Exchange controls, barter, and Cunning Plans

It was sometime in the 1960's. My uncle was teaching in Bulgaria. He wanted to buy stuff in Britain, but wasn't allowed to take much money out of Bulgaria. My father was farming in Britain. He wanted to buy stuff in Bulgaria, but wasn't allowed to take much money out of Britain.

My uncle and father thought up a Cunning Plan. My father went to Bulgaria, where my uncle gave him money, and my father bought stuff. My uncle went to Britain, where my father gave him money, and my uncle bought stuff.

The Cunning Plan was possibly illegal? But it was Pareto Improving. My uncle preferred buying British stuff to buying Bulgarian stuff. My father preferred buying Bulgarian stuff to buying British stuff. The Bulgarian government wouldn't care whether it was my uncle or my father buying Bulgarian stuff. The British government wouldn't care whether it was my father or my uncle buying British stuff. (Even if they had hoarded money, instead of buying stuff, I can't see why either government would care whether it was my uncle or my father hoarding the money.)

The Cunning Plan was economically equivalent to barter. It was exactly as if my uncle had bought Bulgarian stuff, my father had bought British stuff, and then the two had swapped the stuff.

The Cunning Plan worked because my uncle and father knew each other, and trusted each other. What was needed was some sort of internet dating site, so that people like my uncle and my father could find each other, with the host checking that both sides could be trusted. But the dating site would need to be open to threesomes too, for cases where someone in Albania wants to buy stuff in Britain, someone in Britain wants to buy stuff in Chad Cyprus, and someone in Chad Cyprus wants to buy stuff in Albania. Or foursomes. Or orgies with all sorts of people from all sorts of countries taking part to greater or lesser extents.

What would happen if there were more farmers in Britain wanting to meet teachers in Bulgaria than vice versa? You would need some sort of price to adjust, so British farmers would get a worse deal, which would discourage some, and Bulgarian teachers would get a better deal, which would encourage some more.

If the British or Bulgarian governments tried to fix the price in that dating market, that would cause problems. There could be an excess demand or excess supply. Which would create all sorts of problems, and lead to rationing, because some British farmers or Bulgarian teachers wouldn't be able to find a partner. So the governments might need to decide who gets priority in finding a partner. And then people would start to think up even more Cunning Plans to get round those government decisions.

Or, we could forget all about exchange controls and Cunning Plans, and just have flexible exchange rates.

Comments

[primedprimate]

This reminds me of hawala - a system that worked particularly well until 9/11 (I believe it still hobbles along now but governments across the world have clamped down on the system to make flows of money more 'track-able'). Hawala like systems not only circumvent capital controls but they also help people avoid steep foreign exchange transaction costs and bid ask spreads.

I have done the same thing informally on a couple of occasions. I sometimes remit money back to my parents in India. My parents' friends sometimes send money over to their children studying in US colleges. On a couple of occasions it worked out to be more efficient for my parents' friends to send money to my parents in exchange for me sending an equivalent amount of money to my parents' friends' children.

http://en.wikipedia.org/wiki/Hawala

[Nick Rowe]

primed: yep. I think it's exactly the same. There's nothing new under the sun. If something needs to be invented or reinvented, it will be.

[david]

A couple of people - including Delong - have made the remark "money is a substitute for trust" in exactly this meaning...

[Nick Rowe]

david: yep. But there are two things that money resolves: trust is the first; getting 3 (or more) people to all meet at once to do a 3-way exchange is the second (the coincidence of wants gets resolved either by money or by all 3 people doing a simultaneous 3-way deal). I wanted to get both of those ideas in.

[Frances Woolley]

That BBC Cunning Plan link doesn't seem to like Canadian IP address - this link worked.

[Vladimir]

Could the Cyriot government allow claims on deposits to be transferred to others? For example a firm in Cyprus has 500K euros in a bank account that is frozen. They're a good customer of my Canadian firm but unfortunately can't withdraw any cash at the moment and can't be sure how big of a haircut their deposit will have. I am willing to sell them 100K of merchandise for say a 200k of of their account. The legally transfer me that share of their deposit. The bank is notified and puts a hold on 40% of the account. Effectively this would mean a currency devaluation in which financial assets denominated to Cypriot Euros were marked to their expect future value.

[david]

Yep, too. Hence Delong:

Money is a substitute for trust. In the absence of money, you can transact only with people with whom (a) you have an (unlikely) double coincidence of wants, or (b) you have an ongoing non-economic relationship that enables you to trust each other to make your credit good. In the presence of money, you can transact with damn near everybody.

[Nick Rowe]

Thanks Frances. Link changed.

Vladimir: I don't know. If the Cyprus bank doesn't allow you to withdraw money at all (as at present, except for small amounts of cash) then it won't work. But if they allow you to withdraw cash, or write cheques to other Cypriots, but don't allow you to transfer funds abroad, then I think it would work. Effectively it means the Cyprus Euro is different from a Euro anywhere else, and trades at an exchange rate determined by negotiation between fathers and uncles.

david: Yep!

[JP Koning]

"but wasn't allowed to take much money out of Britain."

That reminds me of a story about Ludwig von Mises in Guido Hulsmann's biography. Mises had fled to the US in 1940, and his funds were in London. Wartime exchange controls prevented Mises from getting his hands on his money, and he had no job. Desperate, he got Hayek - then at LSE - to buy up rare books with his funds, including an original "Wealth of Nations", and then send these by boat to the US.

I guess buying rare economics books made sense... if there's any product an economist can appraise best, and avoid getting gypped, its economics books.

"Or, we could forget all about exchange controls and Cunning Plans, and just have flexible exchange rates."

Or we could have a Euro system whereby exchange rates are fixed and there are no exchange controls. All inflows and outflows are netted out on the books of Target2, and net imbalances need never be settled.

[Nick Rowe]

JP. But under Target2, Germany might be worried about permanently exchanging BMWs for electrons that might default, and Club Med countries might be worried about unemployment due to insufficient AD and want to keep the money at home, since they can't print it. So either might impose exchange controls.

