This page has been archived and commenting is disabled.

A Conversation Between Econophile and Martin Wolf

Econophile's picture




 

From The Daily Capitalist

This is a recent conversation I, the not-famous Econophile, had with the famous Martin Wolf, much lauded and awarded dean of economics writers and chief economics correspondent for the Financial Times. This is our second exchange and I have to admit I enjoy them. He drives me nuts, but I very much respect the guy even though he is neo-Keynesian in his world view. He's very bright and articulate. And, usually, he writes very well -- perhaps my finest compliment.

He recently wrote what I thought was a nonsensical article whereby he thought the cure to the southern eurozone's problems was for the Germans to spend more. You can read the article at the Financial Times. You need to register, but they give you 9 articles per month free.

Here's the conversation. I think you will enjoy it.

 

1

 

Dear Mr. Wolf:

I just read your article on "Europe Needs German Consumers." You say, among other things:

So long as the European Central Bank tolerates weak demand in the eurozone as a whole and core countries, above all Germany, continue to run vast trade surpluses, it will be nigh on impossible for weaker members to escape from their insolvency traps. Theirs is not a problem that can be resolved by fiscal austerity alone. They need a huge improvement in external demand for their output. …


What would happen if governments also slashed their spending? In an economy without monetary or exchange-rate offsets to austerity, any reduction in spending is likely to lead to at least an equivalent short-run reduction in output (a “multiplier” of one). …


Germany needs to return the favour. …


If the aim is to avoid disaster, the answer is temporary fiscal support for the struggling countries, robust aggregate demand in the eurozone as a whole and a substantial rebalancing of that demand, led by Germany. The fiscal support would be designed to prevent a short-term confidence collapse from triggering a default. In return, weak countries would need to commit themselves to falling nominal wages and a programme of fiscal retrenchment. …

So, punish Germany for doing well and reward Greece for fiscal insanity?

I cannot make sense of what you are getting at here, Mr. Wolf. We all know that Greece will be bailed out by Germany and France and that Greece won’t structurally change as will be demanded. Why would they if they know their getting bailed out?

In what way does the ECB “tolerate” weak demand? Or, to put it another way: how can they increase demand? I suppose by some Keynesian magic.

According to your Keynesian theory, AD=C+I+G -- [Aggregate Demand (GDP) = consumption + gross investment + government spending]. Are you suggesting that all we have to do is increase C? How? By increasing G? Can you tell me how that works or has ever worked?

If government (G) takes money from the consumer (C) and spends it, how has that helped the economy? Yes I know it increases AD (GDP) but no wealth has been created, no organic growth. You should understand that GDP measures only spending, not the creation of wealth in an economy. Otherwise have G spend everything and see how fine things would be.

Are you suggesting that the good Germans go out and buy stuff from Greece to be Euro-patriotic? And what “favor” are they returning? Germany produces goods the rest of the world wants and Greece doesn’t, not to mention that 25% of Greece’s working population works for the government. There’s a formula for success. What favor have the PIGS done for the Germans other than having nice beaches?

How about letting them fail? Moral hazard and all that. Why drag down the rest of the eurozone so they can suffer along with the PIGS?

With all due respect, you don’t make any sense here at all.

Econophile


2

 

 

This wasn't about Greece. It was about all of southern Europe. Germans wanted these people in the eurozone. I don't see the sense of using it as a machine for serially bankrupting all their partners.

What is it with this US desire to rerun the Great Depression. Wasn't destroying civilisation once enough for you?

Martin Wolf


3

 

 

I still don’t understand what you are saying. What are you suggesting? How did the Germans bankrupt them?

And why do you attack me for asking? And why attack me the basis of something you apparently know nothing about? Make sense of what you are saying and then we can talk about what’s wrong with the world.

And I don’t recall that we destroyed civilization. I believe we rescued it.

I thought it was the Brits and their desire for world colonial domination who destroyed civilizations. Your mercantilist greed from the All Red Route, to India, the Levant, and North America did a hell of a job. You left them with railroads and socialism and look how well your former minions did.

Of course we shook of colonial domination first and put into practice ideals of the Enlightenment so we’re better off. Before I forget, thanks for Locke, Hume, and Adam Smith. We couldn’t have done it without them. Too bad the UK didn’t follow their ideals.

Come on Mr. Wolf. Be serious.

Econophile


4


On the rescuing civilisation thing, I am fascinated that so many Americans believe global history started in 1941 (with the second world war).

The Great Depression, which, of course, began in the US led directly to Hitler's arrival in power. He would never have been elected without it.

I have been trying to explain how I view the world economy over many years. If I have failed to explain it to you in tens of thousands of words, I will be unable to do so now. But my basic view is that mercantilists usually force the rest of the world to accumulate ultimately unpayable debts. That is what is happening in the eurozone.

Martin Wolf


5


You see, it’s just so hard to get any respect these days in a “what have you done for me lately” world. But you should know, as a journalist no one sits at your feet waiting for the next gem of wisdom. Actually in your situation that may be the case so that must be nice. Sorry for not having read all your opinions.

But … there you go again. You attack rather than discuss. I think I know a bit about history, and I thought you would get my “Enlightenment” thing as very pre-WWII history, not something from Timothy Leary in the ‘60s.

And what’s this constant “you Americans” stuff? So now we are now at fault for Hitler? Didn’t know that. Of course, there was Neville the Stout. Whatever. Sorry if you’re prickly about that. You brought up the “civilization” comment and opened yourself up for the dig which I very much enjoyed.

Just curious. Do you think the Great Depression was caused by “capitalism” rather than Hoover and Roosevelt? Hmmm.

I also don’t understand your comment on mercantilists. I was thinking more of Europe’s colonial history or even China today or perhaps Japan 20 years ago.

Are you saying that it is the policy of say, G-7 governments to force the citizens of Greece to buy foreign products and finance them with foreign lenders? Or by the funding of the IMF, sovereigns are forced to borrow for useless infrastructure? (Actually that may be true in some cases.) Or the Greek government is forced by foreign governments to build useless infrastructure projects such as their $15 billion Olympics fiasco and finance it through foreign lenders? Do you see this as a necessary result of free trade?

