How different is the fiscal policy stimulus from the monetary policy stimulus?

Many experts and economists expect that during Trump's presidency, the American economy will depend on the fiscal policy stimulus rather than the monetary policy, as Trump is very likely to expand government expenditure to stimulate the US economy while the US Federal Reserve has already raised its base rates and may increase its base rates further in the future depending on the US economic performance at the time. What is the difference between the fiscal policy stimulus and the monetary policy stimulus?

The fiscal policy targets more in the infrastructure or other relatively basic industries in the economy. The government provides government funding to support some industrial development and create more job positions in the economy and a multiplier effect to stimulate the economy further. However, expanding government expenditure could lead to waste of public resources, as the use of government funding is decided by the authorities and ministries rather than the markets. These people may not be able to accurately measure the optimal distribution of public resources in the economy. In addition, some jobs created under the fiscal expansion would disappear after the period, in other words, the jobs created by the government are temporary jobs and the improvement in the employment of the economy may not be as good as we expect in the long term.

The monetary policy directly influences the financial system, the banking sector. It could create inequality in the society, as monetary resources are attracted by other monetary resources. By providing cheaper liquidity in the economy, the wealthier people and the large companies will be the first to benefit from such environment. Moreover, the use of money is in control of the banking sector that they may choose to maximise the private returns rather than the general social returns. And some areas may be left behind without the support from the banking sector.

Though monetary policy could stimulate the economy and is likely to be more economically efficient, it could worsen the social inequality. Meanwhile, fiscal policy programme may be less efficient and create burden on the current government budget.

What is the result of using pension assets to pay for public debts

Japan is planning to use its pension assets to pay for its huge public debt, which violates UN rules of accounting for public pension liabilities. The UN setting such rules is to provide social security for the general working class. If the pension assets are used for other purposes, the pension system will become more struggling to provide previously expected pensions for the elder population in the society and the social inequality will be worsened and the current working class will feel unsecured. These are the social impacts.

Using some pension assets for other purposes could damage the government's credibility and people will spend more on their pension plans and use more private pension schemes and services. Therefore, the insurance companies and other private pension scheme providers could benefit when the government becomes untrustworthy. The government could use the assets to flatter its balance sheet; therefore, the bond yield may fall as the government controls more assets and the probability of default decreases. Moreover, the government may be able to use the extra resources to provide future economic performance improvement, hopefully it can bring more government incomes in the future due to the future higher economic growth rates and use the extra incomes to compensate the pension assets used today.

I do not think that Japan can use the extra assets to generate high economic growth in the future, as the Japanese government and central bank have used many stimulus policies and still are unable to increase the domestic inflation rate and generate better economic performance. Moreover, the pension system has become fragile in a global scale that many countries may fail to pay out pensions to their populations in the near future. Therefore, instead of using pension assets for other purposes, it is even possible for some countries to use their government budgets to fill out the shortages in their pension systems in order to provide social securities and equality.

Why do the financial centres battle for more IPOs?

Hong Kong and New York have been battling for IPOs in a global scale, and Hong Kong is losing its battle. Jack Ma criticised Hong Kong for outdated stock listing practice and lists its company in New York's Nasdaq. Why is IPO listing so important for these cities marking themselves as financial centres?

More IPOs can bring more companies to list their shares in their stock markets and more companies listing their stocks can bring more financial resources and human capitals. This is a multiplier effect that stimulate the development of these financial centre cities. Moreover, as the modern technology has been developed so fast that communication around the world becomes very fast and easy, the necessities of having so many financial cities become very weaker now. Therefore, these financial cities, including London, Hong Kong, Shanghai, Tokyo, New York, are battling for more resources from their rivalries; otherwise, the resources will become more concentrating in one city.

The current fear of a deglobalisation process will slow down the process of concentrating resources in one place. Therefore, these cities will have more time to prepare for the future competition for more IPOs, more resources and more clients. While in a deglobalisation environment, the large companies need to have multiple financial bases to refinance themselves around the world, as the cross border financing is more expensive than financing locally. Then there is a need to have multiple financial centres around the world.

Based on these factors, in the near future, the current financial centres will not lose their importance; however, in a longer period, the resources will become more concentrated and the number of financial centre cities will decrease.

Would Higher interest rates cool demand for borrowing

The global borrowing levels go beyond 2006 mark and the decision to raise base rates by the US Federal Reserve hopefully would cool down the demand for borrowing especially in the US. However, we may face the similar effect in 2007 and 2008. In 2007 and 2008, the mortgage default rate in the US increased after the US Fed raised its base rates, then the financial crisis hit the global economy.

Although the US based rates have been increased by the Fed, the borrowing costs for many firms do not increase significantly as many large firms have the ability to borrow in a global scale. It is now more expensive to borrow in the US, but in Europe and many other regions the interest rates stay the same and low, the costs of borrowing will not increase in these regions. Therefore, it is not likely to see an immediate increase in the default rates around the world as they have multiple borrowing channels.  However, the small businesses in the US will face borrowing difficulties and they may start to default and bankrupt. As the leverage ratios in these small businesses are relatively low, the increase in the default rates of small businesses is unlikely to create a significant shock in the economy and cause a crisis.

As long as the interest rates in Europe stay low, the borrowing levels will stay high as the large borrowers are multi-national companies who have the abilities from most regions around the world. Once the interest rates in Europe start to increase, I expect some large companies may start to default as even there will be some places that still have lower interest rates but do not have sufficient money to support large companies' borrowing. Thus a form of financial crisis may start to damage our economies. Such financial crisis will become the most serious financial crisis which is more damaging than the previous ones.

Once the financial crisis hit, the countries which have lower interest rates will not have monetary policies as a tool to stimulate their economies. Therefore, I think they probably should increase their rates before Europe, as I see Europe increasing interest rates as the trigger of the next financial crisis. Of course, I can be very wrong about such prediction.

Consumption behaviour

Today is Boxing Day, which is the biggest shopping event in the UK; however, some analysts predict that some sales are shifted from physical stores to online retailers and more customers prefer big shopping centres and high streets over small shops. Although the analysts believe that the number of customers going into small shops would pick up later today.

Both the phenomenon show how lazy we have become. Online shopping is so easy that customers do not need to walk in a crowded shop and do not need to line up to queue to buy for their items. In addition, customers could find their preferred items more easily by using search engines and find more options. And there are so many online payment ways that make our online shopping experience much better and easier. However, the most obvious disadvantage of online shopping is that there are only photos and videos representing the items virtually, customers cannot get direct physical contacts with their preferred items. Therefore, many people will still walk into shops to buy their items. When people choose their shops, they prefer large shopping centres and high streets because the goods and services they want to buy concentrate in these areas, so they save their time in traffic and could spend more time in shopping or other things. In addition, the facilities in shopping centres and high streets are luxury and preferred by the majority of customers. To many customers, shopping maybe is their main goal but having a luxury time is also important. Based on these reasons, large shopping centres and high streets become customers' preferred choice.

Some companies are developing VR technology to improve online shopping experience. I think that the current VR technology could shift more customers from physical stores to online retailers; however, in at least a decade, VR I think still cannot replace the functions of large shopping centres and high streets. Firstly, VR still cannot represent the physical touching experience, for example, by using VR customers are difficult to know whether the shoes are comfortable and fit well. Secondly, shopping sometimes is more about the experience of shopping rather than shopping items itself. Having nice meals and enjoy some relaxing facilities are part of such experience, which is difficult to experience by using VR technology.

Overall, the business of small shops will continue its declining track while the large shopping centres and high streets will develop to become somewhere mixed with multiple luxury and relaxing functions.

Sustainable charity organisations

It is Christmas. Merry Christmas. Santa Claus maybe the most famous charity individual with a long long history. Though Santa Claus does not really exist in our real life, I still want to talk about if it is possible to run a charity organisation for so many decades, like Santa Claus. There are some charity organisations that have lasted so many years, for example, many Ivy League universities, these are known as not-for-profit organisations. These universities were founded by individuals and have independently operated for many years. These universities can generate profits and use the profits earned for future operations, and their profits are generated from their core businesses.

