Asked and Answered. Twice.

Congressman Paul Ryan recently made some news (again) when he said (emphasis mine):

“There is nothing more insidious that a government can do to its people than to debase its currency,” Ryan said.  […]  “Inflation is a killer of wealth. It wipes out the middle class. It eviscerates the standard of living for people who have retired or are living on fixed incomes,” he said. “Name me a nation in history that has prospered by devaluing its currency.”

While I think it’s highly unlikely that economist David Rosenberg is even aware of Ryan’s remarks, he did provide Mr. Ryan with an answer in his note last Thursday (and Rosie is no liberal):

Everybody seems to believe the euro is sacrosanct but this was also the view around the Argentina currency board nearly a decade ago, the country ultimately devalued in order to reflate its economy and pay off its debts in debased currency. After the 10-year currency convertibility plan was abandoned in early 2002, the Argentinean peso depreciated 80%, which in turn paved the way for massive trade surpluses, and from 2003 to 2007, real GDP expanded at a 9% annual rate, and real wages rose by nearly 5% per year. Growth ensued. Memories faded.

Sweden, in the early 90s, is another example, and the reason Iceland no longer makes the news is because the krona has been devalued 60%.

Paul Krugman made similar points on his blog.  But, as always, it is the initial commentary — wrong though it may be — that makes it into our 24/7 news cycle.  The responses and corrections never gain equal traction.

For those who have an interest in how Rosie sees this playing out, he continues:

The end-game as I see it is that some of these peripheral EMU countries leave the union, go back to their own currency so they can reclaim control over their monetary policy and pay their debts in devalued punts, drachmas and pesetas. These peripheral EMU countries need to reflate but are being forced to do the exact opposite by being linked to a currency union. Other countries, such as Germany and the UK, that have big banks that own a ton of these peripheral European bonds will simply see their governments issue debt to cover the losses, either in part or whole (Merkel will see to it that in Germany’s case, it will be the former) in their financial sector. We’ll look back at this like we did Argentina and Russia … with faded memories.

Previously on Paul Ryan:

Things I Learned Last Week

July 31, 2010

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