How do you think about a 100-year bond?

If a country issues a bond which has a maturity of 100 years, is there any one buying such bond? Firstly, a 100-year bond does exist that Mexico has issued 100-year bonds at 4.2 per cent. Secondly, usually we consider a 10-year bond is risk free, especially the US 10-year bond and the UK 10-year gilt. However, the risk increases over the time extension. Therefore, the 100-year bond could not be considered as a risk free asset. The problems about currency, inflation and sovereign will magnify. Then what kind of people will have the motivation to buy such a bond? People who believe the world economy will be in its decline over the following 100 years will have the motivation to buy such a bond. However, there are so many uncertainties that could make a 100-year bond default if the economy is in its decline. Overall, I do not think a 100-year bond is a good way to avoid future risks.

Lower for longer, then what?

I do not think that Yellen's promise of "lower for longer" is profitable and will push up the US economic growth. Recently we can see an increase in default rates, and lower interest rates allow companies, especially those big companies, to increase their gearing ratios. Therefore, the risk of the banking sector increases. Moreover, when loans become cheaper, some successful and large private companies may decide to stay private. In the first three months of 2016, only 9 US companies succeeded in listing, but 21 were forced to shelve IPOs. The major challenge of the US economy is exogenous. Therefore, the promise of "lower for longer" is only profitable when there is no breakout of exogenous crisis.

How "bad" is the Chinese economy?

Recently we have received much negative information about the Chinese economy, especially people start to believe the Chinese economy slowdown is accelerating. Is it true? We can still receive some positive information about the Chinese economy. The traditional industries are in their downturn, especially the mining industries. The most direct way to see this is to look at their share prices. The share prices of many traditional industrial companies dropped. However, the share prices of some more advanced companies, e.g. some auto companies, IT companies and pharmacy companies, increase over the last year. These companies have their potentials but still lack the strength to compete with their overseas competitors. To conclude, I believe that the Chinese economy will grow at a relatively slow rate but there will be a big leap of the Chinese economy in ten to fifteen years when the Chinese advanced companies are able to compete with their overseas competitors.

What can make price wars more likely?

The recent drop of the oil price was caused by a price war. What kind of property makes price wars more likely to happen? There are three properties I think. Firstly, if suppliers have different costs of production, there will be a higher probability for a price war to take place that suppliers with lower cost of production start a price war to remove their competitors with higher cost of production from the market. Secondly, the products have to have very close properties. Otherwise, price competitors will not take place. Thirdly, a single supplier in the market need to have productive capacity to supply  a majority of the total market demand; otherwise, suppliers will not start a price competitor if they can increase their production when their market shares increase. From the above three properties, we can see that the industries are generally low-end traditional industries. These industries usually have very low margins as well. The unprofitable industries can hardly attract new entrants. Therefore, after several price competitions, the low-end traditional industries could become highly concentrated or even monopolistic.

How likely is "Brexit"?

Recently people have argued that Brexit has become much more likely than people expect. I still believe that Britain will stay in the EU. However, we may see that in the future Britain will put more efforts into the EU reforms; otherwise, I expect that there will be another election after another on Brexit, if some basic problems are not solved by reforms.

The practical problems of social planning

Currently, some central banks have started to act as social planners to help the financial industry to locate the resources. As explained in textbooks, we know that the output of a social planner is efficient and the best of a free market can achieve is the level of the social planner output. However, in reality, what a social planner produces is not necessary to be efficient. The best example is the Soviet. In reality, central banks can never get all information they need. The finance companies may lie about their true preferences, the cost to ensure they tell truthfully is expensive. Moreover, the red tapes could worsen the problem of inefficiency, especially when a central bank starts to play a larger part in the economy. Therefore, I deeply doubt about the efficiency of central banks in helping locate resources.

New class conflict

Trump has become unpredictably popular since the launch of his presidential campaign. He has got some extreme statements about Muslim, Mexicans and etc. His popularity shows there is a conflict between American locals and foreign migrants. Many developed countries have similar problems. Moreover, though China has few foreign migrants, it has conflicts between locals and migrants from other parts of China.  This sort of conflict is inevitable. Firstly, we cannot stop such migration, unless we do not want economic growth, as migration contributes to some of our economic growth. Secondly, providing locals with better infrastructures and a better welfare system may not mitigate the conflict, as it could attract more migrants who hope their future generations could benefit from the system. Thirdly, locals want to stay on their land, as they will understand the benefits of their current living environment. The only way to mitigate the effect of such conflicts is to narrow the wealth gap between different areas domestically and globally.

