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Killing it like a hooker in Hong Kong

Greece: You can never escape taxes…

Watching Greece, which is no doubt a prologue to this decade’s saga of sovereign defaults, has made me thing of a couple of things.

Firstly, the Greeks don’t like paying their taxes. In a country of 10 million, less than 6 people reported income of over EUR 1 million last year. Only something like 30% of its citizens pay their taxes, and a vast grey economy exists in the country.

Secondly, the so called obvious solution that many rational economists are crying out for, is for devaluation of some sort. This comment by Simon Johnson in the WSJ is fairly typical:

If Greece (and the other troubled countries) still had their own currencies, it would all be a lot easier. Just as in the U.K. since 2008, their exchange rates would depreciate sharply. This would lower the cost of labor, making them competitive again (remember Asia after 1997-’98) while also inflating asset prices and helping to refloat borrowers who are underwater on their mortgages and other debts. It would undoubtedly hurt the Germans and the French, who would suffer from less competitiveness—but when you are in deep trouble, who cares?

Since these struggling countries share the euro, run by the European Central Bank in Frankfurt, their currencies cannot fall in this fashion. So they are left with the need to massively curtail demand, lower wages and reduce the public sector workforce. The last time we saw this kind of precipitate fiscal austerity—when nations were tied to the gold standard—it contributed directly to the onset of the Great Depression in the 1930s.

Now what he doesn’t mention is that the process of refloating borrowers through devaluation is also a process of robbing savers whose money is in the banks. Anyone who had the good sense to save gets to watch the value of their of their savings decline.

Now the question is, where does that value go? It goes to everyone who has payments due in the local currency, but has access to external currency revenues or borrowings.

So in effect its going to the exporters, and to the government who collects taxes from these exporters, ie increasing competitiveness.

You can actually think of devaluation as a massively regressive tax, which forces middle class savers to ante up to save their government and large companies.

In effect, nations which are politically unable to balance their budgets through taxes and reduced spending can then use exchange rate devaluation to unilaterally tax their citizens.

What genius!

This is precisely the reason libertarians like Ron Paul want to bring the gold standard back, because they are fighting the good fight for the middle class. Force politicians to make tough decisions earlier, force companies to go bankrupt and change hands when they’ve made fatal mistakes, rather than bailing out the elite business owners by in effect taking dollars from the pockets of middle class to give them to the ultra rich. Devaluation is the ultimate regressive tax.

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February 14, 2010 - Posted by | Uncategorized | , , , ,

3 Comments »

  1. I totally agree man,
    why should the middle class bail out the “important” people who made wrong decisions?

    Who will bail the middle class then they (Middle class) makes wrong decisions!?!?

    BUT what was the problem with the gold standard? did it really lead up to the great depression?

    remove the Es

    Comment by II | February 14, 2010

  2. Well, the gold standard did not allow this process of devaluation. Most economists believe that this in combination with the paradox of thrift led to the great depression.

    Basically, the paradox of thrift states that if I save money, and no one else does, then I am better off. But if everyone saves money, and no one spends, then everyone is worse off as total demand falls off the cliff.

    During the Great Depression, the conventional wisdom is that as firms faced massive overcapacity and found themselves overlevered, they ramped down spending dramatically. As the government wasn’t able to devalue the currency to reduce the real value of debts for all these firms, this fed into a paradox of thrift situation as even healthy firms lost demand for their products.

    Comment by vanderghast | February 16, 2010

  3. Depends on how you look at things I suppose, you should read some of Barry Eichengreen’s stuff to get a feel for what the Gold Standard is like. In many respects the Euro, which would force a long painful deflation in Greece is much like the Gold Standard which would have forced a painful long deflation in the late 20s rather than the break and revaluation in many countries like Britain, France etc.

    The problem now is this:

    1) Deflation scenario: Greek banks’ loan provisions continue to get worse, are totally screwed, can’t find financing, etc.
    2) Devaluation scenario: Greek banks face run on their deposit base and higher defaults as borrowers face the old Indonesian problem of using local FX to pay back foreign currency loans.

    All this noise about the Euro is a bit silly since these Greek banks are pretty much dunzo whatever happens.

    Comment by nemoincognito | February 23, 2010


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