Should investors stay bullish on European bonds?

I always think the change of government bond price is not just a matter of financial markets, but also sends signals about the macroeconomic performance, especially government bonds can well refer one government's budget condition and the market confidence about its economy and its world importance.

JPMorgan sends a message to its investors that the investors should stay bullish on European bonds. Recently there has been a big sell off swing in the market. Some investors may follow and sell off their holdings, this has dragged down the bond prices. The fall in bond prices is usually caused by several reasons. Firstly, the market risk premium decreases, then investors may start to prefer securities with higher risk and higher returns, therefore the bonds, especially the low yield bonds become much less popular then the prices will fall for certain. Secondly, when the market expects a high inflation in the future, as the return rates of bonds are usually set as nominal rates, the real returns of bonds become lower.

The current market believes the inflation rate in Europe could rise sharply in the near future, then selling off bonds becomes a rational choice. However, JPMorgan believes that the market risk premium stays the same, so keep holding bonds is the best alternative to all other investment options.

At the moment, I think that people should only stay bullish on inflation-related government bond, this is relatively more certain than other securities including other types of government bonds. Negative interest rates, poor productivity, depreciating currency prices can all contribute to an increase in inflation; however, these facts can also contribute an economic unrest, which leads to relatively poor returns of many securities. Therefore, under such circumstance, only inflation-related government bonds can handle such complex situation well, maybe gold is another safe choice.

Is there a thing called "social responsibility"?

The primary goal of a company is to maximize the profits of their shareholders and currently the public generally agree that a company should also take some social responsibility, which sometimes could violate the interest of the company's shareholders. Under a fully free market, the social responsibility should not become a company's goal or burden, as all a company needs to focus is to maximize its profits.

Some of these social responsibilities are hiring a relatively big number of workers in order to provide more jobs to the society, using greener energy and processes of production, which can have higher costs and many other things.  Therefore, the cost of production will definitely increase and the productivity will decrease. Maybe this is part of the reason why some countries have poor productivity. In terms of environmental issues, when the public is influenced by the environmental problems caused by a company, I believe the prices of this company's products will be dragged down as the customers realize the utilities of the products are actually lower than their previous expectations and the cost of productions will increase as some of its workers may get sick due to the environmental problem. Such things will force companies to deal with this kind of problems, not such environmental problems but also many other issues.

However, if there is no such thing called "social responsibility", then there could be one problem that every individual is making decisions based on their individual matters, and when something happens to the entire nation or the entire world, each individual is so separated with others that it will take quite a lot of time to reunite people together and deal with a large scale problem, sometimes it can be too late. This is a danger without the sense of social responsibility.

Is it possible for the free market to solve the market failure of "externality"?

Externality is considered to one type of market failure that exists under a free market circumstance. Externality exists because individuals or companies do not realize the benefits or costs (spillover effects) to the society in general.
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Modeling in business and academic fields

Nowadays the society, especially the intelligence group, loves numbers and numerical evidence as numbers are considered to be biased and easier to state opinions. Modelling as part of the statistics is widely used in business researches and academic researches. We can compare the social science academic work from centuries ago and the work now, for example, when we compare Adam Smith's 'Wealth of Nation' and many current economic work, Adam Smith does not include as much numerical evidence and statistical analysis as that is included in nowadays work. Moreover, once a new theory is first introduced, the theory developer is more likely to use simple numbers to describe their theories. Sometimes they may also use data from the real world, but once the theory is recognised and developing further, more real world data will be tested to approve the theory and further improve the theory.

In addition, in many business companies, modeling has been widely and regularly used. Modeling is used to analyze customers' behavior, employees' productivity, marketing and etc. In the financial sector, modeling is even more widely and frequently used in order to forecast the market movement. However, in the business, modeling is used to project the market future performances and a rough trend sometimes is good enough. Moreover, in the business, heteroskedasticity issue is often ignored and some other statistical issues are also ignored. Because of the limited resources and the information privacy, in the business field, they can merely use the available resources and data for modelling. In addition, modeling is a very complicated job and ability, not every employee can develop their own models and even if they can, the models they develop do not have the same quality; therefore, within one company, employees tend to use same or similar modelling tools that have already been developed by the company experts. There is one problem here that the modelling tool can be outdated and if it is not accurate, the entire company researches based on this modelling tool will be imprecise.

