The biggest news this week: Brexit

The biggest news this week is the UK Prime Minister, Theresa May, eventually triggered Article 50 to start Britain's leaving the European Union procedure officially. I did not cover this topic because I think I have covered a lot about his topic. So far, I still have not seen any significant change or surprise in this event. However, I find one interesting thing that the existing EU legislation is being transferred into the UK's law book.

It could show that many of these EU regulations and laws have been adopted by the majority of the UK population. Therefore, it is not suitable for the UK government to completely dump the EU legislation. Moreover, the UK government has a very tight time constraint to plan its Brexit and it is impossible for the UK government to consider all impacts the EU brings to the UK and make amendments to them. What will the EU leave to the UK after Brexit then?

Besides the most obvious one, legislation, the UK citizens will still enjoy free access to many of other countries in Europe and their holidays and lifestyles will not change too much after Britain's leaving the EU. In addition, the network between the UK and the European continental countries will also remain. Because of these connections, some businesses between the UK and the European continent will continue. The businesses and the government will be affected by Brexit than the British individuals will.

As long as the legislation and the connections remain in the UK, and the UK is willing to negotiate another free trade deal with the EU, Brexit seems to be less significant. After Brexit, it may not have too many changes in the UK and Brexit may just give Britain more political freedom, but the current UK is not as tightly bounded with the EU like other countries like France and Germany. Therefore, Brexit may not be a significant change to Britain, especially given Brexit's earliest schedule is still after 2019. Many radical opinions will ease when either side faces some crucial challenges.

When we cannot catch up with the speed of innovation

Innovation takes place every day; some may change our lives a lot and some may have less significant effects. However, it is almost definite that our society hardly catches up with the speed of innovation.Innovation sometimes can be simulated and accelerated by other innovation; however, regulations do not interact so well and sometimes even they can be conflicted with each other. In addition, it takes longer to make regulations than it takes to make the use of new innovation. Often once a new innovation appears, the authority hardly knows the actual impacts of this innovation until it sees how people are using it. Moreover, there are many red tapes when designing and acting regulations, this could even make the process much longer. In addition, in our society, not everyone knows how to use the new innovation, it can make some people in more advantageous places. Regulations tend to protect the benefits and interests of the majority of the population. Once regulations cannot catch up with innovation, the benefits and interests of the majority of the population will be affected or even damaged, and the wealth gap between the elite group and the rest of our society will widen further and further.

However, innovation gives more opportunities to individuals and small businesses, as they are more flexible and easier to adopt new innovations than the large institutions and companies are. In this way, the elite group under the era of innovation is very likely to be different from the traditional elite group or the wealthy group. It does not mean the traditional wealth group is not going to benefit any more, it merely means the returns they receive will be lower, and they are more likely to be overtaken by the new elite group than previous.

Environmental problem and government policies

The Trump administration is almost definitely environmentally unfriendly, as the budget plan issues massive cuts in environmentally friendly sectors and the Trump administration also issues environmental deregulations and encourages traditional energy industries. China has been passionate about environmentally friendly development. The Chinese solar industry has received significant amounts of funding from the central government and the local governments, and because of the support received from the Chinese government, the Chinese solar industry has been enjoying a period of fast development. Some solar companies in other countries other than China have been downgraded by many financial institutions as these financial institutions are afraid of oversupply due to the development of the Chinese solar sector and they are also unconfident about the American solar sector development due to the current US administration.

Environmentally friendly policies usually have several main goals. Firstly, China especially is passionate about solving its current air pollution problem. Therefore, such policy often targets improving environment. It has other positive side effects, for example, it could improve the population health and the happiness of the population as well. Secondly, it can boost investment and manage the domestic investment. China sees the alternative energy as the future energy, investment in this sector could generate an outcome with more social benefits and greater returns. Therefore, China uses these policies to make investment and government spending more effective and efficient. Of course, other governments could issue other kinds of policies to make their domestic investment more effective in other ways they want to be. Thirdly, policies sometimes could correct market failures without directly taxing or subsidising. This could save government spendings to some extent. Fourthly, it also sends the market and the society a signal of what the government want. It could provide some guidance to the economy and this could make the process smoother and once there is some problem, it could be solved without causing too much damage.

What if all information is avaliable and made public?

In the financial market, some information is identified as private information, some information is identified as public information. Often illegal internal transactions are caused by private information leaks. However, what happens if we can make all information is available to all people?

Of course, such hypothesis is very unrealistic, let's just imagine a world where we could access to all information. Firstly, prices would be different, as we would have more information available, our expectations would adjust accordingly and the prices based on expectations will definitely change. This might be one positive point of making all information available to everyone. Secondly, arbitrary opportunities would largely disappear, as all information is available, all states and their prices would be known, this would avoid arbitrary opportunities.

