Many experts and economists expect that during Trump's presidency, the American economy will depend on the fiscal policy stimulus rather than the monetary policy, as Trump is very likely to expand government expenditure to stimulate the US economy while the US Federal Reserve has already raised its base rates and may increase its base rates further in the future depending on the US economic performance at the time. What is the difference between the fiscal policy stimulus and the monetary policy stimulus?
The fiscal policy targets more in the infrastructure or other relatively basic industries in the economy. The government provides government funding to support some industrial development and create more job positions in the economy and a multiplier effect to stimulate the economy further. However, expanding government expenditure could lead to waste of public resources, as the use of government funding is decided by the authorities and ministries rather than the markets. These people may not be able to accurately measure the optimal distribution of public resources in the economy. In addition, some jobs created under the fiscal expansion would disappear after the period, in other words, the jobs created by the government are temporary jobs and the improvement in the employment of the economy may not be as good as we expect in the long term.
The monetary policy directly influences the financial system, the banking sector. It could create inequality in the society, as monetary resources are attracted by other monetary resources. By providing cheaper liquidity in the economy, the wealthier people and the large companies will be the first to benefit from such environment. Moreover, the use of money is in control of the banking sector that they may choose to maximise the private returns rather than the general social returns. And some areas may be left behind without the support from the banking sector.
Though monetary policy could stimulate the economy and is likely to be more economically efficient, it could worsen the social inequality. Meanwhile, fiscal policy programme may be less efficient and create burden on the current government budget.
Friday 30 December 2016
Thursday 29 December 2016
What is the result of using pension assets to pay for public debts
Japan is planning to use its pension assets to pay for its huge public debt, which violates UN rules of accounting for public pension liabilities. The UN setting such rules is to provide social security for the general working class. If the pension assets are used for other purposes, the pension system will become more struggling to provide previously expected pensions for the elder population in the society and the social inequality will be worsened and the current working class will feel unsecured. These are the social impacts.
Using some pension assets for other purposes could damage the government's credibility and people will spend more on their pension plans and use more private pension schemes and services. Therefore, the insurance companies and other private pension scheme providers could benefit when the government becomes untrustworthy. The government could use the assets to flatter its balance sheet; therefore, the bond yield may fall as the government controls more assets and the probability of default decreases. Moreover, the government may be able to use the extra resources to provide future economic performance improvement, hopefully it can bring more government incomes in the future due to the future higher economic growth rates and use the extra incomes to compensate the pension assets used today.
I do not think that Japan can use the extra assets to generate high economic growth in the future, as the Japanese government and central bank have used many stimulus policies and still are unable to increase the domestic inflation rate and generate better economic performance. Moreover, the pension system has become fragile in a global scale that many countries may fail to pay out pensions to their populations in the near future. Therefore, instead of using pension assets for other purposes, it is even possible for some countries to use their government budgets to fill out the shortages in their pension systems in order to provide social securities and equality.
Using some pension assets for other purposes could damage the government's credibility and people will spend more on their pension plans and use more private pension schemes and services. Therefore, the insurance companies and other private pension scheme providers could benefit when the government becomes untrustworthy. The government could use the assets to flatter its balance sheet; therefore, the bond yield may fall as the government controls more assets and the probability of default decreases. Moreover, the government may be able to use the extra resources to provide future economic performance improvement, hopefully it can bring more government incomes in the future due to the future higher economic growth rates and use the extra incomes to compensate the pension assets used today.
I do not think that Japan can use the extra assets to generate high economic growth in the future, as the Japanese government and central bank have used many stimulus policies and still are unable to increase the domestic inflation rate and generate better economic performance. Moreover, the pension system has become fragile in a global scale that many countries may fail to pay out pensions to their populations in the near future. Therefore, instead of using pension assets for other purposes, it is even possible for some countries to use their government budgets to fill out the shortages in their pension systems in order to provide social securities and equality.
Wednesday 28 December 2016
Why do the financial centres battle for more IPOs?
Hong Kong and New York have been battling for IPOs in a global scale, and Hong Kong is losing its battle. Jack Ma criticised Hong Kong for outdated stock listing practice and lists its company in New York's Nasdaq. Why is IPO listing so important for these cities marking themselves as financial centres?
More IPOs can bring more companies to list their shares in their stock markets and more companies listing their stocks can bring more financial resources and human capitals. This is a multiplier effect that stimulate the development of these financial centre cities. Moreover, as the modern technology has been developed so fast that communication around the world becomes very fast and easy, the necessities of having so many financial cities become very weaker now. Therefore, these financial cities, including London, Hong Kong, Shanghai, Tokyo, New York, are battling for more resources from their rivalries; otherwise, the resources will become more concentrating in one city.
The current fear of a deglobalisation process will slow down the process of concentrating resources in one place. Therefore, these cities will have more time to prepare for the future competition for more IPOs, more resources and more clients. While in a deglobalisation environment, the large companies need to have multiple financial bases to refinance themselves around the world, as the cross border financing is more expensive than financing locally. Then there is a need to have multiple financial centres around the world.
Based on these factors, in the near future, the current financial centres will not lose their importance; however, in a longer period, the resources will become more concentrated and the number of financial centre cities will decrease.
More IPOs can bring more companies to list their shares in their stock markets and more companies listing their stocks can bring more financial resources and human capitals. This is a multiplier effect that stimulate the development of these financial centre cities. Moreover, as the modern technology has been developed so fast that communication around the world becomes very fast and easy, the necessities of having so many financial cities become very weaker now. Therefore, these financial cities, including London, Hong Kong, Shanghai, Tokyo, New York, are battling for more resources from their rivalries; otherwise, the resources will become more concentrating in one city.
The current fear of a deglobalisation process will slow down the process of concentrating resources in one place. Therefore, these cities will have more time to prepare for the future competition for more IPOs, more resources and more clients. While in a deglobalisation environment, the large companies need to have multiple financial bases to refinance themselves around the world, as the cross border financing is more expensive than financing locally. Then there is a need to have multiple financial centres around the world.
Based on these factors, in the near future, the current financial centres will not lose their importance; however, in a longer period, the resources will become more concentrated and the number of financial centre cities will decrease.
Tuesday 27 December 2016
Would Higher interest rates cool demand for borrowing
The global borrowing levels go beyond 2006 mark and the decision to raise base rates by the US Federal Reserve hopefully would cool down the demand for borrowing especially in the US. However, we may face the similar effect in 2007 and 2008. In 2007 and 2008, the mortgage default rate in the US increased after the US Fed raised its base rates, then the financial crisis hit the global economy.
Although the US based rates have been increased by the Fed, the borrowing costs for many firms do not increase significantly as many large firms have the ability to borrow in a global scale. It is now more expensive to borrow in the US, but in Europe and many other regions the interest rates stay the same and low, the costs of borrowing will not increase in these regions. Therefore, it is not likely to see an immediate increase in the default rates around the world as they have multiple borrowing channels. However, the small businesses in the US will face borrowing difficulties and they may start to default and bankrupt. As the leverage ratios in these small businesses are relatively low, the increase in the default rates of small businesses is unlikely to create a significant shock in the economy and cause a crisis.
