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i'm sorry nick but i have to disagree with you here. the bretton woods system was a system that forced non-U.S countries with chronic current account deficits to devalue and take on austerity and countries with current account surpluses with the united states to take on dollars instead of gold in addition to all sorts of other pro U.S policies (like attaching aid from the united states to buying our exports and encouraging developing nations not to modernize their food production so that U.S agriculture remained dominant). I could go on and on but i think you get my point. for further information i would strongly encourage you to read superimperialism by michael hudson.

Great post Nick; I quite like the use of two types of actors (similar to what Eggertsson and Krugman did). It is interesting that surplus countries have been so resistant to these adjustments in the past; it's surprising that Great Depression examples like the U.S. and France fail to provide cautionary tales to the potential downside of being a surplus nation that refuses to adjust. But framing the problem the way you have highlights the advantages of revaluation to the surplus nations. One hopes that these countries might start to see the benefit of "revaluation"?

Also, one could apply your model to U.S. and China. Could Chinese Yuan revaluation from 2003-2007 be another partial exception?

On the same line of thought is Michael's Pettis amazing review of the European situation:

http://mpettis.com/2010/11/the-rough-politics-of-european-adjustment/

A must read by one of the smartest Chinese watchers!

Nick remarks:


Or they could just continue to accumulate gold reserves indefinitely, by sterilising the gain in reserves. (Sterilisation would mean the central bank would sell bonds in the open market to offset the gold it was buying, and so prevent its money supply from expanding, which short-circuits the natural adjustment mechanism.)

Of course this is precisely how China is behaving today.

Nathan remarks:


(like attaching aid from the united states to buying our exports and encouraging developing nations not to modernize their food production so that U.S agriculture remained dominant).

U.S. agriculture is dominant because its extremely efficient, being done on exceptionally good land (glacier deposits) that has only been under cultivation for two hundred years and well after good farming practices were thoroughly understood. Moreover, there are substantial supplies of fresh water and a long growing season with winter snow cover (water and warmth) and moderate summers (wet but not flooding).

So Bretten woods collapsed, thirty years hence, but we still see that the US still grows about one-quarter of the world's food* using two-percent of its own population.

That's what I call comparative advantage. Perhaps you'd rather all those people just starve and die out.

* The US grows nearly half of the world's corn, half of world's soybeans, 80% of the world's sorghum. Along with those mega crops it supplies 25% of internationally traded wheat and 20% of internationally traded rice. Moreover that's done using about 1M km2 of crop land out of ~50M km2 of crop land in the world.

The only major exception you see this pattern is rice farming which is dominant and enduring in Asia. While the US trades a lot of rice, it only grows about 1% of the world's crop. Notice though that it does this even while growing lots of other stuff and using only 2% of the world's land under cultivation.

This is seriously amazing productivity.

I think it's possible that European debt problems will cause big internal political problems in Germany and perhaps France. Seems pretty clear that Ireland is bankrupt. They aren't going to be able to pay 100 cents on the dollar. Sooner or later, they will default. Based on everything I've read, it seems that an Irish default implies a continental banking crisis. In effect, the Irish are bailing out continental banks who made bad investments decisions. When it all goes pear shaped (more so than it already is), somehow I doubt that German taxpayers will be as complacent as the Irish. So who will win? The German bankers or the German taxpayer? I have no idea. In France, my money is on the citizens. They'll riot and the Gov't will cave.

Patrick: I agree that the buck eventually stops at the German/French banks, and that right now it seems that these bankers are extracting every penny they can out of peripheral European citizenry before the proverbial chickens come home to roost. But when the crisis eventually moves to the core, and there's a conflict between the bankers and the taxpayers, it's hard to see the taxpayers winning. The bankers have a huge advantage: if the banks go down, everyone loses. In the end, the gov't will see this and bail out the banks (no one wants another Lehmans). There might be specific bankers that lose, and there might be a slew of banks that get nationalized, but the sector as a whole is too valuable to take down, or allow default en masse.

