Sunday, July 05, 2015

The financial market as a magic carpet

(This is a "reaction to Greek no vote" blog.)

A financial market is like a magic carpet.
A financial market is like a magic carpet because it is sustained by the belief of the participants.
When these beliefs disappear, the market fails, and falls just like a magic carpet that has lost its magic.

You would think that most people would be very careful to keep "their" magic carpet flying.
Yet many people do not understand that their pension or salary are provided by the magic carpet.

The Euro is a big magic carpet. Yet some governments have been spending too much. In effect they have been removing some of the magic from the flying carpet. This makes the countries that are careful with their spending unhappy, as they know that the carpet will fall if the magic disappears. So although the Greeks are in a terrible situation (and share the blame with others in getting there), I would argue that part of Europe is seriously tempted to eject them from the Euro, if only to remind others that they better shape up, or else suffer a similar consequence.