The US dollar in 2017

The top trade adviser to the US President Trump, Peter Navarro, accused Germany of using undervalued currency to exploit its trade partners, including other European countries as well as the US. The problem of the common currency used in the Eurozone has been long existing and has caused a significant crisis. The main problem of using a common currency is that different economies with different structures and situations share the same monetary policy that does not fit every single individual economy. Germany has a strong trade position as it has a strong industrial sector; it has the strongest trade competitiveness among all Eurozone economies. By taking the advantage of the common currency that represents the general image of the Eurozone economy, which is cheaper than if Germany used its own currency, Germany is able to export more goods and services by using the relatively cheaper currency. The criticism by the US top trade adviser could add more uncertainties in the Eurozone, especially given some countries have been arguing if they can be better off by quitting the currency union.

As the problem has been long existing, the comment by Navarro is targeting to appreciate the Euro in order to weaken the US dollar. The current US President Trump has always been complaining about the "too expensive" US dollar due to many other main currencies have been "undervalued", including the RMB, the Euro. However, the current Trump's plan seems to have a mixed effect on the US dollar. There are some factors that may drag down the US dollar's value. The economy is expected to be boosted by Trump's plan of expanding public expenditure in infrastructure. In addition, the protectionism will reduce imports and create more jobs domestically, this will add more inflationary pressure in the domestic economy. Once there is an increase in the domestic inflation rate, the currency is likely to depreciate. Moreover, Trump's plan is likely to increase the public debt, this can lead to a depreciation in the US dollar. Meanwhile there also are some factors that can lead the US dollar to appreciate. Firstly, the protectionism encourages more investment within the US, this will lead to more capital flowing into the US, thus the US dollar appreciating. Secondly, the US Federal Reserve is unclear if it will increase the base rates in the first quarter of 2017, but it is very unlikely to cut its base rates in 2017. When the base rates increase, more capital will be attracted into the US, and the US dollar will appreciate. Thirdly, Trump wants to encourage more US exports. As exports increase and imports decrease, the improvement in the American current account is very likely to cause an appreciation in the US dollar. Fourthly, if Trump is able to successfully lower the public debt, the US dollar will also appreciate.

Overall, I expect that the US dollar in 2017 may depreciate to a small extent against the Euro and the Japanese Yen.

Private sector employing public servants and politicians

Some politicians are employed by institutions and firms after they retire from their political career. The former UK Chancellor, George Osborne, will join the world largest asset management firm, BlackRock, this February. There are two ways to look into this phenomenon - one is negative, the other is more positive. The negative point view of this issue is that politicians and firms are making deals that when the politicians are in power, they use their power and political influence to benefit the firms and after they retire, the firms offer them with more comfortable retirement lives. This is a political corruption by definition. This should be investigated and punished, and laws and regulations should be made to avoid such phenomenon from happening.

However, there is a positive view of this issue. Recruiting retired politicians can have very positive benefits. Especially under the current situation, the uncertainties from the world political environment increase sharply. The new US President's administration and the Brexit could shape the global political and economic environment. With the help from these experienced politicians, the firms could have better understanding about the current political environment, and the characteristics of the main political participants. Moreover, the senior politicians could also advise on the global issues in terms of foreign policies. Having better understanding of foreign policies is very important to multinational companies. Foreign policies could influence exporting and importing costs, the possibilities of entering foreign markets, the competitiveness due to subsidies, taxation and other policies in foreign countries. Politicians as insiders have more information than outsiders, and definitely have better understanding about the current politicians' strategies and actions. With these politicians' knowledge and experience, firms can minimise the risk caused by the political uncertainties. The current complicated political environmental may lead firms and institutions to employ more retired politicians with higher salaries.

There is a problem of employing politicians in terms of public interests. Given the option of being recruited by firms and institutions, having a good relationship with firms and institutions becomes one of politicians' individual interests, this could let politicians make decisions biased towards firms and institutions rather than the public interest.

Could reducing imports create more jobs domestically?