Kosta: In practice, I think you're right. The bankers will hold a gun to the economy's head and say "bail us out or well pull the trigger". I do think it's possible, at least in theory, to save banking while throwing the bankers under the bus. I have little hope it'll work out that way though.

jon says..."U.S. agriculture is dominant because its extremely efficient, being done on exceptionally good land (glacier deposits) that has only been under cultivation for two hundred years and well after good farming practices were thoroughly understood. Moreover, there are substantial supplies of fresh water and a long growing season with winter snow cover (water and warmth) and moderate summers (wet but not flooding).

So Bretten woods collapsed, thirty years hence, but we still see that the US still grows about one-quarter of the world's food* using two-percent of its own population.

That's what I call comparative advantage. Perhaps you'd rather all those people just starve and die out."

you make a complete caricature of my position. I made no claim of efficiency or inefficiency in American agriculture (largely driven by government largess. in 2002 nearly half of all agricultural income came from united states government subsidies). that has no bearing on whether U.S(or it's international organizations that are now, and have historically been, dominated by U.S government interests) has prevented other countries (especially developing countries) from developing and modernizing their own agriculture industries. the bretton woods system institutionalized America's dominance over other countries and set in place political relations that have survived long beyond the convertibility of dollars into gold. your foray into the natural resources of the U.S as a justification of our agricultural dominance involves an incredible revision 20th century history.

*revision of 20th.

Very good post Nick, so simple, and nobody understand that in Europe. Each countries with problems assumes its responsability in the imbalances, as if it not was a problem of both side!
Germany does not like adjust its internal demand; It would like that Spain, Portugal, Irland (& Co) would adjust by deflationary process. The result shall be inevitably a deflation of the euro zone!

Nathan: the fact that the US$ largely replaced gold in Bretton Woods did create a fundamental asymmetry. One country's money was the reserve currency. I'm not sure about the other stuff though.

Thanks Kosta. Yes, in the Eggertsson/Krugman paper, there's also the same asymmetry. The debtors are forced to consume less. The creditors are not forced to consume more, and will only choose to do so if the interest rate can drop enough.

I don't think this story works for US/China though. Or, at least, not in the same way. China is lending in US$, but the US can print US$.

Finance: good find on Pettis!

Patrick: I think you are right about a banking crisis in Germany. I wonder if that could make my prediction wrong? Would Germany say "We need to quit the Euro so we can print money ourselves, and bail out our banks"? Of course, if everyone else leaves, the Euro will become the New Deutschmark by default! Dunno.

Thanks Luis. Yep.

@nick: I can understand your unfamiliarity with the rest of what I'm talking about and i'm glad that you agreed about the asymmetry in the bretton woods system. Much of my analysis comes from the work of Michael hudson. i would encourage you (if you're interested in the subject)to read his work on the subject (particularly in his book Superimperialism) and judge the evidence presented yourself.

Patrick: agreed on both points. Angela Merkel seemed to have similar thoughts when she suggested that creditors (i.e. banks) should absorb some losses from the European sovereign debt problems. But, did you notice how the Irish crisis quickly grew out of control after she made these comments?

I think that the Euro crisis is pitched in poor terms. The creation of the Euro was fundamentally a political decision, it was designed to be a step towards greater European integration. As such it was just like what British North America did in 1867, only the list of "federal" powers is far less in the European Union than it is in Canada.

In Canada we accept the list of federal powers as the price of being a nation.

Economically, we know what tools would resolve the Irish crisis. We know what it takes to make a federation with a single currency work, even if parts of that federation of disparate economic circumstances. Canada, Australia, the United States, this isn't a new idea. The question is does the European Union and its member nations have the courage to take those steps? The price is going to be national sovereignty and a likely fiscal outflow from France and Germany. We've done that in Canada forever.

This looks like an economic crisis. It isn't. It's a political crisis masquerading as a economic crisis. The answers aren't going to be economic, they're going to be political.

"But if there's a financial collapse anyway, and if a country is forced to issue a new currency just to pay the bills, it can happen."

