tag:blogger.com,1999:blog-6704573462403312459.post6253972161709427332..comments2024-03-29T02:53:03.321-04:00Comments on Moneyness: Grexit: An Escape to More of the SameJP Koninghttp://www.blogger.com/profile/02559687323828006535noreply@blogger.comBlogger19125tag:blogger.com,1999:blog-6704573462403312459.post-83911633844982023002015-07-07T20:51:56.033-04:002015-07-07T20:51:56.033-04:00Thanks for clarifying.Thanks for clarifying.Andrew E. Mathishttps://www.blogger.com/profile/13057529769573506419noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-71300936538431903052015-07-07T20:47:21.864-04:002015-07-07T20:47:21.864-04:00Gresham's law doesn't apply when two curre...Gresham's law doesn't apply when two currencies circulate at floating rates to each other. Only when the government or some other body requires that merchants accept them at a fixed rate to each other does it begin to have an effect. If the stipulated fixed rate overvalues one of the currencies, then the undervalued currency will disappear into hoards. <br /><br />If the Greeks were to introduce a new drachma, it would likely float against the euro, so Gresham's law doesn't apply.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-52355250191034883122015-07-07T20:38:38.525-04:002015-07-07T20:38:38.525-04:00Sorry to butt in here a day late and a drachma sho...Sorry to butt in here a day late and a drachma short, but why is Gresham's law irrelevant? If you have two circulating currencies, then Gresham's law (if I understand it correctly) states that the bad money (here, drachmas) will drive out the good (Euros), in this case likely due to hoarding. What am I missing?Andrew E. Mathishttps://www.blogger.com/profile/13057529769573506419noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-81137476677346057432015-07-02T21:03:21.380-04:002015-07-02T21:03:21.380-04:00I have some additional comments to how much effort...I have some additional comments to how much effort it was/is to switch TO the Euro. During a switch, commercial banks are obligated to exchange the old currency for Euros AT A FIXED EXCHANGE RATE for several months (I recall half a year, but I'm too lazy to check). The central bank is obligated to do the exchange for a longer time (I recall that in some cases forever but I might be wrong). And the exchange rate is set a long time in advance (I recall about half a year).<br /><br />Several weeks in advance, there was a huge information campaign for people to familiarise themselves with the new coins and notes (there still are, albeit smaller, information campaigns as the plastic 5€ and 10€ notes were introduced recently). People could buy a sample set of coins/notes to try it out directly.<br /><br />Furthermore, in some countries (e.g. Slovakia), there was no meaningful political or public opposition to the switch to the Euro. There was no debate. Everyone basically tacitly acknowledged it. This made the switch easier.<br /><br />Compared to that, the logistics and PR in Greece appear much more complex. Greek population does not appear to want to stop using the Euros either. I guess we'll have to see what happens.Peter Šurdahttps://www.blogger.com/profile/02219200720577247444noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-61204678961896967342015-07-01T08:13:41.795-04:002015-07-01T08:13:41.795-04:00As you point out, the euro has only been in circul...As you point out, the euro has only been in circulation for 15 years. The idea that this short period of time has created an overwhelming social pressure or inertia in favor of the euro as a unit of exchange seems odd. Most living Greeks clearly remember a time when they used drachmas.<br /><br />If olive oil producers post a euro price for their olive oil for foreign customers and a drachma price for drachma-using domestic customers, and the price ratio doesn't reflect the euro-drachma market exchange rate, then market forces will compel the producers to re-price. And if most Greeks are being paid in drachmas, then obviously olive oil producers will be compelled to post drachma prices if they want to sell most of their olive oil.<br /><br />Why not nationalize the banks, including the Bank of Greece. Then "tax" all euro-denominated accounts at 100% and transfer all of those euros to government accounts. At the same time issue an equal number of drachmas and credit each of those accounts with drachmas through a direct transfer on a 1-1 basis. Everybody wakes up with drachmas in their accounts. Use the taxed euros to pay off euro-denominated government debts, and hold the rest as foreign reserves.<br /><br />Pass legislation that requires every labor contract and existing private domestic debt relationship to be re-interpreted in drachma terms 1-1. Companies will be compelled to accept payment for their products in drachmas in order to meet their own payment obligations to employees.<br /><br />Pass additional legislation by which the Greek government stands ready to assume all euro denominated debts owed abroad (credit card, whatever), and those private debts are then replaced with drachma debts to the Greek government. Basically, you submit your credit card bills and other bills from foreign firms to a government office. They pay with the taxed euros - then they charge the debtor a drachma debt on a government account. (What to to with those debts then becomes a matter of policy.)<br /><br />There are a lot of state run services in Greece. If Greece refuses to accept euro in direct payment for those services, or for payment of taxes, while offering euro-for-drachma exchange at par, they can reduce the domestic circulation of euro notes rapidly.