How does your holiday plan change when your income changes?

I always believe that all individuals are rational that they make their decisions based on their best information. Many people in the West are spending their holidays at the moment. In China, people usually spend their holidays around the Chinese New Year. When people have different levels of incomes, they can have different ways to spend their holidays.

When people are very poor, they do not have sufficient resources to support their basic living, so under such circumstances, they have to work as hard as possible to get as many resources as possible, they cannot have any holiday plan. When people are a little bit wealthier, as they are still facing great risk in the future, and they can earn a bit more during the holiday period than during the normal period, so they are more interested in working during the holiday season in order to get extra incomes to counter their future risk. When people have stable jobs and are wealthier, they can afford holidays and holiday is another type of consumption; therefore, the way of how they spend their holidays depends on their wealth levels and the length of their holidays also depends on their wealth level that when people are wealthier, they can afford more expensive holiday plans and enjoy longer holidays. However, the marginal returns of holidays are also diminishing. After a certain level of holiday lengths and expenditures, the marginal returns become negative, work becomes more scarce compared with luxury, then people could potentially stop consuming more what we consider is luxury and turn to work.

To conclude, if we assume diminishing marginal return is always true, then even super wealthy people would still work, as consuming additional luxury does not provide additional happiness or utility.

What does the business of M&A booming indicate?

 It is reported that the global M&A (merger and acquisition) business is increasing for the fourth straight year and worldwide mergers and acquisitions have exceeded $3tn. This may indicate the worldwide market is potentially becoming more uncompetitive since companies are growing larger and the number of companies in one market becomes smaller.

It means the market power of the supply side becomes greater. It could mean that companies tend to get higher and higher revenues in general. This is good news for shareholders and employees that higher revenues mean greater stock returns and higher wages. Moreover, it can have the influence on the market price level. When the supply side has greater market power, they are likely to set higher prices. Additionally, when people receive higher incomes from greater stock returns and higher wages, they tend to consume more and have higher living standards. Both households' and companies' sides add more inflationary pressure on the economy. Therefore, the inflation rate will be higher when the companies' market power increase. Furthermore, the business of M&A booming indicates the financial market is more active in this sector, financial companies could generate profits from the business.

To conclude, the M&A business booming may indicate great inflationary pressure and increased market power of the supply side. Moreover, the prices could become stickier due to the lower level of market competition.

Short term costs are increasing over time

Due to the development of the market, the short term costs are increasing over time. For example, the recent US tax reform in the long term will benefit the companies as the corporate tax is cut from 35 per cent to 21 per cent; however, in the short term, firms need to spend more on restructuring their tax efficiency systems to coup with the new US tax system in order to make the most of the tax cut, so from this point of view, the short term costs increase due to the new tax reform.

The development of market is a process of completing the market (to make the market complete). A complete market means that the market has negligible transaction costs and perfect information and there is a price for every asset in every possible state of the world. Once the market is relatively close, it means all sectors attach with each other. The US tax reform is an exogenous change and the entire market has to adopt the change systematically. Such systematic change is costly as some work has to be redone, people may need more training to adopt the changes.

Therefore, to conclude, in a more complete and more developed market, a minor change requires a systematic change within the market, which could be very costly in the short term.

The costs of crime

Crime, of course, hurts the society, as the existence of crime increases individual risk and could potentially destroy the capitals that can create values for our society. In macroeconomics, there is a belief that stealing and robbery do not create negative impacts on the entire economy as long as the expenditure does not change in its whole. This is because the entire economy does not lose any capital from stealing and robbery and the money would merely be transferred from one person to another and then spent into the economy again. However, such belief ignores the side effect of stealing and robbery. The existence of stealing and robbery could change people's consumption attitudes, and the individual expenditures are different between when there is stealing and robbery and when there is no stealing or robbery. This is because of the first cost of crime I mentioned in the beginning. When there is stealing and robbery, individuals face the risk of losing incomes due to stealing and robbery. When individuals face greater risk or uncertainties, they tend to lower their expenditures on consumption; therefore, when there is stealing and robbery, the expenditures on consumption will be lower. It means when there is a high level of crime, the consumption level in the economy would be low. In addition, crimes would destroy the capitals that can create values for our society. Individuals could be potentially hurt by crimes when individuals suffer physical damage, their productivities would be affected as well as the values they create for the society would also be affected.

To conclude, crime does not only affect individuals but also affect the entire economy and the entire society as well.

New sales record

Tomorrow is Boxing Day, the most important shopping day in a year in the West; and I expect that it will create a sales record tomorrow and I have these following several reasons.

Firstly, there is an inflation. This means even with the same real value, this year’s nominal value is definitely higher than the previous year’s nominal value. Secondly, retailers have great significant incentives to boost their sales on this particular day. Boxing Day sales are one of the most important figures that investors and banks pay attention to. If retailers can have very good sales records, they are easier to have access to more finance. Thirdly, the GDP is growing over years, this indicates the population is becoming more wealthier. When individuals become wealthier, they are more likely to spend more. Fourthly, more of the goods people buy need frequent updates, this forces people to buy the updates more frequently. This means people may buy similar goods every year, and the prices tend to be higher every year, since they are updates. Therefore, the revenues will increase over time.

To conclude, I expect this year the Boxing Day will create new sales record.

The US tax cuts

The Republicans are celebrating their huge success of passing the new tax bill, of course, the US President Trump is also celebrating and calling it the Christmas present for the Americans. However, I think that it is not a present for every America, as it mainly benefits those whose annual incomes are higher than 100,000 dollars. Those people' incomes are above the American average income. Given there is a wealth gap in America, the median income could be lower than the average income in America. This means the wealth gap would become even wider under the new tax policy. In general, any tax cut would lead to a wider wealth gap.

Usually, the policy of tax cuts aims to increase people's incentives to work harder and improve their productivity. In America, it does not have such issue. Moreover, too wide wealth gap would reduce the productivity. Therefore, the tax cuts may not be a wise move at the moment for the US. In addition, the corporate tax is also cut significantly; however, it may not mean that the US companies would transfer their benefits back home, especially those large multinational companies. The US corporate tax is not the lowest even after the tax cuts. The current US economy is actually in its almost best shape, no change is actually required at the moment, as the economic growth is strong, the unemployment rate is low and the number of jobs created increase over time. An additional policy may not stimulate the economy further but creates more social equality problems.

Inequality

There are many types of inequality existing in the real world: gender inequality, income inequality, race inequality and etc. To some degree, these inequalities mix with each other; for example, one of the phenomena for gender inequality or race inequality is income inequality that people across different races or genders are paid differently. In the modern world, it is hard to see de jure inequality, especially in the developed world; however, it is very common to see de facto inequality.

The problem of many inequalities is caused by the abilities of the disadvantageous people. The reason for the closing gender inequality gap is that in the modern society, males and females have equal opportunities to receive education and are equally capable in the labour market as they can do similar jobs. The racist problem is caused by the ability difference across different races. Of course, the ability differentiation is caused by many historical reasons and even cultural reasons. 

