Finance

Don’t Worry, I’m An Economist!

Or to anyone else for example. Frequently in the past months I came across the theory that Greece should follow the Argentine 2001 example and devalue its currency. This might imply departing the euro and returning to Drachma, accompanied by a series of bank or investment company runs and capital controls to prevent capital airline flight. But, crucially, the currency devaluation would result in a boom in Greek exports and sustain an investment-led growth. Earlier in November I covered this fallacy in a text on currency devaluation, claiming that no devaluation shall help the Greek economy, as it gained’t address the structural problems this national country is facing.

However, they (and lots of others stressing the advantages of devaluation) have a tendency to overstate what really occurred with the depreciation of the peso in Argentina and the real ramifications of the Argentine Corralito. For individuals who don’t know, the Corralito was the name for some actions initiated in Argentina in 2001 to prevent capital airline flight and bank works. It allowed for small amounts of cash to be withdrawn on a every week basis, but only in pesos (all money denominated currency could only be withdrawn if changed into pesos). 25. Obviously this helped debtors but at the trouble of savers, private taxpayers and companies.

It made an enormous negative effect on the nation’s wealth. Luckily the previous Governors of the Bank of Mexico and Bank or investment company of Argentina, Mario Blejer and Guillermo Ortiz, acknowledged the devaluation risk and called for Greece in which to stay the euro. What Argentina needed then and what Greece needs now could be an effective institutional reform based on, above all, attaining political stability. I’ve made this case repeatedly in some texts, including in the VoxEU, Institute of Economic Affairs, and my very own blog.

This will be excruciatingly hard to do, but in the full case of Greece there are no easy short-term answers – only long term ones. Besides, concentrating on depreciation to reduce real wages and stimulate exports is a short-term measure that is only going to hide the need for institutional reform in Greece, just as it hid the necessity for institutional reform in Argentina.

And, last time I examined, the Argentines are suffering still. So no, Argentine depreciation is no full research study for Greece or for anybody for example. Finally, back in 2004, The Economist did an analysis of Argentina’s recovery and what steps are needed further to continue on the positive momentum created. Note: This post was also released at the Institute of Economic Affairs blog, on 18th June 2012. For any my other IEA articles, see here.

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This form of leverage is “safer” as no margin phone calls are involved. To play it cautious, I have borrowed quantities that I could immediately afford to pay back. For those who are unfamiliar, balance transfer is a type of credit facility offered by credit card companies to help indebted individuals to clear their debt.

The general idea is to borrow at 0% interest for confirmed period of time (e.g. 6 months, year 1, etc) to pay back your other debt. There is an administrative charge to borrow at 0% interest which has to be paid upfront. Instead of borrowing using balance transfer to pay down bills, The proceeds were utilized by me to purchase shares.

As there is an administrative charge, the shares to be purchased must yield greater than the administrative charge for this to make sense. Obviously, using the total amount transfer method for REITs will be more appealing as the spread between REIT produces and the administrative charge is much wider. In addition, REITs pay out their distributions on a quarterly basis.

This will help an individual to pay down the total amount transfer personal debt faster in comparison to non-REITs which spend semi-annually. This technique can be repeated to increase the process of accumulating resources. Second, the user would have normally missed out on a few distributions if she or he had to save lots of up for a couple more months to purchase the REIT. The successful use of balance transfer to buy stocks is underpinned by two critical assumptions.