As long as the interest rates in Europe stay low, the borrowing levels will stay high as the large borrowers are multi-national companies who have the abilities from most regions around the world. Once the interest rates in Europe start to increase, I expect some large companies may start to default as even there will be some places that still have lower interest rates but do not have sufficient money to support large companies' borrowing. Thus a form of financial crisis may start to damage our economies. Such financial crisis will become the most serious financial crisis which is more damaging than the previous ones.
Once the financial crisis hit, the countries which have lower interest rates will not have monetary policies as a tool to stimulate their economies. Therefore, I think they probably should increase their rates before Europe, as I see Europe increasing interest rates as the trigger of the next financial crisis. Of course, I can be very wrong about such prediction.
Although the US based rates have been increased by the Fed, the borrowing costs for many firms do not increase significantly as many large firms have the ability to borrow in a global scale. It is now more expensive to borrow in the US, but in Europe and many other regions the interest rates stay the same and low, the costs of borrowing will not increase in these regions. Therefore, it is not likely to see an immediate increase in the default rates around the world as they have multiple borrowing channels. However, the small businesses in the US will face borrowing difficulties and they may start to default and bankrupt. As the leverage ratios in these small businesses are relatively low, the increase in the default rates of small businesses is unlikely to create a significant shock in the economy and cause a crisis.
As long as the interest rates in Europe stay low, the borrowing levels will stay high as the large borrowers are multi-national companies who have the abilities from most regions around the world. Once the interest rates in Europe start to increase, I expect some large companies may start to default as even there will be some places that still have lower interest rates but do not have sufficient money to support large companies' borrowing. Thus a form of financial crisis may start to damage our economies. Such financial crisis will become the most serious financial crisis which is more damaging than the previous ones.
Once the financial crisis hit, the countries which have lower interest rates will not have monetary policies as a tool to stimulate their economies. Therefore, I think they probably should increase their rates before Europe, as I see Europe increasing interest rates as the trigger of the next financial crisis. Of course, I can be very wrong about such prediction.
Monday 26 December 2016
Consumption behaviour
Today is Boxing Day, which is the biggest shopping event in the UK; however, some analysts predict that some sales are shifted from physical stores to online retailers and more customers prefer big shopping centres and high streets over small shops. Although the analysts believe that the number of customers going into small shops would pick up later today.
Both the phenomenon show how lazy we have become. Online shopping is so easy that customers do not need to walk in a crowded shop and do not need to line up to queue to buy for their items. In addition, customers could find their preferred items more easily by using search engines and find more options. And there are so many online payment ways that make our online shopping experience much better and easier. However, the most obvious disadvantage of online shopping is that there are only photos and videos representing the items virtually, customers cannot get direct physical contacts with their preferred items. Therefore, many people will still walk into shops to buy their items. When people choose their shops, they prefer large shopping centres and high streets because the goods and services they want to buy concentrate in these areas, so they save their time in traffic and could spend more time in shopping or other things. In addition, the facilities in shopping centres and high streets are luxury and preferred by the majority of customers. To many customers, shopping maybe is their main goal but having a luxury time is also important. Based on these reasons, large shopping centres and high streets become customers' preferred choice.
Some companies are developing VR technology to improve online shopping experience. I think that the current VR technology could shift more customers from physical stores to online retailers; however, in at least a decade, VR I think still cannot replace the functions of large shopping centres and high streets. Firstly, VR still cannot represent the physical touching experience, for example, by using VR customers are difficult to know whether the shoes are comfortable and fit well. Secondly, shopping sometimes is more about the experience of shopping rather than shopping items itself. Having nice meals and enjoy some relaxing facilities are part of such experience, which is difficult to experience by using VR technology.
Overall, the business of small shops will continue its declining track while the large shopping centres and high streets will develop to become somewhere mixed with multiple luxury and relaxing functions.
Both the phenomenon show how lazy we have become. Online shopping is so easy that customers do not need to walk in a crowded shop and do not need to line up to queue to buy for their items. In addition, customers could find their preferred items more easily by using search engines and find more options. And there are so many online payment ways that make our online shopping experience much better and easier. However, the most obvious disadvantage of online shopping is that there are only photos and videos representing the items virtually, customers cannot get direct physical contacts with their preferred items. Therefore, many people will still walk into shops to buy their items. When people choose their shops, they prefer large shopping centres and high streets because the goods and services they want to buy concentrate in these areas, so they save their time in traffic and could spend more time in shopping or other things. In addition, the facilities in shopping centres and high streets are luxury and preferred by the majority of customers. To many customers, shopping maybe is their main goal but having a luxury time is also important. Based on these reasons, large shopping centres and high streets become customers' preferred choice.
Some companies are developing VR technology to improve online shopping experience. I think that the current VR technology could shift more customers from physical stores to online retailers; however, in at least a decade, VR I think still cannot replace the functions of large shopping centres and high streets. Firstly, VR still cannot represent the physical touching experience, for example, by using VR customers are difficult to know whether the shoes are comfortable and fit well. Secondly, shopping sometimes is more about the experience of shopping rather than shopping items itself. Having nice meals and enjoy some relaxing facilities are part of such experience, which is difficult to experience by using VR technology.
Overall, the business of small shops will continue its declining track while the large shopping centres and high streets will develop to become somewhere mixed with multiple luxury and relaxing functions.
Sunday 25 December 2016
Sustainable charity organisations
It is Christmas. Merry Christmas. Santa Claus maybe the most famous charity individual with a long long history. Though Santa Claus does not really exist in our real life, I still want to talk about if it is possible to run a charity organisation for so many decades, like Santa Claus. There are some charity organisations that have lasted so many years, for example, many Ivy League universities, these are known as not-for-profit organisations. These universities were founded by individuals and have independently operated for many years. These universities can generate profits and use the profits earned for future operations, and their profits are generated from their core businesses.
However, if the charity organisations want to become more generous in their core charity businesses. They have to develop their profitable businesses in other fields or they need to organise continuous and unstopped fund raising events and ensure they can always raise sufficient fund from these events. Fund raising events are unsustainable to run charity organisations. Entering other fields may distract the charity organisations's efforts and attentions, and sometimes they may even be criticised when they have some "too businessman" behaviour in other fields and their reputations could be hurt when they enter other fields for profits and the charity organisations' reputations are extremely important to them and their future operation.
Therefore, the charity organisations should and have to focus on their charity careers without distracting themselves to other fields. However, to be sustainable, it has to be self-funded and there are very limited ways to achieve this goal. They could ask fund managers to look after their funds and use the annual returns to fund their charity activities or become profitable during their charity activities; however, profiting from charity activities may turn the charities to be like other ordinary firms and businesses eventually.
However, if the charity organisations want to become more generous in their core charity businesses. They have to develop their profitable businesses in other fields or they need to organise continuous and unstopped fund raising events and ensure they can always raise sufficient fund from these events. Fund raising events are unsustainable to run charity organisations. Entering other fields may distract the charity organisations's efforts and attentions, and sometimes they may even be criticised when they have some "too businessman" behaviour in other fields and their reputations could be hurt when they enter other fields for profits and the charity organisations' reputations are extremely important to them and their future operation.
