Recessions are Always and Everywhere a Monetary Phenomenon, In Greece Too
Faisal Islam posted to Twitter some quotes from his book, “The Default Line” (Kindle edition here), which I thought were a fantastic illustration of Nick Rowe’s favourite slogan – I hope Faisal will not mind a transcription here:
It was well known that Greece was running out of cash, in metaphorical terms at least. In June 2011, after months of stalling on its economic reform programme, the foreign Troika that effectively ran the country had run out of patience with the Greek leadership. […]
But what people did not know was that Greece was literally running out of cash. There were shortages of all denominations apart from the €10 note. Greeks had responded to the uncertainty regarding the Troika’s next move by withdrawing euros from their bank accounts at a record rate. Soon there would be not enough euro notes in the country to cope with the number of Greeks trying to get their hands on their money from cash machines and bank branches. A secret plan was activated. […]
As it happened, in June 2011 demand for paper currency had nearly trebled. To deal with this crisis, the Greek military cargo planes returned from abroad laden with freshly printed euros. The secret mission was intended not only to preserve Greece’s fracturing social stability, but also to preserve the single currency itself.
I do not think you could ask for a clearer example of a money demand shock. People are literally trying to hoard the monetary base, the physical currency. Of course it is also a nice illustration, perhaps, how financial crises and recessions are intertwined. I think it’s not unreasonable to argue that the chain of causation can go from “banking crisis” to “money demand shock” to “recession”. But monetarists would argue in between those last two steps we have a central bank which refuses to satisfy money demand by printing “enough” money.
I can recommend buying Faisal’s book based on those quotes!
Update: Giles Wilkes has a great post about how money should be central to our macro debates. It’s great that Giles is blogging again!