There won't be a drachma-induced recovery

I grabbed both Lars Christensen and Brad DeLong made a presentation drachmas miracles Greece claims. Russ, for example, said:
However, Grexit will also remove monetary straitjacket, which has economic difficulties caused by the removal of this straitjacket in Greece will cause a large number of significant easing of monetary conditions in Greece since 2008, which is likely to result in a sharp rise in my opinion Nominal GDP in Greece in the coming years.
I hate the rain party, but even the drachma was introduced, it will not necessarily shorten the recovery value of the drachma caused. Greece is currently in a straitjacket, because its currency standard - system measurement and delivery of the economic value - is the standard of the euro. That the euro as a similar metric for measuring weight and distance, or dots per inch, the standard for measuring print resolution standard. Profile drachma banknotes into circulation, there is not a sufficient condition to create effects, Brad and Lars want the kind. In order to obtain their recovery, Brad and Lars need to go all the monetary standard switch. But as long as prices continued to Greece in euro, drachma would only swim in existing Euro standard fish tank. Various mountains before the penultimate standard switch must cross. This is not the territory "finger snap."

As another bit drachma coins

To better understand the fate of the new drachma, an example of good. Fortunately, we can find a one of the latest monetary recently appeared in the world, Bitcoin. Lars is now assumed that the collapse of the drachma will have a variety of beneficial effects on the Greek economy. But Bitcoin plunges when does the roar of the world economy? No, here's why.

Although merchants to accept Bitcoin payments, they have not accepted it as a standard. Sticker prices continue to like the dollar, yen, pound sterling and other units were set up, within the existing legal standards swim Bitcoin. In order to satisfy those who want to pay in bitcoins, businesses often use the last second bit currency against the US dollar (taking the foreign exchange market), based bitcoin price of their goods. This means that, in cheapening Bitcoin Bitcoin retailers require their own thing immediately adjust the amount of upward accompanied by the amount.

This is important, because implicit in Brad and Las drachma recovery story is a certain price stickiness. As a basic value standard unit plunges, the sticker price is slowly adjusted upward. Knowing sticker prices will start to catch up at some point, people spend their own money, now before it loses value, thereby inciting the economic prosperity as a businessman stock pitched down. The impact of this sticky prices is a complete lack of Bitcoin. Given Bitcoin sickening crash, those things who have no reason to lose value before, spend it. After all, the amount of bits needed to retailers currency adjusted per second, so in terms of Bitcoin prices do not stay sticky. Therefore, a bitcoin collapse no real impact on the world economy.

Applying this lesson of Greece, but there is no guarantee, decline in the drachma would boost the Greek economy. Appears drachma banknotes in circulation does not necessarily mean the sticker price will be set in drachma. To determine how many items Greek drachmas to pay, retailers may refer simply to the euro sticker price, which was converted into the amount of drachmas were glanced at the last second of the drachma against the euro. If so, then, just as the price of Bitcoin is not sticky nor drachma prices. If the adhesive is not necessary, in drachmas will not have Las crash and Brad want a real effect. Only the collapse of the euro, the currency standard will use sticky prices affect both implicit call. However, this actually means that Greece will remain tied its currency, despite the introduction of a drachma.

Obstacles to switch

I've talked about before exchange standards involving network externalities. In the current standards and new standards. Even if the new standards and the quality gap between the current deterioration is quite high, coordinating all costs to the new standards may be too onerous adoptions occur. Lag, or lock, is the result.

Switch to the drachma standards, a strong third-party intervention to overcome these network externalities. They need to punish or threaten to punish those who refuse to comply. The Greek government, which has proved an impossible task of tax collection, such as basic execution, it may lack the necessary adequate resources to fulfill the task to third parties.

Also militating against Drachma standard is its huge quality gap. Monetary standard pollution-free as possible should as far as possible. Merchants do not want to adjust prices every day, and customers want to know, they see the value of the same amount agitator on store shelves Tuesday, when they go back on Wednesday. If the sticker price must be hourly, even by the minute to adjust, time and mental space, it must be assigned to the calculation and measurements will replace other more meaningful activities. Bitcoin as Drachma might be one of the world's most unstable currency; currently one of the most stable euro. So, instead of improving the standard of the euro, a drachma standards will be the quality of return.

Given a strong government must spend significant resources to obtain the population to take better standards, it is difficult to imagine that a weak government can not impose its standards are not faced with low population rebound. Therefore, contrary to the Russ and Brad, we can not guarantee issuing drachmas provides an ultimate salvation. Finally, there may be a small difference between Greece introduced a drachma or a no, because no matter which way the current standard euro is likely to stay.

Note: This is very similar to my previous post on the topic. I have introduced Bitcoin metaphor, I think this helps to drive home the point, it also brings to the forefront the quality gap.

Nick Rowe comments here.

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