10 ms·

Devaluation is austerity done right

48 points by tankenmate 14y ago

AndrewDucker 14y ago
Completely correct. It means that people have time to adjust, as their existing contracts come to an end and new ones come in at new prices, and it gives a boost to the export industry. Also, getting a 5% reduction in your pay through prices going up is a lot easier, psychologically speaking, than trying to actually negotiate a 5% pay reduction with all workers.
givan 14y ago
Why should everyone pay for the speculators?
- bornhuetter 14y ago
  Because like it or not, a lot of the money is simply gone. Sure we need better regulated financial markets and less corruption in politics and the media, but in the mean time something needs to be done to get economies back on track. Increasing taxes on "the rich" and companies are good to some extent, but they will only take you so far. The kind of austerity that involves taking away allowances and tax credits for the poor and middle classes is idiotic. Devaluation certainly does affect the innocent, but overall it is much more equitable (and workable).
  - bahadden 14y ago
    Devaluation is the easiest solution from a political point of view, but it is basically a transfer of value from those with savings/creditors to those in debt (including all of us with large credit card debts and mortgages). It punishes the careful savers and rewards the profligate, and sends a signal that living high on credit is good, while those that save and live within their means are idiots.
    - bornhuetter 14y ago
      Are you talking about currency devaluation, or price inflation? EDIT: also, are you referring to people who have their savings in cash, or investments?
      - bahadden 14y ago
        Good point. I'm actually talking about inflation. I'd assume devaluation usually leads to inflation, especially if we buy a lot of imported goods (we do), but it ain't necessarily the case.
        bornhuetter 14y ago
        Foreign goods would become more expensive, and local goods would remain relatively unaffected (at least in theory). People would be less likely to take their money out of the country. Foreigners would be more likely to invest. If as a saver you invest in local businesses and property, you should do well for yourself.
        ams6110 14y ago
        Almost all our goods except food are foreign or made of foreign-made components, or are commodities traded on the world market.
        bornhuetter 14y ago
        Which country are you talking about?
    - raverbashing 14y ago
      And that's exactly why I disagree devaluation is good It's the coward solution, and if you're not gonna pay 100% of the owed value, just do that instead of making old money worth more than new money.
      - 14y ago
  - planetguy 14y ago
    "The kind of austerity that involves taking away allowances and tax credits for the poor and middle classes is idiotic" No, the kind of profiligacy that allows the existence of allowances and tax credits for the poor and middle classes is idiotic. The poor are a different argument, but there's no way the middle classes should be dependent upon government welfare. Let the middle classes earn their own money and pay a modest share in taxes, not become welfare recipients themselves. Every European country has a lot of government spending and employees and programs that they need to eliminate, first, before they think about raising taxes.
    - bornhuetter 14y ago
      Whether the existence of the welfare state in the first place is good or not is an entirely different argument; one that I'm not going to get into. My point is that when governments say that the best short-mid term solution to the debt crisis is to cut benefits and raise taxes on pensioners they are either lying or crazy.
      - planetguy 14y ago
        Well the easy solution to a debt crisis is always just to stop paying your debts and fall back on the fact that you have a lot of guns. But quite apart from the ethical concerns of unilaterally cancelling all your own debts, the long-term ramifications for the nation can be profound
    - aptwebapps 14y ago
