Robots or Humans?

There is a new automation-driven industrial revolution in China. If the cost of using robots over time is cheaper than hiring human labours, firms are definitely willing to use more robots than human labours. This raises some concerns about the unemployment caused by such structural reforms. People may stand as the public interest to suggest that the government should stop or slow down such transformation. I don't agree with such opinion. Such transformation is definitely good for the economy. As such transformation matches the will of the market, it can help to cut the costs of the suppliers and the prices for the demanders. Therefore, such transformation will be driven by the market force inevitably. The only concern is about the widening wealth gap. Therefore, the government should set up a welfare structure before such transformation is completed.

What is price?

In a market, price is determined by both supply and demand sides and the market price is a price that will create a market equilibrium. This is right; however it is not completely right. Price is a relative term instead of an absolute term. Price connects all different goods and services and allows people to see and compare the values of all different goods and services. When we say an apple worths 1 dollar and a banana worths 0.5 dollar, we could say that the market believes the value of two bananas is equal to the value of one apple. Therefore price is a relative term. More generally, all measurements are all relative terms.

Do global economic risks ease?

The Fed today announces today that it will maintain its rate, but it sees a sign of global economic risks easing. So do global economic risks really ease? Many problems remain unsolved ahead of us. Not until this June, the question of Brexit remains. The OPEC meeting did not deliver an agreement on the production freezing. Maybe the Chinese export data are very inspiring, but the structural reforms of the Chinese economy have many uncertainties, given the current debt level is sky high. The slowdown of the emerging markets is still a systemic risk for us to face, as some emerging economies are not even performing as well as the Chinese economy is. Therefore, I do not think global economic risks ease, I think that the market was panic when all negative information suddenly came at the same time, now the panic eases but the risks remain.

Should state pension funds take risks?

Japan's $1.3tn state pension fund is the world largest investor and it can create huge momentum in the markets as well as the economy. State pension funds are directed by state authorities, so should it respond to the authorities's other policies apart from pension policies? Because of the huge sizes of these state pension funds, it can improve the effectiveness of both monetary policies and fiscal policies. However, the danger is once the policy is incorrect, it could create huge losses for the pension funds even cause social instability in the future. Therefore, I do not encourage state pension funds to fully support fiscal and monetary policies, as the risk is too high. I think that state pension funds should operate as private firms whose priority is to maximize profits.

Debt and economy

Borrowing can stimulate one economy and generate a faster economic growth. It is the same as running a business that borrowing could increase a company's growth. However, just like firms, a too high gearing level could lead to insolvency, when an economy bears too much debt, like Greece, the country will suffer a period of reorganizing its economy, paying back its debt and having a relatively low economic growth. Moreover, the banking industry will have a long period of untrusting the economy and further drag back the economic growth. Therefore, it is very important to find a balance between debt and stabilisation. My opinion is to set up an upper boundary of the debt level, the upper boundary should be equal to 100% plus the sum of the previous 5 years' growth rates and the forward 5 years' estimated growth rates, as this could ensure a country's capacity to pay back its debts and also take the potential economic growth into account.

What sort of financial system do we want?

Before the financial crisis, when we asked about people's opinions about the financial industry, most people would say that the financial industry would benefit the entire economy. However, people's opinions changed after the crisis. The financial crisis speeds up economic activities and enlarges the economic effects. Stability and fast growth could not be gained at the same time, so how should we make the trade-off between stability and growth? It is a question that central banks and regulators should put more efforts.

Floating exchange rate system may not suit small economies

Currently the main currencies have reasonable exchange rates that there is no arbitrary opportunity; however, there are many currencies around the world, and those different currencies create a complex forex market and increase the possibility of arbitrary opportunities. When people could exploit the arbitrary opportunities, the values of the small currencies will fast depreciate as the securities of these currencies futures could be very volatile  and the cost of avoiding risk is too high. Therefore, if a small economy adopts to the floating exchange rate system, it could make its currency fluctuate violently and create huge shocks to its economy.

Do we need central banks to be independent?

In the developed world, the central banks are independent and target inflation and economic stability. However, the independence in some ways is questionable. In most cases, the government's fiscal policies and the central bank's monetary policies tend to achieve a same goal; thus despite they make policies independently the goals of these two channels are the same. Moreover, sometimes fiscal policies need the support of monetary policies. The aim of independence of the central banks is to make central banks more credible and maximize the effects of the signals sent to the markets. If we could maintain the credibility of central banks, there is no need to make central banks independent as they could never be fully independent as the monetary system has to be backed a sovereign.

Migration and Poverty

I read an interesting article, "There is a trade-off between citizenship and migration" on Financial Times. It tells an interesting factor that I did not notice before that migration is an efficient way to reduce poverty. The population movement signals resource movement and redistribution. The trade-off between citizenship and migration is caused by the resource redistribution, as citizenship is a certificate of owning certain resources and migration could damage the reliability of this certificate.

