Friday, April 23, 2010

Greece and the Need for Dynamic Currency

The debt situation in Greece is interesting to me, not just because it represents an interesting dynamic in national solvency and international economics, but also for highlighting the need to have dynamic currencies, particularly for countries which cannot spend within their means (which, for practical purposes, is all countries). Inevitably, eventually, for those countries, you will encounter a situation where you need to effectively print more money to cover you spending obligations; it's a pretty common thing, and is generally accepted by people as a necessary consequence for any fiat currency system. This isn't the end of the country, or even all that bad, it just devalues the rest of the currency proportionally, and life goes on.

In the case of Greece, however, they have created a situation which is unsustainable. On the one hand, they have signed on to a currency which is cross country and cross economy, which they cannot arbitrarily and unilaterally devalue. On the other hand, they have a largely socialist government and economy with large entitlement spending, which will inevitably overspend its income (both due to the spending, and the lack of income from industrial competitiveness which is a common aspect of socialist systems). At some point, something needs to give: either the other euro nations will absorb the losses from Greece's failed government/industrial structure, or Greece will need to default on its debt, and likely fail/restructure as a government/country.

This could have been avoided, however, if Greece had a dynamic currency, even only for it's national obligations (and thus still used the Euro for day-to-day commerce in the country). Sure, their national currency would probably be in hyperinflation free-fall at this point, and it wouldn't do anything to address the structural failure of their political system in general, but it would limit the fallout and impact of their failure as a country on the rest of the other Euro zone countries, and particularly on those with less insolvent political and economic systems. At least then when Greece and the other insolvent Euro countries failed (as an inevitable direct-effect of their own government and policies), the damage would be more contained, and there would be much less danger of a collapse of the Euro itself.

Of course, this argument can be easily extrapolated to any country which is incapable of spending within its means, to better protect those that are from the fallout of collapse... I leave that as an mental exercise for the reader. :)


  1. The plain problem with a parallel currency system is How do you make people take the tender whose value is less reliable?

    During the early 1970s, many countries had unreliable local currencies. Travelers would encounter local unwilling to take the national currency, but pleased to take the foreign currency, especially if the foreign currency was dollars. Mr Carter's government during the lat 1970s eroded the value of the dollar badly, because Americans had too much purchasing power abroad.

    Americans may again experience this feeling. The signs that America is entering an inflationary period are clear. Further Mr Bernanke has indicated a willingness to monetize the debt. Like the Greeks, Americans are in a heap o' trouble.

  2. The currency acceptance problem would not be an issue in the scenario I described, since only the Greek government would have a national currency. All transactions within the country could/would still be in Euros, and all domestic debts would still use Euros as the denominating factor; the national government's foreign debt would just be in their own sovereign currency, which they would exchange for Euros at time of borrowing, and could devalue at will.

    Of course, you could argue that with this system, they would default almost immediately, as nobody would lend them money now in a currency which they were allowed to devalue, but that's sorta the point. Rather than having a series of misguided "bailout" attempts to extend their situation and pretend they won't need to default, while throwing more money down the pit, the government could just default, and get to work on restructuring the country in a manner which is credibly able to repay its debts. All this, and the people could continue to use Euros without disruption, and the other Euro-zone countries don't have to endanger their shared currency.

    Of course, the alternative could be to somehow force the Greek government to spend within their means, but that has clearly been a failure so far, and what they need now is tough love, not more extend and pretend.

  3. Re: “ just devalues the rest of the currency proportionally, ...

    If the stated value, of “Federal” Reserve notes, declines enough with respect to copper and nickel, the 1946-2009 U.S. Mint nickels, composed of cupronickel alloy, could become somewhat rare in mass circulation.

    The April 23rd metal value of these nickels is “$0.0625836” or 125.16% of face value, according to the “United States Circulating Coinage Intrinsic Value Table” available at