...each country has its own banks, and each government uses its banks as piggybanks to stuff with government debt. Then, if the government defaults the whole system is dragged down with it...government default means the country must change the units of its currency. If Chicago defaults on its debts, nobody thinks it must introduce a new currency or that Chicago's banks will fail.In the meantime, the euro has become - in the words of Lars Christensen, a "growth killing machine." One wonders, along with David Glasner, why Germany would willingly force Greece into bankruptcy. Recently, Nick Rowe responded to a post from JP Koning, "There won't be a drachma-induced recovery." If a reintroduction of the drachma were to occur, how difficult would this be, to implement? Here's Koning:
But as long as Greek prices continue to be expressed in euros, drachmas will simply swim within the existing euro standard fish bowl. All sorts of mountains must be crossed before the penultimate switch of standards. This isn't "snap of the fingers" territory.Even in the best of circumstance, a return to the drachma would take time. Only consider that when policy makers don't agree on monetary policy roles, the public is also confused, as to what money is expected to accomplish in the marketplace. Money as a medium of account, experiences ongoing friction between local flows, international flows, and the flows of tradable and non tradable sectors as well. In particular, the unique features of non tradable structures can make them a nation's wild card. Non tradable equilibrium needs to exist in better balance with the wealth of tradable sectors, before a national medium of account can be better understood.
One of my primary concerns of course, is that time aggregates are not even a recognizable component of a nation's general equilibrium. Only consider the degree to which Greece has suffered from extensive unemployment - a problem which neither their government or business interests have been able to address. Greece is hardly alone, in the fact that more fiscal policy has been needed for services sector employment than they can now maintain. Many governments will gradually need to retrench on the promises they made in that regard.
Problems also arise when the wealth of housing assets and services formations becomes dependent on international monetary flows, because these flows are often subject to change. Some would logically ask, why should this be a problem for the U.S.? Presently it does not appear to be so. Just the same, there always needs to be at least one Plan B in place when international flows falter, as the example of Greece clearly shows. Knowledge use systems would provide at least one Plan B, so as to maintain employment levels when it is not possible to do so, otherwise.
How is it that prosperous cities and regions can rely on international monetary flows, if this is problematic for a nation's government? Local economies have multiple points of responsibility for budgets and adaptive circumstance. As Cochrane noted, Chicago would not have to start from scratch with a completely new standard. Whereas national governments often end up with a single "all purpose" budget, which cannot readily adapt as international monetary flows gradually change.
An important takeaway for any nation in all this, is simply to be careful. Don't just assume that problems of this magnitude can't - or won't - "happen here". It is best by far, for governments not to privilege special interests to the point that too many citizens are excluded from economic activity along a wide scale. Even though some cities and prosperous regions have the luxury of creating an exclusive equilibrium, governments need to resist the impulse to make those terms the norm for places with different resource capacities. Governments need to do their level best to allow a wide range of settings which include as many participants as possible. Otherwise, forced austerity can become problematic for a nation's productive capacity when monetary policy falls short - as is presently the case.