Tuesday, June 30, 2015

GRenter laughing

Wow, now this is a real surprise;
Greece on Tuesday requested a new bailout amid a last-minute diplomatic push before the country’s current rescue deal expires and it defaults on a payment to the International Monetary Fund.
Wonder if they took the advice of Greece's most recent Nobel laureate Chris Pissarides;
What would be crucial elements of a good agreement? Besides the fiscal issues of balancing the budget and making pensions proportional to contributions, a good agreement should emphasize microeconomic reforms. It should greatly simplify the procedures for running a business in Greece and reduce business taxes, in order to attract investment and create a productive, export-oriented sector, new jobs, and debt-repayment potential. It should reduce the huge and inefficient state sector that weighs down on the private sector and the taxpayers. The procurement mechanisms of the state should become competitive. Greece should proceed with privatization of trains, airports, ports, and the energy sector. The "closed sectors" of the economy (such as pharmacies and transportation) should be opened to competition. The labor market should be liberalized and the state should crack down on the underground economy that pays no taxes and no pension contributions.
Our bolds above, of course. All good and proper economics. This, not so much;
A Grexit and move to a new drachma would be a complete disaster for Greece. The banks would collapse as depositors would withdraw their euros not knowing whether they would be able to withdraw them later and at what exchange rate. The new weak currency will make imports very expensive, cutting the purchasing power of Greeks by half or one third. Irresponsible politicians would print too many new drachmas, feeding additional inflation and eliminating any international competitiveness gains resulting from the weaker currency. Shortages of even necessities such as medicines and fuel would become the norm.
First, Europe has plenty of experience with currency reforms--watch almost any French movie made prior to 1960 when the franc became the nouveau franc for example--and could pull off another one in Greece. But, it's a little startling to see Phds in economics claiming that inflation would create shortages.

Inflation is one way to resolve disequilibrium in goods markets that have been rendered non-functional by regulation. You'll have higher prices...but, you won't be unable to find goods available (i.e. shortages).

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