Is it possible for an economy to grow when there is a deflation?

My answer to this question is that in the current world economy, it will not happen, but in a close economy, such phenomenon is possible to happen.

In a closed economy, the inflation outside the economy is irrelevant. Then this closed economy is using the gold standard. When an economy is expanding, it means the scale of production expands and the cost of production lowers. In addition, due to innovation and inventions, more kinds of goods and services are developed and supplied to the market.

If we assume the gold is merely used as the medium of exchange and has a fixed total amount, then when the supply of some good or service increases, it has to value less gold. Therefore, once there is a new more advanced product appearing in the market, the price of the new product will inherit the value of the older version of this product, and the older version is devalued. Under this situation, the economy is still expanding.

Why such phenomenon does not exist in reality? Firstly, people love their numbers to increase, when some new products are released, instead of lowering the old products’ prices, firms are more likely to increase the new products and lower the old products just a little bit. Secondly, it is easier to set prices for new products than amending prices for old products, as setting prices for new products are based on the pre-existing information but amending prices for old products is dependent on the new coming information. While there is a rapid change in an industry, the firms have to frequently amend changes for all their old products, which increase the costs. Thirdly, the gold standard is not the most preferred monetary system. Fourthly, under such economic environment, there is no room for instant economic stimulus.

Therefore, an economy that is able to expand requires many strict conditions and do not have good self-correcting methods, so it can theoretically exist under a perfect condition, but is not practical in reality.

Inflation becomes the most important thing nowadays

The size of a government will determine the inflationary pressure it creates in the economy: a larger government creates higher inflationary pressure in the economy while a smaller government creates lower inflationary pressure. What is the role of the government? It is an organisation to enforce contracts between people (many become laws and regulations), to defend the community (nation), to redistribute resources among the population and to increase the community's total benefits (this could include invasion, negotiating trade deals and etc.). However, when we are talking about the social benefits and social costs, we often exclude the costs and benefits of the government.

The government is an important part of our community, many people are employed by the government and many companies are doing business with the government. The reason of why we often omit the costs of the government is that we think that the government is able to borrow money, especially when we are living in a socially and politically stable country. In many countries, the public debts are accumulating over time. If these governments did not have their central banks (though many central banks operate independently), some of them would not just perform better than Greece, Italy and some other Eurozone countries.

When the public debts are accumulating, the most common way for many governments is to add more inflationary pressure to devalue the real value of their debts. And the governments are happy about such strategy as well, because to create more inflationary pressure is to expand government spending, increasing government spending in most cases can win more popularity and support, as many parties in our community can be benefited from government spending expansionary. Therefore, as long as the public debts exist, the governments will always expand their spending. When the economy is growing, the government will expand their spending by proposing more welfare programs, and when the economy is declining, the government will further expand their spending. In this process, the public debt level is going to increase, the inflation pressure always exists (when it fails to deliver an inflation, the government and the central bank will try their best to lift the inflation rate above zero), the government spending is always increasing.

This process can go forever; however, one part of this process is not entirely in the control of the government, which is the inflation rate. When the inflation rate is negative for a significant time period, and the fiscal policy and the monetary policy fail to push the inflation rate back, the whole process will collapse, then the government will bankrupt and the economy will collapse as well. Therefore, inflation I believe is the most important economic factor nowadays. Some people may argue that inflation signals economic growth; I later will discuss if it is possible for an economy to grow when there is a deflation in this economy.

The voting within the central banks is as important as their base rate decisions

Today the ECB announces to keep rates on hold at 0.00%, meanwhile, the President of the European Central Bank acknowledged that within the ECB council, members do not commonly agree with each other. This piece of information is as important as the rate decision, in some ways, it is actually more important than the rate decision.

The rate decision is the accumulative opinions of the central bank council members, it can only imply the central bank sees one status to happen with a higher probability than the others. However, what exactly the particular probability is is unknown. Seeing the economic future based on the rate decision is very risky, as, for example, the economy has a probability of 50.1% to grow, and a probability of 49.9% to decline, the central bank may still reduce the rates or at least stay the rates, this action can be similar to what the central bank may do when the economy has a probability of 60% to grow, despite the two situations are actually different.

However, if we can know the results of voting of the central bank council members, we can have a rough idea of how likely the economy is going to expand or contract by seeing the ratio of the council members voting for and against. Therefore, the voting result combines much more information about the experts' expectations about the future macroeconomic performance rather than the plain rate decision.