I agreed with pretty much everything except the above. Insolvent countries can't create new currencies at the snap of the fingers, especially when an existing trusted currency already circulates. Almost all attempts by a failed Ireland/Greece to bring back the Punt/Drachma will fall stillborn from the printing press. At best you're going to see partial local circulation, but still a mostly-euroized economy.

Read the literature on the creation of new fiat monies. Start with George Selgin's "On Ensuring the Acceptability of a New Fiat Money" JMCB 1994. Then go to the IMF work on dollarization and de-dollarization. After that visit partially dollarized nations like Angola and Cuba who have been trying for years to kick out foreign money. Ireland and Greece can't just choose to chase euros out of their economies and replace them with their own currency. They are stuck with the already-circulating euro. All Irish/Greek re-balancing must be born by less spending and lower prices... a new currency and subsequent devaluation are unicorns.

Determinant: "The question is does the European Union and its member nations have the courage to take those steps?"

My answer is "no". It's not so much "courage", as feeling "we're all in this together as one nation". My reading is that only the elites, and not all of them, feel that Europe is their nation. Yes, ultimately this is a "political" question.

JP: Hmmm. You have a valid point. But suppose the government were paying all its workers in Punts, and paying welfare and EI in Punts too. And suppose the banks would only give you Punts, not Euros. Would these forces be big enough for the network externalities/positive feedback in choice of money/Menger/Kevin Dowd/strategic complementarity effects to kick in and push the economy to a new equilibrium? It is a puzzle, for example, that the US$ hasn't penetrated deeper into Canada. National boundaries do seem to matter for the boundaries between usage of different currencies, even though there are some leakages across national borders.

Say the government pays its workers in new Punts; can these workers buy apples from the grocery store owner with their Punts? The store owner will only accept them if the Punt is credibly pegged to something, say to the Euro at 1Punt:1Euro. But everyone knows the whole point of re-introducing the Punt is to dramatically devalue it, say by 75% to 4Punt:1Euro. So the grocery store owner will never accept punts, since he knows that at any point the 1:1 peg will be removed and he'll be left with a huge capital loss. The nub is that new punts are not credible and will never circulate; they'll pile up with the unfortunate bureaucrats who's salaries are denominated in said currency. Grocery store owners will only sell apples for safe euros. Or they'll accept punts at a huge discount. But then the hot potato is passed back to the bureaucrats... will they appreciate being paid in worthless punts? Nope, they'll strike... until they're paid in euros.

Forcing a new punt into circulation will be very difficult... authorities may achieve some limited circulation but the euro will probably remain preeminent for years.

JP: who says the New Punt will be issued at par with the Euro? I see an immediate float. And if half their customers only have Punts, I think the stores will accept punts for apples. They won't charge the same number of Punts as Euros. The key question is: will they raise prices in Punts, or offer a discount in Euros? What is the new focal point?

Don't forget Mises/Menger. A new currency must have some linkage to an existing traded good. I'm not saying a hypothetical new punt will be issued at par, but it'll have to be initially pegged at a fixed rate to something in order to be credible. Now whether this be a link to the Euro, the dollar, the pound, or gold, it doesn't matter. But the punt can only debut if it is convertible at x into one of these.

The problem is that while the punt must be fixed to some pre-existing valued item in order to gain currency, because everyone knows the peg is only going to be removed the day after in order to devalue, the punt will never gain currency. The self perpetuating equilibria at which a currency has value can't get rolling. Surely you don't believe the Irish can default one day, introduce the punt the next, chase all euros from Ireland on the third, and bake apple pie on the fourth? It ain't that easy. New currencies take time, planning, and credibility. None of which Ireland have.

