Can big banks successfully develop their digital cash?

After the surprisingly sharp increase in the value (price) of Bitcoin, the idea of cybercurrency as well as the blockchain technology hasve been attracting more and more attention. Many large banks have been planning to develop their digital cash. Citigroup is working on its own “Citicoin” solution, and Goldman Sachs has filed a patent for a “SETLcoin”, JPMorgan is also working on a similar project. The largest digital cahs programme in the banking industry is “utility settlement cash”, created by UBS, and Barclays, Credit Suisse, Canadian Imperial Bank of Commerce, HSBC, MUFG and State Street have teamed up to work on this programme, and Deutsch Bank, Santander, BNY Mellon and the broker ICAP have also participated in this programme.

The digital cahs is introduced to reduce the transaction costs within the banking and financial industry via the Blockchain technology. They are not planning to introduce a digital cash to replace the currently existing currencies, and they are definitely not aiming to replace the current global monetary system either. However, if they are able to develop a industry currency or exchange method that successfully reduce or even eliminate transaction costs, other industries and groups are likely to copy their mode.

Therefore, in the future, we probably will see many different digital exchange mediums developed by many indsutries and sectors. However, I expect there would be a brutal competition among these digital exchange mediums including Bitcoin, and only one would survive and become the only winner.

The implication of changes in consumer borrowing

The growth in UK consumer borrowing falls to 9.8% in July. Consumer borrowing includes overdrafts, credit cards and car finance. When there is an increase in the consumer borrowing growth rate, it shows the confidence in the market. People are actually borrowing from their future incomes to spend on their today's consumption in order to improve their current living standards. Normally people would love to have stable and constant living standards, and they would try to avoid having worse living standards in the future. Once they spend more than their earns nowadays, their living standards are improved above the levels they currently are able to afford without borrowing, in order to avoid having worse living standards in the future, their future incomes have to not only higher than the current income levels, but also have to afford the current debts and maintain the current living standards.

A rapid growth in the consumer borrowing can easily lead to higher inflationary pressure in the economy, as more consumption is made and more revenues are earned by banks. However, there is a danger when the price is continuously increasing faster the wage level. Once the price level is increasing, it means people need to spend more for the same goods and services in the future than nowadays. When people are measuring their abilities to afford debts and good living standards in the future from today's value, it is highly likely for them to overestimate their wage increases and underestimate the inflation. Once such thing occurs, many people could face bankrupt or at least they would have to adopt austerity for their ordinary living. Once they start to find they are struggling to pay back their debts, it is normal to see a sharp decrease in the consumption, when a significant proportion of people face similar situations.

Therefore, a rapid growth in consumer borrowing is likely to lead to a bubble in our economy. Unlike other bubbles, it may not cause a finanical crisis, but cause a general austerity environment in the economy and pulls down the consumption sharply and forces the economy back to a recession.

What are the completely random events

Yesterday I talked about some events are completely random and these events are the fundamental causes for the uncertainties in the real world, today I want to talk what are these completely random events.

There are several causes for the completely random events. Firstly, information asymmetry is one and I think the most common cause for completely random events. In some cases, people are unknown to some information and they have to make some decisions about some unknown future events or situations; therefore, their decisions to the uncertain events (in their minds) are also uncertain. Though the future events could be certain, due to information asymmetry, from their subjective views, the future events are uncertain. Secondly, uncertainty could be caused by natural randomness. Natural randomness include natural disaster (earthquakes). Thirdly, our human beings can create uncertainties by ourselves. Sometimes we are emotional and can conduct some irrational activities. Once the irrational activities can other events, it implies once everyone is rational, the outcomes can be certain; however, due to the existence of irrational activities, some events can also have different outcomes from a completely rational society. Fourthly, our experiences can be a source of uncertainties. Everyone of us experience different events and we are making decisions based on our previous experiences. Therefore, due to different experiences, people can have different judgments about same things, thus having different opinions about the decisions made and others' expected actions. When people have different opinions, they are likely to find out the outcomes that do not match their expectations. They may feel these events are uncertain; however, the cause of such experience is because all participants' different experiences lead to taking activities that do not match perfectly participants' individual expectations.

Different levels of randomness

In the real life, we often face some random events and I think these events have different levels of randomness. The simplest and most common random event is flipping a coin, the probability of having a tail or a head is roughly 50%; however, the majority of the random events have multiple layers of randomness. Usually events with more layers of randomness are more difficult to estimate their probabilities of different states.

