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Saturday, December 18, 2010

One good reason to stay away from Europe generally...


The case of Latvia is one where the country has followed all of the advice European Union and IMF policymakers have given them... and their economy has contracted over 20% from the peak and unemployment is unspeakably high.


Instead of engaging in a policy of devaluation to make its goods and services more competitive around the world in a more normal fashion, the EU and IMF have basically force-fed deflation so that wages are being pushed down in a brutal fashion, which is one way to reduce imports... I guess. To paraphrase what Paul Krugman said about this, Latvia was told not to devalue its currency or it would face economic disaster. I respond with, "What exactly is a 20%+ contraction in GDP, 18%+ unemployment and dramatically falling living standards for everyone else?". What Latvia has been put through is nearly criminal.

If this is going to Europe's continued approach all around the periphery of the continent, investors are wise to stay away for the most part except for those European companies that do little business in Europe itself. Deflationary policies are good only for the holders of credit (and even there only in the short run) and bad for just about everyone else.

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