Should Greece return to the drachma? Should Spain resort to the peseta? Should Portugal defy the EU and implement the escudo? I personally have a grave disagreement with those that say these countries should resort to monetary nationalism. The idea of switching currencies for a national one is absurd if you think of the following:
Croatia has a massive trade imbalance with the rest of the world. It imports more than it exports. To finance these imports the nation goes into debt to pay for these goods and services. When the bill comes due, we just refinance the debt with our creditors; insomuch we raise the national debt with the help of the banking sector that absorbs this new debt with freshly created deposits.
If the monetary inflation of the domicile country (Croatia) which is greater than the one that exists from the countries from which we import our goods, there will be natural tendency to favor imports over exports, as goods abroad are more cheaper to purchase than at home. One good example would be the hyperinflation of the Croatian dinar during the Croatian homeland war. To finance the war effort, the government couldn’t tax the population, nor could it borrow funds from abroad, so it resorted to printing of the currency. As the central bank increased the monetary supply, prices began to rise and soon enough people were paying up to 1000 Croatian dinars for a pack of gum. People went shopping in Hungary and in Slovenia where the prices were relatively more stable. And they did the shopping in international hard currencies as no one would except the depreciating dinar. Not only that, but the inflation screws up consumer time preferences and leads to capital consumption.
The call for higher doses of inflation in Croatia is not what it needs. Consider this mental experiment: Croatia has a trade imbalance as it purchases goods with funds borrowed from abroad and can’t repay as inflation created at home from the influx of new funds from abroad bids up prices at home. The solution: Devalue the currency – this will boost our export markets.
What happens if Croatia splits up into two countries: North Croatia and South Croatia? Lets assume that this happens and that the South has a constant trade imbalance with the North. The North provides goods and services, and the South pays the North with its borrowed funds (assuming the existence of a North Kuna and a South Kuna). The South may convert the North Kuna at their central bank with newly created South Kuna, and the banks may create new South Kuna deposits from nothing and loan it out to the population. This will start the inflationary cycle which bids up local prices and increases imports from abroad whose goods haven’t risen in price. The answer would be: More inflation to pay of the debt. The exchange rate would surly rise on the market as more South Kuna’s are needed to buy one North Kuna. This cycle continues as the South Kuna is destroyed through inflation.
What if we dig even deeper? One household in South Croatia is its own country and the other household its is own country as well. What if both use their own currency and engage in trade with the exchange of one currency for the other. One household decides to consume more than they produce and pays for these goods with printed currency. The other household delivers the good and receives the printed monies. To purchase goods from the other household he must use the currency that he received for his sale. Lets assume that he decides not to purchase anything for the moment. The household decides to count its wealth as this currency it accumulates. This arrangement continues as the other household pays for its goods with printed money. The good is received and the inflation is exported. As time goes by, the other household is sitting with a bunch of notes and wants to purchase something from the other household. Since the profligate household hasn’t been productive, just inflationary, it hasn’t produced anything of any worth, maybe something, but not enough to offset the funds the other household has accumulated. The other household buys whatever he can with the worthless currency and vows never to engage in reckless behavior of giving something for nothing. The profligate household is left with a bunch of its worthless currency, and since the exchange rate has exploded in favor of the productive household, the reckless consumer household can’t buy anything from the productive household and is forced to engage in austerity.
This short story illustrates that inflation only creates artificial (shadow) demand and impoverishes the populace at the end of the cycle.
Production is halted in the economy, substituted for consumption and the capital structure is also consumed leaving a lower standard of living in the inflationary country.
To fully understand the depth of this process, one should look into Jesus Huerta de Soto’s book: Money, Credit and Economic Cycles, as it is the best book on this subject and explains in simple economic theory what is going on in todays economy.
“Every boom must one day come to an end” – Ludwig von Mises, 1928.”
Nema komentara:
Objavi komentar