I think that the reason that we are unable to accurately estimate the probabilities of the majority of the events in our real life is based on our limitation of observations. If we assume everything can interact with each other to some degree, then any event is caused by a series of  factors that are also interacting and influencing with each other. From this point, we can imagine there is a series of events, and we only observe a part in this series. At least some of the events that we consider as completely random and black swan events are caused by our limitation on observation that we are only able to observe a tiny part of the series of its causes.

However, there are some completely random events. I think these random events generally take place independently, which means other events will not influence their probabilities of taking place, but they can influence the probabilities for other events to take place. They can be the fundamental causes for the existence of randomness in our real world.

Are there any lazy occupations?

Today I listened to a radio programme discussing how the Spanish empire declined, the programme thinks that the Spanish empire decline is caused by its economic structure at the moment and the way it gained its wealth. The programme believes the Spanish empire's success of conquering America led to its dependence of gold mining and also led people to believing in the possibility of surprising wealth thus laziness in the country. This argument has its reasonable and does have some evidence to back it.

From this argument it is possible for us to conclude one argument which is an effective  way to earn wealth makes people lazy. Here effectiveness is defined as a ratio of inputs to outputs. Once people are possible to seek a way to use limited resources to generate enormous profits, people in the economy are likely to become lazier.

When people are considering one of such methods, I believe many people would have many ideas. However, i think there is almost no such lazy occupation. Firstly information is much open and easy to access. This prevents a particular group from hiding information about lazy jobs. Once more people go to the lazy industry, more requirements are made and this increases the potential costs of people. Secondly, when more and more people receive higher and higher incomes on average, the opportunity costs for any job increase. Therefore, the costs and inputs for these lazy jobs are increasing over time and the jobs become not lazy any more. 

However, there is one job that could be seen as lazy job. This is capitalist. Especially in the western world, there is a group of capitalists. Their wealth is put into wealth management firms and their incomes only comes from their capitals. However, they do not input any of their other resources. When they have large amounts of resources, the costs and risks of impacting their actual life standards almost does not exist. This is only one lazy job with a very high entry bar I think.

Debt ceiling

The US president Trump attacked his parties' leaders on Tweet as they blocked the bill to lift the debt ceiling. Trump and his party have a major political as well as economic ideology conflict, and this conflict focuses on the public budget. Trump comes from a business background, the central government expands its public budgets can benefit many businesses especially the real estate sector could be one of the major benefiters when the government decides to build more infrastructure, therefore Trump is a fan of expansionary government spending; however, the Republican is a fan of the idea of free markets or "small government", its ideology behind its plan to abolish the Obamacare is to leave the health insurance to the market. Though both Trump and the Republican party are in favour of lowering the tax rates, they are seeing the problems from different angles in my opinion. Trump sees the benefits of lower tax rates as a successful businessman, the Republican may also gain some influence from the industries but they are largely supported by the ideology of small government and they want to lower tax rates in order to reduce the government influence. Therefore, when we are seeing Trump and his party hold different opinions on whether or not to raise  the debt ceiling, we should not be surprised.

I do not see whether or not to raise the debt ceiling is a problem, my opinion is the government will always raise its debt ceiling unless the government changes its current monetary policy. As I discussed previously, the government will always want to have an inflation in its economy, when the inflation goes up, the government will borrow more debts and borrowing more debts does not only increase economic growth rates but also increases the inflationary pressure in the economy. The only problem in the decision of raising debt ceiling is its frequency. When such raise happens too frequently, the market and people will doubt the payback ability of the government, this can lead to lower credibility of the government.

Risk loving

Some investors are risk loving as they are seeking for higher returns. Recently hedge funds are embracing bundles of credit default swaps, which have been blamed for exacerbating the last financial crisis. This shows the low volatility in the credit market forces investors including the hedge funds to seek other ways to generate higher returns.

Low volatility means there is a very low risk level in the market, also means a low level of return rate. This is good for very conservative investors including some pensioners. However, when the volatility is extremely low, it cannot satisfy the interests and expected returns of the investors in the market. Under certain circumstances, it may not satisfy all investors especially when the return rates are lower than the inflation rates.

Moreover, individuals' risk preferences are dependent of individuals' personal finance and their standing environment. When an individual has nothing to lose, he or she would become extremely risk loving. Some criminals are bad examples of such risk loving. Moreover, when the welfare system is able to deliver safe nets, it may give people more incentives to take some risky actions, as they do not need to worry they will fall into poverty after failure. 

I am thinking if it is possible for us in the future that everyone is able to receive comfortable enough good and service supply and those who have adventure spirit are free to take all kinds of adventure as they will as there is no cost for the failure. 

How to judge yesterday?

