Negative saving interest rates and limiting cash use can mitigate the negative effects of deflation

If we allow negative interest rates on savings and limit the use of banknotes and coins, then we could probably solve the problem of deflation. Nowadays, people have more wealth in the form of deposits than in the form of banknotes and coins. Deflation is easy to lead an economy to a recession, because once there is a deflation, the expectation of further will lower people's consumption and hurt the economic output as demand drops. However, if we allow negative interest rates on savings, people will probably have the incentives to spend their money. Moreover, as we limit the use of banknotes  and coins, cash becomes a type of security with a fixed nominal value rather than money. People have to purchase necessities even if they know these necessities could be cheaper in the future, because without these necessities, their life standards will be affects. To conclude, if we can limit the use of cash and allow negative saving interest rates on demand deposits, then a significant drop in consumption once a deflation occurs could possibly be prevented.

We no longer use shell, silver, gold as our money, why can't we abolish cash?

Weak demand for oil will continue due to overconsumption of oil

Due to the sharp fall of oil prices last year, many companies and countries have consumed more oil than they actually need. Because their belief that the current oil price is abnormal, they have been over-consuming oil and storing for their future once the oil price increases again. Such behavior will longer the length of low oil price. Once the oil prices rise again, the demand for oil will drop sharply. If the revenues of oil sales fall, many oil exporting countries may reconsider to reduce the oil prices again in order to boost the volume of oil sales. Therefore, I think even after the oil exporting countries agree to cut their outputs, the situation of low oil prices may last longer.

The US economy could continue its outstanding performance, but the risk remains

The US GDP beats expectation. This is great, but what happens next? The US economy has been outperforming the expectation, which shows that there is a high probability of the US economy to continue its performance despite the economic problems taking place in other regions of the world. The US dollar is more than just a type of currency, it is the international reserve currency. Given its continuous strong performances and the largest economy in the world, the US dollar is very likely to continue to appreciate when the future of the world economy is clouded. As we can see today, after the announcement of the US GDP growth, the US dollar appreciates sharply, against most of currencies. And the US dollar has been relatively very strong recently. In addition, from the recent job report, the US employment rate and average income both increase. This is a sign of the market confidence in the US economy. However, some parts of the US economy do not perform so well. The service sector shrinks for the first time since 2013. This could cause a rise in the unemployment in the future. More importantly, the service sector accounts for the bulk of the US labour market. Therefore, it is crucial for the entire US economy if the employment in the service sector decreases. In conclusion, the US economy will continue its good performance compared with other economies in the world; the risk of falling in contraction remains due to the external factors, the US dollar appreciation and its shrinking service sector.

No one can predict how and when a financial crisis takes place

Some people believe that there is another financial crisis coming in 2017, they could be right. Before each financial crisis in our history, there always were some people who correctly predicted its coming. These people are usually the minority. Why do people care less about these people's opinions in general? Because they could predict the coming of a financial crisis, but they cannot tell what will be the trigger and when it will come. People are generally short-sighted: even if they also believe a financial crisis is coming, they will still be as greedy as possible to maximize their profits before  the crisis takes place. Moreover, no one will know the exact trigger of a financial crisis before its coming. In other words, if the central bank knows the trigger, the potential financial crisis will be avoided. Only those which we do not know the triggers will eventually take place. Unfortunately, we have not avoided a single financial crisis yet (Soros's failed battle in Hong Kong might be seen as the only success story). Why? Because there is no single event that can trigger a financial crisis. Based on what we see from the past, a financial crisis is always triggered by a series of inevitable "accidents".  They are inevitable because we see ourselves creating bubbles and we know one day bubbles will burst. They are accidents because there is a probability for the bubbles to burst. For example, why do bank runs occur? Because we believe the others will take out their deposits, we have to run to our banks just like everyone else in order to limit our losses. When most of us believe there will be a bank run, then a bank run will occur. Though the chance of we believe it is very close to zero, it still means a bank run could happen. More extremely, if one day most of us suddenly want some cash from our banks, a bank run will also occur. To conclude, there is always a  probability of a financial crisis, no matter how our economy is performing.