Maybe I'm missing something but this is that is puzzling me about Ireland:

Seems to me that the millstone around the neck of the Irish is the bank liabilities assumed by the sovereign. Presumably, this was done in the hope of saving the economy. Well, it didn't work. The debt is so huge that nobody will loan Ireland money without a huge risk premium - a risk premium they can't afford. So they are effectively locked out of the capital markets. And what happens if they default? Well, lenders will insist on huge risk premiums. It's the same short term outcome either way. But the long term outcomes are not the same. If Ireland tries to pay they are stuck with savage austerity and very high taxes as far into the future as anyone can see. They will never recover - at least not within any time frame anyone would consider reasonable. But if Ireland defaults, then savage austerity will be imposed but not gigantic tax increases to suck money out of Ireland and send it to Frankfurt or wherever. Given a clean slate and low taxation Ireland would at least have some hope of recovery. So why not default? And the sooner the better. It would be nice if they could switch to a devalued New Punt to speed recovery, but I suspect it doesn't change the arguments in favour of default.


Barry Eichengreen on the same point, but much more eloquent and authoritative:

Ireland’s rescue package: Disaster for Ireland, bad omen for the Eurozone

" A new currency must have some linkage to an existing traded good. "

All Ireland has to do is require that the currency be used to pay taxes. This creates a natural demand for the currency, provided that Ireland is able to collect taxes from its citizens -- which it can.

The forex value of the non-convertible currency can float in proportion to Ireland's current account and interest rates, like most other countries. Iceland is doing better than Ireland, for example.

I think the difficulties of leaving the euro (and or defaulting on debt) are overstated, once you're willing to nationalize your banks. Particularly if you would be better off (e.g. will produce more real output) if you can default on unpayable debts and devalue in order to boost exports. At some point, the economic advantages of clearing up balance sheets outweighs the adjustment costs.

"All Ireland has to do is require that the currency be used to pay taxes. This creates a natural demand for the currency, provided that Ireland is able to collect taxes from its citizens -- which it can."

A firm or individual's commercial transactions far exceed the volume of their tax transactions. As such the natural demand for euros will continue to eclipse the artificial tax-induced demand for punts. Your punt's destiny is to never be more than an illiquid coupon-like asset. The Irish will buy it once a year - the day before they have to pay their taxes - and submit it as quickly as they can to the state. Every Irishman knows the game - that the punt exists solely to subsidize the state by losing its value. As such, the euro will always and everywhere be preferred. Only in the odd tax-transaction will punts gain a brief and limited currency.

I agree that default may be an attractive option for the Irish. But giving them the illusion that they can *voila* recreate the punt and devalue is a grave mistake.

Patrick (and others), I agree that default might be an attractive option for the Irish, but shouldn't one also consider the international impact? If Ireland defaults, won't the EU (UK and Germany in particular) have to step up and bail out their own banking systems? If the EU do so, won't they in turn demand redress from Ireland? Would not these demands make it very unappealing for Ireland to default?

Looking at the situation more broadly, the default option has to be more than just attractive for the Irish, default has to be attractive for the EU as a whole.

JP: You know it's one of the central tenets of "Modern Monetary Theory" that fiat money has value because the government collects taxes in this money? I'm going to just watch, and sit this one out.

What a number of people advocating default seem to miss, though, is that the ultimate creditors are people too. I wonder who those ultimate creditors are? My guess is: mostly pension plans.

JP:

You are talking about separate issues here.

1. What will be the "value" of the punt in terms of goods?

2. How will households store their wealth -- nominal euro assets, nominal punt-denominated assets, or other assets?

My point is that for #1, the punt will have value as long as it is needed to pay taxes. There are other sources of value for currency, but taxes is one source to kickstart the process. So no you don't need a stock of pig iron "backing" the punt.

What that value will be in terms of the euro will be determined by how much Ireland exports, relative interest rates, and a lot of other factors.

For #2, Households will transact in deposits, and those will be primarily punt deposits as the Irish Cb will not be able to lend Irish banks euros, and so Irish banks will not be able -- if properly regulated -- to sustain large euro liabilities. That's just an issue of prudent asset requirements as enforced by proper bank regulation. At the same time mortgage debt should be denominated in punts because that's what liabilities the Irish banks can sustain. Whether or not this happens depends on whether Ireland gets serious about having a sound banking system.

There is a good chance that they wont get serious.

Mortgage debts are the bulk of all assets in a typical economy. When households need to pay mortgages in punts, there is a natural demand to be paid wages in punts, etc. That propagates on down to a lot of punt transactions.

