JP Koning and Nick Rowe had some dueling posts on whether or not a return to the Drachma could offer some real salvation for Greece. Koning says no:
"there's no guarantee that a decline in the drachma will boost the Greek economy. The appearance in circulation of drachma banknotes needn't mean that sticker prices will be set in drachmas. To determine how many drachmas Greeks must pay for an item, retailers may simply refer to its euro sticker prices and convert that amount into drachma by glancing at the last-second drachma-to-euro exchange rate. If so, then just as bitcoin prices are not sticky, neither will drachma prices. Without the requisite stickiness, a collapse in drachmas will not have the real effects that Lars and Brad want. Only a collapse in the euro, the monetary standard, will harness the sticky price effect the two implicitly invoke. But that effectively means Greece remains in its monetary straitjacket, despite having debuted a drachma."
"Given that a strong government must spend a significant amount of resources getting its population to adopt a better standard, it's hard to imagine that a weak government will ever be able to foist an inferior standard on its population without facing a backlash. So contrary to Lars and Brad, there is no guarantee that issuing drachmas offers an ultimate salvation. In the end, there's probably very little difference between a Greece that introduces a drachma or one that doesn't, since either way the incumbent euro standard will likely stick around."
http://jpkoning.blogspot.ca/2015/07/there-wont-be-drachma-induced-recovery.html
Nick argues that it can offer some salvation:
"What happens? Does the introduction of the Drachma make the recession less severe?
"I say it does make the recession less severe."
"There are two ways to explain why it makes the recession less severe:"
"1. Unless the Drachma has an exchange rate of zero, the introduction of the Drachma, in addition to the existing stock of Euros, increases the total real value of the stock of media of exchange, and so lessens the excess demand for the media of exchange, and so reduce the severity of the recession. And if at least some people are willing to use at least some Drachmas as a medium of exchange, there will be some demand to hold Drachmas, and so the exchange rate of the Drachma will not be zero."
"2. If at least some people are willing to use at least some Drachmas as a Medium of exchange, that means that Drachmas are an (imperfect) substitute for Euros. The introduction of a new good will reduce the demand for any existing good that is a substitute for the new good. So the introduction of the Drachma reduces the excess demand for the Euro, and so lessens the recession."
"But in order to get this point, you have to understand the essentially monetary nature of recessions. They aren't caused by real interest rates being wrong, or real exchange rates being wrong, or real wages being wrong. Those are all just symptoms, or side effects. The underlying cause of the recession is the reduction in the volume of trade caused by an excess demand for the one good that is demanded or supplied whenever any other good is traded."
"This is in part a response to JP Koning's good post. He may be right about the Euro remaining the medium of account, but it is the excess demand for the media of exchange that causes recessions."
http://worthwhile.typepad.com/worthwhile_canadian_initi/2015/07/euro-moamoe-plus-drachma-moe.html#more
It's a very interesting and important theoretical debate. However, moving from the world of theory to the world of actual events, we may get a chance for a natural experiment very soon.
It's debatable that the time for the Drachma is coming as early as tomorrow morning. See this tweet by Steve Sedgewick:
"Special @SquawkBoxEurope starts 2100cet tonight with me and @cnbcKaren . My biggest Q so far this wknd is 'does Germany want #Grexit now?"
"Dow Jones sources say the Eurogroup draft statement includes a Greek "time-out" from the euro zone as a potential option, which was a German request."
"German request for Greece to sign over €50 billion in assets. This is 27% of Greek GDP. In the U.S. this would be €4.5 trillion."
"A five-year 'timeout' for Greece? Nearly as crazy, says Cordogno:
"In my view, this is a de-facto exit as the “temporary” element would only be on paper. It would be extremely difficult to get back into the Eurozone within 5 years as suggested. Moreover, debt-restructuring outside of the Eurozone would be even more difficult as most obligation would remain in euros while the new national currency would likely be deeply devalued."
http://www.cnbc.com/2015/07/12/greece-crisis-deadline-for-greece-as-european-leaders-meet.html
However, the important thing to remember is that whether or not the Germans now want Grexit-and you could argue that this is what they want; for those like Cullen Roche or JP Koning who argue that a Grexit is the worst case scenario, do they still think so in lieu of Germany's proposal to take 27% of Greece's economy as collateral-may be besides the point.
It seems unlikely now that there will be a deal by tomorrow morning as the markets assumed on Friday. With Greece's insolvent banks they may already have to start printing drachmas tomorrow. Ie, de facto devaluation may already be here.
"DJN also said that given that Greek banks are reportedly set to run out of cash as early as Monday, and with no new funding imminent, Athens may have to start printing its own money again."
Meanwhile there isn't a sense of urgency on the part of the EU:
"And DJN notes that Hans Schelling, the Austrian Finance Minister, was doubtful that a new deal could be done before July 20, when Greece has to repay 3.5 billion euros in bonds and 700 million in interest to the ECB."
"More seriously, though, he says that it's "truly not possible to reach a deal today" and that the best that could be hoped for is a recommendation for the euro zone leaders meeting later. He noted that the "bridge of trust" was a big problem.
"Asked whether it was democratic to try to force Greece into "front-loading" its commitments by passing legislation immediately i.e.demonstrating their commitment to reform, Kazimir said: "This is not a question of whether it's democratic, it's about the economic situation ...I think what's important for the Greek people that the banks are open, and with what currency."