Therefore, the charity organisations should and have to focus on their charity careers without distracting themselves to other fields. However, to be sustainable, it has to be self-funded and there are very limited ways to achieve this goal. They could ask fund managers to look after their funds and use the annual returns to fund their charity activities or become profitable during their charity activities; however, profiting from charity activities may turn the charities to be like other ordinary firms and businesses eventually.
Friday 23 December 2016
What factors could indirectly influence currency values?
Yesterday I argued there are many factors that could indirectly influence currency values and could be controlled by the government. Today I am going to talk about such factors. The currency value could be influenced by the base rate set by the central banks, individual country's trade position and economic expected performance.
These three factors could influence currency values and be controlled by the governments. However, some of these factors are indirectly controlled by the government. Firstly, the central banks are commonly independent from other government executives; therefore, the monetary policy decisions are made independently by the central banks and the governments should not directly influence the central banks. However, in most cases, the central bank shares the interest with the government as both parts want to make the economy stronger and stable and the government could speak to the public and put pressure on the central bank as many key members in the central bank are appointed by the government; therefore, the government does have a great degree of influence on the central bank. The trade position could be influenced by the tariffs and subsidies; however, such process could break some international trade deals and could potentially launch a trade war with other nations. The economic expected performance could be influence by the government through fiscal policy and taxation channels. Although such tools are assumed to be effective, the economic performance is too complicated to be dominated by only one party. There are many parties taking part in the economy and having different impacts on the economy. Once the government does not have enough resources to dominate the rest players in the economy, the government's control of the economy could be much weaker. Of course, the government could use its legislation and executive powers to take control of the economy, but such movement could cause too much risk in the society as well as the economy.
Therefore, the government seems to have many tools to control its currency value, but many of these tools are limited and not as effective as we may assume.
These three factors could influence currency values and be controlled by the governments. However, some of these factors are indirectly controlled by the government. Firstly, the central banks are commonly independent from other government executives; therefore, the monetary policy decisions are made independently by the central banks and the governments should not directly influence the central banks. However, in most cases, the central bank shares the interest with the government as both parts want to make the economy stronger and stable and the government could speak to the public and put pressure on the central bank as many key members in the central bank are appointed by the government; therefore, the government does have a great degree of influence on the central bank. The trade position could be influenced by the tariffs and subsidies; however, such process could break some international trade deals and could potentially launch a trade war with other nations. The economic expected performance could be influence by the government through fiscal policy and taxation channels. Although such tools are assumed to be effective, the economic performance is too complicated to be dominated by only one party. There are many parties taking part in the economy and having different impacts on the economy. Once the government does not have enough resources to dominate the rest players in the economy, the government's control of the economy could be much weaker. Of course, the government could use its legislation and executive powers to take control of the economy, but such movement could cause too much risk in the society as well as the economy.
Therefore, the government seems to have many tools to control its currency value, but many of these tools are limited and not as effective as we may assume.
Thursday 22 December 2016
Having control of borders
The borders between countries have become weaker under the global trading environment. While the firms are doing business around the world, the transportation of all sorts of resources, including human resources. Central governments always want great controls of their own borders; however, sometimes it may not worth restricting the borders to a greater extend when the benefits of tight border control are much smaller than the cost of applying tight border control.
Currently the tension between China and the US strengthens around the task of trade. Once both countries want to win the possibly coming trade war, they need to pay attention to the volumes of their exports and imports with each other, they also need to worry about the exchange rates, they need to look at the taxes received by their governments as well. These three factors all depend on the control on their currencies.
The control of currency means two things: the value of the currency and the exchanging of the currency with other currencies. The value of the currency could influence the prices of its own nation's exports and the imports from other nations and change the nation's trade position. The freedom degree of currency exchange could affect firms' tax efficiency strategies and less freedom of currency exchange policies often increase the collectable taxes from firms. Although countries are often believed to be supposed not to directly influence their currencies in the international Forex market and countries should increase the freedom of currency exchange over time, as China is signalling China is increasing the exchange freedom over time, there are so many factors that could be controlled by the governments and indirectly influence the value of currencies and the freedom of currency exchange.
Therefore, control of currency becomes one of the most important part of control of borders.
Currently the tension between China and the US strengthens around the task of trade. Once both countries want to win the possibly coming trade war, they need to pay attention to the volumes of their exports and imports with each other, they also need to worry about the exchange rates, they need to look at the taxes received by their governments as well. These three factors all depend on the control on their currencies.
The control of currency means two things: the value of the currency and the exchanging of the currency with other currencies. The value of the currency could influence the prices of its own nation's exports and the imports from other nations and change the nation's trade position. The freedom degree of currency exchange could affect firms' tax efficiency strategies and less freedom of currency exchange policies often increase the collectable taxes from firms. Although countries are often believed to be supposed not to directly influence their currencies in the international Forex market and countries should increase the freedom of currency exchange over time, as China is signalling China is increasing the exchange freedom over time, there are so many factors that could be controlled by the governments and indirectly influence the value of currencies and the freedom of currency exchange.
Therefore, control of currency becomes one of the most important part of control of borders.
Wednesday 21 December 2016
Positive factors implying a wonderful 2017
I have not been very positive about 2017, because of the uncertainties created by the long term quantitative easing programme, and the increasing populism and the Trump's presidency which may cause a wider wealth gap in the US, the high leverage ratios of many large global companies. However, there are some positive factors signalling that 2017 could be very positive.
The customer confidence reaches 20 month high in Europe, and the mortgage applications in the US increase despite the Fed increases the interest rates. The stock markets generally perform well, especially many US banks have relatively strong performances after Trump won the presidential election. These factors imply the market has been very confident about the global economy in 2017, especially the economies in Europe and the US. In addition, the UK Prime Minister agrees that the treaties about Brexit has to be approved by the UK parliament and the UK parliament is relatively "pro-EU" and the free trade may become one of the necessities in the Britain's agreement with the European Union. Therefore, the British companies may still enjoy free trading with the rest of Europe and they will not decide to move to the European continent.
With these factors, the world economy could continue to grow. However, these factors may be too narrow and too specific in a certain region without connecting with other parts of the world. Nowadays, the economies around the world have very tight connections with each other that although there is a process of deglobalisation, the deglobalisation could damage many people's interests, not only global cooperation, but individual workers could act against an extreme process of deglobalisation. Therefore, the globalised economy will still exists in a weaker form, but as long as it exists, only focusing on a certain region could leave out many other risks and uncertainties from other regions and sectors, which could influence the region as well in a damaging way.
The customer confidence reaches 20 month high in Europe, and the mortgage applications in the US increase despite the Fed increases the interest rates. The stock markets generally perform well, especially many US banks have relatively strong performances after Trump won the presidential election. These factors imply the market has been very confident about the global economy in 2017, especially the economies in Europe and the US. In addition, the UK Prime Minister agrees that the treaties about Brexit has to be approved by the UK parliament and the UK parliament is relatively "pro-EU" and the free trade may become one of the necessities in the Britain's agreement with the European Union. Therefore, the British companies may still enjoy free trading with the rest of Europe and they will not decide to move to the European continent.
