Cullen Roche on Greece

      In my previous post I discussed some interesting convergences between Sumner and I and Greg and Morgan Warstler.

     http://diaryofarepublicanhater.blogspot.com/2015/07/first-me-and-sumner-then-greg-and.html

     Greg talked about Cullen Roche who thinks that the time for Grexit is passed. Greg agrees with him and Morgan here. There are a number of very smart economists who have the opposite view-Krugman, Lars Christensen, etc.

     Also, the MMT economist, Bill Mitchell.

     http://bilbo.economicoutlook.net/blog/?p=31313

     Sure, a lot of this post was about the simple fact that Greece can leave the euro-as the Syrzia Administration has denied. Still, I think you can infer from the piece that he also doesn't think Grexit would be a terrible decision.

     Roche in one post denies that a Grexit would carry a lot of contagion.

     "There seems to be a bubble in the word “contagion”.  First up is Greece. This is a country that is equivalent to 0.3% of global output. And in the last 5 years their debt has been almost entirely shuffled onto the balance sheets of sovereigns. In addition, the ECB has created numerous programs that deal with banking crisis. If there was ever a debt crisis that the world was more prepared for then Greece is it. That doesn’t mean there are no risks from Grexit (like other countries exiting), but the actual economic impact from this is likely to be very minimal.  Especially outside of Europe. Will there be some contagion? Yes, but this is nothing like Lehman Brothers."

    http://www.pragcap.com/three-things-i-think-i-think-market-turmoil-edition

    Yes in the purely economic sense there isn't-but other countreis leaving the euro would be a political contagion for the euro itself. 
   
    If you see how the markets have rallied on the belief that there will be a Greece deal it's clear that not getting a deal could be very painful for Europe at least. 

    Though it's not the focus of this post, I'll throw in a little extra on Roche's view on China:

   "What about China. Isn’t their stock market crash going to crater the global economy? This one is a bigger worry in my view because the weakness in the Chinese economy is going to have a much bigger impact on Asia.  Then again, we have to maintain some perspective here. If the crash is going to significantly hurt global growth then shouldn’t the boom have been consistent with global growth?  The data clearly doesn’t show that at all."

    Well, it may not itself contribute to global growth but Chinese growth does and this is a worry to the extent that you believe stock markets are forward indicators that the economy is slowing down. This could be  a worry for global growth. 

    With Grexit he argues that Greece has no good options. 

    "There’s an economic battle occurring over whether Greece should leave the Euro or not. Economists on the left tend to say they should leave, bring back their old currency and go their own way. Economists on the right tend to say that Greece should stick it out and hang with the Euro.  I like to think I don’t generally find myself on a “side” and here’s a pretty good example of that."

   http://www.pragcap.com/hyperinflationary-lessons-for-greece

   I find that a bit grandiose-everyone is on a side is my premise. His desire it to be the reasonable extreme between the Right and the MMT Left with his Monetary Realism school. The whole point of my blog title is to send up the idea that anyone is truly 'not on  a side' like David Brooks does.

  He thinks that Grexit would have been the right move 5 years ago but now the cow has long since left the barn. 

  "5 years ago I said Greece should definitely leave the Euro.  My basic reasoning was that full integration is not going to happen and Greece will have to suffer through depressionary deflation in order to allow an internal rebalancing of their economy to occur. That view has turned out to be pretty spot on. Greece has undergone a modern day depression by any standard. And if they’d brought back the Drachma many years ago they could have avoided a lot of the deflation and depression."

   "This is no longer the situation we’re in. Greece has already undergone a substantial internal rebalancing. They’re one of the only Euro Area countries where wages have actually FALLEN in the last 5 years.  And they’ve fallen quite a bit in relative terms:"

  Now though, Roche argues Greece faces no good choice.

   "Now, the economists on the left say that Greece should leave because their new currency will make them so much more competitive. But I am not so sure that’s the right move at this point. The time to leave was before the depression set in. Not 5 years after it set in.  And the reason why is simple. At this point Greece faces no good options. Staying in the Euro is going to very likely involve low growth and further austerity. But the alternative looks perhaps more frightening at this point. And the alternative is a high inflation and perhaps even a hyperinflationary nightmare. In fact, if there was ever a recipe for hyperinflation then Greece meets all the criteria."

•  The problem is multifaceted:
• The Greek economy is too dependent on foreign exports.
• The Euro will still be the dominant currency inside of Greece given that it’s largely a services and travel based economy. They will have, at best, a dual currency system.
• Their tax system is defunct.
• Their current budget promises will not be met via tax receipts.
• Their bonds will not be in high demand in the near-term for obvious reasons.

   "All of this means that Greece will have to fund its spending by harnessing its central bank. And this means they could be on the verge of a hugely inflationary environment. They could offset some of this through harsh government policies including austerity and a balanced budget, but the whole point of this charade is that they don’t want more austerity. There’s a good chance that bringing back their own currency will not only result in austerity (by necessity), but it will also result in sky high inflation. In essence, they will have won nothing."

  Well, I think if nothing else, Cullen wins for the most pessimistic scenario.