Starting tomorrow, or as soon as they start to run out of euros, that currency will start to be the drachma.
"there's no guarantee that a decline in the drachma will boost the Greek economy. The appearance in circulation of drachma banknotes needn't mean that sticker prices will be set in drachmas. To determine how many drachmas Greeks must pay for an item, retailers may simply refer to its euro sticker prices and convert that amount into drachma by glancing at the last-second drachma-to-euro exchange rate. If so, then just as bitcoin prices are not sticky, neither will drachma prices. Without the requisite stickiness, a collapse in drachmas will not have the real effects that Lars and Brad want. Only a collapse in the euro, the monetary standard, will harness the sticky price effect the two implicitly invoke. But that effectively means Greece remains in its monetary straitjacket, despite having debuted a drachma."
"Given that a strong government must spend a significant amount of resources getting its population to adopt a better standard, it's hard to imagine that a weak government will ever be able to foist an inferior standard on its population without facing a backlash. So contrary to Lars and Brad, there is no guarantee that issuing drachmas offers an ultimate salvation. In the end, there's probably very little difference between a Greece that introduces a drachma or one that doesn't, since either way the incumbent euro standard will likely stick around."
http://jpkoning.blogspot.ca/2015/07/there-wont-be-drachma-induced-recovery.html
Nick argues that it can offer some salvation:
"What happens? Does the introduction of the Drachma make the recession less severe?
"I say it does make the recession less severe."
"There are two ways to explain why it makes the recession less severe:"
"1. Unless the Drachma has an exchange rate of zero, the introduction of the Drachma, in addition to the existing stock of Euros, increases the total real value of the stock of media of exchange, and so lessens the excess demand for the media of exchange, and so reduce the severity of the recession. And if at least some people are willing to use at least some Drachmas as a medium of exchange, there will be some demand to hold Drachmas, and so the exchange rate of the Drachma will not be zero."
"2. If at least some people are willing to use at least some Drachmas as a Medium of exchange, that means that Drachmas are an (imperfect) substitute for Euros. The introduction of a new good will reduce the demand for any existing good that is a substitute for the new good. So the introduction of the Drachma reduces the excess demand for the Euro, and so lessens the recession."
"But in order to get this point, you have to understand the essentially monetary nature of recessions. They aren't caused by real interest rates being wrong, or real exchange rates being wrong, or real wages being wrong. Those are all just symptoms, or side effects. The underlying cause of the recession is the reduction in the volume of trade caused by an excess demand for the one good that is demanded or supplied whenever any other good is traded."
"This is in part a response to JP Koning's good post. He may be right about the Euro remaining the medium of account, but it is the excess demand for the media of exchange that causes recessions."
http://worthwhile.typepad.com/worthwhile_canadian_initi/2015/07/euro-moamoe-plus-drachma-moe.html#more
It's a very interesting and important theoretical debate. However, moving from the world of theory to the world of actual events, we may get a chance for a natural experiment very soon.
It's debatable that the time for the Drachma is coming as early as tomorrow morning. See this tweet by Steve Sedgewick:
"Special @SquawkBoxEurope starts 2100cet tonight with me and @cnbcKaren . My biggest Q so far this wknd is 'does Germany want #Grexit now?"
"Dow Jones sources say the Eurogroup draft statement includes a Greek "time-out" from the euro zone as a potential option, which was a German request."
"German request for Greece to sign over €50 billion in assets. This is 27% of Greek GDP. In the U.S. this would be €4.5 trillion."
"A five-year 'timeout' for Greece? Nearly as crazy, says Cordogno:
"In my view, this is a de-facto exit as the “temporary” element would only be on paper. It would be extremely difficult to get back into the Eurozone within 5 years as suggested. Moreover, debt-restructuring outside of the Eurozone would be even more difficult as most obligation would remain in euros while the new national currency would likely be deeply devalued."
http://www.cnbc.com/2015/07/12/greece-crisis-deadline-for-greece-as-european-leaders-meet.html
However, the important thing to remember is that whether or not the Germans now want Grexit-and you could argue that this is what they want; for those like Cullen Roche or JP Koning who argue that a Grexit is the worst case scenario, do they still think so in lieu of Germany's proposal to take 27% of Greece's economy as collateral-may be besides the point.
It seems unlikely now that there will be a deal by tomorrow morning as the markets assumed on Friday. With Greece's insolvent banks they may already have to start printing drachmas tomorrow. Ie, de facto devaluation may already be here.
"DJN also said that given that Greek banks are reportedly set to run out of cash as early as Monday, and with no new funding imminent, Athens may have to start printing its own money again."
Meanwhile there isn't a sense of urgency on the part of the EU:
"And DJN notes that Hans Schelling, the Austrian Finance Minister, was doubtful that a new deal could be done before July 20, when Greece has to repay 3.5 billion euros in bonds and 700 million in interest to the ECB."
"More seriously, though, he says that it's "truly not possible to reach a deal today" and that the best that could be hoped for is a recommendation for the euro zone leaders meeting later. He noted that the "bridge of trust" was a big problem.
"Asked whether it was democratic to try to force Greece into "front-loading" its commitments by passing legislation immediately i.e.demonstrating their commitment to reform, Kazimir said: "This is not a question of whether it's democratic, it's about the economic situation ...I think what's important for the Greek people that the banks are open, and with what currency."
Starting tomorrow, or as soon as they start to run out of euros, that currency will start to be the drachma.
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