The American tax cuts

The American tax cut plan has been unveiled and called as the largest tax cut in the American history. Steven Mnuchin, said that the plan would cut corporate taxes from 35 percent to 15 percent and simplify the individual taxes. I think that larger companies are more likely to benefit from this tax cut proposal, this may not be good news for small businesses.

This proposal contains one very important component that this proposal also contains tax cuts to induce companies to repatriate profits held overseas. Many Amercian multinational companies have the issues of transferring profits from overseas back to the US, including companies like Apple. Apple has held billions of profits in Europe; however, because the cost of transferring back to America is too high, Apple has not transferred its overseas profits back to the US. With this tax cut proposal, many companies like Apple may start to transfer some of their profits back to America, this can boost the tax incomes to some extent.

However, to small businesses, their costs of production may not significantly reduce much compared with the large companies, so the tax cut proposal gives more advantages to large businesses than it gives to small businesses, this will let small businesses be in even weaker positions than previous when competing with large businesses.

Even the Treasury secretary admitted that there was no guarantee that the tax cut proposal would be revenue neutral. This proposal will increase the gap between large businesses and small businesses, and this could further widen the social wealth gap in the US.

International labour market

Chinese controlled firms employed 141000 Americans at the end of last year, according to new research announced on Tuesday. The number increased 46% over the last year. It is more common to see Chinese are employed by multinational companies which are mostly controlled by European and Americans. The phenomenon of more Americans employed by Chinese companies shows that many Chinese companies have been making a process to enter the international market. Moreover, foreign people are seeing the opportunities of these Chinese companies and willing to participate in their international expansion.

When the companies from the developing countries employ workers from a global scale, some skilful and well-educated workers from the developed countries are moving towards emerging markets. This will increase the labour market competition in emerging markets. This will force the original workers in the market to improve their skills and knowledge further in order to compete with their new competitors from the developed world. Additionally, when workers from all around the world are working together, this will encourage more exchange of information, knowledge, skills among workers with different backgrounds.  Such process can lead to more innovation and productivity improvement happening in the emerging market. However, such labour movement can cause some local social issues. For example, the rising populism is partially caused by the increasing competition from labours from other countries. Such situation may also occur in the emerging markets, but it is not necessarily as bad as what occurs in the developed world. Many labours in the emerging market have relatively lower incomes, while the labours from the developed countries usually occupy the positions with higher incomes; therefore, a direct competition may not be formed immediately in the emerging market.

Poltics gambling of the financial market

Today (24.04.2017), Euro and French stocks surged on bets Macron will win the French election his rightwing populist rival. This is a politics gambling done by the financial market and the financial market has done such gambling many times already, sometimes they win and sometimes they lose. I want to talk about politics gambling of the financial market in general.

The financial market usually prefers moderate politicians, as radical and aggressive politicians are likely to lift the market uncertainties and risk. In addition, in terms of changing or not changing, the market prefers not changing. However, moderate election outcomes do not bring moderate market changes, and unpredicted or unfavoured outcomes definitely bring volatile market changes is undoubted.

There is no doubt that politics has great influence on the financial market; however, the influence of politics on the financial market is long term and moderately progressing over time. Usually, before and after a major political event, the financial market is likely experiencing a violent volatility in a short period; however, the market tends to moderate itself later. There is a classic example that after the Brexit referendum, the UK stock fell sharply but now it has risen above the pre-Brexit level. Moreover, the US election has shown that the financial market can be very changeful. When the financial market saw Hillary Clinton seemed to win the election for a greater chance, the financial market was happy about it; now, since Trump won the election, there has been a so-called trumpflation (rally) existing in the financial market.

Overall, I think when a long-term political change is happening (e.g. the US election, the Brexit referendum), a volatile market move is not a rational phenomenon, it is caused by investors and institutions making overdone imagination, prediction and estimation about politics.

Competing to win the first deal with the US?

Wilbur Ross, the US secretary of commerce, has reopened the door to receive negotiation with the European Union but implied that the European Union, Japan and China have to compete for the opportunity of making the first trade deal with the US. I have to say what a typical Trump style foreign policy strategy is. Trump has always talked about how he will use his business skills in American politics, and this is definitely a sign of it. However, whether it is a successful move or a political ignorance is still arguable.