Recently the new US Presidnet Trump is starting to set some of his campaign proposals into motion. Trump's plan of building a wall between the US and Mexico would not only damage the relationship between Mexico and the US, but also affect the trade between these two countries, especially given Trump is very likely to increase tariffs on imports in general. Many US media reporters have been criticising on his hostile movement towards Mexico, in terms of moral issues, politics and economics. I want to focus on the economic effect of a country's reducing its trade with other countries by using the example of the US.

America has a trade deficit with Mexico, Trump always promises to create more jobs in America. One of his plans to create more jobs is to lower imports and make more goods produced in America. There are approximately 6 million jobs in the US relying on exporting to Mexico. Some reporters say if there is a trade war between the US and Mexico, these jobs will be lost immediately. However, it is not fair to say that America will lose 6 million once no trading takes place between the US and Mexico, because as there are no more imports from Mexico, these goods and services will be partially produced in the US, thus some jobs will be created. If more than 6 millions jobs can be created, then it is definitely better for America to stop trading with Mexico. However, this is very unlikely to happen, as America does not only trade with one country, if America stops importing Mexican goods and services, America can import from other trade partners. Moreover, American true comparative advantage is its advanced technology and educated and skillful labour force. Once America all relies on its own production, then some of its labour force will be distributed to the lower end industries, which I view is a waste of labour force. Especially when the current America has a very low unemployment rate, if some of its labour force is used in some lower end industries, the economic productivity is dragged down due to the restructure of the economy, and the innovation and invention speed would slow down, as some of the resources are moving away from innovation and invention.

Therefore, only when the country has a high unemployment rate and a huge trade deficit, it may be sensible to cut off trade with other countries; otherwise, trade can mutually benefit the country and its trade partners.

Should the European Central Bank continue its monetary policy?

Previously, the chairman of the European Central Bank, Mario Draghi, stated that the European Central Bank would continue its asset purchasing programme; however, is it still right to continue such expansionary monetary policy?
Jens Weidmann, the Bundesbank president, said "the economic outlook at the beginning of the year is quite positive and the inflation rate is gradually approaching the ECB's definition of price stability. If this price development is sustainable, the requirements for the withdrawal from the loose monetary policy are met". In the Eurozone, the inflation rates in many countries are reported to increase last quarter; moreover, the world inflation rate is expected to continue to increase this year, as the inflationary factors remain and the costs of trading in the future probably increase in the future could add more inflationary pressure. The role of a central bank is to keep a sustainable economic growth including a sustainable inflation rate. Recently many European countries are experiencing increasing inflationary pressure, which is a positive sign given the previous inflation rates were generally close to zero. In addition, the European countries have relatively high economic growth rates, including Greece. Although Greece is still facing its debt problem, it has a great improvement on its government budget and it is reported to have a high economic growth.
Solely on the inflation issue, the general picture of the Eurozone gives a sustainable inflation and economic growth on the whole and the expansionary moentary policy seems unnecessary; however, looking into some specific countries, public debt problems remain and their economies are still needing support from other member countries, IMF and the ECB, this would make the ECB continuing its asset purchasing programme seem reasonable and necessary.

The opportunities and risks of online money transfer companies

Today, MoneyGram confirms that it has accepted a buyout offer from Ant Financial at $13.25 per share. The purchase is not officially made yet till it is approved by the regulators including the Committee on Foreign Investment in the US. I think that Ant Financial has a good chance to make the deal successfully given Jack Ma previously met the current US President Trump in personal. The buyout will allow Ant Financial to have the access to an international network of 2.4billion dollars accounts, showing the company’s global ambition. However, how successful this type of companies is in the future is questionable. My today’s article is going to discuss the opportunities and risks these online money transfer companies may have in the near future.