However, in the academic field, people love to use the models they develop by themselves, and even if they borrow from others, they tend to make some improvement, which means they are technically not using the same. Therefore, in the academic, when people use different models, they can have different results, once more researches on one particular topic, the topic will be studied and tested by many different models; therefore, the results tend to be more accurate than the researches done by the business companies.

Can negative rates be sustainable?

The yield of the Swiss government bond with up to 20 years maturity falls into the negative zone, which means that bond investors are paying the Swiss government to lend it money. Moreover, many banks are taking action to charge negative saving interest rates on the big companies which hold lots of cash in their accounts. From here, we can see that lenders (savers) are paying to lend their money and borrowers are paid to be lent. Is this a stable equilibrium that the demand and supply of loans are equal and both borrowers and lenders are not willing to take different actions?

When borrowers are paid to borrow, of course they would like to keep borrowing as borrowing can help them generate profits. However, it is not necessary for lenders to keep paying to lend money to the others. First of all, lending involves risk, with a negative interest rate, the risk becomes even greater. The government bond yield falls below zero because the government bond is often considered as a risk free security; once the environmental risk or the exogenous risk becomes too great to invest in any other securities that involve risk. Therefore, under such circumstances, banks and investors will never choose to lend to any borrower who is considered to be risky, the only lending target will be the risk free clients, which are governments and large international firms.

Therefore, it is not even considered as an equilibrium that at the current low rates, there are some unsafe potential borrowers who are willing to borrow, but are not able to borrow from the institutes because they are considered to be risky. Moreover, when the market environmental risk changes, the action of lending will also change, that if risk increases, the interest rate could fall deeper in the negative zone, if risk reduces, the interest rate will increase and become positive again.

Reviews of Milton Friedman's economics idea (2)

Milton Friedman covered many fields about economics during his academic career life, he was even involved in many important policy making decisions and worked in public services several times. There is a core in his academic researches and public service career, which is small government.

The idea of a small government was very crucial at the time, as the second world war just ended and America soon went into the cold war with the Soviet Union and fought in several hot wars, including the Korean War, the Vietnam War. When a country enters a war, the government has to grow larger in order to collect resources from the national scale to fight the war, especially when facing a strong enemy.

However, once the government has grown bigger, it is very difficult to turn it back. As we can see Britain has such a government, some parts of its welfare system have inherited from the wartime government, for example, the national health service. Milton Friedman often suggested a smaller government could benefit more people and in addition, he argued that central banks do not necessarily become very active in the economy, they should use moderate monetary policy to control the price and watch the economy growing slowly and stably.

In addition, Milton Friedman had many other interest economics ideas and policy designing, such as "negative income tax", allowing illegal drugs to be sold in the market, abolishing conscription, privatizing and etc.

Review of Milton Friedman's economics ideas (1)

First of all, I think that our modern economic activities have been too complicated to be precisely described by any economic theorems, especially when we study from a macroeconomics prospect; therefore, I cannot say one of the greatest economists, Milton Friedman, is always right about his economics ideas.

Milton Friedman in his paper "The Role of Monetary Policy" suggested that the priority of monetary policy is to stabilize the price level and the monetary policy should be carried out without "sharp swings". These two ideas are still generally agreed by the current central banks in worldwide. However, Milton Friedman was not a fan (at least in his paper, "The Role of Monetary Policy) of inflation or deflation that he believed that with a carefully designed monetary policy, the economy can grow moderately without an inflation or a deflation. The current belief is a moderate inflation is good for economies and a low inflation is worrying that can send a signal to the market that the economy is in its decline.