[Simon van Norden]

Such Cunning Plans are often discussed in International Business under the name of "Counter Trade" (e.g. http://en.wikipedia.org/wiki/Counter_trade)

[Jacques René Giguère]

Counter trade ( or barter, as we say in french "Qu'en termes élégants ces choses sont dites entre gens de bien)" In so beautifuls words are such things said between people of breeding") : in the early 70's, Bombardier got its start in the water-bomber business in Europe by seling to the two then-poor countries of Spain,Portugal and Yugoslavia. Short of foreign exchange, they gave wine to the QC gov't who passed it to the SAQ (state-owned alcool business) . The proceeds were transfered to Bombardier.
My generation was thus introduced to wine through abundant exposure to Faisca, Mateus, Union de Taragonna and Mostar-Zilavka. It was a patriotic duty to drink foreign wine ( those who remember candian wine of the era, the humanity, the humanity...) Mostar -Zilavka was from the Mostar area in Bisnia and due to the late unpleasantness is no longer availble. Faisca and Mateus caught on and are still on the shelves.

[rsj]

But as long as we are talking about the usefulness of money, it would be good to tell the other side of the story. As soon as trust is gone and money is part of the economic system:

1. speculative attacks on currencies, which can be devasting
2. People devoting more and more real resources to the acquisition of money for its own sake, rather than using money purely as a tool.

A good example here is bitcoin. Look at the USD/bitcoin, which went from less than a dollar to $35 to $2 and is now at $70 per bitcoin in the space of about 3 years.

And people are devoting tens of thousands of dollars to bitcoin "mining", basically buying expensive hardware to solve calculational problems. Those resources could have been used for something productive, but are spent on the acquisition of more bitcoins.

Not to mention the whole host of parasites and intermediaries in the financial system that do nothing but buy and sell money for money, yet account for 30% of economy-wide corporate profits. I.e. there is also a reason that history does not have a kind view of money changers and why some nations prefer to impose capital controls. It is not all just an innocent veil over barter.

[genauer]

"Russian President Vladimir Putin signaled acceptance"

http://www.bloomberg.com/news/2013-03-25/cyprus-continues-to-plunder-the-loot-in-bailout-medvedev-says.html

one day faster than I expected

apparently convinced of our cunning plans: http://www.youtube.com/watch?v=H4wQn8F-YDw : - )

[genauer]

looking at

http://www.youtube.com/watch?v=Jth4yATniS4

[Peter T]

Somebody committed a crime! This proves laws are ineffective! Which hurt the poor of (insert country from Mexico to Latvia here) worse - currency crises or exchange controls? Money is not neutral - it's a form of power. And the amount of money does not correspond to the amount of actual goods and services - you can create (or destroy) various sorts of money so as to manipulate power relations. Happens every day. Floating exchange rates can work - if regulation controls large flows of money and other relations of power (internally and externally) are not too unequal. Note that many of these conditions are missing over much of the world.

One could also note that human cunning is much over-rated, especially by those who think they are most cunning. Baldricks are more common than Blackadders.

[Doctor Why]

genauer,

do you realize that the new restructuring plan does not tax deposits held at the government-owned Russian Commercial Bank?

[genauer]

makes sense to me.

In the last week, the international money transactions of Cyprus were about twice as high as normal, but were not allowed into certain directions.

One Russian bank survives untouched.

Putin is extremely quick to nod his approval, ....., to signal that some Russian banking stays in Cyprus, or how else should I see this?

That means that Euro and Putin had an agreement before.

I begin to doubt that Dijsselbloem's "template" was a gaffe.

[genauer]

I think nobody has anybody with some small scale barter.

The government needs money, and in wide lands it is sometimes difficult to collect.
Much easier at a port, as tariffs.

Buchanan pointed out, that the US fed government, for the longest time, lived basicaslly of tariffs, income tax came up 1913.

[Doctor Why]

genauer,

Let's see. The new plan:

- protects about 2 billion euros worth of deposits at one of Putin's pocket banks,
- effectively destroys its two biggest competitors in the Cyprus offshore banking sector,
- completely screws thousands of Russian SMBs that were trying to hide money from Putin's tax inspection.

So, if this whole mess has a single winner it's certainly Putin. (A few well connected Russians may have lost some money - I have no idea whether it is true or not - but some degree of collateral damage is unavoidable.)

[genauer]

D_w

The Cyprus banks were open in Greece and in London too. I am pretty sure that it did hit just the intended.

But I 've got a much more cunning plan!

When I wondered, why they try to demonize Germany and Angela so much, with an Adolf moustache, please, she can not even run a good beer tent tongue lashing,

It suddenly dawned on me:

The Hellenic, and probably most the Balkans, they want, they need a leader they can fear, with a mustache, believable to eat their first born for breakfast, somebody absolutely WITHOUT a PhD, in Germany now even the communist leaders have one : - )

Now, who could this be?

Our milk raised Vietnamese orphan Philip Rösler? Look at him, and tell me if you could fear him putting you in a bamboo cage, floating in the Mekong.

Bob Smith’s Marine Le pen, or Hungarian Victor Orban, a Calvinist? Please, nobody gets scared by those.

Putin, not so bad, but for some saber rattling, this could irritate the Americans. And showing his muscles around was not really that fearsome, he is a desk warrior, like Merkel.

The choice is obvious:
Recep_Tayyip_Erdoğan

- Male, the right age, a moustache (needs some blackening, maybe a little trimming : - )

- He lives in the neighborhood, has borders with Greece and Cyprus

- He doesn’t fit the old stereotypes Nazi vs communist, but brings a new element to the game, Neo-Ottomanism, without raising the fear of radical Islam

- They already got a lot more German tanks, submarines, gun-factories, because they paid their bills, unlike the Greek : - )

- They know how to rule unruly Balkanese, and he put away half his generals, on pretty thin conspiracy charges

[Nick Rowe]

Sometimes I see continental Europe, from the North Sea, to the Atlantic, to the Med, to the eastern marches, under the thumb of a political-economic system that is destroying people's lives, forcing workers to migrate to the German heartland or else escape outside, denying countries the autonomy to make their own decisions for good or bad, forcing them to supplicate themselves to the German Chancellor, whose whims can make or break them. Except AM is the smug schoolmarm, telling them it's all their own fault, and that she is only doing what's best for them, and that if they would all only behave like good Germans, everything would be fine, rather than the angry aggrieved AH. And I just pray that Britain can retain its independence, despite being outnumbered and outgunned, and survive and lead the resistance.

