Maximum wage is not going to help social equity

The new UK Labour Party leader, Jeremy Corbyn, said he would consider introducing a “maximum wage”. Does a maximum wage really help to reduce the gap between the poor and the rich? Wage is not the only source of incomes; for the most of the rich, capital gains are much greater than their salaries. A study from the non-partisan Tax Policy Centre shows the higher you go up the income ladder, the greater share of income comes from capital gains. Therefore, even with a maximum wage, the super rich will stay as the super rich. This policy will only reduce the income difference between the low-skilled workers and the high-skilled workers if the maximum wage is not set high enough. I think that reducing taxes on people’s wage and raising taxes on capital incomes will be more effective to create social equity and keep workers productive.

Distance still makes a difference

Distance still makes a difference

Many people think modern technology is so amazing that information asymmetry due to distance differences could almost be ignored. The fact shows something different. Volkswagen’s scandal has hurt most investors very hard; however, the German institutional investors lost little during this crisis, as they only held 2.1 per cent of Volkswagen’s capital at the end of last year, while the 26.3 per cent was held by the foreign institutions. This shows the German investors are more aware of what is happening inside the company compared with the foreign investors. Modern technology has made our communication so much easier; however, a long distance still requires more time to achieve the same effect in a short distance. Therefore, people in a long distance usually filter their information in order to improve their efficiency, meanwhile such filtration may put some important information aside.

Renminbi will be included in the Special Drawing Rights (SDR) basket for sure, the question is when?

Renminbi will be included in the Special Drawing Rights (SDR) basket for sure, the question is when?

With support from the US and some European countries, China will be able to put its currency, renminbi, into the SDR for almost 100% certainty, although the concerns over the central government’s heavy interventions and poor communication of reforms will remain for a long period. With these concerns, the IMF may delay the vote, which is scheduled to take place in November, to next year. Moreover, the slowdown of the Chinese economy is still affecting the world financial markets. When the market panic about the Chinese economy has not disappeared, the IMF needs to take its action more carefully in order to prevent from adding more concerns to the markets. Therefore, I think that the IMF need to reconsider when is the right time to hold the vote, which almost certainly will eventually bring RMB into the SDR basket, without making the markets more panic.

The theory of economies of scale might reach its end in the future

The theory of economies of scale might reach its end in the future. Nowadays, productivity improvement seems to reach its limit. The developed countries face a decline in labour productivity. Machinery can replace most of human workforce; therefore, a firm is not necessary to employ a large number of workers when supplying a lot of products. Therefore, we need to replace our traditional idea about the theory economies of scale. I believe that a small group of people is actually more productive than a large group of people in terms of average outputs, because machines can replace many of humans' functions when intelligent robots are put into our production lines.

I think Apple's App Store is a model for the future market. App Store creates credit between the customers and the application developers, that allow them to sell and buy applications without facing any risk, such as a virus. The application developers are usually small firms with under a hundred employees; however, as long as their applications become popular, they can earn a lot of profits. Other industries can copy this model. For example, the financial industrial. The Standard & Poor is a large credit rating firm; however, it could make itself a platform that groups of people can make their credit rating reports and sell them on the Standard & Poor's platform while the Standard & Poor has to ensure these reports are credible in some terms. Moreover, in some large financial institutions, many teams can separate from the firms and become independent.

When a firm is growing, it will face more problems. For example, with more employees, the employers are more difficult to check their employees' productivity, then they have to create more job places to help them do so. In a small firm, workers are sometimes shareholders as well, they have more incentives to work hard and have loyalty to their companies.

In conclusion, I think the theory of economies of scale will die in the future. The possible best firm model is a firm with a very small number of employees but a sufficient number of machines.

Abe’s "2.0 Target" requires much more

Japan falls back into deflation for the first time since 2013, but the Bank of Japan seems really optimistic that the inflation rate will rise back to 2% later this year. Almost all the developed countries are experiencing a low inflation currently. The US Fed has decided to maintain its current zero interest rate due to the low inflation rate. Moreover, fall in energy prices and commodity trading will have the negative effect on the inflation. The deflationary pressure does not just come from the outside world, but also from the domestic. In 2014, the Japanese government decided to raise the Value-added tax. This was said to give the market a sign of confidence; however, the increase of VAT clearly makes goods and services more expensive. Moreover, Japanese employers have been reluctant to invest or to raise their employees’ income, due to the shrinking workforce. If Abe wants to keep his promise, the Bank of Japan has to expand its QE program and the government has to increase its expenditure and reduce taxes. Otherwise, it is impossible to achieve Abe’s “2.0 Target".

