Unless you’ve been living under a stone, you’ll probably be aware of the current crisis going on in Greece. I’m quite a fan of Yanis , the now ex-Greek Finance Minister. He’s been blogging as the crisis has been unfolding on his blog and explaining how and why decisions have been made. It has made for a fascinating read and I have learnt a lot about the complex issues regarding Greece’s problems.
As of today, one day after Greece voted ‘no’ to the deal offered by the Eurogroup, and Varoufakis resigned. He stated on his website:
Soon after the announcement of the referendum results, I was made aware of a certain preference by some Eurogroup participants, and assorted ‘partners’, for my… ‘absence’ from its meetings; an idea that the Prime Minister judged to be potentially helpful to him in reaching an agreement. For this reason I am leaving the Ministry of Finance today.
I consider it my duty to help Alexis Tsipras exploit, as he sees fit, the capital that the Greek people granted us through yesterday’s referendum.
And I shall wear the creditors’ loathing with pride.
I imagine the discussion went like this over the telephone:
Eurogroup: Well you got what you wanted Tsipras. The deal will be done on the new terms, but only if you get rid of that annoying smart arse Varoufakis. We don’t like him and he can’t play with us any more. It’s our ball, our pitch, and he’s spoiling our game.
(Tsipras looks at Varoufakis who slowly nods and smiles. Tsipras grins)
I’ve recently started trading bitcoins algorithmically on the new Coinbase exchange. After reading about High-Frequency-Trading in the book Flash Boys by Michael Lewis, I decided I’d give it a shot myself, albeit in a clumsier, more amateurish way.
The first step in High Frequency Trading (HFT) is to place the systems where the exchanges are. Light passing through fiber takes 49 microseconds to travel 10,000 meters, and that’s all the time available in many cases. In New York, there are at least six data centers you need to collocate in to be competitive in equities. In other assets (foreign exchange, for example), you need only one or two in New York, but you also need one in London and probably one in Chicago. The problem of collocation seems straightforward:
Contact data center.
The details, however, are where the first systems problem arises. The real estate is extremely expensive, and the cost of power is an ever-crushing force on the bottom line. A 17.3-kilowatt cabinet will run $14,000 per month. Assuming a modest HFT draw of 750 watts per server, 17 kilowatts can be taken by 23 servers. It’s also important to ensure you get the right collocation. In many markets, the length of the cable within the same building is a competitive advantage. Some facilities such as the Mahwah, New Jersey, NYSE (New York Stock Exchange) data center have rolls of fiber so that every cage has exactly the same length of fiber running to the exchange cages.
There are not that many people who can so eloquently explain economics to the masses. Post-Scarcity Economics is a great in-depth look at the history of growth in relation to wars, public spending and debt.
What is to be done?
Our policy makers are desperately hoping that ultra-low interest will spark a new asset price bubble and we can return to the fool’s paradise of 2005, right before house prices started falling in Nevada and mortgage-backed securities started stinking up bank balance sheets. Not only is this looking unlikely, it also ignores that debt fuelled consumption didn’t give us strong or equitable growth. Remember, real GDP growth during the bubble years was lower than it was even the unlamented 1970s.
In the short run, the first thing we should do to emerge from this debacle is to increase government deficits and focus this spending on infrastructure and education. These investments in our future create jobs today, and by putting money in workers wallets, give the private sector reason to hire and invest in increasing capacity.
This is a no-brainer.
Pundits and economists enamored with austerity argue against this policy and insist that firms require lower government deficits before they have confidence to invest. This shows a breathtaking lack of understanding of the business world. Only one thing makes entrepreneurs expand capacity and that has nothing to do with government tax policy. A businessman will hire more workers and invest when his inventory is shrinking, specifically, when he is able to sell more than he is able to produce. If stock is sitting on his shelf, he instead fires workers, no matter what his tax rate. Only someone living in Washington who has never run a business could assume that entrepreneurs are fixated on the possibility of future tax hikes. Of course, like all of us, businessmen would rather pay less tax, but what makes employers hire is the realization that they cannot meet the demand for their goods and services with existing staff. If they do not expand production, customers willing to buy their goods will have to leave the store empty handed and spend their money instead at a competitor’s shop.
The need for increased government spending is basic Economics 101. Gross national product equals consumption plus investment plus government spending. If households are consuming less and firms are investing less, government has to increase spending is the economy is not to shrink.
Austerity has been a dreadful failure. A return to sensible Keynesian policies is the first step to restoring prosperity.