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Austerity may cause internal devaluation. Lack of government spending - economy activity reduced and prices deflate. Lower prices means exports increase and imp

by meric 15y ago

Austerity may cause internal devaluation. Lack of government spending - economy activity reduced and prices deflate. Lower prices means exports increase and imports decrease, eventually allowing the economy to grow again. At the same time, debts are paid and the government will have more money to spend again. Yes, deflation is dangerous, but here it is the only way to get around the fixed Euro currency to lower prices.

jeffdavis 15y ago
"Austerity may cause internal devaluation." I'm confused. Devaluation is inflation, right? You're saying that lower government spending may lead to inflation? And you think deflation is the more desirable outcome? I'm not disagreeing, but I haven't heard that line of reasoning before.
- meric 15y ago
  Devaluation is deflation. Normally when the government gives a whole stack of money to its citizens, the country's currency inflates. Its exports will then be cheaper to others. Greece cannot do this; Its currency is fixed with its major trading partners. There is no way to lower prices of its exports... besides deflation. There's two ways out of it. Quit the Euro (default on debts) and inflate the economy to lower export prices (look where that got the US, I'm starting to be skeptical of this tactic), or cut public spending, start deflation, to lower export prices. Since in France, Germany, prices are not deflating, deflation in Greece will lower Greece's export prices. While consumers in Greece may stop spending... "Ooo my money goes up in value by simply holding it", importers in France and Germany will not stop spending "Buying from Greece is cheaper than buying from France, Germany. No brainer". They're not going to stop spending because if they stop spending money to import they also stop earning money from selling the imports to their home countries. Lower export prices -> Increased exports. Eventually, hopefully, it will bring the country back into growth. I think deflation is more dangerous when your currency isn't fixed with others, because then banks/companies will be able to manipulate your currency to take advantage of the deflation in the country. When the currency is fixed, there is just as much point for an importer to play with currency as US Steel plays with US Dollars. (i.e Not their business). This is all what I think Germany is trying to make Greece do. I don't have evidence for any of it.

by meric 15y ago

jeffdavis 15y ago

"Austerity may cause internal devaluation." I'm confused. Devaluation is inflation, right? You're saying that lower government spending may lead to inflation? And you think deflation is the more desirable outcome? I'm not disagreeing, but I haven't heard that line of reasoning before.

meric 15y ago
Devaluation is deflation. Normally when the government gives a whole stack of money to its citizens, the country's currency inflates. Its exports will then be cheaper to others. Greece cannot do this; Its currency is fixed with its major trading partners. There is no way to lower prices of its exports... besides deflation. There's two ways out of it. Quit the Euro (default on debts) and inflate the economy to lower export prices (look where that got the US, I'm starting to be skeptical of this tactic), or cut public spending, start deflation, to lower export prices. Since in France, Germany, prices are not deflating, deflation in Greece will lower Greece's export prices. While consumers in Greece may stop spending... "Ooo my money goes up in value by simply holding it", importers in France and Germany will not stop spending "Buying from Greece is cheaper than buying from France, Germany. No brainer". They're not going to stop spending because if they stop spending money to import they also stop earning money from selling the imports to their home countries. Lower export prices -> Increased exports. Eventually, hopefully, it will bring the country back into growth. I think deflation is more dangerous when your currency isn't fixed with others, because then banks/companies will be able to manipulate your currency to take advantage of the deflation in the country. When the currency is fixed, there is just as much point for an importer to play with currency as US Steel plays with US Dollars. (i.e Not their business). This is all what I think Germany is trying to make Greece do. I don't have evidence for any of it.