Sunday, May 27, 2012

Feldstein: Greece Will Leave the Eurozone and Soon

My favorite Keynesian economist, Martin Feldstein, in the clip below talks about the euro. He knew the euro was going to be a disaster right from the start. 

 In an article, "EMU and International Conflict," published in the November 1997 issue of Foreign Affairs, Feldstein recognized the many destabilising factors surrounding the EU construct. Here's part of a summary by Joel Meeker of Feldstein's paper (The paper itself is not online):
Feldstein believes that the transition to the Euro may well bring about two unexpected results: an increasingly contentious and perhaps only short-lived union among European participants, and conflict between Europe and other countries, including the United States. He presents the following scenario: Existing disagreements on goals and methods of monetary policy among European Monetary Union (EMU) participants would be aggravated when normal business cycles raise unemployment in any given country...This would cause a rise in inter-European distrust, which would be compounded by unrealized expectations about power sharing, as well as both domestic and international policies...

As to the smaller EMU countries, Feldstein maintains they will become frustrated by the increasing dominance of the heavyweights in deciding not only foreign but also domestic policy for the European Union.
Now that's nailing it.

But what really makes him my favorite Keynesian economist is that a couple of years back at a conference I tried to trip him up and asked him about the then Fed money growth.  He had to think for a second, but he then correctly stated the growth to a tenth of a percentage [point. There are few economists, even at the Fed, that watch money supply that closely these days.. (I  recently phoned a senior Fed economist at the NY Fed to ask him about some dramatic volatility in M2 that is currently taking place. He had no idea that the volatility was going on.)

That said, Feldstein is a Keynesian insider. The below interview took place at the Council on Foreign Relations and you will note his prescription for Greece, after it leaves the euro, is for the Greek central bank to print more drachma---a terrible idea that will result in nothing but massive price inflation in Greece. Also, he is apparently buying into the phony growth numbers coming out of China. China is collapsing.

1 comment:

  1. The "massive price inflation in Greece" would be in Drachma then. As the Greeks apparently rush to cash their savings in Euro while they still can, they will be able use the tried and proven solution to that problem: an unofficial but total switch to a foreign cash as de facto local cash currency. Businesses could even even use cashless transactions in foreing currency outside the Greek banking system.

    If that happens, the only victims of Drachma would be all those on Gov paychecks in Drachma, which may be the Greek way of "solving" the Gov sector problem in a less then gentle but completely impersonal way. The real economy thrives in such conditions by using cash, with numerous historic examples in former USSR. Corruption thrives too, using the same cash.That is, until that foreign currency is "good" compared to the local one.

    The hyperinflation would burn itself out in a couple of years, followed by either a new local currency (reset), or a legalized circulation of a commonly accepted foreign currency (capitulation).