Monthly Archives: May 2020

Spanish colonial defaults

You’re probably aware Argentina has defaulted on its sovereign debt nine times since its independence in 1816.

You probably also know defaults are historically widespread across Latin America.  At least five former Spanish colonies have defaulted on their sovereign debts nine or more times each:  Argentina of course, and also Venezuela, Ecuador, Costa Rica and Uruguay.

What you may not know is the colonial backstory.  Argentina’s former colonial overlord, Spain, has defaulted on its sovereign debt at least 22 times that I could find:  1557, 1575, 1596, 1607, 1627, 1647, 1652, 1662, and 1666, plus another six times in the 1700s, and another seven times in the 1800s. (source, source)

Are Latin American defaults a cultural artifact of Spanish occupation?  Well, let’s compare to England.  Turns out that six of the ten countries that have never defaulted are England and former English colonies:  Canada, Malaysia, Mauritius, New Zealand, Singapore.  (The United States is an edge case, having paid interest late a couple of times, and having reneged on gold exchangeability of US bonds in the 1930s.)

When it comes to paying debts, there appears to have been a bug in the Spanish cultural program that was passed to its colonies.  What might that be?

It may be related to Spain’s essentially extractive view of colonization:  find gold and silver, ship it back to Madrid, and spend it on extending empire and Catholicism.  When that spending was not enough, Spain borrowed, and used precious metal extraction to pay the interest.  When that still was not enough, Spain defaulted and started over again.  And again.

Meanwhile, France and England developed industries to sell many of the things Spain was buying.  Spain’s extractive approach brought more long-run benefit to Spain’s rivals than to Spain itself.

Thus Spain was a victim of the Dutch Disease long before it afflicted the Dutch.  Instead of oil & gas, it was gold & silver that hollowed out the Spanish economy.  And Spain’s “bad choices” may to have led to the languishing not only of Spain, but also of certain of its former colonies, by transmitting to them a culture of spending rather than investment.

How the IT revolution leads to central bank policy errors

The Industrial Revolution reorganized the economy to replace labor with capital and/or “land” (resources). Progress was easy to measure. In contrast, the Information Revolution reduces the need for capital and resources, through much more efficient allocation. This is hard to measure, leading to policy errors.

Industrial progress was easily measurable by GDP and productivity. Before 1970, a policymaker could be confident that producing more stuff (more capex, more resource use) with fewer people (less labor) would improve quality of life. Therefore, rising GDP and rising productivity were good measures of progress.

That has changed. Free computing and communications instead let you reorganize to increase quality of life while reducing capital, land and labor, all at once, by using those inputs much more efficiently. We can do more with less. This leads to a measurement problem: lower GDP leads to higher quality of life.

What happens when I save money buying used on eBay? My quality of life goes up, because I spent less than buying new. Yet GDP goes down, because fewer new goods need to be produced. Information has replaced industrial production. A macroeconomist, using traditional measures, would wrongly conclude the economy is getting worse, when in fact it’s getting better.

Many of the innovations of the past twenty years look similar:

  • Fix things easily with online instructions like iFixit, so new items need not be built
  • Rent cars, houses, workspaces, so fewer of these need be built.
  • Phone-controlled self-driving cars empower car sharing, so you needn’t own a car

Of course, we can only participate in this increased efficiency if we have skills: reading, computer use, critical thinking. Demand for skills goes up. So we get skilled labor shortages, and unskilled unemployment, at the same time.

What will the traditional Fed chief do when presented with these conditions: rising unskilled unemployment, stagnant GDP, stagnant productivity? Why, they’ll cut interest rates, every time. They are trying to promote capex, to make GDP go up again.

This is a policy error. It falsely presumes that if GDP is stagnant, then quality of life must be stagnant. It also falsely assumes that stagnant GDP means capital is too scarce, when in fact, post IT revolution, the opposite is true. Artificially cheap money actually delays the natural free-market process of using information to replace capital, by making capex artificially more competitive with information.

The real scarce resource in the information-driven economy is not capital, but skills. The policy response to unskilled unemployment is to turn the unskilled into the skilled. I.e. education. Really nothing else will work.