Firstly, the Forex market can bring opportunities as well as risks for these online money transfer companies. With a good trading strategy, online money transfer companies can make extra profits through the Forex market; however, the risk is obvious that it is possible to make losses. Secondly, the increasing American protectionism could increase the uncertainties of the future policy changing in the US. The policy changing does not influence the acquisition and merge deals, but also has influence on these companies’ revenues as tax policies can influence trading across borders. Thirdly, Ant Financial is a Chinese company, the foreign reserves of the Chinese government are decreasing in recent years. If Ant Finanical’s global ambition help more goods and services to be sold to overseas, the Chinese government can receive more foreign reserves and more importantly the Chinese economic growth rate may be increased as well; therefore, if these things happen, Ant Financial could get additional support from the Chinese government. Fourthly,  once online money transfer companies can build a huge market based on their money transfer networks, the networks then become closed economies, while the majority of the money in the networks can remain in the networks, then the online money transfer companies can have provide extra services in the economies they build and gain additional profits. Ant Financial has been doing well in this part, as Alibaba has built a huge online store in China. Fifthly, the challenges from the traditional payment platforms and banking remain.

Overall, online money transfer companies is unlikely to have surprising growth in their industry in the near future, due to the slowdown of globalization. In addition, the Chinese company, Ant Financial, I think has a more complete business structure than other similar companies, including PayPal and Square.

Artificial intelligence may take jobs from humans and widen the wealth gap, social welfare benefits may be lifted up but the class boundaries become harder

Artificial intelligence has been under the spotlight of today's World Economic Forum in Davos, the heads of many technology companies are anxious to show the world their responsibility and sympathy as they fear that their companies' inventions will be blamed and criticized by the public once their machines are starting to replace labors' jobs. Moreover, they also agree on setting out principles for artificial intelligence. However, I still think that artificial intelligence will eventually take over many of our jobs in the future and the criticism will be unavoidable.

The meaning of the invention of AlphaGo is not that machines can beat humans in a brain game, instead it means a lot more. AlphaGo can learn from repeated matches, this means artificial intelligence can learn from experience; therefore, labors cannot no longer use their ability of learning from experience to gain more productivity as a comparative advantage to artificial intelligence. Moreover, once artificial intelligence can learn from experience, it could lower the frequency of necessary updates of artificial intelligence, so the cost of investing in artificial intelligence as a factor of production can be reduced sharply. If the cost of hiring artificial intelligence is significantly lower than hiring human labors, companies will definitely prefer hiring artificial intelligence. Is such case impossible in the future? I think the answer is quite the opposite that the cost of hiring artificial intelligence in large scale companies is extremely likely to be lower than the cost of hiring human labors. Once artificial intelligence is starting to replace human labors, the society will definitely start to blame these technology companies. Governments cannot enforce companies to stop such process, as they may force the companies out of their countries and lose tax incomes. Therefore, in order to regain the social stability, governments need to increase welfare benefits for the whole population.

There are some skills that artificial intelligence has not had yet and I cannot be certain that artificial intelligence will not gain these skills in the future. One is innovation and invention. Artificial intelligence cannot develop in something irrelevant from its originally designing purpose. Another is aesthetic and designing. Although in an art museum in Dublin, machines are used in drawing, designed by Patrick Tresset. However, it can only accord its designer’s aesthetic; as the fashion is changing all the time, artificial intelligence cannot always design work that matches the fashion. There are other skills that the current artificial intelligence does not have.

In general, in the future I expect that artificial intelligence and machines will further take many jobs away from humans and this could cause an instability and a wider wealth gap in the society that force the government lift up the welfare benefits.

TPP and the UK Supreme Court rule

The new US president Trump pulls the US out of TPP and today the UK Supreme Court rules the Parliament must vote on triggering Article 50. The first part shows that the protectionism is growing in the US; and the second part shows that the timetable of Brexit will be rescheduled and many of the Brexit details will be renegotiated in the UK parliament before the UK officially triggering Article 50.

