Co-founder of Zurcoin.
One of the more remotely studied areas of economics is in the field of x-efficiency. X-Efficiency is the efficiency of operations of monopolies that is usually lost as a result of their incumbent status.
In digital currency markets, I recently observed how a form of allocative efficiency reduction we shall call z-efficiency can be observed and in fact is a creeping problem in today’s markets already.
Z-efficiency as I define it more broadly here in this post is the innovation efficiency of leading currency trading pairs that is usually lost as a result of their being ascribed an incumbent status. With the theory of z-efficiency I postulate that just as for production and profitability efficiency reductions in the case of monopolies in a given sector, so in currencies there is a loss in innovation efficiency in the underlying economy that occurs with respect to the national growth once a currency becomes a major trading pair.
In classical economics, x-inefficiency is the difference of production (quantity) output that is lost as a result of a market of imperfect competition arising due to a net reduction in cost-maximisation. Consequently, y-inefficiency is the resultant y-curvature which leads to a reduced output as bottom-line margins begin to disappear as a result of the x-inefficiency.
I contend that in sovereign economies, that where product and cost are the same source of manufacture (money) the monopolies — in this case, the central banks — cheat, and begin to manufacture their own money / credit. As a result, a greater supply of currency exists. Due to this, currencies become base pairs for pricing world goods and services. As a result of the erosion of affordable sustainability, growth is compromised leading to z-inefficiency, or innovation / growth inefficiency.
There are two types of z-inefficiency:
1) Higher cost => lower allocative output
2) Higher quantity output => lower profitability (-z)
In the case of Z(1), innovation is made practically impossible, as more money must be invested in R&D expenditure that has overall less growth impact than the year before.
In the case of Z(2) higher amounts of growth lead to rising costs which forces a country to print a surplus of broad cash which leads to Z(1). Therefore, unlike x- and y-inefficiencies, z-efficiencies are perpetual closed-loop inefficiencies, meaning that they perpetually trap an economy within a sub-par rate of both production and profit efficiency so that such economies are bound towards total disruption.
The reason that this z-inefficiency occurs is predominantly (though not necessarily exclusively) because of the establishment of the domestic currency as a base trading pair (meaning that it is an international reference point for overall purchases of internationally in-demand goods and services).
The wider utility incurred in establishing a currency as a base pricing mechanism is what gives rise to Z(2) which then causes systemic growth erosion (Z1).
This dual-inefficiency can also be understood to be a bipolar market equilibrium. In classic supply-demand economies both supply and demand meet at a point of natural equilibrium around which production and profit are normally most presently observed leading to reductions in xy-inefficiencies.
In a monetary economy where substantial z-efficiency is present however, there is constant growth in supply for demand and demand for supply, resulting in a bipolarity wherein there is substantial capital asset price appreciation (with excessive demand of assets than is supplied) at the same time as stagnating wage growth (with excessive supply of labour for utility).
I contend that z-inefficiency is a fundamental inefficiency that cannot be remedied without permanent alternation to the fiscal monetary supply and utility that will either harm costs or supply in the short-term.
Z-Inefficiencies are easiest to see in currencies with major base pairs such as Euro and USD versus ones with large domestic economies (i.e. high utility) but without base pairing.
One measurement of innovation is R&D Spend / Revenue Growth. We can perform such an equation just as easily for countries as we can for companies using GDP. This chart maps growth effectiveness of R&D spending on different region’s GDP. Z-inefficiencies are clearly represented here. In the chart below it is clear how the European Monetary system is using the strategy of acquiring lower cost of capital countries such as those listed to increase overall growth versus expenditure (z-Inefficiency type 1).
Meanwhile, the preponderance of the US dollar globally in terms of being pivotal to the pricing of goods such as oil and gold is hampering overall profitability (z-inefficiency type 2).
Therefore, Eurozone countries are in effect operating unsustainable strategies with respect to growth acquisition while the United States’ apparent recent growth — although far behind China’s on a dollar-for-dollar return quotient — will soon force it into similar strategies to Eurozone ones or to breaking up the dollar and applying it regionally throughout the United States.