But Irish households can still purchase deposits of foreign banks if they want, and they will be able to hedge their punt exposure if they want. My personal prediction is that they will chose not to do so, but if they do, then so what? Asset prices will adjust so that there is indifference between holding the euro denominated asset or the punt denominated asset.

In other words, even though there will be a tendency for people to use punts, if they really don't want to transact in punts, they don't need to. It doesn't matter one way or another.

What matters is that the bad debts are defaulted upon and that the banking system is sound. Ireland, is a net exporter whose sovereign debt/GDP ratio is lower than that of Germany or the U.S., is not in bad shape.

The problem is that they agreed to guarantee all the irish bank bondholders, and those assets are 10X GDP, or thereabouts. It's all the off-balance sheet liabilities of the for-profit Irish banks that are causing the problem, and this shouldn't be allowed to translate into fiscal austerity as Irish citizens have to guarantee bondholders. It's not mathematically possible to raise taxes enough to repay 10xGDP of private sector debt. This doesn't mean that there is something wrong with the punt, or with the irish government's own finances. The private sector is the one with the crazy finances, and default, as well as leaving the euro, is what is needed. Most of Ireland's trade is with Britain, which is on the pound, and with the U.S. It's crazy to stick then on the euro so that they are bled dry as the UK and U.S. devalues.

Another excellent post Nick. I wish to gently diasgree with you in one small respect. You stated:

"It's unlikely that any country would choose to leave the Euro, simply because the transition costs would be so high. But some might be forced to leave the Euro. And that won't be Germany".

As one of the posts above noted, the status quo for Ireland, Greece, Portugal is very costly. As Pettis suggested (in his always excellent analyses), there are costs associated with staying and costs associated with leaving the euro. Until this point, most analysts, including most importantly the EU decision makers, have assumed it would be more costly to leave the euro (because they implcitly assume that Germany, when absolutely needed, will back up and bailout the weaker EMU countries).

In other words, the founding EMU fathers and the leadership in the weaker Euro countries, from the very beginning, have counted on Germany coming through and saving them - if only at the 11th hour and 59th minute. If one was cynical, one might even think that the establishment of the Euro was merely a waystation, on the path to entrap Germany into a full fiscal union, in order to finance annual equalization or transfer grants to the EU south, to solve their chronic fiscal problems that extend back deeply in time.

However, if the weaker countries finally come to the conclusion that Germany REALLY will not agree to a fiscal union and REALLY will not continue to bail them out or subsidize them, sine die, THEN at that point, the decision makers in these countries will finally realize that default (with the costs largely falling on the foreign banks as Pettis noted) and exit from the Euro, is in their self interest, as it is less costly than remaining in the EMU.

And, if these countries are astute, they will demand billions in Euro transitional bridge donations - not loans - from Germany, UK, Netherlands and other stronger EU and/or EMU countries for probably 3 years (about the time it took Argentina to recover from its default) - to address the very real and very painful transitional costs you noted.

In other words, these countries will not be forced out of the Euro, so much as finally recognize default and exit is a superior alternative to endless internal devaluation with chronic high unemployment, low growth or no growth, inability to access the capital markets and unable to pay down indebtedness in any meaningful way. Thus, these countries will seek inducements to leave the euro so that they can deflate their way back slowly and painfully.

However, at the present time, these weaker EMU countries are already experiencing the forecast awful consequences of default and exit. So, they have the worst of both worlds - high interest rates, negative growth, insolvency and no currency to deflate.

So, yes, you are correct, it is ultimately a poliitcal decision. A decision that hinges on what the Biggest Banker of all Europe i.e. Germany, wants. A regular read of the German media suggests diminishing German commitment to the Euro and diminishing German commitment to the European project and an increasing unwillingness to be the EU Ministry of Finance including an unwillingness to be the real bank of last resort to - the ECB.

