tag:blogger.com,1999:blog-6276561747841568697.post3625685596500628345..comments2024-03-12T08:15:56.379-04:00Comments on Krugman-in-Wonderland: Yes, Yes, Inflation Solves All Economic ProblemsWilliam L. Andersonhttp://www.blogger.com/profile/01802990642236807359noreply@blogger.comBlogger6125tag:blogger.com,1999:blog-6276561747841568697.post-42373658290737014732010-02-16T17:18:38.859-05:002010-02-16T17:18:38.859-05:00Krugman is a man of many opinions and it seems hal...Krugman is a man of many opinions and it seems half contradict the other half....<br /><br />I love his recent article about Obama's deficits being good for the country. Two years ago, Bush's smaller ones were a terrible drain and devastating to our future...Which time was he lying or does he simply tailor his message to suit those he wishes to worship?Chuckhttps://www.blogger.com/profile/05640644906304246317noreply@blogger.comtag:blogger.com,1999:blog-6276561747841568697.post-48908750313025599682010-02-16T15:00:32.709-05:002010-02-16T15:00:32.709-05:00Understood! Many thanks.Understood! Many thanks.sb101https://www.blogger.com/profile/05719317618259246022noreply@blogger.comtag:blogger.com,1999:blog-6276561747841568697.post-16846836054133779402010-02-16T10:47:22.787-05:002010-02-16T10:47:22.787-05:00I apologize for not giving you an answer right now...I apologize for not giving you an answer right now. I'm working on a paper that I have to present in two days, and am preparing for a trip, so I have to try to get back with you later. I'm not blowing off your questions, but just have to do my day job right now!William L. Andersonhttps://www.blogger.com/profile/01802990642236807359noreply@blogger.comtag:blogger.com,1999:blog-6276561747841568697.post-56050316182340429712010-02-15T18:17:24.680-05:002010-02-15T18:17:24.680-05:00“When a country devaluates its currency, it does s...“When a country devaluates its currency, it does so by inflation.”<br /><br />Yes, but Spain does not have the option to depreciate or appreciate its currency. So when capital entered the country, it drove up relative prices, and now that capital has exited the country, they are left w/ “deflation as their only hope”. However, had they maintained a flexible FX, the peseta would have adjusted w/ capital flows, and relative labor costs would not have gotten so far out of line. Krugman lays out a pretty good argument that the fixed exchange rate is why relative labor costs have gotten so far out of line with the rest of the region. Would you not agree? <br /><br />“During a period of deflation, the value of money gets back into line with the fundamental assets of the economy.” <br /><br />Doesn’t a flexible exchange rate achieve this as well? Spain does not have this option, and aren’t they paying the price in higher labor costs? <br /><br />I do apologize, but I still do not understand the conclusion that Krugman feels “inflation really could save the world”. It’s seems to me he is criticizing the Euro and shows that if Spain had a flexible exchange rate labor costs would not be so out line with the rest of the region. He is, in fact, demonstrating why a market based exchange rate for Spain vs. the rigid currency regime the Euro would be beneficial.sb101https://www.blogger.com/profile/05719317618259246022noreply@blogger.comtag:blogger.com,1999:blog-6276561747841568697.post-90702532233101306672010-02-15T17:17:24.248-05:002010-02-15T17:17:24.248-05:00When a country devaluates its currency, it does so...When a country devaluates its currency, it does so by inflation. For example, in 1971 when he closed the gold window, President Nixon devalued the dollar, which is a nice way of admitting the government had been inflating it for a while.<br /><br />During a period of deflation, the value of money gets back into line with the fundamental assets of the economy. I'm glad to see that you recognize this fact; would be that our "policy makers" did.William L. Andersonhttps://www.blogger.com/profile/01802990642236807359noreply@blogger.comtag:blogger.com,1999:blog-6276561747841568697.post-37985784168841839892010-02-15T16:50:26.246-05:002010-02-15T16:50:26.246-05:00Maybe I am not smart enough to follow your reasoni...Maybe I am not smart enough to follow your reasoning here, but I do not recognize where Krugman is advocating Spain inflate its way out of an inflation problem.<br /><br />If Spain never joined the Euro, the exchange rate and thus relative costs would have adjusted with the capital flows in and out of the country. So if the peseta existed, as Spain’s housing market collapsed, and as capital exited the country, the exchange rate would have adjusted accordingly, and some of the slack in the Spanish economy would have been offset by an increase in exports. If Spain had its old currency, there would be no need to devalue; the market would have taken care of it. Since they essentially have a pegged exchange rate and inability to cut interest rates, the market is inefficient and can not adjust. Spain is in a tight spot, and unlike Greece not because of irresponsible fiscal policy. It’s mainly due to the lack of its own currency, and as you both (correctly) point out, deflation is the only cure.sb101https://www.blogger.com/profile/05719317618259246022noreply@blogger.com