Cash could become the next "security"

We hear frequently about the phrase, "negative interest rates" these days. Around the world, almost all central banks are now putting their efforts to lower their interest rates and some have set their base rates below zero already. If we really have negative returns on everything, including government bonds, saving interests, stocks and bonds, then why don't we hold some cash? Cash could be seen as a security with no change in its nominal value forever and it could also be seen as risk free. Moreover, the money we save in bank accounts is "digital liquid asset", there is price for digital credits to buy cash. This price could change over time. However, once you buy a certain amount of cash, it stays its nominal value forever. For example, you have $100 "digital liquid asset" then use it to buy $100 cash, once you buy the $99 cash, your $99 cash values $99 forever; however, if you hold $100"digital liquid asset" in your bank account, when your bank has a -2% interest rate, your asset value will decrease to $98. To conclude, once negative interest rates become normal in our life, cash will become another type of security.

All industries are likely to become mature and uncompetitive

I feel a bit worried when I find it is very likely for any market to end up becoming highly uncompetitive. When an industry grows to become mature, the profit margin of the business becomes lower, thus this prevents some investors from entering the industry. New investors look for opportunities with higher returns; therefore, even though decreasing competitiveness could create margins for late comers, investors may turn to new businesses with much higher returns. When some companies stay long enough in one industry, they become large enough and very experienced, then competition with each other within the industry becomes extremely expensive and unprofitable. Therefore, we can see that the existing companies in a mature industry face lack of competition from each other or outside potential newcomers. There is a possible equilibrium point in mature industries that companies can earn profits as they cooperate and gain market power, but outsiders have no interests to enter the industries to share their cakes, unless they can find new business models and earn high returns (however, in this case, we cannot call such industry as a mature industry).

What does sterling sliding show to us?

Sterling fell to the seven-year lowest point on Monday. The direct cause to the pound depreciation is London major publicly supported Britain leaving the EU. Most of people did not think the election would lead Britain to leave the EU. The depreciation of the pound shows people view an increase in the possibility of Britain leaving the EU and people generally believe leaving the EU has negative effects on Britain. From this case, we can clearly see that the value of currency is still controlled by the market expectation. Usually we see that the central banks and some governments have controls of their currencies' exchange rates. However, their influences on exchange rates are there because the market believe their acts have effects on their economies and based on the effects made to their economies the market will value their countries' currencies. To conclude, governments can only control the market prices by changing the market expectations.

My view on "Brexit"

I do not think Britain will leave the EU this summer, as staying in the EU has a relatively stronger political support and support from the industries. However, it is still worth thinking about the gains and losses of staying in the EU. The direct benefit is that staying in the EU has less uncertainty of its economic growth. It is easier for the market to predict the British economy's future move if it stays in the EU; however, if Britain leaves the EU, many companies in the UK may reconsider their business structures as many of the multinational companies locate their Europe central offices in the UK and they relocate their European central offices when Britain leaves the EU. If companies relocate their European central offices, the employment and income in Britain may be affected. In addition, staying in the EU can maintain Britain's current trade account, especially exports. However, leaving the EU has its benefits as well. Leaving the EU can reduce its political and economic dependence from the EU. Countries which are in deep deficit may slow down the British economic growth. Greece and some countries have debated about if they have to continue their austerity policies. If they decide not to follow austerity, the budget deficit burdens on these countries may be shared between all the EU member countries. Leaving the EU will allow Britain not to pay for other countries' mistakes. The government may be able to increase its tax incomes when Britain does not need to follow the EU trade agreement. To conclude, leaving the EU is a very risky move, it is hard to see its effect on Britain right now. I think leaving the EU and staying in the EU have very close expected returns to the UK; however, if British people are risk averse, it is sensible to stay in the EU.

Is trading below book value good investment?

Many investors believe trading below book value is great investment as companies' market capitalisations are not be lower than companies' asset values in general. However, market capitalisation lower than asset value could be sensible. For example, some Japanese companies have such situations. To be honest, the most direct and absolute profitable way is to sell such companies then split the money between shareholders. However, this is not realistic, as sometimes because of many reasons, we cannot close or sell a company easily. The government may ask to solve the workers' job problems before closing down companies. Therefore, this absolute profitable way cannot practiced, so there is no absolute profitable way in reality. When a company is not likely to sell assets for financing and people expect a company's asset structure cannot generate more profits but is highly likely to increase its financing costs. To conclude, trading below book value is not always a good investment, especially when it happens to a large company, as it could be too large to adapt any change.

Could EMs become the next "South America"? Everyone knows they have economic difficulties, but pays much less attention

Nowadays, people still talk about the effect of the Chinese economic slowdown in the world economy and worry about the possibility of "Brexit". Meanwhile, some countries have been in economic trouble for many years, but the rest of the world pays much less attention to these countries. I think there are three reasons for this phenomenon. Firstly, it is not news. Secondly, it has not caused big impacts on other countries. Thirdly, it does not happen in the advanced economies. Currently emerging markets face a sharp decline in their growth. Is this a big problem to the rest of the world? I think the effect exists, but is not disastrous, as we still can see some advanced economies have decreases in unemployment and increases in incomes. Therefore, there might be a possibility that the EMs stop their economic growth but the advanced economies grow as previous by finding new trading partners, until one day that advanced economies cannot find new trading partners and realize that the whole world is in economic trouble.