In a very simple demand and supply model, an inflation can indicate a continuous excess of demand or shortage of supply and a deflation can indicate a continuous excess of supply or shortage of demand. When there is a continuous excess of demand or shortage of supply, it means more business activities can be carried out to supply for the excess of demand in the economy; while there is a continuous of excess of supply, more business activities should be stopped. Moreover, when there is no change in the price level, it means the market is at its equilibrium, if there is no force that moves either supply or demand side away from the equilibrium point, the economy is stable and there is no potential growth in it.

From this aspect,  I do not agree with Friedman's "by making that course one of steady but moderate growth in the quantity of money, it would make a major contribution to avoidance of either inflation or deflation of prices." Maybe because of my ignorance, I misunderstand his point, I still believe any kind of inflation, (even more extremely hyperinflation) is better than no price change or deflation, that inflation indicates the potential future growth of our economy while others have no or even negative impact on the economic growth.

Ranks in the impossible trinity

The impossible trinity is a trilemma in economics that states that there are three targets, a fixed exchange rate, free capital movement and an independent monetary policy, and it is impossible to achieve all these three targets at the same time. Among these three targets, I feel central banks have their priorities.

Most countries think a fixed exchange rate is the last on the list that these countries have flexible exchange rates. However, the countries in the Eurozone automatically set a fixed exchange rate as their first priority and give up their independent monetary policies as they have one single central bank, the European Central Bank.

However, although some countries have flexible exchange rates, it does not mean they need to put flexible exchange rates at the top of their lists. Free capital movement and independent monetary policy making could have different degrees of importance. Independent monetary policy making could give central banks a greater control of the domestic inflation and the power to stimulate the economies by expansionary monetary policies. Free capital movement could attract foreign investment and also allow domestic investors to invest in foreign markets.

In some extreme cases, some central banks may only focus on their only priority and give up the other two targets in order to concentrate their energy on one single issue. As sometimes, even if a central bank can achieve two goals at the same time, their energy could be split and they are not able to achieve either goal perfectly. As sometimes, capital movement could add some burden on monetary policy making.

The role of the International Monetary Fund in the modern global economy

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The possibility of a single-currency global market

We may be able consider the Euro as a single "global" currency, as it is used by several different countries.

The solar industry

Today the solar stocks, especially the US solar stocks, rose sharply on the market ahead of the third and final US presidential debate, the polls show that Hillary Clinton is about 7 percent ahead of Donald Trump. This shows how influential the government policy is in the energy sector. Hillary Clinton, the Democratic candidate, seems to be more committed to the task of slowing down the global warming and encouraging green energy than Donald Trump, the Republican candidate.

Normally the green energy sector is considered to have positive externalities that require subsidies from the government in order to get into the socially desirable output. However, there is another theory that explains why the government needs to provide subsidies to the green energy sector, that the early stage investment is too big for a startup business or a sector, so the government needs to step in and help the technology and the businesses to develop.

Based on the first argument about the necessity of the government subsidies, once the oil price decreases, the subsidies should become even greater, as the negative social costs of the fossil fuel increase. This does not happen, maybe because of several reasons. Firstly, the government subsidy plan is not as simple as our model, it does not only depend on the factor of externality but also many other factors. Secondly, the positive externalities of the green energy may not be as big as we imagine. Many other policies may also contribute to supporting the green energy sector other than direct financial support.

Based on the second argument, when the oil price is low, the government also should increase the subsidies, as the competition of the energy sector increases.

The advantage of a flexible exchange rate

I always think that a flexible exchange rate is better at lowering damages from mispricing as it has a self-correcting system. Recently the British sterling has very volatile fluctuations, it could be seen as a systematic self-correction.

It was odd when the value of the sterling had quickly recovered from the news of the referendum result and many people, including me, seemed to underestimate the effect of the decision of Brexit. Once the new Prime Minister May raised the probability of a hard Brexit and the response of the European Union to Brexit seems they want to set Britain as an example and punish Brexit in order to avoid more leaving the European Union. Such response will cause a damage to the British future economy and many businesses may consider to leave Britain to the continent in order to continue to enjoy the single-market system.

As the value of the pound sterling depends on the characters of the British economy and the expected future performance, when the expected British economic performance could be damaged by Brexit, the pound sterling depreciates.