With these factors, the world economy could continue to grow. However, these factors may be too narrow and too specific in a certain region without connecting with other parts of the world. Nowadays, the economies around the world have very tight connections with each other that although there is a process of deglobalisation, the deglobalisation could damage many people's interests, not only global cooperation, but individual workers could act against an extreme process of deglobalisation. Therefore, the globalised economy will still exists in a weaker form, but as long as it exists, only focusing on a certain region could leave out many other risks and uncertainties from other regions and sectors, which could influence the region as well in a damaging way.
Tuesday 20 December 2016
The differences between time points
In the financial market, the performances at the end of year and the performance at the beginning of year are very different. At the end of year, the trading volume is relatively low. This is very understandable as there are fewer financial reports coming out and many workers go on holidays and it is a break time for people as well as the financial market. However, in January, it is generally believed that the returns in January are higher than the rest of year. This was not true in 2016 however. Sometimes, the strategies taken, especially in early January could be seen as irrational. Why time points could make a difference in financial markets without very specific information?
I think the period between the close of financial market at the end of year makes a huge impact. When people are frequently taking actions within the system, people could narrow their thoughts and focus on the projects they are doing. During their working time, they have a very tight time constraint that they have to focus on their own projects by giving up some attentions on the overall environment. In some extreme cases, the information they receive is also restricted as when they have a specific task, the less relevant information will be ignored. Once they go on a holiday, they have a lot more free time and they now have time to see the overall environment and receive more general information that might be helpful. Moreover, during holidays, they meet more people, who are not necessarily from their working system, they start to know some inside information, such as how much others' wages change, how long their working hours are, how they feel about their industries and what they think is their industries' major challenges. After receiving lots of new information and looking at the overall environment again, they now have different expectations about financial markets' performances in the next year, they could be more optimistic or more pessimistic. Then at the beginning of the new year, they will change their strategies according to their new expectations, this is why in January the trading could be relatively more active without adopting much information.
I think the period between the close of financial market at the end of year makes a huge impact. When people are frequently taking actions within the system, people could narrow their thoughts and focus on the projects they are doing. During their working time, they have a very tight time constraint that they have to focus on their own projects by giving up some attentions on the overall environment. In some extreme cases, the information they receive is also restricted as when they have a specific task, the less relevant information will be ignored. Once they go on a holiday, they have a lot more free time and they now have time to see the overall environment and receive more general information that might be helpful. Moreover, during holidays, they meet more people, who are not necessarily from their working system, they start to know some inside information, such as how much others' wages change, how long their working hours are, how they feel about their industries and what they think is their industries' major challenges. After receiving lots of new information and looking at the overall environment again, they now have different expectations about financial markets' performances in the next year, they could be more optimistic or more pessimistic. Then at the beginning of the new year, they will change their strategies according to their new expectations, this is why in January the trading could be relatively more active without adopting much information.
Monday 19 December 2016
The uncertainties of uncertainties
We always face all sorts of uncertainties but some of these uncertainties are certain and some are uncertain. The certain uncertainties have known probabilities, for example, when gambling, some games have certain winning probabilities. However, many events have unknown probabilities that why many companies hire actuaries to estimate the risks, in other words, make these uncertain uncertainties less uncertain.
By actuarial methods, individuals and firms can lower their uncertainties when facing significant individual and environmental risks. However, sometimes uncertainties are uncertainties, not because their probabilities are unknown, in many cases, we cannot cover all risk sources and the risks and the risks that we fail to notice become much more uncertain uncertainties. When such uncertainties exist, the system will fail to observe the overall risk in the system and underestimate the systematic risk.
Of course, people could give an estimated value about how much unobservable risk exists in the system, but it is really difficult to identify the credibility of such estimation as there are many cases that we fail to estimate the unobservable risk and get ourselves into great troubles.
Sometimes when we try to get very accurate results, we face greater risks. For example, in a stock market, many institutions give target prices about stocks. Instead of simply telling the price could be higher or lower in a year's time, giving a detailed price has more uncertainties. Knowing whether the price will rise or fall, traders could only choose one strategy from the two strategies in total, buy or sell. When the actions taken by the traders in the market is simple, the uncertainties during the one year period are relatively low. However, when we know a specific price, there are countless strategies that could be chosen, this will increase the uncertainties and the previous predictions are known to be less credible. Moreover, the difficulties of getting a detailed result are much greater, meaning more errors could be made. Therefore, sometimes it is better to give a simple estimation rather than a detailed and specific result, as the results are definitely less credible and could cause more uncertainties.
By actuarial methods, individuals and firms can lower their uncertainties when facing significant individual and environmental risks. However, sometimes uncertainties are uncertainties, not because their probabilities are unknown, in many cases, we cannot cover all risk sources and the risks and the risks that we fail to notice become much more uncertain uncertainties. When such uncertainties exist, the system will fail to observe the overall risk in the system and underestimate the systematic risk.
Of course, people could give an estimated value about how much unobservable risk exists in the system, but it is really difficult to identify the credibility of such estimation as there are many cases that we fail to estimate the unobservable risk and get ourselves into great troubles.
Sometimes when we try to get very accurate results, we face greater risks. For example, in a stock market, many institutions give target prices about stocks. Instead of simply telling the price could be higher or lower in a year's time, giving a detailed price has more uncertainties. Knowing whether the price will rise or fall, traders could only choose one strategy from the two strategies in total, buy or sell. When the actions taken by the traders in the market is simple, the uncertainties during the one year period are relatively low. However, when we know a specific price, there are countless strategies that could be chosen, this will increase the uncertainties and the previous predictions are known to be less credible. Moreover, the difficulties of getting a detailed result are much greater, meaning more errors could be made. Therefore, sometimes it is better to give a simple estimation rather than a detailed and specific result, as the results are definitely less credible and could cause more uncertainties.
Sunday 18 December 2016
Price differentiation
Common worm pill is found to be priced in the US 200 times its price in the UK. What can make a good be priced so differently in different prices? There are several factors that can cause such phenomenon. In general, there are two sides of factors: the supply side and the demand side.
The supply side factors are generally related to the costs. For example, if the pharmacy industry receives a huge amount of subsidies from the government, the cost of production is lowered by the subsidies and the industry would also be required by the government to provide cheaper products. Therefore, different levels of subsidies could differentiate price levels in different places. Moreover, the different structures of same industry could change the cost of production. Some countries could have different import and export policies and different economic outputs, these factors lead to firms in different countries have different levels of cost of productions, due to different prices of factors of productions.
The demand side factors are related to the purchase abilities of customers and their preferences. Some countries have more completed systems to cooperate with other industries. For example, a completed insurance system or a national health service system has a great influence on the medicine and pharmacy industries. A completed service system often could lower the costs for the customers. Sometimes the revenues do not directly come from their customers, instead their revenues from the service system, such as the government welfare system, the insurance companies. Therefore, pricing becomes less important and different from pricing in some countries which do not have such complete system. The necessity or the elasticity of demand could vary between countries due to different cultural background and consuming habits.
Overall, pricing definitely varies between countries; however, a difference like the common warm pill in the US and the UK is still abnormal and should be corrected.
The supply side factors are generally related to the costs. For example, if the pharmacy industry receives a huge amount of subsidies from the government, the cost of production is lowered by the subsidies and the industry would also be required by the government to provide cheaper products. Therefore, different levels of subsidies could differentiate price levels in different places. Moreover, the different structures of same industry could change the cost of production. Some countries could have different import and export policies and different economic outputs, these factors lead to firms in different countries have different levels of cost of productions, due to different prices of factors of productions.
