“Why can’t the government just print more money?” – NOT such a silly question!
Sunday, 29 August 2010
Want to know why printing money in not the answer to our problems? Inflate your knowledge with this link...
“Why can’t the government just print more money?” – NOT such a silly question!
China's now infamous traffic jam---and why more will happen!!
Graph shows the growth in the number of cars (BLUE line) relative to the road infrastructure to handle that growth (RED line)...The math does not work...
A Lie: US Manufacturing is in decline!! Why are we constantly told this? Let the truth set you free...
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| Business Insider |
Please note that this decline has occured in good times and bad (the bad are recessions marked by the gray bars). This second graph below shows a more recent change in manufacturing output relative to jobs in manufacturing:
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| Carpe Diem |
What is going on? Numerically we are absolutely producing more "stuff" (look at the BLUE line) BUT we are doing it with fewer workers (RED line). How can that be? Are workers more efficient? Do they have access to,and employ more technology and labor saving devices/techniques than workers in the past? The next graph seems to bear this out:
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| Cafe Hayek |
Has there been a silent (silent or people not paying attention) revolution in manufacturing, and technology has made many workers obsolete? It could be said, in terms of manufacturing jobs, the US is in decline, BUT in overall output of goods we are at historical highs, so US manufacturing is VERY healthy, right? Can't have it both ways. You make the call...What do you think??
Monday, 23 August 2010
The Breakfast Club just got more expensive---That will not go over-easy with customers.
From The Economist: The breakfast index: The cost of breakfast rises
"SEVERE drought and wildfires in Russia, the world’s fourth largest wheat producer, have destroyed a fifth of the country’s crop and sent prices soaring. Since the end of June wheat prices have more than doubled. On Wednesday August 4th, the UN’s Food and Agriculture Organization cut its forecast for 2010 global wheat production by 5m tonnes, to 651m tonnes. Kazakhstan and Ukraine, both big wheat producers, have also been hit with dry weather. In Canada the problem is the reverse: unusually wet weather has prevented seeding and destroyed crops. But wheat is not alone. The price of orange juice has also risen recently, probably thanks to bets placed on the likelihood of tropical storms. Coffee prices, which hit a 13-year high, are a result of poor harvests. Taken together, the raw ingredients for breakfast in much of the rich world have increased in price by 25% since the beginning of June."
Ok, I hit a low point in finding examples of Complements for Microeconomics... :)
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| SOURCE |
It's official: China is second largest economy in the world...however Per Capita GDP is about equal to El Salvador...So is China rich or not???
The graphs below represent two perspectives on the recent news that China, in terms of GDP, has become the 2nd largest economy in the world (surpassing Japan, second to the US). It is impressive considering it made no appreciable increase until 1990-1995.
The first graph represents a dollar value of national output ("output method"). It shows the move into second place.
This second graph shows GDP per capita. Per capita GDP is found by taking the GDP number for any time period above and dividing it by the population of a country. By this measure, we get a different perspective on GDP. Per capita GDP represents in dollar terms how much of the production/national income is attributed to each person. By this measure, we can see China is WAY behind the US and Japan (many relatively poor countries as well). Obviously, China's population is very large, so this low per capita figure is somewhat a distortion. GDP per capita does not tell us anything about how this income is spead among members of the country. The income gains have not been uniform across the Chinese population, BUT the gains are significant and concentrated in an extraordinary number of people who are starting to excercise consumption power.
From Robert Reich on this subject:
""...Don’t be misled by these numbers. The important thing isn’t China’s ranking, nor the total value of China’s production, nor even the extraordinary speed by which China has reached #2.
What’s most important is the share China’s production received and consumed by the Chinese themselves. The problem is it continues to drop.
China has dozens of billionaires but the vast majority of the Chinese are still extremely poor. The typical Chinese lives off the equivalent of about $3,600 a year. That puts him behind workers in 126 other countries. (The typical Japanese earns the equivalent of about $39,000; the typical American, $46,400.)...""
Who creates the MOST jobs by far in the US? Must see these charts!!!
""...Kauffman Foundation has done extensive research on job creation. Kauffman Senior Fellow Tim Kane analyzed a new data set from the U.S. government, called Business Dynamics Statistics, which provides details about the age and employment of businesses started in the U.S. since 1977. What this showed was that startups aren’t just an important contributor to job growth: they’re the only thing. Without startups, there would be no net job growth in the U.S. economy. From 1977 to 2005, existing companies were net job destroyers, losing 1 million net jobs per year. In contrast, new businesses in their first year added an average of 3 million jobs annually.
When analyzed by company age, the data are even more startling. Gross job creation at startups averaged more than 3 million jobs per year during 1992–2005, four times as high as any other yearly age group. Existing firms in all year groups have gross job losses that are larger than gross job gains...""
Happy Birthday Social Security!! 75 years young. I hope you have many more????
1. 6 out of every 10 non-retirees in the United States believe that the Social Security system will not be able to pay them benefits when they stop working.