Econophile


6


I didn't think I had said anything particularly controversial about the link between the Great Depression, the rise of Hitler and WWII. It is well known that the Nazi vote soared as mass unemployment hit Germany shortly after the Great Depression hit the US and then onto the world. There is a far deeper point to discuss about the disastrous US role in the world between 1917 and 1941. But that would take much too long.

My reading of the Great Depression is that certainly policy makers made the situation worse but the impetus came from a breakdown in the co-ordination mechanism in the economy. I understand that there is a huge revisionist literature in the US, which says that government caused the Depression. The most plausible element of this argument, to me, is that the Federal Reserve, in response to the fundamental imbalances in the post-World War I gold standard, pursued too loose a policy in the 1920s.

My point on Germany and the eurozone periphery is quite standard international  macroeconomics. I don't feel I need to lay it out at length. If, as I presume, you think  macroeconomics is junk, I will not persuade you. Then both of us will have wasted our time.

I apologise if this is an unsatisfactory reply but it is the best I can do, in the circumstances. I have to move on to other things.

Martin Wolf


7


This is the second conversation we’ve had and, like the previous one, it didn’t end well. Too bad.

You did imply that we caused the rise of Hitler, and that is controversial. Don’t be coy. I think the role of the U.S. you call “disastrous” was actually fairly good compared to the rest of the world. With a big exception for Smoot-Hawley and the erection of trade barriers that all countries reciprocated and thus international trade collapsed. But, our semi-isolationist policy was fairly good. I suppose one could argue that we should have gotten into WWII sooner. But perhaps the idiots running the UK and France could have intervened when Hitler re-armed and discarded the Versailles Treaty. While I’m not an isolationist, I think our current foreign policy is a disaster, starting with W. Bush.

You are correct about “revisionist literature” regarding the Great Depression. And I’m assuming you are not using the term “revisionist” in a pejorative sense. The literature isn’t new and it’s quite good. I’ve read a lot of it. I was fed the “FDR saved the world” theory in college. Almost everyone taught Paul Samuelson’s book here. Don’t know what you learned at Oxford.

I don’t think it’s really revisionism, but more countering the myth that Hoover was laissez-faire, capitalism failed, and FDR saved us. A different way to look at things is the crash of 1920 vs. 1929. My favorite president, Harding (no relation) did nothing. Even though the market crashed deeper than ’29 and even though unemployment was greater (initially), the economy recovered in 18 months.

I’m not sure what you mean by the breakdown of the “coordination mechanism in the economy” during the depression. If you are referring to pricing, which is the only real economic coordination mechanism that I know of, then it didn’t break down. What “broke down” were Hoover’s interventionist policies that insisted on high wages to increase purchasing power and stimulate consumption (sound familiar?). That led to massive unemployment and a severe depression. He did much more but this was the worst. FDR then took a swing to fascism and central planning which caused the economy to collapse again.

I also agree that an increased money supply pursued by Coolidge led to ’29, but that the depression didn’t have anything to do with gold. Countries abandoned gold so they could inflate their way out of a depression. Going off gold is not what brought about a recovery as many Keynesians believe. The whole argument against gold is one of those post hoc ergo propter hoc things. I think you are assuming that the gold standard was a quaint barbarous relic. Of course I disagree, but I’m not going to convince you of that, and as you say it’s more complicated than this discussion.

I still don’t understand your conventional wisdom view of the eurozone and Germany. I have yet to figure out what you expect the Germans to do. Sorry, maybe that’s my failing.

I can’t let the dig about macroeconomics go by without comment. I assume by macroeconomics you are referring to neo-Keynesian econometrics. You presume correctly: I reject it. I afraid I adhere to the Mises—Hayek epistemological view of how we know what we know. I believe, perhaps stubbornly, that they were intellectuals and, though Keynes was a very bright man, he was an intellectual poseur. I keep hoping I can persuade you to look deeper, but then Hayek never convinced Keynes.

Thank you for the conversation. I don’t think it was a waste of time.

Econophile


8


You are an interesting phenomenon. Where do you find the time for all these exchanges?

As I said, the link between the Great Depression and the rise of Hitler isn't controversial. As to your semi-isolationist policy, unfortunately the US imposed an unsustainable peace after WWI and then withdrew. The results were predictable, as Germany overturned the settlement. Again, the impact of the Great Depression on the world had little to do with Smoot Hawley - a conservative myth. It had to do with the collapse of US demand and US bank financing of key European banks. Basically, the US trashed the gold standard. It really would be a good idea to try to view US history from the point of view of others.

I have a lot of time for Hayek. He was a very important philosopher. But, to me, his view of how the economic system as a whole works is theology, not a science. I understand our methodological differences are unbridgeable.

My point on Europe is quite simple. If one country in the system has a large structural current account surplus, its partners must have deficits. This means that the latter must be spending more than their incomes - i.e. selling claims to the citizens of the surplus countries. That worked while the housing bubbles went on. But now the capital importers suffer a chronic shortage of good claims to sell. The result is a collapse in demand and a very deep structural recession.

I do know how you would answer this.

I hope you don't mind if we leave it at that.

Martin Wolf


9


Thanks, I take that as a compliment. I don’t watch much TV and I have an unending faith in the reasonableness of my fellow man.

A few last points.

Post WWI: We are not on the same page here. As I recall the U.S. was fairly hands off during Versailles.

As to the Depression, I don’t know where you get your data. The best thing I’ve read is Rothbard’s America’s Great Depression. And the U.K. went off gold before the U.S.

I don’t think I’m a flag-waiving jingoist with an Amero-centric view on everything. But I am an ardent free market advocate. My problem is that most people I discuss economics with have no clue about anything other than what they were spoon fed in college or by the media. So I claim a certain amount of intellectual curiosity to be where I now am philosophically.

The fact you could say that Hayek is “theological” along with the Austrian tradition from whence he came, is, with all due respect, a complete misunderstanding of this school of economics. I have read Keynes’s General Theory, and could say it relies on magic.