      I don't see how tax credits are always idiotic. Presumably in a given system there is an idea tax rate for a particular income level. If the actual system has the rate 10% to high but the tax credit puts that back where it 'should' be, is that idiotic? In short, don't the final numbers matter more than whether we reach them with or without a tax credit?
- crusso 14y ago
  Aren't the "speculators" a bit of a boogeyman? Nobody complains when the speculators provide economic benefit (which studies say they do). Besides the general market efficiencies that speculation has been shown to provide, sometimes the speculators drive prices down very sharply in anticipation of commodity devaluation. No one ever seems to complain about that.
  - bornhuetter 14y ago
    You're being very unspecific about who these "speculators" are, and lumping a huge group of people and companies into one bucket. Saying that the financial sector provides no benefits to society is ill-judged, but saying that everyone should be absolved of wrong-doing just because the sector as a whole provides some benefit is equally ill-judged.
    - crusso 14y ago
      > You're being very unspecific about who these "speculators" are, and lumping a huge group of people and companies into one bucket. Generalizing the evil "speculators" without calling out specific sub-groups or behaviors was exactly what the OP did and why I was pointing out the reason we tolerate and encourage speculation in the first place. >but saying that everyone should be absolved of wrong-doing just because the sector as a whole provides some benefit is equally ill-judged. I certainly didn't say that or even mean to imply it if that's how you read it.
  - r00fus 14y ago
    The major problem is the speculators risk OUR MONEY for THEIR PROFITS. If they win, they take their captured marbles home, if they lose, well, they were playing with other people's marbles. This privatization of profits and socialization of risk is what's at stake. If actual accountability (even if it's not entirely symmetrical) existed, I doubt anyone would care. Right now, it's heads==they win, tails==we lose. That's a fools game, and we're the fools.
    - crusso 14y ago
Jebus 14y ago
Government is short of cash? No worries, just steal more money from the people!
nickik 14y ago
What people dont understand specially the ones that are against all inflation is this: There is natural and artefical inflation and deflation. You get for example natural inflation when you have supplyshocks (If somebody blow up intel CPUs would be more expensiv) you get artefical inflation when you print money. The first is just the market reacting to 'something'. The same goes for deflation, you have natural (good) deflation when you become more productive (you can see this for example in times of the (real) gold standard when moneysupply was almost constant. Bad deflation is when you activly contract the money supply (this is the great depression story and the reason why people think deflation is generally bad). What can we conclude out of this? The shock to the economy was pretty big, we shuld have seen natural inflation happening, this is however still represt since the ECB pushes that down by creatning bad deflation (in real terms). In nominal terms this means 2% inflation, in real it is deflation. When central banks target inflation (say 2%) and the economy is growing around 2% (thus 2% deflation) they acctully produce 4% inflation in nominal terms. This is all works out relativly good and is not to harmful as long as the real terms are not to big. If the become big (say a economy that is shrinking 10% or more) targeting inflation can be very harmful. The price level should reflect the economy and not what some guy think is the right growth of the price level. The idea would be to target NGDP or in terms of the formula MV=Py, it would mean holding MV constant (or let it grow 3-7% depening on your opinion on some other matters). The school that supports this would be: http://en.wikipedia.org/wiki/Market_monetarism http://en.wikipedia.org/wiki/Market_monetarism This would mean that the ECB should look at the grow/contraction of the economy and setting the price level accordingly. That would