Greece is not real (it’s nominal)

I enjoyed this post from Scott Sumner:

This tiny country is 2% of the EU.  If (God forbid) it was destroyed by an asteroid tomorrow, stock markets would soar upward all over the world.  The Greek crisis would be over.  Yes, banks would hold some worthless Greek debt; but with no further moral hazard concerns, the rest of the eurozone would gladly bail out their banks, and add that Greek debt to their own public debts.  Remember, Greece is 2% of the EU.

Why would stocks soar on the destruction of Greece?  Because it would end the uncertainty, the fear that a Greek departure from the euro would have a contagion effect.  People who talk about structural problems talk about things like malinvestment in too many houses or BestBuy stores, or Obama’s big government policies, etc.  But the markets don’t care very much about those things; they care about things like Greece.  And not because Greece is big enough to have a real effect on the global economy, obviously it isn’t.  Rather Greece matters because it could trigger a financial panic that would reduce AD [aggregate demand] all over the world.  That’s why global equity markets lose TRILLIONS of dollars when the Greek crisis intensifies.  The real problem is nominal.

Everywhere I look I see more and more evidence that the developed world has a massive AD problem.  Yes, individual countries (southern Europe, to a lesser extent the UK, and to a still lesser extent the US) also have some structural problems.  But the NGDP problem is both easy to fix and a big part of what’s hurting the world economy.  It’s frustrating to see us ignoring it.

It’s now far too big a problem to be addressed by any token fiscal stimulus that could come out of this recent Camp David push for “growth.”  Monetary policy is our only hope.


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