Inflation watch...

Who issues currency? Well, of course, governments and central banks do. But if you think about it, up to a point, airlines do, too. The miles you accumulate, what are they worth? You can redeem them for a plethora of goods, from flights and upgrades to hotel stays and donations to charity. You can even pay your (flight) taxes with them. Given that more and more economists are starting to think that perhaps, with inflation above the ECB target, we should worry about price pressure, it is interesting to see that Lufthansa has just (effective January 2011) decided to devalue its own currency. While some award requirements stay the same, others are going up by a whopping 17%. I am sure they will say that they haven't adjusted them for years. Well, since the price of their flights changes in terms of "real" money, it is not clear to me that this is much of an argument -- the value of the miles fluctuates with the value of the normal tickets, so there is no reason why they should change at all.

So here is your lesson - miles are really just like fiat money. If Lufthansa (or any other airline) decides that tomorrow, your miles are worth 90% less, there is nothing you can do about it. And if you look at the charts in Reinhart and Rogoff's book on average inflation since 1500, you see very clearly that the overall pace of inflation has accelerated hugely since the introduction of pure fiat money in the 1970s... So if miles are a bit like fiat money, what is the limit of the analogy? Getting and spending are oddly tied up with airmiles, in a way that is not the case with normal money. The only way you can accumulate enough miles for a nice award is to fly so much that you don't want to see another plane for a very long time [yes, I just came back from the Boston area, where, inter alia, I gave a couple of talks about the M.Sc. programs at Barcelona GSE /UPF].

Beware of the people who cite you...

for the wrong reasons. Over at the Daily Telegraph, Ambrose Evans-Pritchard had lunch with Carmen Reinhart, who (together with Ken Rogoff) wrote a well-timed, erudite and enormously important book on financial crises: This Time Is Different. Evans-Pritchard cites my work with Mauricio Drelichman on the debts and defaults of Philip II. He argues that Greece is a bit like Habsburg Spain -- and that default is inevitable. I actually agree with the conclusion, but I cannot agree with his characterization of why bankers lent to Castilian Crown. Mauricio and I basically say -- the defaults were anticipated; bankers made money, on average; and a default was simply a bad outcome that everyone anticipated could happen. Much like in the case of insurance, the insurer sometimes has to pay out. In good times, they collected a lot of money upfront. It all evens out.

Somewhat oddly, Evans-Pritchard drags out the old chestnut how Philip II's defaults ruined his bankers, including the Fuggers. This is what Fernand Braudel famously claimed, but we find the exact opposite -- the same banking familes who lent to Charles V also lent to Philip, and the ones affected by the early bankrutpcies (in the 1550s) are still there in the 1590s, doing a healthy business, including the Fuggers. Even a default needn't be a calamity, if you play it right.

The implications for today? I think a Uruguayan solution (ie a healthy haircut for the bondholders) would make a lot of sense. It won't be fun for the investors, but we are creating a world of monstrous moral hazard if we bail out Greece and, in turn, the French and German banks who bet that the taxpayer will always help. Will this create another Lehman-style meltdown? I don't think so. Financing costs on sovereign debt are going to go up anyway, by a bit, in the next few years; many people are worried about the overall level of debt as it is. A Greek default won't change a thing. A lot of people received higher interest on their Greek bonds (unless they bought in the last 2 years); the higher return goes with higher risk, which should materialize in their portfolios roundabout now.