However, once all information is made available, there could be negative effects. Firstly, it could be an increase in the systematic information. Once all information is available, all people would be more likely to take similar actions. Although all information is available, it still does not mean the future is 100% certain. Once everyone in the system makes similar moves, then the system could go terribly wrong when an event with a lower probability occurs. Secondly, financial activities may slow down. Some of the financial and investment events are largely based on the risk taking and the returns from taking the risks. When all information is available, the risk would become more obvious, then people would make their actions based on their risk preferences, and they would no longer to make the judgement on the risk they would face. The financial sector often has some form of rallies; therefore, once they become more conservative, the financial market would enter a frozen period where any risky actions will be abandoned. Because they have the same judgement on risk as all information is available, they would make almost the same actions. Conservative strategies are more welcome by the general public, as we are afraid aggressive moves made by the financial institutions. Therefore, the innovations in the financial institutions would slow down very much.

Is limiting the roles of international organisations reasonable?

Conservative economist Allan Meltzer calls for a rally to limit the roles of international organisations, especially the World Bank, and the International Monetary Fund. These international organisations were founded based on good wills and they are taking actions to achieve some mutual benefits of the global society.

Allan Meltzer has some relationship with the current Trump's administration and such criticism seems to match the anti-globalization ideology of the Trump's administration. However, as he is a respectful economics professor, we should not take account of his political ideology; but instead, we should consider the economics concept behind such claim.

Firstly the international organisations are not necessarily charities. For example, although the International Monetary Fund provides aids for the countries like Greece, the help is not unconditional and Greece still has to pay back the loans offered by the IMF. Secondly, the relationship between the international organisations and their associated countries is not equal. Sometimes their associated countries could dominate the organisations, for example, America has a very strong position in front of the World Bank, and the World Bank openly admits it is important to build a strong, constructive relationship with every US administration. It could cause a bias when it is dealing with some international issues. Sometimes, the international organisations are in stronger positions. For example, the IMF is in a stronger position in front of Greece. Such unequal relationship could cause ineffectiveness, unwanted opposition, and unfair judgement. Thirdly, many people love the idea of globalisation and free trade, but these international organisations are not the symbols of free trade. Free trade should not involve any third party, the existence of any type of third parties will increase the cost of trading. When these international organisations set up many rules and regulations, they indirectly damage the free trade.

The narrowing internation inflation gap

The international inflation gap has fallen to a decades-long low, as the inflation rates in developed countries increase and the inflation rates in emerging markets decrease. This may indicate that the developed countries are growing stronger and the emerging markets are growing weaker, as the economy that has a higher inflation rate tends to have a higher economic growth rate as well. However, this could be acceptable for both groups. The developed countries currently have been enjoying low unemployment rates, stable economic growth. Meanwhile, this is good for the future trade for the emerging markets. The inflation rates in the developed countries increase means their domestic goods and services are becoming more expensive, they are likely to consume more imports which are likely to be cheaper. While the inflation rates in the emerging markets decrease mean their domestic goods and services are relatively cheaper. Their exports could become more attractive in the developed countries and they are more likely to import fewer goods and exports as their domestic goods and services are already very cheap. Therefore, their current accounts could improve a lot.

However, under protectionism, it will become a totally different story. It could give the developed countries more benefits in a short term period. Emerging markets have their economies based on the international trading. Under protectionism, their exports will reduce, meanwhile because of their technological disadvantages, certain types of goods and services are largely dependent on importing from the developed world. Therefore, in a short period of time, the developed countries are at advantageous positions. However, in the long run, the developed countries could lose more. Firstly, the increasing inflation rate lifts their domestic living costs of ordinary people. Secondly, the emerging markets' dependence on their advantageous technologies weakens over time. Thirdly, their economies are losing specialisation's advantages. Because many goods are produced by the emerging markets, once they reduce imports from the emerging markets, they now need to produce these goods by themselves, The costs of production are much more expensive and the economy has to produce most types of goods and services themselves. Under such situation, they can no longer specialise themselves in some particular sectors.

The healthcare sector

Currently, the American society has focused on the upcoming new healthcare policy to replace the Obamacare. The healthcare sector is very complicated that it is believed to have enormous positive externalities; therefore, the society requests enormous government intervention in this sector. Once the government intervenes in the healthcare sector, the government has to decide the correct level of subsidies and taxation. The market information is too complicated for the government to make a decision that pleases everyone. In addition, the government is never able to make everyone pleased, as everyone has his/her individual unique preferences. Furthermore, the negative comments on the government intervention will draw much more attention than the positive sectors will; therefore, it seems there are more people against the government policies than those supporting the policies. Under such circumstance, the government also faces lots of opposition when the society's attention is drawn towards the opposition force.