The average ability difference between different groups of people causes the income gap between different groups of people, leading to the issue of social inequality. Many people believe that to narrow down the social inequality is to provide more education; however, nowadays many researchers find that the contribution of education to incomes only counts 5%, the income is largely determined by people’s backgrounds.

To improve people’s backgrounds is extremely difficult, as the systematic shift of people’s backgrounds is usually caused by exogenous events. For example, the two world wars caused a sharp reduction in the number of Western noblemen and created a social class change. 

Moral hazard and its cost

Due to information asymmetry, moral hazard is very common in the real world. Moral hazard means under many circumstances, the outcomes will benefit one party but be very inefficient. The inefficiency is the cost of moral hazard. Sometimes, if we are willing to pay a certain price, it is possible for us to lower the probability of moral hazard. The additional price we pay for lowering the probability of moral hazard is also the cost of moral hazard. Most of the regulations and laws are made to avoid moral hazard issues, or to punish those who take ill actions. 

From this point of view, we can see a huge amount of resources including labour resource have been spent on the issue of moral hazard. Considering the cost, especially the opportunity cost of the moral hazard issue, the cost is incredible. This is one of the reasons that why the blockchain technology has been attracted so much attention as the blockchain technology can potentially solve the problem of information asymmetry. Of course, blockchain cannot solve the issue of moral hazard completely.

We have invented so many things to counter the issue of moral hazard. To some degree, even the government is an institution to counter the moral hazard issue. Some of the tools that we invented for countering moral hazard have grown to incredible sizes that we cannot erase their existences even when we no longer face the moral hazard issue. The enormous institutions would become the burden that slow down our development in the future.

Is it possible to avoid bubble burst?

It is almost impossible to avoid bubble burst, as bubble burst is unpredictable. As I discussed previously that the bubble burst could be caused by mistaken expectations, once there is a fear among the market, it is very easy to make the fear become the truth. In addition, even if the possibility of a bubble burst is noticed before it takes place, it is unlikely to prevent the bubble burst from happening, instead it would make the bubble burst even faster. When the market notices a possible bubble burst, the market will immediately react to this probability. They will not try to prevent the bubble from bursting, they will try to gain more profits or limit their losses from the bubble burst. Therefore, there is only one probability that may prevent bubble from bursting that the regulators notice the danger of the bubble burst; however, this is not realistic that it is more likely for the market to notice the danger than the regulators do.

For regulators, because they cannot notice the possible bubble in the market ahead of the market, they have to use policies to reduce the probability of the market noticing the bubble in the market. In addition, they also tend to lower the bubble risk. These are the reasons that the regulators tend to moderate the economic volatility, not only the economic decline but also the economic growth as well. When there is no significant change in the market, it is less likely to create bubble in the economy.

Therefore, the regulator and government can only moderate the economic volatility to reduce the probability of bubbles; however, they cannot actively respond to a noticed bubble and prevent it from bursting.

Problem of Index

An Index is often used to measure something that is not easy be quantified or measured. Especially in the field of social science, indices have been widely used for measuring some social phenomena. In some research papers, researchers use indices to measure a country’s government size, degree of democracy and many other subjective characteristics. After these researchers get these indicesm, most of them use the indices to form quantitative analysis models to measure the correlations between the “key indices” and the topic they are studying.

The problem of such indices is that it does not form a complete quantity result. Usually papers using indices may conclude 1 unit change in the index would have a certain impact. However, because an index contains too much information, we have no idea about if all the infomation with the same weights in the index would have the same effect. Moreover, it does not provide useful guidance in practice, as if is hard to make 1 unit change in the index in the real world, as too many factors that would interact with each other and influence the index.

In addition, using different indices can get different results, and researchers tend to use the indices that deliver the most significant results. Such results could be biased and provide inaccurate guidance. Moreover, there is not a standard that measures the accuracy of the indices; therefore, it is very subjective to argue whether an index is good or bad.

Overall, I do not think indices are very useful in research to deliver reliable results.

Demand without free entry

When a firm is deciding whether it is going to supply, we usually consider the costs of  production and the revenues. When firms want to gain more customers, they would like to increase their expenditures on advertising, the expenditure is counted as part of the cost of production. 

However, the demand in the market is not infinite. Even if we make a good free, people still face some constraints to consume the good, for example, they could have time constraint to consume the good. The limitation of the market means the firms' supply decisions are not only constrained by the costs of production, but are also constrained by the size of the market. Therefore, to make supply decisions, it is important to know what determines the size of the market. 

My opinion is that the limitation of the market size is caused by there is a cost for consumer to enter the market. As I mentioned above, consumers need to spend time on entering a market. Moreover, consumers have to choose between different markets, some markets can be complement, some can be substitute.  Modern days, we can see more and more specific markets. Consumers would like to spend more time in the markets that they think are interesting, which means they would like to have more information about the suppliers. In such market, the firms have to spend resources on their public image. In some markets, consumers do not spend so much time on studying the market, the only thing they care is the price. For example, people do not care about the brand of their lamps when comparing with their smartphones. In such market, prices become the key determinant.

To conclude, starting a business in the sector where people care the most is the easiest and the hardest. It is easy because it is unlikely to get oneself into a barbarian price competition, it is hard because consumers know more information. 

Does the EU really have more control of the negotiation with Britain?

Many EU countries have asked the UK Prime Minister for the clarity over the future relationship between the EU and Britain, as it seems to pass the mark of Phase 1. May is still hiding her cards, this is a negotiation strategy. However, when Britain and the EU are sitting on the negotiation table, who can have more dominant power?

In terms of the influence and aggregate power, the EU has a much greater power and influence over Britain, as the EU has a larger market and economy, it has a greater population size. In this way, Britain has a weaker negotiation power, which means it may get  less advantageous deals from the negotiation. However, the EU has a major disadvantage on its side. Britain has very divisive opinions within its country about Brexit; within the EU, the opinions could be more divisive and different countries could have different interests that could violate each other. Britain has one leader, the Prime Minister May; but the EU does not have a specific leader, though Germany and France could potentially be the leaders of the EU, individual countries can still have different interests and have their says in the negotiation, this makes the coordination between the EU countries more difficult and costly. When considering the costs of coordination, the EU countries may not create enough pressure on Britain. In addition, Britain is able to take advantage of the division within the EU. Moreover, the information between the EU countries is incomplete and imperfect, they can only make decisions on their expectations about each other. When their expectations are different from the truth, their decisions are not the most efficient.

Therefore, although the EU is much larger in terms of its size, the information asymmetry within the EU and the cost of coordination actually given Britain more negotiation power on the Brexit negotiation table.