Chinese factories face shortage of workers because of the ageing population and most of the jobs created in the service sector are not efficient to generate enough income.

Chinese factories are currently struggling to find workers, commentators argue this is due the ageing population and a rapid growth of jobs in the service sector to provide services to the expanding middle class. Suppose this argument is true. We should see an increase of proportion of consumption out of GDP. However, this is not true, the household final consumption expenditure is falling from 2011, in terms of % of GDP. If we ignore the possible measurement error, we can conclude that the ageing population is the most crucial reason that causes the shortage of labour in the manufacturing sector, and most jobs created in the service sector are not efficient to produce more incomes.

People are rational even when they are behaving irrationally

People are rational even when they are behaving irrationally

When we are building up some economics models, we usually assume that people are all rational, even the markets show sometimes the opposite. Are they really irrational? The answer is no, people are all making their best decisions with their different constraints of information collecting capacity. 

Usually, we believe that anyone should make his/her decision after receiving all possible information. This is incorrect. Reacting faster means the variation of expected future returns becomes greater, as well as less information. The making correct prediction can receive greater benefits. Spending more time on collecting information will narrow the variation of future outcome. However, when the time is in progress, people are keeping receiving more new information from the market, such as prices; therefore, people’s expectations are also changing. People will make correct predictions more likely, but never with 100% certainty. In addition, time itself creates opportunity cost, spending more time means an increase of cost. 

Moreover, people’s expectations are interacting. Sometimes people believe the others may have more information. Therefore, the effects of information are multiplied by such belief, leading to some overreacting of the market.

In conclusion, people all make decisions rationally. People need to decide whether they react faster with lower opportunity cost but higher risk or react less fast with greater opportunity cost but lower risk. 

George Osborne is flattering the Chinese, and mitigate the UK investors' fears over the Chinese economy's slowdown.

George Osborne spoke at the Shanghai stock exchange and predicted the Chinese economy would continue to fuel global growth. I don’t think he was speaking with honesty. He is flattering the Chinese, and wants to mitigate the fears over the China’s economy will affect the UK economy, as the global stock markets have been moving in the same direction with the Chinese stock market over the last several months. 

Permanent zero interest rate might be inevitable, productivity would be the most decisive factor

When information is exchanged without much limitation, investment and lending become more secure. Therefore, interest rates should be approaching zero, because there are fewer risks. If interest rates became permanently zero, what would happen to the markets? The velocity of money transfer would become greater; more importantly, the concept of cash would disappear. When interest rates are zero, M0, M1, M2, M3 and M4 are all the same. According to the function, VM=PT, when V increases and M stays constant, then at least one of P and T will increase. (V is the velocity of money for all transactions, T is the aggregate real value of transactions in a given time, P is the price level, M is the total nominal amount of money in circulation on average in the economy). Therefore, when interest rates become permanently zero, we would have a high inflation or an increase if the aggregate real value of transactions. To avoid hyperinflation, it is important to ensure supply to match up the market demand.

Differentiate VAT, Encourage more consumption, restore market confidence

Currently, the market confidence is low, especially the financial market has become very sensitive to all sources of shocks. Why do we have such low market confidence? The reason is that we have very low inflation and there are many negative exogenous factors. Most of the sources of shocks come from the outside world. The key issue is how to deal with problems coming from the rest of the world. It is important to boost the domestic consumption. In order to boost consumption, it is important for the central government to have enough budget to run the country with lowering tax income. Lowering income tax and raising the minimum income level can help to raise the population participation ratio, especially when more jobs are created. Spending on benefits does not need to be raised, in order to keep the labour force productive. Charging different levels of VAT can still contribute to the death redistribution, as well as give vast major of the population incentives to spend more of their incomes. Goods and services can be affordable to more than half of the populations should be considered to be charged lower tax, compared with those only the super rich can afford. By doing tax differentiation, the government can raise the same level of tax income from consumption, but create more consumption.

the UK economy is relatively stable but lacks potentials to grow in the future.

In August, the UK inflation rate was pushed back to zero by the slide in fuel costs. Furthermore, breakfast costs in the UK also fell. There is almost no signal of underlying inflationary pressure. Is this a good thing to the UK? It is good for many people that zero inflation rate means they will have no pressure from the increasing living costs. However, it signals the lack of demands and consumption. Moreover, the low inflation rate will lead to an appreciation of GBP in real terms. The government budget is tight and the interest rate is already low. The UK government and central bank has few tools to stimulate the economy. Currently, the UK economy is relatively stable but lacks  potentials to grow in the future.

Productivity improvement needs market confidence, and more importantly innovation.

