Last week we took a quick diversion into Euroland, which is crashing as we speak. Obviously, we went much too quickly to really give a good analysis of her problems. I urge readers to look at the front pages of NEP for timely pieces. Since this is a Primer, we want it to be more like a textbook. If Euroland completely disintegrates before next summer, I’ll add another section to do a post mortem on the misguided experiment in separating nations from their currencies. There are only very limited circumstances in which that can work—and Europe is not one of them.
Last week we received a well-thought-out query, which is pasted below in its entirety (although I removed the author’s name to respect privacy). I think the author raises points that are sufficiently important that we should take another unplanned diversion this week. This is the great thing about running the Primer this way as I can see where I’ve failed to adequately explain something. I had thought the distinction between real and financial (nominal) was clear—but obviously it was not.
At this point you might want to skip down to the bottom of this post to read the query. I will summarize the main point later, but I expect that many of you would agree with the author—so go ahead and read it first. Then we’ll get to the response.
Ok, let me try to explain this as clearly as possible.