An example of a mispriced currency

Many people may still remember the Black Wednesday on September 12th, 1992 when the British government was forced by the market to withdraw its currency from the European Exchange Rate Mechanism. Some people may blame or admire George Soros's strategy and the event eventually caused a cost of estimated 3.3 billion pounds to the British public, which shows how important precisely valuing a currency is. Moreover, from this example, we could also find out an important cause of mispricing a currency.

The British government attached its pound sterling to the European Exchange Rate Mechanism, meaning the pound sterling would have a relatively fixed exchange rate with the German currency at the time. The British central bank had to conduct monetary policies to prevent the exchange rate of the pound sterling with other member currencies from fluctuating over 6%. However, the British central bank failed to keep the inflation rate as low as the German inflation rate; therefore, years after years, the accumulated inflation in Britain was much greater than the inflation in Germany, as the exchange rate of the pound sterling and the German currency stayed relatively stable, the pound sterling was actually overpriced because the greater inflation devalued the pound sterling. The speculators observed this mispricing and forced the British government to withdraw the pound sterling from the European Exchange Rate Mechanism and gained enormous profits.

The key issue here is the countries agree to have a fixed exchange between their currencies, but ignore the differences in their economies, especially the inflation. Once they agree on a fixed nominal exchange rate but have different inflation rates, their currencies could be mispriced according to the inflationary factor.

This example tells once when we test currencies with fixed exchange rates with other currencies, for example, when testing HKD, it is important to compare the countries' inflation rates, as different inflation rates could easily lead to mispricing.

How would GBP change if Britain can pay for a single market?

The markets are clouded by the increased probability of a hard Brexit and the current primer minister's cabinet is discussing an offer of billions of pounds to the European Union in order to get an access to the single market for the City as well as many other sectors that could benefit from having a single-market access. Obviously it shows that accessing to the single market of the European Union has been benefiting the British economy for the last decades, the referendum result of leaving the European Union could damage the British economy and force some firms out of the country; and now the cabinet is discussing about a possibility of becoming independent of the European Union but paying the access to the European single market.

This is not impossible and I think is very likely to happen in the end. When Britain is in the European Union, Britain needs to pay for its "membership"; once Britain leaves the European Union, if it still wants the access to the single market, it is fair for it to continue to pay for its "subscription", however, I think the "subscription" fee will be higher than the "membership" fee. The European Union needs the funding from Britain, this is why this deal will be accepted by the European Union. This could be mutually beneficial; however, it will add more burden on the shoulder of the British government budget. The British government may issue more government bonds to pay for the "subscription" fee and I can imagine many banks will like this idea of "subscription" fee. The yield of the British government bond yield could stay low as although the deficit worsens, the British economy will be strengthened by this plan. Moreover, the GBP may even appreciate for the same reason.

Therefore, Britain can have the access to the single market by paying a fee to the European Union, the positive side is stronger than the negative side of this plan, I expect the British currency will appreciate once the plan is confirmed and accepted by the European Union.

Studies and factors of how to value a currency

Recently I have been studying on how to value a currency in case when the currency is mispriced by the market. The market price could be considered as the price determined by the market based on all the known information; however, there is a possibility that the market could miss out some important but minor information and cause currencies to be mis-priced.

I have read several books on the monetary police, limited to my sources, I have found some of the studies have focused on how to regulate or reform the current international monetary system since the fall of Bretton Woods and some focus on the history about how the modern monetary is formed. Moreover, the field of monetary policies has attracted much attention due to the current global economic environment. In addition, some researches and papers are written in other languages apart from English, especially when studying economies like the Russian economy.

Though the focus of some of the researches is relatively different from my topic, many of their details are inspiring. The ratios of government deficits to their economy sizes are very important key factors determining countries' credibilities, and the imbalance of trade between two countries causes the change in the exchange rate between the two countries. However, there is one issue about the imbalance of trade that as the official data are only monthly released, we may not be able to have enough data to form a very convincing sample to study the correlation between the imbalance of the trade and the exchange rate changes. The government deficits may have the same issue.