The demand side factors are related to the purchase abilities of customers and their preferences. Some countries have more completed systems to cooperate with other industries. For example, a completed insurance system or a national health service system has a great influence on the medicine and pharmacy industries. A completed service system often could lower the costs for the customers. Sometimes the revenues do not directly come from their customers, instead their revenues from the service system, such as the government welfare system, the insurance companies. Therefore, pricing becomes less important and different from pricing in some countries which do not have such complete system. The necessity or the elasticity of demand could vary between countries due to different cultural background and consuming habits.
Overall, pricing definitely varies between countries; however, a difference like the common warm pill in the US and the UK is still abnormal and should be corrected.
Friday 16 December 2016
What does it mean if you become a major creditor of another person?
Japan now has replaced China and become the largest creditor of the US. Such relationship does not involve economic and financial factors, but involves political concerns as well. Politics is extremely complicated and many factors are unknown to the public; therefore, I would only talk in economic and financial terms about being creditors in a more general sense.
We could become others' creditors in our normal life. When we open a saving account and put our money in the account, then the bank owes your money and you become the bank's creditor. Why do we want to lend money to others? Economics teaches that we are making our decisions to maximise our own personal expected preferences, so the decision about whether or not to lend money is based on the return of lending and the risk of defaults and opportunity costs.
Once you becomes someone's creditor, then as the money you lend is also part of your wealth, your wealth becomes partially depend on your debtors' default risk and performance and the financial environment. When you are a major creditor and a large proportion of your wealth depends on your debtor, then your interest is to help your debtor to generate greater returns by using your money and lower its default risk. However, on the other side, your debtor could lose incentives to make more money, as your debtor has to pay you interests and lower its returns and growth. When the profits gain reduces, the incentives to work hard will decline as well. Meanwhile you cannot directly influence your debtor's decision making process, the more money your debtor borrows, the higher default rate your debtor has, as the incentives reduce due to lower profit levels.
Therefore, becoming a major creditor is carrying your debtor's risk upon your shoulders without having direct influence on managing the risk.
Thursday 15 December 2016
How is 2016?
It is near the end of 2016, there have been lots of surprising and important events. I think it is a good time to conclude this year. There are two most memorable events: one is Brexit, the other is the US president election. Both of them show one thing is that the majority of the population has different opinions with the society elite class. Such phenomenon may reflect to the economy as well.
When people have different opinions and thoughts, they definitely have behaviours and different behaviours will lead to different individuals and a complicated and less predictable economic outcomes. However, although different players have different behaviours, unlike the political system, in the economic system, different people have different abilities to influence the economy. In a political system, the middle and lower classes may have greater power than the top wealthy class due to their large population size; however, in an economic system, the top wealthy class has greater resources than the other classes, that in some countries, top 10% of the population own over 90% of the entire wealth. Once they have a greater proportion of the wealth, they gain greater power in the economy. Because in the economy, the wealth could stimulate the economy and distribute the resources in the economy. Therefore, in the economy, the economic outcome will favour the interest of the top wealthy class, unlike the political system outcome is more likely to favour the middle and lower classes.
Overall, the economic outcomes may be less surprising than the political outcomes.
When people have different opinions and thoughts, they definitely have behaviours and different behaviours will lead to different individuals and a complicated and less predictable economic outcomes. However, although different players have different behaviours, unlike the political system, in the economic system, different people have different abilities to influence the economy. In a political system, the middle and lower classes may have greater power than the top wealthy class due to their large population size; however, in an economic system, the top wealthy class has greater resources than the other classes, that in some countries, top 10% of the population own over 90% of the entire wealth. Once they have a greater proportion of the wealth, they gain greater power in the economy. Because in the economy, the wealth could stimulate the economy and distribute the resources in the economy. Therefore, in the economy, the economic outcome will favour the interest of the top wealthy class, unlike the political system outcome is more likely to favour the middle and lower classes.
Overall, the economic outcomes may be less surprising than the political outcomes.
Wednesday 14 December 2016
Heading to 2017
Today (14th Dec), the US Federal Reserve increases its short term rates to 0.5-0.75 per cent. The US Fed expects that in the 2017, the US economy will gain momentum and stimulus from the likely Fed tax cut promised by the President-elect. Given the possible inflation and fiscal stimulus, the US Federal Reserve has decided it is the right time to raise rates.
However, I feel that the US Federal Reserve may be too optimist about the US economic performance in 2017. I believe 2017 is a year with a great number of uncertainties and different expectations about how the world economy is performing in 2017 which lead to different strategies and policies.
Different opinions in the market mean that after a certain period of time, players with different opinions will have very different returns and some will lose the competition and leave the market. The winners can exploit the losers as much as possible and the government has no incentives to intervene the market and rescue the losers. The market could be more concentrated as many players may leave the market and leave their resources to the winners.
In addition, as some firms become extremely successful and some firms fail to stay in the markets, the population will be influenced and the wealth gap in the society could be wider than ever.
However, I feel that the US Federal Reserve may be too optimist about the US economic performance in 2017. I believe 2017 is a year with a great number of uncertainties and different expectations about how the world economy is performing in 2017 which lead to different strategies and policies.
Different opinions in the market mean that after a certain period of time, players with different opinions will have very different returns and some will lose the competition and leave the market. The winners can exploit the losers as much as possible and the government has no incentives to intervene the market and rescue the losers. The market could be more concentrated as many players may leave the market and leave their resources to the winners.
In addition, as some firms become extremely successful and some firms fail to stay in the markets, the population will be influenced and the wealth gap in the society could be wider than ever.
Tuesday 13 December 2016
Why is the wealth gap issue so serious?
The wealth gap is so serious that every country needs to pay a lot of attention to. Most countries have been putting lots of effort in reducing their domestic wealth gap and some populist parties gain power through using the wide wealth gap to attack the elites and gain popularity. This is how the wealth gap could affect the political environment and increase the probability of social unrest. It can cause more risk towards the whole society.
Recently the wealth gap becomes even more important that the elite class becomes relatively less significant in terms of political roles. Because of the globalised market, the assets held by the elite class are less restricted by geographical factors, while the other social classes do not have the mobility of their assets, they could care more about the domestic politics than the wealthy class. While they gain more political power, they could attack the wealthy class, as they feel the wealthy class is not loyal to the county and they block their ways to gain more wealth, which is definitely not a good thing to the wealthy gap, though their wealth could be accumulated more easily; moreover, it could even create corruption as these people may accumulate their own wealth after gaining political power.
In addition, wide wealth gap could directly cause economic productivity issues. Although some have argued that wider wealth gap could increase people's incentives to work harder and gain more wealth, wide wealth gap could instead reduce people's incentives to work hard and reduce the economic productivity. Once the economic wealth gap is continuously widening, people will realise that they fall into a wealth trap that they have few opportunities to increase their wealth to reduce their wealth differences with the top wealthy class, then the incentives to work hard will decline sharply and the whole economic productivity will worsen.