2. 35% of Americans over the age of 65 rely almost entirely on Social Security payments alone.
3. 56 percent of current retirees believe that the U.S. government will eventually cut their Social Security benefits.
4. There will be two workers for each retiree in 2025
5. Social Security paid out more in benefits than it received in payroll taxes this year
6. Approximately 57 percent of Obama's budget consists of direct payments to individual Americans
7. America's 100 largest corporate pension plans were underfunded by $217 billion at the end of 2008.
8. Approximately half of all workers in the United States have less than $2000 saved up for retirement.
9. 36 percent of Americans say that they don't contribute anything at all to retirement savings.
10. The number of pensions at risk inside failing companies more than tripled during the recession.
11. 24% of U.S. workers admit that they have postponed their planned retirement age at least once during the past year.
12. California has $22,000 per working adult in unfunded pension liabilities
13. California's three biggest pension funds are as much as $500 billion short of meeting future retiree benefit obligations.
14. In New Jersey, the governor has proposed not making the state's entire $3 billion contribution to its pension funds because of the state's $11 billion budget deficit.
15. It has been reported that the $33.7 billion Illinois Teachers Retirement System is 61% underfunded and is on the verge of total collapse
16. The state of Illinois recently raised its retirement age to 67 and capped the salary on which public pensions are figured.
17. The state of Virginia is requiring employees to pay into the state pension fund for the first time ever.
18. In New York City, annual pension contributions have increased sixfold in the past decade alone and are now so large that they would be able to finance entire new police and fire departments.
19. For all states, unfunded pension liabilities equal up to $3.2 trillion
20. Entitlement programs have a $46 trillion shortfall over the next 75 years
21. Debt plus entitlement spending may absorb 92 cents of every dollar of federal revenue by 2019
22. By 2080, debt and entitlement spending will eat up 50 percent of GDP
Mercedes-Benz take-off in China And Germany exits recession--Coincidence? Sales figures enclosed.
Mercedes-Benz sales by markets
July 2010 %Chg from Last July Jan-July %Chg Jan-July
Western Europe 47,100 -2.5 321,900 -0.1
– of which Germany 23,600 -1.8 146,000 -5.7
NAFTA 19,900 +7.4 140,200 +19.0
– of which USA 17,400 +7.0 121,000 +19.5
Asia/Pacific 23,300 +108.6 141,000 +68.3
– of which Japan 1,700 -5.9 16,900 +12.2
– of which China 14,600 +204.7 75,100 +132.4
"Sales at Mercedes-Benz continue to improve, rising by 17 percent in July. This marked the ninth month in a row that sales have increased at a double-digit rate. Global deliveries to customers amounted to 97,700 units last month (July 2009: 83,500). As a result, sales now total 654,400 units since the beginning of the year (January-July 2009: 566,600), representing an increase of 16 percent.
Mercedes-Benz made great gains in many automotive markets in July. The brand had its best month ever in China (incl. Hong Kong), where it sold 14,600 passenger vehicles (July 2009: 4,800), an increase of 205 percent compared to the same month last year. As a result, Mercedes-Benz remains the fastest-growing premium brand in China.
Mercedes-Benz achieved its biggest gains last month in the dynamically growing market of South Korea, where 1,300 customers bought a vehicle bearing the Mercedes star. This was five times the number sold in July of last year (plus 446 percent). Within the Asia/Pacific region, sales also rose substantially in Australia (plus 48 percent). Mercedes-Benz in July also achieved its best month ever in Russia (plus 116 percent). Record sales were posted as well in India (plus 142 percent) and Turkey (plus 155 percent)."
Saturday, 14 August 2010
Is your Pet a Need or a Want? Don't ask an economist this question...
Pet survey: Is having one a need or luxury? Weigh in
Do you need or just want your pet? What about Internet connection and an annual family vacation? For many baby boomers, those are all basic needs, not luxuries, according to a new survey.Do you agree that having a pet is a basic need? Vote HERE
Eighty-four % of those surveyed said having an Internet connection is a basic need, and 66 % said shopping for birthdays and special occasions is. Fifty-one % said pet care is a basic need, and 50 % said taking a family vacation once a year is a need, not a luxury, according to a recent survey by MainStay Investments of 1,049 consumers aged 45 to 65. The report also said people would put off retirement and spend less now so they could afford the same lifestyle when they do retire. And as children leave home to start their own lives, pets can take on added importance for empty nesters.
Pet meds and care can be expensive. Veterinarian Patty Khuly says it's not unusual to spend $1,700 a year for quality pet care. There are 10 pet insurance companies selling brands for petowners who are devoted to having the same treatment options -- especially when it comes to cancer -- for their pets as they have for themselves.
All the people who sent in photos for our shelter pets loving life photo album would agree their pets are a basic need.
Getting Product to Market---By all means necessary...
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| Chris Blattman |
BOO!! Here are some Friday the 13th facts and figures...