Moreover, when we estimate the model, we have to use time series as many of these factors can influence the exchange rates and the values of currencies over time instead of just an immediate impact.

How may we be able to estimate the credibility of one currency?

When we abolish the gold standard, the values of modern currencies are based on the issuing countries' credibilities. Different countries obviously have different credibilities, at least the markets believe they have different credibilities. Some may be more credible than the others due to their different sizes of economies, stabilities of regimes, credibilities of central banks, and many other factors. When the currencies are backed by the countries with credibilities, same information or factor change could cause different influences on different currencies. For example, when the possibility of a hard Brexit is currently increasing, the British currency GBP depreciates against other currencies. Because different countries have different credibilities, their currencies are influenced by the news and appreciates against the British sterling to different extents. When they appreciate at different rates, the exchange rates among them also change. Therefore, we could use these cases to test the countries' different degrees of credibilities. We can set up a benchmark for the foreign exchange market and test every single currency's price change against the benchmark over time. The benchmark could be gold or USD. I prefer using gold, as no country directly influences on the gold price.

If we can have a wide time range that we can a large sample of as many data as possible, we can estimate how different the responses of different currencies to information. However, there is a problem: among the appreciating currencies, the more credible currencies should have greater appreciation rates than the less credible ones; on the other hands, among the depreciating currencies, the more credible currencies should have smaller depreciation rates than the less credible currencies. Therefore, when we should contain a dummy variable to state whether the currency is facing an appreciation pressure or a depreciation pressure so we could see that the currency's responses to appreciating pressure as well as depreciating pressure. Moreover, of course, there is some information that directly links to one country, so the impact on the country is definitely greater than other country; however, if we can have a sample that is large enough, such cases will be more likely to equally distribute among all countries, then the errors caused to the modelling system might be mitigated in general.

Issues when modelling the modern age foreign exchange market?

When we model a two-party system, the model is extremely simple, once a piece of information, which is applied to either or both parities, is released, then there will be a response in the foreign exchange market that one currency's price increases and the other' price drops accordingly. However, in a model with three participants, when one factor changed in one participant has different impacts on the other two parties, then the ratio of the values of the two parties changes without any factor change directly happen to them. Moreover, when the number of the participants increases, the complexity of the model increases, and it is more difficult to estimate the true value of one party, especially when there is a possibility for any other party's to be mis-estimated. Therefore, any outcome should not be considered as the true value.

In order to simplify the model, I may assume that we only test one country's currency and ignore the possibility of other currencies' being mis-estimated. Moreover, we need to find a state that all currencies represent their values respectfully. The time just before one country abolished the gold standard may be able to be used as a state that truly represent one country's currency price.  In addition, as some countries have never adapted to the gold standard, so how do we find a point that we agree that the currency is fairly valued. There is another question that how we judge if the impact is an overreaction that leads to mis-estimation, what is the standard for overreaction. These are the issues I can think of for now when modelling the modern age foreign exchange market.

Currency price under a floating exchange rate system

The gold standard is a fixed exchange rate system, while currently many countries' currencies adapt to the floating exchange rate system. When adapting the floating exchange rate system, there are several factors that could influence the currency price to change.

Firstly, the trading account will influence the currency price. In a simplified model, there are two countries, A and B. When Country A has a trade surplus with Country B, Country B demands more A's currency to buy A's goods and services than Country A needs Country B's currency. Therefore, Country A's currency will appreciate.

Secondly, the economy's stability will influence the country's currency price. When an economy is stable, it means less risk to investors if they decide to hold the currency. Less risky securities, including currencies, are more attractive to investors, so the prices of such securities are higher than those of the risky ones.

Thirdly, the economic growth will influence the country's currency price. While one country is experiencing a fast economic growth, its currency will appreciate compared with those of the economies which have slower economic growth.

Fourthly, monetary policy will influence the country's currency price. The currency of one country with more aggressive expansionary monetary policy will depreciate compared with those of the countries with less aggressive expansionary monetary policy.

Fifthly, any information that can change people's expectations about the factors mentioned above in the future will influence the country's currency price at the moment of the information released.