However, if the charity organisations want to become more generous in their core charity businesses. They have to develop their profitable businesses in other fields or they need to organise continuous and unstopped fund raising events and ensure they can always raise sufficient fund from these events. Fund raising events are unsustainable to run charity organisations. Entering other fields may distract the charity organisations's efforts and attentions, and sometimes they may even be criticised when they have some "too businessman" behaviour in other fields and their reputations could be hurt when they enter other fields for profits and the charity organisations' reputations are extremely important to them and their future operation.

Therefore, the charity organisations should and have to focus on their charity careers without distracting themselves to other fields. However, to be sustainable, it has to be self-funded and there are very limited ways to achieve this goal. They could ask fund managers to look after their funds and use the annual returns to fund their charity activities or become profitable during their charity activities; however, profiting from charity activities may turn the charities to be like other ordinary firms and businesses eventually.

What factors could indirectly influence currency values?

Yesterday I argued there are many factors that could indirectly influence currency values and could be controlled by the government. Today I am going to talk about such factors.  The currency value could be influenced by the base rate set by the central banks, individual country's trade position and economic expected performance.

These three factors could influence currency values and be controlled by the governments. However, some of these factors are indirectly controlled by the government. Firstly, the central banks are commonly independent from other government executives; therefore, the monetary policy decisions are made independently by the central banks and the governments should not directly influence the central banks. However, in most cases, the central bank shares the interest with the government as both parts want to make the economy stronger and stable and the government could speak to the public and put pressure on the central bank as many key members in the central bank are appointed by the government; therefore, the government does have a great degree of influence on the central bank. The trade position could be influenced by the tariffs and subsidies; however, such process could break some international trade deals and could potentially launch a trade war with other nations. The economic expected performance could be influence by the government through fiscal policy and taxation channels. Although such tools are assumed to be effective,  the economic performance is too complicated to be dominated by only one party. There are many parties taking part in the economy and having different impacts on the economy. Once the government does not have enough resources to dominate the rest players in the economy, the government's control of the economy could be much weaker. Of course, the government could use its legislation and executive powers to take control of the economy, but such movement could cause too much risk in the society as well as the economy.

Therefore, the government seems to have many tools to control its currency value, but many of these tools are limited and not as effective as we may assume.

Having control of borders

The borders between countries have become weaker under the global trading environment. While the firms are doing business around the world, the transportation of all sorts of resources, including human resources. Central governments always want great controls of their own borders; however, sometimes it may not worth restricting the borders to a greater extend when the benefits of tight border control are much smaller than the cost of applying tight border control.

Currently the tension between China and the US strengthens around the task of trade. Once both countries want to win the possibly coming trade war, they need to pay attention to the volumes of their exports and imports with each other, they also need to worry about the exchange rates, they need to look at the taxes received by their governments as well. These three factors all depend on the control on their currencies.

The control of currency means two things: the value of the currency and the exchanging of the currency with other currencies. The value of the currency could influence the prices of its own nation's exports and  the imports from other nations and change the nation's trade position. The freedom degree of currency exchange could affect firms' tax efficiency strategies and less freedom of currency exchange policies often increase the collectable taxes from firms. Although countries are often believed to be supposed not to directly influence their currencies in the international Forex market and countries should increase the freedom of currency exchange over time, as China is signalling China is increasing the exchange freedom over time, there are so many factors that could be controlled by the governments and indirectly influence the value of currencies and the freedom of currency exchange.

Therefore, control of currency becomes one of the most important part of control of borders.

Positive factors implying a wonderful 2017

I have not been very positive about 2017, because of the uncertainties created by the long term quantitative easing programme,  and the increasing populism and the Trump's presidency which may cause a wider wealth gap in the US, the high leverage ratios of many large global companies. However, there are some positive factors signalling that 2017 could be very positive.

The customer confidence reaches 20 month high in Europe, and the mortgage applications in the US increase despite the Fed increases the interest rates. The stock markets generally perform well, especially many  US banks have relatively strong performances after Trump won the presidential election.  These factors imply the market has been very confident about the global economy in 2017, especially the economies in Europe and the US. In addition, the UK Prime Minister agrees that the treaties about Brexit has to be approved by the UK parliament and the UK parliament is relatively "pro-EU" and the free trade may become one of the necessities in the Britain's agreement with the European Union. Therefore, the British companies may still enjoy free trading with the rest of Europe and they will not decide to move to the European continent.

With these factors, the world economy could continue to grow. However, these factors may be too narrow and too specific in a certain region without connecting with other parts of the world. Nowadays, the economies around the world have very tight connections with each other that although there is a process of deglobalisation, the deglobalisation could damage many people's interests, not only global cooperation, but individual workers could act against an extreme process of deglobalisation. Therefore, the globalised economy will still exists in a weaker form, but as long as it exists, only focusing on a certain region could leave out many other risks and uncertainties from other regions and sectors, which could influence the region as well in a damaging way.

The differences between time points

In the financial market, the performances at the end of year and the performance at the beginning of year are very different. At the end of year, the trading volume is relatively low. This is very understandable as there are fewer financial reports coming out and many workers go on holidays and it is a break time for people as well as the financial market. However, in January, it is generally believed that the returns in January are higher than the rest of year. This was not true in 2016 however. Sometimes, the strategies taken, especially in early January could be seen as irrational. Why time points could make a difference in financial markets without very specific information?

I think the period between the close of financial market at the end of year makes a huge impact. When people are frequently taking actions within the system, people could narrow their thoughts and focus on the projects they are doing. During their working time, they have a very tight time constraint that they have to focus on their own projects by giving up some attentions on the overall environment. In some extreme cases, the information they receive is also restricted as when they have a specific task, the less relevant information will be ignored. Once they go on a holiday, they have a lot more free time and they now have time to see the overall environment and receive more general information that might be helpful. Moreover, during holidays, they meet more people, who are not necessarily from their working system, they start to know some inside information, such as how much others' wages change, how long their working hours are, how they feel about their industries and what they think is their industries' major challenges. After receiving lots of new information and looking at the overall environment again, they now have different expectations about financial markets' performances in the next year, they could be more optimistic or more pessimistic. Then at the beginning of the new year, they will change their strategies according to their new expectations, this is why in January the trading could be relatively more active without adopting much information.

The uncertainties of uncertainties

We always face all sorts of uncertainties but some of these uncertainties are certain and some are uncertain. The certain uncertainties have known probabilities, for example, when gambling, some games have certain winning probabilities. However, many events have unknown probabilities that why many companies hire actuaries to estimate the risks, in other words, make these uncertain uncertainties less uncertain.

By actuarial methods, individuals and firms can lower their uncertainties when facing significant individual and environmental risks. However, sometimes uncertainties are uncertainties, not because their probabilities are unknown, in many cases, we cannot cover all risk sources and the risks and the risks that we fail to notice become much more uncertain uncertainties. When such uncertainties exist, the system will fail to observe the overall risk in the system and underestimate the systematic risk.

Of course, people could give an estimated value about how much unobservable risk exists in the system, but it is really difficult to identify the credibility of such estimation as there are many cases that we fail to estimate the unobservable risk and get ourselves into great troubles.

Sometimes when we try to get very accurate results, we face greater risks. For example, in a stock market, many institutions give target prices about stocks. Instead of simply telling the price could be higher or lower in a year's time, giving a detailed price has more uncertainties. Knowing whether the price will rise or fall, traders could only choose one strategy from the two strategies in total, buy or sell. When the actions taken by the traders in the market is simple, the uncertainties during the one year period are relatively low. However, when we know a specific price, there are countless strategies that could be chosen, this will increase the uncertainties and the previous predictions are known to be less credible. Moreover, the difficulties of getting a detailed result are much greater, meaning more errors could be made. Therefore, sometimes it is better to give a simple estimation rather than a detailed and specific result, as the results are definitely less credible and could cause more uncertainties.