Cost of communication, efficient outcomes

In economics, we have many terms to describe different types of equilibrium, in both macroeconomics and microeconomics concept. When there is an equilibrium, no one would like to change their strategies (it is often referred as Nash Equilirbium in a pure strategy game). In the reality, we often change our actions very easily and randomly (as we could simply change our behaviours according to our mood). The major problems in the reality are imperfect information and incomplete information. Moreover, because of the costs of information, we have different probabilities to having control of determinant information, that would influence our behaviour. Communication is also costly that it is much easier to collude with people that are closer to them than to collude with the entire market. This will lead to many blocked collusions within the market. Such outcome is very likely to be less efficient than the outcome without blocked collusion. However, when we take into account of the costs of communication and coodination, the outcome of the market with blocked collusion would be more efficient if people do not form individual collusion within the market.

Therefore, the current outcome may be the most possible efficient at the moment, given the existence of communication and coordination costs. 

Expectation caused risk

Yesterday I said that expectation could fill risk in the market. This is because our decisions are made based on our expectations. Once there is a market expectation that implies there may be a bubble burst in the near future, the market will take the information seriously and sell out their holding assets or goods and create the situation of bubble burst. However, the market expectation about bubble burst may not actually be caused by the signs of bubble burst or other sorts of direct or indirect evidence, sometimes they could merely be caused by mistransformation of information or miscommunication.

In addition, the market expectation may not reflect the true market state, as I mentioned yesterday that those who have market powers in the market may be the minority. Their opinions form the market expectations. However, they may not speak out their real expectations and opinions due to personal interests. In addition, they are not necessary right about their views of the future. When they are wrong, the signals sent by them do not reflect the real situations. When the market expectation has been far from the real situation, once some people realise there is a mistake, then there will be a very volatile redistribution of people’s wealth and resources, this could be a temporary shock or a crisis.  

The expectation and the risk

Everyone has experienced making plans; however, all plans are dependent of our expectations, because we do not have complete or perfect information about our future. Our expectation is made based on the natural factors, our experience and some relevant information. The changes in the factors that influence our futures will change our expectations; meanwhile, our expectations are also one of the factors that influence our futures. The debt crisis from the last century, the Mexico's debt crisis, was a crisis that was caused by the people's expectations. Many studies have found that if the maturity could have extended, it would have been impossible for the crisis to take place; however, the reason that Mexico was unable to extend its maturity of their sovereign debts because at the time the market had am expectation that Mexico was about to default and no one was willing to let Mexico roll over its debts.

The crises that are caused by people's expectations are impossible to be predicted. This is because sometimes the changes in people's expectations are very random, they could even be caused by whispers and rumors. Moreover, the expectations do not reflect the truth about the market. Because of the concentration of capitals and wealth, the market expectations are actually represented by a small group of people who have the control of the enormous capitals and wealth. When this number is small, the expectations they make would be distanced from the truth, and wrong expectations could increase the systematic risk.

Therefore, the expectation itself is a source of risk.

Big banks’ uncertain attitudes towards Bitcoin

The price of Bitcoin increased by 40% within 40 hours, this price increase was fuelled by the coming Bitcoin futures contracts trading. However, the reaction of big banks is not as enthusiatstic as the market, some big banks are not willing to support the launch of Bitcoin futures, some will clear for customers but after a very difficult transaction process.

Although many big banks have invested in block chain, the key technology of cyber urgency, they do not have confidence about the cybercurrency market. Firstly, this is a very new sector for everyone, so no one gains significant advantages. Secondly, the “crazy” increase in the price definitely raises people’s concerns about the possible bubble in the cybercurrency market. Thirdly, the cybercurrency is unlike the currencies that we are using, it is decentralised, so its value is much more difficult to be determined. 

In addition, the cyber currency may have a great potential, but at the current moment, the market is still relatively small. However, in some underdeveloped countries, because of the political chaos, the decentralised cybercurrency becomes the currency chosen by the locals. Therefore, we cannot conclude that cyber currency cannot become the universal currency.

Chinese foreign direct investment falls 40.9%: a good thing or a bad thing

Non-financial Chinese foreign direct investment in the first 10 months of 2017 is reported to fall by 40.9%, showing the government policy has worked. The EIU report shows Singapore has replaced the US as the top destination for the Chinese foreign direct investment. Recent years, the Chinese overseas investment has increased relatively, especially the investment in “the Silk Road Economic Belt and the 21st-Century Maritime Silk Road" has increased.

Receiving foreign direct investment is critical for developing countries and emerging markets, as they need foreign investors' funding to boost their domestic economic outputs. The Chinese government's action to lower its foreign direct investment still puts itself in the position of a developing country. The increase in the foreign investment means hot money flows out. When hot money flows out, it can help to depreciate the currency value. In addition, the investment can bring back the profits generated overseas to China, this is another benefits of foreign direct investment, as some Chinese people (businessmen and investors) could gain additional opportunities and profits.

However, on the other hand, I think that the Chinese government lowers the foreign direct investment for political reasons. When the foreign direct investment increases rapidly, it means there are many people having their mutual benefits with other governments, those who benefit from foreign direct investment are more likely to be influential. This means the increase in the foreign direct investment could mean an increasing loss in sovereignty 

How might AI structure the labour market?

I think that most of the people must agree that once AIs are more widely used in our life, the labour market would be deeply affected. Some economists suggest that the increasing in the use of AIs will make many people lose their jobs, some even suggest than two thirds of the jobs would be replaced by AIs in the future. Of course, the increasing in the use of AIs will increase the demand for the labours that are specialised in this field. The question is how fast AIs will replace human labours and what is the gap between the number of jobs created by AIs and the number of jobs replaced by AIs.

The speed determines how likely the labours in the market have the right skills to match the need for the AI-era economy. And the gap between the number of jobs created and the number of jobs replaced will determine the unemployment rate in the future after entering the AI era.

I do not think the speed of replacing human labours with AIs will be fast; this is because under the modern economic circumstance, the investment required for replacing labours with AIs is relatively large,so only those big institutions and companies may have such financial abilities to replace human labours with AIs; however, there is a weakness of big institutions and companies that they are too big to be flexible, so such major structural change is not going to be conducted smoothly. Those who first replace the most of jobs with AIs would face incredible risk (not only financial risk, but also pressure from the society), so such replacing process will be conducted moderately. 

Therefore, I do not expect we would enter a complete AI era in the coming decade.

Labour, the most important factor of production

There are four factors of production: labour, capital, land and entrepreneurship. Entrepreneurship could be seen as management skills or innovation, which I think is part of labour, as CEOs and even many entrepreneurs are employed by capitals. Therefore, there are only three major factors of production, labour, capital and land. Of course, to complete production, any of the three factors cannot be discarded. However, in terms of cost saving or profit maximisation, labour is the most important determinants.

Either capital or land has very limited leverage abilities that neither is able to generate profits more than its individual value. However, labour is much different. Labour is the key factor to leverage the values of capitals and land. There was a meeting between the UK government and the financial institutions and during the meeting, the CEO of BlackRock raised its concerns about Brexit, however, his concern was not about leaving the EU single market, but focused on the possible change in the migration policy that could affect its employees.

