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June 10, 2012 (LBO) - Paul Krugman, an influential Nobel laureate who peddles a formula of deficit spending for rulers and currency depreciation for people as tools of economic recovery, has received a set down from a small nation that did the exact opposite.
In a New York Times blog post earlier this week, Krugman ridiculed the economic recovery of Estonia, a Balic nation, brought about by conscientious rulers who cut spending and a citizenry that supported it by paying higher taxes.
"Let's write about something we know nothing about & be smug, overbearing & patronizing: after all, they're just wogs," an angry Estonian President Toomas Hendrik Ilves said in a post on Twitter, a social networking site.
"Let's sh*t on East Europeans: their English is bad, won't respond & actually do what they've agreed to & reelect govts that are responsible."
Currency Board
After exiting the tumbling ruble in 1992, Estonia created a currency board-like system or hard peg, initially with the Deutche Mark, and later with the Euro. In 2011, Estonia entered the Euro zone.
Estonia's economy was hit from 2008, with the end of a boom brought by capital inflows. But its rulers discarded deficit spending in favour of greater fiscal prudence.
In 2011, fiscally prudent Estonia (it has national debt of only 6 percent of GDP) grew 7.6 percent, the fastest in the Euro zone, after a 15 percent slump in 2009.
"So, a terrible — Depression-level — slump, followed by a significant but still incomplete recovery. Better than no recovery at all, obviously — but this is what passes for economic triumph?" Krugman said.
Earlier, Estonia's monetary authority, along with those of neighboring Latvia and Lithuania - set up on currency board lines - have resisted calls to devalue.
Devaluationists including Krugman himself and Nouriel Roubini, from Princeton University have predicted the fall of Baltic currencies and called for their depreciation.
"Guess a Nobel in trade means you can pontificate on fiscal matters & declare my country a 'wasteland'. Must be a Princeton vs Columbia thing," President Ilves tweeted. He is a Columbia University graduate.
"But yes, what do we know? We're just dumb & silly East Europeans. Unenlightened. Someday we too will understand. Nostra culpa."
Consistent Policy
Steve Hanke from John Hopkins University, who has advised Baltic States on their exchange rates said in 2009 that neither Latvia, Lithuania or Estonia should devalue, despite the dire predictions of Krugman whom he called 'Dr Gloom' or Rubini, who was labeled 'Dr Doom'.
Hanke said the monetary authorities of the three countries with or without orthodox currency board arrangements were running monetary policy consistent with a fixed exchange rate target with little or no sterilization of foreign exchange sales or purchases.
Their domestic monetary base remained fully backed by foreign reserves and no fresh money was being printed, unlike Argentina whose so-called currency board collapsed due to a legal provision that allowed forex sales to be sterilized up to 30 of foreign reserves.
"In consequence, Latvia could convert its entire monetary base into euros at the current exchange rate," Hanke wrote in 2009.
"The same can be said of Estonia and Lithuania -two countries that officially adopted modified currency board systems in 1992 and 1994, respectively."
"They would do better to officially adopt the euro, even without the blessing of the European Central Bank, than to devalue their national currencies."
Ironically in August 2011 Estonia's credit rating was upgraded two notches in one revision to AA- by Standard and Poor's, rating agency, around the time deficit spending USA was nudged off its triple A pedestal to 'AA-'.
In an interview with the Wall Street Journal this week Hanke said Estonia was one of the freest economies in the world, ranked 24th on the World Bank's list of easiest places to do business and it had run through a typical boom-bust cycle seen in emerging economies.
Poverty Worldview
He said Krugman's comments were a "burr on the saddle of any sane politician or economist" in the Baltic countries.
"How would you like a Nobel laureate trashing your economy, when it was growing at 7.6 percent last year, you were running a budget surplus, national debt was 6.0 percent of GDP…?" Hanke said.
"Krugman said they were going to be the first one would be the first ones to absolutely, completely collapse. No. They were the first ones to bounce back."
Hanke said the analysis was "bad, very bad" and it was to be expected since did not like free markets and particularly did not like currency boards.
Many rulers prefer devaluation because it allows them to continue to spend and inflate away the debt avoiding sovereign default and deflect criticism from popular media, state worker unions and opposition groups claim to be 'austerity'.
A sovereign default or a hair-cut on state debt, only imposes 'austerity' on people who loaned their savings to rulers.
A devaluation slashes the real value of both state and private debt, destroying lifetime bank savings, imposing 'austerity' on everyone, particularly old people depending on pensions.
Estonian leaders made difficult political choices and convinced their citizens to ignore a global consensus that state deficit spending brings recovery or economic prosperity through 'stimulus', which has failed spectacularly in the US and elsewhere.
"Krugman supports the worldview that created poverty," Estonian finance minister Juergen Ligi told a news conference on June 07.