Yes, the analogy is not exact, but I can understand why others might see it that way. And I have much more sympathy for Germany, both in the past and in the present, than many. I know the Germans suffered much more than the Brits, and that terrible things were done to them.

I have been re-reading Leon Degrelle, a Belgian Rexist who joined the Waffen SS with other Belgians and fought on the Eastern Front. It was a pan-European army. There was even a very small British contingent. And many who fought in it did so out of conviction that they were creating and defending European civilisation.

[Nelly]

How are you any better than the people exhibiting Nazi-Merckel pictures genauer? You have just written a ridiculously insensitive, offensive, racist ('unruly Balkanese') and quasi-fascist in its adulation for 'strong leadership' thesis, collectively stereotyping other people because they became unruly in the face of their county's GDP being reduced by 25% in three years. Who would have guessed?

[Nick Rowe]

The biggest difference, of course, is that this time the Germans really didn't start it all. And the Germans are no more at fault than any other country that joined the Euro.

[J.V. Dubois]

Nick: "The biggest difference, of course, is that this time the Germans really didn't start it all..."

And then you take a look at German NGDP growth and you see that monetary policy seems quite a good fit for it. Or you read this inteview with ECB president: http://www.ecb.int/press/key/date/2012/html/sp120323.en.html and you see sentences like this "The Prussian element is a good symbol of the ECB’s key task: to maintain price stability and to protect European savers." So maybe it was French-Italian conspiracy of ECB presidents that started all this?

But in spite of all this, I am already beyond blame-assigning phase (even if I am afraid that most people in Eurozone did not even start started this phase yet). With mess of this scale only one thing is certain - there is enough of blame around that anyone can get as much as he wants.

[Nick Rowe]

JV: agreed.

But this comment thread has now been derailed into a discussion about Germany (which perhaps I too should not have joined in).

So: no more comments about Germany per se. This post is about monetary theory, exchange controls, and fixed vs flexible exchange rates.

BTW, did I leave it too implicit? My "Cunning Plan" was nothing more than the reinvention of flexible exchange rates with national currencies. Or was that sufficiently obvious?

[Doctor Why]

Nick,

I think it all depends on the strength of the substitution effect. In a large diversified economy the substitution effect is usually strong, so it makes sense to have a national currency. But for small specialized countries like Greece or Cyprus, the adjustment will happen mostly via the income effect, which you can reproduce with austerity policies.

Since a small country would also find it more difficult to conduct independent monetary policy, I don't see any obvious benefits from a local currency, but a very obvious cost in the form of periodic current account crises.

[Doctor Why]

To clarify a little bit.

Inside a common currency area a country has a problem when it hits a debt ceiling (e.g. Greece) - or maybe when the debt ceiling suddenly collapses due to a decline in collateral prices(e.g. Spain) - because it has to adjust its level of net borrowing with strong negative consequences for aggregate demand.

If a country has a national currency, this changes the situation in two important ways.

1) The country can change the debt ceiling by adjusting interest rates.
2) It can change net external borrowing by adjusting the exchange rate (at constant domestic income).

In a big diversified economy both mechanisms are very effective and the adjustment is much easier compared to a common currency area:
- in the short term, a devaluation will increase net external borrowing because of the J-curve effect, but monetary policy will soften the impact on aggregate demand by temporarily increasing the debt ceiling,
- in the long term, net external borrowing will decrease and the level of debt will stabilize.

However, in a small specialized economy:
- a devaluation may increase net external borrowing not only in the short term, but also in the long term, since the substitution effect is small;
- monetary policy may not be very effective at moving the debt ceiling if the domestic financial markets are underdeveloped.

As a result, a small country would be worse off compared to the common currency case, because a devaluation will force an even more dramatic change in net borrowing and aggregate demand.

[genauer]

very well said by D_w, why there is some significant advantage for a small country, to be within a currency, even if it is by far not an OCA. This was one of the arguments for the Euro, which is still somewhat valid, the transaction costs while traveling or buying some thing abroad, that is pretty negligible today.
I buy at amazon UK and US with the same ease as DE, with the same credit card, of course shipping from the US costs something.

It might be worth how to look at the Carribean Islands and central American states, how they deal with that. Internal Devaluations ? Is their a curse of the mid size, like Haiti?

[scepticus]

Nick.

See www.ripplepay.com

[Doctor Why]

One more clarification:

"- a devaluation may increase net external borrowing not only in the short term, but also in the long term, since the substitution effect is small;"

this can happen if exports are inelastic

[genauer]

To discuss market size and access with that,
maybe business size and diversity,

I could imagine, that we could do this with the example cell phone market,

Canadian RIM for smartphones and Finnish Nokia for the mass market leaders for some time, but now struggling again, and somehow loosing out to Apple, Google, Samsung,

very predictable from my point of view.

Just a proposal, maybe it inspires some of you.

[genauer]

Before we now forget about me developing my really sinister, much more than cunning, plan for world domination by my franconian tribe : - )

and make up time tables, who will leave, and not join, what kind of union, when,

I dont want to forget about a link, I enjoyed a lot:

http://www.youtube.com/watch?feature=endscreen&NR=1&v=cds8ajwGeps

[Frances Woolley]

Some day I'm going to get you to put together a book called Rowe's Fables which is going to consist of parables like this one, but with a sentence at the end to explain the moral of the story, something like "Flexible exchange rates are better than fixed ones." Love these posts, but never am quite sure whether or not I've got the point!

[Jacques René Giguère]

genauer: "Is there a curse of the mid-size?"
Yes. Macchiavelli recommended to the Prince not to meddle in the affairs of the Greats.
And today, seeing the Middle East, we should tell the Prince not to meddle in the affairs of the Smalls.
In French we say "Vivons heureux, vivons cachés." "Let's live happy,let's live hidden."

[Alex]

I'm not sure it's a serious proposal, but a Turkish Minister says Turkey would support Cyprus converting to the Turkish Lira:
http://www.hurriyetdailynews.com/turkey-favorable-if-greek-cyprus-wishes-to-switch-to-turkish-lira-eu-minister.aspx?pageID=238&nID=43503&NewsCatID=344
Doesn't help Greece, Spain, or Italy, though.