Labour force is the key factor to make capital and land truly gain values. Karl Marx also suggested in his famous book, “Kapital”, that labour production was the method to give goods and services values. This may be too extreme; however, labour provides the majority of a product’s value and helps firms to gain more profits. Moreover, in the future, since information transfer becomes faster, individuals are able to find cooperation partners to start their businesses and production. Under such circumstance, labour, or the population quality, becomes the key factor that determines one economy’s performance.

Being honest is the key of winning in the long term

The current US president, Trump, has been talking about his “great negotiation” skills over and over again; and the strategy that he talks the most frequently is being uncertain and upredictable. There have been many people talking about negotiation skills, and one strategy is to mislead their opponents on the negotiation table and even provide wrong information. However, being dishonest I think is the worst strategy on the negotiation table in the long term.

Once the strategy of being dishonest is used, others will acknowledge that this player is a dishonest player and in the future, other opponents would filter or even ignore the information provided and the information asymmetry will become even worse. According to economics, when the situation of information asymmetry becomes worse, the aggregate benefits will be lower. Therefore, when making information more transparent, it is more likely to make mutual benefits greater. Of course, this strategy does not necessarily generate higher private benefits than providing misleading information; however, it is more likely to provide stable and higher benefit over the long run, especially when the credibility is generally realised by the entire market, the cost of negotiation will become lower and the two parties of the negotiation will become easier. 

To conclude, being honest can lower the systematic cost for negotiation and also increase the aggregate benefits.

Can economists make big money in the financial sector?

I am studying economics for some years. When I tell others that I am doing economics, some people, especially those who do not know this field very well, often ask me about my opinions about the financial market and to give them some investment tips. They often believe economics and finance are the same; however, this is not true. However, if people ask me since the two are two different subjects if economists can make big money in the financial sector, my answer would be good economists can definitely earn big money from the financial sector but average economics cannot, at least this is my answer at this moment. Economists here are defined as they work in the economics academy. I know from my colleagues and professors I know, some of them are very conservative that they save a lot, some enter the financial market but make a loss, of course there are some that make some money from the financial market. From this very limited sample, we can see that the group of economists is just like the ordinary population; however, the reason for me to have that answer is good economists that have some abilities that others do not have.

Firstly, I want to give some successful examples of good economists can make big money from the financial market. The most famous economist since the 20th century, Keynes, made his fortune from the wheat future market; there was a story about him that once he bought some wheat futures but forgot about it because of his busy work, one day he found that tones of wheat were delivered outside his college in Cambridge. There was another successful example that David Ricardo was a successful broker and made his fortune from being an opportunist during the Battle of Waterloo, but he was not formally an economist at the time, but his contribution to economics could not denied.

Many economists and I would like to compare ourselves with doctors that doctors aim to cure diseases and economists aim to economic disease and even some social diseases. There is one thing that economics and medicine shares in common at least from my limited knowledge and understanding (especially in medicine) that there are many theories that are relatively vague and largely based on our hypothesis and assumptions. Good economists are those who can raise different thinking paths to the important questions and possible feasible solutions to the problem; therefore, good economists are not just those who are good at theories, statistics or mathematics, they are those with incredible imagination and problem solving abilities under an environment with enormous unknowns and uncertainties. Such environment is exactly the same as the financial market that the financial market is also a place with enormous unknowns and uncertainties. Therefore, I believe good economists also have the abilities to make big money from the financial market.

How should we compare data?

When we are analysing data, we often need to compare data across individuals (sectors) and time periods. When we are analysing economic data, such as revenue growth, GDP growth, we can compare the data from all previous time periods, or from a certain part of the previous time period, the annual GDP growth rate is a comparison of the first type and the quarter-on-quarter growth rate is a comparison of the latter type.

Here raises a question that how we choose the correct type of comparison. This problem is generally solved by econometrics and statistics. Econometrics tell us if we want to check the influence across different periods (such as quarterly), we need to check the continuous time series first with a number of lags. In addition, when there are some important events that could make structural changes, we might see a break between our time series.

When we read reports, sometimes we only see the comparisons on quarter-on-quarter base, such report could mislead us, as we do not know whether such analysis is reasonable, especially for those key factors. Some factors are accumulated across time, a quarter-on-quarter comparison does not make much sense. Therefore, it is necessary for us to re-do data analysis when making important decisions.

More on exchange rates and international trading

Yesterday I talked about how some exogenous factors such as exchange rates might not affect trade between countries because trade depends on the countries’ comparative advantages rather than absolute advantages. However, in the real world, we often can see some cases where the exchange rate changes affect the exports. Then how does exchange rates affect the trade under the comparative advantage theory?

This is because the theory of comparative advantage plays a more significant role in inter-sector trade rather than an intra-sector trade. In the real world, trade between some countries is intra-sector trade, as they exports the goods and services that have some differences but belong to similar categories to each other, such exporters gain revenues from product differentiation. For example, Germany, France and Britain export cars to each other, such trade is an intra-sector trade and car exporters gain revenue from their differentiated cars can gain different types of consumers. However, when prices change, the oligopolistic power created by market differentiation would be weakened, so when the exchange rate changes, the prices change accordingly, then the sales would be affected. Moreover, the costs and revenues of exporters are calculated by different currency units, when the exchange rates change, the ratios of revenues to costs change, this would affect the exporters’ strategies, even would change the decisions whether they would continue to export their products.

To conclude, exchange rate will not affect the inter-sector trade as significantly as it affects the intra-sector trade.

Some thoughts about international trading

Comparative advantage is a very concept in the international trading, and what is amazing is that this concept was first raised by David Ricardo around two centuries again. There are still many economists studying this concept nowadays. Comparative advantage suggests that countries compare the advantages across other countries but also across their domestic industries. This could be seen as a process of difference in difference. Based on the comparative advantages, the factors that change the absolute advantages between two countries will not influence the trade between countries. This is because these factors will not change the structures within their domestic economies, the relatively more efficient industries will not be changed by these exogenous factors. Based on this belief, the factors like exchange rates will not change the trading positions between two countries since their comparative advantages will not be changed by the changes in exchange rates.

Moreover, trade is good for economies in general, as the aggregate returns are positive (trade is not a zero sum game). However, trade may hurt sovereignty, as trade means cooperation with other countries. Because of trade, countries would lose some of their dependence, especially when the trade between countries is mostly inter-industry trade. Once there are two countries that have different levels of dependence with each other, the one with the lower level of dependence could have more bargaining power when they are on the negotiation table. 

(Inspired by Peter Neary’s lecture)

What is the effect when universities go to the capital markets for seeking funding?

Oxford university plans to sell 100-year bonds worth £250 million; it will be the first time for Oxford university to turn to the capital markets. Due to the cut in government funding, more and more UK universities sell bonds in the capital markets. What would be the impacts when the capital markets become the major financing source of the higher education sector?

Universities have several functions, and the two major functions are educating students and conducting research. Both functions can be sold; however, for universities, their products are not like ordinary goods or services that can be sold freely in the markets. For example, students pay equally tuition fees to receive education when they meet the entry requirements (ordinary goods and services do not requests buying permits from their customers). Moreover, the demand for research does not match the supply of research. The values of research are like the values of investment that the returns are uncertain, especially for theoretical reserch. This is why the demand side is more likely to demand more empirical research relatively. Theoretical research has lower private benefits but higher public benefits than empirical research. 