Price differentiation

Common worm pill is found to be priced in the US 200 times its price in the UK. What can make a good be priced so differently in different prices? There are several factors that can cause such phenomenon. In general, there are two sides of factors: the supply side and the demand side.

The supply side factors are generally related to the costs. For example, if the pharmacy industry receives a huge amount of subsidies from the government, the cost of production is lowered by the subsidies and the industry would also be required by the government to provide cheaper products. Therefore, different levels of subsidies could differentiate price levels in different places. Moreover, the different structures of same industry could change the cost of production. Some countries could have different import and export policies and different economic outputs, these factors lead to firms in different countries have different levels of cost of productions, due to different prices of factors of productions.

The demand side factors are related to the purchase abilities of customers and their preferences. Some countries have more completed systems to cooperate with other industries. For example, a completed insurance system or a national health service system has a great influence on the medicine and pharmacy industries. A completed service system often could lower the costs for the customers. Sometimes the revenues do not directly come from their customers, instead their revenues from the service system, such as the government welfare system, the insurance companies. Therefore, pricing becomes less important and different from pricing in some countries which do not have such complete system. The necessity or the elasticity of demand could vary between countries due to different cultural background and consuming habits.

Overall, pricing definitely varies between countries; however, a difference like the common warm pill in the US and the UK is still abnormal and should be corrected.

What does it mean if you become a major creditor of another person?

Japan now has replaced China and become the largest creditor of the US. Such relationship does not involve economic and financial factors, but involves political concerns as well. Politics is extremely complicated and many factors are unknown to the public; therefore, I would only talk in economic and financial terms about being creditors in a more general sense.

We could become others' creditors in our normal life. When we open a saving account and put our money in the account, then the bank owes your money and you become the bank's creditor. Why do we want to lend money to others?  Economics teaches that we are making our decisions to maximise our own personal expected preferences, so the decision about whether or not to lend money is based on the return of lending and the risk of defaults and opportunity costs.

Once you becomes someone's creditor, then as the money you lend is also part of your wealth, your wealth becomes partially depend on your debtors' default risk and performance and the financial environment. When you are a major creditor and a large proportion of your wealth depends on your debtor, then your interest is to help your debtor to generate greater returns by using your money and lower its default risk. However, on the other side, your debtor could lose incentives to make more money, as your debtor has to pay you interests and lower its returns and growth. When the profits gain reduces, the incentives to work hard will decline as well. Meanwhile you cannot directly influence your debtor's decision making process, the more money your debtor borrows, the higher default rate your debtor has, as the incentives reduce due to lower profit levels.

Therefore, becoming a major creditor is carrying your debtor's risk upon your shoulders without having direct influence on managing the risk.

How is 2016?

It is near the end of 2016, there have been lots of surprising and important events. I think it is a good time to conclude this year. There are two most memorable events: one is Brexit, the other is the US president election. Both of them show one thing is that the majority of the population has different opinions with the society elite class. Such phenomenon may reflect to the economy as well.

When people have different opinions and thoughts, they definitely have behaviours and different behaviours will lead to different individuals and a complicated and less predictable economic outcomes. However, although different players have different behaviours, unlike the political system, in the economic system, different people have different abilities to influence the economy. In a political system, the middle and lower classes may have greater power than the top wealthy class due to their large population size; however, in an economic system, the top wealthy class has greater resources than the other classes, that in some countries, top 10% of the population own over 90% of the entire wealth. Once they have a greater proportion of the wealth, they gain greater power in the economy. Because in the economy, the wealth could stimulate the economy and distribute the resources in the economy. Therefore, in the economy, the economic outcome will favour the interest of the top wealthy class, unlike the political system outcome is more likely to favour the middle and lower classes.

Overall, the economic outcomes may be less surprising than the political outcomes.

Heading to 2017

Today (14th Dec), the US Federal Reserve increases its short term rates to 0.5-0.75 per cent. The US Fed expects that in the 2017, the US economy will gain momentum and stimulus from the likely Fed tax cut promised by the President-elect. Given the possible inflation and fiscal stimulus, the US Federal Reserve has decided it is the right time to raise rates.

However, I feel that the US Federal Reserve may be too optimist about the US economic performance in 2017. I believe 2017 is a year with a great number of uncertainties and different expectations about how the world economy is performing in 2017 which lead to different strategies and policies.

Different opinions in the market mean that after a certain period of time, players with different opinions will have very different returns and some will lose the competition and leave the market. The winners can exploit the losers as much as possible and the government has no incentives to intervene the market and rescue the losers. The market could be more concentrated as many players may leave the market and leave their resources to the winners.

In addition, as some firms become extremely successful and some firms fail to stay in the markets, the population will be influenced and the wealth gap in the society could be wider than ever.

Why is the wealth gap issue so serious?

The wealth gap is so serious that every country needs to pay a lot of attention to. Most countries have been putting lots of effort in reducing their domestic wealth gap and some populist parties gain power through using the wide wealth gap to attack the elites and gain popularity. This is how the wealth gap could affect the political environment and increase the probability of social unrest. It can cause more risk towards the whole society.

Recently the wealth gap becomes even more important that the elite class becomes relatively less significant in terms of political roles. Because of the globalised market, the assets held by the elite class are less restricted by geographical factors, while the other social classes do not have the mobility of their assets, they could care more about the domestic politics than the wealthy class. While they gain more political power, they could attack the wealthy class, as they feel the wealthy class is not loyal to the county and they block their ways to gain more wealth, which is definitely not a good thing to the wealthy gap, though their wealth could be accumulated more easily; moreover, it could even create corruption as these people may accumulate their own wealth after gaining political power.

In addition, wide wealth gap could directly cause economic productivity issues. Although some have argued that wider wealth gap could increase people's incentives to work harder and gain more wealth, wide wealth gap could instead reduce people's incentives to work hard and reduce the economic productivity. Once the economic wealth gap is continuously widening, people will realise that they fall into a wealth trap that they have few opportunities to increase their wealth to reduce their wealth differences with the top wealthy class, then the incentives to work hard will decline sharply and the whole economic productivity will worsen.

How important is the minimum wage safe net?

I think that minimum wage should be introduced when the economy has a relatively low unemployment rate, that helps to improve the living standards of the working members of the society and narrow the domestic wealth gap. The set up of a minimum wage level may reduce the employment rate but it increases the payment of the employed population and encourages more people to join the labour market and increases the competition in the market which can improve the productivity of the economy. However, in some cases, the set up of any form of minimum wage could damage the welfare of the whole population.

For some kinds of jobs, there is no need for setting up a minimum wage level as the payments of the jobs are already high enough to their high entry requirements. Other traditionally low paid jobs are believe to need the government to set up a minimum wage and improve the treatment of these workers. However, when there is a big unemployed population. The minimum wage increases the cost of labour of the firms, which are usually producing lower value added products. Then instead of employing more workers, they may reduce their employee numbers or even considering to move their firms to countries which have lower cost of labour if possible, then the unemployment rate may increase further.

Therefore, I believe when the government is setting up the minimum wage level for the labour market, the minimum wage level should not be set as a fixed number, it should be a function that involves the consideration of the economic growth as well as the current employment rate. Just as what many central banks, when the inflation is high, they lowers base rates, when the inflation is low, they increases base rates; governments should do the same when setting up their minimum wage levels for their markets.

The increasing competitiveness in the financial market?

I think that the increase in competition in the financial market does not happen in the market of banks or institutions and firms, it happens in the market where banks and institutions seek for money and funding. The current low interest rate and risk averse environment limits the supply of money and funding in the market, that a good amount has become inactive in the market.

The financial market is trying its best to attract investors to participate in the market; however, the cashes are not distributed widely and equally that some sectors have absorbed more money than other sectors do. This creates a competition between different sectors within the financial market; but the decision for investment largely depends on two factors, the expected returns and the investors' risk preference.The expected returns are determined by the nature of the market and the risk preference depends on investors' personality and the future use of the money. The institutions and fund managers have no control of these two factors; therefore, they passively accept the demand of their investors.