Despite the government has difficulties to make everyone satisfied, the healthcare sector has its own complexity as well. It involves cooperation between many different sectors, including the insurance sector, the pharmacy industry, the medical sector (including hospitals and doctors), the medical equipment industry and etc. Some of these sectors do not meet the conditions of a perfectly competitive market. Actually, most of these sectors have monopoly or oligopoly markets. Therefore, the prices in the healthcare sector tend to be higher than the normal levels under a perfectly competitive market condition. In addition, in the modern world, wealthier people tend to live much healthier lifestyles, as they have time and money to go to gyms and eat healthily, so they are likely to need health care less than poorer people who are more likely to have unhealthy lifestyles. However, almost everyone would like to have the best available health care they can get, so the demand for health care could be infinite. Therefore, it is possible to see some people are overconsuming health care, some people are underconsuming health care due to their poorer financial conditions.

Overall, as people's demands for health care could be close to infinite, and the supply and the demand can hardly find an equilibrium point with or without government intervening, there is no way to make everyone satisfied.

Internet censorship

The German Justice Minister imposed fines on social networks for their failures to delete hateful content. His act has been criticised as people concern about Internet freedom. There are some countries that have some Internet censorship policies, one notable example is China. China has blocked Facebook and Google and some other foreign websites. Such Internet censorship policies are usually designed for some good purposes, such as social stability (to stop spreading terrorism, crime and other violent ideologies), education (to protect children from pornography) and etc.

However, the effectiveness of Internet censorship may be relatively limited. The information on the Internet is very different from physical goods. The characteristics of the information on the Internet are very close to the characteristics of public goods that are non-excludable and non-rivalrous. The information on the Internet is often free and once it is spread across the Internet, it definitely is public goods. Some information is not free but this kind of information does not entirely belong to private goods. Because when the information is bought by others, it does not stop others from purchasing the same information, as the quantity is not affected by any purchases.

Moreover, information on the Internet has one special quality that it can grow and develop by itself. For example, once an event happens, many news presses publish the story on their websites, later some expertises, bloggers and columnists and some others will write comments about this event on the Internet. In addition, more people will share the story and the relevant comments and will also make new comments. Such process is almost infinite and will develop more sources of the information.

Overall, the spreading of information will not reduce the quantity (if we can measure). Instead, it will increase the quantity.

What is the future of the EMs?

The G20 meeting showed globalisation could be more vulnerable than what we previously expected. The EMs (emerging markets) have been benefited from globalisation for decades, and the currently increasing populism and protectionism will drag our process of globalisation and even we may face some strong reverse movement in the near future. China plays an important among the EMs, it is the third largest economy and has the largest population in the world. This makes China differentiate itself from other EMs. Therefore, when the world enters a possible era of deglobalization, the future of China can be quite different from other EMs.

Recent years, we can see there are many giant companies including Alibaba, Wanda, Tencent and etc. Though these companies have global businesses, they focus a lot more in their domestic markets. In addition, the potential consumption power of the Chinese population is enormous. Many countries welcome Chinese tourists as they usually buy many products and help to boost exports. The two main engines of the current Chinese economy are retail sales and investment. When the Chinese population becomes more wealthy, the consumption will increase sharply and boost the Chinese economy further. I think that in China, some welfare policies should be designed to narrow the wealth gap within the population in order to the boost the consumption power of the social lower classes. However, other EMs do not have comparable domestic markets, when it enters an era of deglobalization, their dependence on exports becomes crucial and will damage their economic growth. India is another exception as it has a similar size of the population but has an even wider wealth gap which gives it a weaker position in the future development.

Overall, the EMs' economies will be on a declining trend when it enters an era of deglobalization. However, the size of the population will become a determinant factor when the economy becomes a relatively closed one, as larger population will build up a large market to generate more wealth.

Bubble needs liquidity

We often hear about housing bubbles, financial market bubbles, economic bubbles. These bubbles have one thing in common that they all need liquidity. Without liquidity, bubbles can hardly be created. Bubbles occur when people miscalculate the values of goods or assets. However, sometimes people even know they are creating bubbles when they are creating bubbles. This is because they are dealing with assets with high liquidity, they believe creating bubbles will continue and the assets they buy at one period will be sold at higher prices in the next time period.

However, to build up such illusion of continuously increasing prices has to have liquidity. The madness of bubbles needs very narrow time gap between trades, liquidity can ensure that assets can be sold faster. Some people argue that real estate markets have bubbles as well, as we can see that the Financial Crisis was started by the collapse of the US real estate market. However, I think that the US real estate market is the real cause of the crisis, the problem was started in the bond market. Bond has much higher level of liquidity. However, bonds need borrowers to start the initial bond formation. The banks used the people who originally could not afford mortgages to expand their lending and create more mortgages. Then they securitized these mortgages to transfer them into assets with better liquidity. Because of the MBSs, the housing market started to be filled with bubbles. People traded MBSs and banks saw an opportunity to earn more profits by creating more such MBSs, they would look for more mortgage borrowers, then the real estate market expands as more buyers appeared as more people became able to borrow mortgages.