[genauer]

thinking for quite a while about Nick's last 2 posts, especially the wording and references, I think we should actually continue that , manana.

I believe, in the end, we could come to very similar conclusions, where certain things should end, and then one can also find common ways to get there.

Exchange controls a.k.a. Reinhart/Rogoff "financial supression"
the basics of barter: reliability, enforcability, fairness, "Trust"

In the meanwhile, I have 2 links, coming up today, which I think can inspire your thinking

1. Some 42% of the world apparently very unhappy how certain things are organized at present

http://www.bloomberg.com/news/2013-03-25/brics-nations-plan-new-bank-to-bypass-world-bank-imf.html

“We need to change the way business is conducted in the international financial institutions,”

"The U.S. has failed to ratify a 2010 agreement to give more sway to emerging markets at the IMF, while it secured Jim Yong Kim, an American, as head of the World Bank last year over candidates from Nigeria and Colombia."

These guys are so mad about it, that they organize their own monetary fund now

2. "Aut viam inveniam aut faciam"

I believe, that many of the participants here have so far very little exposure to the rough and tumble of the "real world" out there.

http://www.bloomberg.com/news/2013-03-26/hannibal-inspires-gm-s-girsky-to-slash-at-opel-s-culuture.html

An american "UAW consultant" gives the Hannibal in a 20 000 worker Auto Company

It shows again,

a) that even the US and DE auto cultures have long simmering difficulties with each other, after the Daimler-Chrysler Disaster.

b) In certain situation, you can't mince words any more
"Every time you opened the door, more dead bodies fell out"

c) it is nearly always the tiny hard-left who tries to play the nationalist card.

d) Chopping heads starts at the top: "Since January 2012, only four of Opel’s top 18 leaders remain".

Summarized in the translation:

“I shall either find a way or make one.”

and for this I have another Superbowl youtube (I am getting used to those citations : - )

http://www.youtube.com/watch?v=wx8-EH78I_8

please note the fundamental two team structure to it.

Jacques, I meant it differently, with respect to currencies.

But responding to your quote, we have here similar "Gehe nicht zu deinem Fürst, wenn du nicht gerufen wirst". "Nicht auffallen, dann kann man nicht reinfallen".

[Nick Rowe]

Paul Krugman says Cyprus should quit the Euro now. I feel like he hacked into my brain, and said what I was going to say. I read that about 25% of Cypriot workers are employed in banking or closely related professions(!!). But, despite the "(!!)" the size of that sector will surely decline a lot. What will replace it? With its own currency and flexible exchange rates, there would now be a big devaluation, which would make Cyprus a much more attractive exporter of (e.g.) services to tourists.

Cyprus' banking troubles are largely caused by their banks holding a lot of Greek bonds. When Greek bonds went down, Cyprus and its banks went down. And with Cyprus' GDP going down, will Cyprus bonds go down too? It is like dominoes. But I am very surprised how slowly it takes for one domino to hit the next.

[Nick Rowe]

Ironically, every time the Eurozone really screws up, like over Cyprus, the Euro drops against other currencies. Which helps the Eurozone economies recover a bit of aggregate demand. The fixed exchange rate system of the Eurozone is on life support provided by its flexible exchange rate with the rest of the world.

[Doctor Why]

Nick,

1) I think the local value added in a typical Cyprus package tour is about one-third of the final price - the rest is plane tickets and distribution costs, so the retail price is not very sensitive to the exchange rate and after devaluation export revenues (in euros) may actually decline.

2) As a direct result of the banking crisis about 3 thousand bank employees will lose jobs - that's slightly below 1% of the total workforce. Important but not huge.

3) Cyprus imports virtually everything. If Cyprus leaves the euro it will find it very difficult to borrow in euros and its economy and standard of living will collapse.

4) Krugman's comments on the eurozone are as usual uniformed, biased and totally irresponsible, given that he's one of the leading experts on international economics.

[Min]

"some British farmers or Bulgarian teachers wouldn't be able to find a partner."

Flexible exchange rates? I thought you were making a pitch for E-Harmony and Bitcoin. ;)

[Doctor Why]

"Krugman's comments on the eurozone are as usual uniformed... "

I meant un-informed, not uniformed. Though, come to think of it, they are also pretty uniform.

[Doctor Why]

Once again, a eurozone country could benefit from introducing its own currency if:

- there is considerable potential for import substitution;
- the exports are highly elastic;
- there is strong potential demand for financial assets denominated in local currency.

As far as I can tell, Cyprus satisfies non of these conditions, so leaving the eurozone could lead only to a full-scale economic collapse.

[genauer]

Doctor__why,

I agree with your arguments.

On the other hand, just 5 years ago, Cyprus got by without the Euro.

How did this happen? Euro de facto standard, or ....
I do not think, you exchanged Gold bullion : - )

Could you tell a little bit, how the currency thing worked the last 50 years in Cyprus?

[Doctor Why]

genauer,

They had to rely on some indirect trade barriers and currency controls, for the most part. However, I moved here right after Cyprus joined the euro, so I have no firsthand experience of living with the pound.

[Kevin Donoghue]

Nick Rowe: "But I am very surprised how slowly it takes for one domino to hit the next."

Time to doubt ratex models, or at least the ones which imply meaningful efficiency?

Dr Why: For sure Krugman is one of the leading experts on international economics, as you say. But I'm not clear why this means he should conform to your opinions. Just look at what you wrote:

Once again, a eurozone country could benefit from introducing its own currency if:

- there is considerable potential for import substitution;
- the exports are highly elastic;
- there is strong potential demand for financial assets denominated in local currency.

Would you really have the balls to say that in a seminar with Krugman watching you? What would you say if he simply replied, as he very well might: "Model, please?"

[Doctor Why]

Kevin,

"Would you really have the balls to say that in a seminar with Krugman watching you?".

Absolutely. And I would be able to show a model.

[Kevin Donoghue]

If you've got an argument which the author of Currencies and Crises might find compelling, publish it and please post a link here. Any fool can say Krugman is "uninformed, biased and totally irresponsible". On some blogs the mere mention of his name is enough to start people flinging poo like that. If you can do better then you should.

