Wednesday, May 16, 2012

Want to understand the economic woes in Europe?

International Money Pile in Cash and Coins
Photo by








  1. erm... remove some of the coupons? Before or after the coupon has devaluated? And how do we remove these coupons, do we take them by raising taxes? Once these coupons have been printed its rather hard to claim them back.
    And to invite more people in the co-op you better make sure there are more baby's to take care of first, or should these people bring their own babies too (read businesses).
    I'm afraid the only way out is to except that we have less coupons for a while, until we have actually more babies to generate more coupons etc.
    But since nobody wants less coupons today, we vote for governments that will print these just like the Americans do. This way we can pretend times are the same as a few years ago when we all lived on loaned coupons. Which banks foolishly lend us to receive big bonus-coupons.
    Since we can prepare for more print-coupons-governments we better make sure we hold real value stuff like food, houses and GOLD. So when hyper-inflation hits in max 5 years time, we are still able to get babysitters (who at that time use the coupons to wipe their arses).

    1. You wrote: I'm afraid the only way out is to except that we have less coupons for a while. Except that fails abysmally because that's effectively the problem the co-op faced in the first place: people were afraid that if they spent their coupons for baby-sitting, they wouldn't be able to get any for later if they really needed them. Thus, saying "the system's failing because we're not spending enough coupons, so we're going to guarantee that people can't spend those coupons" is trying to put out a fire with gasoline.

      Remember: the problem in an economic downturn isn't that the money mysteriously disappeared. The money is still there, it's just not being spent, so a government program that decides to increase the tendency not to spend money is dangerous. And if austerity magically worked, why is Europe, after years of austerity, still struggling? If it's a light downturn, it's entirely possibly that it's a normal, self-recovering business cycle, but sometimes things get depressed enough that individual action isn't enough to overcome the problems, so government must act to jump start the economy.

      Obviously the story of a baby sitting co-op is an inexact analogy, particularly since the coupons are not fungible and you'd have to expand the coupons in many areas to get a better analogy with a real economy, but the basic process of a recession is the same. But you are correct to point out the problem of removing coupons after the economy has recovered. That's frequently done with a mix of both monetary and fiscal policy. Unfortunately, Europe doesn't have much flexibility due to a monetary union without a fiscal union. I'm sure many people holding Greek debt right now would be delighted if Greece could devalue their currency rather than default on their debt but Greece, stuck with the Euro, doesn't have many options.

  2. I'm afraid the right approach is not known, we can only have believes. And the fact that Europe is still struggling after years (2-3 years) of austerity is not really solid evidence that printing money is the way to go. One can say that printing money is in fact keeping an artificial growth in place, only to come back at 30's style inflation, probably ending in war.
    But then again, if people start losing jobs now we might get social unrest (or worse) too in another approach.
    You are right in stating that people are afraid to spend their money causing part of the issue. However, money did disappeare though, and not mysteriously. It was lent out by banks and not paid back or not backed by any underlying value, causing mistrust and a credit crunch.
    Perhaps we should allow us to shrink with say 10%, we back at 2003 levels. Was it so bad then? Of course it is easier for me (working) to say than for a jobless single mom.
    If you wanna read some doom thoughts about governments buying their own dept with printed money and the coming big collapse...

    1. I think you're right that we don't know the right approach, but only in that we may be too far down the road for any known approach to reasonably stave off a crash :(

  3. Replies
    1. I do admit that I like what they did :)

  4. Really lovely explanation of how a recession works. Thanks.