Posted by: Dirk | June 15, 2009

The big problem of small change

James Surowiecki at the New Yorker writes about the shortage of coins in Buenos Aires. He sees psychology at work:

… the anxiety that others might be hoarding coins and melting them down seems to have been enough to start a panic. Hoarding causes shortages, but shortages also promote more hoarding.

Here you can clearly see whom people trust. Apparently, in Argentina people do not trust banks. The history of Argentina is full of stories with the government laying their hands on the people’s money – like last year (in Spanish). Therefore, people seem to prefer cash. While this does not help against inflation, at least it solves the larger problem of seeing your money taken away from you directly. Surowiecki points out that in the US, people do trust the government and that the US economy is awash with cash. That, by the way, is why economists should be very careful when dealing with different countries. What works in one country might not work – or even be damaging – in another. Especially in times of crisis there should be great care with regard to details. This is especially relevant in the euro zone, where a one-size-fits-all monetary policy has to work, somehow.

To be more clear: if people trust the government, that is good. Investing the money in government bonds is better than hoarding. If people trust the private sector, let them invest in corporate stocks and bonds. That is also better than hoarding. Whether investing in government bonds or in corporate bonds and stocks is better we don’t have to care about right now. Credit flows are at the heart of economic activity in our economies. The priority is to stop hoarding, keep up the flow of credit and avoid a collapse of economic activity.

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