[Doctor Why]

Kevin, I understand your position. However,

1) I'm not that interested in economics. If I were I would have chosen an academic career.

2) Nobody has to pay any attention to what I say, but I'm always happy to reply to concrete arguments.

3) If somebody here in Cyprus decides to follow his advice, this may lead to food shortages and social unrest and even - in some scenarios - Turkish military intervention. So I take Krugman's words very personally.

[Mandos]

The Turkish stalking-horse is the rarely-spoken point here.

I think what happened in pre-Euro-Cyprus is kind of crucial here.

The population of the southern part of Cyprus is 838K. This ain't China, but this is not *such* a small labour force. A million is not a small number of people.

[Mandos]

Oh, and, there won't be social unrest now? Did Cyprus really have that much to lose before it became a crisis situation? The reports re deterioration of health services in e.g. Greece do not sound good.

[Doctor Why]

Mandos,

1) Erdogan's Turkey is a different country - I would not call it a stalking horse.

2) Are you trying to say that a country with a workforce of around 400K people can become a big and diversified economy?

3) Pre-euro Cyprus existed in a much safer economic and political environment, but even under those conditions going back to the Cypriot pound would be a huge shock.

4) There may be some social unrest, but hopefully no food shortages or riots. As it is, supermarkets are already beginning to run out of food, but with banks opening tomorrow things should be back to normal soon. However, imagine what would happen if Cyprus lost access to the ECB's lending facilities and the interbank payment system - that's what leaving the euro would mean in practice. In addition, at this point it is not clear whether Cyprus would be able to stay in the EU when it leaves the euro (probably not), and leaving the EU would be another shock of a similar magnitude.

[Mandos]

Yes, but argument 4 is an argument for being trapped in a system that is arguably not turning in a favorable direction for Cyprus or for many of the other Southern countries. How long do you plan to be subjected to the social experiment of having no access to a normal central bank? That there would be severe shocks from leaving the Eurozone is obvious...but it's extremely unclear to me what the way out is, except for a long-slow decline until somehow, the Eurozone leadership comes to its senses.

[Mandos]

2) Are you trying to say that a country with a workforce of around 400K people can become a big and diversified economy?

I am saying...it is not without resources. Do you have to be as big as some of the larger Eurozone countries to prosper with your own currency? It seems *very* dubious to me that that is necessarily the case.

So yes, I am saying that a country with a workforce of around 400K people can "become a big and diversified economy", in the sense that is capable of being a developed country and standing on its own feet. It's working for Iceland, which is smaller.

[genauer]

Denmark with a population of 5 Mio has its own krone, which is pegged to the Euro.

But it is "well diversified" and is close to the center of Europe.

So I think, any attempt by Cyprus to reintroduce the pound would be just met with a stare of disbelieve.

Cyprus has Tourism, will keep some Russian banking, trade, and after it comes to an agreement with Erdogan, they will exploit whatever really is there in gas drilling.

In the long run, after the Greece situation is sorted out, it could become a province of Greece.

The most important decisions for the Euro are now done by the ESM with voting rights according to shares, and that means that in the next ECB reform, these smallholder positions of Cyprus, Malta, etc. can be ended.

The mayor of Luxembourg apparently sees the writing on the wall : - )

The US are now also going after Liechtenstein, and this will continue. The dragnets are out, and can snap from Friday evening to Saturday morning.

The Iceland situation is not really resolved.

It has now been made very clear, that the hoi polloi will not be blackmailed by the hoi oligoi with this "too big to fail".

In one hour I will listen to a seminar:

"Financial Repression; How it Affects the Business Model of Banks" by a PIMCO SVP.
Should be interesting

[genauer]

Paul Krugman is an Ivory Tower Clown, who was never involved in any real world work.
Or can somebody here tell me anything?

I am still waiting for one single positive response to my old question:

Please tell me one specific Krugman PAPER, and in a very few sentences, what YOU specifically find good about it.

[Jacques René Giguère]

Greats and Smalls: the euro was designed ,rightly or wrongly, by two Greats who saw it as what they thought, rightly ot wrongly,as a problem or opportunity. The Smalls who stayed out (Sweden and Denmark for example) are doing rather fine. The smalls that were let in are causing unnecessary trouble for the rest. Would a Cyprus still on its own pound had developped into such a problem? Iceland was bad. It didn't endanger anything fundamental for Europe. Had Iceland proposed to eliminate deposit insurance, the message would have been don't bank in Iceland. In Cyprus, it was don't bank in euro...

[Mandos]

The most important decisions for the Euro are now done by the ESM with voting rights according to shares, and that means that in the next ECB reform, these smallholder positions of Cyprus, Malta, etc. can be ended.

The mayor of Luxembourg apparently sees the writing on the wall : - )

Yes, you realize that if this were true, joining the Eurozone was a terrible idea for these countries. I mean, how does the way you're talking about the writing on the wall, followed by a smiley, not confirm, well, some negative assumptions?

[genauer]

Mandos,

after this Junckers repeatedly lorded it over to others, how to run a successful economy, people like me took a closer look, and discovered lots of tax cheating,
at some point they were even close to get on some "grey list".

For Liechtenstein I do know, that they have some tech companies, maybe not really "high-tech", but certainly profitable and globally competitive. I was once there, trying to sell some addon to a 2 m product, for which they had a 200k addon, and I could provide a better performing 40k, (internal costs 10k, dependent on how you calculate this). It didnt work out, tax reasons, business strategy, many years ago.

This Mister Juncker, who wanted to play "Euro(group) Chief" got not only on my nerves.

And with all the mud slung daily into our direction, and then people get hung up over a smiley, which is not perfectly located.

Please read the Hannibal link above, to put the style into proper context.

[Mandos]

We're going to get into a Germany-argument again over this, das Nick schon ausschloss. So I'll stop.

[Doctor Why]

Mandos,

It's much easier for Cyprus to stay in the eurozone and focus on its natural competitive advantages, than try to build a diversified economy without any real economies of scale.