Therefore, bubbles always take place in markets with better liquidity.

What can worsen and improve productivity?

There are some factors that can help to improve as well as worsen productivity. Last century, Britain started its foundation of a wealth state and introduced many new policies to help elder, unemployed and lower paid people. Meanwhile, many trade unions were set up and have forced enormous power that can influence markets.When people are provided with higher living standards, their lives will have safety nets. They can have lower risk and are more likely to work harder as their health and children's care are secured. However, when such safety net is raised above a certain level, workers can lose their incentives to work hard as many of their goals can be easily achieved without working hard. In addition, trade unions can help positive roles as well as negative roles. They can protect workers' benefits to help them secure their jobs when they work hard; however, sometimes trade unions become businesses, they work for maximising their members' and unions' profits but ignoring the mutual benefits of the entire industry.

Furthermore, some companies and schools complain internet and computers have disturbed their employees and students' focus, they block Facebook and some other similar websites from their employees and schools. Of course, such block does not really have efficient impacts, as such distraction has countless sources and companies and schools cannot block all of them away from employees and students. Meanwhile, internet and computers definitely help workers and students to receive more information and deliver work faster, as computers and internet have many qualities that our human beings cannot compete with.

Therefore, everything has its positive and negative sides, there is an optimal point where delivers the best outcomes.

Can the EU and South America boost their growth by their cooperation?

The economies of the European Union and South America both face some problems about their future growth. Britain is about to trigger Article 50 and start its negotiation with the European Union. Meanwhile, the new American Administration is in favour of protectionist and has encouraged companies to move their factories to America and stay in America. Under such circumstances, the European Union and South America are very likely to suffer trade volume decline in the near future, leading to their economic growth slow down.

The European Union and South American countries are working on a free trade deal between these two regions. They have comparative advantages, as the European countries are better at providing more qualified goods and services and South American countries have relatively cheaper labours, so their trade deal is mutually beneficial. However, how much such benefit could be is doubtful. As the potential growth of the cooperation between the two regions is estimable and relatively limited. Neither of these two regions I think cannot achieve a significantly high growth rate even after they start cooperation.

Firstly, previously these South American countries do not have the US has their important partner. Although the entire European Union has a greater economy than the US has in terms of the total GDP, the US is much closer to South American countries and such geographical advantage does not exist in the cooperation between the EU and South America. When the US has been enjoying a period of steady economic growth and decreasing unemployment since the Financial Crisis, these South American countries have not taken signifcant advantage of the US economic growth. And the European Union economy will shrink when Britain leaves the EU. In addition, the expansionary monetary policy seems to come to an end. The ECB president previously annouces his success in dealing with the low inflation issue in the Eurozone and the US Federal Reserve has started its rate hike path. The global monetary policy is moving towards contraction, this will reduce the economic growth rate, though it can be countered by stimulus fiscal policies.

Overall, the cooperation between the EU and South American is mutually benefit, but the final benenfit is likely to be insignificant and overestimated.

What might be the fastest way to win more wealth?

The banking and financial industry is attracting many graduates from top universities around the world every year. The graduates are attracted by the high average income in this industry and the relatively high rate of income increases. However, is it the fastest way to win more wealth?

The most elite people can always accumulate their wealth faster than the others as they are more talented and have more capacity. But among these most elite people, what they are doing can differentiate their speeds of accumulating wealth. Innovation can help to accumulate a huge amount of wealth in a very short time period. Such example figures have Elon Musk, Bill Gates, Steve Jobs and etc. They win wealth from their intelligence, brain work that they do not accumulate their wealth like bankers and more likely to accumulate wealth faster than bankers. Bankers and investors accumulate their wealth from their pre-owned wealth. Although the number of super wealthy individuals is tiny compared with out entire population, when it comes to a great investment opportunity, each of such wealth individuals has to compete with each other to win the opportunity, so they have to lower their expected returns from this opportunity to attract the brain workers' favour to accept their investment. Therefore, the brain workers gain more wealth from their own work than their investors.

People may arugula that the super wealthy individuals have people like Warren Buffett, George Soros and many other investors. However, their successes not only depend on their great intelligence of great investment decision making, but also depend on their previous wealth accumulation. Therefore, their wealth is accumulated by a series of successful investment decisions. If they fail and make several big investment decisions, their success will be erased completely. As we can see from the 2008 Financial Crisis, some banks went bankruptcy because of their investment failures in mortgage bonds and MBS. However, the people who make efforts in innovation and technology development can make many failures, once they make one single successful achievement, they immediately win an enormous wealth from their success. Such example has Elon Musk. His initial success has helped him to accumulate huge wealth and credits for his success afterwards.

Overall, wealth accumulation in the banking and financial sector depends on a continuous series of success; while wealth accumulation in innovation and technology development depends on one single success, any failure before the success does not make any significant impact on their final wealth accumulation results.