What makes people get paid differently?

It is interesting for me to study what makes people's incomes different and how incomes vary across different jobs. I think there are several elements/variables that have effects on people's incomes: education, working hours, working conditions, experience, family background and risk. Education, working hours, working conditions, experience and family background are easy to understand their effects on incomes and easy to measure or rank. However, different jobs have different degrees of risk, such as job security. Risk is very difficult to measure and sometimes people cannot precisely tell how much risk they face. Risk is exogenous as well as endogenous and changes overtime. Moreover, it is reasonable to assume people who carry greater risk receive higher incomes but from data some people could receive much lower incomes when they are suffering from the negative sides of their risk. To study the correlation and influences of these variables, we could probably have some ideas which one plays the largest role in widening the income gap. Moreover, we can compare different jobs and see which jobs have better payment and lower cost (working hours, working condition and etc).

The population structure may put the pension fund business in decline

When we reach the ageing population, more people are ready to collect their pensions through the public and private channels. Although the age of retirement has been rising, these people will collect their pensions one day and this could make the pension funds have a tough time. Moreover, if there are more people retiring than those who enter the labour market and pay their contributions to the pension schemes, then there could be a limited fund growth or even a deficit in the cash flow of the pension funds.  This could put pressure on the pension funds to generate higher returns of their funds in order to attract more funds, so the pension funds may take more risky strategies, leading to an increase in the systemic risk within the pension operation or even the whole economy. To conclude, the current population structure may increase the systemic risk and cause a decline in the pension fund business.

How to break down price leadership

In some oligopoly markets, there are price leaders. I would like to discuss how price leadership breaks down. Today, Apple announces cuts in the prices of several of its products. This might show Apple is losing its price leadership. From the figures that Apple provides, we can see that Apple is the leader in the smartphones market. As the leader of the markets, Apple gains the market power, especially price leadership. With price leadership, Apple could set its price first, and other companies will set their prices accordingly. This time Apple cuts its smartphone's price. Why does this happen? Firstly, there are more competitors in the markets. Secondly, Apple no longer has its operating efficiency advantage. Other companies have as low cost of production as Apple does and an Indian company produces a smartphone with a two-figure price. Therefore, to break down a price leadership, there are two ways: the first is to increase the market competition, the other is to improve scale or technology to catch up with the price leader's product efficiency.

The different demands in a company

When doing any business, there is a complex circle of demands: the company's shareholders want their investment returns maximized, the managers want to maximize their salaries and the clients want to minimize their costs. In some situations, these demands could be met at the same time; however, there are some situations that these demands could not be all satisfied. When this happens, the managers and the clients are the two who are the most likely to achieve their goals, as they directly participate in the business. Due to the imperfect information, the interest of shareholders is likely to be left out. The shareholders cannot be fully aware of the accumulation of micro risks. This is especially crucial in the banking sector. Therefore, it is important to balance different parties' interests to ensure no one crosses the line.

Interconnection is the nature of the financial industry

It is very common for regulators to focus on stability of the banking sector and adjust the competition in the industry to achieve the goal. However, in other industries, our regulators encourage effective competition in most of other industries and markets. Why? Because the banking industry is too important to have any volatile. In the banking industry, the most crucial element is the interconnection within the industry. Interconnection makes all banks in the system have the characteristics of "too big to fail" and reduces the incentives of banks to compete with each other. The interconnection exists in the entire financial industry. This is a problem that I am not able to find any optimistic way to solve. Why? Because this is a very strange industry that it supplies something it also demands - funds. All banks and institutions are suppliers as well demanders, such characteristic makes banks and institutions inevitably interconnected, as they always demand each other's products. Therefore, interconnection is the nature of the financial industry.

Low inflation rate could happen "naturally"

My opinion is that the cost of production is always diminishing due to improvement in technology and productivity. As the cost of production decreases, if the market is competitive, the price will decrease as well. From this aspect, it is reasonable to see a deflation in long run. However, from our recent experience, this is not the case. When our economy grows rapidly, we usually see a very high inflation. One of the reasons that why high inflation happens is that our population grows at a faster rate compared with the improvement of technology and productivity. Another reason is that what we consume has changed when we receive higher incomes. When economic growth is fast, our incomes increase as well. When we have higher incomes, we tend to consume better quality goods and services which have higher prices. The previous cheap and poor quality goods and services are forced out of the market and excluded from the equation calculating the CPI. Based on these two reasons, we can have ideas what causes the current low inflation rate. Firstly, if we have a real GDP growth rate which is higher than the country's population growth rate. This adds deflationary pressure on the economy. Moreover, when we can hardly improve the qualities of our goods and services, we will continue our previous consumption. When the cost of production as well as the prices are diminishing, we will have a deflation in the economy. To conclude, the problem of deflation is not necessarily caused by the lack of the market confidence or economic downturn.