This question is totally based on if the European Union, China and Japan are willing to compete with each other. There is an existence of competitions between these countries, it is definitely extremely beneficial to the US in terms of its foreign policy and economic performance. As it is about making trade deals, then we have to look at how likely Chinese exports, Japanese exports and the European exports are competing with each other. The competitions between these three economies are differentiated. The competition level between Chinese exports and the European exports, especially the German exports is the lowest, as the two economies have different comparative advantages, many Chinese exports still rely on their cheap costs of production, and the European exports, especially the German exports are dependent on the skilful labour force and high-end technology. The competition between Japan and the European Union is the highest I think. This is because the exports from the both economies have much more similarities. And the competition between Japan and China is in the middle. Therefore, such foreign policy strategy that allows China, Japan and the European Union definitely benefits America, but also makes China in a relatively advantageous position as it faces the lowest level of competition among the three economies while Japan faces the highest level of competition among the three.

Overall coordination and competition

The existence of uncoordinated business decisions and activities is an important factor that can impact the effectiveness of government policies or other external changes. However, nowadays, are the decisions and activities that seem uncoordinated really uncoordinated? My opinion is that in our modern economic system there are more coordinated business decisions and activities than uncoordinated ones. There are several reasons to support my opinion.

Firstly, information transfer has been easier and faster nowadays, it makes coordination much easier than before. Secondly, coordination meets the interests of many businesses. Because coordination can help to reduce competitions, firms tend to coordinate when such option becomes available. Thirdly, without having direct communication, firms can send signals to their markets in order to inform others to coordinate together. For example, in the airline industry, when one airline firm publicly announces its price increase, it does not aim to inform its customers, it actually informs other airline firms that it may be the time to increase the entire market price. Fourthly, firms are able to coordinate by estimating other firms' strategies and moves. All companies' targets are clear and known to everyone, which is to maximise their profits. However, because such coordination is based on estimation, firms do not necessarily make the ideal decisions and their decisions also do not necessarily match others' estimates. Under such circumstance, we can see that uncoordinated business activity and decisions appear.

Of course, it is normal for firms to compete with each other in order to gain more market shares. the competition tends to increase when the sector is at its early stage of development, then the competition is likely to decline since a clear winner appears in the sector and coordination becomes more favourable.

As nowadays, the major general sectors tend to be complete and well developed while their new sub-sectors are at their developing phases, then coordination will be the mainstream pheromone while competition appears in relatively smaller scales. 

Which sector tends to be the most anti-deglobalisation?

I have argued that some specific groups of people have supported the deglobalisation movement because their interests have been damaged by the globalisation process, today I want to talk about which sector or which group of people tends to be the most anti-deglobalisation. Many groups of people and organisations (including companies) support the idea of globalisation and have been benefited from the globalisation process. A significant number of companies gain larger markets and generate greater revenues and profits, individuals are also benefiting from this process when their holding shares and other wealth increase. However, the benefits gained by different sectors are different, some sectors gain more benefits than the others.

Firstly, the manufacturing sector has changed a lot over the last decades. Manufacturers have moved to countries with cheaper labour costs from countries with higher labour costs. Such change can help to produce a larger volume of goods overall, and increase the overall revenues as well. However, such changes do not improve the entire manufacturing sector everywhere, as in the areas with higher labour costs or transportation costs may lose their previous market shares. Secondly, the energy sector has also been benefited from the globalisation, as it gains more access to natural resources all around the world theoretically. However, as natural resources are often considered as national wealth and important strategic reserves, access to natural resources overseas is still relatively limited. Thirdly, the hi-tech and IT sectors have been largely benefited from globalisation. They have a unique advantage that when they gain larger markets, unlike many other sectors, they are not likely to face more volatile direct competitions immediately as their technologies are protected by copyright and some of their advanced technologies are almost too advanced to be copied by their rivals from less developed countries. Fourthly, the financial sector is also enjoying the globalisation, as these financial companies and institutions gain access to more assets and clients in general and the business activities across countries increase their business opportunities as well. However, different countries have different regulations. Moreover, when a financial firm enters a new market, there is probably already existing a powerful rival in this market. For example, when a financial institution like Goldman Sachs enters the Chinese market, of course, it gains more business, meanwhile, it has to face different regulations and competitions from the local institutions (and the local laws and regulations also favours the local institutions more).

Therefore, among the four sectors I have discussed, the high-tech sector probably is the one that is benefited the most from globalisation; therefore, it is likely to be the most anti-deglobalisation.