These are the five key factors that I believe have the greatest impacts on the currency price changing under the floating exchange rate system. If we believe one country's currency price is below or above the real value, we may analyze the whole currency exchange floating process to see if there is any point that the price was not changed properly by the key factors.

The Gold Standard

In the past, paper money was equilivant to a piece of easy-carrying gold, as the value of the paper money was backed by the gold. Then the total amount of money that one country could produce under the gold standard is limited by the gold reserves owned by the country; therefore, many modern policies are not available under the gold standard and when there is an economic crisis, the monetary system has its hands tight on creating more liquidity into the market. Moreover, when facing a high level of economic growth, money could experience a deflation as gold could be considered as a fixed amount of resources. Although more gold could be earned through mining, the growth of mining more gold from the underground may not catch up with the speed of economic growth and under the gold standard, it is the national interest to mine gold at its fastest rate all the times. Moreover, it creates inequalities between countries that if all countries use the gold standard, the countries with rich gold resources will have greater advantages than the countries with poor gold resources. These disadvantages of using the gold standard have forced many countries dropping the gold standard.

However, the gold standard has several very strong advantages. Firstly, it can create a long term value stability of the currency. Secondly, because the value of the currency is built on the value of the gold, once s regime has enough gold, it can introduce the gold standard and bring back a monetary discipline back into the system even if the system is very unstable. Thirdly, the credibility of the currency could be ensured by the value of the gold.

To conclude, I feel that the gold standard has some unique and very important qualities that the modern monetary requires, such as long term value stability and decreased uncertainty in international trading. In terms of valuing the currency, the gold standard is the "gold standard"of precisely pricing the value of the currency.

War and inflation

Our money values are impacted and changed by the two world wars. However, we had so many wars in the past, but not a single one had more impacts on our money values like these two did. In the ancient age, especially the Medieval Age, we can see wars as business activities run by monarchies, as they fought wars based on their own interests and benefits. More importantly, they were using their own resources and abilities to fight their wars. Sometimes when they did not have enough resources, they could borrow money from bankers and businessmen at the time, then the bankers and businessmen would make their lending decisions based on how likely the lords could win their wars, as when the lords won the wars, they could take resources from their opponents. Due to the technologies at the time, the resources, including arms, spent on wars could often be recycled and the losses in sum were relatively very limited. These wars could be considered as zero-sum games.

However, in the modern era, wars are no longer individual matters, they are the activities that influence every single individual in the society; therefore, wars must be fought to the end. When a full scale war takes place, all citizens have the duties to fight for their country, then the economy is no longer in a sustainable state, as all productions of the economy are actually inputs that input into the war and there is no outputs that really makes any profits. The production is pushed beyond the limit and as long as the war continues, all available resources are put into the war and there is no sense of cost and benefit analysis. Once the war ends, resources become very limited, and cashes having in people's pockets devalues as cash was possibly the least useful resources during the war and now it is flooded in the markets. Moreover, even the winners do not often benefit from the wars, as they use all possible resources and there are not many resources left their opponents have for them to take if the wars' scales are large. Therefore, following a world war, we always see a sharp increase in the price levels on a worldwide scale.

GBP abnormal shock's impact to the markets

If the drop of the GBP is actually made by the algorithm, then today’s sharp was an accident, which may not have presented the real market view on the GBP’s value. However, such drop has definitely changed the market view on the value of the sterling, as when the price drops, people would have raised the question that if the sterling has any possibility to be at such a low point. The answer is definitely a yes, as if the British government fails to negotiate a relatively beneficial deal with the EU, the British economy will suffer and the sterling will devalue sharply. Though the algorithm traders are here to be blamed, once such argument appears in people’s mind, they will reduce their expectations of the GBP values.

Moreover, the sudden drop would frighten the markets as a whole. Firstly, it shows how damaging a fault in the trading algorithm could cause to the markets, people may fear such a thing could happen again in a wider range of markets. Secondly, the GBP’s depreciation means appreciations of other currencies, which causes a wide fall in the markets. Usually a currency’s appreciation could lead to a market fall. Therefore, a global scale of the market dropping is not abnormal to happen.