When universities enter the capital markets, the investors are more interested in the profit abilities of the universities rather than things like their reputations (of course, reputations can improve the profitabilities). Therefore, to improve profitabilities, unversities are likely to expand their sizes to seek more overseas students who pay higher tuition fees. Of course, receiving alumni’s donations is another source of financing; therefore, in the future, more and more universities’ facilities will be named after sponsors and students would become more selective and those who are more likely to make donations will be offered places first. Moreover, research of the universities would focus more on empirical research than theoretical research, as empirical research is easier to seek funding. In addition, the cooperation between universities and the business sectors would become more frequent.

There is one possible issue that due to the increasing influence from the private sector, the reports made by universities may lose their neutrality. 

The value of certainty

Almost a decade ago, many investors were afraid of the collapse of the Eurozone following the European supreme crisis; however, since th ECB and the German chancellor firmly supported the Eurozone and made a statement that they would do whatever necessary to keep the Eurozone, the fear in the market disappeared almost immediately. This is the power of certainty. Of course, some people made a gain due to this certainty announcement and some made a loss. 

Certainty has a value, and it is often calculated by measuring how much an individual is willing to pay to avoid a potential risk. In the real world, the prices of insurance could be seen as the market prices for certain uncertainties, for example, the value for paying for possible car accidents. So we pass our uncertainties to insurance companies, and the insurance companies also pass their uncertainties to others, so they find reinsurance companies. After several steps of insurance, the uncertainties do not disappear, they spread among the entire population. The idea is while we spread uncertainties wide enough, each individual bear less uncertainty. Although the prices of insurance are still the values of uncertainties, individuals bear more uncertainties than they actually realize. They do not only bear uncertainties that they want to pay insurances on or are willing to bear, they also bear the exogenous uncertainties due to the results of the uncertainty pooling by the insurance sector. This is the individual level of certainty value.

There is an aggregate value of uncertainty. If we assume there are always some people betting against all available states and everyone involves in the betting, then the total aggregate returns are unaffected by uncertainties, but the standard deviation changes due to uncertainties. However, from a longer time, the aggregate returns could change due to uncertainties, when we assume the marginal propensities of investment and consumption are diminishing, it means that the side which makes a loss due to uncertainties potentially produce more values in the economy than the side which makes a gain due to uncertainties actually produces in the economy, and the production gap is the value of certainty.

Should small and medium companies be given more funding and resources?

There are many governments that have made many policies to help small and medium businesses, especially in some countries, the majorities of their populations work in small and medium businesses. However, is it reasonable to encourage financial intermediaries to provide funding for the small and medium businesses above their previous levels?

Firstly, we have to assume that financial intermediaries make their financing decisions completely rationally. Once governments impose any policies, financial intermediaries still behave rationally, so in order to make financial intermediaries lift their lending (financing) levels, the governments have to increase the financial intermediaries’ possible profit rates or low the financial intermediaries’ risk levels. To increase the financial intermediaries’ profit rates, the governments can provide subsidies for the financial intermediaries when they lend to small and medium businesses. However, to lower the risk levels, the governments transfer some of the risks taken by the financial intermediaries to the governments themselves. Therefore, governments need to choose whether they are willing to bear more risks or expand their spendings. 

To conclude, when governments want financial intermediaries to lend more than they usually do, the governments have to increase the risks taken themselves and increase the budget deficits, which only involves large public costs.

What makes you impatient?

Some people are more patient than the others; of course, this could be caused by different people have different personalities. However, when living in different environments and receiving different education, people's personalities are more likely to be different. I would like discuss what factors make individuals impatient.

Firstly, what kind of behaviour is considered as impatient behaviour? Impatient behaviour is those who have to be done as soon as possible. Then why do people want to take such impatient behvaiour? It is because these people have large discount rates, which means the value they gain from tomorrow is significantly lower than today's value. Therefore, it is clear that to find out what makes people impatient, we just need to find out what enlarges the discount rate.

It is much more straightforward that there is one main factor that influences the discount rate, which is risk. There are two sources of risk. One source of risk directly impacts on individuals themselves. For example, if one individual believes that he or she is highly likely to die tomorrow, then his or her discount rate is very close to negative 100% that he or she does not care about the possible utility he or she can gain tomorrow. The other source of risk impacts on the individuals' targets. For example, if there is a hyperinflation in the economy, people are more likely to spend all their money today rather than to spend in the future. 

Therefore, when we see some people seem much more impatient than the people surrounding them, it possibly implies that these people have more sources of risk that directly impacts themselves.

How much wealthier will you feel when your house prices increase?

In economics, there is a belief that when housing prices increase, people would feel wealthier so they would consume more. This belief is usually used in policy making or to explain economic performance. Today I would like to discuss whether this belief could be explained based on microeconomics.

The important concept in microeconomics is that individual demand relies on two factors, price and wealth, (usually denoted as x(p,w)). If we only look at one time period, housing prices increase, the wealth increases, so individuals are likely to consume more. When we consider the aggregate demand, the population consumption will increase when housing prices increase. However, in the real world, we cannot only consider one period, when we are thinking about infinite time periods, we have to consider the changes in our wealth and the changes in prices, as individuals do not only make their consumptions on this period's prices and their net wealth, but they would also consider their future wealth and the prices in the future. Under such circumstance, the factors that influence housing prices increase. Moreover, considering the increase in wealth caused by housing price rise could be a temporary change or a permanent change in wealth. For example, in some large cities, particularly in China, the housing prices keep increasing over the time, such housing price rise could be seen as a permanent increase. Such change would cause one time permanent increase in individual's consumption; to generate more consumption boosts, it is necessary to have surprising increases in housing prices.. Of course, an one time increase in housing prices is a temporary change in wealth, this will increase individuals' consumption for only one period and in the next periods, the consumption will fall back to its previous level.

Therefore, the increase in housing prices could have impacts on consumption, but the effect is rather limited.

Street interview: the most unreliable reference

From TV programmes and some online media, we often see there are many street interviews which are used to support the media’s opinions or observations. Then here comes a question that how reliable these street interviews are.

My answer to this question is that street interviews are the most unreliable sources that you can trust. The major reason is street interviews have serious selection bias issues. Firstly, the population who are willing to answer street interviews, particularly those involve very sensitive questions, share similar characteristics; therefore, the interviewees are not randomly selected, the results generated by street interviews cannot reliably reflect the entire population’s opinions. Secondly, the interviewers usually conduct street interviews within limited regions due to cost concerns and other constraints, so the sample is selected based on their geographical characters. Thirdly, we do not know whether we watch all conducted street interviews or a selected sample of street interviews, and the media does not tell us either.

Moreover, many studies have found that the ways to answer questions can largely influence the interviewees’ answers to the questions. Therefore, it is possible for interviewers to design their questions to ensure they are more likely to get the answers they want. 

