Bill Mitchell — A rogue nation is needed to exit the Eurozone

I plan to send my final manuscript for my Eurozone book to the publishers tonight. I have some final checks to make on the 390 pages. I hope it will be published in both English and Italian later in the year. Obviously I will promote it here once it is ready. The book contends that the Eurozone is structurally biased towards stagnation because of the neo-liberal rules that constrain national governments from dealing with large spending collapses with appropriately scaled fiscal responses. The crisis in now into its 6th year and there is little sign that the stagnation is over. Indeed, the latest data would suggest that some of its largest economies are going backwards still. Italy has just announced it is back in recession and factory orders to Germany have plunged. I have been saying it for years but repetition is no sin – they should dismantle the currency union in an orderly manner and allow the national governments to return to growth in their own way. The nations are incapable of doing that collectively given the neo-liberal Groupthink that has them in a vice. So, a rogue nation is needed to break out of the straitjacket and provide a blueprint for the others. Italy should be that nation. In many ways it has panache and flair – it is time to show it in this specific way.

Bill Mitchell – billy blog
A rogue nation is needed to exit the Eurozone
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the Charles Darwin University, Northern Territory, Australia

Deflation.

The layperson often thinks that falling price levels are a good thing. But the reality is that deflation is incredibly damaging to an economy. Why is that so? There are several reasons why an economy wants to avoid deflation. 

First, debtors are hit with rising real debt burdens and falling asset prices. Creditors gain but the overall impact on aggregate spending is negative because debtors cut their spending by more than creditors increase theirs. In turn, this can promote further deflation and a spiral into depression. 

Second, the falling asset prices, particularly home values, lead to bankruptcies and sharp decreases in mobility as workers get locked into housing they can not sell without massive losses. In such cases, even if the unemployed worker desired to move elsewhere in search of work, their housing situation makes that nigh on impossible. 

Third, deflation usually only occurs when there is mass unemployment. 

Fourth, falling inflation leading to deflation engenders expectations of further price falls, which has two negative impacts. Consumers and firms will postpone spending in the hope they can get the product cheaper later on. Further, people postpone decisions to borrow because there are no losses involved in holding cash balances (the real value rises) and it is reasonable to assume interest rates will be cut thus making loans cheaper in the future. 

All of these impacts reinforce the deflationary spiral downwards, building on each other to make matters worse.