[Mandos]

Doctor Why: We'll see. I'm not convinced that many of the Eurozone countries can escape their current downwards spiral on what is basically a gold (bitcoin?) standard.

[123]

Nick:
"I have been re-reading Leon Degrelle, a Belgian Rexist who joined the Waffen SS with other Belgians and fought on the Eastern Front."

A book by Timothy Snyder "Bloodlands: Europe Between Hitler and Stalin" would be a much better read, the author does a good job with the macro-micro dichotomy - how the individual stories relate to the big historical picture.

[123]

I see this has become a comment thread about how one former German leader is related to the macroeconomic issues of the day. The best video I have seen this year is called "Hitler bets angainst QE":
http://www.youtube.com/watch?v=hwxcXnFW07s

[Doctor Why]

Mandos,

as I tried to explain before, the real problem is not the single currency itself, but the macro-economic stability framework that comes with it.

Fortunately, focus is already beginning to shift from budget targets to structural reforms, so I hope the framework will eventually evolve into something more flexible and consistent with full employment.

[Mandos]

Mandos,

as I tried to explain before, the real problem is not the single currency itself, but the macro-economic stability framework that comes with it.

Fortunately, focus is already beginning to shift from budget targets to structural reforms, so I hope the framework will eventually evolve into something more flexible and consistent with full employment.

I agree that it is the stability framework that is at issue. I just don't see it evolving any time soon as the politics of the various countries evolve further and further apart, and the democratic legitimacy of the whole project erodes further and further. I see it as evolving in the wrong direction.

[Doctor Why]

Mandos,

In the worst case scenario, the eurozone has to survive for about a decade (until the European baby-boomers retire) relying on different ad-hoc solutions, and then the current framework will become perfectly acceptable.

It may be a risky approach, but then messing with inflation and fiscal targets is not without risks either.

[Mandos]

In the worst case scenario, the eurozone has to survive for about a decade (until the European baby-boomers retire) relying on different ad-hoc solutions, and then the current framework will become perfectly acceptable.

It may be a risky approach, but then messing with inflation and fiscal targets is not without risks either.

It's not just a risky approach. With the latest reports on health in Europe, it seems to me that a decade is far too long, and deeply inhumane. As the mechanism underlying the Euro is based on a bad theory and one apparently held very deeply by people whose opinions now hold sway, I don't know if 10 years is enough, or if the politics of the various countries in question can stand it.

It seems to me rather blase and sanguine, which suggests to me that Paul Krugman may have a point.

[Doctor Why]

Mandos,

No, he does not. He seems to believe that it's mostly a matter of ideology, but in reality some problems don't have easy solutions. (For example, the recent US experience shows that the inflation rate is very downward sticky, so you can't easily change the inflation target whenever you want.)

[Doctor Why]

Getting ready for a bank run: 4 containers with 5 billion euros' worth of banknotes arrive in Cyprus (slideshow)

http://www.kathimerini.com.cy/index.php?pageaction=kat&modid=1&artid=127894

[Mandos]

Mandos,

No, he does not. He seems to believe that it's mostly a matter of ideology, but in reality some problems don't have easy solutions. (For example, the recent US experience shows that the inflation rate is very downward sticky, so you can't easily change the inflation target whenever you want.)

We'll have to agree to disagree then. I think the likely solution set for the Eurozone is narrowing and narrowing, and that narrowing is accelerating. If it muddles through, it will be a very Pyrrhic victory. There may not be *good* solutions, but sometimes, there are easy choices.

[Doctor Why]

Mandos,

What easy choices?

[Mandos]

In many of the Eurozone countries (not just Cyprus) the case for the leaving the Eurozone grows and grows. You would have to believe that there is a high probability of reform of the whole system in the right direction, and I don't believe that probability is increasing. In that case, it becomes easy for me to prescribe Eurozone exit.

[Simon van Norden]

"I am still waiting for one single positive response to my old question: Please tell me one specific Krugman PAPER, and in a very few sentences, what YOU specifically find good about it."

I'm back (after a couple of days absence to write a lecture on banking crises, Cyprus and the Eurozone.)

Genny, your challenge interests me, but I think it is missing a word. Is there any particular KIND of Krugman PAPER that I should "tell you"?

[Nick Rowe]

123: I have read reviews of that book. I think it would be too depressing to read.

Doctor Why: in answer to your (much) earlier question, about diversified economies and flexible exchange rates.

Suppose you had a very diversified economy. There would be less chance of a shock hitting all your sectors at once. And if a shock did hit, and have macro effects, a small change in the real exchange rate might be enough to reallocate demand and resources towards those that survive. If you have only two sectors (banking and tourism) you have a bigger chance that one might get wiped out, and you would need a bigger fall in the real exchange rate to reallocate demand and resources towards the other.

That real exchange rate adjustment has to happen somehow, even if you wish you could keep on earning the same old income at the same old real exchange rate. Under fixed exchange rates, the only way it can happen is through deflation, which is slow and painful. Under flexible exchange rates it can happen through exchange rate depreciation, which is fast and not quite so painful.

[Simon van Norden]

"Suppose you had a very diversified economy. ... a small change in the real exchange rate might be enough to reallocate demand and resources towards those that survive."

Um....I think there's an implicit assumption there that you might want to make explicit. Why should a diversified economy show more responsiveness to exchange rate movements than a specialized one?

[123]

Nick, it is depressing, but it is a real history, and it is one of those rare books where the economic strategy of the countries concerned is given due weight.
By the way, in the country where I live parents have complained that sixth grade history textbook is too depressing - in the chapter about the Soviet mass famines (which are also covered in the Snyder's book).

[Doctor Why]

Nick,

I understand the theoretical argument for flexible rates, but in the real world reallocation of resources may happen in different ways (many of the unemployed will eventually move somewhere else, or retire) so devaluation and deflation are not the only choices. But even if we limit ourselves to those two choices, the answer is not obvious.
Adjustment through devaluation can indeed be less painful, but only if the country can finance the current account deficit - and this is not always the case in the real world.

So from a practical perspective - if we talk about an exit from the eurozone - the choice is between deleveraging and a current account crisis. And my point was that, for a small specialized country, the combination of a very bad J-curve, limited ability to borrow in local currency, and no access to international markets would make the current account crisis a much more painful experience.