The stock market is a great example that more and more good firms reject to issue IPOs as they are expected to experience high growth and have no worry about seeking for investors and the companies which issue IPOs are expected to already finish their most rapid growth trends and now face a constant operation. Therefore, though the risk in the stock market is relatively higher, the expected returns in the stock market are not high enough to compensate its risk and many large investors pull their money out of the market and seek for other opportunities as when they have large enough cashes, more investment opportunities are open to them.

Overall, the financial market is a very strange market, although the demand side can observe the supply side preferences, they do not have direct tools to attract investors, as the factors determining the investors' actions are mainly based on investors' own preferences and the market nature, which the institutions and fund managers cannot control of.

Could deglobalisation help to avoid a globalized crisis?

One of many problems that globalisation is argued to have is globalisation will increase the scale and size of an economic crisis as well as other types of crises. As currently there is a sign of a global scale of deglobalisation led by the populists, is it possible for such process to avoid a globalised crisis in the future?

It will depend on the extend of deglobalisation. If it is a limited political move and only aims to reduce the population mobility across countries, then as long as the global trading network exists, the economic crises can spread their influences across borders and become global scaled crises. However, if the deglobalisation becomes a limitless process that target all fields of the world societies, then we may expect a sharp reduction on the world economy at the start of the process, as when it is a globalised world, the scale effect of production will increase the productivity of production, and once the process of deglobalisation stars, such effect will disappear and drag down the global outputs. Afterwards, the economic growths in most of individual countries will be relatively slower than they are in the world economy, as they are only limited to the resources in their own regions. Of course, as the leverage effect created by the globalisation disappears, the size of a crisis could be limited as well, but due to the limited resources available, the resources that can be used to solve the crisis is limited as well. In addition, the close of borders can prevent domestic crises from spreading to other countries and prevent foreign crises from impacting the domestic economy. Similarly, the close of borders will close the door to foreign resources to borrow in the crises.

Overall, I still see that deglobalisation will limit the scale and size of crises due to lowering leverages but limit the amount of resources available as well, there is I think greater costs than benefits of deglobalization.

The end of QE, then what?

The scale of the asset purchasing program by the European Central Bank is diminishing, which implies the QE may come to an end in the near future. It is an enormous scale of economic experiment to test the impact of QE, which is absolutely a new thing this century. The time length and the scale of QE programs around the world are incredibly enormous.

Some countries have already ended their QE programs and even increased the base rate; while some others' QE programs are still ongoing with negative real interest rates. We cannot clearly know the actual impacts of these QE programs on our economy as it may have a long period impact which we have not observed yet.

There is one thing which is clear, that the short term effectiveness of QE programs is diminishing over time. The first introduced programs have larger impacts on the economy than the later introduced programs.

In addition, although trillions of euros have been flew into the economy, many countries' inflation rates stay relatively low, which shows that the cashes delivered by the QE programs. The slow economic growth in the developed countries are now seen as a normal phenomenon.

The central banks may need to find other solutions to boost the economic growth and increase the inflation rates. They may allow interest rates to fall below zero without any intervention.

Emerging market banks in bad shape, a regional problem or a global crisis?

As there are many warnings on emerging market banks' financial positions, the large institutions must already be aware the problem existing in emerging market banks, so if there is a collapse in the emerging market banking system, it is unlikely to lead to a global crisis. However, a wider spread among emerging economies is highly likely that even some emerging market banks may have relatively healthy finance, they could be hit hard by the crisis.

Bank crises are very likely lead to economic crises, as banking could be seen as the heart of the economy. Once the bank crisis happens, the emerging economy will also be in a deep trouble. However, if the emerging economic crisis is going to spread in a global scale is questionable. The developed world depends on their imports. Although without closing the export manufactures banks can gradually collect their loans, it is the banks' best interest to force manufactures to file bankruptcy so banks can collect big amounts of assets in a much shorter term. Therefore, the imports for the developed world are reduced sharply. Though it can help to create jobs in the developed economies, it increases the costs of producing such goods and services which usually rely on imports. The inflation rate in the developed world will increase.

The inflation could be a good thing, as well as a bad thing. The positive side is that the inflation can reactivate the inactive money holding in the bank accounts, more cash flowing into the economy can stimulate economic growth. The negative side is that the inflation could get out of control once an enormous amount of cash suddenly flood into the market.

Overall, I think the emerging market bank crisis will remain in the emerging market and the inflation in the developed world could be pushed higher by the shock in emerging markets.

How to save jobs

A study by the Centre for Business and Economic Research at Ball State University states that 85 per cent of the job losses are caused by technological change, other than trade suggested by the US president-elect Trump. How could he keep his promise to save the US jobs?

Businesses are businesses, they want to maximise their profits. If there are more profits to move their companies to other countries, 'facing serious consequences' is not something unacceptable. If companies see that employing machines is cheaper than employing humans, then they will switch to machines and reduce their employees or force down the wages and make labour costs cheaper.

Based on this nature, there are two ways to save jobs from technologies. The first solution is to increase taxes on firms with higher technology adoption rates. This will increase the costs of switching to machines and technologies; however, as long as it does not lower the cost of labours, the firms will be forced to move their firms to other countries, as the general tax levels increase the costs of cooperations. The second solution is to remove the minimum wage. Once the adoption to machines seem more attractive firms get greater bargain power over their employees, then they are likely to force down their employee wages and reduce their costs of labours. However, this could widen the domestic wealth gap and create some degree of social unrest. Although there is a solution to this problem that the government could provide subsidies to companies who use more labours than machines, the costs of such solution is too high to be sustainable.

Overall, we cannot stop firms from switch some jobs from labours to technologies, as they are rational and make decisions on profit maximisation.

what are the assumptions that get us the result of real estate prices in financial centre cities increase over the long term?

Yesterday I argued in financial centre cities, the real estate prices will increase over the long term. However, it involves some pre-existing assumptions that I did not explain yesterday.

First of all, the world economic performance has an increasing trend. This is important, because if the global economy is shrinking over time, then the phenomenon of more resources being attracted to financial centre cities will not occur, thus the real estate prices will not be likely to increase over the long term. The second assumption is we all stay on the earth. If we can travel across planets, the geographic picture of the world economy changes and some financial centre cities will lose their importance. The third assumption is there is an inflation in the world economy over the long term. Although we assume an economic growth over the long term, I still think we need the assumption of inflation, as many economic theories may be right at the moment, it does not necessarily mean they are right in the future, growth may not necessarily mean inflation in the future. If we cannot have an inflation over the long term, the real values of real estates may still rise but the nominal values could decrease over the long term.

However, if the existing financial centre cities attract almost all available resources around them, they will compete with each other. Although they are already competing with each other, the level of competition will increase over time, due to the development of technology, the need for multiple financial centres is less and less significant, eventually there could be one financial centre that absorb all resources from other financial centres. In this case, the one survival financial centre could an enormous increase in its real estate prices, while others will lose in the battle and the real estates will slump.

The advantages and disadvantages of investment in real estate

For years, the real estate prices in major cities and financial centres, such as London, New York, Shanghai, Beijing, are soaring sharply. Therefore, investing in real estate becomes a safe and profitable investment opportunity, that is suitable and almost designed for many middle class families. Today I would like to discuss about the advantages and disadvantages of investment in real estate, the real estate I want to talk about is housing (houses and flats).