The US quits TPP makes the future of TPP clouded. If there is no strong government that is willing to fill in the gap created by the US withdrawal, TPP may not survive. However, the US withdrawal opens the door of TPP to many other economies including China. TPP targets to boost trade and deepen economic ties between member countries. Trump is very likely to raise tariffs on imports, this could influence the Chinese economy as well as the Indian economy and many other economies (given the Indian economy's dependence on exports increases faster than the Chinese economy's dependence on exports). Joining TPP becomes attractive to some economies which depend on their exports. For example, if China can join, China may be able to increase its exports to these TPP member countries. Moreover, as Australia is also a member country and has very rich natural resources, China could import cheap natural resources as raw materials for its own industries and even further lower its exports' prices and boost its exports. To Australia, it is good to have China joining TPP as Australia can exports more and imports more to and from China, it is a win-win situation.

On the other side, the UK Prime Minister, May, has lost her control on the timetable of Brexit. She has to convince the Parliament that how the negotiation with the European Union can benefit the UK. She may have to change some of the details she previously raised, for example, she previously stated that she could accept the UK to lose its access to the European single market in order to gain a complete control on migration. In addition, the strong opposition from the Scottish MPs will even try to cancel the Brexit plan. There is a certain thing that can be foreseen that triggering Article 50 will be delayed. A lot more details about Brexit will be discussed openly, as the MPs are from different regions and represent different groups' interests, it will take a lot of time to get the Parliament to widely agree on the Brexit, in terms of the time of triggering Article 50, negotiation details and etc. As the Parliament may have a long period of discussion and debate around this issue, the UK financial markets may experience a long period of volatility as well and the companies in the UK are facing more uncertainties, especially when all kinds of news and gossips are spreading across the economy.

Overall, more uncertainties are created around the issues of TPP and Brexit. The American withdrawal from TPP could give more opportunities to other non-member countries. The UK Supreme Court's rule on Brexit is likely increase the market volatility and risk for a long period till the UK Parliament finally agrees on the details about Brexit.

Is a pension scheme a Ponzi scheme?

In some countries, the pension schemes are likely to fail in next few decades; in order to avoid such situation from happening, these countries are planning to lift up individuals and employers’ pension contribution levels and delay retirement ages. It feels like that the current working generation is paying for the current retired generation. As the later generation is paying for the earlier generation, it feels to meet some characteristics of a Ponzi scheme. However, my argument is that healthy pension schemes should not be a Ponzi scheme and do not have any similar characteristics of a Ponzi scheme.

If an insurance company only has one pension scheme client, then the company uses this client’s current payment as the initial assets to invest, with a good investment strategy and action, the investment generates an accumulated positive return for the pensioner and the insurance company gets some of the return as its revenue. In this case, it does not have any characteristics of a Ponzi scheme. Such pension strategy should be followed by all private pension providers. However, it may not be suitable for many state pension schemes. As in some countries, state pension schemes are only started in the late 20^th century, some of the populations did not contribute to their pensions from the beginning of their employment, the governments need to fill in the missing contributions in order to give all individuals equal pension benefits. Once the governments do not have the ability to provide sufficient financial support for their state pension schemes, they have to use the younger generation’s contribution to pay the older generation’s pension benefits, then it looks like a Ponzi scheme. However, unlike a Ponzi scheme, a government can fill in the shortage part with several payments, once the government fills the gap, there should be no need for any future payments to the scheme from the government and the pension scheme can be sustainable if it has good management and investment strategies. Once the pension scheme is run in an effective way, there is only one possible situation that the pension scheme will not be able to generate sufficient funds to pay out pension benefits. This situation is that the whole society and economy are in a long term negative condition that there is a high unemployment rate and the economy is shrinking without any growth. In this case, there is likely a deflation existing in the economy so lower pension benefits could still give the retired population some life security. And the most priority of the government is to rescue the society and the economy instead of giving more money to the state pension schemes. Once the society and the economy is picking, the returns of these pension schemes will also be picking up, so they can then provide sufficient pension benefits.

Overall, pension schemes are definitely not a Ponzi scheme when they are using a good management and investment strategies and they should be sustainable with some limited external support that may come from the governments.