Recently the wealth gap becomes even more important that the elite class becomes relatively less significant in terms of political roles. Because of the globalised market, the assets held by the elite class are less restricted by geographical factors, while the other social classes do not have the mobility of their assets, they could care more about the domestic politics than the wealthy class. While they gain more political power, they could attack the wealthy class, as they feel the wealthy class is not loyal to the county and they block their ways to gain more wealth, which is definitely not a good thing to the wealthy gap, though their wealth could be accumulated more easily; moreover, it could even create corruption as these people may accumulate their own wealth after gaining political power.
In addition, wide wealth gap could directly cause economic productivity issues. Although some have argued that wider wealth gap could increase people's incentives to work harder and gain more wealth, wide wealth gap could instead reduce people's incentives to work hard and reduce the economic productivity. Once the economic wealth gap is continuously widening, people will realise that they fall into a wealth trap that they have few opportunities to increase their wealth to reduce their wealth differences with the top wealthy class, then the incentives to work hard will decline sharply and the whole economic productivity will worsen.
Monday 12 December 2016
How important is the minimum wage safe net?
I think that minimum wage should be introduced when the economy has a relatively low unemployment rate, that helps to improve the living standards of the working members of the society and narrow the domestic wealth gap. The set up of a minimum wage level may reduce the employment rate but it increases the payment of the employed population and encourages more people to join the labour market and increases the competition in the market which can improve the productivity of the economy. However, in some cases, the set up of any form of minimum wage could damage the welfare of the whole population.
For some kinds of jobs, there is no need for setting up a minimum wage level as the payments of the jobs are already high enough to their high entry requirements. Other traditionally low paid jobs are believe to need the government to set up a minimum wage and improve the treatment of these workers. However, when there is a big unemployed population. The minimum wage increases the cost of labour of the firms, which are usually producing lower value added products. Then instead of employing more workers, they may reduce their employee numbers or even considering to move their firms to countries which have lower cost of labour if possible, then the unemployment rate may increase further.
Therefore, I believe when the government is setting up the minimum wage level for the labour market, the minimum wage level should not be set as a fixed number, it should be a function that involves the consideration of the economic growth as well as the current employment rate. Just as what many central banks, when the inflation is high, they lowers base rates, when the inflation is low, they increases base rates; governments should do the same when setting up their minimum wage levels for their markets.
For some kinds of jobs, there is no need for setting up a minimum wage level as the payments of the jobs are already high enough to their high entry requirements. Other traditionally low paid jobs are believe to need the government to set up a minimum wage and improve the treatment of these workers. However, when there is a big unemployed population. The minimum wage increases the cost of labour of the firms, which are usually producing lower value added products. Then instead of employing more workers, they may reduce their employee numbers or even considering to move their firms to countries which have lower cost of labour if possible, then the unemployment rate may increase further.
Therefore, I believe when the government is setting up the minimum wage level for the labour market, the minimum wage level should not be set as a fixed number, it should be a function that involves the consideration of the economic growth as well as the current employment rate. Just as what many central banks, when the inflation is high, they lowers base rates, when the inflation is low, they increases base rates; governments should do the same when setting up their minimum wage levels for their markets.
Sunday 11 December 2016
The increasing competitiveness in the financial market?
I think that the increase in competition in the financial market does not happen in the market of banks or institutions and firms, it happens in the market where banks and institutions seek for money and funding. The current low interest rate and risk averse environment limits the supply of money and funding in the market, that a good amount has become inactive in the market.
The financial market is trying its best to attract investors to participate in the market; however, the cashes are not distributed widely and equally that some sectors have absorbed more money than other sectors do. This creates a competition between different sectors within the financial market; but the decision for investment largely depends on two factors, the expected returns and the investors' risk preference.The expected returns are determined by the nature of the market and the risk preference depends on investors' personality and the future use of the money. The institutions and fund managers have no control of these two factors; therefore, they passively accept the demand of their investors.
The stock market is a great example that more and more good firms reject to issue IPOs as they are expected to experience high growth and have no worry about seeking for investors and the companies which issue IPOs are expected to already finish their most rapid growth trends and now face a constant operation. Therefore, though the risk in the stock market is relatively higher, the expected returns in the stock market are not high enough to compensate its risk and many large investors pull their money out of the market and seek for other opportunities as when they have large enough cashes, more investment opportunities are open to them.
Overall, the financial market is a very strange market, although the demand side can observe the supply side preferences, they do not have direct tools to attract investors, as the factors determining the investors' actions are mainly based on investors' own preferences and the market nature, which the institutions and fund managers cannot control of.
The financial market is trying its best to attract investors to participate in the market; however, the cashes are not distributed widely and equally that some sectors have absorbed more money than other sectors do. This creates a competition between different sectors within the financial market; but the decision for investment largely depends on two factors, the expected returns and the investors' risk preference.The expected returns are determined by the nature of the market and the risk preference depends on investors' personality and the future use of the money. The institutions and fund managers have no control of these two factors; therefore, they passively accept the demand of their investors.
The stock market is a great example that more and more good firms reject to issue IPOs as they are expected to experience high growth and have no worry about seeking for investors and the companies which issue IPOs are expected to already finish their most rapid growth trends and now face a constant operation. Therefore, though the risk in the stock market is relatively higher, the expected returns in the stock market are not high enough to compensate its risk and many large investors pull their money out of the market and seek for other opportunities as when they have large enough cashes, more investment opportunities are open to them.
Overall, the financial market is a very strange market, although the demand side can observe the supply side preferences, they do not have direct tools to attract investors, as the factors determining the investors' actions are mainly based on investors' own preferences and the market nature, which the institutions and fund managers cannot control of.
Friday 9 December 2016
Could deglobalisation help to avoid a globalized crisis?
One of many problems that globalisation is argued to have is globalisation will increase the scale and size of an economic crisis as well as other types of crises. As currently there is a sign of a global scale of deglobalisation led by the populists, is it possible for such process to avoid a globalised crisis in the future?
It will depend on the extend of deglobalisation. If it is a limited political move and only aims to reduce the population mobility across countries, then as long as the global trading network exists, the economic crises can spread their influences across borders and become global scaled crises. However, if the deglobalisation becomes a limitless process that target all fields of the world societies, then we may expect a sharp reduction on the world economy at the start of the process, as when it is a globalised world, the scale effect of production will increase the productivity of production, and once the process of deglobalisation stars, such effect will disappear and drag down the global outputs. Afterwards, the economic growths in most of individual countries will be relatively slower than they are in the world economy, as they are only limited to the resources in their own regions. Of course, as the leverage effect created by the globalisation disappears, the size of a crisis could be limited as well, but due to the limited resources available, the resources that can be used to solve the crisis is limited as well. In addition, the close of borders can prevent domestic crises from spreading to other countries and prevent foreign crises from impacting the domestic economy. Similarly, the close of borders will close the door to foreign resources to borrow in the crises.
Overall, I still see that deglobalisation will limit the scale and size of crises due to lowering leverages but limit the amount of resources available as well, there is I think greater costs than benefits of deglobalization.
