QuoteOriginally posted by: CuchulainnQuoteOriginally posted by: Traden4AlphaThis thread reminds me of some failed attempts on Wilmott.com to discuss the optimal geographic scope of a currency. The divergence of the German and Greek economies shows that even these two relatively proximate economies they cannot be measured in a common numeraire. These economies, and others, fluctuate some what independently of each other. Worse, they each have respective drift terms that create unsustainable discrepancies in how wages, goods, and debts should be priced in the two locations.But now we have the upcoming iCurrency.LOL! Exactly! A self-proclaimed beautiful person said "time will tell"! ;-)What was interesting is that the iCurrency discussion did highlight (for me at least) the instabilities that underpin any given numeraire used in a non-trivial economy. The exchange rates between the numeraire and labor, the numeraire and goods, or the numeraire and other numeraires (including the numeraire and it's future self) are subject to the forces of supply and demand (modulated by human cognitive tendencies such as sticky prices). That makes each exchange rate somewhat unstable. These instabilities of the many kinds of ratios of items-to-numeraires then operate under imperfectly correlated patterns supply and demand. If supply and demand are unstable for one commodity, they are even more unstable for the ratios across two commodities in a local economy (e.g., the ratio of labor_skill_i to staple_good_j). Those instabilities will be even worse across widely separated locations.One might think that the mobility of money, people, and goods can mitigate these instabilities in supply and demand. At first glance, it is true in that the unemployed in one region can move to another region that has jobs. At first glance, the EU and the Euro seem like a great idea for creating a broader base of supply and demand that can damp out more of these local variances. But there are two hidden assumptions about the effects of mobility. The first is the consequences of mobility in terms of who gets left behind. Unless the mobile population is exactly representative of the whole population, the people that are left behind form an even more-imbalanced, more-impoverished economy than was there before the exodus. The mobility of the excess supply of labor removes from the local economy what might not have been excess demand for goods. Mobility can be especially damaging for fixed assets which lose their base of support when people leave. We can easily see this phenomenon operating around the world in which rural areas are losing people to cities, leaving plummeting property values, shuttered shops, and rapidly fading rural ghost towns in their wake. The second hidden assumption (that compounds the first) is in the effects of competition by which the first hidden assumption self-amplifies. Geographic heterogeneity of the market-clearing value of the numeraire WRT geographic distribution of people who value that commodity more than the market rate versus the people who value that commodity less than the market rate will drive the mobility of people, goods, and money from poorer regions to richer ones. Someone in the US or Germany can easily afford to pay several dollars or euros for a liter of petrol or diesel. Someone in rural India or Africa cannot. Hence oil flows West. And when that liter of petrol or diesel was derived from grain or oilseed, then the person in India or Africa starves. That phenomenon motivates various forces (especially governments) to impose heterogenous prices and disrupt the mobility of people, goods, and money. Although it might seem like a universal numeraire can buy anything anywhere, these various forces imply that prices will vary strongly. And if the prices for a given good vary, it's really as if the numeraire itself had no constant price making it not actually universal.BTW, the mobility of money is even more perilous as one can see in recent delightful examples such as IceSave, subprime mortgages, and even the flash-crash. The easier it is to move money, the more likely money is to slosh into the wrong place which looks like the right place because the movement of money can create a temporarily self-fulfilling prophecy.
Last edited by Traden4Alpha
on June 28th, 2015, 10:00 pm, edited 1 time in total.