mean in the current case that they would have do QE to hit the 'right' pricelevel. I would recomend this book: Less Than Zero: The Case for a Falling Price Level in a Growing Economy http://mises.org/books/less_than_zero_selgin.pdf http://mises.org/books/less_than_zero_selgin.pdf Edit: I just found a nice post that shows a nice example of a case in history when central banks tried to recontract after the had inflated befor, this is in many ways simular with what we have today: Danish and Norwegian monetary policy failure in 1920s – lessons for today http://marketmonetarist.com/2012/06/12/danish-and-norwegian-monetary-policy-failure-in-1920s-lessons-for-today/ http://marketmonetarist.com/2012/06/12/danish-and-norwegian-... Edit: Correction of a error point out in comments.
- crusso 14y ago
digitalengineer 14y ago
Not correct, this is helping the debtors (like our government) while extremely hurting the savers, people on fixed income, people with a pension and low income. As most western-european countries import more than they export (especially energy and food, when their currency goes down, what they can afford to import goes down as well. What we're seeing and why the $ and € don't fluctuate much (even though Europe is in such a mess) is both Europe and the US (and all the others) are devaluing their currency one after another. It's called Currency Wars: "Currency wars are one of the most destructive and feared outcomes in international economics. At best, they offer the sorry spectacle of countries' stealing growth from their trading partners. At worst, they degenerate into sequential bouts of inflation, recession, retaliation, and sometimes actual violence. Left unchecked, the next currency war could lead to a crisis worse than the panic of 2008. http://www.amazon.com/Currency-Wars-Making-Global-Portfolio/dp/1591844495 http://www.amazon.com/Currency-Wars-Making-Global-Portfolio/... Here's a nice video explaining it using a comic from the '50's! http://www.youtube.com/watch?v=bFxvy9XyUtg http://www.youtube.com/watch?v=bFxvy9XyUtg
- spot 14y ago
  that may or may not be a problem (a kind of moral hazard) depending on your perspective but it's not an argument about devaluation vs piecemeal austerity, it's a separate issue. maybe that video explains it but i didn't have patience for more than a couple minutes of it. do you have a written argument?
- pessimizer 14y ago
  Don't forget the debtors that aren't the government, the vast majority of the population. The dollar has been absurdly overvalued for a long time, destroying our exports and causing us to import excessively, leading to trade deficits and more debt. Not that savers won't be hurt unfairly, but they will be hurt even more by the accumulation of capacity loss caused by the lost potential output of austerity philosophies. Unless they are retired, and don't plan to participate anymore - then they're just screwed. Unless we decide not to eviscerate Social Security and Medicare, that is. The most important thing is not to have people who want to work sitting idly, especially people who are newly entering the workforce. This destroys the future more than debt ever could. We either need to lower nominal wages or devalue the currency to the same effect - or let massive unemployment become the new normal. Good luck lowering nominal wages: It's really a choice between the last two options. I'm not sure what the conservative saver horde expects will happen to its savings over the long term if interest rates stay at 0% or negative indefinitely. Maybe pour all of their money into something else dumb like dotcoms or real estate and become the whiners of tomorrow?
Shivetya 14y ago
and for whom does he propose this solution? Devaluation will only help countries who have their own currency, countries which bought into the Euro gave up that option and are nearly wholly dependent on more fiscally responsible member countries to bail them out. Yet those countries are not obligated to do so. In the good old days of having your own currency you would just soak your own populace and foreign investors. With a joint currency your attempting to soak another countries people as a whole and that idea is not palatable to many. Then there is this whole term of austerity. It certainly doesn't mean what it used too. Most of those countries whom activist and wanna be economist claim are being harmed by austerity are in fact being harmed by still increasing government spending. Apparently austerity now means not spending as fast as before but it certainly does not mean spending less.
