On Aug 4, 2010, at 9:39 AM, Michael Pollak wrote:
> Hugh puts his finger, in particular, on one gaping hole in the logic of
> the opponents of devaluation. We can't devalue, they say, because the
> Latvian private sector has a lot of debts in euros, and a devaluation
> would make it very hard for borrowers to service those debts. As Hugh
> points out, the proposed alternative -- sharp wage cuts, and basically
> a major domestic deflation -- will also make it hard to service those
> debts. In fact, I'd be a bit more specific than Hugh: other things
> equal, a nominal devaluation and a real depreciation achieved through
> deflation should have exactly the same effect on debt service (unless
> some of the debt is in lats rather than euros, in which case
> devaluation would do less damage.)
But the class effects are different. In a wage deval, the working class gets hammered. In a currency devaluation, those with foreign assets get hammered.
Doug