Krugman on Latvia 12

Here is a pointer to Paul Krugman's presentation for the Allied Social Science Associations, which has substantial references to Baltic States and Latvia in particular. Specifically, Krugman re-iterated his Latvia -Argentina analogy again (p.1): "…the Baltic nations, in particular, seem well positioned to follow in Argentina's footsteps."

Iesaki citiem:

Although Baltic States were not the main focus of his presentation, he took time to argue that not devaluing was, and is, a big mistake (p.8). The arguments are pretty straightforward, no need to reproduce them here.

I am thoroughly mystified about how long people here can persist in their belief that launching deflation was the right thing to do. The world's top economists tell us that not devaluing was and is a serious mistake. Moreover, the result of this has been, so far, such an obvious disaster. Yet the government and the Bank of Latvia (and some other people) keep telling us that, "oh, it's different in Latvia". This is of little practical value, or consolation, I am afraid. As Reinhart and Rogoff in their "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises" tell us, that's what people were saying on the eve of nearly every financial crisis in history. I guess Krugman is right in saying that there is a "strong "pride goeth before a fall" syndrome".

Iesaki citiem:
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Komentāri (12) secība: augoša / dilstoša

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ha 12.01.2010 13:45
here is what you wrote G.D. since it sounds like you've already forgotten:

So, it is rather difficult to say what and who "this time is different". But Krugman is basically a columnist in NYT, not a "top economist". Well, one may read all the bullshit he publishes on every possible subject every week there..


yep, a nobel prize winner, one of the main experts on currency crisis and trade theory is just a columnist and writes `bullshit.' sorry, but the only one that is writing `bullshit' appears to be you.

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G.D. 11.01.2010 23:13
Thanks for info to "ha" and whatever there :) You have opened to me a whole new world ;) If you want evidence it's been widely discussed here in Slava's and other blogs of relevance. BTW. The recent experience shows that fixed exchange rate countries had been more successful in achieving current account turnarounds. And that is systematically. Of course there are some reasons behind it, maybe not very nice reasons, but the fact: is floats had helped little to improve current account positions + and even if they did, the following capital inflows of late have moved countries back to square one. Compare e.g. Ukraine vs. Latvia or Estonia...

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Gerry 08.01.2010 08:16
The question whether to devalue or not is largely decided by whether Latvia can find sources of finance to keep the population reasonably happy ahead of elections.

In contrast to Lithuania and Estonia which have been able to finance themselves on the free market Latvia is only EU/IMF life-support.

Thanks to the Soviet experience in fulfilling 5-year plans (on paper) the government accountants are perfectly capable to produce convincing EU and IMF performance reports. I am not sure though whether EU/IMF officials have similar patience as GOSPLAN officials.

Also the general public has been rather quiet. In most countries extensive street-battles would be raging by now if they had applied Latvian-style austerity policies. However there is a very strong undercurrent of discontent that can explode anytime. So far the traditional Latvian/Russian divide has stopped people from revolting openly.

And finally there is the prospect of windfall profits of several hundred millions for the Bank of Latvia in case of a devaluation.

Being short of funds, Latvian politicians will probably find it very tempting to devalue, take Bank of Latvia profits and distribute them to the public ahead of elections.

The smartest way to accomplish that would be to devalue and then immediately adopt the Euro unilaterally.

Looking from several angles a devaluation therefore looks likely to me.

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Zintis 07.01.2010 11:16
I still do not see any strong arguments for the currency devaluation as a remedy. Krugman argues that currency devaluation would not hurt domestic-currency borrowers while deflation hurts everybody. Currency devaluation, however, is inflationary and reduces real disposable income. Hence from the perspective of purchasing power neither of the strategies appear to be more beneficial (unless there is a thorough economic research proving opposite and which I have missed). Krugman also notes that currency devaluation causes current account turnaround. But as it appears in Latvian case, deflation causes similar effect. Current account balance has changed from strictly negative to positive.
The only benefit currency devaluation undoubtedly has, it can be implemented much quicker than deflation and hence there is some amount of time value of money that can be saved
In the end, neither of the strategies address structural issues in Latvian economy e.g. education and infrastructure. And the worst thing here would be frequent swinging from one strategy to another.

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ha 07.01.2010 10:21
nice one G.D., krugman is one of the main experts on currency crisis. maybe you should have at least bothered to read the link posted in the above, but it seems all you can muster is a sad ad hominen attack, nothing of substance, just attack the man. evidence: zero, argument: zero, attack: 1.
impressive

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bong 07.01.2010 08:27
G.D.
Just a columnist? Are you kidding? For starters: go to amazon.com to see the real stuff he as written.

You have a degree of truth on other points though.

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G.D. 07.01.2010 04:39
I guess, all is said before about this subject. No use to iterate. Except - fixed exchange rates is not a novel Latvian invention and has performed well for centuries and in many countries, - gold standard is also aversion of fixed exchange rate system. A lot of countries, which I guess we don't know, have fixed exchange rates now, e.g. Denmark and actually principally the same system of adjustment applies to all currency unions, but those, obviously are quite a bunch of Argentinas.... And... there are a lot of funny flexible exchange rates - those countries in working with Paris club all at one point in history tried to solve their problems with printing money. So, it is rather difficult to say what and who "this time is different". But Krugman is basically a columnist in NYT, not a "top economist". Well, one may read all the bullshit he publishes on every possible subject every week there... And if he/she agrees to that all - may agree also on Latvia. I did not manage to do this.

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Latina 07.01.2010 00:10
How do you think will Latvia eventually devalue the lat?

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Pingpong 06.01.2010 20:37
Please come up with a realistic scenario what to do with private debt in case of devaluation. If not, please stop starting each morning with an announcement how stupid everyone is. Get over it and bring in your best proposition given the existing circumstances. Btw, whats your eur/lvl position? Have you used financial instruments to bet on devaluation?

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pofix 06.01.2010 16:03
just an idea--what will happen, if the government with banks collaborates to have some sort of "loan holidays", giving any Latvian resident, having taken loan, possibility to postpone the process of repaying. But every person should then have limit on the sum, that is given to him as a bank loan on the territory of Latvia (this is not to leave banks without any income in case of massive interest in the option).
Is it wild and uneconomic? Or is it something economically acceptable? I think, that this can further consumption (is it?). It's trivial thought, I know, but I'm just user of Latvian economy.

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Kaido 06.01.2010 14:44
I see one good thing with devaluation - constitution court could not stop effective reduction of pensions. A lot of thinking is stuck in nominal values.

Anyway, let's see, if Estonia manages to survive reasonably the deflation phase. I am completely sure that devaluation would not avoid unemployment and worsening conditions of pensioners.

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An obvious disaster 06.01.2010 14:31
Since when deleveraging is a pleasant exercise? With or without devaluation, let's not fool ourselves that it can be done smoothly and that nobody suffers. Or maybe you have an example that proves the opposite?
More generally, maybe you have a scenario and calculations how devaluation would work here in Latvia - costs/benefits analysis (and by that I do not mean the bnpparibas-type of crap)? If not, then sorry, all your talk is just that - talk.

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