The zero sum game of current account deficits/surplus is a meaningless statistic. Since the U.S. has been in deficit since the early ‘80s, one would think our GDP would show terrible negative growth, but we all know that isn’t the case.

We also differ on the circumstances surrounding the current crash and the bubble. The problem was not the collapse of demand, but the malinvestment made during the credit boom which was unsustainable. But it had a lot to do with debt.

Thank you again for the conversation. I’ll cut it off. As a present for being patient, I am sending you a PDF of my current analysis of the US economy, which was serialized in three parts. The PDF contains the entire piece. I have a different take on what is going on if you are interested.

Econophile


10


Yes, I agree. We are not making progress.

There was a time when I read a lot of Hayek. 25 years ago I thought myself a Hayekian. I would say that I still  agree with quite a bit of it. But I do not accept that it is a complete and final account of the economic system, as true believers do.

Martin


11


The UK went off gold because the US had trashed the gold-standard system.

Martin Wolf


12


I’ll respond eventually when I have more time. But you have the last word.

Econophile

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Sat, 02/13/2010 - 23:24 | 230324 JR
JR's picture

Wolf may be “fascinated that so many Americans believe global history started in 1941 (with the second world war),” but I am fascinated that Wolf thinks “the Great Depression, which, of course, began in the US led directly to Hitler's arrival in power.”

Hitler’s rise to power began at Versailles.

To give British economist John Maynard Keynes credit where credit is due, it was he who stormed out of the Versailles Peace talks in the spring of 1918, disgusted by the extent to which Western nations sought to milk a vanquished Germany to pay for their own distress at the end of the First World War, impoverishing the German people and setting the stage for World War II. 

Keynes recognized that the bill ultimately would be paid, even if the due date were pushed far down the road.

Ironic, isn’t it that Wolf puzzles over why the Germans now don’t want their tax money used to encourage the sort of reckless fiscal behavior – reckless lending, careless borrowing and over-consumption – that precipitated this financial crisis.

Perhaps the Germans have a memory.  Perhaps they remember how the Allied Powers scorned their principles of sound government and destroyed the German economy with the Treaty of Versailles, September 10, 1919, under the dominating thumb of President Woodrow Wilson.

Compare what happened to Germany with the “chains of Versailles”* with what’s happening now in the United States of America.  In Germany, our leaders:

Deprived the German people of territory, including vital mineral areas

Deprived her of her merchant fleet

Saddled her with impossible payments in reparations

Gave the new Czechoslovak state 3.5 million people of German ancestry and speech.

Reduced the mark’s purchasing power to zero bringing on the German economic crash of 1923.

Samuel B. Pettengill wrote in Reader’s Digest, October 1951, that a widow’s receipts in 1923 from her husband’s life insurance were “just enough to buy a meal.”  Drew Pearson on March 22, 1951, said that a cup of coffee “cost one million marks one day, a million and a half the next and two million the day following.”

And so were sewn the seeds for WWII.  President Franklin Delano Roosevelt said later to his Secretary of State James F. Byrnes that the German survivors of WWII “for a long time should have only soup for breakfast, soup for lunch and soup for dinner (p. 182 of Byrnes’s book,  Speaking Frankly 1947).

Germany’s final crowning blow came after WWII when her conquerors dismantled her industrial plants, and actually trucked out the machinery to re-assemble the plants on Soviet communist soil.

Today, America’s ruling billionaire plutocracy is maneuvering the following:

Displacing America’s blue-collar workers with lower-pay illegal immigrants to profit international corporations, and substituting her professional workers with cheaper H-1b’s and L1 visa workers

Relocating her manufacturing base on Third World soil

Saddling her mid-to-upper middle classes with the sustenance payments of housing, schooling and providing health care for the corporatists’ new low-pay work force

Devaluing the currency earned and saved by the American people as the store of value from their labors

Providing offshore tax havens for the plutocracy to avoid taxes

Replacing representative government with corporatist-lobby government.

To top it all off, the plutocracy maneuvered mortgage lending to make trillions in money off subprime loans to people who couldn’t pay and/or on houses that allegedly didn’t exist and, then, in a blind canyon, threw up their hands and said the taxpayers would have to pay.

The investment banker plutocracy not only bankrupted Germany and now Greece, but it is now in the process of bankrupting America.

*   http://simple.wikipedia.org/wiki/Treaty_of_Versailles

Win, lose or draw, Econophile?  You won. Hands down.

Sat, 02/13/2010 - 22:35 | 230297 Anonymous
Anonymous's picture

Why are journalists so arrogant? Wolf seems to be really full of himself.

It's not like he's a $1M per year hedge fund manager or a Fed governor. He's just a guy who writes well.

Sat, 02/13/2010 - 21:06 | 230246 Anonymous
Anonymous's picture

This is an interesting exchange that says a lot about europe. If you talk to these people, particularly Germans they have a very strange view of history. They think they're not racist but the Americans are and they'll actually claim the US started ww2. The British can be almost as bad. Plus, they think Americans are all idiots, so they won't even bother explaining. It's like they fixed the global warming statistics. I'll be glad once their union collapses and their economy turns to shit. There's no doubt that Europe is done as to having any type of world influence. The worst thing is they have lots of influence in our university system, which loves people with foreign accents. The US has some good points and I'm not convinced we can't compete with the Chinese, but if we listen to the Europeans forget it. The asian countries pick up some of this eurologic too. Indians in particular tend to follow British thinking towards America. The Chinese use German logic to justify snuffing out various groups. Gosh, I'm actually thinking of quitting Christianity here cause europe is such a shit hole.

Sat, 02/13/2010 - 20:48 | 230233 Anonymous
Anonymous's picture

"The UK went off gold because the US had trashed the gold-standard system."

In the words of Rahn Emanuel, that's F'n retarded.

The UK went off gold because they were broke-the nasty effect of imperialism.

In the 1920's they devalued the Sterling, which caused a bubble in the US stock market. Bubble burst and they were broke again.

They tried taking a bunch of money from Germany (because they were broke!!!), but then the Germans decided they wanted to kill them.