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-70866148024861538552015-01-26T11:25:10.403-05:002015-01-26T11:25:10.403-05:00"Economists studying dollarization suggest th..."Economists studying dollarization suggest that network externalities are the main reason for hysteresis. When a large number of people have adopted a certain standard there are significant costs involved in switching over to a competing standard. The presence of strong memories of past inflation may also explain dollar persistence."<br /><br />I think it is more fundamental than that, it is a reflection of the strength of the respective economies themselves. Especially if these countries are major traders, "hard currency", that is a currency with 'currency' has to be earned. Import dependent countries need to buy the dollars with something, which means a competitive value added export sector.<br /><br />The problems in Greece do not really relate to government debt, that is really a symptom, but the structure of its trade. These problems were hidden in the pre-Euro days through devaluation, but this did not do anything for industrial progress. <br /><br />Greece's problem existed pre-Euro and during the Euro. Its problems go back a long way.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-69834111971966699402015-01-25T20:12:22.332-05:002015-01-25T20:12:22.332-05:00The 1948 example had the following features: 1) Th...The 1948 example had the following features: 1) The existing currency was being canceled; 2) the existing currency was a failed one; 3) the new currency was to be supported by the strongest nation in the world. If Greece were to leave the euro, none of the same factors exit: 1) The euro is not being canceled; 2) the euro is not a weak currency; and 3) a new drachma would not receive US support. So 1948 Germany is a bad analogy to Grexit. JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-74616030677588005242015-01-25T12:52:07.537-05:002015-01-25T12:52:07.537-05:00The UK had a very brief dabble with USD denominate...The UK had a very brief dabble with USD denominated government debt and it was an utter fiasco. http://www.nationalarchives.gov.uk/cabinetpapers/themes/sterling-devalued-imf-loan.htm<br />It makes it all the more appalling that much of the world has used such a system for decades. Basically the Greek euro denominated government debt creates just the same problem doesn't it?stonehttp://directeconomicdemocracy.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-31305408616724790392015-01-25T12:43:03.991-05:002015-01-25T12:43:03.991-05:00In Latin America, I think it was especially true t...In Latin America, I think it was especially true that the local currencies were basket cases because the government debt was denominated in USD. That was the key step that ruined everything else as far as I can see. It meant that the governments had to exchange tax receipts that were in local currency for USD in order to service the government debt. If they had had local currency denominated government debt (as a developed world government would have), then the local currencies would not have been sliding. Then local people would not have wanted to have financial assets denominated USD and so the local currency would have been sought after and as a result stable.stonehttp://directeconomicdemocracy.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-63926662002482819202015-01-25T12:12:35.160-05:002015-01-25T12:12:35.160-05:00I'm just trying to get my head around this. I ...I'm just trying to get my head around this. I really appreciate your blog and the effort you take in explaining all of this. <br /><br />My understanding was that the Latin American governments did not have the political power to cause contracts to change. The military in those countries was beholden to the creditor interests. Perhaps even the CIA would have taken part in regime change had such measures been taken. But it really wasn't down to what customers and industry in those countries were needing in terms of a workable currency arrangement. Employers could have hired workers readily enough with local currency wage contracts. Suppliers would still have wanted to sell goods even using local currency.<br /><br />A switch from a currency to wriggle out of insurmountable debts was done in Germany in 1948 after all wasn't it? I think it is all about the political power of the creditors. In Germany in 1948, that power was fairly non-existent. In Latin America it was huge. Perhaps in Greece now it is not so strong?<br /><br />I'm struck by how currently lots of Polish household apparently have mortgages denominated in CHF. I'm fairly certain that such mortgages would not be allowed to be marketed to retail customers in the UK. I think countries such as the UK (and I guess Canada too) take legal measures to ensure the national currency is used. I was interested to see though that this gold clause was upheld by a US court http://www.ca6.uscourts.gov/opinions.pdf/08a0322p-06.pdf stonehttp://directeconomicdemocracy.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-79012723865111060942015-01-25T11:24:40.545-05:002015-01-25T11:24:40.545-05:00If it was easy for existing contracts, especially ...If it was easy for existing contracts, especially rent and wages, to be re-denominated from a stronger to a weaker unit, wouldn't the Latin American governments have been able to escape dollarization decades ago? The reason that a literature has sprung up on dollarization, de-dollarization, and hysterisis is because shifts like these don't occur between Sunday night and Monday morning. JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-22561999009459600322015-01-25T10:34:26.416-05:002015-01-25T10:34:26.416-05:00Thanks, sorry for not grasping that.
