On Wednesday 30 March 2005 14:32, Ian Lynch wrote: > On Wed, 2005-03-30 at 22:59, Daniel Carrera wrote: > > Hi all, > > > > Is there someone here who knows about economics and can explain > > something to me? I'm reading this article on Wikipedia, about > > the Euro:
I'll give a stab at it. Like Ian mentioned, it is very complex. But if I understand it correctly, here are the basics. Long ago and far away, in the time of Adam Smith (who wrote the Wealth of Nations) it was believed that the wealth of nations was based on their gold reserves. Then along came Smith, Karl Marx, and others who argued that it was more complex than that. What about arable land? What about its labor power? These questions started people thinking not just about the current gold reserves, but the potential for nations to produce the MEANS to acquire gold. Along with the growth of international trade came the appearance of currency markets. All modern markets measure one basic thing: belief in the future as viewed from the present. The same is true of currency markets. Each market measures something different. Stock equity markets measure the current belief about the future prospects of companies traded on the market under reasonably foreseeable circumstances. Currency markets measure belief in the economic health of a nation, usually the nation issuing the currency. Now with the arrival of the Euro, currency markets are asking whether the US is still the hub of the international market. There are lots of subquestions, but that is the premier question, IMHO. And it appears that the currency markets are starting to wonder how healthy the US economy is vis-a-vis the European economy. The complexity arises from the fact that every nation needs a market to buy goods exported from that nation. As the dollar climbs, goods produced in the US become more expensive outside US dollar-dominated economies, and so the consumption of goods from the US declines, at least in theory. The theory, as with most things in capitalist theory, is that the market is the best aggregator of human wisdom, for reasons covered really well in Jim Surowieki's book, "The Wisdom of Crowds." The theory is that in currency markets, as elsewhere, the market will prevent any one currency from getting out of control, because as the cost of the US dollar (for example) increases, consumption of US produced goods will decline, thereby exerting downward pressures on the dollar. Supposedly, it's a self-correcting mechanism. But any market can be gamed, as Ian pointed out with Soros. goods produced in that market increases, the cost > > > > > http://en.wikipedia.org/wiki/Euro > > > > I think I sort of understand that having everyone's reserves in > > US dollars would make he US dollar artificially expensive. It'd > > create artificial demand. Is that about right? +1 The saying in currency markets is that "bad money drives good money out of the market", all things being equal, because investors would rather hold the solid currency than the weak currency. So they spend the weak currency where they can, and hold the strong currency, until such point that they think that the value of the stronger currency has peaked, at which time they sell. The mere fact that people are willing to hold US dollars pretty much universally, except for spikes in other currencies, means that the market BELIEVES that the US will continue to be the hub of the international markets. Now enter Bhaskar Chakravorti. If people start believing in the strength of one business hub, say the GNU/Linux business hub, and doubting the strength of another business hub, say the Microsoft business hub, they will start wanting to find a role as either a demand-side or supply-side player in the new network. As Chakravorti points out, the strength of a market hub is dependent upon the interconnections of THE PLAYERS in the hub, and to what extent they need to pass through that hub in order to get to a trading partner elsewhere in the hub. So as long as everyone uses Windows, Office tends to be more valuable, because both demand and supply side players count on the fact that other players will be placing bets conditioned on the strength of the hub. Same with the Euro and the US dollar. > > Yes, if somethng is in demand the value rises even if the Emperor > has no clothes and its peceived rather than real value. If > confidence suddenly falls there can be a crash - recent stock > market crash after the .com bubble burst is an example. > > > What I don't understand is in which way foreign markets are > > supposed to be subsidising the US budget deficit. As long as demand and supply side players in the international currency markets BELIEVE in the strength of the US economy as the market hub, they will tend to ignore flaws in the US economy which would otherwise sink the US currency. The US can get away with things no other currency issuer can get away with, because of the fundamental BELIEF in currency markets in the stability of the US dollar and the US economy. But, as Doc Searls says in his audio snip on the front page of the Digital Tipping Point website, "The conditions are changing." The performance of the European economy has been enhanced by the Euro. As anyone reading this list from Europe knows, it is FIENDISHLY COOL to be able to move from France to Germany to Spain and use the same currency. As long as the basic strength of the economies of the individual member states is maintained at a satisfactory equilibrium, removing the currency barrier results in something like Metcalfe's law coming into effect: the value of the network equals the square of the nodes. So if those nodes are businesses in Germany, France, Spain, etc., the Euro has removed some transaction costs in moving goods, services and key talent through those markets. Whenever you are analyzing the strength of any developed economic unit, where a basic infrastructure is in place (the Internet; the US economy; the European economy), making tiny changes in marginal earnings can result in HUGE aggregated benefits. So Fedex rules in the US because they are able to squeeze an extra net margin of say 2 cents out of each transaction compared with DHL. The US is able to do what it is able to do with regard to the US budget deficit because everyone always believed that the US economy was a safe haven for money. The US therefore can do what Argentina never could in terms of running deficits, because of the basic belief in the strength of the dollar. > > Nor do I > > understand what this has this has to do with the price of the > > dollar or the trade deficit. Now, for the first time in post war