The rate hike in China

The Chinese central bank has quietly raised domestic money market rates. Such move is to target the current increasing capital outflows. In the central bank's statement, the decision was made based on "recent changes in external and domestic factors influencing market supply and demand", it was "not at all a rate rise".

The current capital outflows are caused by several reasons. Firstly, there is an increase in overseas investment on a global scale. When Chinese are investing in other countries, capitals will definitely be moved to foreign countries. Secondly, the Chinese government may be worried about if the capital outflows result in an increase in worry about the domestic economic and social condition. People know money is likely to move to where has higher returns and lower risk. When capital is flowing out of China, it could send signals and cause market anxious. Thirdly, capital outflows could also affect the Chinese government tax incomes, as currently many countries have troubles of taxing multinational companies. Therefore, it is not surprising to see China is trying to slow down its capital outflows.

The central bank's new policy only increases the cost of transferring capitals to overseas, does not fundamentally change the factors that lead people to transfer their capitals to overseas, other than the cost factor. However, it also raises some concerns about the cost of borrowing from local banks. Some local banks do not have very strong balance sheets at the moment as they more often need interbank money market to raise sufficient fund. The increase in the short term rates will significantly increase their costs, and may even force them into financial difficulties.

Therefore, such increase in rates is a very risky move to slow down the current capital outflows.

Bonus and individual incentives

According to Financial Times, Wall Street's bonus pool rose for the first time in three years. It was caused by the increase in trading volumes due to the boom in the global financial markets. The bonus rates have been cut several times since the 2008 Financial Crisis, as bankers have been blamed for their misconduct and their damage for the global economy and society. The bonus cuts have been seen as a part of punishment.

However, recently the boom in financial markets will increase investors, traders and bankers' incentives to act actively in financial markets. Moreover, because bonus still exists, bankers and traders want to build up volumes in order to boost their bonuses, especially when the proportion of profits and revenues received by bonus pool decreases, building up volumes becomes extraordinarily important. Usually when quantity increases, quality will decrease, as when more human capital (including time, human capacity, knowledge, and etc.) are used for building up volumes, the quality of decisions is very likely to decrease. This can cause an accumulation of omitted risk over time.

During the boom period, as long as no one pays attention to the omitted risk and the prices increase, such problem will not appear. And the quality problem of decision making seems insignificant, as the majority of the decisions made during the boom seems to have no problems based on their short-term outcomes. While we enter a recession, these investors, banks and traders become very cautious and risk averse, they rather take more time to make one crucial move than rush to seek a large number of opportunities. When they spend more time on making each decision, the quantity will definitely decrease but their decision making quality is very likely to improve. However, their decision making quality is still difficult to be fairly judged. Unlike the boom period when the positive side is overestimated, during a recession, the negative factors will be overestimated as well.

Bonus can increase individuals' incentives to seek for short-term profits; however, it may worsen the quality of decision making as it focuses too much on short-term effect. In addition, due to the outcomes are long lasting and appear differently at different time periods, quality evaluation is difficult to be fair and accurate.

When companies are moving out

The UK Prime Minister, May, has successfully got what she wants from the both Houses and is about to trigger Article 50 by the end of March. The Scottish National Party is asking for another Scotland Independence referendum, given one important reason that in the Brexit referendum, the majority of the Scottish population voted to stay in the European Union. If this time Scotland becomes independent, Scotland may be able to choose to stay in the European Union and last time some of them voted not to leave the UK because they wanted to stay in the European Union.

Some companies have made it clear they are going to move their European head offices to the European continent. Some financial institutions also announce to move their head offices to some continental European countries, including Blackstone, one of the largest private equity fund managers, has announced to move its head office to Luxembourg. It is not surprising to see many companies' European head offices are leaving Britain.

Luxembourg has very attractive corporate tax rates, this is one thing that Britain does not have right now but is achievable. Some people have been talking about massive tax cuts in Britain and led Britain to become another tax heaven. Of course, some politicians have been opposed to this idea. In addition, the UK Prime Minister believes if the UK can negotiate fairer trade deals with more countries around the world. However, as long as the UK gains no access to the European single market, then it immediately loses one of its most important comparative advantages. Many countries may have similar strengthen as the UK regarding negotiating trade deals with other countries.

Therefore, the UK may remain its original strong position at the start due to its pre-existing assets and its strong position will be crumbling over time.

Strike: a normal or abnormal phenomenon in the labour market?

In the UK, there are many strikes: one of the most common ones is the tube strike. Such strike usually causes much inconvenience to other members of the society in order to raise social attention and help them to achieve their goals. I think that such phenomenon only exists in an imperfect labour market where the supply side (labours) has a relatively dominated power over the demand side.