1. This Friday some people will be so paralyzed with fear they simply won't get out of bed. Others will steadfastly refuse to fly on an airplane, buy a house, or act on a hot stock tip. It's Friday the 13th, and they're freaked out. "It's been estimated that [U.S] $800 or $900 million is lost in business on this day because people will not fly or do business they would normally do," said Donald Dossey, founder of the Stress Management Center and Phobia Institute in Asheville, North Carolina.
2. So how did Friday the 13th become such an unlucky day?
Dossey, also a folklore historian and author of Holiday Folklore, Phobias and Fun, said fear of Friday the 13th is rooted in ancient, separate bad-luck associations with the number 13 and the day Friday. The two unlucky entities ultimately combined to make one super unlucky day.
Dossey traces the fear of 13 to a Norse myth about 12 gods having a dinner party at Valhalla, their heaven. In walked the uninvited 13th guest, the mischievous Loki. Once there, Loki arranged for Hoder, the blind god of darkness, to shoot Balder the Beautiful, the god of joy and gladness, with a mistletoe-tipped arrow.
"Balder died and the whole Earth got dark. The whole Earth mourned. It was a bad, unlucky day," said Dossey. From that moment on, the number 13 has been considered ominous and foreboding.
3. There is also a biblical reference to the unlucky number 13. Judas, the apostle who betrayed Jesus, was the 13th guest to the Last Supper. Meanwhile, in ancient Rome, witches reportedly gathered in groups of 12. The 13th was believed to be the devil.
4. This fear of 13 is strong in today's world. According to Dossey, more than 80 percent of high-rises lack a 13th floor. Many airports skip the 13th gate. Hospitals and hotels regularly have no room number 13.
5. On streets in Florence, Italy, the house between number 12 and 14 is addressed as 12 and a half. In France socialites known as the quatorziens (fourteeners) once made themselves available as 14th guests to keep a dinner party from an unlucky fate. Many triskaidekaphobes, as those who fear the unlucky integer are known, point to the ill-fated mission to the moon, Apollo 13.
Please interpret this graph---Why did Healthcare Costs START to rise dramatically in 1985? Anyone know WHY?
This graph (the gold line specifically) shows the Consumer Price Index for ALL items in the market basket the govt. uses to measure changes in prices/price level in the US. The darker line shows the change in the price of medical care only. There is a direct relationship between the two up to 1985 then there is a rapid separation. Why was this year a watershed moment in the cost of healthcare. I was "only" 25 at time. I know an aging population is a part of it, but it cannot explain all the price change. Any ideas??
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| Source: Economix |
Ever wonder how your favorite company got its name? Find out here...
1. Google
The name started as a joke about the amount of information the search engine could search, or a "Googol" of information. (A googol is the number 1 followed by 100 zeros.) When founders Larry Page and Sergey Brin gave a presentation to an angel investor, they received a check made out to "Google."
2. Hotmail
Sabeer Bhatia and Jack Smith had the idea of checking their email via a web interface, and tried to find a name that ended in "mail." They finally settled on hotmail because it had the letters "html," referencing the HTML programming language used to help create the product.
3. Volkswagen
Volkswagen literally means "people's car." Adolf Hitler initially came up with the idea for "cars for the masses," which would be a state-sponsored "Volkswagen" program. Hitler wanted to create a more affordable car that was able to transport two adults and three children at speeds of 62 mph. He choose the car manufacturer Porsche to carry out the project, and the rest, as they say, is history.
4. Yahoo
The word "yahoo" was coined by Jonathan Swift in the the book Gulliver's Travels. The term represented a repulsive, filthy creatures that resembled humans (think: Neanderthal). Yahoo! founders Jerry Yang and David Filo considered themselves yahoos, and thought the term would be appropriate for their joint venture.
5. Asus
The consumer electronic company is named after Pegasus, the winged horse of Greek mythology. The founders dropped the first three letters for the high position in alphabetical listings. In 1998 Asus created a spinoff company named Pegatron, using the other unused letters of Pegasus.
6. Cisco
Contrary to popular belief and theories, Cisco is simply short for San Francisco. Their logo resembles the suspension cables found on the Golden Gate bridge.
7. Canon
When Canon was founded in 1933 under the name Precision Optical Instruments Laboratory. Two years later they adopted "Canon" after the company's first camera, the Kwanon. Kwanon is the Japanese name of the Buddhist bodhisattva of mercy.
8. Coca-Cola
Coca-Cola's name comes from the the coca leaves and kola nuts used as flavoring in the soft drink. Eventually Coca-Cola creator John S. Pemberton changed the 'K' of kola to 'C' to create a more fluid name.
9. FranklinCovey
The planning product line was named after Benjamin Franklin and Stephen Covey. The company was formed in 1997 from the combining of the two companies FranklinQuest and the Covey Leadership Center.
10. IKEA
IKEA is simply a random collection of letters, based from the first letters of founder Ingvar Kamprad's name in addition to the first letters of the names of the Swedish property and the village in which he grew up: Ingvar Kamprad Elmtaryd Agunnaryd.