Ian: my (political) judgment (FWIW) is that Germany will not come through with a big enough bailout package. And, even if it did, there would be enough strings attached that the other countries would refuse to accept the loss of sovereignty. Given the EU set-up, where it takes too many countries to agree to do anything, I don't see fiscal union happening. As Kissinger(?) said, if I want to pick up the phone and call Europe, who do I call?

RSJ, take a look at the de-dollarization literature, and avoid the western foible of focusing on Europe and US; observe the monetary economies of 3rd world countries. De-dollarization is VERY difficult, especially in the middle of crisis. Western nations haven't had to deal with the issue in decades, now suddenly they do, so if we want to understand the issue, we've got to look at case studies like Zimbabwe, Angola, Panama, Cuba, etc.

Requiring the punt be accepted for taxes will give it some token demand. But every Irishman already knows that the whole point of reintroducing the punt is to print huge quantities of it in order to monetize the state's worthless debt, in the process dramatically destroying the punt's value [or haven't you got this notice yet, RSJ?].

Which comes back to my point: no one will ever accept punts or hold them, knowing that even though the punt may have some fleeting value x, that value has been/will continue to plunge or be on the cusp thereof. The result? Punts will never be more than a constantly depreciating coupon that an Irishman is forced to purchase and quickly submit - hot potatoe-like - once a year to the government. They will not be liquid - their moneyness will be on the same scale as a permanently falling and disliked penny stock. The amount issued will be tiny; no one will want them. Irish movie coupons will be more fit to call "money" than punts; there will surely be more of these coupons in circulation. And the fact that a competing medium of exchange exists - euro and euro deposits - means the Irish demand for a liquid asset will be met.

"You know it's one of the central tenets of "Modern Monetary Theory" that fiat money has value because the government collects taxes in this money?"

Yeah, I realize I'm probably contradicting my normally anti-MMT views. The way I think of it is this... if McDonald's suddenly declared that the only way to buy Big Macs was with McDonald's paper coupons, would those fiat items have value? I think they probably would. The coupons are convertible on demand into a good hamburger, and they're the only way for a Big Mac fan to get at the burger. Would the coupons be liquid and money-like? Maybe, but I doubt it. Not liquid like bank deposits, at least. But definitely more liquid than the less popular Whopper coupon. Government coupons issued in order to pay taxes, are they the same thing? Video game tokens or car wash tokens, same thing? Dunno... what do you think Nick?

Signing off for the week, but will read comments when I get a chance.

JP -

Argentina de-dollarized, in the middle of a crisis, and it seemed to work out pretty well for them...

Reminds me of a case where a Canadian who ran a bus company had a cash flow problem, so started paying his bus drivers in bus tickets. But he overissued, and caused inflation.

If any big trader starts using (paying and accepting) medium X, then that will give a big boost to everyone else using medium X. It's like language. The government is a big trader.

Perhaps it's better to think about *why* de-dollarizaiton is difficult. Sometimes it is and sometimes it isn't. When you owe a debt in currency X, then this creates a demand for the currency in order to repay the debt. It doesn't matter if you only pay the debt once a year. If the government is taxing 30% of national income, then that would create a huge short squeeze if everyone tried to cover their short position once a year. The demand will be throughout the year, and it will be significant.

So taxes are important only because they are one form of debt that the government can impose on the public. But they are not more important than any other form of debt. So you see dollarization occurring in nations where there isn't a lot of mortgage borrowing and most of the borrowing is for firms that say, trade goods that sell for dollars or import dollars -- e.g. trade credit.

In that case, there are a lot of dollar debts, and if these firms are the main ones who have access to credit, then you get dollarization. You would also get dollarization if the government primarily borrows in dollars, since then it would also need to "effectively" tax in dollars. Or if there are a lot of external debt.

It's no accident that those nations that dollarize are the ones who do not have well-functioning domestic credit markets. In that case, the government and non-government sectors must borrow externally, and will do so in dollars (or in the case of EMU, in euros). Russia is a perfect example.