It will depend on the extend of deglobalisation. If it is a limited political move and only aims to reduce the population mobility across countries, then as long as the global trading network exists, the economic crises can spread their influences across borders and become global scaled crises. However, if the deglobalisation becomes a limitless process that target all fields of the world societies, then we may expect a sharp reduction on the world economy at the start of the process, as when it is a globalised world, the scale effect of production will increase the productivity of production, and once the process of deglobalisation stars, such effect will disappear and drag down the global outputs. Afterwards, the economic growths in most of individual countries will be relatively slower than they are in the world economy, as they are only limited to the resources in their own regions. Of course, as the leverage effect created by the globalisation disappears, the size of a crisis could be limited as well, but due to the limited resources available, the resources that can be used to solve the crisis is limited as well. In addition, the close of borders can prevent domestic crises from spreading to other countries and prevent foreign crises from impacting the domestic economy. Similarly, the close of borders will close the door to foreign resources to borrow in the crises.
Overall, I still see that deglobalisation will limit the scale and size of crises due to lowering leverages but limit the amount of resources available as well, there is I think greater costs than benefits of deglobalization.
Thursday 8 December 2016
The end of QE, then what?
The scale of the asset purchasing program by the European Central Bank is diminishing, which implies the QE may come to an end in the near future. It is an enormous scale of economic experiment to test the impact of QE, which is absolutely a new thing this century. The time length and the scale of QE programs around the world are incredibly enormous.
Some countries have already ended their QE programs and even increased the base rate; while some others' QE programs are still ongoing with negative real interest rates. We cannot clearly know the actual impacts of these QE programs on our economy as it may have a long period impact which we have not observed yet.
There is one thing which is clear, that the short term effectiveness of QE programs is diminishing over time. The first introduced programs have larger impacts on the economy than the later introduced programs.
In addition, although trillions of euros have been flew into the economy, many countries' inflation rates stay relatively low, which shows that the cashes delivered by the QE programs. The slow economic growth in the developed countries are now seen as a normal phenomenon.
The central banks may need to find other solutions to boost the economic growth and increase the inflation rates. They may allow interest rates to fall below zero without any intervention.
Some countries have already ended their QE programs and even increased the base rate; while some others' QE programs are still ongoing with negative real interest rates. We cannot clearly know the actual impacts of these QE programs on our economy as it may have a long period impact which we have not observed yet.
There is one thing which is clear, that the short term effectiveness of QE programs is diminishing over time. The first introduced programs have larger impacts on the economy than the later introduced programs.
In addition, although trillions of euros have been flew into the economy, many countries' inflation rates stay relatively low, which shows that the cashes delivered by the QE programs. The slow economic growth in the developed countries are now seen as a normal phenomenon.
The central banks may need to find other solutions to boost the economic growth and increase the inflation rates. They may allow interest rates to fall below zero without any intervention.
Wednesday 7 December 2016
Emerging market banks in bad shape, a regional problem or a global crisis?
As there are many warnings on emerging market banks' financial positions, the large institutions must already be aware the problem existing in emerging market banks, so if there is a collapse in the emerging market banking system, it is unlikely to lead to a global crisis. However, a wider spread among emerging economies is highly likely that even some emerging market banks may have relatively healthy finance, they could be hit hard by the crisis.
Bank crises are very likely lead to economic crises, as banking could be seen as the heart of the economy. Once the bank crisis happens, the emerging economy will also be in a deep trouble. However, if the emerging economic crisis is going to spread in a global scale is questionable. The developed world depends on their imports. Although without closing the export manufactures banks can gradually collect their loans, it is the banks' best interest to force manufactures to file bankruptcy so banks can collect big amounts of assets in a much shorter term. Therefore, the imports for the developed world are reduced sharply. Though it can help to create jobs in the developed economies, it increases the costs of producing such goods and services which usually rely on imports. The inflation rate in the developed world will increase.
The inflation could be a good thing, as well as a bad thing. The positive side is that the inflation can reactivate the inactive money holding in the bank accounts, more cash flowing into the economy can stimulate economic growth. The negative side is that the inflation could get out of control once an enormous amount of cash suddenly flood into the market.
Overall, I think the emerging market bank crisis will remain in the emerging market and the inflation in the developed world could be pushed higher by the shock in emerging markets.
Bank crises are very likely lead to economic crises, as banking could be seen as the heart of the economy. Once the bank crisis happens, the emerging economy will also be in a deep trouble. However, if the emerging economic crisis is going to spread in a global scale is questionable. The developed world depends on their imports. Although without closing the export manufactures banks can gradually collect their loans, it is the banks' best interest to force manufactures to file bankruptcy so banks can collect big amounts of assets in a much shorter term. Therefore, the imports for the developed world are reduced sharply. Though it can help to create jobs in the developed economies, it increases the costs of producing such goods and services which usually rely on imports. The inflation rate in the developed world will increase.
The inflation could be a good thing, as well as a bad thing. The positive side is that the inflation can reactivate the inactive money holding in the bank accounts, more cash flowing into the economy can stimulate economic growth. The negative side is that the inflation could get out of control once an enormous amount of cash suddenly flood into the market.
Overall, I think the emerging market bank crisis will remain in the emerging market and the inflation in the developed world could be pushed higher by the shock in emerging markets.
Tuesday 6 December 2016
How to save jobs
A study by the Centre for Business and Economic Research at Ball State University states that 85 per cent of the job losses are caused by technological change, other than trade suggested by the US president-elect Trump. How could he keep his promise to save the US jobs?
Businesses are businesses, they want to maximise their profits. If there are more profits to move their companies to other countries, 'facing serious consequences' is not something unacceptable. If companies see that employing machines is cheaper than employing humans, then they will switch to machines and reduce their employees or force down the wages and make labour costs cheaper.
Based on this nature, there are two ways to save jobs from technologies. The first solution is to increase taxes on firms with higher technology adoption rates. This will increase the costs of switching to machines and technologies; however, as long as it does not lower the cost of labours, the firms will be forced to move their firms to other countries, as the general tax levels increase the costs of cooperations. The second solution is to remove the minimum wage. Once the adoption to machines seem more attractive firms get greater bargain power over their employees, then they are likely to force down their employee wages and reduce their costs of labours. However, this could widen the domestic wealth gap and create some degree of social unrest. Although there is a solution to this problem that the government could provide subsidies to companies who use more labours than machines, the costs of such solution is too high to be sustainable.
Overall, we cannot stop firms from switch some jobs from labours to technologies, as they are rational and make decisions on profit maximisation.
Businesses are businesses, they want to maximise their profits. If there are more profits to move their companies to other countries, 'facing serious consequences' is not something unacceptable. If companies see that employing machines is cheaper than employing humans, then they will switch to machines and reduce their employees or force down the wages and make labour costs cheaper.
Based on this nature, there are two ways to save jobs from technologies. The first solution is to increase taxes on firms with higher technology adoption rates. This will increase the costs of switching to machines and technologies; however, as long as it does not lower the cost of labours, the firms will be forced to move their firms to other countries, as the general tax levels increase the costs of cooperations. The second solution is to remove the minimum wage. Once the adoption to machines seem more attractive firms get greater bargain power over their employees, then they are likely to force down their employee wages and reduce their costs of labours. However, this could widen the domestic wealth gap and create some degree of social unrest. Although there is a solution to this problem that the government could provide subsidies to companies who use more labours than machines, the costs of such solution is too high to be sustainable.