Shift or Shock? This could be subjective

I read a book by Martin Wolf, called "The Shifts and the Shocks". In economics terms, a shock mean a economy' performance is away from its trend but will return back in the future; a shift mean a economy's trend is changed. The difference seems so obvious; however, in the real life, sometimes, it is very difficult to distinguish the difference between these two terms. The largest problem is sometimes we do not know the value of our productions. For example, if there is a rumor that using Phone A has a higher chance to get cancer, then the price is very likely to decrease forever even if the rumor is proved to be wrong. This should be a shock, as nothing really changes. However, the impact shows it is a shift, as the price has been permanently changed. This is because some people's expectations about the value of the phone have been affected permanently. If some people believe there is a very small possibility that the rumor could be true, then the public expected value of this phone will decrease. From this example, we can see that a shift occurs when the accumulation of changes in people's expectations does not equate to zero; otherwise, markets will shock around the previous trend as the overall expectation does not change.

Why is there too much paperwork to open a bank account?

You always need to do a lot of paperwork to open a bank account. Why? Is it because of security reason? Not really. More money is made by banks to keep their old customers, compared with to attract new customers. This causes that the banking industry is not very competitive. If banks can cooperate together, the best strategy is to keep their old customers and not to compete with each other. In order to achieve this, increasing paperwork to open an account could largely reduce the probability of a client to leave one bank to another. Moreover, because most banks will exist for almost infinitely long time, they have no reasons to cheat on each other.

Monetary union is not enough, to speed up recovery, some form of fiscal union seems necessary

https://next.ft.com/content/0c9acf2e-d189-11e5-92a1-c5e23ef99c77 Four signs another eurozone financial crisis is looming

https://next.ft.com/content/2b918ed2-d17e-11e5-831d-09f7778e7377 Eastern Europe defies the gloom

Two articles from Financial Times tell different stories of the Eurozone. In East Europe, since 2014, the Eastern European economy has been picking up . Bulgaria was the weakest , with a year-on-year rise in GDP of 3.1% in the last quarter of 2015, while Slovakia the strongest at 4.2%. Moreover, these economies enjoy a period of high growth but low inflation, as they benefit from the slump of oil prices. While another article suggests the Eurozone is near another financial crisis. The whole eurozone faces the same external risks and shocks and is influenced by the ECB's policies. Some economies are doing better than others because they have different economic structures, in other words, their income sources are different. Similar situations happen within a country as well, as some parts of a countries can be richer than other parts. However, because of the central government power, the central government can redistribute wealth across regions. Such case does not happen in the Eurozone. Only monetary union is too weak, some sort of fiscal union may be necessary to gather sufficient resources to restructure the economies which are in bad shape. However, currently, austerity limits the speed of Greece and other countries to build healthy economies. To conclude, with only help from some financial institutions and the ECB, the speed of recovering the eurozone economy is limited and may be too slow to avoid another crisis.

Comments on "The bankers' new clothes"

The authors argue that politicians and regulators focus on the public interest and carry out the necessary steps to regulate the banking sector. This opinion is right but we need to consider about its practical values. We can see from history that important industries influencing the politics is very normal. This does not uniquely happens in the banking sector, as we can still remember the Rockefeller's influence on American politics of his era. Therefore, I think that politics is always rational and focuses its attention on the sector where the social resources concentrate.

Why is the market rallying?

When a market is not doing well, investors are suffering from devaluation of their assets, they have to two choices: hold or sell (we do not consider the case of buying more, as we assume their priority is to stop further losses and both are risk averse). They could hold their assets in the hope of asset prices will recover in the future. Or they can sell their assets to avoid further losses. To simplify the problem, I assume there are only two investors making decisions at the moment.

	hold	sell
hold	-b+a,-b+a	-(b+c),-b
sell	-b,-(b+c)	-b-d,-b-d

At the beginning, both investors have losses of -b. If both investors hold, then their losses will maintain or even be cut, as when no trading happens, the price will maintain at its original level; moreover, if there is a new investor entering the market, this could increase the price . If one decides to hold, the other decides to sell, then the one who chooses to hold will have a greater loss as selling could decrease the price, and the other who chooses to sell will prevent from future losses and limit his/her losses. Both traders decide to sell, both will suffer greater losses (d>c). Such game does not play for once, this is a repeated-game. In real life, different investors have different costs of their assets and their expectation of their assets' future values; therefore, they will not continue with one choice, though both choosing to hold is the best strategy can provide the best outcomes in the repeated games. In general, when the market is rallying together to push up prices, it signals most investors are suffering losses from the devaluation of their assets.

