“But for a country that can create its own currency there is never any necessity to default.”

This sentence on Simon-Wren Lewis’ Why should someone who is anti-austerity care about debt  is inspiring – and intuitively demonstrates how tractability in macroeconomics may hamper realistic thinking. 

Printing currency is socialising public debt through inflation.
Beyond politically appalling, it is useless in a world where domestic content (read value-added) of price-sensitive exports is necessarily low.

This holds unless a country can ensure foreign demand for domestic currency denominated assets and export inflation regardless of issued assets. 

Assuming this happens with a handful of high output, net importing countries in the world we should ask ourselves what is the price elasticity of demand to higher labour costs (inevitable as currency depreciation and current account deficits erode real earnings – I’d look into the history of banking in France since the XIX century for a gist).

Finally, even if this would work in those economies where demand for domestic assets is inelastic (maybe two or three of that handful), we’d be condemning people to lower real income in the short-term (due to inflation) and economic decline in the medium-term as (imported) investment inputs would become more expensive (and, excluding FDI, so would foreign inputs to exports).

What Simon Wren-Lewis describes was done by so many a European Country in the past before the Euro – and a reason why the Euro was so lauded.


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