It was sometime in the 1960's. My uncle was teaching in Bulgaria. He wanted to buy stuff in Britain, but wasn't allowed to take much money out of Bulgaria. My father was farming in Britain. He wanted to buy stuff in Bulgaria, but wasn't allowed to take much money out of Britain.
My uncle and father thought up a Cunning Plan. My father went to Bulgaria, where my uncle gave him money, and my father bought stuff. My uncle went to Britain, where my father gave him money, and my uncle bought stuff.
The Cunning Plan was possibly illegal? But it was Pareto Improving. My uncle preferred buying British stuff to buying Bulgarian stuff. My father preferred buying Bulgarian stuff to buying British stuff. The Bulgarian government wouldn't care whether it was my uncle or my father buying Bulgarian stuff. The British government wouldn't care whether it was my father or my uncle buying British stuff. (Even if they had hoarded money, instead of buying stuff, I can't see why either government would care whether it was my uncle or my father hoarding the money.)
The Cunning Plan was economically equivalent to barter. It was exactly as if my uncle had bought Bulgarian stuff, my father had bought British stuff, and then the two had swapped the stuff.
The Cunning Plan worked because my uncle and father knew each other, and trusted each other. What was needed was some sort of internet dating site, so that people like my uncle and my father could find each other, with the host checking that both sides could be trusted. But the dating site would need to be open to threesomes too, for cases where someone in Albania wants to buy stuff in Britain, someone in Britain wants to buy stuff in Chad Cyprus, and someone in Chad Cyprus wants to buy stuff in Albania. Or foursomes. Or orgies with all sorts of people from all sorts of countries taking part to greater or lesser extents.
What would happen if there were more farmers in Britain wanting to meet teachers in Bulgaria than vice versa? You would need some sort of price to adjust, so British farmers would get a worse deal, which would discourage some, and Bulgarian teachers would get a better deal, which would encourage some more.
If the British or Bulgarian governments tried to fix the price in that dating market, that would cause problems. There could be an excess demand or excess supply. Which would create all sorts of problems, and lead to rationing, because some British farmers or Bulgarian teachers wouldn't be able to find a partner. So the governments might need to decide who gets priority in finding a partner. And then people would start to think up even more Cunning Plans to get round those government decisions.
Or, we could forget all about exchange controls and Cunning Plans, and just have flexible exchange rates.
Worthwhile Canadian Initiative 
Oh, and, there won’t be social unrest now? Did Cyprus really have that much to lose before it became a crisis situation? The reports re deterioration of health services in e.g. Greece do not sound good.
Mandos,
1) Erdogan’s Turkey is a different country – I would not call it a stalking horse.
2) Are you trying to say that a country with a workforce of around 400K people can become a big and diversified economy?
3) Pre-euro Cyprus existed in a much safer economic and political environment, but even under those conditions going back to the Cypriot pound would be a huge shock.
4) There may be some social unrest, but hopefully no food shortages or riots. As it is, supermarkets are already beginning to run out of food, but with banks opening tomorrow things should be back to normal soon. However, imagine what would happen if Cyprus lost access to the ECB’s lending facilities and the interbank payment system – that’s what leaving the euro would mean in practice. In addition, at this point it is not clear whether Cyprus would be able to stay in the EU when it leaves the euro (probably not), and leaving the EU would be another shock of a similar magnitude.
Yes, but argument 4 is an argument for being trapped in a system that is arguably not turning in a favorable direction for Cyprus or for many of the other Southern countries. How long do you plan to be subjected to the social experiment of having no access to a normal central bank? That there would be severe shocks from leaving the Eurozone is obvious…but it’s extremely unclear to me what the way out is, except for a long-slow decline until somehow, the Eurozone leadership comes to its senses.
I am saying…it is not without resources. Do you have to be as big as some of the larger Eurozone countries to prosper with your own currency? It seems very dubious to me that that is necessarily the case.
So yes, I am saying that a country with a workforce of around 400K people can “become a big and diversified economy”, in the sense that is capable of being a developed country and standing on its own feet. It’s working for Iceland, which is smaller.