Since street interviews are so unreliable, when we are watching those, we should ignore the messages they send and focus on the data coming from a much larger and randomly selected sample.

What makes Japanese exports so special?

According to the latest report, Japan’s trade surplus rose by 21% in October compared with the previous month. In column terms, Japan’s exports increased by 3.8% on a year ago, and the imports increased by 3.2%. Despite the fact of a weaker yen, the increase in its exports to China is another important factor that caused such increase in Japan’s trade surplus. Japan’s exports to China rose 26% on a year ago, and the demand from China has been shown very solid and would continue to contribute the Japanese economy. Although Japan’s exports to other nations also increased that the trade surplus with the US increased by 11%, the enormous demand from China is a major drive of the Japanese economy. China is a large international exporter, and often referred as “the world manufacturer”; then what makes China demand so many Japanese products, even when China is a large manufacturer already?

In China, there is still a myth that foreign products, especially those from more developed countries, have better qualities than domestic products do. In Asia, the economies that are more developed than the Chinese economy may only be the Japanese economy and the Korean economy. When comparing the Korean economy and the Japanese economy, the Japanese economy is more diversified that the Japanese economy is able to provide all types of products and services while the Korean economy seems to be more specialised in several particular sectors. Therefore, if Chinese want to demand products from these two countries, the demand for Japanese products and services is much more likely to be higher than the demand for Korean products and services. Moreover, standing at the Chinese people’s position, when they are comparing products and services across the world, the Japanese products and services are more preferred than the Western products and services, this makes the Japanese companies more likely to provide products that better match the Chinese people’s preferences. The culture differences seem narrower. For example, both Chinese people and Japanese people love eatin sticky rice, so the Japanese companies are more likely to produce the right type of rick cooker for the Chinese customers. Moreover, Asian people look different from people from other races, in terms of height, weight and skin colour and etc. Therefore, especially for clothing, the Japanese companies are more likely to design products that fit the Chinese people than the Western companies. Such biological difference does not only have impacts on the clothing and fashion industries, it also plays a role in other sectors as well, especially when ergonomics is becoming more and more important in our product designs. Moreover, when more people like using Japanese products, according to herding effect, more and more people would like to buy Japanese products. There is another important factor that makes people like using the Japanese products. It is that Japan still has a culture of craftsmanship, that it is able to produce handmade unique products. Under today’s highly industrialised environment, craftsmanship becomes an attractive selling point that matches the nature of people that we like to be different and unique from others.

However, it does not mean that the Japanese economy has no worry. The Chinese economy’s performance is able to affect the Japanese economy significant, as the demand from China is enormous. In addition, once the Chinese people become more confident in their domestic products and services, the growth in the demand for the Japanese products and services may slow down and even turn negative. But it is undeniable, in the Chinese economy, the Japanese products and services face relatively limited competitions at the moment, due to the natural advantages.

Are individuals more risk adverse when their wealths increase

There is a common belief that individuals become more risk adverse when their net wealths become greater. However, in the reality, we often see that many phenomenon show many wealthier people are more risk loved than ordinary people. For example, due to regulations, those highly risky investment projects only accept high net wealth individuals to participate, such as PE. Moreover, the investment in the emerging markets (except China) is conducted by wealthy investors and financial institutions. Investment in some emerging markets is very risky, as the economic performance in the emerging markets is highly volatile. In addition, wealthy investors are also willing to become angel investors or participate in venture capital. For example, the famous NBA former player, Kobe Bryant, opened his own venture capital fund, serving other retired wealthy basketball players.

If we consider that wealth helps us to gain our happiness (utility), some wealthy people may have already been wealthy enough to afford everything that ordinary people can imagine, so they would like to find something more interesting. After they leave themselves the wealth that is able to afford their luxurious lifestyle, the wealth remained is used as the wealth to create additional excitement. Gambling is a source of pleasure or excitement; similarly, risky investment could be seen as a type of gambling. However, risky investment does not mean the probabilities of winning and losing are totally dependent on the natural probabilities, it can depend on the careful measure of investors. This means when investors win their investment bets, they can feel a greater victory. 

To conclude, considering people like gambling, when people become wealthier, the wealth they are able to afford for gambling-liked investment becomes greater, this may cause when people's wealth reaches a certain level, their risk preferences become more and more preferring taking risk.

The danger of “Free Cash Flow” evaluation

Free cash flow is very important in terms of value investment, which is a very popular investment strategy endorsed by Warren Buffett. Free cash flow represents the cash held by a company after maintainence or other ordinary operation costs. It is a key figure to look at when making value investment, as it provides a measure about how much this company is able to provide more opportunities to benefit its shareholders. Amazon is a successful company and focuses more on its free cash flow rather than profitability. However, many people are confused with the term “free cash flow” and “cash flow”, “free cash flow” is not directly shown on companies’ balance sheets and “cash flow” is required to be included in public companies’ balance sheets. There is a traditional way to calculate free cash flow; however, some investors have also invented other ways to calculate free cash flows.

More cash held by a company is definitely a good thing for its shareholders; however, it doesn’t mean making profits is not important. If a company is at its fast growth trend, it is not a big deal to look at its profitability other than its free cash flow. However, a sudden stop for a company’s growth can be a disaster. Because this company does not make profits, is used to a large amount of free cash flow, this company could lose its growth potential. Although the cash held by this company is large, since the growth stops, the company has to try something different to generate growth, and this is a risky moment for the company when it moves to a new field, especially when the company is large. Of course, it can pay dividends to its shareholders by the free cash flow. However, while the shareholders receive extra dividends, the values of their share will depreciate dramatically, as the company completely loses its growth momentum.

Economic growth and stability

Many governments tend to smooth their economies’ growth trends by trying to lower the deviation in their economies. For example, rthe Chinese government now focuses more on stabilisation of the Chinese economy rather than the economic growth that the Chinese central government recently axes a local government’s spending on a construction building project and the regulators also push the financial sector to lower the leverage ratios. Other countries have also imposed similar policies to tackle the issue of violatility in their economies. The central banks have been playing very important roles in stabilising economies. Inflation is an important measure of the violatility in the economy. Central banks tend to control the inflation rates within a reasonable range by imposing effective monetary policies.

However, from history, black swan events are far more dangerous than observable violatility. For observable violatility, it is more likely for policy makers to impose effective policies to tackle the issue; however, for black swan events, it is impossible for policy makers to do anything before a black swan event takes place, as it is unobservable.

If we are able to find a link between the black swan events and the violatility, it will definitely help us to find an indirect possible solution to lower the likelihood of black swan events taking place in the economy. To find the relationship between black swan events and violatility can be done by observing the economic violatility when a swan event take places. However, it has several issues to make the finding less credible. Firstly, the sample size is not big enough. Secondly, it does not provide a clear direction of causality between the two variables. Thirdly, there has been enough theoretical work to support the model building.