history, investors are gaining confidence in another business hub: Europe. In the past, if the international scene started getting sketchy, you saw a flight either to dollars; or gold; or just the US equities market. Now those same standards are starting to accrue to the Euro, and hence the European economy. Which brings us back to the Digital Tipping Point. When standards change, players who have bet in the emerging business hub early tend to gain the most. The bigger the bet, the greater the gain, unless you bet on the wrong hub, in which case your loses tend to aggregate at an increasing pace. The longer you wait, the more you bet on a hub that turns out to be a loser, the bigger the loss, and the harder it is to recover from the loss. The best analogy is water in a cookie baking sheet. Carrying a cookie baking sheet with even a little water in it is a sketchy proposition, because if you tip the sheet even a little bit, the water will rush to the low end, which increases the weight, which causes you to lower that end even further, and as Ian says, "it's back to the lily pond all over again." The height of the water rapidly exceeds the height of the sides of the cookie sheet, and now you have soapy water all over the kitchen floor. Modern markets have developed the equivalent of baffles on the cookie sheet to slow the progress of water in the event of tipping; plus they have made the sides of the cookie sheet somewhat higher; plus they have increased the viscosity of the water, etc. Same for Microsoft, Disney, and Comcast. DRM, DMCA, the Fritz chip, the broadcast flag, all are attempts to slow down the flow of water from one end of the cookie sheet to the other. Actually, you are all going to be shocked to hear me say this, but to a certain extent, it is a good thing that those baffles are there, simply because Microsoft is in EVERYONE's retirement portfolio, and other funds. If Microsoft were to evaporate tomorrow, there would be international panic. The problem with those baffles, though, is that they are too high. As with the US dollar, the preservation of the Microsoft monopoly strains certain parts of the world economy and disproportionately benefits other portions. Viruses are one example of the costs of the artificially high cost of Windows (lack of competition means MS can put holes in its code for the purpose of control, and viruses slipstream on that control). The cost of viruses is not born by the market hub; instead, those costs are externalized to the fringes in the form of downtime and anti-virus software, tech support, etc. Likewise, the cost of "empire", for lack of a less politically charged word, is that the economies subordinate to the empire have to bear the costs of environmental degradation; artificially depressed wages; and artificially inflated relative costs for finished products exported back to the fringes from the hub. Also, since the international market hub depends upon its size to leverage its advantages, wars are needed both preserve favorable terms for the export of raw materials, such as oil, from resource rich areas, say Iraq for example, and to preserve property rights in favor of US-based companies, like Dole in Guatemala. Now I really am not political on this list, and so I'm not interested in debating things like weapons of mass destruction, etc., but in strict economic terms, IMHO, the US administration concluded that the US interest in the stability of market-friendly governments in the Middle East is why the US invaded Iraq, rather than Saudi Arabia. There might also have strong domestic issues that played a part, but I won't go there. At any rate, the bottom line IMHO is that the rise of the Euro at this point in history is causing the international investor community to question whether the US dollar and the US equities market shall continue to remain the world's premier business hub, or whether they need to shelter some of their resources in the European Union. As a result, the US economy and currency is no longer able to take advantage of the stability of being the standard, which means that all of those "marginal" advantages no longer accrue at the same rate to players whose bets are heavily invested in the former business hub (the US and Microsoft). Now enter FLOSS. With more commerce increasingly being carried in digital format over the light spectrum, rather than fiber optics, the arrival of FLOSS means that developing countries are starting to be able to lay down the basic infrastructure which will permit them to leverage the same kinds of margin revenues across millions, then billions then trillions of transactions. With the growth of the Euro, the arrival of FLOSS, and the ballooning US budget deficit, you can expect that the current fringes of the international markets will grow in influence with respect to the former hub, while Europe and the Euro will gain in its role as an emerging hub. The US has enjoyed the benefits of being the hub since the late 1940s, but as Doc Searls says, "The conditions are changing." > > If there is investment in the US because people believe that some > time in the future the economy will grow giving good return on > investment that investment can be used to bridge any gap between > revenue and spending. The other way to get investment into a > country is to put up interest rates so people put their money > into that country rather than another for a higher rate of > return. Here in the UK interest rates are high and tend to be > because finance is a key part of the UK economy. Raising interest > rates takes money out of the pockets of consumers - their credit > card bills mortgages etc go up with no tangible benefit to them > but this is then money they can't spend on consumer goods. This > tends to inhibit growth and act in a deflationary way. So putting > up interest rates is a classic way of reducing inflation. Also if > interest rates are high, people tend to take money out of stocks > and shares and put them into bank accounts.The dynamic > equilibrium between interest rates, inflation, currency values > and stock exchange prices is complicated. The sort of things that > mathematics PhD people do to build models to try and predict the > effects of different scenarios ;-) > > There was a famous day called Black Wednesday here in the UK when > financier George Soros speculatively bought lots of currency. It > caused interest rates to go up to 15% here momentarily and the > Chancellor of the exchequor to lose his job. I believe Soros made > billions and is now busy giving it out to projects in Eastern > Europe and Africa. Sort of Robin Hood on a big scale :-)