11. Lego
Lego is a combination of the Danish phrase "leg godt," which translates to "play well." Initially the company built wooden toys, and later switched to making plastic bricks. Lego also means "I put together" in Latin, but the Lego Group claims this merely coincidence and the origin of the word is strictly Danish.
12. Reebok
Reebok is simply an alternate spelling of "rhebok," an African antelope. The company founders found the word in a South African edition of a dictionary won by the Joe Foster, son of the Reebok founder J.W. Foster.
13. Sharp
The Japanese consumer electronics company is named after its first product, an ever-sharp pencil that was created in 1915.
14. Six Apart
Six Apart's name has one of the most interesting origins. The web company's co-founders Ben and Mena Trott were born six days apart.
15. Skype
The original prototype of the company's flagship product had the name "Sky-Peer-to-Peer," which was shrunk down to Skyper, then finally Skype.
16. Verizon
Verizon is a combination of the words veritas, which is Latin for "truth," and horizon.
"SHOW ME THE MONEY!" The Fiscal Stimulus money, that is...Nice chart showing the dollar amounts
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| Washington Post via ChartPorn Piecing together the stimulus
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My, how prices have changed since 1942---Or have they?? See for yourself...
Item 1942 Price 2010 Price Inflation Adjusted Price
Oranges 1 cent (ea) 75 cents (ea) 13 cents
Grapefruit 5 cents (ea) 25 cents (ea) 67 cents
Apples 25 cents for 4 lbs $4.72 for 4 lbs $3.35
Potatoes 19 cents for 5lbs $2.31 for 5 lbs $2.54
(Note: I adjusted potatoes weight to match 5 lbs and used current russet potato price---not sure of the potato type in 1942)
How to read this:
(1) An orange cost 1 cent in 1942. If the price of oranges only increased as much as inflation increased from then to now, the price of an orange SHOULD be 13 cents BUT it is 75 cents. Orange prices increase significantly more than inflation.
(2) A grapefruit cost 5 cents in 1942. With inflation it should cost 67 cents, BUT it only cost 25 cents! What a deal on Grapefruit!
Using the same methodology, you can see Apples have increased faster than inflation but potatoes a little less than inflation.
This is not a perfect analysis of the changes in prices overtime. There are many variables that could affect prices of particular goods. BUT it is interesting! (C'mon, you gotta admit it...)
I used current pricing data from HERE and use the BLS inflation calculator HERE
Cigarettes and Elasticity---this time "Reservation Price" has a different meaning...
""New York state boosted the cigarette tax to $4.35 a pack from $2.75 on July 1 as one of a series of measures designed to help close a $9.2 billion deficit for fiscal 2011, giving it the highest cigarette tax rate in the country....(Ben's note: Tax increased $1.60)
With the per-pack price rising to a range of $9 to $12, "aghast" smokers flocked to tribal stores, which are tax-free, the black market, and border states with lower cigarette taxes, said the New York Association of Convenience Stores. (Ben's note: I will use $10.50 as the price)
Convenience stores that are located close to reservation competitors sold 45 percent fewer cigarettes; more distant stores experienced drops of 25 percent to 35 percent, the lobbying group said...."Assume the new per pack price of cigarettes is $10.50 (halfway between the $9 to $12 cited in the article). Before the tax the price of a pack was $8.90 ($10.50 minus $1.60 increase in the tax). The percentage change in price is +18% ($10.50 minus $8.90=$1.60 divided by $8.90 times 100= 17.97%). For the good to be price inelastic, the percentage change in quantity demanded would have to be LESS than 18%. The article cites two statistics for change in quantity demanded. One for stores close to reservations/tribal stores (NOT subjected to State Taxes) and one for stores further away from reservations/tribal stores. If you use the numbers quoted for change in quantity demanded and plug them into the formula to determine elasticity you yield a number LARGER than one, indicating the good is PRICE ELASTIC. Remember 18% is in the denominator. What is going on here? What caused the good to magically change from an inelastic good to an elastic one? Was this a bad policy?
It is amazing how many fires are occuring all over the world right now---See for yourself here!
Quite amazing to me...I did not know SO many fires were happening at the same time all over the world...Source: HERE
Thursday, 12 August 2010
If the Capital Stock decreases (and it is), then your future prospects and standard of living do too...How do I know? Why the Production Possibilities
In order to have healthy economic growth in the short run and long run, it is vital that a nation builds upon its Capital Stock. Capital Stock is, well, the Stock of Capital a nation has available to make goods (stuff). It is includes everything from basic tools to heavy machinery; from the quality of its public infrastructure (roads, water, power, schools, etc) to the quality of its private infrastructure, such as commercial buildings, factories, skills of the workforce, etc. This article has a nice graph showing the US is not increasing its capital stock, but is only maintaining and/or replacing its current stock of capital. If fact, we have experienced an overall DECREASE in national capital stock (you can see it on the FAR right side--the line dips below 0).