What is the function of fiscal policy?

Fiscal policy is that a government adjusts its spending level and tax level to influence the country's economic growth. However, government can use subsidies and taxation to target some microeconomics problems, such as externalities. Which policy made by the UK chancellor catches the most attention today? The sugar tax. The purpose of this policy is to reduce the children obese problem. However,  I feel surprised that it can catch so much attention. It will influence the food industry; however, in terms of the UK economy,  the impact is almost zero. I believe that the priority of fiscal policy is to maintain a sustainable budget and a stable economic growth. Maybe we have overestimated the impact of monetary policy and underestimated the fiscal policy. Today we may have reached the limit of what monetary policy can achieve. If we would like more policies to create more positive momentum, these policies will be fiscal policies. Fiscal policy can especially impact on the least productive industries. Removing subsidies or increasing tax could force companies to improve their productivity or leave the market. This could increase unemployment rate in the short term; however, in the longer term, if we can have a faster economic growth rate, there will be more opportunities in the labour market. Given the current low unemployment rate, a short-term cost for a long-term gain should be considered. Fiscal policy does not only have an impact on improving productivity, it can also influence the financial market. The bailout made by the government during the latest financial crisis is an example showing what a government could achieve. More than saving the market in bad times, using taxation could change banks' behaviour as well, thus improving the stability of the banking sector. In conclusion, I believe there is much room left for fiscal policy to influence the economy when some central banks have their hands tied.

How should rates change?

Today the American banking industry asked for raising rates, as their profits have been hit by the low interest rates. Moreover, they suggested lowering interest rates could affect the market confidence, rates should only be cut further when the economy is in very bad shape. The positive side of raising interest rates is to give some profits to the banking industry, which had losses over the last half a year and to show the market that the economy is good shape. The negative side is obvious as well. It will increase the difficulty for companies to get refinanced, leading to a decrease in investment. Currently, many large companies have "too good" cash flows on their balance sheets, benefiting from the low interest rate policy, and some of the cash has been thrown to the stock market by many buyback programs, instead of investment. In addition, the default rate increases, which increases the risk of the banking sector. Raising interest rates could increase banks' profitability and reduce their incentives to take risky strategies to increase profits. Providing some evidence of optimistic economic growth and raising interest rates can restore the market confidence as well. Increasing interest rates can cut large companies' unnecessary borrowing, thus improving financial resource allocation effectiveness. Therefore, in general, I believe it is a right time for the Fed as well as the Bank of England to raise rates with some supportive policies for small businesses.

The ageing population might be our natural response to scarce resources

What causes ageing population? Firstly, increase in incomes could be one of many causes. When income increases, a family no longer needs more family member to support the family spending. Increase in incomes could be linked with the improvement of productivity. In addition, the increase in incomes also provides an issue of tradeoff between having more children and having higher living standards. Secondly, ageing population is a historical issue. As after the Second World War, there was a huge decrease in all countries' populations. Therefore, the population had incentives and had also been encouraged to have more children. At that time, there was a sharp increase in birth rates. Now the people born during the "baby boom" now get old and this is another cause of the ageing population. Thirdly, people receive relatively better health care and have higher living standards. When people now can live longer, the number of older people increases. These three reasons show us the ageing population might be a temporary problem. Moreover, it might be our natural response to scarce resources, as we realize the cost of having an extra child could be larger than the benefit that it brings to us. Therefore, I think the ageing population is a temporary issue and shows our response to scarce resources, after a certain period, the population will get smaller but have a healthy age structure.

Some questions about the world economy

I have several questions about the current economy. Firstly, what will explode the next economic crisis? Secondly, what can be the driver of our economy? Thirdly, how do we solve inequality, especially when technology can replace many of our positions?

Some consumption decisions could be independent from budget

The companies with high profit margin products must have done research on how discount offers affect people's consumption decisions. We all have some experience of consuming some products because their offers are too nice to be rejected, even sometimes we do not necessarily need them. Being informed about the discount offers is important. When we are informed about the pre-discounted price, we may raise our expected value of one good and decide to consume it. However, if we are offered a discount but not informed, we are less likely to consume the good as our expected value does not change. Moreover, when we are making individual consumption decisions, we do not usually consider about the budget constraint. We do care about prices, but make individual consumption decision based on if the price matches the utility the good gives us. Therefore, when we think about individual consumption decision, it is not a question of utility constrained by budget, instead it is a question that whether the price could match the utility the good provides. From logic, budget is determined by income, then budget will then be split into small parts of individual expenditures, we decide our consumption based upon these small parts. However, in reality, we have a big image of our budget, but we make individual consumptions relatively independent of the budget, unless the consumption requires a significant portion of the total budget. To conclude, when people's incomes increase, their consumption decisions made might become more independent from their budgets, and vice versa.