Perfectly competitive market is unable to exist in the modern age

My belief is that nowadays the requirement of the existence of a perfectly competitive market is unable to be satisfied. Usually, people believe with the modern technology, the improved and faster information transfers can help to improve the market condition to support forming a perfectly competitive market, which ideally matches the interests of consumers, as the price under a perfectly competitive market condition tends to be the lowest possible price. The faster information transferring system definitely helps to improve the consumers' knowledge about the market; however, it also helps companies and suppliers to improve their knowledge about their consumers to a greater extent. Companies and other forms of suppliers have greater resources than their individual customers; therefore, the improvement of collecting information on the supply side is greater than the improvement on the demand side. Therefore, information asymmetry still exists.

Moreover, once companies and other suppliers have greater knowledge about their customers, they are able to differentiate their customers and avoid direct competitions which can easily lead to price competitions.  In addition, it is not only the interest of the suppliers to differentiate their products, it is also the interest of the demand side to receive personalised products which are closer to their needs than general products. Additionally, the communication between customers and their service or product suppliers become easier and faster so they can tell their suppliers their specific preferences and make their suppliers possible to provide products that deliver products that meet their preferences perfectly. When consumers split themselves into several smaller groups or start to purchase individually personalised products, the conditions for the existence of a perfectly competitive market fail automatically.

Overall, when customers start to look for products and services that meet their specific preferences, they will automatically split general markets into many small specific markets, and this meets the interest of suppliers to maximise their profits, as differentiating markets helps to reduce competitions and boost profits.

When entering the global market, will the price increase or decrease for luxury products?

I think when a luxury brand enters a larger market, it is very likely for it to increase the prices for its luxury products for several reasons.

Firstly, usually, the supply of luxury products is relatively limited to expand for mass production, as it is constrained to expensive raw materials and available skilful labour forces. As the cost of production is relatively very expensive (though it is still incomparable with the final retail prices), it has greater risks to expand supply without having accurate demand information. Secondly, even when a luxury brand enters a larger market, for example, a luxury brand first enters the Chinese market, a small proportion of the entire population actually have the potential to become its customers. However, they do control the majority of the social wealth. Therefore, they can boost the demand. Under such situation, it is easy to attract more consumption without lowering prices. More importantly, although, in some markets, the demand for the luxury products increases significantly (as many companies become Asia will be the largest luxury market and have the biggest demand for wealth management), companies find that increasing prices is more profitable than increasing the supply proportionally in many occasions. Especially the luxury brands often have market power, because the luxury market is likely to be an oligopoly market.

It is not likely to decrease prices when a luxury company wants to increase its profits. Firstly, prices are not a typical feature that attracts people to buy luxury products. Secondly, when luxury brands have market power in their oligopoly markets, it is their interests to set prices above the market equilibrium price where the demand equals the supply. 

Monetary policy and currency manipulation

Yesterday I talked about how governments can use tariffs to take revenge against their currency manipulator enemies, today I want to talk about other methods that can be used to punish so-called currency manipulators. Monetary policy can be one of those methods.

Usually, the currency manipulators tend to depreciate their own currencies against their trade partners in order to gain price advantages when trading with each other. Therefore, to counter such effect, their trade partners should depreciate their currencies as well. Monetary policies can be used to manipulate currency values by controlling the supply of their currencies. Moreover, they also influence the financial market interest rates.

The first step is to lower the base rates, that can help to lower the financial market interest rates and bond yields. When the interest rates decrease, "hot money" will flow out of the country so the price of the currency will decrease. Therefore, such action can cause a currency depreciation directly. However, manipulating interest rates is not a continuous solution as there is a bottom for such policy, as the public has not accepted the idea of negative interest rates fully. Fortunately, there are other methods to influence exchange rates. Every country has foreign currency reserve. They can change their foreign reserve volumes to manipulate their currency values. Moreover, central banks do have controls of the supply of currency, which can influence the price in the forex market.

However, monetary policies that tend to manipulate currency prices can lead to chaos in the financial markets, as governments do not publicly announce their targets about manipulating currency prices, then the policies become unpredictable.

What is bad about being recognised as a currency manipulator?

The US president Trump has stated that his administration will not recognise China as a currency manipulator, this is a piece of good news for China and its economy in general. Why is it bad to be recognised as a currency manipulator? Almost all governments are suspicious to be involved in manipulating their currencies in some form of ways. As long as central bank members are appointed by their governments, they must be those whom governments believe can serve their interests best. Although governments and countries may conduct some form of currency manipulation, it is bad to be recognised as currency manipulators by other countries, especially countries like the US.