(From WSJ: Firms Spend More—Carefully )
A basic concept in economics, usually the first model encountered in an introductory class, is the Production Possibilities Frontier (PPF). The PPF gives a graphical representation of how a society is doing in terms of utilizing its productive resources. Societies produce goods that can be put into two specific categories, but the goods with-in those categories are very broad. The two categories are Capital Goods and Consumer Goods. Capital Goods are goods produced that don't give immediate satisfaction (can't eat it, play with it, or be entertained by it--These would be categorized as Consumer Goods.) Among them are the items mentioned in the discussion on Capital Stock in a previous paragraph. Producing and investing in Capital Goods is vital, because it allows a society to ensure future production capacity to satisfy future needs and wants. This is what the PPF looks like in graphical form:""Companies in the U.S. are stepping up purchases of equipment and software at the fastest pace since the late 1990s. But much of the spending is aimed at replacing older equipment after recession-related postponements or to improve efficiency—not to raise production or boost hiring..."""...Companies may keep increasing spending on equipment, computers and software even if they don't add capacity. Nomura Securities economist David Resler calculates that businesses didn't spend enough in 2009 on new equipment to offset the wear and tear on their existing equipment. As a result, the capital stock—the inflation-adjusted value of all business equipment and software in place in the U.S.—dropped 0.9% from 2008—its first decline since World War II...."
Ok, fine, all we have to do is get things moving again and we can put those unemployed resources to work and get BACK to Point "B", right??? Not so fast, considering the state that Capital Stock is in now.
The article says we are in a period of DECREASING (slight, yet decreasing none the less) Capital Stock. Graphically, this is what is happening:
Fewer Capital Goods means less production of other capital goods AND less production of many Consumer Goods (how are they going to be made with a lack of Capital Goods?). A highly undesirable thing may happen---the PPF, or our potential to produce goods now and in the future, is going to diminish. Graphically, it looks like this:
As I say in class ALL THE TIME: If our politicians, business leaders, and other policy makers DO NOT make the correct investment decisions today, then students will have fewer opportunities down the road. Let's get to investin' and-a-shiftin' the PPF to the RIGHT!
How much does your employer pay you? How much does it cost to actually employ you? Two VERY different numbers!!
This opinion piece appeared in the WSJ yesterday. While we can parse the obvious politics in the writing, I think it is instructive to look at the numbers he uses to calculate the cost of hiring an employee. These "costs" , I believe, are objective and the percentages (especially the taxes) cited are correct from what I know about them.
He uses the salary of Sally, an employee of his firm. Her stated yearly salary, or gross pay, is $59,000. He first deducts from her salary the following items BEFORE getting to her net pay, which is what is left over after ALL the deductions are made:
(1) Her portion of Healthcare/Dental Insurance- $2,376These are the costs to the employee, BUT the employer also incurs significant costs OVER AND ABOVE what they actually pay the employee in gross pay. Here are the costs he pays in addition to the salary of $59,000:
(2) The State for Unemployment Insurance---$126
(3) Disability Insurance---$149
(4)Medicare---$856
(5) State Income Tax (Texas does not have this)---$1,893
(6) Social Security- $3,661
(7) Federal Income Tax Withholding (to pay Fed Income tax at the end of the year)---$6,250
Total Deductions---$15,300 (some of that $6,250 in withholding may be refunded to her depending on her eventual Federal tax liability).
(1) The employers portion of Healtcare/Dental---$9,561 (Sally paid $2,376 too)(You will notice some of the amounts that the employer pay and the employee pay are identical, most significantly Social Security and Medicare. The employer "matches" these amount on your behalf. )
(2) Other personal insurance, i.e. employer paid life insurance policy---$153
(3) Federal Unemployment Insurance---$56
(4) Federal Disability Insurance ---$149 (Sally paid this too)
(5) Workers Compensation Fund---$300
(6) State Unemployment Insurance---$505
(7) The Employers portion of Medicare---$856 (Sally paid this too)
(8) The Employers portion of Social Security---$3,661 (Sally paid this too)
Total Cost to Employer to for this salary, over and above $59,000, is ---$15,241. It costs approx $74,000 to employ Sally for $59,000 per year!
I believe this is information is important because most people are not aware of the total costs of hiring an employee. We tend to only acknowledge the wage we are paid. There are many other direct and indirect costs of employing someone that are not even mentioned in the above calculation. As usual, there is more to the story...So, next time you clock into work, thank your owner or manager for your pay!!! Ok, maybe not..
"Quantitative Easing"---Incentives to banks to start lending...My explanation with graphs!
This is a follow up to my last post regarding the Federal Reserves possible use of "quantitative easing" as a way of stimulating the economy by increasing the money supply. In a nutshell, The Fed is going to create an account and deposit money into it. Well, not money as we know it, but electronic credits. However, it amounts to printing money out of thin air (although The Fed does not actually print money...that is another lesson). They are going to use that "money" to buy various financial assets. The term financial asset is rather broad, but in the short term The Fed is going to purchase (1) non-performing assets on banks balance sheets, which a fancy way of saying their bad loans and (2) buying short term US Treasury's, which is a fancy way of saying US government debt. Specifically, I will focus on US Treasuries for the purposes of this lesson.