Denmark with a population of 5 Mio has its own krone, which is pegged to the Euro.
But it is “well diversified” and is close to the center of Europe.
So I think, any attempt by Cyprus to reintroduce the pound would be just met with a stare of disbelieve.
Cyprus has Tourism, will keep some Russian banking, trade, and after it comes to an agreement with Erdogan, they will exploit whatever really is there in gas drilling.
In the long run, after the Greece situation is sorted out, it could become a province of Greece.
The most important decisions for the Euro are now done by the ESM with voting rights according to shares, and that means that in the next ECB reform, these smallholder positions of Cyprus, Malta, etc. can be ended.
The mayor of Luxembourg apparently sees the writing on the wall : – )
The US are now also going after Liechtenstein, and this will continue. The dragnets are out, and can snap from Friday evening to Saturday morning.
The Iceland situation is not really resolved.
It has now been made very clear, that the hoi polloi will not be blackmailed by the hoi oligoi with this “too big to fail”.
In one hour I will listen to a seminar:
“Financial Repression; How it Affects the Business Model of Banks” by a PIMCO SVP.
Should be interesting
Paul Krugman is an Ivory Tower Clown, who was never involved in any real world work.
Or can somebody here tell me anything?
I am still waiting for one single positive response to my old question:
Please tell me one specific Krugman PAPER, and in a very few sentences, what YOU specifically find good about it.
Greats and Smalls: the euro was designed ,rightly or wrongly, by two Greats who saw it as what they thought, rightly ot wrongly,as a problem or opportunity. The Smalls who stayed out (Sweden and Denmark for example) are doing rather fine. The smalls that were let in are causing unnecessary trouble for the rest. Would a Cyprus still on its own pound had developped into such a problem? Iceland was bad. It didn’t endanger anything fundamental for Europe. Had Iceland proposed to eliminate deposit insurance, the message would have been don’t bank in Iceland. In Cyprus, it was don’t bank in euro…
Yes, you realize that if this were true, joining the Eurozone was a terrible idea for these countries. I mean, how does the way you’re talking about the writing on the wall, followed by a smiley, not confirm, well, some negative assumptions?
Mandos,
after this Junckers repeatedly lorded it over to others, how to run a successful economy, people like me took a closer look, and discovered lots of tax cheating,
at some point they were even close to get on some “grey list”.
For Liechtenstein I do know, that they have some tech companies, maybe not really “high-tech”, but certainly profitable and globally competitive. I was once there, trying to sell some addon to a 2 m product, for which they had a 200k addon, and I could provide a better performing 40k, (internal costs 10k, dependent on how you calculate this). It didnt work out, tax reasons, business strategy, many years ago.
This Mister Juncker, who wanted to play “Euro(group) Chief” got not only on my nerves.
And with all the mud slung daily into our direction, and then people get hung up over a smiley, which is not perfectly located.
Please read the Hannibal link above, to put the style into proper context.
We’re going to get into a Germany-argument again over this, das Nick schon ausschloss. So I’ll stop.
Mandos,
It’s much easier for Cyprus to stay in the eurozone and focus on its natural competitive advantages, than try to build a diversified economy without any real economies of scale.
Doctor Why: We’ll see. I’m not convinced that many of the Eurozone countries can escape their current downwards spiral on what is basically a gold (bitcoin?) standard.
Nick:
“I have been re-reading Leon Degrelle, a Belgian Rexist who joined the Waffen SS with other Belgians and fought on the Eastern Front.”
A book by Timothy Snyder “Bloodlands: Europe Between Hitler and Stalin” would be a much better read, the author does a good job with the macro-micro dichotomy – how the individual stories relate to the big historical picture.
I see this has become a comment thread about how one former German leader is related to the macroeconomic issues of the day. The best video I have seen this year is called “Hitler bets angainst QE”:
Mandos,
as I tried to explain before, the real problem is not the single currency itself, but the macro-economic stability framework that comes with it.
Fortunately, focus is already beginning to shift from budget targets to structural reforms, so I hope the framework will eventually evolve into something more flexible and consistent with full employment.
