The State of the Euro Zone

In the early decades of the twentieth century Germany experienced two great shocks, the hyperinflation of the twenties eventually followed by the second world war. These two events shaped German policy in the post WWII era, the twin imperatives of anti-inflationary monetary policy and European integration. Today however the two policies are coming to a head with the collapse of the Greek economy. What kind of policy should Germany pursue, tolerate a large deficit or expel Greece from the Euro zone. Martin Wolf at the Financial Times discusses the above conundrum in his opinion column.

The situation in Greece has enormous implications for the Euro zone, both economically and politically. Unlike the United States Greece can't print its way out of the crisis, since the printing press of the Euro (the European Central Bank) is in Germany. At some point Greece will find it more convenient to leave the Euro; however the political ramifications will be enormous. On the other hand Martin Feldstein argues that this is inevitable.

Hence the pandering has begun, and here's probably one of the worst articles from the Economist, both praising German restraint and demanding a more Anglo/Saxon (the British/American) model of overconsumption to stimulate the rest of Europe. The comments on the article are actually more insightful although the article lays down the context. Read more!

China and Currency Manipulation

A couple of interesting posts on the currency situation with China, from Krugman and the Telegraph. Both articles argue that the Treasury should officially declare that China is manipulating its currency which would immediately trigger punitive measures starting with the imposition of tariffs on Chinese products.

Unfortunately I think both articles are wrong as most of the comments on Krugman's article point out. Take tariffs for example, Walmart will spend a fortune to water down any bill so that is unlikely. Even if it were possible, the manufacturing isn't going to come back to the U.S., it will move to Vietnam or some other low cost nation. Once the manufacturing base is destroyed it's difficult to rebuild it overnight, especially since investors are not sure how long the tariffs will last.

I agree that this is a mutually assured destruction, while it will hurt America some, it will wreck havoc in China, massive unemployment leading to unforeseeable consequences. In America this will lead to some inflation but more could be in the offing. The current low interest rate levels are sustainable specifically because China is still buying bonds to keep the yuan pegged to the dollar. As the rates increase, it would trigger a new round of defaults etc. Moreover, the US is about to lose the triple A rating, so the consequences for the US could be substantial as well.

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Public Transportation

I was talking to a Houstonian about the public transportation system in New York, and her comment was that people in Texas are very independent, and she would not be able to give up the freedom of having a car, New York would be a nightmare for her. A few days later I experienced the first traffic jam and started thinking about independence and public transportation.

Cars don't get you much freedom at all, of course in Houston cars are essential. But consider this, a car makes you dependent on a) the car running properly, b) fuel in the tank, gas station, gas prices etc. c) the traffic running smoothly, and other road conditions, d) your own concentration while driving e) other drivers around you driving safely.

On the other hand the time spent driving is a complete waste, you can't read or do any kind of work. In New York you'd wait for a train, if the train is delayed just get up to the street and hail a cab, and if everything is blocked you can just walk. For all their independence Houstonians can't depend on their own two legs to get them anywhere. I think the meaning of independence, freedom and liberty really needs to be thought over.

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Executive Pay on Wall St.

The best option I have heard so far is that of the escrow account. A trader puts on a twenty year trade and books a mark-to-model profit and gets a percentage as a bonus. The bonus instead of being held by the bank is put in an escrow account, with the same vesting period. Thus if the trade tanks, the bank can claw back some of the money, on the other hand the trader does not lose the bonus if he decides to leave the bank. Read more!