Lets use an easy example. Assume Congress needs $9,000 to finance some spending they want to do. To get this $9,000 they are going to sell 100 US Treasury Securities with a face value of $100 for $90 each. They sell them for $90 with the promise to pay $100 at some pre-determined time in the future, so the owner of the security will make $10. The supply and demand graph below illustrates this arbitrary equilibrium price I set. Notice the supply curve "S*B/T" is vertical at 100 bonds/treasuries. We will assume this is all there is in the market and no matter what the price, there are no more to be had (keeping it simple).
We know we make $10 from this security, but to get a more accurate measure of our investment we want to convert this into a percent. Calculating this percent, also known as Rate of Return OR Interest Rate, is important because you can use it to compare across investments (compare Treasury returns to stocks, other bonds, commodities, real estate, etc). To calculate our interest rate we take our investment ($90) and divide it INTO our expected gain ($10) then multiple by 100 to put it in percentage terms. We find in this example our interest rate is 11.11%. What a terrific interest rate, yes??
What The Federal Reserve is finding out is that the banks like this too! Banks are borrowing money from the Fed at almost a 0% interest rate (aka "Federal Funds Rate), and instead of lending it out to consumers and businesses, like The Fed desires them to, the banks are putting the money in US Treasuries, or government debt. They are doing this because (1) banks are hesitant to make loans in an uncertain economic climate, (2) in this economic climate earning 2% on an investment GUARANTEED by the US government (borrowing at 0% and putting in Treasuries earning 2% is better than a sharp stick in the eye) is a very safe strategy.
Since being foiled by the dastardly bankers, The Fed is pondering "quantitative easing", which means they are going to intervene in the Treasury market themselves! This is SIGNIFICANT, because it is somewhat a "last straw" measure to get banks lending.
Review the first paragraph of this entry because I want to pick up from there. The Federal Reserve wants to make Treasuries unattractive to banks and to provide them an incentive to loan out money instead of socking it away in Treasuries. The way to do that is for The Fed to BUY Treasury's themselves which will serve to DECREASE the interest rates those Treasuries earn! Say what?
The Fed enters the market as a DEMANDER for US Treasury's. As a new entrant with big bucks, they are going to INCREASE the demand for Treasuries. See the graph below that illustrates this INCREASE in demand.
As happens when the demand for anything goes up relative to the supply, the price will INCREASE. The price of a $100 Treasury increased from $90 to $95. What happens to our rate of return or interest rate? We earn $5 on the Treasury we bought for $95. Using our formula, the new interest rate is 5.26%, considerably less than before! KEY POINT: There is an INVERSE relationship between the price of a Tresury Security (or Bond) and the interest rate it earns. As the price increases the interest rate decreases. The reverse is true also: as the price of Treasury (Bond) decreases, the interest rate increases.
With this lower interest rate, the banks MAY consider other investment strategies, like, oh, I dont know, LENDING money to people to buy houses, cars, big screen TV's or to businesses to replace capital goods, buy new capital goods, expand factory production, or build new facilities?
The bottomline with employing quantitative easing is that lowering the Federal Funds Rate to virtually 0% has not loosened up the credit markets enough to spur sufficient economic activity (buying stuff). If The Fed can make alternative, albeit safe investments, LESS attractive to banks, AND if they can relieve banks of non-performing loans so banks can loan out that money as well, then perhaps we can move forward. It is risky and smacks of a last ditch effort...We will see how it works out!!!
The Federal Reserve meets tomorrow---You may hear a new term "Quantitative Easing"--Learn about it first HERE!!
This definition of Quantitative Easing from Wikipedia:
""The term quantitative easing (QE) describes a form of monetary policy used by central banks to increase the supply of money in an economy when the bank interest rate, discount rate and/or interbank interest rate are either at, or close to, zero.[citation needed] A central bank does this by first crediting its own account with money it has created ex nihilo ("out of nothing").[1] It then purchases financial assets, including government bonds and corporate bonds, from banks and other financial institutions in a process referred to as open market operations. The purchases, by way of account deposits, give banks the excess reserves required for them to create new money by the process of deposit multiplication from increased lending in the fractional reserve banking system. The increase in the money supply thus stimulates the economy. Risks include the policy being more effective than intended, spurring hyperinflation, or the risk of not being effective enough, if banks opt simply to pocket the additional cash in order to increase their capital reserves in a climate of increasing defaults in their present loan portfolio. "Quantitative" refers to the fact that a specific quantity of money is being created; "easing" refers to reducing the pressure on banks.[2] However, another explanation is that the name comes from the Japanese-language expression for "stimulatory monetary policy", which uses the term "easing".[3] Quantitative easing is sometimes colloquially described as "printing money" although in reality the money is simply created by electronically adding a number to an account. Examples of economies where this policy has been used include Japan during the early 2000s, and the United States and United Kingdom during the global financial crisis of 2008–2009....""
