Last night I had mentioned that I found an article about the new South American union, UNASUR that was formed. I also mentioned how no one had talked about it (it's off front page reddit, kottke, and there's no mention on the economic blogs I frequent - Marginal Revolution and economic woman).
Now, I will admit, I don't have tons of formal training in Economics. Yet. But there are certain things that make me question the theory and the models. Take something like a common currency. It doesn't even need to be the Euro. Let's use the Canadian Dollar.
Canada is a big country. Not counting the territories, whose economies seem to float along no matter what, there is a large difference in the make up of each provincial economy. You hear it all the time. Ontario and Quebec have tons of manufacturing. There's tons of commodities in the country west of Manitoba. Newfoundland has Hibernia (and nothing else). The Maritimes have, well, I don't know what they have. Pretty schools that cost a lot of money. But I digress.
Recently, there's been a lot of talk about the Canadian Dollar. High commodity prices out west are pushing and keeping the Loonie up. The whole concept of this was finally explained to me in a lovely conversation with my macroeconomics professor last night, in which he told me that growth in real money supply is now linked to total output (GDP) instead of just the growth in one type of metal (Gold, Silver, etc). High output of commodities, with high prices due to increased demanding in large, developing countries like China and India, mean that the money supply growth rate has to roughly match the price and output of all additional final good (which we're seeing shoot way up due to the increased demand).
This has been good, and bad. I can't speak for Alberta, but Ontario bitches and complains about loss in productivity as the higher dollar makes having a car industry in southern Ontario make less sense (higher relative labour costs as the Loonie gains value against the Greenback), especially with long border waits (apparently the idea of using more freight trains is too crazy). On the other hand, the strong Loonie has countered increased food prices so that we don't notice it as much.
So, if you were the kind of economist who endorsed active intervention to level out the depth of a recession or boom, you would be inclined to act to help. Unfortunately, in a case like this, you can't. Canada is too big a country. You can't raise the interest rate to counter inflation in Alberta without screwing up the rest of the country. There was a long winded explanation for this that went something like this: I can't remember the intuition for right now. In this case, I can see a common currency causing problems. A while back The Economist was suggesting that Italy might be forced out of the Euro.
On the other hand, if you were the kind of economist who said the central bank shouldn't interfere with the markets, then I can see the appeal of a common currency. Unfortunately, at this point, I don't trust the real world application of a lot of the models (and apparently neither do a lot of other economists, I just need to find that article again) because the models are all set in the long-run. It's nice to know that in some point in the future, things will work themselves out. That doesn't help me now.
