Either way is an option - I didn't mean to suggest one over the other. Both will be extremely painful and crash the economy, but both give the country a fresh start. The winners and losers are different in each case, but both strategies can solve the debt burden itself. Like you said, countries really don't like to default, so hyperinflation is the other option. But regardless, I don't think bailouts are ultimately going to work. All they do is buy Europe time to prepare themselves for the endgame.
Well, yes, inflation is inevitable, but if your back is against the wall, and there's only a choice between hyperinflation and default, in my mind, if you're the government of that country, you choose default 100% of the time. I also, to be honest, just have an aversion to printing money, and think that if you're printing money as the solution to your default, then that's what you're doing for everything else...it leads to an attitude of carelessness towards your own currency that will eventually see it collapse along with your country. As a sidebar from that note, I think deregulated Keynesian economics and unpegged fiat money is leading us swiftly to the road to disaster. Mind you, I'm not necessarily averse to Keynesian ideas, but you need your head checked if you continue to let politicians play with unchecked fiat money. So far, pretty much everyone (save for a few nice exceptions---Canada and the Scandinavians come to mind) is playing with their money like crack addicts. That includes those who get them from lucky material gluts (Middle East, Russia, Venezuela) and those who get them from printing ever more (Western economies). I just don't think it's healthy to let politicians have so much control over the money supply, when their consequences for printing money are next to nil, and the rewards are so great. Now, I'm not advocating for a return to the impractical gold standard, but I would like to see some more control over central banks and politicians who seem content to throw trinkets at their voters with borrowed money.
Default Winners-no one, really, other than the ghost of financial responsibility. Losers-shamed borrowers, stupid, overzealous lenders. Hyperinflation Winners-Lenders who escape with at least something. Losers-The country itself, especially the citizens who now cannot pay for food or, well, anything. Also, the ghost of financial responsibility gasps, since while you may have taught the country something about living beyond their means, you haven't taught the lenders anything more than that risky, overextended debt is an inexhaustible source of profit with no realistic chance of default, so they go looking for another country to sucker in, and this same scenario plays out again.
I'm curious but without going to the Gold, or some other standard, how would you put in that sort of control? Also even with a gold standard couldn't countries still just keep on borrowing? I mean Greece doesn't control the Euro yet are still in the mess that they are in.
An educated electorate that demands balanced budgets (or really, hell, a level of debt that is eclipsed by yearly GDP growth if you want to be technical). Yes, that might seem like Tea Party rhetoric or classic GOP boilerplate, but if there is one thing I do agree with them on, it is the importance of reminding politicians with power over the money supply to be responsible about it. The only way to do so is to make sure it is a priority in the minds of the only party they are nominally accountable to...their voters. I differ however, on how to go about doing this from those groups, so I don't want to be dragged into a debate about where and how to cut and etc. in this topic at least. Countries could still keep on borrowing money, but their ability to print money to meet those obligations would be severely restricted due to the physical requirement of matching gold reserves. Greece's predicament is somewhat different from the scenario, since you are right, they don't directly control the Euro. However, in cases like the United States, a return to the gold standard would have the effect of drastically reducing the amount of currency creation that is currently happening. Even with a gold standard, messes like this could still happen, but they'd be less likely since it does impose a measure of financial responsibility. However, as I said before, I do believe the gold standard is impractical somewhat and too drastic a step. I don't want to be stuck arguing about the floating system vs the pegged system, so I'll just stick with the answer to your first question.