Being recognised as a currency manipulator means countries are hostile to your monetary policies, then they will take actions against your country, sometimes it may start with tariffs on imports from a currency manipulator. Then it will cause a sharp decrease in exports for a country which is recognised as a currency manipulator. If the country's economy largely depends on exports, it could become a disaster for the economic growth, when an important export target country increases its tariffs on its products. The unemployment rate will inevitably increase and a significant number of companies which rely on exporting will bankrupt. When the unemployment rate is high, some other social issues will then appear. In addition, when the US recognises another country as a currency manipulator, its interest-sharing countries will recognise this country as a currency manipulator and increase tariffs on this particular country's products.

Overall, being recognised as a currency manipulator by an important exporting target country is definitely bad for the economy, as it signals that the target country will take actions to change trade volumes between the two countries according to its belief of the "correct exchange rate".

Zero hour contract

I have learnt a new concept called zero hour contract. By definition, it is a type of contract between an employer and an employee, where the employer is not obliged to provide minimum working hours (so the employee is not able to get a guaranteed payment), meanwhile the employee is not obliged to accept any work offered (so the employee is not in a position that he or she has to accept all the work offered). Many business leaders support the idea of zero hour contracts, as they believe such contracts will increase the flexibility of the labour market, some people who do want to receive some occasional incomes can take advantage of such contracts. In addition, people can also concentrate on the work they are willing to do and good at, no long need to accept all the work offered. This can improve productivity. Such contracts can create a more specialised matching between workers and jobs.

However, such idea can be too complicated and too idealistic, especially in some specific sectors. In a significant proportion of our jobs, we do not expect what exact kind of work we will receive, neither do the employers. In some cases, some work requires workers' creativity. Under zero hour contracts, workers' creativity is largely limited, as the contracts build a much stronger one direction relationship between workers and their employers that workers only work for their incomes to do certain jobs and such short-term and temporary contracts reduce the loyalty of workers. The incentives to be creative under a temporary employer are much more likely to be lower than under a long-term employer. Moreover, usually being creative needs workers to receive information from many different sectors and do many different kinds of jobs. Only doing certain things is not useful to improve workers' creativity, and indirectly lower the potential productivity of workers.

Overall, I do not think that zero hour contract is a good idea in many sectors.

The function of a company's moral reputation

The day before yesterday, I mainly talked about how companies build their reputations to differentiate themselves from their competitors. Such reputation is a general reputation but still more about quality reputation rather than moral reputation. Some companies are building moral reputations, such as they only use recyclable materials to produce their products or they use solar energy for their energy use. These changes do not necessarily improve the qualities of their products or change the consumers' actual utilities gained from consuming their products. Why would companies still build such reputations?

Firstly, producing environmentally friendly products usually increases the cost of production, so the prices of such products are also higher than ordinary products, which do not use environmentally friendly materials. However, producers are likely to increase the prices higher than the actual increases in costs of production. Secondly, being morally correct sometimes can help companies to gain more social support and gain more customers as well. It could make companies gain more popularity. It almost gives companies free advertise to some extent. Thirdly, nowadays, some people very care about environmental issues and moral issues. If companies can first establish their environmentally friendly reputations or other moral reputations. They could first gain such customers, earlier than their competitors. Fourthly, some company leaders and founders have their social responsibilities. They have more power to operate their companies in the way they want; therefore, they may shift some of their profits to be socially friendly.

Overall, companies' moral reputations are not only about profit matters, sometimes they can be social responsibility issues as well.

Tax system and people's living standards

Taxation has always been a big factor that has a very tight link with people's living standards for centuries. Governments need tax incomes to fund their functions, including providing social justice, national defence, and many other important matters. If we believe in a small government, a government still needs to provide national defence, justice (law enforcement), market watchdog these functions. Therefore, taxation is a necessity in our society and its income should depend on the citizens. Citizens have to give their taxes to their government in order to make their government be fair when dealing with the domestic problems and be biased towards its country when dealing with the international problems.

As we know even a small government has to receive taxes from its citizens, it is important to make the tax system fair and easy. Governments have to set correct taxes for their citizens, and even personalise the tax levels for different groups of people to improve social equality. Therefore, governments love to discuss how they want to set their tax levels, whether they will increase or decrease the tax levels. However, there is another important issue in the tax system that the system has to be clear even simple in order to be user-friendly. We have to admit some members of our society are not well-educated or well-informed about their governments' tax policies, and this group is not a minority group, and maybe we always underestimate the proportion of such people in our society. When the tax system is overcomplicated, this group of people may fail to pay right amounts of taxes to the governments, in many cases, they are more likely to pay fewer taxes and unintentionally break the law. This definitely increases the social cost. In addition, people can accept indirect taxes more than direct taxes. More importantly, indirect taxes do not necessarily need people to understand the system completely in order to pay the full amount of taxes.

