For those readers who have been following Naked Capitalism’s coverage of Greece a significant amount of this will be old news. However, it was good to have the opportunity to make the case to another audience and with a recording that may be more accessible to the uninitiated than our coverage.
One point I make a few times in this talk that I haven’t articulated elsewhere is this: Economists tend to talk about economies using ex post (meaning after the fact) measurements of transactions, whether these transactions are all domestic spending on goods and services (GDP), or a net measure of international purchases and sales of goods and services (trade balance). These are of course important but a danger, which has definitely manifested in discussions of a Grexit, with thinking in terms of ex post measurements is the belief that we can project transactions that have happened in the past into the future.
This is a reasonable assumption some of the time, but is clearly foolish when we’re discussing a Grexit because by definition we’re talking about a radical change to how domestic production, imports and exports are financed. There are transactions people would like to make in the future that they don’t make because they can’t finance it. If your bank account is frozen or suddenly you can’t make international payments with it, production will shut down when you can’t acquire necessary inputs. This is a process that has already begun in Greece and is likely going to be much worse than the dislocations in Cyprus.
Saying that Greece had a balanced current account last year so it has no import financing needs is foolish. Not only can those transactions not be projected into the future, but each one of them was financed whether by working capital (i.e., a deposit in a bank) or through Euro bank loans they could get from their local bank because they were still a part of the Euro then. Even worse, the ability of tourists to finance their spending becomes almost totally impaired without an international payments system. I may hope that tourism spending this year comes to equal or be greater than tourism spending last year but realistically I don’t see how that’s possible given how things have been going. Cancellations have already started en masse and last minute bookings have dried up completely
In short, what matters is ex ante transactions (i.e., the financing of planned transactions) not ex post measurements of transactions that already happened.
The audio quality isn’t as pristine as I’d like to be and it starts off slowly (as well as having a little dead air) but I think overall this was a good exposition of our views on a Grexit and a chance to respond to reasonably informed questions on the topic.
You can also download the file here.