To conclude, governments and policy makers tend to lower the violatility to smooth the economic growths; however, black swan events have been the worst source hurting our economies.

Job market and future economic performance

The economic performance and the labour market performance are interacted with each other. that employers make their hiring decisions based on their expectations about the future economic performance and their market future development, on the other hand, the labour market is also an important factor that could affect the economy. When more people are hired in the labour market, it could lead to an increase in the entire population income.

Therefore, employers have to analyze the factors that cause the economic growth. If they find that the economic growth is mainly driven by an increase in the employment rate, they may slow down their hiring speeds, as such expansion of production (an increase in hiring is a type of expansion of production) may lead to overproduction.

Recently the stock markets (particularly the US and the UK) have achieved their historical peaks; however, many traders and fund managers have been very cautious about the current market situations. This is because the real economic growth has been lagged behind the financial market growth. People expect huge bubbles have been created in the financial market.  Bubbles are very likely to be created when the economy is only dependent of very limited economic drivers. When the key driver stops its growth, the economic growth will stop, and all the previous investment based on the expectation of the continuously growing driver will become useless and investors will suffer huge losses. This will create a fear in the market and stop the hot money flow in the economy. This leads to a financial crisis.

The globalised business cycle and the regional tax system

Nowadays, there have been many large multinational companies that are operating over the world. However, the business environment is different across different regions. One of the most important factors is the difference in the tax systems that different countries do not have same tax rates; therefore, despite the differences in the capital market and labour market prices, the tax rates could significantly determine how much profit they can receive from their revenues. Multinational companies are able to pay fewer taxes than small and medium companies in terms of proportions, especially in those countries with high corporate tax rates. This is because multinational companies have very professional tax sufficient teams that enable them to transfer profits to those countries with extremely low tax rates.

Therefore, apart from those companies which are founded and grow inside the countries, the governments are hardly collecting revenues from those foreign multinational companies. The current global tax environment is kindly exploiting small and medium companies and giving away huge benefits to those large companies. Such environment encourages those small and medium companies with huge potentials to keep growing to become mutlinational companies. On the other hand, the disagreement between countries will make the current global tax system unlikely to change over the coming year.

Therefore, it seems that the unglobalised taxi system is a drive to encourage companies to grow the become mutlinational companies and contribute to the globalisation.

Is an oligopoly market more desirable than a perfectly competitive market in the future?

I think that in the future an oligopoly market may be more desirable than a perfectly competitive market. This is because of the possible replacement of human labours by machinery and AIs. Many people are afraid that the rapid development of AI may replace labours' jobs, and the unemployment rate could increase dramatically. However, if the economy is dominated by oligopolistic companies, such worry could be mitigated or even disappear.

When an economy is dominated by oligopolistic companies, it means the companies in the economy are able to have some degree of market power, which means they are able to have more control of their revenues and profits. On the other hand, in a perfectly competitive market, companies are the same as consumers that they are all price takers; therefore, companies only have to choose between producing at the lowest possible costs or leaving the markets. Such difference means companies in an oligopolistic market and in a perfectly competitive market have different attitudes when making hiring decisions. Companies in a perfectly competitive market have to hire labours with the lowest costs; however, oligopolistic companies are able to become more flexible when making hiring decisions, so they do not have to hire the cheapest labours or replace labours by cheaper machines or AI. In addition, when an economy is dominated by oligopolistic companies, their employees are also their consumers; therefore, if they do not pay their workers well, their consumptions would become less capable to consume their products, thus reducing their profitabilities, so they would like to balance the labour costs and their consumers' consumption abilities.

Therefore, if an economy is dominated by oligopolistic companies, workers in the economy are likely to receive higher incomes and less likely to be replaced by machines and AIs, as they are also their employers' important consumers.

Why is Apple IOS more user friendly than Android?

The title may sound like a commercial electronic product article that compares the differences between Apple IOS and Android, but I would like to discuss the economic intuitions behind this issue. On the market, apart from Apple, the majority fo smartphones are using Android as their operation systems, some manufacturers have made some amendations to the operation systems as well. Overall, the experience of using IOS, the iPhone operating system is nicer than the experience of using Android, at least this is my personal experience and opinion.

Though IOS can be updated without any charges and seem free, while the consumers buy their iPhones, they also buy the operating system as well and the operation system cannot be replaced by other operating systems. As IOS has a higher price than Android (IOS has a hidden price and Android is free and open), IOS has to have a better quality in order to be competitive. In addition, there is an imperfect information in the market of Android, that the developer of Android does not know the manufacturers of the smartphones. When there is an information asymmetry, the market outcome cannot be as good as the market outcome without an information asymmetry. However, for IOS, there is no such issue that IOS’s developer is also the designer of iPhone, the developer knows the perfect information about the smartphone. From this point of view, the smartphone designed by Google is likely to be more compliant with Android than other smartphones. Thirdly, IOS targets a much more limited range of products than Android, this makes the design of IOS can be more specialised. More specialised products are more likely to meet the requirements of their target demanders (in this case, smartphones and tablets).

To conclude, IOS is better than Android because it has to have a better quality to counter its price disadvantage and perfect information about its target products and more specialised design make it possible to develop a more user friendly operating system. Therefore, if in the future, Apple is trying to use the same operation system on more platforms, it is likely to reduce the compliance of its operation system.

Strategies on the negotiation table

Some media point out that the UK Prime Minister, Theresa May, is ready to increase Britain’s offer to the EU over the Brexit divorce bill. The maximum amount that the UK is willing to pay is the difference between the economic gains from joining the European single market and the economic gains after leaving the European single market. However, the UK itself may not know the actual difference exactly, even if the UK government knows, it will not make it public, otherwise, Britain may have to pay the full price. Of course, Britain will not be the only one who will lose after Brexit; other EU countries may also lose after Britain leaves the EU, since Britain is one of the three major economies in the EU. Therefore, Britain technically only needs to pay the gap between what Britain would lose after it leaves the EU and what the rest of the EU would lose after Brexit.

Negotiation strategy is basically strategies that build on information set and expectation. Information set means the parties on the table do not know each other's information for certain; therefore, the parties make their decisions based on their own expectations about the outcomes of their opponents according to their estimated probabilities. However, in addition to the traditional game theory model, in the real world, bluffing is a common strategy that tends to mislead their opponents' estimation. Though people tend to know their opponents are likely to use bluffing strategy, it increases the difficulties of making precise estimations about their opponents. Moreover, in the real world, the money is not the only bet that can be put on the table. The valuation of other bets makes the negotiation much more difficult. 

To conclude, there is not a perfect negotiation strategy, as information is unknown and bluffing is very common, the estimation is very likely to be distant from the correct answer. Therefore, there is no perfect negotiation strategy but there are definitely bad strategies.