[Nick Rowe]

Simon: "Why should a diversified economy show more responsiveness to exchange rate movements than a specialized one?"

Fair enough. I'm assuming it's easier to expand an existing industry than to start a new one from scratch. That might not always be true, but it seems plausible. Or maybe, the more sectors you have, the better the chance that resources unemployed in one sector could find another sector where they could be productive. The better a country covers product-space, the greater the supply elasticity in any one sector?

[Nick Rowe]

Doctor Why: Paul Krugman has a new post making the same point I was making, comparing real devaluation through deflation vs nominal exchange rate devaluation. But I think I see your point about the ability to borrow from abroad to tide you over a temporary bad patch being easier if you use an international currency. But if it makes that bad patch last longer, so it's riskier to lend to you, I'm not sure which effect would dominate.

[Doctor Why]

Nick:
"But if it makes that bad patch last longer, so it's riskier to lend to you, I'm not sure which effect would dominate."

That's exactly the problem. Krugman, who writes for a broad audience, is using a very simple model to make a general statement on a very important subject. (You are doing the same, but writing for a much more specialized audience, which is OK).

[genauer]

Simon,

take any of his "papers", as in published in Journals, preferable one of the more popular.

With respect to the wording:

On the one side I tried to cut down on the clutter of people, who have just read his NYT columns, and agree with them. Or people, who have read one of his textbooks as an intro into economics. And finally those who sent just some general praise of 3rd and 4th persons to me.

On the other side, I tried to appeal to the positive side in people, praising something they know and like. And do this in the most open form.

I had at some point realized, that most people, who preach about the philosophy, methods and science(tific) discovery, never did it themselves, and that their books have little to do with how it is really done, at least from my perspective.

The same holds for "Design of Experiments", which is, at least in my area, done very differently, and driven by other constraints.

And finally, working on a business idea / MBA thesis, I spent about a month designing a delicate questionaire "consciously deviating" from Colin Robson(2002) "Real World Research" to be as open as possible for unexpected answers.

So, hearing from an economist, how he asesses papers in his fields should give me more insight, that hacking away with negativity by myself.

[genauer]

To be more specific:

"peer reviewed" is prefered strongly, but NBER, IMF or OECD staff KIND is acceptable too.

[genauer]

LOL,

after FTAV came up with cunning plans on their own

http://ftalphaville.ft.com/2013/03/28/1442612/alphachat-the-cunning-plan-edition/,

I looked up more than Nick's youtube and discovered that between "Shake the Spear" and James Bond & Mr Bean there is some more popular culture with Baldrick & Blackadder (wiki) : - )

It may not reach our Goat herd and Skiller,

but I also learned from Paul Krugman, that on every list of strongly worded demands, you should never forget the "and a pony" at the end : - )

[Simon van Norden]

Genauer;

Actually, how about Krugman's doctoral-level trade theory textbook with Helpman ("Trade Policy and Market Structure")? It basically covers only material that the two of them developed (IIRC) and is a far cry from any undergrad or MBA text. It was the required reading for the second half of the trade policy course that I took.

[Simon van Norden]

P.S. that book was part of what got him the Nobel Prize....but it was one of the contributions that was made before he really got into economic geography.

[genauer]

Simon, I am afraid this is not good:

1. it is Eastern, and that means the earliest I could get my hands on, would be tuesday evening, best case, either library or amazon molto presto service

2. The first author is Elhanan Helpman, who published as early as 1978 "A Theory of International Trade Under Uncertainty" New York/London, and there are multiple versions of it

3. There seems to be some fallout about who contributed /owned what, and they went separate ways

4. I had this already with another paper and an assistant professor, who attributed something to the paper, and then claimed that a book krugman did with fujity would show, that fujita says, it was krugmans idea, which it did not, and I even found an earlier paper from fujita, without krugman which adressed this.

5. In a textbook you do not always attribute fully stuff from others, go into details of data, or full derivation of equations. Very easy to mistake something there as "original Krugman", which is in fact somebody else. People usually dont haggle in public about missing citations in textbooks.

My main purpose is to find out, why so many american academic economists admire Krugman as a kind of demi-god. What am I missing here? The admiration is there, and I really want to understand this.

And the best way would be, you come with a paper and "see, this is real good, because of this and that" and I can say: "Aaaah, now I begin to understand"

In my field, people dont dish out break through insights as full-book-only, but as paper. A clear, crisp Phys.Rev.Letter with 3 pages or shorter is the holy grail : - )

To go forward efficiently:
I have online access to the very most papers here.
I have local copies, and read to some degree, of:

1978 JIE

1979 Chicago

1979 JIE

1979 J of Money ...

1991 J of Pol Econ, but I sort of demolished that, maybe not the best chance to get to get to a positive outcome

1994 Proc of the Worldbank (peer reviewed?)

1996 J of Jap Inter Econ

I assume my very colloquial reference style is good enough for you

[Doctor Why]

genauer,

You seem to have a real grudge against Krugman ("an Ivory Tower Clown"). I myself would describe him as mostly competent, but shallow and unoriginal.

[Simon van Norden]

Genauer: Is anything that Krugman wrote with a co-author is too suspect for you? Note that much of the work for which he was awarded the Nobel Prize was co-authored, with various people. And this is the rule rather than the exception in economics: e.g. Friedman and Schwartz, Modigliani and Miller, Black and Scholes, Engle and Granger, etc., etc.

BTW, easter is no constraint....I'm a busy guy and I'll get to this when I can for my own amusement. There's no rush for you to respond....you'll be able to take your time.

I really don't understand your objections #2 & #3. Yes, both had previously done work on trade. What's your point? Yes, they both went on to work with others. So? I'm not aware that they had a falling out. Is this your usual innuendo or do you have some original-source factual material to back up these claims of yours?

"In my field, people dont dish out break through insights as full-book-only, but as paper." Who cares? This is economics. Top people sometimes do just that. In international economics, Ken Rogoff has done it twice: with Obstfeld and Rogoff, and then with Reinhart and Rogoff.