How The Average American Uses Energy---Nice graphic!
How The Average American Uses Energy
"Amber Waves of Grain..." Not so much in Russia---What does the price of wheat in Russia have to do with you?
"Russian Prime Minister Vladimir Putin, responding to the country's crippling drought and deadly wildfires, said on Thursday that exports will be banned from Aug. 15 until the end of the year..."Look at what has happened to the price of wheat in the last few months:
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| NY TIMES |
Most people have a "ho-hum" reaction when it comes to commodities like wheat, corn, soy beans, etc. But these are important inputs into so many finished food products. When we have negative supply shocks like the one in Russia it affects the economy at both the macro and micro level.
In the global market for wheat there has been a reduction in supply due to drought AND fires in the highly productive regions of Russia (Ukraine, especially). Now added to the mix is a mandate by the Russian President that wheat is subjected to an export ban. Graphically, the supply curve for wheat is going to shift to the left, indicating a decrease in market supply (at any given price, the quantity supplied is less than what it was before--graph those new points and you get a new supply curve (S1) that lies to the left of the previous one (S*).
As supply curve S1 shifts to the left, notice we MOVE ALONG the existing Demand Curve D*. Demanders are responding to the supply reduction by DECREASING the quantity demanded of wheat as the price of wheat increases, as the Law of Demand would suggest. Think of it this way: as the price goes up then some demanders are simply not going to be part of the market as they were before because they are "not willing and/or able" to purchase the same quantities of wheat at the new higher price P1 (or maybe none at all now). The difference between market quantity from Qe to Q1 illustrates this reduction in BOTH quantity supplied due to weather, fire, government policy and the quantity demanded due to the higer price. Here is an example of the decrease in quantity demanded from the article:
They are not completely out of the market, but the higher price is limiting their ability to purchase the same amount as before, hence the decrease in quantity demanded.""The wheat price spike has forced the U.N. World Food Program, which helps feed more than 90 million people world-wide, to cut back on purchases, according to a spokeswoman""
On a Microeconomics level this is only the begining--how is this going to affect farmers/ranchers, aid organizatioins, food processors, retail and wholesale businesses in terms of the cost of production? On the Macoeconomics level--globalization, government policies that affect world trade, allocation of resources (as planting season approaches, is wheat a better bet than corn, soy beans, cotton, etc)? Is this a start of a broader increase in food prices resulting in harmful inflation? Will the rise in price for this essential input cause food riots in some countries?
Something as simple as wheat can have a large impact on our lives is so many ways...This is why I love economics!! So much to consider and ponder...
Thursday, 5 August 2010
I may live to see this happen...
China has overtaken Japan to become the world's second-largest economy, the fruit of three decades of rapid growth that has lifted hundreds of millions of people out of poverty....Depending on how fast its exchange rate rises, China is on course to overtake the United States and vault into the No.1 spot sometime around 2025, according to projections by the World Bank, Goldman Sachs and others.
Nice Interactive Graphic on the aging population---Too many "olds" not enough "youngs".
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| HT: Chartporn |
With all the infusion of money into the economy, why do we not have Inflation? Hello! It's due to Velocity of Money! Did you not know that??? Nice cha
Bartlett: Hoarding Cash Could Stifle Growth and Halt the Recovery
""The Wall Street Journal reported somewhat breathlessly on June 10 that nonfinancial businesses in the U.S. are sitting on $1.84 trillion in liquid assets, or 12.6 percent of the gross domestic product (GDP). The implication is that this money could immediately be mobilized to invest and create jobs. This isn’t quite so, but excessive cash holdings by households, businesses and banks are symptomatic of a fundamental problem plaguing the economy: the low level of monetary velocity.
The $1.84 trillion figure is a bit misleading because businesses always have a lot of liquid assets. At the end of 2007, before the financial crisis hit, they were sitting on $1.53 trillion in liquid assets, which represented 11.1 percent of all their financial assets. At present, liquid assets represent 12.9 percent of financial assets, roughly comparable to the 12.5 percent share in 2005.
It’s difficult to say what would be a normal percentage for liquid assets, but it’s doubtful that businesses are sitting on much more than $150 billion or so of precautionary liquid assets . If they were to spend these funds on hiring or investment or even dividend payments to shareholders, it would help the economic situation, but not by all that much.
However, to the extent that businesses and households are hoarding cash it reduces the rate of turnover of money in the economy—the number of times dollars are spent in the aggregate—which economists call velocity. In the simplest terms, velocity is the ratio of the money supply to GDP in nominal (money) terms.
For many years, economists treated velocity as if it was a constant like pi (π), the ratio of the diameter of a wheel to its circumference. Throughout the 1960s and 1980s, velocity was fairly stable at around 1.6/1.7. But in the 1990s, it began to rise due to financial innovations, such as debit cards, that allowed people and businesses to use their cash more efficiently. Throughout the 1990s, the velocity ratio was more than two, meaning that if you multiplied the money supply by two, that would approximately equal GDP.