I agree that it is the stability framework that is at issue. I just don’t see it evolving any time soon as the politics of the various countries evolve further and further apart, and the democratic legitimacy of the whole project erodes further and further. I see it as evolving in the wrong direction.
Mandos,
In the worst case scenario, the eurozone has to survive for about a decade (until the European baby-boomers retire) relying on different ad-hoc solutions, and then the current framework will become perfectly acceptable.
It may be a risky approach, but then messing with inflation and fiscal targets is not without risks either.
It’s not just a risky approach. With the latest reports on health in Europe, it seems to me that a decade is far too long, and deeply inhumane. As the mechanism underlying the Euro is based on a bad theory and one apparently held very deeply by people whose opinions now hold sway, I don’t know if 10 years is enough, or if the politics of the various countries in question can stand it.
It seems to me rather blase and sanguine, which suggests to me that Paul Krugman may have a point.
Mandos,
No, he does not. He seems to believe that it’s mostly a matter of ideology, but in reality some problems don’t have easy solutions. (For example, the recent US experience shows that the inflation rate is very downward sticky, so you can’t easily change the inflation target whenever you want.)
Getting ready for a bank run: 4 containers with 5 billion euros’ worth of banknotes arrive in Cyprus (slideshow)
http://www.kathimerini.com.cy/index.php?pageaction=kat&modid=1&artid=127894
We’ll have to agree to disagree then. I think the likely solution set for the Eurozone is narrowing and narrowing, and that narrowing is accelerating. If it muddles through, it will be a very Pyrrhic victory. There may not be good solutions, but sometimes, there are easy choices.
Mandos,
What easy choices?
In many of the Eurozone countries (not just Cyprus) the case for the leaving the Eurozone grows and grows. You would have to believe that there is a high probability of reform of the whole system in the right direction, and I don’t believe that probability is increasing. In that case, it becomes easy for me to prescribe Eurozone exit.
“I am still waiting for one single positive response to my old question: Please tell me one specific Krugman PAPER, and in a very few sentences, what YOU specifically find good about it.”
I’m back (after a couple of days absence to write a lecture on banking crises, Cyprus and the Eurozone.)
Genny, your challenge interests me, but I think it is missing a word. Is there any particular KIND of Krugman PAPER that I should “tell you”?
123: I have read reviews of that book. I think it would be too depressing to read.
Doctor Why: in answer to your (much) earlier question, about diversified economies and flexible exchange rates.
Suppose you had a very diversified economy. There would be less chance of a shock hitting all your sectors at once. And if a shock did hit, and have macro effects, a small change in the real exchange rate might be enough to reallocate demand and resources towards those that survive. If you have only two sectors (banking and tourism) you have a bigger chance that one might get wiped out, and you would need a bigger fall in the real exchange rate to reallocate demand and resources towards the other.
That real exchange rate adjustment has to happen somehow, even if you wish you could keep on earning the same old income at the same old real exchange rate. Under fixed exchange rates, the only way it can happen is through deflation, which is slow and painful. Under flexible exchange rates it can happen through exchange rate depreciation, which is fast and not quite so painful.
“Suppose you had a very diversified economy. … a small change in the real exchange rate might be enough to reallocate demand and resources towards those that survive.”
Um….I think there’s an implicit assumption there that you might want to make explicit. Why should a diversified economy show more responsiveness to exchange rate movements than a specialized one?
Nick, it is depressing, but it is a real history, and it is one of those rare books where the economic strategy of the countries concerned is given due weight.
By the way, in the country where I live parents have complained that sixth grade history textbook is too depressing – in the chapter about the Soviet mass famines (which are also covered in the Snyder’s book).
Nick,
I understand the theoretical argument for flexible rates, but in the real world reallocation of resources may happen in different ways (many of the unemployed will eventually move somewhere else, or retire) so devaluation and deflation are not the only choices. But even if we limit ourselves to those two choices, the answer is not obvious.
Adjustment through devaluation can indeed be less painful, but only if the country can finance the current account deficit – and this is not always the case in the real world.