The ECB has done its best, now maybe the governments could do a bit more.

What is today's biggest news? The ECB's new expansionary stimulus.  Today Mario Draghi, the president of the European Central Bank (ECB) has announced his new policy of cutting its benchmark rates as well as providing cheap short-term loans and longer-term liquidity and expanding the QE. How satisfied is the market? Not quite. As we can see from today's market response, the market rally quickly burnt out quickly after the ECB's announcement. Why? Firstly, Draghi said he would not cut the rates further unless some extreme cases happen. This signals the market that the ECB's further stimulus will be very limited. Secondly, the further rate cut increases inflation risks that the market fears that all the inflationary pressure could explode some time in the future at once. Thirdly, the stimulus does not meet everyone's demand. Some economists suggest that it only meets the minimum requirement. My opinion is the ECB has done almost everything can be done, the problem of the European market is a structural problem in some particular countries. Ireland suffered the subprime crisis but now has the fastest growth in Europe, this shows that the ECB's policy works. The failure in some countries is caused by their structural failure, rather than lack of stimulus from the ECB. Therefore, I do not think there will be another cut in rates in the near future, especially big cuts; I believe the real solution of the European economy is upon those governments and it is necessary for them to restructure their economies when the global economy is far from optimistic.

Maybe it is a good time to narrow the wealth gap in China

I watched a short video on Financial Times about the Chinese labour market. It suggests that the migrant miracle ends. More people decide to look for jobs in their hometowns and the ageing population creates labour shortage and rise in labour cost. If the data is correct in the video, then there will be more opportunities in small cities and towns. When people decide to stay in their hometown, the population will increase faster than it in large cities, such as Beijing and Shanghai. The problems in large cities are high living cost, well formed social and business structures. The high living cost could make high income in large cities less attractive. Well formed social and business structures form barriers for new enters. This does not mean people will be differentiated in the labour market; however, it means the difficulty to break into higher ranks in the society rises. Moreover, large cities have all necessary services and infrastructures. This is what smaller cities and towns might not have, which means people can start their business in these areas. In addition, the cost of starting a business in small cities is much lower than it in a large city. Therefore, we could see in the future, more resources will be moved from large cities to small cities and small cities will experience faster economic growth and create more job positions compared with large cities.

The FT video link: https://next.ft.com/content/0a86583e-e5f2-11e5-bc31-138df2ae9ee6

Too big to fail, why not split?

Should we allow those big companies to fail? The answer in most cases is no. This answer is made based on subjective and objective reasons. When a company grows large enough, it naturally gains some sort of market power. They are much easier to finance themselves. Moreover, when they fail to pay back their debts, banks usually will give them some money to keep them alive. Why? Because once these big companies fail, it will destroy bankers' careers and damage banks. In addition, some companies are so large that their bankruptcies could leave thousands of people unemployed on the street, which any government never wants to see. Because of the damage to individual and public interests, when a big company is at the edge to fall, the financial companies and the government will use their resources to keep it alive and hope for a miracle. This is a highly inefficient use of resources. Moreover, such environment encourages firms to grow big and abuse their power. The worst thing is interconnection is built stronger when financial companies use their resources to save a company from bankruptcy, once this company fails to avoid bankruptcy then the financial companies which bail it out will suffer as badly as the bankrupted company. Because the financial industry its own interdependence and its connection to other parts of the economy, a domino effect will hurt the entire economy. Many markets should not have natural monopolies due to their characters; however, due to the current environment, many firms blindly expand their business fields and cause massive inefficiency. Therefore, it is important to build an environment to encourage the owners and investors to split their companies into a few of smaller but more efficient companies.

What decides market fluctuation?

Once receiving information, the market fluctuates very intensely at the start. Then the market move will turn to be moderate and move around the true market expected value. When information is just received, people concentrate at the two ends; however, as time progresses, people are moving towards the average, which is the market expected value. There is a recent example, which shows such effect. The London major, Boris, announced his support of letting Britain leave the EU. After his announcement, the UK bond market and foreign currency market experienced huge fluctuations. However, now the markets tend to move much less intense. However, I have some questions: what factors decide how intensely the market fluctuates and how long the intense fluctuation lasts. I can think of several factors but have not done any precise data analysis: macroeconomics information tend to make intense fluctuation longer, more surprising information will make fluctuation more intense. The problems here are what decides whether a piece of information is macroeconomics information or microeconomics information, and what makes information more surprising and is measurable (or at least able to be ranked objectively).