I think such shock occurred to the market, could last for another week, but the market will recover from the abnormal and move in its direction independently from the British future possible economic performance.

GBP's depreciation is a short term reaction of the nervous market

Today, the British currency, GBP, hit 31-year low, because of the increasing hear of a hard Brexit deal with the EU. Moreover, following the Mrs May’s speech, Goldman Sachs predicted a further 5 per cent drop, which could drag GBP to 1.20 dollars. I think such drop is not only caused by people’s increasing worry about getting a tough deal with the EU, it is also caused by Mrs May’s planned schedule of triggering Article 50 is earlier than many people’s estimates that some people think it could take at least another year for Britain to trigger the article.

I do not think that such a drop could cause a huge loss in the British market, as I see it is a short term market’s response to the information. Such depreciation of the British sterling cannot last very long unless the situation of Britain’s negotiating the trade deal with the EU continues to worsen. There will definitely be another shock in the foreign exchange market in the future when Britain officially triggers Article 50 and starts the trade deal negotiation with the EU. The evidence of showing it is merely a short term market reaction to the news is today’s UK stock market gains due to the sterling depreciation.

Where we stand right now may look similar as where we were in 2007 but actually could be different

The 10 year US government bond yields jumped up to 1.72 per cent and the markets also gain after the new data showed that the US services sector expanded. However, IMF warns world debt hits 152 trillion dollars. Once we receive good news and bad news at the same time, it is worth analyzing which one has a greater impact.

The good news is only relevant to the US economy, which means the US services sector expanded does not mean the services sectors in other economies also expanded. Therefore, in terms of the global economy, the impact of the bad news overrides the impact of the good news. Though the 10 year UK gilt yield responded to the increase in the 10 year US bond yield by increasing by 4.62 base points, considering the sharp depreciation of the GBP and the relatively small increase rate, there is no positive impact on the UK economy, especially given the UK markets fell today. When we come to the question how well the US is performing right now, we could have very divisive views. The US has a low unemployment rate, though the number of new jobs created is declining, a relatively high GDP growth, compared with other developed countries. The majorities of the US industries expanded. However, there is some bad news. As the IMF warns, global debt hits historical high, the US economy could face a much riskier global economic environment, which increases the risk facing the US businesses and individuals. In addition, the US itself has a very high debt level and in the past several years, some firms have taken advantage of the low interest rates and lifted up their leverage ratios. This definitely raises some worries.

The situation right now is a bit like what happened approximately ten years ago. Ten years ago, everyone said the housing market was great and mortgage-backed securities were safe and the US Fed was about to increase its rates. Right now, everyone says the government bonds and big corporate low yield bonds are safe and the US Fed seems to increase the rates as well. However, there is a difference between the bond market and the housing market. Bonds are issued by governments and firms. The prices in the housing market are determined by the supply and demand in the market, there is no additional value after the houses are built. However, governments and companies always make their contributions to their citizens and their shareholders, as well as to the whole society. As long as the values are created and acknowledged, people will expect more from them. This makes the bond markets decisively different from the housing markets.

Therefore, I may be very optimistic about the performance of the US economy in the future when the Fed decides to increase its base rate.

Do we still need gold as our backup currency?

Gold has been playing an extremely important role in our global economy for centuries. In the past, gold was used by many nations as their currencies and made the international trades possible. Without of the Gold Standard, the current paper money system could have taken much longer time to be built; and the gold standard exists until the mid of the last century. Even more, gold is still playing an important role as a sort of way to hedge against an increasingly risky market. However, even when we are in a crisis, can we replace our current money by gold?

In some countries which have many unstable political and economic environments, people may use gold as their medium of exchange; however, they are more likely to use other mediums of exchange, such as the US dollar, illegal drugs, cigarettes. Why are these alternatives more popular than the gold? These alternatives are much easier to carry and they have similar characteristics as the gold does, so their values can be secure. Is there any situation that only gold and similar precious metals can survive but other mediums cannot?