To what extent can low government bond yield help to increase inflation rates

10-year Japanese government bond yield fell below zero; moreover, currently many 10-year government bond yields are close to zero, including the US and UK government bonds. Very low government bond yields could improve government financing itself, as the cost of borrowing becomes cheaper. Therefore, a government could increase its expenditure by taking advantage of negative government bond yields and borrowing more. When more cash is flowing into the economy, there is a higher probability that the inflation rate will be increased. However, very low government bond yield could have negative impacts on the market, as it is a signal of the economic performance. Low government bond yields signal high risks in the economy as well as the financial markets, which could prevent people from further investment. Moreover, the change in yields is usually a market's move. This means when the yield is very low, the economy is definitely in bad shape. The government cannot directly influence the yields except by borrowing more, as the interest rates will not be increased by the central bank when there is a recession. Therefore, the impact on the inflation rate will depend on how much more money the government raises for its expenditure and how much less money has been withdrawn from investment and consumption sectors due to the signals sent by low government yield.

How important is the oil market?

BP offers its own outlook of the oil market. In the report, it points out a potential increase of demand which could drive the oil price up. My question is how important the oil market is to our global economy. Of course, it is important to those oil companies and oil exporting countries, as low oil prices will damage their incomes. However, to what extent does the oil market directly affect the other economies? If the world economy is in good shape, the low oil price will be good to lower production costs. Moreover, when economic growth is high, oil prices are usually pushed up as demand increases. If the world economy is in bad shape, I think that low oil prices may only worsen the problem but are not the cause of the problem. I doubt about the effect of oil prices on the financial markets, I think it just reflects people's worries about the future economic performance but is not the cause of the core problem.

The Japanese economy is in trouble, so are many others

10-year Japanese government bond yield falls below zero, which means investing in risk free assets will have negative returns, if we assume 10-year Japanese government bond is risk free according to its good record. This is caused by people's concerns about the Japanese economy as well as the world economy. However, this leads to other questions that how commercial bank interest rates could change. Deposits saving in banks are usually considered as risk free as well; however, when there is a bank run, it will be no longer to be risk free. Therefore, commercial bank interest rates cannot be lowered, as lowering interest rates could increase the risk of bank runs, as the public may be afraid of having negative interest rates. However, if the interest rates stay high, banks have to find  effective ways to seek profits. Under the current circumstances, profits earned from lending are cut by the decrease in investment due to worries over the health of the world economy. Therefore, banks may face another big problem after the financial crisis. In addition, storing cash at home could also be considered as almost low risk. Cash has a constant nominal returns of zero. Especially under the environment of deflation, cash becomes a better choice compared with other types of investment. This largely increases the probability of bank runs. Therefore, I think that the negative 10-year government bond yield may be signaling another financial crisis in Japan; meanwhile we can many other economies have similar conditions as Japan does, which is very worrying.

The 2008 Financial Crisis has not left us, still gradually damages our economies

The 2008 Financial Crisis is more than a crisis, it is like cancer that gradually damages our world economy. To stimulate the economies, many countries have set their interest rates at historically low levels. During the "so-called" post-crisis period, we had a good period of recovery that the US economy has achieved the lowest unemployed rate since 2008 and the UK and German economies both seem to recover well from the crisis. However, there are many economies who have not recovered from the crisis. Countries like Greece still have very high debt levels and heavily depend on the financial supports from foreign aids. Brazil and many South American countries have economic difficulties which long exist. Moreover, even in the economies like the US and the UK, there are potential risks that could cause another crisis. The low interest rates set up by the central banks since the 2008 Crisis have largely increased companies' debt levels, as it is cheaper to borrow. In addition, because financing has become cheaper to companies, the share prices rise sharply. Therefore, it is not difficult to imagine if these companies face financial difficulties, bond markets and stock markets will drop sharply. Overall, it is not easy to see that the sequela of the 2008 Financial Crisis still exists and the room for further both fiscal and monetary stimulus is very limited.