There are many obvious advantages of investing in real estate. Firstly, the real estate prices in big cities are unlikely to fall in long term and are almost certain to having an increase long term trend.  As big cities always attract more people due to the opportunities and resources they have, more people living in big cities will absorb more resources and opportunities, such multiplier effect is unlikely to stop unless the global population has got a sharp and immediate reduction, which is only likely caused by diseases or natural disasters. Therefore, the returns of investing real estate are relatively positive and secured. Secondly, sometimes owning one or more houses and/or flats can have some side effects. For example, it can increase one's credit rating and make him/her easier to borrow from his/her bank at a relatively cheaper interest rate. Owning a well located house or flat can send their children to better schools and receive better education. These are all non money benefits. Thirdly, the real estate prices can fall but they cannot fall below zero; therefore, it has a safe net of the investment and even sometimes families may not be able to sell for more money they can own their houses and gain utilities from their houses. They can lend their houses or flats to receive rents and increase their family incomes.

However, investing in real estate can have disadvantages. Firstly, to families, investing in real estate requires a relatively big amount of  money as the initial investment, it has an enormous opportunity cost. Secondly, investing in real estate has a liquidity issue that selling houses and flats requires a relatively long period of time. Thirdly, the scheduled payments will reduce incomes in short term and affect short term living standards.

Overall, if you have better investment skills in a wider selection, the liquidity and opportunity cost issues should draw you away from real estates towards equities or bonds which are more liquid than real estates.

Where is the turning point?

Today we learn that the US unemployment rate falls to the lowest since the crisis, it is a piece of good news; however, we should not ignore the phrase ‘since the crisis’, it means before the crisis, the US had even lower unemployment rate and better economic performance. Therefore, although the US economy and some other economies are performing well, we should be surprised if a serious financial or economic crisis hit us at the corner in the near future.

Sometimes a small change could turn everything upside down. The last crisis was I think directly triggered by the decision of the US Federal Reserve to increase the base rate, as it increased mortgage rates as well as the default rates. I think that a reverse move of previous monetary policies by the central bank could be one of the possible triggers. Moreover, starting a trade war could be another trigger. A trade war hurt the world economy, because it can reduce the global trading volumes as well the productions for exports. Then some countries will have an expansion in some unproductive industries as they no longer import as many as they demand; moreover, some countries' industries may suffer weak demands as their exports are cut by the trade war. This will all cause an economic slow down and increase the domestic inflation. 

Who wants free trade?

Where is the origin of free trade? I think the idea of free traded started centuries ago, but the the era of colonisation was partially developed from this idea. The European countries definitely benefited from colonization via free trading with their colonies; however, after the second world, the colony system broke down, the European countries were forced to or voluntarily give up their controls over their colonies. What happened that caused them to give up their colonies? Now many developing countries welcome free trade more than those developed countries which initially established many free trade deals worldwide.

China is willing to make free trade deals with almost all the countries around the world, countries like some African and Asian countries too want free trade deals with developed countries in order to boost their economic growth. In the past, the developed countries wanted free trade deals, because they had productive industries and the costs of production in the secondary industries were way lower than their colonies while their colonies can provide very cheap raw materials for their industries. However, nowadays, many developing countries have these machines and lower their costs of production in their secondary industries, their average costs of production are lower than some developed countries due to their cheap labour costs. There are some developed countries that may still want free trade. When developed countries focus on their advanced industries, where many developing countries do not have the matched technologies, they then have their comparative advantages and in the advanced industries they have lower costs of production.

Overall, the countries which have lower costs of production in their major industries will want free trades.

Has my prediction been wrong?

Yesterday I made my prediction that the price fall in oil will continue for at least one decade and the world economic growth could remain low until a new economic stimulus tool is developed. Today these predictions seem to be wrong. That the OPEC agrees to cut oil supply and push oil price above 50 dollars and the US 10 year bond yield rises sharply today, showing the market confidence about the future growth.

However, my predictions are about long term trends rather than short term performances. The markets are always changing and adapting latest incoming news and information, and the prices can fluctuate all the time. I am actually surprised about the agreement made by the OPEC that I thought they could no longer be able to come to an agreement as they previously increased supply to compete each other. However, the low oil price will still continue, because of several reasons.

Firstly, the demand for oil is determined by the world economic growth. If the world economic growth slows down, the demand for oil could become weaker, thus the oil price will remain low. Secondly, there are now more alternatives to oil. The previously fall of the oil price also pushed down the prices in these alternative energy industries. Moreover, the technology development also drag down the costs of production in the alternative energy industries as well as the market prices. The alternative market is far more competitive than the oil market; therefore, even when the oil price retreats, the alternative energy prices will stay low, as the levels of competitions remove the possibility of cooperation and any increasing price will lead to a loss in the company’s market share. As long as the alternative energy price stays low, the price of its substitute, oil, cannot rise to a very high level. Thirdly, many countries and companies have stored large amounts of oil when the oil price hit its low. Now they have more than enough oil reserve for their future use; therefore, they can have greater bargaining power when consuming more oil, as the OPEC countries largely rely their oil incomes. When the consumers have greater bargaining power, the market price will decrease accordingly.

Therefore, the trend of falling oil price remains.

How long will falling oil price last?

The global oil price dives today as Iran refuses to cut its oil production and Saudi Arabia according to the previous report will accept any production cut without the cooperation of Iran and Iraq, so Saudi Arabia is not likely to cut its oil production as well. I always believe the oil price is experiencing a long period of falling trend that the OPEC countries will have more and more difficulties to cooperate with each other, as once the competition starts, it will then increase automatically.

The falling oil price could put more pressure on the world economy, especially it can force down the inflation rate. As oil has been used widely in current industries, the falling oil price makes production cheaper, which can lead to a decrease in the prices, when the companies face greater competitions or weak demand. Currently there is a weak demand around the world, the demand for goods and services. Although the market seems confident about the future world economy, compared with the previous performance, the market has become much more risk averse, as we can see that low risk assets have become far more popular, the fixed income funds attract more money than other funds with higher risks, more hedge funds close than those open. The extreme risk averse environment could actually enlarge the risk in the economy, as they force down the returns of investment and create an unfriendly environment for new businesses and smaller firms. The deflation and the low return of investment including individual investment and the risk averse behaviour of the financial institutions will come together and contribute to a low economic growth, a continuous weak demand.

The fall of oil price and the low economic growth will interact with each other and force each other further downwards. Therefore, the falling oil price could last for at least one decade and the low economic growth must have some kind of new solutions.

When does infrastructure plan work when doesn't it work?

The OECD has a great confidence about Trump-led America that it suggests the US economy under Donald Trump's proposed economic plan will grow faster than the previous expectation mainly because of his infrastructure plan. Last century, Roosevelt built massive infrastructure during the Great Recession, from the result, the American economy did recover from the Great Recession; however, the main factor that cured the US economy is questionable and the economists have argued varies reasons for the recovery. In addition, Japan has started its massive infrastructure plan after its economy collapsing; however, the Japanese economy has not fully recovered and the inflation rate stays very low for years and the government seems to have no effective tool to boost the economy and create an inflation in its economy. Therefore, we can see infrastructure does not necessarily make the economy grow faster.

The idea of infrastructure plan is to boost government expenditure, this will directly lead to an increase the aggregate demand according to the basic aggregate demand calculation formula. In addition, the plan can create thousands of jobs immediately and these people can use their incomes to consume goods and services in the economy and creates a multiplier effect that boosts the economy further. Therefore, the immediate positive impact of the infrastructure does exist. However, the cost of such plan may be greater than the benefit. Firstly, infrastructure is only one part of the economy, there are many other fields that require government funding and some of them may be more important and urgent. Secondly, the long term effect of infrastructure could be doubted. I am not saying that infrastructure cannot contribute to future economic growth, instead I am saying the impact of building new infrastructure in some areas could be less effective. It is more effective to build infrastructure in an area with higher population density than in an area with lower population density; however, the area with low population density is usually poorer and made to be the priority of infrastructure plan, the cost could be much higher relative to its benefit.

Therefore, infrastructure plan may have positive impact on the economy, but it is not necessarily to be the best solution.

We may change to have a much smoother consumption habit

We are starting to change our consumption habit by something called subscription. Subscription is not new at all, everyone should be familiar about subscription, as we have already been subscribing news and magazine for a very long period time. However, now we can subscribe more and more kinds of goods and services.