So from a practical perspective – if we talk about an exit from the eurozone – the choice is between deleveraging and a current account crisis. And my point was that, for a small specialized country, the combination of a very bad J-curve, limited ability to borrow in local currency, and no access to international markets would make the current account crisis a much more painful experience.
Simon: “Why should a diversified economy show more responsiveness to exchange rate movements than a specialized one?”
Fair enough. I’m assuming it’s easier to expand an existing industry than to start a new one from scratch. That might not always be true, but it seems plausible. Or maybe, the more sectors you have, the better the chance that resources unemployed in one sector could find another sector where they could be productive. The better a country covers product-space, the greater the supply elasticity in any one sector?
Doctor Why: Paul Krugman has a new post making the same point I was making, comparing real devaluation through deflation vs nominal exchange rate devaluation. But I think I see your point about the ability to borrow from abroad to tide you over a temporary bad patch being easier if you use an international currency. But if it makes that bad patch last longer, so it’s riskier to lend to you, I’m not sure which effect would dominate.
Nick:
“But if it makes that bad patch last longer, so it’s riskier to lend to you, I’m not sure which effect would dominate.”
That’s exactly the problem. Krugman, who writes for a broad audience, is using a very simple model to make a general statement on a very important subject. (You are doing the same, but writing for a much more specialized audience, which is OK).
Simon,
take any of his “papers”, as in published in Journals, preferable one of the more popular.
With respect to the wording:
On the one side I tried to cut down on the clutter of people, who have just read his NYT columns, and agree with them. Or people, who have read one of his textbooks as an intro into economics. And finally those who sent just some general praise of 3rd and 4th persons to me.
On the other side, I tried to appeal to the positive side in people, praising something they know and like. And do this in the most open form.
I had at some point realized, that most people, who preach about the philosophy, methods and science(tific) discovery, never did it themselves, and that their books have little to do with how it is really done, at least from my perspective.
The same holds for “Design of Experiments”, which is, at least in my area, done very differently, and driven by other constraints.
And finally, working on a business idea / MBA thesis, I spent about a month designing a delicate questionaire “consciously deviating” from Colin Robson(2002) “Real World Research” to be as open as possible for unexpected answers.
So, hearing from an economist, how he asesses papers in his fields should give me more insight, that hacking away with negativity by myself.
To be more specific:
“peer reviewed” is prefered strongly, but NBER, IMF or OECD staff KIND is acceptable too.
LOL,
after FTAV came up with cunning plans on their own
http://ftalphaville.ft.com/2013/03/28/1442612/alphachat-the-cunning-plan-edition/,
I looked up more than Nick’s youtube and discovered that between “Shake the Spear” and James Bond & Mr Bean there is some more popular culture with Baldrick & Blackadder (wiki) : – )
It may not reach our Goat herd and Skiller,
but I also learned from Paul Krugman, that on every list of strongly worded demands, you should never forget the “and a pony” at the end : – )
Genauer;
Actually, how about Krugman’s doctoral-level trade theory textbook with Helpman (“Trade Policy and Market Structure”)? It basically covers only material that the two of them developed (IIRC) and is a far cry from any undergrad or MBA text. It was the required reading for the second half of the trade policy course that I took.
P.S. that book was part of what got him the Nobel Prize….but it was one of the contributions that was made before he really got into economic geography.
Simon, I am afraid this is not good:
1. it is Eastern, and that means the earliest I could get my hands on, would be tuesday evening, best case, either library or amazon molto presto service
2. The first author is Elhanan Helpman, who published as early as 1978 “A Theory of International Trade Under Uncertainty” New York/London, and there are multiple versions of it
3. There seems to be some fallout about who contributed /owned what, and they went separate ways
4. I had this already with another paper and an assistant professor, who attributed something to the paper, and then claimed that a book krugman did with fujity would show, that fujita says, it was krugmans idea, which it did not, and I even found an earlier paper from fujita, without krugman which adressed this.
5. In a textbook you do not always attribute fully stuff from others, go into details of data, or full derivation of equations. Very easy to mistake something there as “original Krugman”, which is in fact somebody else. People usually dont haggle in public about missing citations in textbooks.