Even looking at the extend of latin american dollarization that occurred -- those nations in which mortgage debts were a larger portion of total credit market debt were less dollarized than nations in which households did not have access to credit. I'm not aware of a single case of dollarization in which more than, say, 25% of the credit market debt was mortgages, and typically you would see 10% of credit market debt being mortgages. But developed nations have mortgage debt typically equal to about half of credit market debt.

So this points to the path of how to de-dollarize -- default on the dollar debts. Then you kill a lot of the dollar demand. To effectively leave the dollar (or the euro), you need to default on the debts, or do a forced conversion of the debts to your own currency. I.e. Argentina. But if you don't do that, then you wont be able to leave the currency.

So all of this is related to the current euro crisis -- it's a battle as to whether the nations will prop up their banks or not. The banks have euro-creditors, and will be forced to default if the government does not support them. Leaving the euro requires a financial sector default. It's a different aspect of the same debate.

The debate is not whether Ireland is going to issue "worthless" currency, but whether it will prop up it's own worthless (insolvent) financial sector at the expense of deflation -- or whether it will have a sound financial sector with price stability.

A sound financial sector is going to require credible deposit insurance, which means the government must be able to issue its own currency, and simultaneous to that, a healthy financial sector must be one in which bond holders are forced to bear losses. The enticement is to seek lower rates -- e.g. borrowing in euros is cheaper, and if bondholders are backstopped, then credit will be cheaper, so the government is mesmerized by the advantages of cheap rates and keeps borrowing in an external currency up until the crisis occurs, at which point rates go up and the debt cannot be rolled over. It's no different than the Asian crisis or any of the traps that these government (and private borrowers) keep falling into, again and again.

Good points, I don't have much time to do justice to them. My one comment is that Argentina has not de-dollarized, they have a mongrel float. Many individuals keep dollar deposits in banks OUTSIDE of Argentina and settle large transaction using those accounts. A majority of real-estate transactions are still conducted in dollars. 100 bills still circulate there. [ie. everything the rich do is in dollars] Dollar demand is alive and well, and this severely neuters the Banco Central de la República Argentina's ability to issue peso liabilities. Justifiably so since the central bank's decision to steal citizen's wealth in 2001 was, in my humble opinion, entirely reprehensible. De-dollarization is tough, so will be de-euroization. The punt, if it circulates at all, will be the currency of the poor Irish, the euro that of the rich Irish.

> "All Ireland has to do is require that the currency be used to pay taxes. This creates a natural demand for the currency, provided that Ireland is able to collect taxes from its citizens -- which it can."

But isn't the problem that the Irish government has assumed heavy euro-denominated liabilities?

"isn't the problem that the Irish government has assumed heavy euro-denominated liabilities?"

Not if it announces it will honor them in punts. As Mel Brooks says, "It's good to be the King."

"In that case, the government and non-government sectors must borrow externally, and will do so in dollars (or in the case of EMU, in euros)."

I'm wondering why any government that can successfully impose a tax liability would ever have to borrow in any other currency. If I'm say, Russia, and I can impose (and collect on - a big if in Russia, I know) liabilities equal to 20-30% GDP, I should be able to find sellers for anything I want who will take rubles, and convert them to dollars themselves. It seems to me countries borrow in foreign currencies for two reasons: 1.) The international consultants tell them to, and 2.) It's easier for kleptocrats to steal foreign currencies and keep them in the Caymans...

Jim: "Not if it announces it will honor them in punts."

That's what I had in mind. Of course, it's a default. But if they are going to default anyway.

Or, I might just be wailing at the moon, and wishing they had never joined the Euro in the first place, so would be able to get out of this mess so much more easily.

"I'm wondering why any government that can successfully impose a tax liability would ever have to borrow in any other currency."

Good question. I've never seen a convincing answer. Sure, everything else equal, lenders might prefer to lend in the lenders' currency. But everything else would not be equal. It's the same question of why we see so little plastic vs glass.

"I'm wondering why any government that can successfully impose a tax liability would ever have to borrow in any other currency."

It's own domestic elites/firms borrow in the foreign currency (in order to enjoy lower rates), can't repay, and the government decides to bail them out. Whether it "has" to is a question of how much political clout the borrowers have.

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