For example, the most recent and well-known programme is Apple's iPhone Upgrade Programme. It can be seen as an iPhone subscription programme that the customers can receive the latest iPhone once it is released and the release of a new generation is scheduled. In addition, many computer programme companies start to sell subscriptions of their products that allow their customers can always receive the latest programme. Such marketing strategy could even be extended to other more traditional markets. For example, if there is a supermarket can offer their customers subscriptions to daily food and drink, the customers can receive fresh food and drink without going into a supermarket. This may not be desired by every customers, but certainly some customers who do not have time to do shopping very often may like this idea.

Subscription is mutually beneficial to both customers and sellers. For customers, they can also receive the latest goods and services and they are able to manage their spending more easily as once all everyday used goods and services are subscribed, they can easily calculate their monthly living costs. In addition, they can have a smoother consumption that reduces some of their risk. Moreover, the data analysis technology is relatively advanced that it allows sellers to know their customers' individual preferences, so the subscriptions could be personalised and more matched with customer's preferences, and the customers can receive the satisfied goods and services without spending too much time on researching and comparison. For companies, once their customers prefer subscription, their finances can be better managed as they can have clearer knowledge about their future earnings and cash flows. The subscription numbers can send better signals to investors, banks and other participants in the financial market about the companies' current and future performances, I think based on better signals, they can make better decisions thus the financial system could also lower its risk.

Therefore, I think subscription will become far more popular in the future.

What can we see from the total consumption on special shopping events?

Today is the Western Black Friday, when many retailers tend to provide discounts and boost their revenues on the day. Earlier this month, the China's Singles Day finished with a total consumption of 17.8 billion dollars, set another history.

When we compare the total consumption year from year, if we can see an increase in consumption, we may come to a conclusion that there is an increase in the entire population's consumption power; if we see a decrease in consumption, we may consider the population's consumption has decreased or we may think that some proportion of the middle class become more wealthier and busier that it is not worth buying goods and services on a specific day, especially on a working day.

There is always some news covering how these retailers cheat on their customers without actually reducing the prices; however, we have never seen that the consumption is ever significantly affected by this kind of negative news. This shows either customers are not sensible about the prices they consume or the majority of the prices actually decreases.

Why do people love to consumer far more than usual on these special shopping events? Of course, the discounts are very attractive and many people buy more based on their excitement about the sharp discounts. On the China's Single Day, the rate of the increase in people's consumption was greater than the average discount rate, which means the preferences of many Chinese people treat the price differences after the discounts greater than the actual price differences, then they have a convex preference curve towards discounts.

It is an era of new opportunities and orders

China right now has a very good opportunity to strength its world power and economy because of several factors.

China is the third largest economy in the world, after the European Union economy and the American economy. These two economies are facing very serious internal divisions. Firstly, the European Union and the Eurozone is at the edge of collapse. The Brexit this June means Britain is highly likely to leave the European Union in the near future, thus at the time the British economy will be affected in a negative way as well the European Union will lose a strong support from one of the largest economies in Europe, the British economy, especially when the negotiation is forced into an ugly revenge action. Secondly, America now has a very divisive nation and the result of the recent presidential election actually widens the nation's division. In addition, the next American president with his party dominating both houses seems he will focus more on the domestic issues rather than the global issues. This means other countries may face less opposing force from America.

Besides the European and American factors, the low interest rate environment around the world means the Chinese companies with good performances can have lower costs of financing around the world, and their expansions could be a lot easier. The large Chinese population and land and resources build up a large production possibility frontier and I believe the current Chinese output is still not any near the edge of the frontier, as some of the Chinese population are not acting productively in the economy, especially those in the inner China.

However, China has to be aware several factors that may cause a sharp drop of the growth. Firstly, China has to maintain and stabilise its currency in the Forex market. China should avoid the Japanese economy collapse from the last century. Secondly, China has some national divisions as well, the rapid economic growth raise the issue of the widening wealth gap, especially the gaps not just between the classes but also between the regions. When we can narrow the wealth gap, we can expect an increase in the consumption, and consumption should replace exports and investment to become the drive of the Chinese economy. In addition, the opportunity gap is more serious than the wealth gap that some regions have far fewer opportunities than others, especially those on the eastern coast. This may lead some people trapped in poverty.

What if two economists play the prisoner's dilemma?

I was asked an interesting question that 'what if two economists play the prisoner's dilemma together'. To be honest, in principle, it does not matter who is playing the game, the outcome of the prisoner's dilemma does not change, as it is the Nash equilibrium.

However, we can still imagine there are two economists playing the same game. We call them economists because we assume they understand the outcome of the prisoner's dilemma is not the best mutually beneficial outcome and they try to be 'smart' to outperform the others and they know each other well as they work in the field.

With these assumptions, we actually add one more assumption that they have the incentive to cooperate together. However, they do not know each other's possibility of choosing to cooperate, the only thing they know about if the willingness to cooperate is higher than the willingness to 'betary' his/her profession. This leads to a change in their preferences, as the payoff of cooperation increases and the payoff of defection decreases due to their professional 'pride'. Then we need to introduce risk preference into our model and the less risk averse the economists are, the more likely they are to cooperate.

Therefore, in fact, they may have a much greater chance to choose to cooperate. However, the model is no longer a prisoner's dilemma model, as the change in the payoffs of cooperation and defection due their professional 'pride' may change the basic structure of the model and they have a rough knowledge about each other and they can respond to each other's expected strategy.

What if the financial industry is fully competitive?

Of course, the current financial industry is not perfectly competitive due to various reasons. However, is it truly desirable to have a perfectly competitive financial industry.

In order to ensure it is a perfectly competitive industry, there are two key assumptions that we have to make. Firstly, the number of financial institutions is large enough to avoid an oligopoly market. Secondly, the entire market is fully aware all possible public information. Based on these two assumptions, we then can evaluate the possible outcomes of a perfectly competitive financial industry.

In the financial industry, price and utility are not the only two factors that demanders or consumers consider, each individual has own unique risk preference. Therefore, if we do not assume all consumers are homogenous, the market will inevitably be divided and differentiated according to different risk groups. Therefore, there will not be a single homogenous product sold by all financial institutions. However, within each different market targeting a specific risk group consumers, the institutions tend to provide the same product that balances its risk and return well and best suit the specific risk group. Moreover, even between the different small markets, the different products provided to different risk groups may have similar patterns that the products may contain the same items with different proportions in order to fit their consumers' risk preferences.

This will make all financial institutions have the same investment strategies, then make the economy fast abandon the industries in decline.

Is universal tax truly unrealistic?

Currently, our tax systems around the world always have many different types of taxations and some politicians have tried to simplify their taxation systems but all of their experiments ended in failure. I think that a universal tax could exist, but it requires a very complicated function to calculate the socially optimal taxation level for each individual in the society. This is one disadvantage of having a universal taxation system that it is almost impossible to come out one function that can consider all kinds of situations and factors and calculate the socially optimal tax for each individual. In addition, there are three time points that the government could tax one individual. The first time point is when one receives his/her incomes, the second is when one is owning his/her wealth and the final time point is when one spends his/her incomes on his/her consumption. Previously the politicians tried to impose a universal tax via the VAT channel. This channel is not effective that people's consuming habits are always changing over time. For example, in some western countries, people tend to consume more vegetables and fruits as they think this can make their diets healthier, meanwhile, in some countries, the price of meat is much higher than vegetables as in these countries meat is considered to be luxury goods. Taxing on people's wealth over time may not be a good idea, as this action could force people's wealth abroad. Therefore, I think that the only possibility of imposing a universal tax is to impose the universal tax on people's incomes. Then there are many factors that should be considered when we are forming the taxation function.

Overall, I think that imposing a universal tax is theoretically possible; however, in practice as there are too many factors that have to be considered and new issues can appear over time.

What does Brexit mean to the Eurozone?