France did the same. The US was their ally, but I don't think we share equal responsibility, much less the blame.

Did anyone else notice how Wolfe is too busy to actually defend any of his ideas? What does he do except write about his ideas? Cowardly.

Sat, 02/13/2010 - 20:27 | 230214 JR
JR's picture

Martin Wolf is just a cleaned-up Randi Rhodes—they both rationalize squandering.

If the Keynesians are right, and we’re to spend, spend, spend, and Hazlitt is wrong and there’s no virtue in savings either for individuals or nations, then why is it that the U.S. government is having to take away savers’ money with negative interest rates to give it in the form of down-payment money to wannabe homeowners and car owners? Have they no savings of their own?

Henry Hazlitt explains that in the modern world, savings is only another form of spending. Hazlitt shows that a saving policy is both “in the best interests of the individual as well as in the best interests of the nation,” that a cheap-money policy is not. 

The true unadulterated fact is that if you don’t have money you can’t buy and if you don’t save then you don’t have money.  Thus your savings and taxes and devalued wages are being used by the Keynesians to provide the spending for the ever increasing appetite of their lending institutions—cash for clunkers, tax credits for first-time home buyers and home buyers who just wanna move on up, bailout for bankers, high pay for government employees, "free" healthcare and child credits for illegals...

Says Hazlitt: Keeping interest rates artificially low creates economic distortions.  “It tends to encourage highly speculative ventures that cannot continue except under the artificial conditions that gave them birth.  It discourages normal thrift, saving, and investment… It is obviously a process of cumulative danger.”  The truth is if the world does not save and add to its stock of capital, it cannot buy anything, Greece or no.

Progressive talk show hostess Randi Rhodes, alias Jewish Randi Buten who supported Obama over Hilliary Clinton and is best known while temporarily off-the-radio for her off-color characterization of Hilliary, explains economics in terms that everyone can understand: that’s one of the reasons she’s so popular with the lefties.  Yesterday’s program was all about how to fix unemployment, and tough-talking Randi first pointed out how the first stimulus was saving jobs—teachers were teaching, firemen were on the job, police were policing and all the rest, because Obama got in there with the money to save their jobs. 

What can be done now?  Why more money!  Says Randi: “Let’s give them all of it in order to get people back to work.”

Martin Wolf says it much, much better and uses far more complicated and interesting intrigue.   But the bottom line is the same:  It is paying people to work and consume, not paying for work. 

So if Greece is spending beyond its means, Martin and Randi and the Keynesians have the solution.  Guess what?  More money! Germany's money!  By the way, that “spending beyond your means” policy is just an under-the-table means to meet the means of...Guess who?…the international investment bankers.

Sat, 02/13/2010 - 18:40 | 230153 Wondering
Wondering's picture

I also think that the right response to Wolf's hypothesis about the US and the rise of Hitler was to ask him about the rise of the Junkers and their banks and their higher risk (taking stock as collateral for example, etc) banking practices (a la China's banks) behind the rise of the great German industrial giants from 1848 and why therefore the Treaty of Versailles was the revenge of the Bank of England on the Junker banks. Fascism as practiced under Bismarck was the target of the BOE and the Treaty and it paradoxically made a populist blend of Facism more likely a decade and a half later

Sat, 02/13/2010 - 18:24 | 230132 Wondering
Wondering's picture

Walked away very unimpressed by Wolf.

Silly, graceless and pompous. Thought the same of his last show off effort reprinted here a few days ago

Sat, 02/13/2010 - 17:50 | 230112 Anonymous
Anonymous's picture

Econophile - I am disheartened with your rude and ill informed responses to Mr. Wolf, as they only serve to confirm the widely held belief that Americans and bloggers are intellectual pigmies. Martin Wolf writes the most highly researched articles at the FT is the only economist at the paper who will even speak to members of the 'REAL ECONOMY', much less acknowledge that it even exists. He is 100% right on Wall Street's destroying Europe in the 30's and on his view of mercantalists' use of debt servitude. You ought to examine your craving for debasement of world living standards that you worship at the altar of fiat debt enslavement as the U.S. and Europe are being 'IMF'ed' like an African colony.

Sat, 02/13/2010 - 21:49 | 230268 dumpster
dumpster's picture

hog wash  ,, a wolfs in sheeps clothing .. thanks for feeding us with food laced with poison ,, bow scrap..

give the guy the back of your hand these keynesians have done much to destroy the lives of people and bring poverty wars and suffering ,

 

 Silly , silly,, when do we tell it like it is .

 

the world is coming apart because of wolfs policys and his ilk now just pile it on. madness

definition

 of insanity .. doing the same things over and over again expectiong to get different results

Sat, 02/13/2010 - 17:29 | 230093 Anonymous
Anonymous's picture

some questions you might want to throw at martin:

why does germany have a current account surplus? is it really because of "mercantilism"? has the german government been intentionally financing piigs borrowing, like china finances the u.s. treasury? or is it cultural ("protestant" savings habit)? or perhaps it is just because germany has a low rate of home ownership, so that (unlike piigs) it didn't experience a housing bubble and resulting debt-financed consumption boom?

is it true that higher inflation in piigs reflects a loss of competitiveness? what about the samuelson-balassa effect? what about the currency risk premium, which made the piigs currencies fundamentally undervalued versus d-mark when exchange rates were locked in 1999? when you disaggregate the inflation data, where has the higher piigs inflation actually be coming from? the price of haircuts maybe?

do current account imbalances drive the capital account or vice versa? is it really surprising that when households in the piigs suddenly got access to loads of cheap credit overnight for the first time in their living history, they went on a borrowing binge? maybe the value of "protestant" work and savings ethics is something that can only be learned the hard way, a lesson that can only be learned once the opportunity to overborrow and overconsume has actually presented itself? is the loss of piigs overconsumption really such a bad thing (albeit that the transition is of course painful)? perhaps germans just need to work less, produce less, earn less, and enjoy their leisure time a bit more?