The gender pay gap

In almost all countries, there is a culture of differentiating women from men; and based on the culture, women are considered to have different social responsibilities from men, and this has been critiqued by feminists. However, there is a gender discrimination in the labour market that even when doing the same job, men usually get paid higher than women, such gap is very significant in the developed world as well. Recent years, this issue has attracted much attention. One of the reasons that this problem has started to be mitigated is that the communication is faster. When people talk with each other more frequently, they are more likely to realise the pay gaps between them and their male coallegues. Moreover, when they are changing their jobs more frequently, they can feel different companies have different attitudes towards the existing gender gap. With more comparisons, the issue of the gender differentiation can be realised by more people. Secondly, the types of jobs have been changing over the past years. More and more jobs do not require labours to have physical strength to complete their jobs, this makes men and women equally productive when they have similar levels of experience and knowledge. Since the men and women are similarly productive, there is no reason that men and women should be paid differently. Thirdly, when more and more women become the leading groups of the society, they have more incentives to change the situation and close down the gender gap. Fourthly, the market force may close down the gender pay gap as well. In the labour market, as women are paid less even when they are as productive as men, women are more preferred by employers, so the demand for female workers will increase till the wage level for women is equal to the wage level for men. Of course, people can argue that women need pregnancy holidays and need to take care of their families; however, recent years, in some countries, men also take pregnancy holidays to be with their families, and some men have left their jobs to take care of their families.

To conclude, the gender gap in the labour market will be closed automatically by the market force as well as the social force, it is just a matter of time.

global warming could be more harmful than what we think

Many individuals and countries have realised the importance of environment and the danger of global warming. However, some of the side effects of the global warming have not been discussed frequently though they could cause serious impacts on our economy as well as our society. 

The temperature change caused by the global warming could cause serious and immediate impacts on us. There is a study that finds that increasing the temperature by 1 degree could increase the probability of a civil war in a African region by 1 percent and also have a lagged effect of 0.9 percent in the coming year. As we know that the political stability has a very close relationship with the economic development. When a country’s economy is largely dependent of its agricultural industry, the impact of the temperature on its economy could be very significant, a lower production in the agricultural sector due to the climate change could lead to a political instability due to the poor economic environment. In addition, the temperature change could have a multiplier effect as well. When the temperature is higher, we do not feel very comfortable, so we need to use industrial tools, such as air conditioners, to help us to live under a comfortable environment, while the industrial tools potentially could increase the temperature further more. This means the temperature increase rate could be accelerating when the temperature is higher. Moreover, as we all can feel that temperature can easily affect our mood, when it is hot, we are more likely to be impatient; when we become impatient, our attitudes in our daily activities including consumption and investment change (many economic theories have pointed out the consumption and investment behaviour differences between patient and impatient people), so our society and economy would also change systematically. 

Oil price and its future trend

Today the oil price climbs above 64 dollars a barrel after Saudi Arabia’s domestic political changes. Saudi Arabia recently arrested dozens of princes and business tycoons under its anti-corruption crackdown, it has raised the financial market’s concerns about the political stability of Saudi Arabia, the world’s largest crude oil exporter. The future oil export policy and its political continuity closely rely on its domestic political stability.

Earlier the king of Saudi Arabia visited Russia and discussed the policy of crude oil exporting. It may imply that the two major crude oil exporters are likely to collude in terms of the future energy policy, especially when many countries have been putting lots of efforts on developing new alternative green energy. The development of new energy will lower the oil price in the long run; to slow down the speed of replacing crude oil by other alternative energy, the oil price has to be low in order to make the idea of replacing crude oil less attractive; however, at the same time, when the oil price is low, the profits these crude oil exporters can get are certainly low as well, though the sales may increase due to the lower price.

Therefore, there is a paradox here that exporters want to increase the oil price so they can get more profits but meanwhile they also want to lower the oil price in order to make oil more competitive when comparing with other alternative energy.

While the price of using other alternative energy is lower, the oil price will drop again significant. Once the oil price is low, there is not much room for it to increase any more unless there is an event that makes the oil production drop dramatically.

The US tax reform and the future US society

The new US tax reform has been released, and this could be seen the first major policy since Trump became the US president earlier this year. The tax reform focuses on the two parts, one is tax cuts, the other is simplifying the taxation system. Trump presented how the new tax form would look like, and from the photo posted, the new form would be much shorter and neater than the current one. The simplification of the taxation. This is very necessary as when the tax form becomes too complicated, the efficiency for taxpayers as well as the government would be poorer, it is more likely for taxpayers to pay miscalculated amounts of taxes.
However, the tax cuts need to be analysed more. The tax cuts could also be divided into two parts: one is the cuts in cooperation tax, the other is the cuts in income tax, especially for those who are very wealthy.Firstly, the cooperation tax is going to be cut, it means the profits gained by companies in the US are likely to increase. This encourages multinational companies to transfer their profits back to the US; however, considering there are some countries which have zero cooperation taxes, this effect may not be as great as the US government wants. However, this is definitely bullish for the stock market, as the costs for American companies will be lowered under the tax reform. Here comes with another issue that how the companies are going to do with the extra profits they get under the tax reform. Are they going to invest in production to boost the market supply? It depends on the individual incomes (which could be also influenced by the tax reform). If they do not find any investment opportunities in the economy, they may just use the cash they hold to conduct some buy back programmes, like what Apple did over the past several years. This could make their shareholders richer, but would not be necessarily helpful for the whole economy. Secondly, from individuals’ perspective, the tax reforms may benefit many middle and upper classes who are likely to save lots of money due to the tax cuts. Moreover, the minimum wage required for paying taxes is lifted, this is beneficial for many poor people. However, the issue of widening the wealth gap in the US society could not be ignored. Under the tax reform, the wealthiest people are benefited the most, the wealth gap between the wealthiest and the poorest would be larger and larger. This could increase the likelihood of social unrest when the gap is too wide.
To conclude, the cut in cooperation taxes would benefit the shareholders the most, and the cut in income taxes would benefit the wealthiest people the most; therefore, the wealthy people would become even richer under the new tax reform and the social wealth gap in the US would be widened.

How important is the chair of the US Fed?

In the US, the central bank is independent from the US government; however, just like the supreme court, the chair of the US Fed is named by the President, so the US government definitely has some influence over the central bank. Of course, though the US government cannot directly ask the US Fed to make certain monetary policies, the US government could send signals to the market about their wanted monetary policies or at least future policy directions. The naming of the nominee for the chair of the US Fed is a great tool to send signals to the market. The candidates for the chair of the US Fed are usually well respected in the financial sector; however, they hold different opinions about the future monetary policy decisions, some of them may love to loosen the policy and focus more on the economic growth, and some could focus more on limiting the inflation in the economy. Based on the candidates’ different opinions about the future monetary policy, the US president could name the one whose opinion matches the best; therefore, the policy opinion of the nominee pointed by the President also represents the opinion of the White House. Of course, once the nominee officially becomes the chair, he or she could adjust the policy plan, but the main direction of the future monetary policy is very likely to stay the same, because unlike a supreme court judge, the chair of the US Fed has a term, they are less likely to be fully neutral and independent.

In general, the chair of the US Fed can smoothly finish his or her job in his or her term, as he or she also present the opinion from the US government.