A short and clear contract is necessary to allow clients to understand their real costs when regulators cannot catch up innovation speed

Innovation also moves faster than regiulation, this creates problems for regulators. The 2008 Financial Crisis proves that regulators can hardly catch up with innovation if the industry is at its full speed. Nowadays regulators can catch up with banks, because the profits in the banking sector have sharply dropped since the financial crisis and bankers' speed of innovation has also slowed down. Currently the innovation in the IT industry is moving at its full speed. We can see that the regulators around the world are not efficient to create new policies to control the spillover effects of IT innovation.Moreover, sometimes people do not recognise the spillover effects. Some people do not consider companies collecting their private data as a spillover effect when receiving free services. There is another big issue that the agreements made by those IT companies with their clients are tediously long that almost no one will sign after finishing reading the whole contract. Maybe the regulators cannot catch up with the innovation speed; however if we want to rely on the market force, it is important for clients to understand their costs. Therefore, a short and clear contract is necessary to ensure clients understanding their real costs.

Reduce the traffic pressure in China before the Chinese New Year

The world largest mass migration every year is taking place currently just before the Chinese New Year. When ten of million people are moving across country to return home, the efficiency of transport becomes worse. Is there a way to improve the transporting efficiency? To deal with this problem, we face two constraints: time and costs. To reduce the pressure of traffic, we can increase people's available time to return home, or reduce people's willingness to return home. By doing so, we can either increase the holiday wage levels or give migrant workers longer holiday. However, it is also important to ensure that workers can only choose one option from the two choices; otherwise, the problem will not be solved.

Austerity versus Expansionary policies

When an economy is in recession, its government is the mostly likely to use expansionary policies to stimulate its economy. However, when the government is also in deep deficit, austerity may be introduced in the hope of lowering the government debt level. Government’s deficit is equal to government expenditure minus tax incomes. If we assume that tax received is positively correlated to the GDP and government expenditure is negatively proportional to the GDP as governments tend to expand fiscal and monetary policies in recession, then government balance is in the same direction as the economy growth.

Now we assume:

GDP=f(G), dGDP/dG>0, T=g(GDP), dT/dGDP>0 (GDP:GDP, G: government expenditure, T: tax income);

then: dT/dG=(dT/dGDP)*(dGDP/dG)>0.

However, dT>dG has to be greater than 1 in order to use expansionary policies to improve government budget.

dGDP/dG could be considered as the government expenditure multiplier effect ratio, dT/dGDP is the rate of taxes returning from the economy. The product of these two figures which could change with GDP figures has to be greater one in order to change expansionary policies to improve both GDP and government budget. Otherwise, austerity is a wiser choice to prevent worsening government deficit.

The cause of capital outflows

Capital outflows have become a problem of the current Chinese economy. What are the causes of capital outflows? Firstly, the balance of payment is always zero in theory. If the current account is in surplus, then the capital account will be in deficit. Secondly, if the returns of capital overseas are higher, capital tend to outflow. Thirdly, if the domestic risks become higher, investors will try to move their capitals to foreign countries to avoid risks. Fourthly, when the costs of transferring capitals become cheaper, it will speed up capital outflows.

Will we have another economic boom boosted by technology innovation?

We have had several periods of economic booms boosted by technology innovation. The two most valuable companies on the earth, Apple and Alphabet, are companies based on technology innovation. Recently we could see that there have been so much technology development. Countries agree to replace fossil fuel by renewable energy by the end of this century, and we can see many electric cars on the street already. Moreover, some driverless cars have been put on streets for tests. In addition, SpaceX's successfully reduce the cost of space transport and Luxembourg launches a space mining project with its European partners and US. All these scientific projects have huge potential economic profits that everyone can see and require huge investment. We are in a generation of many new ideas and rapid technology development. Therefore, I optimistically believe that maybe we have some economic difficulties at the moment but we will have a rapid economic growth with the help of rapid technology development in the near future.

International tax system is needed

Recently Alphabet, Apple and some other global companies are fighting a global tax war. Alphabet and Apple are huge companies and two of the most valuable companies in the world and make huge profits. They almost operate in all countries around the world. Every countries want to share their success by receiving more tax from them. Because countries have different tax policies, global firms have very complex tax efficient strategies. For example, the amount Amazon's sales in the UK are greater than most of other EU countries; however, the tax it pays in the UK is not proportional to its revenues. Countries are competing with each other in order to gain more profits from taxing those global companies. Governments may decide to reduce their tax rates in order to attract the companies to pay tax on higher proportions of their revenue in their countries. Therefore, I believe that if the governments want to gain the most out of these huge companies, they need to unite together and form a global tax system.