from MacroScope:
Political economy and the euro
The reality of 'political economy' is something that irritates many economists -- the "purists", if you like. The political element is impossible to model; it often flies in the face of textbook economics; and democratic decision-making and backroom horse trading can be notoriously difficult to predict and painfully slow. And political economy is all pervasive in 2010 -- Barack Obama's proposals to rein in the banks is rooted in public outrage; reading China's monetary and currency policies is like Kremlinology; capital curbs being introduced in Brazil and elsewhere aim to prevent market overshoot; and British budgetary policies are becoming the political football ahead of this spring's UK election. The list is long, the outcomes uncertain, the market risk high.
But nowhere is this more apparent than in well-worn arguments over the validity and future of Europe's single currency -- the new milennium's posterchild for political economy.
For many, the euro simply should never have happened -- it thumbed a nose at the belief that all things good come from free financial markets; it removed monetary safety valves for member countries out of sync with their bigger neighbours and put the cart before the horse with monetary union ahead of fiscal policy integration. But the sheer political determination to finish the European's single market project, stop beggar-thy-neighbour currency devaluations and face down erratic currency trading meant the currency was born and has thrived for 11 years.
Now the budgetary and bond market upheaval currently afflicting euro member Greece and stalking Portugal, Ireland, Spain and Italy has reawakened the whole debate. "Will the euro survive?" seems a legitimate question once again.
Apart from financial analysts, Paul Krugman seems to have made his peace with the euro's existence but he still reckons it was a bad idea. Eric Maskin thinks financial markets are right to question the future of the single currency. And much is being made once again of Milton Friedman -- high priest of 20th century monetarism -- having reportedly said in 1998 that the euro would not survive the zone's first serious economic downturn.
But having an opinion about the euro is not the same as knowing whether it is going to survive. And this is what most annoys those who have money at stake. Plugging in a new set of variables into complex econometric equations is probably not going to get any of these experts closer what happens next. Hanging around the corridors of power in Brussels, Frankfurt, Berlin or Paris is likely to prove more fruitful.
In the 1990s, many financial strategists in London, Manhattan and elsewhere often confused what they thought should happen with what was likely to happen and got the call wrong on one of the most far-reaching monetary events of the century.
Who lost the dollar?
– James Pethokoukis is a Reuters columnist. The views expressed are his own –
The state of the dollar probably hasn’t been a first-tier political issue in the United States since, say, the presidential election of 1896. Back then, it manifested as whether or not America would stay on the gold standard or switch to a bimetallic one. (The William Jennings Bryan “cross of gold” speech and all that.)
The aftershocks of the global financial crisis may now be propelling the dollar back to the political forefront. The greenback’s continuing slide makes it a handy metric that neatly encapsulates America’s current economic troubles and possible long-term decline. House Republicans for instance, have been using the weaker dollar as a weapon in their attacks on the Bernanke-led Federal Reserve.
For more evidence of the dollar’s return to political salience, look no further than the Facebook page of Sarah Palin. The 2008 GOP vice presidential nominee — and possible 2012 presidential candidate — has shown a knack for identifying hot-button political issues, such as the purported “death panels” she claims to have found in Democratic healthcare reform plans. In a recent Facebook posting, Palin expressed deep concern over the dollar’s “continued viability as an international reserve currency” in light of huge U.S. budget deficits.
She might be onto something here, politically and economically. A recent Rasmussen poll, for instance, found that 88 percent of Americans say the dollar should remain the dominant global currency. Now, the average voter may not fully understand the subtleties of international finance nor appreciate exactly how a dominant dollar has benefited the U.S. economy. But they sure think a weaker dollar is a sign of a weaker America.
And that’s the political problem for the Obama administration. Its benign neglect of the dollar is another example of an economic policy — along with TARP and the $787 billion stimulus — that the White House thinks is helping the economy, but many Americans find wrongheaded.
In his New York Times column today, Paul Krugman makes the usual case for a weaker dollar: It helps U.S. exporters and is a necessary part of a global economic rebalancing. And there is some truth in that, particularly the idea that Rising Asia will result in a less-dominant dollar.
Well informed blog, interesting. I like this site. Just to let you know what I see is inflation and the smart money managers moving their funds to combat it. Grocery store prices on normal items have all went up fifteen cents so that corporations can recoup their losses. And the treasury will be printing money to cover all the debt the country has incurred and will continue to incur.
The dollar will be worth less. The only bright spot I see happens to be in the fact that the cost of producing goods overseas will increase because of fuel cost, low currency value, and higher wages for overseas workers, hopefully to the point that it will become cheaper to produce products in the United States again. If the money keeps flowing out of this country and the debt keeps adding up we will eventually be broke and suffer a recession in spite of the bailouts.
from Rolfe Winkler:
Krugman and the pied pipers of debt
Investors are celebrating an incipient "recovery," but the interventions responsible are sowing the seeds of a more violent contraction down the road. The problem, quite simply, is debt. We've accumulated record amounts, yet many economists tell us we need more.
Leading the charge is Paul Krugman. He exhorts us to borrow our way back to prosperity, but he doesn't acknowledge that his brand of Keynesian economics ignores debt's consequences. If you look at a chart of America's total debt burden, he's leading us over a cliff.
(Click chart to enlarge in new window)
The problem begins with the flawed way Krugman and other economists measure well-being. Primarily, they look at measures of activity, like GDP. These tell us how much people spend, but say nothing about where we get the money.
Every so often, we overextend ourselves, buying too much useless stuff with too much borrowed money. So we cut back, dumping the third family car and swapping the McMansion for a townhome.
But this is problematic for Krugman and other economists. Less spending means falling GDP. It means "recession."
Parker, you are so correct in sighting that proverb. Now add to it “where your treasure is there your heart is also”.
And with the two, those rich in the spirit will rule over those poor in it. In this understanding the citizen is not bound by the merchant tyrants that now rule our nation. Those rich in spirit, that is to say, those who are people of conscience and who strive to live in love, can use their gifts to elevate us above this money worship we now engage in.