"Our poverty won’t be cured with the recipes that prescribe lavish borrowing, purchasing expensive things and then feeling rich."
http://lbo.lk/fullstory.php?nid=1735627980
In a New York Times blog post earlier this week, Krugman ridiculed the economic recovery of Estonia, a Balic nation, brought about by conscientious rulers who cut spending and a citizenry that supported it by paying higher taxes.
"Let's write about something we know nothing about & be smug, overbearing & patronizing: after all, they're just wogs," an angry Estonian President Toomas Hendrik Ilves said in a post on Twitter, a social networking site.
"Let's sh*t on East Europeans: their English is bad, won't respond & actually do what they've agreed to & reelect govts that are responsible."
Currency Board
After exiting the tumbling ruble in 1992, Estonia created a currency board-like system or hard peg, initially with the Deutche Mark, and later with the Euro. In 2011, Estonia entered the Euro zone.
Estonia's economy was hit from 2008, with the end of a boom brought by capital inflows. But its rulers discarded deficit spending in favour of greater fiscal prudence.
In 2011, fiscally prudent Estonia (it has national debt of only 6 percent of GDP) grew 7.6 percent, the fastest in the Euro zone, after a 15 percent slump in 2009.
"So, a terrible — Depression-level — slump, followed by a significant but still incomplete recovery. Better than no recovery at all, obviously — but this is what passes for economic triumph?" Krugman said.
Earlier, Estonia's monetary authority, along with those of neighboring Latvia and Lithuania - set up on currency board lines - have resisted calls to devalue.
Devaluationists including Krugman himself and Nouriel Roubini, from Princeton University have predicted the fall of Baltic currencies and called for their depreciation.
"Guess a Nobel in trade means you can pontificate on fiscal matters & declare my country a 'wasteland'. Must be a Princeton vs Columbia thing," President Ilves tweeted. He is a Columbia University graduate.
"But yes, what do we know? We're just dumb & silly East Europeans. Unenlightened. Someday we too will understand. Nostra culpa."
Consistent Policy
Steve Hanke from John Hopkins University, who has advised Baltic States on their exchange rates said in 2009 that neither Latvia, Lithuania or Estonia should devalue, despite the dire predictions of Krugman whom he called 'Dr Gloom' or Rubini, who was labeled 'Dr Doom'.
Hanke said the monetary authorities of the three countries with or without orthodox currency board arrangements were running monetary policy consistent with a fixed exchange rate target with little or no sterilization of foreign exchange sales or purchases.
Their domestic monetary base remained fully backed by foreign reserves and no fresh money was being printed, unlike Argentina whose so-called currency board collapsed due to a legal provision that allowed forex sales to be sterilized up to 30 of foreign reserves.
"In consequence, Latvia could convert its entire monetary base into euros at the current exchange rate," Hanke wrote in 2009.
"The same can be said of Estonia and Lithuania -two countries that officially adopted modified currency board systems in 1992 and 1994, respectively."
"They would do better to officially adopt the euro, even without the blessing of the European Central Bank, than to devalue their national currencies."
Ironically in August 2011 Estonia's credit rating was upgraded two notches in one revision to AA- by Standard and Poor's, rating agency, around the time deficit spending USA was nudged off its triple A pedestal to 'AA-'.
In an interview with the Wall Street Journal this week Hanke said Estonia was one of the freest economies in the world, ranked 24th on the World Bank's list of easiest places to do business and it had run through a typical boom-bust cycle seen in emerging economies.
Poverty Worldview
He said Krugman's comments were a "burr on the saddle of any sane politician or economist" in the Baltic countries.
"How would you like a Nobel laureate trashing your economy, when it was growing at 7.6 percent last year, you were running a budget surplus, national debt was 6.0 percent of GDP…?" Hanke said.
"Krugman said they were going to be the first one would be the first ones to absolutely, completely collapse. No. They were the first ones to bounce back."
Hanke said the analysis was "bad, very bad" and it was to be expected since did not like free markets and particularly did not like currency boards.
Many rulers prefer devaluation because it allows them to continue to spend and inflate away the debt avoiding sovereign default and deflect criticism from popular media, state worker unions and opposition groups claim to be 'austerity'.
A sovereign default or a hair-cut on state debt, only imposes 'austerity' on people who loaned their savings to rulers.
A devaluation slashes the real value of both state and private debt, destroying lifetime bank savings, imposing 'austerity' on everyone, particularly old people depending on pensions.
Estonian leaders made difficult political choices and convinced their citizens to ignore a global consensus that state deficit spending brings recovery or economic prosperity through 'stimulus', which has failed spectacularly in the US and elsewhere.
"Krugman supports the worldview that created poverty," Estonian finance minister Juergen Ligi told a news conference on June 07.
"Our poverty won’t be cured with the recipes that prescribe lavish borrowing, purchasing expensive things and then feeling rich."
http://lbo.lk/fullstory.php?nid=1735627980