An imperfectly competitive labour market is also often caused by an imperfectly competitive good or service market. For example, in the UK, the national transport industry including the national rail and the London underground is a close-to-monopoly industry. Once a trade union has the ability to control the supply of labours, then it controls the supply and the outputs of the entire industry. All industries create values in our society and economy; when one industry is under the control of a trade union, then our economy partially depends on the action of this trade union, as if it decides to cut the supply of its industry, the entire economy and society will face losses.

In a perfectly competitive market, there are countless numbers of suppliers. It is impossible for a single trade union to control the entire labour supply in this market, so any trade union cannot act alone and gain enough power to influence the market and our society. When there are too many trade unions in industry, it is impossible for them to cooperate to conduct an effective strike. Therefore, in a perfectly competitive market, a strike is unlikely to take place as it can hardly make an impact.

Overall, in a perfect free market, a strike should not happen.

Tightening monetary policy and deregulation at the time

The latest US job report has been released and the low unemployment rate indicates that a Fed rate hike is inevitable. Many financial institutions have also brought forecast of the timing of the Fed rate hikes in 2017 and some experts have suggests there may be three rate hikes in 2017, given the current US economic condition. However, the current US President is famous of his deregulation and tax cut plans. Such fiscal policies are likely to stimulate the economy.

Deregulation in the banking sector can change the strategies that many financial institutions choose, they are more likely to increase leverages and take more risk. Also, massive tax cuts can increase the incentives for companies as well as individuals to make more profits. Tax cuts will increase the expected returns when the return is higher, it implies that individuals and companies are willing to take higher risk, as normally higher return needs to be awarded to higher risk, tax cuts ensure higher return will be awarded.

On the other hand, the US Fed is almost certain to increase base rates this year. This will reduce the returns from investment and cool down the current heat in the US financial market. This will create an opposite force against the momentum formed by the possible future fiscal policy. Individuals and financial institutions may take riskier strategies to conduct their banking businesses in order to generate higher profits under a contractionary monetary policy environment to enjoy the increase in their profits and incomes caused by tax cuts. Especially to individuals, massive income tax cuts can increase the attractiveness of taking riskier actions. And their employers will ignore their misconduct if they do not make losses.

Therefore, in the future financial market, investors and traders may perform more radically and aggressively to gain more returns and the systematic risk will increase due to their actions.

Inequality in information

Information is never equal that different pieces of information have different priorities. Previously I argued that people are more likely to be influenced by negative information than positive information, as people are risk averse, meaning they care more about potential costs than potential gains.

Information is not equal in many other ways. Firstly, people trust the information that is first delivered to them, the later information needs much more convincing argument and evidence to overturn the impression made by the earlier information. However, the first arrived information usually tends to be less accurate than the later arrived information, as taking more time can help to collect more data and carry out more detailed and accurate data process. Therefore, we are more likely to be misled by the wrong pieces of information that we choose by ourselves despite correct information may also be available to us.

Secondly, complicated information is less accepted than easy and short information, though the more complicated information is more likely to be accurate and closer to the truth, as reality is never simple. In addition, complicated information is not only rejected because of our time constraint, but also because of our knowledge constraint. Often our abilities could limit the impacts of receiving reliable information. Thirdly, information sometimes is confused with opinions. Sometimes, because some people are powerful or credible, their opinions are taken as information or facts. For example, Trump tweeted that he believed the F35 price was too high, many people took it as a fact that the President would bring down the price. Although it came true at the end, it was not a fact until Trump took the action and brought down the price. Sometimes some opinions may not come true at the end.

Overall, even if we were provided with all available information (which is not realistic), we would not be able to choose correct information and make right decisions because of our human imperfection.

How successful is the ECB?

The president of the European Central Bank declared his victory against deflation in the Eurozone; however, how successful is the European Central Bank's monetary policy? Or the European deflation just cured itself?

The inflation rate is often related to the economic growth; once the growth rate increases, the inflation rate tends to increase as well. In addition, when a currency depreciates, the inflation rate tends to increase.

The European Central Bank's monetary policy has two parts: one is to increase its asset purchasing programme, the other is to lower the base rates. To increase asset purchasing programme will force more hot money into the markets as well as the economy. When there is more hot money in the economy, the inflation rate will inevitably increase. In addition, asset purchasing programmes will increase the prices of assets, as when the demand for assets increases, the prices will increase, if the supply is stable. To lower the base rates is to lower the costs of borrowing and increase the opportunity cost of saving. This will encourage more investment and more consumption.

However, I think that the European Central Bank's many policies benefit the financial markets much more than the ordinary markets and the economy, may increase the wealth gap in Europe. As the asset purchasing programme and the base rate reduction directly influence the financial market, the financial market will be benefited more than other sectors of the economy. However, the inflation rate is usually unrelated to the prices in the financial market. The financial market is in the boom, but the general inflation rate did not increase previously.