- nickik 14y ago
  I agree that most countrys dont acctually do Austerity but I think some of these countrys are to far for austerity to work, they have to default. People say that is not possible because of the Euro but that is BS, even on the gold standard countrys defaulted. The reason that greek can not just default is because of EU regulation not the Euro per se (or any common currecny). The defaulting country would have to default, balance the buded and start again (update there democracy and constituion would be a plus). Real wages would have to go down, lifing standards would go down, government handouts would have to go down but it would set a sound platform for recovery. The EU could help with Aid for the people that got hit hardest. They should have done that in 2008, like iceland they would be much better of now.
- pessimizer 14y ago
  Not more "fiscally responsible countries", just richer ones. Unless you're arguing that it is fiscally responsible to loan massive amounts of money to other countries to buy your exports. If I loan money to Bob the unemployed guy to buy a car from me, and it turns out that he can't pay me back on time, do I get to call myself fiscally responsible? On the Euro: Either closer fiscal union or end it. If the member state's debt can't be backed by a proper central bank, it's just a mechanism for shipping wealth from the periphery to the core.
Symmetry 14y ago
Iceland was one of the countries that was hurt the worst by the financial crisis, remember the joke "What's the capital of Iceland? About a buck fifty". But since then its done very well recovering. To quote a blog: Iceland did almost everything right. They stiffed the bank creditors to avoid aggravating the moral hazard problem, just like the textbooks recommend. In the eurozone the bank creditors are being bailed out. They relied of fiscal policy to address S/I and debt issues, and let monetary policy address AD, just as the New Keynesians were recommending in the 1990s. In the eurozone they combined tight money with reckless deficits. And now Iceland is growing fast and the eurozone is stagnating. http://www.themoneyillusion.com/?p=14895 http://www.themoneyillusion.com/?p=14895
- betterth 14y ago
  Question I wonder is: Iceland is tiny. Like TINY tiny kind of tiny. Their National GDP is $12.57 billion USD. America spends about $20.2 billion a year on air condition in Afghanistan. The point being -- the world economy can (and did) withstand the default and destruction of the Icelandic finance system. Could it have survived the default and destruction of the American finance system? Or would our incredibly interlinked, globalized finance system bring down the world economy with it?
  - nickik 14y ago
    Acctually it is very, very unlickly that the American finance system would have blown. Everytime the US has bailed out banks unter the premis 'to big to fail' later analysis has shown that the impact would have been much smaller. There is a book about that: "Too Big to Fail: The Hazards of Bank Bailouts" http://www.amazon.com/Too-Big-Fail-Hazards-Bailouts/dp/081570304X/ref=tmm_pap_title_sr http://www.amazon.com/Too-Big-Fail-Hazards-Bailouts/dp/08157... or maybe better for most people a podcast with the auther: http://www.econtalk.org/archives/2009/10/gary_stern_on_t.html http://www.econtalk.org/archives/2009/10/gary_stern_on_t.htm... It was acctually the feds intervention (paying banks to hold reserves) not the fall of leeman that froze the holesale lending market.
  - Symmetry 14y ago
    Good question, but I think the important thing to reduce moral hazard is that the bank's investors or creditors take it on the nose, not that we allow the bank itself to collapse. Still, it is a more complicated question for the US than for Iceland.

