I find the moaning and gnashing of teeth over the possible erosion of the value of claims accumulated by surplus countries surreal. There is only one possible way to avoid that erosion of value, and that requires that the surplus countries work with the deficit countries to reverse the trade imbalances. If the surplus countries refuse to take the necessary steps, an erosion in the value of those claims is the automatic and necessary consequence. In practice that means that either the claims must be devalued or they will lead to default.
Category Archives: macroeconomics
Comparing Ireland 2011 with Argentina 1999
If enough financial help is provided through a joint venture between the IMF and the European Union, Ireland will have the chance to restore confidence without issuing new debt in the coming months.
The importance of Exports and Services Trade Re-evaluated
Value-added trade statistics tell another, more accurate story about who is actually exporting what in the world economy and how much they gain from it. If better statistics can contribute to better policies, then the ongoing efforts to calculate value-added trade measures should be encouraged.
Aggregate Demand and Austerity
Both modeling and the historical record indicate that austerity in the midst of a balance sheet recession leads to increased deficits. The historical analogy frequently raised by Richard Koo, who argues that the attempt by the Japanese government in 1997 to reduce budget deficits in the midst of a balance-sheet recession resulted in larger deficits, not smaller ones. We may be already seeing the same thing in the UK, as deficits there are now growing in the aftermath of austerity measures undertaken late last year.