does it make sense to talk about e.g. the "spanish" economy when total trade > 50% of gdp? how can the price of tradable goods in spain be any different than in germany (allowing for vat)? how is it possible for spanish labour in the tradable sector to become "uncompetitive" in the first place? are spanish trade unions really that powerful? if spain is experiencing a dreaded "asymmetric shock", doesn't that mean it will by definition be considerably offset by export demand from the rest of the eurozone? if not (i.e. if demand in the rest of the eurozone is also lacklustre), doesn't that mean that the shock is not "assymetric" and therefore the ecb will (eventually) need to cut rates for the whole eurozone?

bena gyerek

Sat, 02/13/2010 - 17:21 | 230085 Anonymous
Anonymous's picture

some questions you might want to throw at martin:

why does germany have a current account surplus? is it really because of "mercantilism"? has the german government been intentionally financing piigs borrowing, like china finances the u.s. treasury? or is it cultural ("protestant" savings habit)? or perhaps it is just because germany has a low rate of home ownership, so that (unlike piigs) it didn't experience a housing bubble and resulting debt-financed consumption boom?

is it true that higher inflation in piigs reflects a loss of competitiveness? what about the samuelson-balassa effect? what about the currency risk premium, which made the piigs currencies fundamentally undervalued versus d-mark when exchange rates were locked in 1999? when you disaggregate the inflation data, where has the higher piigs inflation actually be coming from? the price of haircuts maybe?

do current account imbalances drive the capital account or vice versa? is it really surprising that when households in the piigs suddenly got access to loads of cheap credit overnight for the first time in their living history, they went on a borrowing binge? maybe the value of "protestant" work and savings ethics is something that can only be learned the hard way, a lesson that can only be learned once the opportunity to overborrow and overconsume has actually presented itself? is the loss of piigs overconsumption really such a bad thing (albeit that the transition is of course painful)? perhaps germans just need to work less, produce less, earn less, and enjoy their leisure time a bit more?

does it make sense to talk about e.g. the "spanish" economy when total trade > 50% of gdp? how can the price of tradable goods in spain be any different than in germany (allowing for vat)? how is it possible for spanish labour in the tradable sector to become "uncompetitive" in the first place? are spanish trade unions really that powerful? if spain is experiencing a dreaded "asymmetric shock", doesn't that mean it will by definition be considerably offset by export demand from the rest of the eurozone? if not (i.e. if demand in the rest of the eurozone is also lacklustre), doesn't that mean that the shock is not "assymetric" and therefore the ecb will (eventually) need to cut rates for the whole eurozone?

Sat, 02/13/2010 - 16:27 | 230034 Madcow
Madcow's picture

Great conversation.Thanks.

One thing i think is being under-estimated - There are a lot of people who are hoping that a wave of inflation can wash away their sins and their finger-prints.  Over time, deflationary contraction will expose more and more fraud and abuse within the banking system, regulatory system, ratings agencies, government agencies, corporations, etc. etc. 

 

No one wants to go to jail or be tried for high treason. 

 

Sat, 02/13/2010 - 22:52 | 230310 scaleindependent
scaleindependent's picture

1+

Sat, 02/13/2010 - 16:35 | 230042 WaterWings
WaterWings's picture

Or have their wages garnished for defaulting on credit cards used to buy gold and ammo.

Sat, 02/13/2010 - 16:26 | 230032 Anonymous
Anonymous's picture

Let's not forget about England and Frances insistence on ludicrous reparations payments from Germany following WWI. That and other humiliating demilitarization and land transfer terms were the crux of Hitler's rise to power.

Sat, 02/13/2010 - 16:12 | 230020 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Econophiile: Sense and logic?

Martin Worlf: No.  Strawman.

Econ:  Strawman?

Wolf:  Strawman.  And lies.

Econ:  That is BS!  Let me tell you something with ernest....

Wolf:  Hitler, Great Depression, fear and more fear, strawman.

Econ:  I will politely end this conversation.

Wolf:  You are such an interesting phenomenon.  You would make a very promising sacrifice for the Bavarian Illuminati.  Have you ever considered a few years of stardom in exchange for your soul?  Also, economics is a science and philosophy is not.  Science is above philosophy because philosophy does not prove anything, and science proves that he who has the gold....

Econ:  Whatever you say, oh magical alchemist.

Wolf:  When I was young I used to question my sexuality, now I am comfortable with it.  Would you like to join me over mint julips?

Econ: I’ll respond eventually when I have more time. But you have the last word.

Econophile

Sun, 02/14/2010 - 20:27 | 230997 Econophile
Econophile's picture

Fabulous!

Sat, 02/13/2010 - 16:33 | 230039 WaterWings
WaterWings's picture

LOL

That last bit is true to Keynesian form:

Keynes obsessively counted and tabulated almost everything; it was a life-long habit. As a child, he counted the number of front steps of every house on his street. Later he kept a running record (not surprisingly) of his expenses and his golf scores. He also counted and tabulated his sex life.


The first diary is easy: Keynes lists his sexual partners, either by their initials (GLS for Lytton Strachey, DG for Duncan Grant) or their nicknames ("Tressider," for J. T. Sheppard, the King's College Provost). When he apparently had a quick, anonymous hook-up, he listed that sex partner generically: "16-year-old under Etna" and "Lift boy of Vauxhall" in 1911, for instance, and "Jew boy," in 1912.

 

http://www.moreintelligentlife.com/node/824

Sat, 02/13/2010 - 16:01 | 230008 Anonymous
Anonymous's picture

Wolfe is a Keynesian thus by default a liberal. A famous man once said 'If you are young and not a liberal you have no heart, if you are old and not a conserative you have no brains' (paraphrase).
My outlook is that if you are a liberal of any age you by default are freakin nuts, it just keeps getting worse as you get older. And to WaterWings, you would do much better to vote for Coulter or Palin. They are both more intellegent than Obama and put country first (not to mention conserative so therefore completey sane).
So, while I must give Econophile much credit, Wolfe is nuts and so can't be reasoned with. Even when everything comes crashing down because of massive spending while the world suffers debt saturation, liberals will never admit any wrong doing. Again, crazy people have no concept of reason.

