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Scotland’s currency options

One of the controversial topics in the debates of Scottish independence is the currency question. The other day, the Financial Times asked several economists to consider four options available to an independent Scotland: a currency union with the UK, sterlingisation (which would be the continued use of the pound sterling but without backing of the Bank of England), establishing a new Scottish currency, and joining the euro. Not surprisingly, opinions were divided.

However, strictly speaking, the choice is not limited to these four options. Besides, there are others which deserve a closer look as well in this context.

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Interconnectedness, uncertainty and innovation – Brian Arthur on economic complexity

The other day, Charles Consult on Twitter drew attention to a fascinating paper by W. Brian Arthur on Complexity Economics.

At a time of never-ending financial crises and lasting imbalances when people are becoming increasingly aware of the shortcomings of traditional economics with its focus on equilibrium as the natural state of an economy, Brian Arthur presents a different approach, a nonequilibrium view of economic processes and structures. In his paper, in acting and interacting firms, consumers, investors and other economic agents collectively create an outcome and then adjust their strategy in response to what they see they have created. The result of these adjustments is another outcome which causes them anew to make revisions – and so forth.

As a consequence, the economy is constantly in motion. It is not “something given and existing but forming from a constantly developing set of technological innovations, institutions, and arrangements that draw forth further innovations, institutions and arrangements.” In this scenario, equilibrium is the exception, not the rule. As the author notes: “For highly interconnected systems, equilibrium and closed form solutions are not the default outcomes; if they exist they require justification.”

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The social value of HFT – Salmon, Stiglitz and the problems of HFT reconsidered (2)

In a recent article, Felix Salmon summarized the key points of a widely noticed speech delivered by Nobel prize-winner Joseph Stiglitz on the problems of financial innovation in general, and high-frequency trading (HFT) in particular.

Stiglitz asked Are Less Active Markets Safer and Better for the Economy? and came to the conclusion that they are. His arguments revolved around three aspects: speed, costs and social value.

In the first part of this article, the speed aspect was discussed. This second part deals with the costs and social value of HFT.

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Salmon, Stiglitz and the problems of HFT reconsidered (1) – Speed

Building bridges between scientists and the public in communicating research findings is one of the most rewarding activities of bloggers and journalists. Felix Salmon is an outstanding example in this respect. In a recent article, he summarized the key points of a widely noticed speech delivered by Nobel prize-winner Joseph Stiglitz on the problems of financial innovation in general, and high-frequency trading (HFT) in particular.

Stiglitz asked Are Less Active Markets Safer and Better for the Economy? and he came to the conclusion that they are. His arguments revolved around three aspects: speed, costs and social value.

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Michael Lewis’ Flash Boys – further comments and links

The publication of Michael Lewis’ book “Flash Boys” renewed the general interest in high frequency trading and fuelled the debate about its potential use or harm. After finishing my first compilation of comments and reviews of the book I came upon further interesting and challenging contributions which I would like to share with you.

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A perfect storm – first reactions to Michael Lewis’ Flash Boys

Since many years, there is a controversy about high-frequency trading which just reached the wider public with the publication of Michael Lewis’ latest book Flash Boys. His conclusion that US stock markets are rigged by high-frequency traders rose strong emotions on both sides. With the following links and excerpts I would like to give an impression of some of the first days’ contributions and comments.

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Paul Einzig and the foreign exchanges

The other day, I came upon an interesting article on Vox about The Returns to Currency Speculation: Evidence from Keynes the Trader where Olivier Accominotti and David Chambers described the results of their research on currency speculation in London in the 1920s and 1930s. Looking for more, I found a preliminary unpublished paper by the same authors on the topic in the internet (which unfortunately must not be quoted). In that paper, describing the London foreign exchange market in the period under consideration the authors drew heavily on Paul Einzig’s The Theory of Forward Exchange of 1937. This is one of several rich and fascinating books Paul Einzig wrote (actually, the author himself considered it his best effort, as he mentioned in his autobiography), which, although from another century (in 1919 the telegraph had just begun to change the nature of foreign exchange dealing in London), bear many lessons, not only for historians.

Paul Einzig was born in 1897 in Braşov in Transylvania, in a “quiet little backwater, a small town at the foothills of the South Eastern Carpathians” (Einzig 1960), at a time when this Romanian region was still a part of Hungary. In 1919, after studies at the Oriental Academy of Budapest and first steps as a financial journalist in his home country, he came to London.

The world Paul Einzig was set to conquer: 2nd October 1919: London Dandies attired in menswear by Beau Brummell promenade in London’s Fleet Street.

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Inflation indexing and Bitcoin rhetoric

The other day, the New York Times provided us with an example of how fads and fashions can be used to draw attention to, and win acceptance for, an economic argument. In his article In Search of a Stable Electronic Currency Nobel laureate Robert Shiller proposed the introduction of an inflation-indexed unit of account similar to the Chilean unit of development or unidad de foment (UF) which is existing since the 1960s. The article is in large parts a summary of the ideas of an academic paper the author published in 1998. In short, its main argument says that recent progress in computer technology has considerably widened the possibilities of inflation indexing which would allow for a better pricing, contracting and risk management in an economy.

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Regulators’ games

Are US regulators corraling their financial system with the latest financial-safety rules for foreign banks as Patrick Welter (Frankfurter Allgemeine Zeitung) and others argued or will their move eventually even pave the way for closer cooperation and a revitalization of the worldwide regime of bank supervision?

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Sneak previews: Deutsche and RBS

Let us hope that this will not become a habit. As David Enrich (The Wall Street Journal) wrote the other day on Twitter

The tactics to choose a favorable moment (in case of Deutsche Bank a Sunday) ahead of the regular presentation of results to confront the markets with bad news illustrates how much, five years after the peak of the financial crisis, both institutions are still struggling to explain their activities and performance to the public in a damage-limiting way. What happened to the two banks which were once the biggest in the world? The following is a short compilation of information from banks’ press releases, media comments and other readily available sources to find out what the main problems are. Of course, this is no substitute for a thorough analysis. If not mentioned otherwise, data are from the banks’ official websites.

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