Many developed economies are experiencing a decline in productivity. The Internet has solved most of the issues of transaction costs and information equality. Improved productivity can improve potential for future economic development. However, before improving productivity, the unemployment rate must be kept low. Because if labour force becomes more efficient, lack of market confidence will create more unemployment. Low unemployment rate may restore confident the market; when the market is confident demand for goods and services will increase to catch up the increased production due to efficiency improvement, and the unemployment rate will not increase meanwhile. Therefore, before considering to improve production efficiency, to restore market confidence is critical. Moreover, the problem of production efficiency cannot be merely solved by government policies. The key to improve production efficiency is innovation. The biggest leap of productivity in the developed world is when recovering from World War II, because they inherited the innovations taking place during the war.

The low inflation will remain for most of this half or even continue to next year; therefore, the Fed will raise rates no earlier than December.

My previous prediction about the Fed has been proved to be correct partly. The Fed has decided to maintain current zero rates because of the current low inflation rate. The US economy has a low inflation due to the low energy cost. The Chairwoman Yellen describes such deflationary pressures as “small problems”, but I cannot agree with her. I think the oil price will maintain at the current level for a long period, or become even lower. It is a demand side issue that the price is dragged down by the lower demand, according to the global economic environment, especially the Chinese economy. The US economy itself is doing well with a low unemployment rate, but the market confidence is still doubtable because of exogenous factors. Low inflation rate and market confidence interact. However, I believe that the US housing market is gradually growing. Because the US economy is one of the very few economies that do not have many endogenous problems. Strong US dollar is bad for the US economy, but it can show some confidence of many investors about the US economy’s future growth. The low inflation will remain for most of this half or even continue to next year; therefore, the Fed will raise rates no earlier than December. Despite the low inflation, I think that the US economic power will remain unchallenged for some years.

microcredit firms are likely to be unsustainable

I find that, when microcredit firms raise funds to give out loans, they like focusing on how microcredit can improve their borrowers’ lives. On the platform of P2P, the loans are still considered as “microcredit” in terms of their sizes; however, the borrowers like addressing their capability to pay back their loans instead. I think this is how we differentiate between charity and business.

the stock bubble burst will happen after the Fed announcing raising rates, but it will not be serious enough to cause another crisis.

The Fed’s rate decision has been attracting so much attention, the financial markets have been fluctuating over the past one month. It seems raising rates is a huge issue to the financial markets. This phenomena is abnormal and shows the panic of the markets. Many of the investors fear that the stock bubbles will burst when the Fed will eventually decide to raise rates. How bad will the bubble burst this time? Unless some unnoticed problems appear like what happened in 2008, this time will be similar as the burst of the dot-com bubble. I think asset-light industries will suffer the most because they are more difficult to estimate their real values and have strong growth in terms of their market capitalisation. Because it is a system risk, without superb business performances, no stock can be an exception. Bonds with good credit quality can still be profitable. My opinion is the burst will happen after the Fed announcing raising rates, but it will not be serious enough to cause another crisis.

What does the Chinese trade account change show?

China’ s exports and imports both fell compared with last year. How much does this change link to the Chinese economy slow down? How does this change affect China and the rest of the world?

The value of imports fell 14.3 per cent year on year in RMB terms in August. Exporters to China will suffer the consequence of decreasing imports. The car industry has been hit heavily by the Chinese economy slowdown. German machinery exports to China fell 5 per cent in the first half of 2015, and Jaguar Land Rover’s sales in China dropped 7 per cent. Sales of other luxury products are also expected to fall. Gartner says  4% fewer handsets were sold in the months of April, May and June compared with the same period in 2014. Apple’s share price fell below 100 dollars per share once the Chinese stocks fall sharply. In addition, the fall in imports is not just caused by the economy slowdown, it is also due to the growing competitiveness of Chinese firms. This can be seen clearly in the smart phone market. Samsung was the top sale in the market in 2014, but fell 48.9% this year, the top two leading firms of Q2 2015 are both Chinese companies.

Despite falls in imports, Chinese exports dropped 6.1 per cent in August from a year ago, and 8.9 in July. The depreciation of RMB last month helped to increase exports to some extent. Moreover, since March, China‘s exports are gradually increasing, but at a slow rate. RMB had been appreciating against USD and most of other main currencies over the last several years. It is not a surprise to see a fall in exports. However, it is important to analyse the structure of China’s exports. Raw materials and low-end products could be a burden to the future growth, as China cannot maintain its comparative advantages of cheap labours forever.