Overall, a tax system has to be clear and simple and citizens' best interest is to pay the taxes themselves (rather than imagining a system that governments just finance themselves).

How important is reputation to a company

The question of how important a company's reputation is to the company depends on how customers choose their products. Reputation could be differentiated into two categories: one is quality reputation, the other is moral reputation. In many cases, customers see quality reputation more than moral reputation; while brands have similar quality reputation, customers will then consider about these bands' moral reputations.

However, any type of reputation needs its company to spend its money on building the reputation; therefore, the cost of building reputations is usually included in the company's cost of production. Companies always include their costs of production in their products' prices. Although prices are determined by the market force, only when the prices are not lower than the costs of production, the companies will be willing to produce the products. Therefore, the companies which build their reputations are those which can supply products at prices which are higher than their ordinary costs of productions. Based on the economic concept, it means these companies usually have some form of market power, and they are not in a perfectly competitive market.

However, building reputation can be companies' tools to differentiate their products from their competitors. Moreover, companies can build different reputations to differentiate their customers and markets so they can split their market into several smaller parts, and each of them can form market power and stop other companies from entering the market. I think the Swiss watch industry is a classical example of building different reputations to differentiate their customers. Swatch is a brand that targets the younger customers, Rolex builds its reputation of marking its customers as the social elite group, Patek Phillips builds its reputation of building its products for collectors. So their customers are more loyal to their brands, a Swatch buyer is unlikely to switch to buying a Patek Phillips watch.

Therefore, reputation is not something companies build for being moral, it is built based on profit purposes and to differentiate companies from their competitors.

the average of weighted black market price and weighted official/normal market price is close to the real market price

The average of weighted black market price and weighted official/normal market price is close to the real market price. In some incomplete or restricted markets, people cannot have free access to goods or services, and the goods and services are almost necessities to some people; therefore, they will seek for these goods and services in some black markets. Supply in the official market is usually undersupplied and the price is usually set by the authority, which means it is not determined by the market supply and demand law. In addition, the price is generally lower than that when there is a free market system. When people enter the black market, they will be charged with higher prices. The supply does not meet all the demand; however, usually, people are able to pay the goods and services they need if they are willing to offer high prices. The sum of the black market supply and the official market supply will be still more limited than the supply under a free market system.

In a black market, the cost is higher than the cost under a free market. Because a black market is forbidden by the government, the cost of production is not the only cost, the price also has to consider the risk of suppliers in the black market. A black market is illegal, once the suppliers are caught by the government, their profits will become zero; therefore, if suppliers are more likely to be caught by the government or the government spends more resources on catching these black market traders, the prices in the black market will be higher.

Therefore, because the total supply in the official market, as well as the black market, is lower than the supply in a free market, suppliers in a black market faces much higher risk than those in a free market, it is clear that the weight average price of the prices in official markets and black markets should be higher than the price in a free market. This means a black market will not allow the total supply to be at a free market level. This concept is important as the government does not need to worry too much that a black market existence will let restrictions to products with negative externalities ineffective.

Better access for financial investment in China

According to American and Chinese officials, it is likely for the Chinese government to offer the American administration better market access for financial sector investments. It is not surprising to see that America does not turn its relationship with China into a hostile relationship even under the Trump administration which has been campaigning against China in many occasions. Many people say it is because of Trump's businessman style presidency. The information shows that the Chinese government may be loosening the restrictions for foreign investors, this time some American financial companies or even individuals may be allowed to enter the Chinese financial market more directly, in the future more and more foreign investors will be offered with better market access.

In addition to offering better market access, the restriction to US beef exports is also likely to be loosened as another offer. Then it is curious that if Trump is really doing a business with the Chinese government, what Trump will offer to the Chinese government. It can be political as well as economic offering. If it is a political offer, then the issue could be complicated, it may be about the South China Sea, Taiwan, or other political issues. If it is an economic interest exchange, then it is easier to guess what it is about. Firstly, China still wants its exports to be strong; therefore, the Chinese government may ask the US government to maintain or even lower its current tariffs. Secondly, China is also interested in some US technology advantages; therefore, the Chinese government may ask the US government to loosen its restrictions on high-tech product exports. Thirdly, China may also be interested in expanding its investment in the US. If the US government decides to spend a large amount of its government funding on improving its infrastructure, many Chinese companies will also be interested in participating in this great opportunity.