Sat, 02/13/2010 - 23:07 | 230316 Yes We Can. But...
Yes We Can. But Lets Not.'s picture

Heh.  For amusement, go out on dating site match.com some time and conduct a keyword search to see a listing of those who describe themselves as 'intellegent'...

Sun, 02/14/2010 - 04:10 | 230443 WaterWings
WaterWings's picture

Make sure it is spelled incorrectly, with variations, to find the good stuff.

"entellijent"

Sat, 02/13/2010 - 15:56 | 230002 dumpster
dumpster's picture

a lot of great books

 

rhese keynesian gaints want  no new books

the walls are lined with books ,, we crash and burn while we read books . lol

 

capitalism by Reisman is a very comprehensive look at the problems..

 

books are written for the cheerleading section, to admire one self in the mirror , or to earn a great gold star on the fore head for tenure .. (and watch out from those who are denied as the news points out this day ,,

 

Sat, 02/13/2010 - 15:51 | 229997 ThreeTrees
ThreeTrees's picture

I love how economics today thinks it's a hard science.

When it comes to Economics empiricism fails by it's own rubric.  If knowledge can only be inducted then intepretting economic statistics is impossible.  "Correlation is not causation," and all that.

You can't escape a priori.

Sat, 02/13/2010 - 15:26 | 229979 percolator
percolator's picture

You should send Wolf a copy of Rothbard’s "America’s Great Depression" too.

A great book which I can only hope will enlighten his misinformed beliefs.

Sat, 02/13/2010 - 15:09 | 229969 pak
pak's picture

Excuse me for a second.

When someone describes China as an evil 17th-century-like mercantilist because of their currency manipulation, I have no problem with it.

But when Germany was able to maintain their surplus even while EUR climbed to 1.6, that shows one thing to me - Germany is the last remaining advanced industrial power, and they just make better stuff than anyne else.

I strongly believe that the US and China have been robbing the whole world for close to 30 years through their "vendor financing" scham, but they failed to bring Germany down. It seems mainstream American and British economists are just jealous with the Germans.

Sat, 02/13/2010 - 15:43 | 229991 Ben Graham Redux
Ben Graham Redux's picture

Much of Germany's surplus is within the EU which means that the jump in the Euro had less impact on their trade than you'd normally think.  The Germans appear to have played the vendor financing game like other mercantilists.

Sat, 02/13/2010 - 16:12 | 230022 pak
pak's picture

Did you mean to say Eurozone, not EU?)

In the Eurozone, Germans have large surpluses with France, Italy, Belgium, Austria and Spain.

However, they have even larger surpluses with the US, UK, plus large surpluses vis-a-vis Sweden and Switzerland - none of which are in the Eurozone.

In the Eurozone, they have meaningful deficits with Netherlands, Ireland and Czech Rep.

Germans have had such nice trade balances because their deficits with China, Japan and Russia have not grown oversized - remarkably because they have managed to export a lot to these three currency manipulator countries.

Therefore, your argument is not correct unless you can outline which mechanism of "vendor financing" exists between Germany, on one hand, and France and Italy, on the other..

Sat, 02/13/2010 - 16:25 | 230031 Ben Graham Redux
Ben Graham Redux's picture

I was referring to their trade with southern europe as well as the emerging european nations where they apparently do provide vendor financing.  In the case of Germany, it appears that they offer trade financing to allow these nations to purchase their capital equipment while running a total trade deficit with countries like Poland and the Czech Republic.  In essence, they sell high margin machinery while buying the cheaper output from that machinery.  They run a deficit while still providing capital.

Sat, 02/13/2010 - 17:54 | 230117 pak
pak's picture

So which of this puts Germany in the same league with China and the like who prevent their currency from natural appreciation, and use THUS acumulated reserves to vendor finance consumption of their own products?

Nothing, I guess.

German machinery is not "high margin", it is expensive because it's not made of silumin and plastic, and it's not made by Chinese, Indian or Mexican workers.

There's mercantilism and mercantilism. When a nation's only competetive advantage is its cheap currency - that's extremely unfair to anyone else.

It seems to me, a global neomercantilist resurgence is necessary to contain Chinese mercantilism. Yes, we will get a global depression, but with what we are doing now, we are just postponing and prolonging such a depression.

Free trade helped the US contain communism in Asia and win the Cold War. But it's also this WTO-type free trade combined with a fiat currency regime which has been at the core of the so-called "global imbalances" which are yet to cause a lot of pain.

Sat, 02/13/2010 - 18:27 | 230144 Ben Graham Redux
Ben Graham Redux's picture

There seems to be some miscommunication here.  Here's what I initially wrote: "Much of Germany's surplus is within the EU which means that the jump in the Euro had less impact on their trade than you'd normally think."  All I did was temper the point that Germans are running a trade surplus despite the rising euro. 

My point is that the Germans are playing the mercantilist game, to some extent, within the eurozone.  I never claimed they were on par with China or Japan,  I simply pointed out what should have been obvious to everyone.

Now, getting back to your point about Chinese mercantilism - I agree emphatically - so much so that I've been writing about it since 2004.  I've even had a couple of pieces published in the msm pointing that out.

Sat, 02/13/2010 - 15:00 | 229959 Anonymous
Anonymous's picture

Evidently, Mr.Wolfe has been busy replying:

More generally something, naturally, has to give here and according to the FT's Martin Wolf, Germany needs to return the favor as he puts it, or more specifically; the Eurozone needs German consumers.

(...) Germany was able to offset extreme domestic demand weakness with robust external demand, from both inside and outside the eurozone. Indeed, as much as 70 per cent of the increase in Germany’s GDP between 1999 and 2007 was accounted for by the increase in its net exports.

Germany needs to return the favour. More precisely, the only way for eurozone countries to slash huge fiscal deficits, without their economies collapsing, is to engineer another private-sector credit bubble or a huge expansion in net exports. The former is undesirable. The latter requires improved competitiveness and buoyant external demand. At present, none of this is available. It is difficult to regain competitiveness when the euro is strong, partly because Germany is so competitive, and eurozone inflation also so low.