Should banks split?

In some countries, banks split due to the regulations. Such regulations are designed to reduce the risks taken by the banks. However, such regulations do not really solve the problem or mitigate the problem. As in Germany, banks do not need to split, but as we see from the last financial crisis, the systemic risk in the German banking sector was definitely lower than that in the American banking system. Therefore, the operation in the banking sector might create higher risk than the structure of the banks does.

Housing price and wealth gap

The difference of housing prices is due to the density of resources. Locations with more resources have higher value, thus higher housing prices. Moreover, because of productivity and efficiency, it is better to concentrate resources. With connection to more resources, firms and individuals could achieve higher goals. However, rising property prices is a cause of widening the wealth gap. As the prices of the properties with connecting to more resources tend to rise faster than the prices of the properties with connecting to fewer resources. Is it possible to mitigate such problem? It could be possible as information technology could shorten the virtual distance between individuals and resources and the physical distance could become less and less important due to the technology innovation. However, currently it needs time and the physical distance is still important and decisive.

How could we minimize the damage caused by natural disasters?

To minimize the damage caused by natural disasters, it is important to use models to create an insurance system that could limit people's losses in extreme cases. Secondly, it is also important to take natural disasters into account when making any sort of decisions. Although sometimes it is all right to ignore some risk, it has to be done after careful measurement and calculation. Thirdly, it is important to improve infrastructure, especially transport.

Good news and bad news

What is good news this week? China has reported very strong exports. What is bad news then? Germany has ruled out debt relief for Greece. People may ease their fear of the Chinese economy slowdown accelerating; however, many non-European shareholders of the IMF are not willing to grant Greece any more special treatment. In the worst case, it could cause the collapse of the Greek economy as its economic growth heavily depends on the loans given by other countries and widely spread its effect towards the EU and global. OPEC is meeting this weekend. Although with any possible outcomes, it is impossible to push the oil price back to its previous level, it may help to further stabilize the oil price and restore confidence for some oil exporting countries. To conclude, the global economy may gain some positive momentum, but the downside possibility remains.

The price of a sovereign bond

All elements that affect the credibility of a sovereign bond are all related to its economy's performance. Government budget and monetary stability could affect the credibility of a sovereign bond, but depend on the economic performance. However, when the economy is in a bad shape, these sovereign bonds become alternatives to investors, leading to an increase in bond prices. To combine these two factors together, we may conclude that the price of a bond is in a positive relationship with the domestic economic performance but in a negative relationship with the world economic performance.

Some comments about the ”living wills“

Five US banks (Bank of America, JPMorgan, BNY Mellon, Wells Fargo and State Street) failed both regulatory tests and the US regulators reject their living wills. Besides these five banks, Goldman Sachs and Morgan Stanley failed one test. Living wills could prevent a massive bailout in the future and create a safe net for the investors. However, when a crisis hits, the entire financial system is in its danger of collapsing, then we might need a living will for the entire system. In the last crisis, we could see that the central banks and governments use fiscal and monetary tools to provide liquidity for the markets. Although banks did exist during the crisis, they were more like middlemen between the central banks and the markets. Therefore, I do not think the living wills will play an important role in rescuing an economy from a crisis.

Can we predict the time of a crisis coming?

Sometimes some people can correctly predict the coming of a financial crisis; however, they hardly predict correctly when the financial crisis could come. Everything happens with a probability; and when several important things happen to happen at the same time, then a crisis breaks out. If we know these important elements and their probabilities, then could we predict the time of a crisis happening. Time 1 and time 2 are independent, which means when one thing does not happen in time 1 it does not increase the probability of happening in time 2. However, we can know the probability of it does not happen in both time 1 and time 2. Moreover, when the time is progressing, the probability of an element that could cause a crisis to happen increases, as we know when the bubble becomes larger, it gets easier to burst. Therefore, if we know the key elements that cause a crisis and the probabilities over time, then we could predict the probabilities of a crisis not happening over the future periods. When the probability of a crisis not happening is significantly smaller than a certain level, then it is sensible to say that a crisis is very likely to occur in that period.

The limits of negative interest rates

Negative interest rates have been introduced by some central banks in order to stimulate the economies. However, the idea of a negative interest rate is not widely accepted, and currently only the central banks' base rates have been changed below zero. There are several limits of negative interest rates. Firstly, it has a limit from politics. People like accumulating their wealth; therefore, negative interest rates, which could damage savers' profits, could face lots of political pressure. Secondly, it has a limit from the current monetary system. Introducing negative interest rates could damage the current financial system, as lenders will not lend their money for negative returns. The third limit is about wealth distribution. When there is a monetary stimulus policy, usually the wealthiest class benefits the most from such policy. The big businesses generate incomes for the wealthiest class and lower interest rates create an environment for those big businesses to grow faster. Lowering interest rates could widen the wealth gap in the society. Based on these three limits, further lowering interest rates might cause social, political and economic chaos.

