Paul Krugman wrote:
>Not long ago Argentina's "currency board" monetary system, which fixes the
>value of the peso permanently at one dollar, was lauded as a model for
>other countries. Now that monetary system has become a trap; tied rigidly
>to a strong dollar while neighboring Brazil has devalued and the euro has
>slumped, Argentine producers find themselves priced out of world
>markets. ... the loudest praise for Argentina's currency board came from
>the Wall Street Journal / Forbes / Cato Institute crowd, who saw it as the
>next best thing to a revived gold standard.
this currency board stuff is just like what England did to itself when it
fixed its Pound to gold at the pre-World War parity in 1926. The economy
sank, leading the rest of the world into the Depression (though not causing
it to go that direction, except in the sense of being part of the general
malaise before 1929). This is a case of "monetary cranks in power," where
they think a simple monetary solution will solve the problems of country.
The English elite wanted its pre-War glory back on the cheap, while the
Argentine elite faces innumerable problems and pressures from the IMF /
U.S. Treasury crowd.
>Those are the same people who have been howling for the abolition of the
>I.M.F. and other international financial institutions.
Of course, the IMF represents the modern and _politicized_ version of the
old gold standard, with the Rudi Dornbusch-type technocrats in the driver's
seat. Krugman of course prefers the IMF (where his folks have a say) to a
more automatic, and often equally destructive system,
>The irony gets deeper when you notice that Malaysia, which was supposed to
>have been cast into the outer darkness after it imposed controls on
>foreign investors two years ago, has had no trouble selling its bonds on
>world markets.
of course, capital controls are PK's preferred solution (within limits).
With a big enough crisis, this kind of palliative doesn't work.
>... As the financial crises of the 1990's taught us, such pessimistic
>prophecies can be self-fulfilling. A scenario for the next world
>financial crisis is already obvious: a default by a big debtor -- maybe a
>country, maybe a big corporation (say an overambitious telecom company)
>creates a bond market panic. And the unwillingness of investors to buy
>risky bonds forces countries into drastic austerity programs, forces
>companies to cancel investment plans and leads to a slump that validates
>investors' fears.
>
>Of course, it doesn't have to happen. We could be lucky; or we could act
>quickly to limit the damage when financial disruptions appear. A couple
>of weeks ago it seemed that an Argentine default might trigger a crisis;
>for the time being, at least, the I.M.F.'s loan package has averted that
>danger.
>
>What worries me is this: The bond market is warning us of turbulence
>ahead. That would be O.K. if the world's largest economy were being run
>by experienced, open-minded officials like the ones who got us through the
>last crisis. But who will actually be in charge? If it turns out to be
>knee-jerk conservatives who are opposed to any government intervention in
>markets, you'll be amazed at how badly things can go wrong. *****
wow! the economics elite is scared.
>P.S. What happened to the Krugman Watch, Jim D.?
I'm teaching three sections of introductory economics (two preps) and I'm
also supposed to do research and I can't stop posting stuff to pen-l...
Jim Devine [EMAIL PROTECTED] & http://bellarmine.lmu.edu/~JDevine
"From the east side of Chicago/ to the down side of L.A.
There's no place that he gods/ We don't bow down to him and pray.
Yeah we follow him to the slaughter / We go through the fire and ash.
Cause he's the doll inside our dollars / Our Lord and Savior Jesus Cash
(chorus): Ah we blow him up -- inflated / and we let him down -- depressed
We play with him forever -- he's our doll / and we love him best."
-- Terry Allen.