My main purpose is to find out, why so many american academic economists admire Krugman as a kind of demi-god. What am I missing here? The admiration is there, and I really want to understand this.
And the best way would be, you come with a paper and “see, this is real good, because of this and that” and I can say: “Aaaah, now I begin to understand”
In my field, people dont dish out break through insights as full-book-only, but as paper. A clear, crisp Phys.Rev.Letter with 3 pages or shorter is the holy grail : – )
To go forward efficiently:
I have online access to the very most papers here.
I have local copies, and read to some degree, of:
1978 JIE
1979 Chicago
1979 JIE
1979 J of Money …
1991 J of Pol Econ, but I sort of demolished that, maybe not the best chance to get to get to a positive outcome
1994 Proc of the Worldbank (peer reviewed?)
1996 J of Jap Inter Econ
I assume my very colloquial reference style is good enough for you
genauer,
You seem to have a real grudge against Krugman (“an Ivory Tower Clown”). I myself would describe him as mostly competent, but shallow and unoriginal.
Genauer: Is anything that Krugman wrote with a co-author is too suspect for you? Note that much of the work for which he was awarded the Nobel Prize was co-authored, with various people. And this is the rule rather than the exception in economics: e.g. Friedman and Schwartz, Modigliani and Miller, Black and Scholes, Engle and Granger, etc., etc.
BTW, easter is no constraint….I’m a busy guy and I’ll get to this when I can for my own amusement. There’s no rush for you to respond….you’ll be able to take your time.
I really don’t understand your objections #2 & #3. Yes, both had previously done work on trade. What’s your point? Yes, they both went on to work with others. So? I’m not aware that they had a falling out. Is this your usual innuendo or do you have some original-source factual material to back up these claims of yours?
“In my field, people dont dish out break through insights as full-book-only, but as paper.” Who cares? This is economics. Top people sometimes do just that. In international economics, Ken Rogoff has done it twice: with Obstfeld and Rogoff, and then with Reinhart and Rogoff.
“In a textbook you do not always attribute fully stuff from others, go into details of data, or full derivation of equations…. A clear, crisp Phys.Rev.Letter with 3 pages or shorter is the holy grail : – )” Consistency is not your strong suit, is it? You want full details, complete derivations and brilliant original insights (and I guess a complete literature survey to show that the contribution really is new) in 3 pages or less…..double-spaced?
No, Genauer. That will not do. If you want to bash Krugman with credibility, you have to judge him on his own turf; compared to the work of his peers. It is too easy for armchair pensioners to criticize a famous economist they have never met for not being more like a physicist. (And too dull: who wants to argue that economists are good physicists?) To judge Krugman, you have to learn some economics. Of course, I’ll understand if you’re too busy or you feel that would be too difficult for you…..
Simon,
“To judge Krugman, you have to learn some economics.”
Krugman considers himself to be an expert on everything (e.g. global warming)- so it is only fair that people who have some field experience question his contribution to our understanding of the world – unless, of course, you consider economics to be a branch of mathematics.
I, for example, find it very disturbing that economic commentary I read in Le Monde usually makes much more sense than Krugman’s economic columns.
Simon,
we have to get the emotions out.
Point 1. Eastern is a hard constraint, because I can’t get any copy of any Krugman book until Tuesday evening. Time wise this weekend is actually perfect for a dispute of any length, I have no special plans, and the weather is real bad. But without the text ….
The papers would be available.
Point 2. / + are soft constraints
I thought I had explained, why I had asked the question in the open form, to get a paper assessed from an expert economist’s point of view.
I think I have learned some fair amount of economics, went through German books with exercises (Felderer-Homburg, Gärtner-Lutz for exchange rates, implemented some spreadsheets, …) looked at 3 books from Krugman, and some others and read quite a number of papers (27 AER, about 50 NBER, ….), for most I believe to understand the points made.
Papers are as long as they need to be. PRL has a hard cut off limit at 4 pages, then one has to take it to another Journal with the appropriate impact factor.
My point with the PRL was, that I was so far used to get the “good stuff” first and timely in “paper” format, and not in a text book. And that the main, younger author goes first in the author list. I am always willing to learn about the habits in other areas.