The world economy may diversify further into different growth rates

In January, the world market fell sharply in pessimistic atmosphere. Soros's prediction of a coming financial crisis in 2017 did not come from nowhere, as there are many factors that show the world economic growth is falling sharply and some remaining problems since the last crisis have not been solved. However, we can still see that some countries have relatively positive economic performances. We cannot deny the effect of globalisation could spread one country's failure to the rest of the world. However, recently we can see that many multinational companies start to restructure their businesses and reallocate their resources in the countries which have relatively better performed. This mitigates the negative impact of the globalisation on those better performing countries when a financial crisis occurs; however, those economies which have already been in trouble would be hit even harder.

Which business model is better? A moderate but stable one or an aggressive but risky expansion?

I want to share some interesting stories. Nowadays, most of us have adapted to 3G or even 4G and enjoyed superior internet speed on our smartphones. However, Japan adopted to 3G before many other countries. Moreover, long before Apple Pay, in Japan people already could use their mobiles to pay on self-service machines. The Japanese should have earned huge profits for their advanced and thoughtful technology and services, but they did not and Apple Pay is still widely seen as a big step of modern innovation. Why? Because people are not aware of what happens in Japan, as most of their products are self sufficient. Some Japanese companies have wonderful products, but they only focus on their domestic markets and have no incentive to enter overseas markets. Such behavior limits the profitability and scales of these Japanese companies which have incredible potentials. Comparatively, the American companies may start from their locals, but they always have the will to enter the global market. Therefore, they grow faster and the successful ones end up being multinational companies. These two different types of entrepreneurship have their own advantages and disadvantages. The Japanese model is moderate, the ownership of a company is stable and the loyalty of their consumers is relatively guaranteed; while the American model is more aggressive and better at expanding companies' influence. However, I prefer the American model, as it is very profitable to those successful and innovative companies, it also increases the competitiveness in a global scale so it will encourage self-motivated innovations and help the global economic growth.

Measurement of the effectiveness of resource allocation

We study economics in order to find the most effective way to allocate our constrained resources. There are two extremes of this argument. One end is Adam Smith's "invisible hand" of the free market. The other end is led by Karl Marx, a social planner who is like the god with  omnipotence, omniscience and omnipresence and allocate resources to satisfy everyone's preference. These are from a macroeconomics aspect. There are some microeconomics points of view. People talk about economies of scale and specialization, which improves productivity so less waste will be made. Compared with the macroeconomic view, the microeconomic theories are generally more practical and easier to measure, as we usually measure the cost of production. From the macroeconomics aspect, we usually talk more about the inequality; however, economic growth is also important. Then is it possible to combine GDP growth rate with inequality measurement to form a new index, which to show how effectively a country allocates its resources? I think a country is better at allocating its resources when it could maintain a relatively high economic growth with widening the wealth gap.

The benefit and damage of rising property prices

Rising property prices could make people feel wealthier, especially to those who own their properties. Therefore, we could probably see an increase in consumption. Moreover, it could increase investment, as rising property price could improve people's ability to borrow, especially to borrow mortgages. However, rising property price has its negative effects on the economy. Rising property price is one of the easiest ways to widen the wealth gap and increase inequality. Moreover, as we can still remember from the 2007-08 financial crisis. The crisis followed the burst of the property market bubble. There is another trade-off if we focus on the property market boom. When there is a property market boom, we are more likely to put more resources into the property market than usual, which means other parts of our economy will receive fewer resources and have slower growth. More than just the property market, if we have any rapid growth in one particular market, it could lead to the similar situation.

Improve education could narrow the differences in financial decision making quality

People always make decisions of different qualities, because of their unique characteristics. People with different educational backgrounds and experience make different judgments when facing a same problem. This is a very normal and everyone could understand this. However, such situation makes information always be asymmetric, as people have different processes of information filtering and analysis, which means people will come out with different relevant information and expected futures. Therefore, is it possible to narrow the differences in decision making qualities by providing similar standards of education? Narrowing the differences in decision making qualities could also mitigate information asymmetry. This may mitigate the volatility in the market. To conclude, improving education could reduce the wealth gap caused by the different financial or investment decision making qualities.