Italy's referendum adds more uncertainties to the fortune of the euro. All three opposition parties in Italy want Italy to exit the Eurozone. When Italy wants to exit the Eurozone, other countries like Greece, will also take action to exit the Eurozone, this could lead to the collapse of the Eurozone due to the domino effect. Germany at the time will not have the power to stop this from happening.

If these relatively smaller economies exit the Eurozone, I think that the value of the euro could even appreciate as the remaining in the Eurozone are larger and stronger economies, like the German economy and the French economy. However, the increased value of the euro can harm the German and the French exports, especially when we expect the US is likely to launch a global trade war.

Britain could see an opportunity of an increase in its bargaining power when negotiating about the trade deal after Brexit. If Britain is able to stay in the EU, it is actually still a mutual benefit for both sides as Brexit will not break down the economic union in Europe. Free trade to many European countries has more benefits than costs; however, staying in the Eurozone makes some weak economies more and more difficult as they do not have the freedom of controlling its own monetary policies and their exports are not as competitive as those of stronger economies.

The possible of Italy's exiting the Eurozone could make Britain's Brexit negotiation easier, meanwhile the negotiation will also set up an example for Italy and other Eurozone countries who want to exit the Eurozone. Therefore, for the EU countries who want to exit the Eurozone, they want the Brexit negotiation to be easier, but for the countries like Germany, they want Brexit to be as hard as possible to set an example for the countries who are considering leaving the EU as well as the Eurozone.

The future global inflation and interest rate

Currently, across the world, many countries are experiencing low inflation rates and low interest rates and in some countries, some banks are forced to lower their interest rates below zero as the low interest rate makes their lending businesses less profitable. However, the globalization and free trade process are slowing down and even reversed; therefore, exports and imports are very likely to become more expensive, then the inflation rate around the world will increase due to the rise in import prices.

When the inflation rate increases, will the public consumption increase? The answer is not necessary. Because, based on very simple demand and supply model, when the price increases, the demand will fall, so the consumption will drop. Of course, when people are expecting the price will continue to increase in the future, people will be willing to spend their incomes as soon as possible. However, there is another theory called diminishing marginal utility that especially in the developed countries, people's living standards have reached certain levels that additional consumption has diminishing marginal utility; therefore, when they may focus on the short-term impact - the price increases on something they do not necessarily need, but ignore the fact of there may be a continuous inflation over time. This will affect companies' revenues and they will decide to lower their costs but the profit will decrease. Therefore, a sharp increase in inflation could be temporary in many developed countries, but later the price level will be stable again while the profits earned by the businesses will decrease.

In this case, it makes running businesses more difficult, so many countries will like to continue their low interest rate monetary policy in order to lower business borrowing costs. This will continue to be ineffective.

Overall, the future global inflation will increase to a certain level that covers some increase in the costs due to imposed import taxes then stay at that level without much fluctuation. However, the possible increase in the base rate by the US Federal Reserve may make a difference that it may bring down some big businesses and cause violent fluctuations in the financial markets, especially the bond market and the stock market.

Differences between running an economy and running a company

The US president-elect Donald Trump is widely accepted as a successful businessman and many American people believe he could direct the American economy as well as he directs his own business, especially given a big probability of another economic crisis during his presidency. However, I think that there are differences between running an economy and running a company, so a successful business career may not help one become better at running a country's economy.

Running a company is to maximize the company's profits and running a country's economy is to maximize the social welfare, these two goals look very similar but actually fundamentally different. The ownership of a company belongs to its shareholders who do not work inside the company, but the ownership of a country belongs to all citizens who actually work in the economy.

When running a company, the management team can change the company's employment structure in order to make it more profitable and more productive, sometimes it is better to lay off some unproductive workers and replace them with better ones. However, this is not possible and right when running an economy. When running an economy, people could be transferred from one position to another in the labour, but forcing them to be unemployed because of their abilities or productivities is not something socially desirable. Therefore, when running an economy, a primary goal is to maximize the employment without considering too much on profitability and productivity which are less important than lowering the unemployment rate. Additionally, the motivation of running a company successfully and the motivation of running a country is different.

Therefore, I think running a business successfully does not mean he or she can run a country's economy successfully.

Conflicts between the economic gains and the social opinions

Sometimes the interests between the economic growth and the social will contradict each other and the government may not have any strategy to satisfy one without hurting the other. When a country has to sacrifice one for having the other, how should the government make its decision in order to maximize the total social welfare at the moment as well as in the future?

We see many examples of how the economic interest conflicts with the social will. The most typical example is Brexit. The British population, especially the English and the Welsh population, is afraid of the border security and the job opportunities taken by foreigners. However, without having the access to the European single market system, Britain as a strong economy loses its opportunity to take advantage of the single market system, especially as it has the most advanced financial system in Europe, having the access to the single market can make Britain become the heart of the European market when most of the financial activities in Europe take place in London in Britain. This generates thousands of jobs in Britain and an enormous amount of incomes in the City.

Moreover, the economic growth usually distributes its incomes unfairly that the wealthier group becomes wealthier and the poorer group becomes relatively poorer though their incomes increase as well. Under such circumstance, the poorer group may maintain their previous situation without having increases in their incomes and widening their differences from the wealthy group.

Therefore, the conflict between the interests of the economic growth and the social will is often caused by the widening wealth gap, that forces the government to use more aggressive wealth redistribution policies domestically. But the government can have policies to encourage more economic activities and encourage firms to give out higher salaries by reducing corporate taxes. Therefore, it will be companies' interests to open business in the country and it can generate more incomes for the entire population while the incomes will be redistributed more equally among the population.

When America starts its protectionist policy, what could happen to the forex market?

Once Trump was elected, it created huge volatility in the forex market that we saw a sharp appreciation in the Japanese currency as well as a sharp depreciation in many Latin American countries' currencies. As the value of a currency is largely determined by the country's trading position, economic performance, and the market expectations about these factors' future changes.

When Trump comes to power and starts his protectionist policy, it will affect all countries' trade positions around the world, in some countries, their economies could be affected more than others' as their economies have greater dependency on the American economy. There is another factor about America that following the protectionist policy, the American inflation rate could increase.

The countries, which are expected to have relatively lower inflations than America and/or improvement in trade positions or relatively smaller decrease in exports, are highly likely to have their currencies appreciating. These countries could include the Eurozone, Japan and even Canada, whose economy, though, has a large dependence on the American economy, since America has a long history of a good relationship with Canada, may not be affected as badly as others'. Vice versa, the countries, which are expected to have relatively higher inflation than American and/or a huge decrease in imports, are likely to have their currencies depreciating. This has been shown clearly by the forex market behavior once Trump was elected.

In terms of the US dollar, I think US dollar may appreciate in the future. Though the American inflation rate may increase after the protectionist policy is put into action, the possibility of a trade war in a global scale may damage many countries' economies and affect their governments' credit ratings, then the US dollar may become the most secure currency to hold, thus the value of the US dollar will increase against many other currencies which are considered to be risky.

Is there any protectionist policy without starting a trade war?

The US president-elected Trump is famous of his nationalism and protectionism. The world economy is afraid of a global scale of trade war, which will definitely damage the global economy.

I think that it is impossible to start any protectionist policy without a possibility of starting a trade war, actually trade wars always exist in some form of war even without other countries' moves towards protectionism. Once a country is in a weak position in terms of trading, this country is very likely to start some form of protectionist policies which can lead to a trade war.

Therefore, it may worthily ask if anyone could be less harmed or even gain some benefits during a trade war. From our past experience, the countries which initially start a trade war could benefit from the trade war in the beginning; however, in terms of long benefit, the countries which have the fastest innovation and development speed will benefit from the trade eventually. As it is impossible to have a trade war that lasts forever, once the trade war ends, the country with the most advanced domestic economy and industries will benefit from the reopening of the global market.