Yesterday I posted a “complaint" article suggesting the financial market is not always concerning all expected factors. Today there was a retreat in the solar industry in the stock market. This is a move that the market felt it had overreacted to the solar eclipse. We would see such retreat after some sharp price rises and drops. This is normal; though it partially reflects the irrationality of the market, it fits our expectations about our human beings' behaviours.

When we see a signal, the first thing we think about is how to react to this signal rather than thinking about the credibility of the signal. This is normal and fits our best interests, because we are generally risk averse and loss averse. When facing very likely either price rise or drop, not reacting to the price change fast enough is a loss to us. When we are not reacting to the signal that signals profitable opportunities but are checking the credibly of the signal, though we are not facing direct costs and losses, we are facing extraordinary opportunity costs; similarly when not reacting to the signals that signal potential losses, every second when we are checking the credibility of these signals, we are facing direct losses when others are reacting to these signals and dragging the market prices downwards. Therefore, under either circumstance, once we capture any possible signal, the first thing we need to do is to react to the signal rather than to check the credibility of the signal.

In the future, once AIs (including algorithmic trading) are more widely used in the financial market, such phenomenon I think will not change. AIs are faster than humans, but compared with other AIs, they are still at similar levels; instead of using their capabilities to analysing the credibility of the signals in the markets, the AIs are still better to try to react to the signals ahead of other AIs. 

Therefore, to conclude, at any time, reacting fast is the best strategy at all time.

What do I see from the solar eclipse?

A total solar eclipse occurred in the US today, to many American people, it was a valuable experience in their lives; however, to me, it was relatively negative, as holding several solar firms' shares, it was a bad day for me. The solar industry was hit by the solar eclipse since bankers and investors believe that the solar grid would be harmed by this event.

Though the solar eclipse was not a black swan event and First Solar spent a year planning for the eclipse, because of the lack of the confidence about our current solar technology, the market in general still believed that a big megawatt drop could occur.

From this event, I see that the market is still relatively short-sighted and has limited access to information. Firstly, the solar eclipse as I just said was not a black swan event, its coming was fully predictable and it was not even an uncertain event. However, under such circumstance, we can see that investors only reacted to this event on the day it happened. Last Friday, there had not been a big shock in the solar industry. The theory says that the formation of share price should involve all relevant factors and discount rates; therefore, theoretically speaking, the solar eclipse should have already been considered in the share pricing since their IPOs. Secondly, an event should shift people's beliefs. Previously people did not question the reliability of the solar power; however, once the eclipse occurred, investors suddenly increased their concerns about the reliability of the solar power, as the event is tightly related to the reliability. Thirdly, there is no 100% security in terms of our technology. It is fragile when our new technology faces the nature force.

To conclude, from today's solar eclipse, I find that people's feeling about one thing is changing when approaching to its appearing and judgment has changed over time progresses.

Has the UK recovered from the 2007-08 Financial Crisis?

I read some data from previous years about the UK, I find that before 2008, the UK GDP growth rates were generally above 2.0% and in some years, the UK economy could even have experienced over 4% economic growth rates for several times. However, since 2008, the UK economic growth has been in decline. Although the UK economic growth rates have been turned to be positive since 2010, the average growth rate since 2010 is still slightly below 2%, and it was above 3% only once. Therefore, it is arguably that the UK economic growth trend has been flatter than its before the Financial Crisis. If the trend cannot be as sharp as the period before the Financial Crisis, we may have a reason to believe that the UK economy has not recovered from the crisis.

An economic recession occurs when an economy experiences negative economic growth for two or more consecutive quarters. However, there is not a very clear definition for economic recovery. Economies are different that they will take different lengths of time periods to recover their economies. Moreover, people could have different beliefs about economic recovery. Some people could think once an economy can restart to continue producing positive economic growth, then this economy is recovered.

Since the last economic crisis, the world economic growth trends have generally become flatter than last century. This is because many governments and companies themselves are afraid that faster economic growth could generate more systemic risk, in order to reduce the rate of accumulating systemic risk, they tend to slow down the economic growth rates. Therefore, after the 2008 financial crisis, we see a general decline in the world economic growth trend.

How much incentive would it improve by giving employees shares?