In the 2000s, velocity fell to the 1.8/1.9 range. On the eve of the financial crisis it was about 1.93, as shown in the table. But in mid-2007, it began to fall, hitting a low of 1.68 in the middle of last year, a level not seen since the 1980s
A decline in velocity has the same economic effect as a decline in the money supply, which creates deflation—falling prices. This is what happened during the Great Depression. At that time the money supply fell because there was no deposit insurance, so when banks failed, their deposits literally disappeared. (Most of the money supply is in the form of checking accounts or demand deposits that exist only in an accounting sense.) Between 1929 and 1933, the money supply shrank by 30 percent. Since the price level is a function of the quantity of money times the goods and services available for sale, this caused the Consumer Price Index to fall by about 25 percent.""
Does an increase in the Minimum Wage hurt teen employment? Textbook says it does, but maybe Grandpa has a different opinion.
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Statistically, there are more 65+ people in the job market at the lower ends of the pay scale then teenagers (a relatively new development, demographically speaking. So, perhaps it is not as cut and dry to say that the increase in the minimum wage has reduced teen employment. Perhaps "the olds" are being employed at a higher rate than teenagers. I don't know the answer, I just pose the question that the WSJ does not address I suppose one would have to look at the hiring rate of the 65+ group and see if there is a connection. Might be a good research paper for someone...
Letting the Bush Tax Cuts Expire--Primer on Marginal Tax Rates...It is FUN!...Really, it is!!
Marginal is a fancy word economists use to mean "each additional". In the US we have what is termed a progressive tax structure, which means the more you earn beyond certain levels of income, a higher tax rate is levied on each of those additional dollars. Currently we have 6 levels of income that when each level is exceeded, the tax rate applied on each additional dollar is higher than the tax rate on the previous level of income (confusing, I know...example to follow).
First, look at the graph below. The current marginal tax rates are in the first column. The benchmark level of income that is subjected to each marginal tax rate is in the third column. The fourth column are the previous (pre-2001) marginal tax rates and the ones that we will return to if the tax cuts are allowed to expire. These columns are the ones we want to examine.
Look at the first line in our graph. Right now, if your TAXABLE INCOME, is between $1.00 and $16,750 you pay 10% of that income in Federal Income Taxes. Assume you take all your deductions and credits you are entitled to take and you are left with a taxable income of exactly $16,750. Currently, when you do your tax return you would owe 10% of that, or $1,675. If the tax cuts expire, you would pay 15%, or $2,512.50. One caveat here: Congress has the discretion (important word!) to keep any of the current tax rates or change any one of them. It is NOT likely they would make lower income people pay this much more, percentage-wise, but for illustration purposes I will assume they do.
Lets assume instead of $16,750 your taxable income was $17,750. Under the current tax rates you would pay 10% of the first $16,750 or $1,675 PLUS 15% of the $1,000 over $16,750, which is $150. Per our definition, each additional dollar over $16,50 is taxed at a higher tax rate (15%). So, now your total tax would be $1,675 + $150 = $1,825. Using the numbers from the previous paragraph, you can easily calculate what the total tax bill would be on $17,750 if the tax cuts were allowed to expire. Note: the 15% marginal tax rate is the only one that stays the same. I forget the main idea behind this, but I have to assume that this level of income represented middle class America back then.
Another example: You are now a high paying executive and are doing your taxes. After deductions/credits you find you have a taxable income of $250,000 (which means you ACTUALLY earned $300,000+). Nice going!!! Lets calculate your Federal income tax:
Looking at the above table under CURRENT TAX RATES
The first $16,750 of earnings times 10% = $1,675.00
The amt. between $16,750 and $68,000 = $51,250 times 15%= $7,687.50
The amt. between $68,001 and $137,300 = 69,299 times 28% = $19,403.72
The amt. between $137,301 and $209,250 = $71,949 times 31%= $22,304.19
The amt. between $209,251 and $250,000 = $40,749 time 33%= $13,447.17
Phew!!!
Federal income tax owed on a taxable income of $250,000 = $64,517.58
While you are in the 33% tax bracket ($250,000 is in between $209,251 and $373,650 with a marginal tax rate of 33%) your EFFECTIVE TAX RATE is $64,517.58 divided by $250,000 multiplied by 100 = 25.8%. In other words, you are actually paying 25.8% of your taxable income in federal taxes, not 33%. And in terms of your gross income, say $300,000, you are effectively paying ($64,517.58 divided by $300,000 mulitplied by 100) 21.5% of your income in Federal taxes. This is a technical issue, but important to know if you want to be literate on the issue...
Now, YOUR homework is to calculate what the amount of tax in dollars AND the effective tax rate is on $250,000 IF the Bush Tax Cuts are allowed to expire. How do the two compare? We will use this for class discussion on Fiscal Policy, tax policy and Automatic Stabilizers...
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