Overall, the monetary policies of the European Central Bank directly influence the financial market, it does not necessarily influence the prices in the ordinary markets. Of course, people can argue there is a time lag for the impacts on the financial market influence the entire economy; then in this case, the European Central Bank may over-stimulate the economy, as it does not leave any time gap for its policies to take effects on the economy.

Should a government be blamed for any wrongdoing of its country's companies?

The German chancellor, Angela Merkel, said that the German government should not be blamed for the Volkswagen emissions scandal and people should not demonise the diesel industry, in her speech. Her speech definitely has her political purpose to gain more support and reputation for her government; however, I partially agree with her point that a government should not be blamed for wrongdoings of its country's companies.

For nationalised companies, the government could be blamed for their wrongdoings, as the government is the companies' owner and should be responsible for their misconduct. However, there are many companies in the private sector. These misconducts are made based on their individual interests, as long as they expect the profits from misconduct are greater than the costs from misconduct. The government cannot directly intervene in companies' management; however, it does not mean the government has no control over companies. They are regulators who can increase the costs of companies' misconduct. However, the regulations only influence the domestic markets and have no influence on foreign markets.

When the companies have business activities overseas, such regulations are useless. Therefore, any government does not have any influence on companies' misconduct in foreign countries.

Trade-off between privacy and more complete and bettermarkets

Currently, there are many complaints about threats to our privacy. Wikileaks has released many documents suggesting many secret service agencies are spying on private communication and information; however, Wikileaks itself is a threat to privacy as well, when it releases some private information. In addition, the technology has made recording information much easier and the information collected is much more detailed. Once the information is more detailed, personal and private information is more likely to be collected. In addition, as people's acts are not completely unpredictable or unreasonable, when we are doing some data analysis, it is not surprising to find out how some people are likely to behave under some certain circumstances. Then it is not surprising that once companies have knowledge about such information, they can improve their marketing strategies or even people may say manipulate their customers' behaviour.

It hurts people's hurting when they feel they are manipulated by companies. However, people may not be at the risk of leaking their personal information if there are a good management and a complete regulation of information. Firstly, when doing data analysis, the process is about to build models to show the relationships and links between different factors, rather than focusing on individual information. Once they collect the information, if they do not have the identity information (such as national insurance numbers), it is very difficult for them to trace the information back to their customers and know their customers' detailed information. Secondly, if companies do have a large number of customers, they do not really care about each individual customer's characteristics, so they are unlikely to really manipulate their customers individually. Thirdly, the problem does not occur when the information is collected, the problem usually occurs when the information is stored. Therefore, maybe we should focus on how to save the information securely rather than how to stop personal information from being collected by their service providers, because personal information being collected by your service providers is inevitable.

I think that since more and more information is being collected, people will be forced to store the information more securely and more regulations about information will be released; however, the amount of information being collected will increase continuously.

Why are people rich but angry?

Recent years, we can see that there is an increase in populism around the world; however, in many of such countries, people are actually enjoying higher incomes. For example, in the US, the unemployment rate reaches a historical low, meanwhile, in Netherland, a populist politician has become increasingly popular, and the incomes in Netherland increase. Even in the UK, the population voted to leave the European Union for change given the unemployment rate in the UK is also very low.

I have some hypothesis explanations about why people become richer but also angrier. Firstly, it may be caused by the wealth ceiling. In a society, people are very difficult to earn more wealth once their wealth reaches a certain level, which can be called as wealth ceiling. As these countries have already become rich enough, people find their income growth is in decline, and they do not find any opportunities to become super rich; therefore, they may look for social change. Secondly, people may no longer worry about not earning enough incomes. Instead, they are worried about how to maintain the current status and have a safe environment. Under such circumstance, the migrants become their enemies, as their coming may change the current status, as they could bring a threat to their job security and incomes. In addition, they are also worried about the social insecurity that may be brought by the increasing incoming migrants. Thirdly, the terrorism has become worrying. The news about terrorist attacks has been reported by all media. It is easier for bad stories to draw people's attention than for good stories. Although people are enjoying improved living standards, people are drawn attention to horrible stories. Moreover, the Internet helps to spread these horrible stories faster. And sometimes, people are more attracted to horrible stories rather than true stories, so people are likely to be misled by some "attractive and exciting" (in bad ways) stories.

Overall, once people's life standards reach a certain level, it is hard for ordinary strategies to make further improvement, so people may fancy more radical changes. In addition, people are likely to be influenced by some information that is "attractive" and horrifying but not necessarily true.

China's banking system

China's banking system has overtaken the European banking system and become the world's largest banking system by its asset size. In addition, the top three largest banks are Chinese: Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China. And
Bank of China is the fifth largest bank, after Mitsubishi UFJ Financial Group. It is partially because of the high leverage ratio in the Chinese economy. Once the firms and the government as well as many local governments are borrowing from the banking system, the equity held by the banking system will increase. If the leverage ratio increases, and the equities will increases, then the expansion of the asset size of the banking system is not a surprise.