48 points by tankenmate 14y ago

Completely correct. It means that people have time to adjust, as their existing contracts come to an end and new ones come in at new prices, and it gives a boost to the export industry. Also, getting a 5% reduction in your pay through prices going up is a lot easier, psychologically speaking, than trying to actually negotiate a 5% pay reduction with all workers.

givan 14y ago

Why should everyone pay for the speculators?

bornhuetter 14y ago
Because like it or not, a lot of the money is simply gone. Sure we need better regulated financial markets and less corruption in politics and the media, but in the mean time something needs to be done to get economies back on track. Increasing taxes on "the rich" and companies are good to some extent, but they will only take you so far. The kind of austerity that involves taking away allowances and tax credits for the poor and middle classes is idiotic. Devaluation certainly does affect the innocent, but overall it is much more equitable (and workable).
- bahadden 14y ago
  Devaluation is the easiest solution from a political point of view, but it is basically a transfer of value from those with savings/creditors to those in debt (including all of us with large credit card debts and mortgages). It punishes the careful savers and rewards the profligate, and sends a signal that living high on credit is good, while those that save and live within their means are idiots.
  - bornhuetter 14y ago
    Are you talking about currency devaluation, or price inflation? EDIT: also, are you referring to people who have their savings in cash, or investments?
    - bahadden 14y ago
      Good point. I'm actually talking about inflation. I'd assume devaluation usually leads to inflation, especially if we buy a lot of imported goods (we do), but it ain't necessarily the case.
      - bornhuetter 14y ago
        Foreign goods would become more expensive, and local goods would remain relatively unaffected (at least in theory). People would be less likely to take their money out of the country. Foreigners would be more likely to invest. If as a saver you invest in local businesses and property, you should do well for yourself.
        ams6110 14y ago
        Almost all our goods except food are foreign or made of foreign-made components, or are commodities traded on the world market.
        bornhuetter 14y ago
        Which country are you talking about?
  - raverbashing 14y ago
    And that's exactly why I disagree devaluation is good It's the coward solution, and if you're not gonna pay 100% of the owed value, just do that instead of making old money worth more than new money.
    - 14y ago
- planetguy 14y ago
  "The kind of austerity that involves taking away allowances and tax credits for the poor and middle classes is idiotic" No, the kind of profiligacy that allows the existence of allowances and tax credits for the poor and middle classes is idiotic. The poor are a different argument, but there's no way the middle classes should be dependent upon government welfare. Let the middle classes earn their own money and pay a modest share in taxes, not become welfare recipients themselves. Every European country has a lot of government spending and employees and programs that they need to eliminate, first, before they think about raising taxes.
  - bornhuetter 14y ago
    Whether the existence of the welfare state in the first place is good or not is an entirely different argument; one that I'm not going to get into. My point is that when governments say that the best short-mid term solution to the debt crisis is to cut benefits and raise taxes on pensioners they are either lying or crazy.
    - planetguy 14y ago
      Well the easy solution to a debt crisis is always just to stop paying your debts and fall back on the fact that you have a lot of guns. But quite apart from the ethical concerns of unilaterally cancelling all your own debts, the long-term ramifications for the nation can be profound
  - aptwebapps 14y ago
    I don't see how tax credits are always idiotic. Presumably in a given system there is an idea tax rate for a particular income level. If the actual system has the rate 10% to high but the tax credit puts that back where it 'should' be, is that idiotic? In short, don't the final numbers matter more than whether we reach them with or without a tax credit?
crusso 14y ago
Aren't the "speculators" a bit of a boogeyman? Nobody complains when the speculators provide economic benefit (which studies say they do). Besides the general market efficiencies that speculation has been shown to provide, sometimes the speculators drive prices down very sharply in anticipation of commodity devaluation. No one ever seems to complain about that.
- bornhuetter 14y ago
  You're being very unspecific about who these "speculators" are, and lumping a huge group of people and companies into one bucket. Saying that the financial sector provides no benefits to society is ill-judged, but saying that everyone should be absolved of wrong-doing just because the sector as a whole provides some benefit is equally ill-judged.
  - crusso 14y ago
    > You're being very unspecific about who these "speculators" are, and lumping a huge group of people and companies into one bucket. Generalizing the evil "speculators" without calling out specific sub-groups or behaviors was exactly what the OP did and why I was pointing out the reason we tolerate and encourage speculation in the first place. >but saying that everyone should be absolved of wrong-doing just because the sector as a whole provides some benefit is equally ill-judged. I certainly didn't say that or even mean to imply it if that's how you read it.
- r00fus 14y ago
  The major problem is the speculators risk OUR MONEY for THEIR PROFITS. If they win, they take their captured marbles home, if they lose, well, they were playing with other people's marbles. This privatization of profits and socialization of risk is what's at stake. If actual accountability (even if it's not entirely symmetrical) existed, I doubt anyone would care. Right now, it's heads==they win, tails==we lose. That's a fools game, and we're the fools.
  - crusso 14y ago

Jebus 14y ago

Government is short of cash? No worries, just steal more money from the people!

