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Got on DeLong’s blog today:

Ten Mostly Economics Pieces Worth Reading: February 9, 2010 …
By Brad DeLong

4) Felix Salmon: Helicopter-Firehose Trichet:

Warren Mosler has an interesting and provocative remedy for Europe’s current fiscal woes: the European Central Bank should simply print 1 trillion euros, and hand it out, on a pro-rated basis, to all the Eurozone states. This is a per-capita payment: it would be based on population, not on GDP, with the highest-population countries getting the most money. Mosler reckons that spending would be unaffected, because the Eurozone countries are already up against their Maastricht limits, and that therefore inflation wouldn’t be affected either. More importantly, he says, the Eurozone debt ratios would come down, by say 5 percent of GDP across the board.

The interesting thing is that given recent weakness in the euro, something along these lines — if not quite as explicit — seems to be already priced in, to some degree. I don’t think anybody in Europe is particularly worried about inflation right now; if anything, deflation is more of a problem, especially in the PIIGS. The big question, of course, is whether and how anybody at the ECB would ever let something like this happen, given its much-vaunted independence. Deflation worries might have to pick up quite a lot before it happens, and even then it’ll be a very tough sell among the European central-banking crowd.


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12 Responses

  1. Great to see this out “there” Warren!

    If the Germans who dominate the ECB are so worried about it, they can just take their portion and spend it on an extra weeks holiday in Greece this summer.

  2. At some point the people realize the currency is worthless, a sham, and hyperinflation sets in. It’s not a technical condition, you don’t see it coming. It’s a mindset that overtakes an economy like a virus. Why not make every European a millionaire tomorrow? It’s just numbers in a computer, right?

      1. Bill’s point doesn’t deserve a “yes and the world will end at some point too” rejoinder. In my opinion he is absolutely right. Print up a trillion Euros and you face a real possibility that everyone comes to the conclusion that another trillion is on the way and they start buying everything off the shelves and voila you have hyperinflation (or at least very serious inflation). Just because Bill or anyone else can’t tell you what the magic figure is and when it would happen doesn’t mean his point isn’t well taken.

      2. Bill/Jason: “(or at least very serious inflation). … Just because Bill or anyone else can’t tell you what the magic figure is and when it would happen doesn’t mean his point isn’t well taken.”

        Jason/Bill, the problem with this/his statement is it a conjecture which leads to political paralysis. Is that the ‘point’ to be well taken?

        If you’ve read the papers on this site you would understand that
        Warren’s proposal and the solution to your inflation fears are both easy to implement through fiscal policy action. Action, not paralysis.

      3. “they start buying everything off the shelves”

        And in Euroland, the VAT kicks in and immediately starts draining purchasing power from the private sector. It’s really tough to have hyperinflation in a country with a functioning tax system. In fact, you might say that hyperinflation is another word for the breakdown of taxing authority – not a response to “printing money” (whatever that means)

    1. Bill,
      Because that (your straw man) would be absurd. That’s why Warren is rationally proposing a E3,000 per capita transfer (based on >300M EMU population). Just a slight “fiscal” adjustment to take the short term pressure off. Resp,

  3. “my euro ’solution’ is on DeLong’s blog today”

    Perhaps this is a ‘peace’ offering?

    Kinda like Iran offering an alternative path other than war. Requires a small reciprocal move?

  4. in the mid 90’s when the mexican peso blew up and confidence went to 0 or less the peso went from maybe 3.5 to the dollar to 10 where it stayed for a long time. Same when Russia blew up- the ruble went from 6.48 to 28, where it also stayed for a long time.

    Point is, even under far more severe conditions than anyone imagines, you don’t just leap to hyper inflation.

    The value of a currency is a function of prices paid by govt when it spends, etc. as in all the literature on this site. Note that
    all the great latin am inflations were traced to indexation of govt psyments.

    So as long as
    there is continuous tax enforcement a jump to hyper inflation is more than highly unlikely.

  5. The inflationists also have to look at Japan and not just cite Weimar and Zimbabwe, which were outliers arising from exogenous shocks. Anyone looking at Japan’s humongous debt to GDP ratio would run out screaming, “The sky is falling. Hyperinflation is here for sure!” Never happened. Instead, Japan has been fighting deflation with extraordinarily low rates. You have to look at situations case by case in terms of prevailing conditions, not just apply “commonsense” nostrums masquerading as theorems.

    Post-Weimar Germany is continually fretting about inflation. Now it needs to be concerned with deflation.

  6. the euro still has a deflationary bias, and if greece defaults that many financial assets vanish, further tightening up the currency.

    right now the euro is being torn in both directions.

    the increased deficits are adding net financial assets and driving it down, as is the desire to exit.

    but on going tax liabilities and fiscal tightening plans and the risk of default and deleveraging and high unemployment are deflationary and fundamentally supporting the currency.

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