The enormous size of the Chinese banking system will force the banking system to grow fast and mature. In order to manage such size of assets, the banking system has to be more careful about its risk management and cash transfer management. This is a form of risk, but is an opportunity as well. The Chinese banks are generally internal and domestic banks. Although they have many assets across the world, their main business activities are within the Chinese border and their main business partners are Chinese firms and other companies which have business in China. Their corporate banking has been expanding outside China, but their personel banking is still limited within China. To management risk, there are several ways. The first way is to lower the leverage ratio, but as an ambitious bank, this is the least liekly strategy to be chosen. The second way is to pool the risk within the system. This is a very likely strategy to be taken but will increase the systematic risk in the banking system. The third way is to have more types of holding assets. Having one single type of assets has higher risk (or lower returns) than holding multiple types of assets. Therefore, the Chinese banks will expand their business.

However, the Chinese banking system has been influenced by the regulators to a great extent. As the systematic risk increases, more regulations will be introduced, and the growth of the Chinese banking systme I think will slow down.

How could adverse selection cause risk averse?

Yesterday I argued that because of the common existence of adverse selection in almost all markets, people's risk preferences are generally risk averse. I feel I did not explain the question of how adverse selection causes risk averse clearly, so I am going to explain it in detail again today.

Adverse selection is likely to keep the market prices lower as people generally underestimate the goods and services’ values and prices due to imperfect information. However, as customers do not feel that they as demanders involve in the price making processes, they commonly think that the price makers are those suppliers and they do not trust the prices set by the suppliers. Individuals are very likely to believe the prices are set higher than their actual values (or prices), so they will dislike the current market prices. Once they dislike the prices, they will feel they are losing if they make the purchases. Then their expected returns from the purchases could be lowered due to their subjective opinions. This leads to once the prices are equal to their expected utility, sometimes people will still not make the purchase decisions.

In addition, distrusting market information and prices makes people think there is more potential risk existing. Therefore, even with the understanding of the current market risk, people will still believe there is greater risk. They will appear to be risk averse when they think they have more risk than there appears to be. With the same returns in all states but greater risk, people’s expected returns are definitely lower than those with lower risk. Therefore, given the market risk, people think the actual risk is greater than the market appears to have, their expected returns are lower than if they believe they only have the risk that the market appears to have.

To conclude, people are risk averse because they believe they are bearing greater risk than the markets appear to have due to the possible existence of imperfect information.

Adverse selection in all markets

Adverse selection is a kind of market failure that exists when the information is asymmetric. Then all good goods and services in the markets will be underestimated as people will price them the same as they the bad goods and services, because they cannot be certain about the qualities of goods and services. Such problems could occur in every single market. Our society has countless numbers of goods and services have been available for us; however, we can never know all the information about the goods and services. As we cannot know all the information about goods and services that are available for us, information asymmetry can occur in every single market. For example, when we go into a supermarket, we do not know what exactly Coke will benefit or cost us, the only thing we know about is its taste. Then we can price Coke incorrectly and make incorrect shopping decisions, but we do not realise.

We do not understand how our goods and services are exactly produced and provided, we will never give a fair price or value to the goods and services that are available. Such information asymmetry will cause adverse selection in all markets; and many of our decisions are influenced by advertise or others' opinions and feedbacks. Therefore, the expected utility is not objective. In financial markets, it is the same. Although public companies have to provide their financial statements, there is much information about these companies that stays private. Therefore, we usually imagine what happens if the worst thing happens.

Overall, I think that the common risk averse behavior of us is caused by such information asymmetry and adverse selection.

The world inflation

Germany was just reported to experience the fastest inflation in the last four years; moreover, many other European countries and America are also experiencing increased inflation rates according to the reports. Therefore, it is fair to say the world inflation is increasing since the last quarter of 2017. It is uncertain whether the ECB will maintain its current expansionary monetary policy or reduce; however, the US Federal Reserve has publicly announced that the rate hike in March is a significant probability which means the base rates will be raised in March for almost 100%. Moreover, many experts have expected that many countries will focus more domestically; therefore, protection tariffs and subsidies will lift the prices of exports and this will add more inflationary pressure to the world economy. However, I think that the inflation comes from another even more important factor: the previous expansionary monetary policies.

Previously there was a long period of continuous expansionary monetary policies including close-to-zero interest rates across the world. However, there was a period of time when the confidence in the financial market was relatively low and the investment behaviour was more passive rather than aggressive, the bond market was more attractive than the equity market and other more risky financial markets. Since Trump was elected, many investors are expecting lower regulation and more tax cuts, so their investment behavior becomes more aggressive, especially in the US, as more investors have moved their attention from the bond market to the equity. In addition, many countries are announcing some good economic performances, including China and some European countries. This could lead more investors to invest more and more aggressively. Such change of behaviour will lead more hot money into markets, this could drag up market prices as well as the inflation rates.