This argument is similar to one Mr. Wolf made recently on Japan and in the context of which he and I had a tête-à-tête on just what the possibilities are for Japan's economy and its consumers to stage a recovery driven by domestic demand. My argument and beef with Mr Wolf is the same here. Thus, it is not because I think that Wolf is wrong and certainly not because I cannot see the fundamental need for Germany to attempt a rebalancing of its economy. However, the key question here is not what Germany needs to do, but whether it is feasible to expect Germany to pull forward the Eurozone through growth in domestic demand? I think it is not and I think you need to take a long hard look at the increasingly ageing German population and how this feeds into the ability of the economy to generate growth based on domestic demand.
http://eurowatch.blogspot.com/

Sat, 02/13/2010 - 21:45 | 230265 Econophile
Econophile's picture

Is that you, Martin? Just kidding.

What Keynesians don't get is that economies aren't national aggregates, they are, rather, the actions of individuals.

The only way for the eurozone to slash fiscal deficits is to spend less or tax more. You could have a country thriving with a balance of trade/payments deficit and still have healthy economic growth as in the U.S. since 1980. So what does export-imports have to do with it? In every case econometricians look at only one side of the balance sheet (exports) and fail to see the economic value of imports and its benefit to consumers (generally lower prices).

The Euro's and eurozone's problems are related to sovereign fiscal insanity and money supply shenanigans, not economic activity. Japan's problem is stagnation--which is where they've been for the past 20 years (avg. GDP growth of 0.6%) as a result of following the Keynesian playbook. Now they have the largest sovereign debt per GDP among the G-20. Taxes, debt, and the failure to liquidate bankrupt businesses have mired them in stagnation. They just won't learn.

If you and Wolf wish to cling to these long disproven beliefs, then you wish the world to catch the Japanese disease.

What the eurozone needs is more capitalism.

Sat, 02/13/2010 - 14:35 | 229934 Ben Graham Redux
Ben Graham Redux's picture

Wolf argued a narrow point - that a mercantilist within a multinational exchange system destabilizes the rest.  He's correct on that point.  He's also correct that greater consumption by Germans would solve the problem in the short run.

The real problem is that common currencies destroy the self balancing mechanisms where success leads to strong relative currencies which ultimately creates parities in relative cost to produce between countries.  Historically, southern Europe embraced a declining relative standard of living as they periodically devalued.

The thing I don't understand is why you were so brash and rude towards Wolf in your first few missives?  What has the guy done to you other than have a different point of view?

Sat, 02/13/2010 - 15:22 | 229977 Econophile
Econophile's picture

Ben Graham:

1. I loved your book. Why does everyone read it, yet not follow it?

2. Wolf was talking about the eurozone and they are all on the Euro.

3. Why favor imports over exports? Who is going to decide that for the good Germans? The ECB? What about the Greek businesses built around imports--are they to be sacrificed to exporters? Whose ox gets gored by policies handed down on high from the State?

4. Southern European states are highly socialized and that is their problem--lackluster economies and corruption.

5. It's not my first conversation with Wolf, and he tends to be condescending, firing both barrels as his opening. I think he enjoys it, as do I.

Sat, 02/13/2010 - 15:27 | 229980 Ben Graham Redux
Ben Graham Redux's picture

Econophile,

Don't get me wrong - I agree with your position as I favor the Austrians.  Also, I like Wolf but in a very narrow way as I view him as a mouthpiece for the European salons but with a smattering of common sense. 

In regards to your style, I'll assume that you know his demeanor better than I do and that your approach is built on your reading of the situation.

Sat, 02/13/2010 - 22:06 | 230274 dumpster
dumpster's picture

sure define common sense

 

as food mixed with poison .

 

how long would you allow some one to 

urinate

 into your food with out saying stop.

 

what is this common sense business,,

last time i looked the common sense of the world is heaving its last breath,, on this alter of if it kills us slowly .. and takes 100 years then go with the flow..

 

it is all just common sense .. you know lets level the playing field . with keynesian myth ,, feel good policys , and once again food laced with poison

 

Sat, 02/13/2010 - 15:09 | 229968 Dirtt
Dirtt's picture

Because we have had enough of Mermaid and Unicorn solutions for a flawed species.  Humans are flawed.  Get over it.

 

The only time you can get REAL CHANGE from a human is usually in the form of a sledgehammer.  When Hope&Change is spoon fed with condescending whipcream "brash and rude" is only the opening chapter of When The Pendulum Swings.

 

Brash and rude?  You haven't seen anything yet.  We Americans have a crappy reputation to uphold.  And with all of our flaws I'll take it over people who think "greater consumption" will "solve the problem."  All songs have an ending. Fibonacci was one truly epic human.

Sat, 02/13/2010 - 14:58 | 229955 WaterWings
WaterWings's picture

How else to you deal with ego?

Sat, 02/13/2010 - 15:14 | 229973 Ben Graham Redux
Ben Graham Redux's picture

I deal with egos by politely showing them the inconsistencies of their positions while asking probing questions.  People with big egos will generally recognize intellectual peers by the quality of their questions.  A rude and brash stance suggests that you want to be considered in their league, yet don't really see yourself at that level.  Besides, in this instance, Martin Wolf did nothing to warrant rude behavior

Sat, 02/13/2010 - 16:27 | 230033 WaterWings
WaterWings's picture

You make a very, very good point. That level of diplomacy and tact is truly for higher intellects than my own. 

Now, in the view of current circumstances, with our collective fate uncertain, I feel that hard answers are in order. Pleasantries are not to be wasted on those that would rob and murder you. Mr. Wolf certainly is not to be considered in this category, but he thoroughly sustains the infernal machine by looking down his nose at anyone that does not know his version of history.

When Joe Wilson interrupted a presidential address with, "You lie!", it was a breath of fresh air in this suffocating climate of open corruption, misery, smug politics, and no chance of societal improvement on the horizon. Partisan thought aside we need fewer speeches and more action.

But that is the point. The jackals maintain the status quo, placating and deceiving their victims with promises of safety and prosperity.  

The time for politeness is over.

