North And South Forest | Founders' Review Editorial

This is the tale of two countries, North and South Forest.

There is not much of a difference, both have a population of about a hundred thousand people.

The South has villages similar to each other. Each village has two gas stations on average. They have a few groceries, dining places and general stores.

The North is different. There is a small capital and a big city with a few steel mills. There are also some villages. The government limits movement from villages to cities to reduce crowding and crime rate.

There was also a civil war thirty years ago in the North. Some families still do not talk to each other.

Education is restrictive, there is an influence of family history and ethnic background on college admission decisions. There is some corruption.

You plan to invest in a new oil refinery. If you invest in the South, you can choose among many villages. There is not much risk of the decision. The project can be carried out easily. You will find enough employees.

If you choose the North, there is a risk of vandalism or sabotage due to the occasional ethnic clashes. Stress reduces workforce productivity. You have to negotiate with the government directly. If the government is not reelected your investment is at risk. You need to carefully select employees, not to discriminate against any ethnic groups.

The population is more diverse financially in the North. If you need to hire, the wages vary a lot. If you sell a mortgage, you may not know if it will be paid back.

Good infrastructure with low rates are typical in the South. It is easy to handle amortization. This reduces maintenance in the South. Land income and value becomes higher.

Your financier calculates with a higher rate as a result, if you invest in the North. Higher nominal rates bind with higher inflation there. People need to pay more for infrastructure. Defaults are more prevalent. Inflation also fluctuates. Their currency devalues faster compared to the South as a result. The central bank tends to increase real interest rates above price increases, to push down the occasional spikes in inflation.

The South becomes more efficient with lower prices and bigger choice. The North will initiate trade talks and bilateral agreements to increase tariffs making products more expensive and choice smaller. The extra bureaucracy and clearance requirements increase costs even further.

The North increases interest rates making the lives of some households worse, some households better. This makes prices, rates and risks even bigger.

Interest rates are like antidepressants. They may increase overall well-being, but they cannot replace the individual therapy.

Nationalism, community politics, wars, disorder, distorted education all have an impact on inflation and welfare for a long time.

The difference in interest rates and the resulting exchange rates create an opportunity for arbitrage. The new group of traders build up on the knowledge of the differences, and the gap starts to fade. Elections start showing results in the North close to 50%-50%. The communities do not care about emotion fueled community politics anymore. They want programs.

The two forests eventually agree. They form a union with a free trade agreement, the South pays subsidies from the extra tax revenues of the excess exports.

These subsidies smoothen risks. Inflation will become low, and rates eventually start to drop.

The two forests are of course just imaginary. The thinking is fun. It might be a good candidate for a smartphone game.