I don't think it's quite this simple. Winners, in some cases, are bondholders - because a default is not necessarily a 100% default. With hyperinflation, all those bonds become mostly worthless, but a default allows bondholders (and banks, etc) to recoup some or a good chunk of their losses if you're talking about a restructuring of debt. Plus if you protected yourself with CDS, you have some protection there - which you would not under hyperinflation. Losers also include future borrowing problems for the country. A default doesn't necessarily restructure government. For example, with Greece, even if they 100% defaulted today and wiped out their debt, they'd default again tomorrow because even without interest payments, their government is still larger than their revenue source. Borrowing costs immediately shoot up, which locks you into an even worse cycle. One of the reasons for Greece to go with this bailout is that it buys them time (in theory) to get their government small enough that they could survive without having to borrow at crazy rates. Eventually, rates will come back down, but initially, once default is on the table, rates will be ridiculous. Winners - as noted above, I think hyperinflation is actually worse for the lenders. The country also gets a bit more flexibility in that they (theoretically) have some control over how much they try to inflate and how quickly. Losers - The entire country isn't losers. Remember, with hyperinflation, wages go up too - everything goes up. The savers lose out here; the debtors win though. Suddenly their debt on their house disappears and now those debtors are suddenly much richer because they basically got a free house. The banks obviously lose in that scenario. But it's more complex than "everyone loses".
Major, if you're talking about a choice between hyperinflation or default, I have to assume you're talking about total default i.e zero ability to repay obligations without printing mad amounts of money. No country will take hyperinflation over a structured default, that's just total insanity. If they can meet their obligations without printing enough money to make their currency worthless, they will. Obviously, a default sullies a country's reputation, but so does allowing your country's currency to go into hyperinflation. Lenders may be willing to forgive you eventually after a while with a default (they certainly are quite amenable when it comes to sovereign debt), but hyperinflation means there may be nothing to forgive after a while, lenders will simply refuse to lend to your shamble of an economy. Also, Major, I'd argue that with inflation, your arguments might stand (though, I am rather averse, as I said before, to countries printing money to get out of problems, it leads to a slippery slope). But with hyperinflation...I mean, we might be arguing just about simple semantics at this point, but man, you can't just pull that word out at people with economics backgrounds, they'll freak lol, as I am doing. At that point, paying people wages is basically giving them monopoly money.
Sorry - I've been using both terms fairly loosely. Defaults can be done in a variety of ways, and inflation can be done in a variety of ways. When I say hyperinflation, I mean something significant (not 10-15% per year), but not 1000% per year, or 5% every day or that kind of craziness. Agreed - both tend to hurt a country's reputation, but they affect future bond rates in different ways. With a default, you may need to borrow again immediately at ridiculous rates (in Greece's case). With inflation, you keep printing money so while debtors won't lend you money, you don't need to borrow any in the short term anyway. Once you get out of that mess, greedy investors will again lend you money. Countries have successfully come out of significant hyperinflation, so - while difficult - it's not an impossible scenario. Brazil had that type of 1000% inflation stuff for a full decade in the 1980's and 1990's. A decade later, they are one of the most powerful engines of economic growth in the world and the envy of the world. My only point is that there are multiple ways to get out of an economic crisis - but Greece is not on any of those paths right now. They are currently just delaying in inevitable. http://www.sjsu.edu/faculty/watkins/brazilinfl.htm From 1980 when the IMF price level series began to 1995 the price level increased by a factor of 1.0 trillion. That which cost 1.0 Real in 1980 cost 1.0 trillion Reais in 1997. They had 30,000% inflation in one of those years. But notice that all through that decade, their REAL GDP continued to go up and per capita real GDP held steady. So it wasn't like the country spiraled into doom. Once they got out of that mess, they began what is now an economic boom.
Understood. Theoretically, it would work that way...but it really depends on what you do with the printed money, and how much you print. You bring up Brazil, but Brazil has resource factors and demography that Greece can only dream of. I don't think Greece can ever solve its' problem without addressing the fundamental problem of it spending way beyond its' means, whether it chooses to inflate itself out of the problem (which I think is like curing the patient by giving him more of the sickness), or defaulting, or taking IMF loans. Of course in this case, as you pointed out before, Greece cannot inflate itself out of trouble...but hypothetically, I would be cautious if it could, and would definitely not consider it my first option.
Wouldn't hyperinflation help austerity since it would devalue the benefits they are providing to their citizens like pensions and the revenue in absolute terms would go up?