nickik 14y ago

What people dont understand specially the ones that are against all inflation is this: There is natural and artefical inflation and deflation. You get for example natural inflation when you have supplyshocks (If somebody blow up intel CPUs would be more expensiv) you get artefical inflation when you print money. The first is just the market reacting to 'something'. The same goes for deflation, you have natural (good) deflation when you become more productive (you can see this for example in times of the (real) gold standard when moneysupply was almost constant. Bad deflation is when you activly contract the money supply (this is the great depression story and the reason why people think deflation is generally bad). What can we conclude out of this? The shock to the economy was pretty big, we shuld have seen natural inflation happening, this is however still represt since the ECB pushes that down by creatning bad deflation (in real terms). In nominal terms this means 2% inflation, in real it is deflation. When central banks target inflation (say 2%) and the economy is growing around 2% (thus 2% deflation) they acctully produce 4% inflation in nominal terms. This is all works out relativly good and is not to harmful as long as the real terms are not to big. If the become big (say a economy that is shrinking 10% or more) targeting inflation can be very harmful. The price level should reflect the economy and not what some guy think is the right growth of the price level. The idea would be to target NGDP or in terms of the formula MV=Py, it would mean holding MV constant (or let it grow 3-7% depening on your opinion on some other matters). The school that supports this would be: http://en.wikipedia.org/wiki/Market_monetarism http://en.wikipedia.org/wiki/Market_monetarism This would mean that the ECB should look at the grow/contraction of the economy and setting the price level accordingly. That would mean in the current case that they would have do QE to hit the 'right' pricelevel. I would recomend this book: Less Than Zero: The Case for a Falling Price Level in a Growing Economy http://mises.org/books/less_than_zero_selgin.pdf http://mises.org/books/less_than_zero_selgin.pdf Edit: I just found a nice post that shows a nice example of a case in history when central banks tried to recontract after the had inflated befor, this is in many ways simular with what we have today: Danish and Norwegian monetary policy failure in 1920s – lessons for today http://marketmonetarist.com/2012/06/12/danish-and-norwegian-monetary-policy-failure-in-1920s-lessons-for-today/ http://marketmonetarist.com/2012/06/12/danish-and-norwegian-... Edit: Correction of a error point out in comments.

crusso 14y ago

digitalengineer 14y ago

Not correct, this is helping the debtors (like our government) while extremely hurting the savers, people on fixed income, people with a pension and low income. As most western-european countries import more than they export (especially energy and food, when their currency goes down, what they can afford to import goes down as well. What we're seeing and why the $ and € don't fluctuate much (even though Europe is in such a mess) is both Europe and the US (and all the others) are devaluing their currency one after another. It's called Currency Wars: "Currency wars are one of the most destructive and feared outcomes in international economics. At best, they offer the sorry spectacle of countries' stealing growth from their trading partners. At worst, they degenerate into sequential bouts of inflation, recession, retaliation, and sometimes actual violence. Left unchecked, the next currency war could lead to a crisis worse than the panic of 2008. http://www.amazon.com/Currency-Wars-Making-Global-Portfolio/dp/1591844495 http://www.amazon.com/Currency-Wars-Making-Global-Portfolio/... Here's a nice video explaining it using a comic from the '50's! http://www.youtube.com/watch?v=bFxvy9XyUtg http://www.youtube.com/watch?v=bFxvy9XyUtg

spot 14y ago
that may or may not be a problem (a kind of moral hazard) depending on your perspective but it's not an argument about devaluation vs piecemeal austerity, it's a separate issue. maybe that video explains it but i didn't have patience for more than a couple minutes of it. do you have a written argument?
pessimizer 14y ago
Don't forget the debtors that aren't the government, the vast majority of the population. The dollar has been absurdly overvalued for a long time, destroying our exports and causing us to import excessively, leading to trade deficits and more debt. Not that savers won't be hurt unfairly, but they will be hurt even more by the accumulation of capacity loss caused by the lost potential output of austerity philosophies. Unless they are retired, and don't plan to participate anymore - then they're just screwed. Unless we decide not to eviscerate Social Security and Medicare, that is. The most important thing is not to have people who want to work sitting idly, especially people who are newly entering the workforce. This destroys the future more than debt ever could. We either need to lower nominal wages or devalue the currency to the same effect - or let massive unemployment become the new normal. Good luck lowering nominal wages: It's really a choice between the last two options. I'm not sure what the conservative saver horde expects will happen to its savings over the long term if interest rates stay at 0% or negative indefinitely. Maybe pour all of their money into something else dumb like dotcoms or real estate and become the whiners of tomorrow?

