Friday Links and Thoughts

While volatility might be good for antifragility, the presence of volatility hardly means systems are any more advanced. An old trade paper looks at how complexity can be a source of comparative advantage between nations. Because of better institutions in more developed countries, they are able to produce goods of higher complexity at a comparative advantage.  This then explains why less developed countries tend to produce "commodities" that have higher international volatility.

Another trade paper on financial flows and crises.  The abstract is pretty interesting stuff:

In recent years a number of emerging markets experienced rapid expansions in domestic credit. Though …nancial deepening is greatly beneficial to economic growth, it is feared that credit booms increase the likelihood of banking crises. This paper establishes that credit booms are indeed associated with episodes of banking system distress, and that the e¤ect is highly nonlinear in both credit growth itself and the in the impact of other variables during credit booms. We find that larger and more prolonged booms and those coinciding with higher in‡ation and, to a lesser extent, low economic growth are more likely to end in crisis. By contrast, external factors such as real exchange overvaluation or the current account do not seem to consistently affect the crisis probability. Better banking supervision and greater trade openess seem to reduce the crisis probability. 

What I find interesting is that it states exchange rate overvaluation shouldn't affect the probability of a crisis. However, with the Greek situation, I wonder if exchange rate overvaluation would have any effect on the magnitude of the crisis.  Given that overvaluation makes equilibriating trade more difficult, it should theoretically have an effect.

Why can't we just let the power of comparative advantage do its work in solar panel markets?  Of all the things we could be throwing tariffs onto, why solar panels?  Do they produce some externality in another country that we need to be accounting for?  Are we taxing our domestic firms in some way that the tariff would need to balance?  It seems like the primary effect of the tariff would to be slow down the integration of solar panels into the United States.  Maybe instead of protecting our solar panel industry we could start to work harder on a smart grid or other higher value-added products.

More work on globalization's second rebundling as applied to foreign direct investment.  I think it's interesting to think of trade as a combination of locally sourced products and locally consumed products.  The mixes between these two regimes then creates the overall trends of trade, with the wheel-spoke systems characteristic of the second rebundling.

European financial markets are freezing up.  Repo curves are getting inverted; investor uncertainty is shooting through the roof.

Yay, capital injections for Bankia!  While capital injection is the right move, the fact that it's needed is terrifying.  However, spreads on Spanish debt is shooting up through the roof; if Portugal's story was any guide, this does not bode well for the Spanish economy. Eurozone contagion might just spread even if Greece stays with the Euro.

China, why more stimulus? China is pouring more money into large investment projects even though the current investments have a severely negative rate of return. 70 more airports? Even more housing? More railroads? China may not necessarily be overinvested, but the rate at which they're trying to "rebalance" to higher consumption is going in the wrong direction. Pouring good money after bad is not a long term solution to the crisis. The only hope is that the stimulus can tide us over until regional imbalances can be addressed. However, with the increasingly higher levels of credit from the central government, the fragility and the large negative consequences it can engender is terrifying.