Thursday, June 30, 2011

The Greek Problem is a Fiscal Problem, Period

There's a tendency among analysts in the US and the UK to treat the Greek debt crisis as a currency crisis, and to associate the Greek crisis with the Argentina currency board downfall. These arguments appear to be convincing at first sight (what explains their popularity) but are nonetheless deeply flawed.

The inevitable reality that applies to all countries is that you cannot solve a deep government budgetary problem with monetary measures. You have to solve the deep government budgetary problem, period.

Comparing Greece with Argentina is however ludicrous. Argentina had a weak national currency based on a deeply flawed monetary arrangement which lacked any real backing. Greece on the other hand is full member of a monetary zone based on a solid currency, the euro, backed by a large federation of important economies. The crisis has only served to confirm the euro's strengths.

To argue that the solution to Greece is to leave the eurozone is as laughable as to argue that Arkansas would be better off by leaving the dollar monetary zone once it faces budgetary or debt refinancing difficulties. Its fiscal problems wouldn't magically go away just by adopting a new (and probably weak) currency, and many new difficulties would be created.

Saturday, June 11, 2011

The Age of Financial Regression

The Economist's Buttonwood teaches basic lessons of economics to a Nobel Prize winner (here and here) while bringing forward a note by the Deutsche Bank that uses an interesting public choice argument to explain how we're seeing the rise of the age of financial regression:
With such a large overhang of Debt across so many developed countries it's likely that the financial markets regress back some way towards the controls that were commonplace for decades post WWII. The alternative if this doesn't happen is the risk of widescale Sovereign and Bank defaults across Developed markets over the next few years. So we'd argue that the next few years could be characterised by 'financial regression' as the financial system deals with the huge debt problem by pulling back from the free unfettered, free flowing cross border capital markets developed over the last 30 years.

Tuesday, June 7, 2011

The Impossible Monetary Economics of Star Trek (Part 2)

In reply to a previous post, a reader suggested that the problem of scarcity in the Star Trek universe has mostly been solved, so human economic needs such as to accumulate wealth wouldn't necessarily apply. I disagree. The problem is that scarcity can be a technically insurmountable or a subjective problem, and therefore cannot be eliminated by technical means, in reality, it cannot be eliminated by any means. You can replicate a da Vinci with some level of precision, but there will always be only one original da Vinci, therefore its scarcity cannot be waved away with technology.

Were you to move from Andoria to Earth, you would inevitably face some sort of scarcity. You would surely not be able to live wherever you wanted, even if you were extremely wealthy (think about a Bill Gates' hypothetical wish to live in the White House). Even if you could trade your place on Andoria for a place on Earth, some sort of moneyed transaction would for sure take place, unless the decision, instead of being taken by free people, would be made through central planning. I don't think, however, that Rodenberry envisioned the Federation as a totalitarian system.

Love cannot be replicated or easily replaced, so it will always be scarce (as we've seen happening in many Star Trek episodes). Death itself was not vanquished in the series, so there's scarcity of life and health.

And where there's scarcity there will be money, or some sort of quasi-money. How it's labeled doesn't really matter, as long as it serves the same functions of money, that is, a social networking tool that allocates scarce resources efficiently in a complex and decentralized economy, contemporaneously or across time. After all, money and its financial derivatives are the human invention that got the closest to working as a time machine, allowing wishes to be transferred from the present to the future (think about savings) or vice versa (think about credit).