Sat, 02/13/2010 - 14:14 | 229926 Anonymous
Anonymous's picture

Is that really your view of the British contribution to the world? It is shockingly ignorant, and extremely fucking rude. The fact that Wolf is a pompous pinko twat who delights in slagging off the US does not justify your cock-eyed Braveheart ramblings. I assume this:

"I thought it was the Brits and their desire for world colonial domination who destroyed civilizations. Your mercantilist greed from the All Red Route, to India, the Levant, and North America did a hell of a job. You left them with railroads and socialism and look how well your former minions did."

is a fucking joke? World fucking domination? Put the star wars DVD down you wanking teenager. Why don't we enumerate the former British colonies and compare them to their neighbours and competitors? I think we all know a pattern would emerge, don't we?

Sat, 02/13/2010 - 13:51 | 229910 Anonymous
Anonymous's picture

Wall Street banks, including those run by the Bush and Dulles families, funded over $30 billion in bonds to the Nazis to rebuild industrial Germany and fund the Nazi rise to power. Samuel Bush was a partner with Fritz Theissen in Silesian mining and steel production, giving him several of the steel patents from his own American steel production, and Prescott Bush was the president of the Holland Amerika Line which ran the Nazi spy network in and out of North America and of the Nazi's bank in New York.

America doesn't like to look at its role in the rise of the Nazis, but this is remembered in Europe. As Mr Wolf says, it is not considered controversial in Europe as it is very well documented there. It is only in America that it is left out of the history books.

The Federal Reserve in the 1920s was as irresponsible as the Greenspan/Bernanke Federal Reserve in the last two decades. They expanded money supply, allowed massive expansion of debt by Wall Street, promoted securitisation of assets, and basically set the world up for a global great depression.

Sat, 02/13/2010 - 13:28 | 229891 dumpster
dumpster's picture

as martin watches the imploding mass under the watch of keynesian principles he doth protest to much .

as far as who was that Econophile,, tonto .. hi ho silver and gold from the distance comes the sound of horses hooves  ,, the lone ranger rides again .

 

impressed  on a scale of ! to 10   a 12  .. lol

Sat, 02/13/2010 - 13:30 | 229883 mchawe
mchawe's picture

He wants to see Government pushing for the transfer of wealth from those who produce goods and services that others are willing to pay for, to those who don't.

Fundamentally what is what he is proposing is ultimate destruction of wealth.

An idiot but unfortunately a dangerous one. He is yet another proponent of parasitism.

Sat, 02/13/2010 - 13:20 | 229881 Anonymous
Anonymous's picture

at the beginning of this crisis, I wrote my 3 cents to Martin Wolf having read his article. So this is my 3 cents contribution to this exchange.

Dear Martin,
I read your article about the elephant with great interest. I believe that everyone who is involved in economic writing, and thinking, should go back to basics and study Karl Marx all over again. I mean it, without irony.

I was born and raised in Poland. I lived through the martial law, printed some leaflets, got into a modest trouble, ended up in the US. I have no illusions about Socialism. Neither do I have illusions about invisible hands, and the self-regulation of a "free market" society. Back then in Poland, in my youth, we all laughed at Socialism, thinking that western societies found *the* alternative, a system which balanced interests of labor and capital through the intervention of the state. As Marx wisely observed (paraphrasing), the "free market" economy requires a reasonable balance of power between capital and labor, which balance of power is (most unfortunately) not intrinsic to the mechanism itself. Quite to the contrary, left in its wild state the free market economy collapses, as it inevitably crushes labor, thus crushing the consumer of the goods. We thought that it was the tripartite solution of labor, capital, and a democratically elected government, government which is biased towards the interests of labor, that solved the Marxist dilemma, spared the West from the socialist experience, and made the free market economy workable. Little that I knew, I was destined to live through the experience of the "West" apparently unlearning the lessons of having been nearly overthrown by the socialist virus.

The "West" is living through a Henry Ford moment. Labor has been crushed, by union busting, and by outsourcing. I do not mean just industrial workers, as outsourcing goes way up the food chain. Ordinarily this would cause a major recession, which would be bad for profits. To keep profits up, the "West" erected for itself a debt pyramid scheme, which worked for a couple of decades, and is hereby unwinding.

It gets even more interesting in places like China. They will soon face a true Marxist moment. Their comparative advantage has been: turning themselves into a really big labor camp. In the process, for the first time in Chinese history, they got themselves some proletariat in large numbers. Trouble is, you can not really lift this proletariat out of working for food, because the western technological civilization can not be simply cut and pasted on China and India. There are too many people living there. These countries have to develop organically, learning how to deliver what feels like prosperity at a much lower cost to the environment. The "West" needs to participate in this undertaking because it can not monopolize resources without a really big war. Turning China into a labor camp, with a connivance of the communist party and a thin layer of emerging "middle class", will not really accomplish the objective of organic, sustainable economic prosperity..

The upshot: get ready for the new cycle of "isms". What was the preamble to the communist manifesto? Something is circling around Europe? More like the Globe today, but otherwise it seems like deja vu all over again ...

And this time, with nukes on day one.

Sat, 02/13/2010 - 13:52 | 229911 WaterWings
WaterWings's picture

If Palin and Coulter ran a ticket together I could see us burning books by 2011.

Sat, 02/13/2010 - 14:00 | 229916 masterinchancery
masterinchancery's picture

Where did this asinine attack come from? Give us 1 piece of evidence to support your statement.

Sat, 02/13/2010 - 14:30 | 229930 WaterWings
WaterWings's picture

What, you would actually vote for them?

Sat, 02/13/2010 - 16:00 | 230007 Anonymous
Anonymous's picture

I hope it doesn't come to that, but it depends:

versus Obama - yes
versus Reid - yes
versus Pelosi - yes
versus Dodd - yes
versus Schumer - yes
versus Franken - hell, yes

you get the idea. And Coulter IS hilarious.

Sat, 02/13/2010 - 15:01 | 229961 Dirtt
Dirtt's picture

Coulter is hilarious.

Do NOT follow this link or you will be banned from the site!