Tuesday, May 28, 2013

Monetary Devaluation is the Diffusion of Responsibility By Other Means

One of the things that corporate culture seminars love to preach about is the concept of "owning it". That is to put your own indelible mark on a project so that people know who to blame when something goes wrong. Because in a poorly managed project where there is no clear owner, the likelihoods of failure are high and then when the project fails, it triggers a cascade of blame. The developers blame the business analysts. The BAs blame the project managers. The PMs blame the customer. The customer blames everybody else.

What's left is a mess of wasted money and man-hours (which is essentially money) and no usable product. A failed project has plenty of blame to go around, but without a clear owner, the responsibility of failure gets diffused throughout the entire group, allowing everybody to keep their jobs. However, if somebody very clearly assumes public responsibility for the project early on, that person is likely to get canned or demoted (or rather just passed up for promotion in the next round of career adjustments).

One thing that economists and policy analysts love to bring up when they talk about Greece's economic depression is its lack of ability to export its way out of the crisis. If Greece had its own independent central bank, it could devalue its currency to gain a competitive advantage on the export market, and thus earn enough hard currency to rejigger the economy. What nobody likes to mention is the flip side of devaluation. Sure, your exports look more attractive. But imports become horribly expensive. It represents a real and substantive decline in living standards across the board, and it effects everybody within the country.

If they were to go the Full Argentina (a full default of their debt and a return of the Greek Drachma), their debt burden goes away. But they've traded a spear for a pike. They don't have to leak any further purchasing power abroad in the form of bond repayments, but they lose purchasing power at home in the form of higher prices for imports. The economy of Greece is centered primarily around shipping/trade, agriculture, and tourism. That's where it earns its hard currency (foreign exchange). It has to import just about everything else.

One of the reasons preventing Greek exporters from spearheading the economic recovery is the fact that they don't want to cut their Euro-denominated prices. To do so without concurrent devaluations in other sectors of the economy is to paint a target on their back. Nobody wants to be the first to give up the gravy train. Because the firms that still exist profitably within Greece are going to try and ride out the storm while the country's high prices and sclerotic regulatory system prevent the mobilization of its dispossessed capital (unemployed Greeks). So if one firm lowers their prices and the others don't, that firm becomes that much less profitable and more likely to be on the chopping block.

That's why monetary devaluation is so appealing to certain economists. It forces everybody to share the pain. Collectively, Greece needs to accept a permanently lower standard of living but no individual wants to take the first step. That's why monetary policy represents a massive diffusion of responsibility. No one Greek is responsible for the devaluation of the currency. The country, collectively, is responsible. And that means no one is responsible.

Staying within the Eurozone, however, gives the Greeks a clear owner: Germany. The feeling of powerlessness and dependence that many Greeks have toward Germany is palpable. And that's creating massive anti-German sentiment in the country. And yet, it's still the clear preference of the Greeks who matter. The recent Greek elections elected a coalition that favors staying within the Eurozone, and thus staying under Germany's thumb.

Because breaking away from the Eurozone means a loss of German subsidy and the transferring of responsibility from Germany, an external enemy, to itself. And that's something the Greeks don't want. Responsibility is a heavy burden to bear, especially when you're responsible for a catastrophic failure.


  1. Monetary devaluation is not about the foreign exchange rate, its about increasing domestic demand. Indeed when the U.S. devalued in 1933 the trade balanced actually "worsened" even though output soared.

    1. Every central banker is warning about concurrent devaluations and getting embroiled in a trade war because each individual country is devaluing their own currencies. Given the fact that supply chains are truly global and trade is more important than ever to maintaining our standard of living, you can say that devaluations aren't about foreign exchange ratios, but I just find it hard to believe.

      The most recent example, Japan, has seen its Yen tumble precipitously against the dollar once it announced its rate cuts. And even though it is running a heavy trade deficit due to its prodigious imports of natural gas, Japanese exports still increased in nominal values.

      And the post is about Greece. The economies of Depression Era US and the current depression ravaged Greece are two completely different animals. Greece has to export in order to gain money. The country is broke.

    2. No, central bankers (at least the smart ones) have not. When asked about a trade war with Japan Bernanke dismissed it as ridiculous.

      And yes, the great depression and the Euro crisis are very similar. Recessions are always and everywhere monetary phenomenons. The Euro is essentially playing the role that the gold standard did for the U.S in the 1930's. The only difference is that Greek politicians have no say in their country's monetary policy, where as the U.S could easily choose to devalue.

      Here's Lars Christensen:

    3. Recessions are always and everywhere monetary phenomenons? That's a cute play on a famous phrase, but it's a laughable premise. I really can't take that seriously at all.

    4. There is no other explanation which fits the post war data and works in theory too. RBC failed hard and New Keynesianism (basically monetarism) is pretty much the only serious game in town, so you're basically without a model if you deny that recessions are not primarily monetary phenomena.

  2. The same was true of Argentina. Exports declined but domestic demand picked up.

  3. but then again you seem to not believe general gluts can even exist, so there really is no helping you.