A friend of mine asked me to decipher Paul Krugman's latest article in the New York times entitled, "We're Not Greece." I don't think we're Greece either, but we're on our way. Regardless, one paragraph in Krugman's piece turned my stomach more then any others. That's what I focused on. This is what I wrote.
First, Paul Krugman is an economic hack. He's a Keynesian which means he believes spending is what drives an economy, not production. This is wrong. It's a very convenient theory for most politicians and academics - people who benefit significantly from government spending - but it's not reality. I'm just going to go through some of his B.S., there is too much for one email. I'd be happy to discuss it some other time though. :)
"Greece, on the other hand, is caught in a trap. During the good years, when capital was flooding in, Greek costs and prices got far out of line with the rest of Europe."
First, the flood obviously came through lending. Expanding credit can indeed cause inflation. That is what happened in the 1920's and what cause the Great Depression. But what is really out of line for Greece are their entitlements. In Greece, It's possible to retire and live off the state starting in your early 50's. So many people work for the Greek government, the government doesn't know how many people actually work for them. It's probably close to 25-30% of the population. In the Greek constitution it says that once you get a job for the government, you are guaranteed that job for life - you can't be fired. The cost of government and entitlements are what's far out of line with the rest of Europe.
"If Greece still had its own currency, it could restore competitiveness through devaluation. But since it doesn't, and since leaving the euro is still considered unthinkable, Greece faces years of grinding deflation and low or zero economic growth."
This almost makes me sick to here. Inflation (devaluing your currency) is the worst cure possible. It's like bleeding a sick person. The theory is that devaluing a currency (printing more money) makes your exports cheaper. You can sell more goods, so it must be beneficial. While you may be able to sell more goods, it's only benefiting those who buy the exports - provided they have a stable currency. For the citizens of Greece, the goods they produce for themselves will cost far more, and goods they try and buy from overseas will cost far more as well. Who would want a Greek drachma in exchange for a good, if you knew that you would only be able to purchase half as much with it in a month? If you could find someone willing to take drachma's in exchange, they would demand a higher price due to the risk of accepting currency that is being actively devalued. Likewise, any Greek would take an Australian Dollar over a drachma, they might even give you a deal on the good they are selling. They could actually save it for a rainy day. As for "grinding deflation," if a currency is stable, prices will naturally move lower. As productivity increases, there is more available to society. The greater the supply, the lower the price and the higher the standard of living. Deflation is and always will be a good thing. Finally, the reason they will have low or zero economic growth isn't because of a lack of inflation, it's because they have to pay back their debt. Instead of using the things they produce to benefit themselves, they have to use it to pay off the people they owe. The key is to avoid debt in the first place.
"So the only way to reduce deficits is through savage budget cuts."
Uhg. This is the only moral way to get out of debt. To do so through inflation or default is immoral. It is theft, pure and simple. Let's say you lend me 2 pure gold coins which I will use to purchase a new stereo. Instead of working hard and saving up two gold coins for repayment, maybe three if you're charging me interest, let's say I take the coins you gave me and melt them down. I then find a cheap metal like zink and create 5 smaller round disks. I take the melted gold and cover the disks, and press them into the same shape and size as the original coins. I now have 5 "gold" coins. I give you three, and use the other two to buy my stereo. I have stolen your gold. Heck, maybe if I created 6, I would even have savings. If the price of gold is $1200/oz, anyone who knows what I did is going to want twice as many coins from me in exchange for a good. For a government to do this on purpose to it's people is reprehensible - as is Krugman.
There is so much more I could say. But if I argued every stupid point by this crackpot, I'd be here all day - I'd enjoy myself, but I'd be here all day. :)
Craig