Such situation requires a meltdown of the global monetary system, which is very unlikely to happen at the moment, even if there is a war taking place. Even when such an unlikely event happens, gold may not solve the problem. Firstly, gold has mostly been stored and concentrated in certain places. It is very difficult to distribute the gold among the population. If it cannot be distributed easily, its price may rise sharply but is not able to solve the problem in the system. Secondly, even if a country reintroduces the Gold Standard, the credibility of a government after a meltdown of the global monetary system may not be able to support the Gold Standard. Moreover, as the gold is so concentrated and stored, a government may not be able to hold enough gold to reintroduce the Gold Standard.

Therefore, I think that if when the monetary system is in danger, the price of gold will certainly rise sharply, but gold itself cannot be the solution to any problem in our monetary system.

Apples and Apple have different price changing directions

In general, we think our economy and markets are experiencing inflation; however, it is not necessarily true for all products. The prices of different kinds of food are experiencing some degree of inflation depending on which country you are living; however, the Apple products are experiencing decreases in their prices that once a new product is released, the previous version immediately experience a sharp cut in its price. What makes the prices of apples and Apple change so differently?

Although we usually say price is determined by the market via the demand and supply model, because IT companies tend to differentiate their products from other companies, each IT product market is not a perfectly competitive market, so the companies choose prices for their products that allow a certain number of customers to accept the prices and buy their products. Based on this point, the prices of Apple products depend on how much Apple thinks its customers value its products. Then what makes Apple’s customers value its products diminish over time, compared with apples?

Actually, the Apple products have some good reasons that their prices should not decrease over time, compared with apples. The Apple products can be stored much longer, having no effects on their functions. The Apple products have fewer substitutes than apples. The Apple products have stable performances over a relatively long period of time while apples have no utility any more once you have eaten them. However, the production factors of the two kinds of goods decisively determine the price change directions. The key productive factor of apples is the nature, without the sunlight, water and soil, apples cannot be planted. These are considered as stable or even diminishing factors. On the other side, the key productive factor of the Apple product is knowledge and technology, which are considered to be able to develop over time with no limits. When the new ideas come out, the old ones become much less useful and desirable, so the prices drop sharply. Moreover, when we have a technology boom, which could generate a rapid economic growth, the speed of the technology development accelerates the speed of the IT products’ devaluation while other goods markets seem to have relatively high inflation levels.

Therefore, although we always say that knowledge is priceless, in fact, the knowledge itself often devalues over time when we are always developing our technology and knowledge.

The impact of environmental regulations as trade barriers

We all understand how green regulations reduce pollution and help our environment and understand the importance of a good environment to our health and living standard. However, some people see that green regulations put heavy burdens on businesses' shoulders and may potentially slow down the economic growth. The US Republican nominee, Donald Trump, even once said that the climate change was made by the Chinese government to keep the US businesses out, which is definitely wrong and nonsense; but it shows that people generally believe that environmental regulations increase the cost of the businesses. I would like to discuss about the impact of environmental regulations as a trade barrier.

Imposing environmental regulations on imports is not a new thing that the EU and the US have imposed different environmental imports, the most recognized one is the one imposed on the cars. Such regulations raise the bar and reduce the amount of certain chosen imports, and sometimes are considered as tools to lower the trade deficits. However, environmental regulations are not only imposed on the imports, but also partially on domestically produced goods, as the environmental issue cannot be discriminated between the domestic products and the foreign products. This means the country needs to have comparative advantages in its green industries in order to take advantage of the environmental regulations and improve the country's trade balance. Foreign businesses still have opportunities to maintain their market shares after environmental regulations by investing more into the environmentally friendly technologies.  This can create pressure on the domestic businesses and force them to keep or even speed up their environmentally friendly technological development. Both foreign and domestic businesses will put more efforts in the environmentally friendly field.

To conclude, environmental regulations could be used as trade barriers to reduce trade deficits in the short term if the country has its comparative advantage, and in the long term, environmental regulations could speed up environmentally friendly technological improvement on a global scale.