Monday, November 29, 2010

The Spanish Trap

Krugman explains how Spain's recovery from recession is made difficult because it cannot take actions to devalue the euro. Consequently, it must undergo internal devaluation to lower its cost structure so that it can export its way out of recession. That means a long process of wage compression and slow growth until its products are cost competitive.

The US and the UK have their own currencies and they can use monetary policy to devalue their currencies and build up their export base. The attack on the Fed by conservatives may restrict the use of monetary policy to make US exports price competitive. The result would be the "Spanish Trap". That is, wage compression to make our products less expensive to sell overseas.

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