Overall, we should be happy to see that the relationship between China and the US is not turning hostile. This can ensure the world future economic growth and contribute global peace.

The US job report shows the US economy is at a corner

The latest US job report shows the number of new jobs was 98000 which was under the Wall Street forecast, 180000 while the payroll growth also slowed down compared with the previous records. Such phenomenon shows the US economy is highly likely to operate at the full employment rate (it is not necessarily to be 0 unemployment rate as a completely full employment rate is not desirable to maximise workers' incentives to work hard). If the US economy wants further growth, it requires an increase in investment in both private and public sectors. The most direct and instant boost in investment comes from government investment, as government investment usually is less calculated while private investment often involves many different concerns of risk, returns, individual preferences and many other factors. In addition, private investment sometimes sees government investment as its guidance. Therefore, government investment in most cases moves first.

The US public debt level is very high, it is not surprising if we see an increase in the US public debt ceiling during Trump's four years' presidential period. Under such condition, the US government investment decision has to be made under much more calculation than previously. It has to target those sectors which have the best effectiveness. The US government can invest in infrastructures, this is a very safe option. Improving living standards and public transport can help to improve productivity. However, it is likely to generate enough tax returns from these problems to lower the US public debt level even in the long term. Of course, the US government can invest in some sectors which are possible to generate higher returns. However, such investment will be risky and is likely to be publicly unpopular, as these sectors are more likely to be private sectors. And it may not help the average people to increase their incomes. For example, during the Cold War, the US launched a space race with the USSR. The programme was actually cheaper than building so many nuclear warheads and intercontinental missiles. But building missiles and warheads could directly make the US population feel their military defence getting strong and their life should have become safer. On the other hands, the space race led to many innovations and inventions which we can use in our daily life, but such influence and consequence were not very obvious and some of the inventions and innovations were not meant to be used in the ways we now know. Such investment does not have very certain results and future returns.

Therefore, I think the type of the US government investment will decide the future US economy growth trend. If it is conservative, the potential of the US economy could be relatively more limited.

Economic forecasting is a forecast or a guidance

At the beginning of a new year, governments, central banks and financial institutions annouce their economics forecasting for the coming year or quarter. Forecast is usally made based on historical data and organisations' individual expectations about their future. However, when governments and some other organisations which can have strong influence on economies, their forecasts become some form of guidance and they could be influencial towards the economies.

For example, when a government annouces its economic forecast for the coming year or quarter, the forecast result is made partially based on its planned policies for the new year or quarter. In addition, the government also possibly accounce its plans for the economy and explain the reasons for the new policies. Other parties in the economy are able to see the forecasts issued by the governments and have esimations about the government and central bank policies in the new year. They are able to adjust their operation strategies according to the possible policy changes. In addition, they are also able to predict where their governments are likely to invest more or less. This can increase the effectiveness of government investment, as companies usually see government investment can help them to lower their costs and expand their revenues and profits. Moreover, as the forecasts are issued and published by governments or other influencial or powerful institutions, they become more credible. Once the forecasts are believed by general public, they will plan their strategies and these straregies will evetually result the result of the forecasts. This could be said that the forecasts guide their activities in the economy and achieve the targets of the forecasts.

Overall, forecasts issued by governments or other authorities are more like guidance as they are making powerful influence on the economy.

No need for rate hike soon in the UK?

A member of the Bank of England's Monetary Policy Committee Gertjan Vlieghe has said a rate hike in the short term is unnecessary. In addition, last month only one of the nine members voted to raise rates, this shows that the Committee seems to commonly agree on not raising rates in the short term. The financial markets expect that this year will be a year of central banks' increasing rates in a global scale. However, Vlieghe suggests that the financial markets have overestimated the probability of rate hiking. It is very reasonable for the Bank of England not to raise rates this year.

Britain just triggered Article 50 to officially start its Brexit process and this would lower the potential investment in the UK from domestic as well as foreign investors, especially when some companies are deciding to move their European head offices out of Britain. Investment is an important sector in an economy and Britain is no exception. Increasing base rates could drag down investment as borrowing becomes more expensive. In addition, increasing base rates will also be likely to make its currency appreciate against other currencies. This could reduce the British exports and increase the British imports. When the future trade deal between Britain and the European Union after Brexit is still uncertain, it is reasonable to stabilise the current exchange rate. Moreover, it is also to reduce all kinds of potential risk as much as possible. Rate hike potentially increases the risk of the British economy, given it could bring the changes I just mentioned.

When an economy faces large future risks, they tend to make fewer changes in other sectors which do not directly relate the main risk factor in order to control the systematic risk as much as possible.

