Debt Deflation in Greece: a textbook example.
Diogenes, always ready to mock ‘social contrivances’ (to quote a famous Paul Samuelson definition of money), was kicked out of Sinope because he debased the currency. In Greece, at this moment, the opposite is happening: the price level is declining. And not with a little bit. Deflation runs at about 3% a year. Which disables the ability of the Greek to pay back Euro-debts. The amount of production already declined with about 23%, on top of this the price level of production (and therewith the total amount of income) is declining, for about two years, now. Which may become the reason why they will be kicked out of the Euro Area. My twitter stream is ablaze about the speech of Tsipras, the new prime minister of Greece. By far the most controversial measure is a halt to foreclosures. Normally, I’m in favor of foreclosures, provided there is a procedure to split up the remaining debt between the debtor and the creditor in a more or less reasonable way. Whenever there is deflation, foreclosure and fire sales of foreclosed property only makes things worse. It’s called debt deflation. And we have known this for quite a time now (Irving Fisher in fact already mentioned this in his second edition of ‘The purchasing power of money‘ (1922). There are reasons for controversial measures, in Greece. As we’ve known for over 90 years. Sigh. The Euro Area clearly is a monkey trap.