Monday, May 24, 2010

Left, Left, Left-Right-Left

Yves at NC periodically has articles that claim, to make a long story short, that everyone should just wake up on the same day, say fuck you to their creditors, and go spend the afternoon drinking pan-galatic gargle blasters and just generally outliving the hell out of everyone else.  She's done this with Iceland, and the Lativians, and now she's focused, like everyone else, on what Greece should do.  In this context, comparisons with Argentina come up naturally, and the temptation is to go grab the GDP chart, examine their post-crisis period from 2002-2010, and conclude that it works -- you default, and you play hardball with your bondholders, you get yourself some anti-capitalist religion and swerve dramatically to the left (always rhetorically more than actually of course), and life is grand.  Argentina's strong growth recovery from their crisis is meant to prove this, and the question is, should the Greeks take the same caserolazo to the Germans.

I don't, as a matter of principle, have any trouble with this line of reasoning.  Which is to say that I don't think that anyone should feel some sort of moral obligation to pay their loan shark.  I don't take it as gospel that the right way to divide up the post-bankruptcy value is the give it all to the creditors, and I certainly don't take it as a given that that is what's going to happen.  But let's slow down for a second and consider the analogy, and think about just how cushy life has been in Argentina over the last decade, and just how costless nuclear default really is.

Because it's really not.  Costless, that is.  In fact, it's pretty miserable.  Instead of romanticizing the yanqui-hating Argentinians, let's look at the whole history of the situation, which turns out to be remarkably easy to find (all hail the great and mighty information oracle).  If you click through, you will see that the nominal GDP for Argentina now exceeds the pre-crisis peak by maybe 15% (the numbers stop in 2008, so I'm adding more growth to what they show here).  Looks like a V-shaped recovery to me! 

Except this is to confuse the whole notion of "V".  The idea is not just that it goes up after it goes down.  That's almost inevitable once the whole country is no longer out in the streets beating on pots and pans.  When people talk about a V-shaped recovery, they mean that GDP springs back to the same trendline it was on, as if nothing had been permanently lost, not simply that the economy starts growing again.  Argentina is only just now, one decade later, making the same amount of stuff that it did before the crisis.  This is pretty meagre success when you think about it.

The other thing to remember in all of this is that all of the people who had savings before the crisis in pesos = dollars, now have savings in pesos = 0.25 dollars.  It's true that costs have been re-denominated in cheapened pesos as well, though this had the predictable effect of driving inflation to the moon.  So anyone with the smallest amount of middle class savings has gotten completely fucked in this deal.  Maybe it's true that they would also have gotten fucked by the rising taxes, lower spending, and slower growth necessary to avoid default, but to paint the solution as painless or even to be taken lightly, is irresponsible.

I don't know what the right solution is for Greece.  Probably best is some negotiated default that leaves them in the Euro and imposes serious but manageable deflation.  Or some inflation in Germany.  This isn't going to be fun no matter what.  But the crash that happens when an economy temporarily reverts to barter because no one know what money is any longer is also a pretty painful thing.  All I can do is repeat what an Argentine told me when I said that it looked like Greece had the same problem: "pobres".

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