Overall, we cannot stop firms from switch some jobs from labours to technologies, as they are rational and make decisions on profit maximisation.
Monday 5 December 2016
what are the assumptions that get us the result of real estate prices in financial centre cities increase over the long term?
Yesterday I argued in financial centre cities, the real estate prices will increase over the long term. However, it involves some pre-existing assumptions that I did not explain yesterday.
First of all, the world economic performance has an increasing trend. This is important, because if the global economy is shrinking over time, then the phenomenon of more resources being attracted to financial centre cities will not occur, thus the real estate prices will not be likely to increase over the long term. The second assumption is we all stay on the earth. If we can travel across planets, the geographic picture of the world economy changes and some financial centre cities will lose their importance. The third assumption is there is an inflation in the world economy over the long term. Although we assume an economic growth over the long term, I still think we need the assumption of inflation, as many economic theories may be right at the moment, it does not necessarily mean they are right in the future, growth may not necessarily mean inflation in the future. If we cannot have an inflation over the long term, the real values of real estates may still rise but the nominal values could decrease over the long term.
However, if the existing financial centre cities attract almost all available resources around them, they will compete with each other. Although they are already competing with each other, the level of competition will increase over time, due to the development of technology, the need for multiple financial centres is less and less significant, eventually there could be one financial centre that absorb all resources from other financial centres. In this case, the one survival financial centre could an enormous increase in its real estate prices, while others will lose in the battle and the real estates will slump.
First of all, the world economic performance has an increasing trend. This is important, because if the global economy is shrinking over time, then the phenomenon of more resources being attracted to financial centre cities will not occur, thus the real estate prices will not be likely to increase over the long term. The second assumption is we all stay on the earth. If we can travel across planets, the geographic picture of the world economy changes and some financial centre cities will lose their importance. The third assumption is there is an inflation in the world economy over the long term. Although we assume an economic growth over the long term, I still think we need the assumption of inflation, as many economic theories may be right at the moment, it does not necessarily mean they are right in the future, growth may not necessarily mean inflation in the future. If we cannot have an inflation over the long term, the real values of real estates may still rise but the nominal values could decrease over the long term.
However, if the existing financial centre cities attract almost all available resources around them, they will compete with each other. Although they are already competing with each other, the level of competition will increase over time, due to the development of technology, the need for multiple financial centres is less and less significant, eventually there could be one financial centre that absorb all resources from other financial centres. In this case, the one survival financial centre could an enormous increase in its real estate prices, while others will lose in the battle and the real estates will slump.
Sunday 4 December 2016
The advantages and disadvantages of investment in real estate
For years, the real estate prices in major cities and financial centres, such as London, New York, Shanghai, Beijing, are soaring sharply. Therefore, investing in real estate becomes a safe and profitable investment opportunity, that is suitable and almost designed for many middle class families. Today I would like to discuss about the advantages and disadvantages of investment in real estate, the real estate I want to talk about is housing (houses and flats).
There are many obvious advantages of investing in real estate. Firstly, the real estate prices in big cities are unlikely to fall in long term and are almost certain to having an increase long term trend. As big cities always attract more people due to the opportunities and resources they have, more people living in big cities will absorb more resources and opportunities, such multiplier effect is unlikely to stop unless the global population has got a sharp and immediate reduction, which is only likely caused by diseases or natural disasters. Therefore, the returns of investing real estate are relatively positive and secured. Secondly, sometimes owning one or more houses and/or flats can have some side effects. For example, it can increase one's credit rating and make him/her easier to borrow from his/her bank at a relatively cheaper interest rate. Owning a well located house or flat can send their children to better schools and receive better education. These are all non money benefits. Thirdly, the real estate prices can fall but they cannot fall below zero; therefore, it has a safe net of the investment and even sometimes families may not be able to sell for more money they can own their houses and gain utilities from their houses. They can lend their houses or flats to receive rents and increase their family incomes.
However, investing in real estate can have disadvantages. Firstly, to families, investing in real estate requires a relatively big amount of money as the initial investment, it has an enormous opportunity cost. Secondly, investing in real estate has a liquidity issue that selling houses and flats requires a relatively long period of time. Thirdly, the scheduled payments will reduce incomes in short term and affect short term living standards.
Overall, if you have better investment skills in a wider selection, the liquidity and opportunity cost issues should draw you away from real estates towards equities or bonds which are more liquid than real estates.
Friday 2 December 2016
Where is the turning point?
Today we learn that the US unemployment rate falls to the
lowest since the crisis, it is a piece of good news; however, we should not
ignore the phrase ‘since the crisis’, it means before the crisis, the US had
even lower unemployment rate and better economic performance. Therefore,
although the US economy and some other economies are performing well, we should
be surprised if a serious financial or economic crisis hit us at the corner in
the near future.
Sometimes a small change could turn everything upside down.
The last crisis was I think directly triggered by the decision of the US
Federal Reserve to increase the base rate, as it increased mortgage rates as well as the default rates. I think that a reverse move of previous monetary policies by the central bank could be one of the possible triggers. Moreover, starting a trade war could be another trigger. A trade war hurt the world economy, because it can reduce the global trading volumes as well the productions for exports. Then some countries will have an expansion in some unproductive industries as they no longer import as many as they demand; moreover, some countries' industries may suffer weak demands as their exports are cut by the trade war. This will all cause an economic slow down and increase the domestic inflation.
Thursday 1 December 2016
Who wants free trade?
Where is the origin of free trade? I think the idea of free traded started centuries ago, but the the era of colonisation was partially developed from this idea. The European countries definitely benefited from colonization via free trading with their colonies; however, after the second world, the colony system broke down, the European countries were forced to or voluntarily give up their controls over their colonies. What happened that caused them to give up their colonies? Now many developing countries welcome free trade more than those developed countries which initially established many free trade deals worldwide.
China is willing to make free trade deals with almost all the countries around the world, countries like some African and Asian countries too want free trade deals with developed countries in order to boost their economic growth. In the past, the developed countries wanted free trade deals, because they had productive industries and the costs of production in the secondary industries were way lower than their colonies while their colonies can provide very cheap raw materials for their industries. However, nowadays, many developing countries have these machines and lower their costs of production in their secondary industries, their average costs of production are lower than some developed countries due to their cheap labour costs. There are some developed countries that may still want free trade. When developed countries focus on their advanced industries, where many developing countries do not have the matched technologies, they then have their comparative advantages and in the advanced industries they have lower costs of production.
Overall, the countries which have lower costs of production in their major industries will want free trades.
China is willing to make free trade deals with almost all the countries around the world, countries like some African and Asian countries too want free trade deals with developed countries in order to boost their economic growth. In the past, the developed countries wanted free trade deals, because they had productive industries and the costs of production in the secondary industries were way lower than their colonies while their colonies can provide very cheap raw materials for their industries. However, nowadays, many developing countries have these machines and lower their costs of production in their secondary industries, their average costs of production are lower than some developed countries due to their cheap labour costs. There are some developed countries that may still want free trade. When developed countries focus on their advanced industries, where many developing countries do not have the matched technologies, they then have their comparative advantages and in the advanced industries they have lower costs of production.
Overall, the countries which have lower costs of production in their major industries will want free trades.
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