Overall, I think that a trade war will harm all countries in a general term; however, if any country could have a faster development speed than the others in the most profitable sectors under protection, once the global market reopens, it could be the biggest winner of the global economy.

Are we heading to deglobalization?

Ten years ago, we never thought of a process of deglobalization that almost everyone was thinking about how wonderful globalization was and how we could speed up the process of globalization. However, nowadays, we can see a backlash of globalization, that it seems we are heading to deglobalization.

There are two major events that could be marked as deglobalization processes. One is the Brexit referendum and the other is the US presidential election. Moreover, in Europe, some radical populist groups are gaining more support from the public, even some are considered to be Neo Nazists.

What causes the process of deglobalization? As we can see from the past years, the global economy has been benefiting from the process of globalization; however, it creates more inequality in the society that some groups in the society feel they have been left out by globalization. Moreover, globalization has brought more players into the market, so the scale and the degree of competition increases, some workers or individuals are not used to such scale and degree of competition and feel threatened; therefore, they have the incentive to reverse the current process of globalization. In addition, globalization allows the "better" groups to gain much more from the "worse" group and the individuals and organizations who belong to the "worse" group will be angry about such situation and anti-globalization.

With the current wealth gap, we are inevitably heading towards deglobalization, in my words, we are heading towards an era of domestic wealth redistribution. Once the domestic conflict is mitigated or even solved, countries will restart their globalization process as people are now ready for and willing to get a larger market.

Therefore, maybe we should view globalization and deglobalization just like boom and recession, they are in a circle and hopefully our trend is towards globalization but there is some time that we are experiencing deglobalization.

Separation of individual ownership and management could improve social equality

Nowadays, in many companies, especially the publicly listed companies, have a system of separated ownership and management. It could deal issues like conflicted interests, inside trading and many others; moreover, such system encourages more competition in the market. However, when it turns to competitions between individuals, individuals have their ownership and management combined, it creates some issues about fair competitions.

People can have their own advantages that are independent of their skills or effects, they are merely lucky to have all those resources available to them. When it comes to competitions between individuals, their "ownership" affects their "management" as well as their competitiveness. Many people argue that individuals cannot separate their own ownership and management; however, I think that there is a way to do so.

In order to separate individuals' ownership and management, we can separate their personal life and professional life more clearly. For example, when they enter the labour market, of course they can take their owned resources with them in order to take advantage of these resources, but they need to agree once they are employed and enter their professional life, the resources they have taken with them are also fully available to their employers. This means while the people with wealthy background do not only sell their skills and knowledge, they also sell their wealth. Moreover, the resources they do not take with them into the market are strictly used for their personal purposes and they are not allowed to violate this rule.

Some people may argue that people with wealthy can use their wealth to buy top professions; however, in most time, they will get into those places anyway and now they have to buy much higher prices. In addition, especially for large firms, unless an enormous amount of money is offered, they focus more on their employees' potentials rather than an immediate one time transfer. This means wealthier people have higher costs when they are competing with people who do not have such wealthy background. And the money contributed by the wealthy group can be redistributed through companies to their less wealthy employees.

Therefore, a separation of individual ownership and management can improve social equaliy.

The US economy is heading to more expansionary fiscal policies

After being elected, Donald Trump in his victory speech promised to rebuild the infrastructures in the US, which would require a huge amount of government expenditure. Moreover, Trump's "put America first" political strategy could lead to protectionism. In addition, the defense company stock prices rise sharply due to his aggressive populist and anti-Muslim comments.

Up to now, Trump's policies require a sharp increase in the government expenditure while he does not have effective budget saving policies yet; therefore, we can see that the government deficit could increase to an even higher level. This is why we are seeing a surge in bond yields. Some experts suggest the American inflation rate will also increase sharply, as the current unemployment rate is close to zero, while the government expenditure is expanding, more money is pumped into the American economy, so the inflation rate should rise sharply when Trump starts to exercise his policies.

In addition, Trump promised previously in his campaign speeches that he would issue a big tax cut. The inequality in America can increases, but the firms can benefit from the tax cut. Protectionism could impose heavy import taxes and effect firms' profitabilities. I think that according to the current situation, the rate of these import taxes could be extremely high in order to compensate the losses from his tax cut to the government budget.

Overall, as Trump does not have a clear budget saving policy, the increase in import taxes is currently the only budget saving policy at the moment, I expect the American government deficit may further increase and firms which focus on the American domestic market will make much more profits under Trump's presidency while the multinational companies may perform better domestically but lose profits due the other countries' revenging increase in their import taxes.

Why were the polls wrong about the result?

I recommend this article on the Financial Times today: https://www.ft.com/content/8de13154-a677-11e6-8898-79a99e2a4de6 (Trump victory: corporate winners and losers). Their argument may not be perfectly precise, but definitely provides us with some details about what Trump's possible future policies could be according to the content of his previous election campaign speeches. As I have expressed my expectation about how Trump will lead the US, I am not going to talk about this issue today.

Many people feel that the victory of Donald Trump is like Déjà vu as Brexit had a similar situation before. The media find that their previous polls were quite wrong about the final results. Last time they were wrong about the Brexit, this time they were wrong about the US election. Why did these polls fail to predict the election outcomes?

The first major problem is that these polls failed to cover a fair sample, the samples they select are generally biased due to the ways they used to reach their interviewees. Moreover, some voters are only active on the election, and the media is not able to reach them any other time. The second problem is some people are not willing to speak about their true preferences as their preferences are considered to be different from the social mainstream opinion. This could cause the results the media gets are biased towards their favor. The third problem is that when the voters feel they are the minority, they have stronger incentives to vote than those who feel they are the majority.

Therefore, when it comes to a situation when the mainstream media has a very strong bias, the polls can be conducted to be biased towards their views despite their willingness to conduct a fair poll. This means when the mainstream media has a strong bias towards a particular result, the polls they conduct are very likely to be biased towards that result; therefore, the probability of get a wrong prediction increases.

What could happen if the Opec's worry comes true

OPEC warns that the demand for oil could peak within 15 years as the market is switching towards alternative fuel cars and more aggressive climate change plans. These factors are real and very crucial right now. Green energy has always been considered as the future energy; however, when the global economy is slowing down, the governments around the world are always willing to use expansionary fiscal policies to stimulate their economies if possible. When they are thinking about where to expand government expenditure, the green energy industry is very likely to be on the top of their lists. This may be partially the reason why the current policy targeting the climate change is becoming more and more aggressive.

Once the OPEC's worry comes true, the cartal will become more likely to fall apart that their market becomes smaller and the level of competition increases. The price of oil could fall more rapidly and then the producing countries have to find their ways to boost sales quantities.

Free market, social mobility and inequality (part 2)

Yesterday I talked about how a free market system may help to improve the social mobility and social equality, and today I would like to talk how a free market system can worsen the social inequality and reduce the social mobility.

Firstly, education makes a big impact on people's career and incomes; however, all studies have found that the background can have more influence on children's academic performance than other factors. In addition, children with wealthier background are more likely to receive a better education than the children with poorer background. A free market system may not help children with their education, as the system can improve the impact of their background on their academic achievements which significantly influence their employability and their future incomes. Secondly, sometimes workers who own significant amounts of resources are far more attractive to their employers than those who do not own much wealth. This nature of the labour market can widen the inequality. Thirdly, in some sectors, people who have greater amounts of resources naturally receive greater returns than those who own less and the wealthier people are more able to get better deals than the less wealthy people. This can widen the wealth gap.

As we can see the person's background and personal wealth are taken into account when involving in most of the economic activities, more wealth can make individuals stand at a more advantageous position. Just like larger firms are more likely to gain more resources, wealthier people are more likely to receive further more resources, as owning more resources is a signal that values something in the market. Under the free market system, the markets will recognise the values of these signals, which could lead to a further social inequality.

I believe a limited government intervention is definitely necessary to deal with the issues of social mobility and social equality. The intervention should encourage the markets recognise more about the values of individual efforts than the values of some factors that are not controlled by individuals.