There is simply no possibility that the US dollar has to compete with the countries that have elected to remain non-base pair currencies for global pricing of goods and services: cost of capital is too high, production too inefficient and profitability is scarcer every year.
Further, the more that R&D spend is increased the more the increase is offset as a competitive advantage for the non-base pair countries (some evidence for this exists with Thailand’s recent growth-spend for example). The reason for this is that as costs grow increasingly unaffordable those with preferential cost reap the benefit of consumers travelling overseas for certain benefits (e.g. healthcare).
In another study I undertook to measure the z-efficiency of various global currencies, the bottom-most pairs were the Japanese yen (itself via carry-trade a significant base pair), the United States dollar and the Euro. At the top of the list sat Thailand, Turkey and China. The evidence however you slice it could not be clearer: the more widespread the currency in circulation, and the greater the utility, the lower the level of comparative innovation and the higher the risk of permanently stunted growth and backwardised development.
What other ways can we measure innovation? Well, other ways to measure innovation than efficiency are by its overall effectiveness. Effective innovation growth will show an increase in overall growth per resources.
What is interesting here is the Z-Efficiency loss that America incurs over China is significantly more pronounced, while it is clear that Z-Efficiency 1 is present in the case of Europe since the growth corresponds immediately and startlingly with the acquisition of new resources.
Innovation in the richer European countries used to be highly effective prior to the introduction of the Euro whereas almost all US innovation has been much flatter than the country has led the world to believe is the case. In fact, in the case of Europe, almost as soon as the Euro was introduced it became extremely ineffective innovation-wise, so much so that it is negative in effectiveness in the present day.
This is most obviously displayed by taking out the acquisition Euro-countries:
We can see clearly the impact of Z-Efficiency in the Chinese economy here; where domestic growth began to overtake the USA growth on a per resources basis in 2012, three years later it had become altogether more effective too (chart 1). Thus, Z-Efficiency is about maximum utilisation of resources in the first instance for the purpose of value creation, followed by a harnessing of z-inefficient economic resources of other competing nations that become part of a z-efficient nation’s z-efficiency.
This is very much in the same way that allocative x-efficiencies are divided among newly privatised/fragmented industry segments where perfect competition is suddenly introduced. In other words, z-efficiency is a form of competitive positioning that costs the z-inefficient nations the most of all and allocates such costs to the growth of the z-efficient ones.
Recall that the difference between z-efficiencies and xy efficiencies is that once they are lost, they are almost impossible to regain again, as z-inefficient economies keep giving up growth to z-efficient ones due to the impact of globalisation. The reason that globalisation has been so hard for America and Europe then, and so prosperous for China, is simply that the latter economy has no widespread currency base fragmenting its competitive innovation positioning, while the z-inefficient economies still have large consumer basis with huge demand and consumption quotas.
This is in a way the perfect storm for economies that are seeking to introduce new innovations. A similar thing happened in the early 2000s with the introduction of American technology to the Chinese markets where there was z-inefficient innovation growth at the time; the wide base of consumers simply lapped it up. Between 2001–2005 however this z-efficiency was eroded as a result of some exogenous shock to the US dollar.
The only logical conclusion given the socio-political framework at the time is that a sharp rise in credit, effectively diluting z-efficiency per resource combined with the widening use of the US dollar in invaded Middle Eastern economies and China’s tight regulation of its own currency meant that this z-efficiency 2 quickly began to take root in the US economy.
The result of z-inefficiency is a systemic reduction in innovation and value erosion of the domestic economy to such an extent that war or dismantlement of the financial system of affected countries is the only possible solution. The result is to combine the side-effects of x- and y-inefficiency and compound them whereupon substantial systemic value erosion occurs on a continual basis that is irreversible without dismantlement.
As unfortunate as it may appear that western European countries and North America will never be able to celebrate economic victory united, the longer it is left, the graver the consequences socially, financially and ultimately of course, personally will get for every domestic citizen of the countries affected.
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