But perhaps ...Thanks, sorry for not grasping that.<br /><br />But perhaps then the point is that it isn't independent monetary policy that is the crucial issue here. <br /><br />Perhaps the crucial thing Greece needs is for existing contracts to be in Greece's own free floating currency and for Greece to have its own central bank standing by as a buyer of last resort so as to ensure that Greek treasury bonds don't have default risk.<br /><br />Many small countries (such as Singapore) just have rough exchange rate targets as being what largely governs monetary policy (rather than inflation targets). And yet they have functioning fiat currency systems whilst Greece frankly doesn't.stonehttp://directeconomicdemocracy.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-49163159763696906492015-01-25T10:25:12.330-05:002015-01-25T10:25:12.330-05:00"I'm not sure I fully understand why a Gr..."I'm not sure I fully understand why a Grexit wouldn't be substantive."<br /><br />The point of this post was very specific, about the ability of Grexit to lead to an independent monetary policy. It's not a comment on debt write downs. Having an independent monetary policy comes down to the control of an economy's price level. Whether a shop displays current price in euros or drachma is a therefore a crucial point. If only a portion of an economy's population of prices are expressed in drachmas, then that country's central bank only partially controls the price level.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-90488393696271193842015-01-25T09:43:30.593-05:002015-01-25T09:43:30.593-05:00I'm not sure I fully understand why a Grexit w...I'm not sure I fully understand why a Grexit wouldn't be substantive. Wage contracts, pensions, rental agreements, loan repayments, Greek treasury bond servicing, etc are all in Euros now. Let's imagine that Greece decrees that all of those contracts swap over to being drachma denominated as of Monday. Then on Monday the Drachma floats, surely those contracts require some sort of legal recourse if the creditors want to enforce Euro denominated payments. As far as I can see it all boils down to who controls those laws. <br /><br />As far as I can see, whether a shop displays current prices in Euros or Drachmas isn't the crucial point, it's existing long running payment contracts that really make the difference. Its the burden of those contracts that is hobbling Greece.<br /><br />The switch over to the euro entailed just such a swap in the denomination of pre-existing contracts didn't it? So it does have a legal precedent.<br /><br /><br />Perhaps an example is the swap from the Reichsmark to the Deutsche Mark in Germany in 1948<br />https://en.wikipedia.org/wiki/Shock_therapy_(economics)#Economic_reformsstonehttp://directeconomicdemocracy.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-38524388281588441502015-01-25T03:41:20.156-05:002015-01-25T03:41:20.156-05:00My error - Gresham's Law is irrelevant.My error - Gresham's Law is irrelevant.KongKinghttps://www.blogger.com/profile/10992633301481631373noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-70891441256625137302015-01-25T00:12:40.191-05:002015-01-25T00:12:40.191-05:00Agreed.Agreed.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-68321279147345924882015-01-25T00:12:10.671-05:002015-01-25T00:12:10.671-05:00"The use of Euros as a medium of exchange for..."The use of Euros as a medium of exchange for domestic transactions would quickly decline to almost zero because of Gresham's Law."<br /><br />Do you know what Gresham's law means? <br /><br />And of course the use of euros would decline to almost zero, just like the use of U.S. dollars rapidly declined to zero in Latin America.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-8361005546562616892015-01-24T23:42:47.958-05:002015-01-24T23:42:47.958-05:00All the issues mentioned here have little merit.
1... All the issues mentioned here have little merit.<br />1. "All euro bank deposits held at Greek banks must be forcibly converted into drachma deposits, and speedily enough that a bank run is preempted".<br />Forcible conversion is probalby unnecessary. The big money has already fled from Greek banks. Much of that which remains is likely to be voluntarily converted to drachmas in order to pay taxes and otherwise do business in Greece. This will be especially the case if drachma prices are lower than Euro prices.<br /> <br />2. "The Bank of Greece... needs to issue new drachma bank notes".<br />Yes, but this not a serious problem. With competent planning, drachmas could be printed in advance, and then be quickly put into circulation. <br /><br />3. "euro remains the economy's preferred accounting unit, even as Greek drachmas begin to circulate as a medium of exchange"..."hysteresis".<br />This discussion is a bit confused. <br />It seems to be recognised that drachmas would immediately become a medium of exchange. This because all government expenditures, transfer payments and tax payments would be in drachmas.<br />The use of Euros as a medium of exchange for domestic transactions would quickly decline to almost zero because of Gresham's Law.<br /><br />Regarding the unit of account, maybe prices and wages would be expressed in both Euros and drachma initially. Or in US$. Or any other unit. It really doesn't matter what is the unit of account. <br /><br />What matters is the level of Greek prices and wages, expressed in whatever unit of account is preferred. In contrast to the current arrangements, with Grexit "Greek goods & services will become "competitive on world markets, spawning an export/tourism-led recovery". I would add to this, that domestically produced import substitutes would also become more competitive within Greece.KongKinghttps://www.blogger.com/profile/10992633301481631373noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-77158867567778716582015-01-24T18:18:52.238-05:002015-01-24T18:18:52.238-05:00If you think about how Greece could successfully i...If you think about how Greece could successfully introduce a new currency, it's pretty clear that there's only one practical way: by credibly pegging it to the euro. Eventually, after a few years perhaps, they could consider floating it and regain monetary policy control. But that won't help with the current crisis.<br /><br />So I agree completely and I'm surprised by the number of professional economists who suggest that Greece can benefit (short term) from leaving the euro. It's bad advice.<br />Maxnoreply@blogger.com