Greece is Not Real (It’s Nominal)

Lots of people believe the structural view of the current global recession; some of them are smarter than me.  But everywhere I look I see more and more evidence it’s a nominal shortfall, an AD problem.  Or at least 70% is demand-side.

I’ve already discussed:

1. The LBJ argument.  He was much more a big government guy than Obama, and the economy boomed for the 5 1/2 years he ruled.  There were problems later, but that’s exactly my point.  Supply-side problems look very different from sudden recessions.
2. The timing problem.  The big drop in housing construction occurred between January 2006 and April 2008, and yet unemployment was almost unchanged, as the laid off construction workers found jobs in other growing sectors.
3. The no mini-recession argument.  If recessions were caused by real shocks, then mini-recessions should be much more common than actual recessions.  But we’ve had virtually none–unless you count the 1959 steel strike.  And that ended almost immediately.
4. The David Glasner argument.  The stock market hated inflation in the 1970s.  Since 2008 stocks have been strongly correlated with TIPS spreads.  In other words the stock market started rooting for more AD about when market monetarists started arguing we needed more AD.
5. And now we have Greece.  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 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.