If Greece defaults. They start over with a new slate. Like a bankruptcy. The bankers grumble for awhile. The Greek people do not suffer as much as they would under banker gutting of their pensions. The economy will grow faster than if they let the bankers do an austerity trip. At least this is what happened in Argentina and Mexico when they defaulted. I suppose the bankers suffer more with a default. Some people think this and they seem to have more credibility to me than such bankers as Goldman Sach and the folks who led to the crisis.
That would be true but Greece sold bonds in form of 'currency swaps' to other european nations. They in turn mixed and mash these with other investments and sold them worldwide. United States may indirectly be a big debtee. So Greece defaults and we'll feel it here. It's not so easy to say "let them default" once you know you're the one being owed money.
We have to be careful here... Inflation and hyperinflation are undesirable results of monetary policy solutions. You never really desire these things (there are some positives to small and controlled amounts of inflation, and obviously you don't want to be at zero or deflation, but beyond that, you would be hard-pressed to find economists arguing for more inflation) but loosening monetary policy and printing money to meet your obligations will cause these things. But do not take them to be solutions in of themselves, but as symptoms. When I say "inflate out of trouble", I really mean printing money to solve the problem---thus causing inflation. I don't mean to cause inflation to solve the problem. Now, in cases where the amount of benefits are pegged and pre-defined, and only if the government continued to send these benefits at the same static rate, and charged taxes at the explosively higher rate, your hypothetical example of a "benefit of hyperinflation" would stand. But quite a few countries have COLA (cost of living adjustments) factored in to compensate for inflation (most notably the United States), and these clauses would kick in even if there were hyperinflation, such that you aim to give about the same amount of purchasing power taking into account the drastic devaluation of the currency. Even if you don't have COLA, you'll rapidly realize your citizens will mutiny if you demand of them taxes many times more than the benefits you give them. So, basically you're treading even on this aspect, if not worst. However, this theoretical argument is somewhat useless, since with true hyperinflation, your economy becomes so unstable that any benefits you could have derived from printing money in such copious amounts are washed away in constant riots/unrest, and the absolute destruction of your currency. You face difficulties in importing-it is near impossible to get foreign sellers to take your worthless currency. Your people rapidly cannot afford basic staples like food. Hyperinflation is not just regular inflation. Economists use it very grimly to define cases where inflation has almost completely gone out of control, and it always implies a measure of tragedy and disaster. A gradual loosening of monetary policy that causes controlled inflation is a practical tool. Hyperinflation due to disastrously loose monetary policy is like a storm that you have unleashed that, once past a certain point, cannot be controlled. Witness Zimbabwe. It is a fate you do not wish on anyone. Certainly, it cannot even be considered a solution.
While it's possible to have a currency devaluation with inflation, and without "hyperinflation", it's not possible to have any public discussion of this without having to defend against Zimbabwe and german wheelbarrows and other such items. Congratulations, wingnuts, you shouted longest and loudest on this and you have won, in spite of merits.
Really Sam? Beyond a small, controlled amount of inflation, and beyond avoiding deflation, please do tell which economists advocate for more inflation in of itself? They may advocate for printing more money. But it has escaped my knowledge that many are advocating for the indirect aspect of it creating more inflation as a positive.
Can Greece unilaterally pull out of the Euro and go back to the Drachma? If they did and then decided to devalue the Drachma to pay off their debts that were incurred in Euros would they be able to do that or would their creditors be able to demand that they be paid back in Euros or the equivalent value in another currency?
You can't just switch from a pegged to a floating currency just because you're facing a crisis at the moment, while I'm not sure about the specifics, I'm sure the European Union forbids it, otherwise the Euro would be unstable as hell. It's one of the risks of a centralized currency---you lose control of it to deal with individual scenarios. I'm sure Greece swallowed the pill on that and decided to come in anyways, so they can't escape from it now that they're in a crisis and want to print their way out.
So what you're saying is that, other than the economists who advocate inflation, nobody advocates inflation? I agree with you. LIkewise, I agree with the larger vein of classic Northside Storm logic from which it is born - if we exclude all factors that distinguishe two variables from each other, then those variables are the same. Can't argue with that.