In general, I think China needs to be aware of its economy’s structure. Chinese smart phone industry sets a very good example of producing products requiring some skills and technology. When losing its advantage of cheap labours, it is good to see China is trying to export more high-end products. Meanwhile, the rest of the world needs to know China is not likely to have a double-digit growth in the future. Falls in exports and imports are just parts of the economy slowdown. In addition, firms will face more competitions from Chinese firms not only inside China but also globally. I think RMB currency is still fluctuating for some time in order to reduce the differences of prices between China and the rest of the world.

Do we really need to worry if the Fed raise rates?

My answer is we should not be too worried. Yes, the world economy has experienced a long period of zero interest rate policy since the financial crisis. Benefiting from this policy, firms can issue cheap bonds to expand their business, more jobs have been created. If the Fed decides to raise rates, those benefits seem to disappear. Many firms have already started to issue more bonds as they want to take advantages of low interest rates before the Fed raises rates. However, even if the Fed raises rates, rates are likely rise slowly. The Fed reserve interest rate is predicted to be at 0.625% by the end of 2015, 1.625% by 2016 from June 2015 meeting. In the long run, the rate is likely to be raised to 3.75%. Moreover, because the markets are “over-reacting”, the Fed may eventually raise rates lower than it previously predicted. In conclusion, if the Fed decides to raise rates, it will only raise by a small extent, that will not damage its domestic economy as well as the world economies.

All major central banks will not raise rates, except the US Fed and Reserve bank of India.

All major central banks will not raise rates, except the US Fed and Reserve bank of India. The UK Monetary Policy Committee voted eight to one against raising rates. China may further decrease its rates instead, as its current goal is to keep momentum in order to maintain its current growth. The ECB still needs to be aware of Greece’s debt problem; moreover, the issue of the Syrian refugees requires the European governments to expand their expenditure. Therefore, the ECB wants to have low interest rates. However, India might be another exception besides the US. Despite India’s dreaming of taking over China, its inflated statistics may require an increase in interest rates to make inflation lower.

If the Chinese government eventually allows individuals to directly invest in overseas financial assets

Chinese people, especially the middle class, are usually interested to invest in stocks. If the Chinese government eventually allows individuals to directly invest in overseas financial assets, the global financial market will be boosted by the Chinese capital inflows. However, this policy may have some negative impacts on the Chinese economy. Overseas investment boom will drive increased demand for foreign exchange, leading to further depreciation of the renminbi (RMB). If the depreciation is greater than expected and the government does not strict its control on RMB, investors will start to panic and the price of RMB may eventually get out of control. The big fluctuation of the Chinese stock markets over the past several months has made most foreign investors withdraw from the Chinese markets, Chinese investors also want to invest in more mature markets. This will speed up the outflow of funds, leading to a possible depression in domestic financial markets. Under the current situation, I don’t think the Chinese government will take the risk to loosen capital controls.

A further continuous oil price drop

The disagreements between Russia and Opec probably lead to a further continuous oil price drop. The oil industry is an oligopolistic industry: all the major oil-exporting countries obtain monopoly power through cooperation and control oil prices by controlling the oil supply. This phenomenon may not exist in the future. Because of Russia's differences, they no longer have the strength to control supply. In addition, game theory tells us that non-cooperative behavior reduces the probability of future cooperation; cooperation can only be obtained unless there are large enough profits existing, so no one has an incentive to cheat on others. However, due to the current economic environment and the development of new technologies, such profits do not exist and will not exist. Without cooperation, the increased level of competitiveness will drag the oil price further down.

Taxing the banks’ UK profits is a double-edged sword.

Taxing the banks’ UK profits is a double-edged sword. The positive side is that the government is able to raise sufficient amount of funds. The negative side is this act will prevent new entries, and damage the ordinary people’s interests due to less competition between the current existing retail banks.

now the world economy is in a phase of history has never seen before

I think now the world economy is in a phase of history has never seen before. The economies are tightly connected, but not in a unified path. Whether the Fed will raise interest rates is the main source of uncertainty in the current economic volatility. Strong US employment data and the low interest rate hike decision support; however, low inflation and concerns about China's economic slowdown make people feel it is not the right time to raise interest rates. The complexity of the world economy has also caused by people's expectations of future disagreements. Most developed countries have recovered from the financial crisis; however, some issues remain unresolved, such as Greece's debt. In addition, the world's second largest economy, China, is expected to have a low growth rate this year. The public opinion is more dominated by the pessimistic expectations. I believe that if more positive news released, the Federal Reserve will raise interest rates before the end of this year, releasing space for future monetary stimulus. However, if there is no more positive news, the act of raising rates may be the last straw that breaks the world financial markets.