Balance of Payments Adjustment and the Euro Crisis

It is worth remembering that according to Eichengreen (1996, p. 25) “the most influential formalization of the gold-standard is the price-specie flow model of David Hume. Perhaps the most remarkable feature of this model is its durability: developed in the eighteenth century, it remains the dominant approach to thinking about the gold standard” (for a critique go here).

The idea is that, at least in a fixed exchange rate regime, inflation and deflation do all the work of adjusting the balance of payments (BOPs). Modern versions add credibility and all that (which includes austerity) for the stabilizing flows of capital to work. Why do I bring this up? Because of Martin Wolf's column (subscription required) in the Financial Times today, which has the graph below.

Note that the countries in crisis, Greece, Ireland, Italy, Portugal and Spain have already adjusted their BOPs (in this case their trade balances). Yet the adjustment is more Keynesian than Humean, or to be more precise, it follows the analysis of A.G. Ford, who argued that peripheral countries, like Argentina, adjust their current account deficits with a good old recession not by lowering domestic prices. And yes, Wolf is right, the specie-flow would only work in a parallel universe.

Lindsay Lohan is a monetarist



Via Jason Linkins; the joke of the day.  So Lohan twitted the following:

"Have you guys seen food and gas prices lately? U.S. $ will soon be worthless if the Fed keeps printing money!"

Apparently she was paid by a group called the National Inflation Association (with that name I'm sure they are in favor of inflation).  Forget that the causes of inflation had nothing to do with the Fed printing money, what is really hilarious is that conservative/monetarists chose Lohan as the speaker of their cause.  It must be a question of credibility!