Interesting readings on the EU and Brexit

As the UK referendum is coming, more questions have been raised. The uncertainty has already risen to the highest. There are several interesting articles explaining the questions about the decision of the UK referendum and the current situation of the public support:
https://next.ft.com/content/e7b2d4d4-daea-11e5-98fd-06d75973fe09
https://next.ft.com/content/680a19bd-af7c-3083-b270-9ae851f19c08

How to break down "Too big to fail"

Bernie Sanders, the Democratic presidential candidate, seems to fail to provide details about his plan of breaking up the biggest Wall Street banks. I am not going to talk about how to break up the big financial industries, because as I explained before that the nature of the industry bounds companies together. How about other industries? During the economic crisis, the US government also bailed out GM, which is not a financial company. It shows that the problem of "too big to fail" also exists in other industries. The interconnections in other industries are easier to solve. The first thing is to increase the competition by lowering entry barriers and etc. The second thing is to break down the interconnection by further specialization in the business. Finally, there is another concern about the relationship between innovation and competition. Innovation is good and motivated by competitions. However, good innovation could prevent further competitions. Therefore, innovation should be awarded but shouldn't become another entry barrier.

What's next for the EU?

European Central Bank chief, Draghi, called for governments across the bloc to take action to lift the Eurozone's economy in a speech. It signals that Draghi wants to keep his promise of no more monetary policies unless there is a serious change in the economy. In the Eurozone, different governments have different capabilities to use fiscal stimulus according to their different budgets and credit ratings. And currently governments are very careful about using fiscal policies as they want to control their budget levels. Therefore, I expect that the Eurozone economy will stay flat until another economic crisis hit.

Talking about some advantages of Brexit

Most people say that it is not a wise decision for Britain to leave the EU, but there are still people who are willing to vote for Brexit. Therefore, let's talk about the advantages of Brexit. Firstly, the EU workers will have to apply for visa sponsorship just like other overseas workers, this decreases the competition in the labour market, especially the low income labour market. Secondly, Britain could control its border, this make Britain easier to defend terrorist attacks. Thirdly, it could prevent British businesses from the EU as it could increase the tariffs when Britain leaves the EU. Therefore, people vote for Brexit is reasonable.

Could a crisis come from the current low interest rate environment?

I read an article "Currency wars backfire for Japan and Europe" on Financial Times. It is interesting and describes the environment of low interest rates. When almost all central banks lower their base rates, the world exchange rates will stay constant and the global inflationary pressure would increase. Currently we have experienced a long time of low interest rates since the 2007 financial crisis. After learning from the subprime crisis, undoubtedly now banks become more careful about their lending decisions. However, we can still see the gearing rates of many large companies increase and those companies are very good at borrowing to pay back their matured bonds. These bonds with good credits, even AAA ratings could go wrong. Moreover, this system is widely spread and interconnected. One company usually borrows from many banks and one bank lends to many companies as well as banks. Anything wrong that happens in one such company or bank could bring down the whole system and eventually cause a financial crisis.

The election vote is always biased

Theoretically, no single vote will change the final result. However, this belief is commonly known and could result bias of the election result. The expected minority group has more intention to vote than the expected majority group, thus a greater proportion of the expected minority group will vote. Thus the final result does not show the real opinion of the public and is biased towards the expected minority group. Based on this thought, we could expect that the election result of Brexit may be biased towards the "Exit", the expected minority.

Does one country need all industries?

Tactically, I don't think one country needs all industries; however, in reality, this is not practical. If one industry is important but has significantly low productivity,  one country has to obtain it in its economy otherwise it could become dependent on other countries' imports. All countries want independence, economic as well as political independence. Within an economic and political union, it is reasonable for each country in the union to focus on their most productive industries and trade with each other. This could improve the productivity of the union and decrease the cost of production.

Should we ignore risk?

Every day we face all sorts of risk that we could be hit by a car or even choke to death when drinking water. However, these extreme cases only happen with very small probabilities. Within our economy, extreme cases do exist. Should we ignore these extreme cases? It depends on the expected return of ignoring the risk and the expected return of taking actions to hedge against the risk. It the expected return of ignoring the risk is higher, then feel free to ignore the risk, and vice versa. Moreover, we could not expect ourselves to know all the existing risk. The most obvious risk usually has the highest probability and the least obvious risk has the lowest probability. When the probability is small enough, it is ok to ignore it without having signficant impacts on the estimates.