How to pay back debts?

Every individual, institution, company or country is possible to borrow debts that they cannot afford paying back in a short term. There are two ways to pay back such large amounts of loans: one is to save other spendings, the other is to make more money to pay back loans. The first way is definitely not sustainable, as it cannot make the best use of loans to create more growth. For individuals, however, this may be the better way to pay back loans. As individuals do not have many choices to make additional incomes without taking some risks. For some individuals, their main ways to earn incomes are to sell their time. Under such situation, they almost impossible to find a way to earn additional money without selling more of their time. However, for companies, institutions and countries, the situation is totally different. The loans borrowed by individuals are usually spent on something that has a diminishing value and has poor liquidity. The loans borrowed by institutions, companies and countries are spent on assets and capitals. These assets and capitals may not have very good liquidity or appreciating values, but they can usually be put into production to produce more goods and services. This is a type of investment, and expanding production scale usually has lower risks especially given the banks have measured their risk and still decided to lend them money. However, governments are different from institutions or companies. The loans governments borrow are not all put into capitals or assets, some could be used for national defence, welfare benefits and some other sectors which do not necessarily generate sufficient returns to pay back their loans. But governments can change fiscal policies or influence moentary policies to manupulate government fiscal incomes and domestic inflation rates. Besides these two methods, there is another way to pay back loans which is borrowing new loans to pay back previous loans. Such method will increase the level of borrowing gradually.
For individuals, their abilities to pay back loans are less sufficient and they are genenerally loan averse; however, for companies, organisations and governments, they are more able to pay back loans, but they are more likely to borrow as much as possible and ignore the potential risks increased by the rising debt levels.

My hopythesis: a productivity cycle

Our economy has an increasing trend, but within one economic cycle, the economy experiences contraction and expansion. Currently, many countries are worried about the productivity slowdown. I think that productivity may have a similar cycle and trend.

Firstly, productivity has an increasing trend as new technology improvement and innovation and invention will lead our productivity to grow in the long term. Secondly, we can have productivity increase and decrease in the short term, which I call a productivity cycle.

It is easy to explain the increase during a productivity cycle. Such increase is led by an improvement of technology and applying new technologies. Such technology improvement may even create new jobs. For example, once alternative energy has been introduced, the proportion of employment in the energy sector has increased to a large extent and overtaken some traditional energy industries already. However, once the productivity increases upon a certain level, such increase will slow down and even decline. Technological improvement is also possible to reduce the number of jobs, as when productivity increases, more outputs will be produced, then there is a probability of oversupply in the economy. Therefore, companies will either choose to cut their jobs or slow down their technology improvement process. Under huge social pressure, companies will be more likely to choose to slow down their technology improvement process. Such slowdown will cause productivity slowdown. Such decline is not endless, it will be stopped by new technology and new invention, which can create new jobs and allow some jobs to be moved to new industries from the traditional industries.

Therefore, a productivity cycle may exist and be supported by continuous innovation and invention.

Big data and a planned economy

There was an interesting thought that a planned economy could be managed better with the help of the computer ability's large data analysis. Data analysis has been improved and widely used in more and more fields. Supermarkets use data analysis to adjust their marketing strategies according to their customers' behaviour in order to expand their revenues. In the financial markets, computers are starting to replace human beings to trade in the markets. Moreover, computers have been starting to learn to improve themselves, Alpha Go is the leader in this field. Additionally, driverless cars are already tested on roads, these cars are driven by AIs instead of humans. People generally believe with good programmes, computers can make better decisions and make fewer mistakes. Under such belief, if we use such ability of computers, is it possible to use computers to rescue the already failed planned economy system?

I never believe that an economy or even our society can be ruled by computers. Yes, computers are better at analysing an enormous number of data and able to make some estimations and expectations. However, as long as the future is uncertain, the estimations and expectations cannot be 100% accurate. Because these results calculated by computers are not completely accurate, we cannot rely on computers. In addition, even if computers could calculate accurate results, we would even know what kinds of extinction we will face. Imagine such world, would we still have any motivations to develop our civilisation and build up our own ambition? I think that the answer is negative. Moreover, computer programmes are made by our human beings, the programme designers are not gods, they can miss some very important factors. They do not know what kinds of innovations and inventions we will experience in the future. In addition, people may know what they need right now but they do not know what they need instead in the future. Therefore, computer programmes may be able to know what an economy should be in the last period as computer calculation has time lag but they are impossible to make plans for our future.