9.7% below its 2008 level. And that's assuming an average inflation rate of "only" 6.7% (for some reason the domestic demand and private consumption deflators in the GDP numbers have increased significantly less than the harmonized consumer price index for Iceland).
Some point to how Iceland still has relatively low (7%) unemployment but that overlooks first of all that Iceland had extraordinarily low (just 2%) unemployment before the crisis, and secondly that "hidden" unemployment has increased strongly as there has been a big drop in the participation rate and thirdly that there has been a 9% drop in real wages for people who still have jobs.
I am fluent in two languages: namely English as readers may have concluded from the fact that I am able to blog in English here, and Swedish, which is my native language, as readers may have concluded from the fact that I'm from Sweden (and blog in Swedish here). Due to the similarities of Norwegian and Danish to Swedish, I understand these languages mostly, but that is only due to the fact that the languages are so similar, I haven't made any effort to study them.
Setting aside my "coincidental" understanding of Norwegian and Danish, the third language that I have some understanding of is German. I studied it in Sweden's equivalent of high school, and though I've forgotten some of what I learned (It was a lot of years since I was in high school), I remember most of it, and have recently upgraded my vocabulary by watching on youtube German language versions of movies I've watched. Still, I am far from being fluent in German , so for the time being I can only say that Ich kann deutsch sprechen und verstehen, aber nur ein bisschen.
Anyway, the reason I brought up this subject is that I've noticed an interesting pattern in the latest unemployment statistics: two out of the four countries in the EU with the lowest unemployment rates, namely Austria and Germany have German as the only official language and in one of the remaining, Luxembourg, it is one of the three co-existing official languages (along with French and Luxembourgish, the latter being basically a local version of German).
Add to that two German speaking countries outside of the EU, Switzerland and Liechtenstein, have even lower unemployment rates than Austria, Germany and Luxembourg, and it seems that at least for the time being the unemployed of Europe should try to learn German and apply for jobs in German speaking countries.