Shivetya 14y ago

and for whom does he propose this solution? Devaluation will only help countries who have their own currency, countries which bought into the Euro gave up that option and are nearly wholly dependent on more fiscally responsible member countries to bail them out. Yet those countries are not obligated to do so. In the good old days of having your own currency you would just soak your own populace and foreign investors. With a joint currency your attempting to soak another countries people as a whole and that idea is not palatable to many. Then there is this whole term of austerity. It certainly doesn't mean what it used too. Most of those countries whom activist and wanna be economist claim are being harmed by austerity are in fact being harmed by still increasing government spending. Apparently austerity now means not spending as fast as before but it certainly does not mean spending less.

nickik 14y ago
I agree that most countrys dont acctually do Austerity but I think some of these countrys are to far for austerity to work, they have to default. People say that is not possible because of the Euro but that is BS, even on the gold standard countrys defaulted. The reason that greek can not just default is because of EU regulation not the Euro per se (or any common currecny). The defaulting country would have to default, balance the buded and start again (update there democracy and constituion would be a plus). Real wages would have to go down, lifing standards would go down, government handouts would have to go down but it would set a sound platform for recovery. The EU could help with Aid for the people that got hit hardest. They should have done that in 2008, like iceland they would be much better of now.
pessimizer 14y ago
Not more "fiscally responsible countries", just richer ones. Unless you're arguing that it is fiscally responsible to loan massive amounts of money to other countries to buy your exports. If I loan money to Bob the unemployed guy to buy a car from me, and it turns out that he can't pay me back on time, do I get to call myself fiscally responsible? On the Euro: Either closer fiscal union or end it. If the member state's debt can't be backed by a proper central bank, it's just a mechanism for shipping wealth from the periphery to the core.

Symmetry 14y ago

Iceland was one of the countries that was hurt the worst by the financial crisis, remember the joke "What's the capital of Iceland? About a buck fifty". But since then its done very well recovering. To quote a blog: Iceland did almost everything right. They stiffed the bank creditors to avoid aggravating the moral hazard problem, just like the textbooks recommend. In the eurozone the bank creditors are being bailed out. They relied of fiscal policy to address S/I and debt issues, and let monetary policy address AD, just as the New Keynesians were recommending in the 1990s. In the eurozone they combined tight money with reckless deficits. And now Iceland is growing fast and the eurozone is stagnating. http://www.themoneyillusion.com/?p=14895 http://www.themoneyillusion.com/?p=14895

betterth 14y ago
Question I wonder is: Iceland is tiny. Like TINY tiny kind of tiny. Their National GDP is $12.57 billion USD. America spends about $20.2 billion a year on air condition in Afghanistan. The point being -- the world economy can (and did) withstand the default and destruction of the Icelandic finance system. Could it have survived the default and destruction of the American finance system? Or would our incredibly interlinked, globalized finance system bring down the world economy with it?
- nickik 14y ago
  Acctually it is very, very unlickly that the American finance system would have blown. Everytime the US has bailed out banks unter the premis 'to big to fail' later analysis has shown that the impact would have been much smaller. There is a book about that: "Too Big to Fail: The Hazards of Bank Bailouts" http://www.amazon.com/Too-Big-Fail-Hazards-Bailouts/dp/081570304X/ref=tmm_pap_title_sr http://www.amazon.com/Too-Big-Fail-Hazards-Bailouts/dp/08157... or maybe better for most people a podcast with the auther: http://www.econtalk.org/archives/2009/10/gary_stern_on_t.html http://www.econtalk.org/archives/2009/10/gary_stern_on_t.htm... It was acctually the feds intervention (paying banks to hold reserves) not the fall of leeman that froze the holesale lending market.
- Symmetry 14y ago
  Good question, but I think the important thing to reduce moral hazard is that the bank's investors or creditors take it on the nose, not that we allow the bank itself to collapse. Still, it is a more complicated question for the US than for Iceland.