How do we go forward here?
Wait over the whole weekend, until I can get the book, because you say, this is really it, and anything will just not do.
Or taking a paper, as I originally wanted?
Or?
To be maybe less cryptic for others, like Doctor_Why:
PRL is Phys(ical) Rev(iew) Letter, THE reference in Physics for short (Letter) presentations, expected to be of significant, general importance. The one thing every physicist, I know, read, while active.
PRB (Physcial Review B) and others are usually longer, Ando Fowler Stern 1982 in Rev. of Modern Physics
was over 200 pages long, and I was deeply honored that Stern showed up for my talk at IBM Yorktown Heights, THE Commanding Heights in my field, in his last work week.
A corporate R&D as the Gold standard, probably unusual in most other fields.
AER is American Economic Review, the Gold standard, as far as I understand.
NBER is mostly “working papers”, but with a better reputation than most Journals.
But it would be interesting to have Simon characterize this, as putting JIE (Journal of International Economics) and others into proper context.
genauer,
Why like me?
I used to be a physicist (briefly), my younger brother is still an active physicist, who publishes mostly in Applied Physics Letters, but also has one or two papers in PRL,PRA and Nature Materials.
Doctor_why,
1. you seem to be the only one, beyond Simon and me, still participating here
2. your familiarity with both fields could be very helpful and fruitful in clearing up misunderstandings
3. you seem to have some significant “Nehmerqualitäten” (translating to “taker qualities (?)” with respect to my wording. I don’t know how much you lost with what is going on presently in Cyprus, and me taking a pretty hard line, and we even talked the next day again, here. I like that! Remember, I said, that I could imagine to do some business together, one day.
I, for example, find it very disturbing that economic commentary I read in Le Monde usually makes much more sense than Krugman’s economic columns.
I would find that disturbing too. (Actually I’d probably go to the doctor pronto and say: I think I’m hallucinating.) Now if you said that Dean Baker, Ken Rogoff, Olivier Blanchard or indeed Nick Rowe were making more sense than Krugman I wouldn’t bat an eyelid. They have all thought long and hard about economics. I doubt that’s true of the guys who write for Le Monde, but perhaps I’m wrong. Can you point me to where they have presented an argument which you think Krugman would reject and which makes more sense to you than he does?
Kevin,
For example, they don’t say that Cyprus would be better off leaving the euro. And they also did not predict that the euro could disappear before the end of 2011.
Krugman may understand international trade (at least pre-gloablization), but his understanding of central banking, financial markets and European political economy is not particularly good.
…they don’t say that Cyprus would be better off leaving the euro.
Well AFAIK, Sarah Palin doesn’t say that Cyprus would be better off leaving the euro. Do they present an argument for staying in the EZ, which Krugman might find fault with?
You seem to think that it’s enough to say that he doesn’t agree with you. It’s not. You could be wrong. Personally I’m pretty sure that staying in the EZ will have dreadful consequences for Cyprus.
Dr. Why: I’ll leave PK to defend his own comments on global warming. And while I might agree with some things that he writes (for example, some of his remarks on Cyprus and the troubles in the Eurozone and just bad Merkel is for the EU) I don’t agree with (or even read) all of it. But Genauer had a challenge regarding PK’s contribution to economics that I think is sufficiently ignorant that it might be fun to correct….if he is open-minded enough to want to find out more.
Kevin,
My main objection to Krugman’s argument is that it’s based purely on analysis of international trade – it does not take into account financial factors (e.g. international capital flows, currency reserves, structure of domestic financial markets), or political and legal factors (e.g. ability to leave the euro, but stay in the EU).
Le Monde, on the other hand would typically include most of those factors, and their analysis, while less technical, would be more balanced and sensible.
Dr Why, I don’t think you understand Krugman’s thinking. To say that he disregards currency reserves, for example, is rather easily refuted — some of his earliest work is on that very topic. You say upthread that you’re not that interested in economics. That’s evidently the plain truth so I’ll bow out.
Best of luck to you and Cyprus.