"In a textbook you do not always attribute fully stuff from others, go into details of data, or full derivation of equations.... A clear, crisp Phys.Rev.Letter with 3 pages or shorter is the holy grail : - )" Consistency is not your strong suit, is it? You want full details, complete derivations and brilliant original insights (and I guess a complete literature survey to show that the contribution really is new) in 3 pages or less.....double-spaced?

No, Genauer. That will not do. If you want to bash Krugman with credibility, you have to judge him on his own turf; compared to the work of his peers. It is too easy for armchair pensioners to criticize a famous economist they have never met for not being more like a physicist. (And too dull: who wants to argue that economists are good physicists?) To judge Krugman, you have to learn some economics. Of course, I'll understand if you're too busy or you feel that would be too difficult for you.....

[Doctor Why]

Simon,

"To judge Krugman, you have to learn some economics."

Krugman considers himself to be an expert on everything (e.g. global warming)- so it is only fair that people who have some field experience question his contribution to our understanding of the world - unless, of course, you consider economics to be a branch of mathematics.

I, for example, find it very disturbing that economic commentary I read in Le Monde usually makes much more sense than Krugman's economic columns.

[genauer]

Simon,

we have to get the emotions out.

Point 1. Eastern is a hard constraint, because I can’t get any copy of any Krugman book until Tuesday evening. Time wise this weekend is actually perfect for a dispute of any length, I have no special plans, and the weather is real bad. But without the text ....

The papers would be available.

Point 2. / + are soft constraints

I thought I had explained, why I had asked the question in the open form, to get a paper assessed from an expert economist’s point of view.

I think I have learned some fair amount of economics, went through German books with exercises (Felderer-Homburg, Gärtner-Lutz for exchange rates, implemented some spreadsheets, ...) looked at 3 books from Krugman, and some others and read quite a number of papers (27 AER, about 50 NBER, ....), for most I believe to understand the points made.

Papers are as long as they need to be. PRL has a hard cut off limit at 4 pages, then one has to take it to another Journal with the appropriate impact factor.
My point with the PRL was, that I was so far used to get the "good stuff" first and timely in "paper" format, and not in a text book. And that the main, younger author goes first in the author list. I am always willing to learn about the habits in other areas.

How do we go forward here?

Wait over the whole weekend, until I can get the book, because you say, this is really it, and anything will just not do.

Or taking a paper, as I originally wanted?

Or?

[genauer]

To be maybe less cryptic for others, like Doctor_Why:

PRL is Phys(ical) Rev(iew) Letter, THE reference in Physics for short (Letter) presentations, expected to be of significant, general importance. The one thing every physicist, I know, read, while active.

PRB (Physcial Review B) and others are usually longer, Ando Fowler Stern 1982 in Rev. of Modern Physics
was over 200 pages long, and I was deeply honored that Stern showed up for my talk at IBM Yorktown Heights, THE Commanding Heights in my field, in his last work week.
A corporate R&D as the Gold standard, probably unusual in most other fields.

AER is American Economic Review, the Gold standard, as far as I understand.

NBER is mostly "working papers", but with a better reputation than most Journals.
But it would be interesting to have Simon characterize this, as putting JIE (Journal of International Economics) and others into proper context.

[Doctor Why]

genauer,

Why like me?

I used to be a physicist (briefly), my younger brother is still an active physicist, who publishes mostly in Applied Physics Letters, but also has one or two papers in PRL,PRA and Nature Materials.

[genauer]

Doctor_why,

1. you seem to be the only one, beyond Simon and me, still participating here

2. your familiarity with both fields could be very helpful and fruitful in clearing up misunderstandings

3. you seem to have some significant "Nehmerqualitäten" (translating to "taker qualities (?)" with respect to my wording. I don't know how much you lost with what is going on presently in Cyprus, and me taking a pretty hard line, and we even talked the next day again, here. I like that! Remember, I said, that I could imagine to do some business together, one day.

[Kevin Donoghue]

I, for example, find it very disturbing that economic commentary I read in Le Monde usually makes much more sense than Krugman's economic columns.

I would find that disturbing too. (Actually I'd probably go to the doctor pronto and say: I think I'm hallucinating.) Now if you said that Dean Baker, Ken Rogoff, Olivier Blanchard or indeed Nick Rowe were making more sense than Krugman I wouldn't bat an eyelid. They have all thought long and hard about economics. I doubt that's true of the guys who write for Le Monde, but perhaps I'm wrong. Can you point me to where they have presented an argument which you think Krugman would reject and which makes more sense to you than he does?

[Doctor Why]

Kevin,

For example, they don't say that Cyprus would be better off leaving the euro. And they also did not predict that the euro could disappear before the end of 2011.

Krugman may understand international trade (at least pre-gloablization), but his understanding of central banking, financial markets and European political economy is not particularly good.

[Kevin Donoghue]

...they don't say that Cyprus would be better off leaving the euro.

Well AFAIK, Sarah Palin doesn't say that Cyprus would be better off leaving the euro. Do they present an argument for staying in the EZ, which Krugman might find fault with?

You seem to think that it's enough to say that he doesn't agree with you. It's not. You could be wrong. Personally I'm pretty sure that staying in the EZ will have dreadful consequences for Cyprus.

[Simon van Norden]

Dr. Why: I'll leave PK to defend his own comments on global warming. And while I might agree with some things that he writes (for example, some of his remarks on Cyprus and the troubles in the Eurozone and just bad Merkel is for the EU) I don't agree with (or even read) all of it. But Genauer had a challenge regarding PK's contribution to economics that I think is sufficiently ignorant that it might be fun to correct....if he is open-minded enough to want to find out more.

[Doctor Why]

Kevin,

My main objection to Krugman's argument is that it's based purely on analysis of international trade - it does not take into account financial factors (e.g. international capital flows, currency reserves, structure of domestic financial markets), or political and legal factors (e.g. ability to leave the euro, but stay in the EU).

Le Monde, on the other hand would typically include most of those factors, and their analysis, while less technical, would be more balanced and sensible.

[Kevin Donoghue]

Dr Why, I don't think you understand Krugman's thinking. To say that he disregards currency reserves, for example, is rather easily refuted -- some of his earliest work is on that very topic. You say upthread that you're not that interested in economics. That's evidently the plain truth so I'll bow out.

Best of luck to you and Cyprus.