It is commonly believed that giving employees shares of their companies could improve companies' productivities as once employees get their companies' shares, they can share the additional benefits gained by their hard working and they have more incentives to work hard. However, this belief is too general and is not always true in all cases. To give employees shares of their companies is to combine operation with ownership. Usually it is more common to see a combination of management and ownership where the executives of companies are given shares or options in order to give them incentives to provide more benefits for their shareholders. Such decision is carefully calculated by shareholders that the shares they give away should be fully compensated by the potential benefits gained by the likely improved management. On the other hand, managers and other employees who are given shares or options also need to consider their costs and benefits. They will only improve or at least try to improve their productivities once their benefits are greater than their costs. Moreover, as marginal benefits are declining, a employee gains less and less incentive when he or she gains more and more incomes, at a certain wage level, he or she views luxury time more valuable than incomes. From this point of view, it seems more effective to give employees with lower income levels shares or options to improve the companies’ productivities. However, to large companies, such strategy is not desirable or achievable, as the employees with relatively lower incomes are the majority of all the employees in the companies, it is too expensive to give employees with low incomes shares or options to improve their productivities. Therefore, giving away shares is possible but not effective to improve the performance and productivity of a company, as such method is unable to improve the productivities of the entire employees.

In addition, giving away shares or options has a negative effect that not only shareholders are short-sighted, the managers and other employees are also short-sighted as well. Once all interest groups around the company are short-sighted, companies could increase its risk rapidly in order to boost growth and expansion in the short term. Furthermore, once one company gives its managers or employees share awards, other companies in the same sector have to follow this rule in order to attract talented managers or developers. Therefore, giving shares to employees does not necessarily increases the absolute benefits for shareholders, but aims to maintain its competitiveness in the sector and prevent talented employees from leaving their companies. From this, we can clearly see a flow of benefits from ownership to its managers and talented employees.

To conclude, such awarding system may have been a voluntary strategy to improve a company’s productivity; however, nowadays, the awarding system is an involuntary decision of shareholders in order to prevent their talented employees from leaving their companies and maintain the competitiveness of their companies and remain in the markets rather than voluntarily trying to improve the productivities to win competitions over other companies. And the transfer of benefits from ownership to employees I think will become more and more common in the coming years.

Global trading network nowadays

Nowadays, the global trading network is becoming more and more complicated as there are more and more different sectors interacting with each other. The cost of production is no longer as simple as the cost for buying raw materials and hiring labour force; nowadays, costs of production involve costs of financing, taxes, tariffs and other factors. As specialisation has become more detailed, more and more individuals, parties, companies, organisations and countries have been involved and participating in the global trading network, sometimes even without their full realisation. Therefore, under current globaling trade situation, it is impossible to start a trade war that only involves two countries. Once a country brings another country to a trade war, all other countries which are trading with either of these two countries are also brought to the trade war involuntarily. Moreover, if the two main countries in the trade war are very large economies, the trade war could have much larger side effects and some of other economies which are relatively smaller could be harmed even worse. Large economies are large does not only imply their economies' sizes are large, but also imply their industries and sectors are more various and comprehensive and they have more trade partners; on the other hand, small economies are more likely to have relatively limited scale of industries, their resources are more often concentrated in particular sectors, their trade parnters are also more limited. Therefore, once there is a trade, of course in terms of absolute losses due to the trade war, the losses of the two main characters defintely will be the largest; however, in terms of relative terms compared with the entire sizes of economies, the small economies which rely on trading with the two main characters in the trade will lose the largest relative losses due to the trade war. Moreover, nowadays as the global trading network is much more complicated, it is impossible to contain a trade war in a designed scale. In the current world, when making global trading, a company does not conduct this activity by itself, it has got to gain support from some financial institutions to give it some advice on taxes and even direct and indirect financial support, once a sector has been in the danger of trade war, all financial institutions backing this sector and other supporting sectors will also be under threat of a trade war. From this point of view, a limited scale of trade war does not exist any more.

Debt and growth

Debt is a source of financing that governments, individuals and companies are all using. Debt is also possible to create multiply effect for governments and individuals as we know the money supplied by central banks will create multiply effects in the economy and the money is sometimes supplied in a form of debt. Debt is an effective source of finance to minimize the opportunity costs. Although opportunity costs always exit, borrowing debts can minimize the probability of opportunity costs greater than expected returns.

For companies, the level of debt changes over their development. Once a company is newly established, its investors are relatively conservative at lending too much money, as investing in such firm is already a risky action. When a company is expanding and performing well, its level of debt is also increasing over time, as investing in these companies has higher expected returns (relatively higher returns and lower risk). When a company is mature, its level of debt is likely to slow down or even decline, as its growth potential disappears, investors are only looking forward to constant returns and do not want these mature companies to conduct some risky adventure. 

I think that this rule may also apply to governments. The level of debt depends on the government tax incomes as well as its economy's performance. From this point of view, when an economy is expanding at a rapid rate, it is normal for its government to increase its public debt level. Higher levels of public debt are highly likely to generate further economic growth. However, we should not expect increasing public debt would have an over 100% multiply effect, though it is possible. Overestimating multiply effect of public effect could lead to sharp increasing in the public debt level, and increase the risk of default in the future once the economy cannot generate sufficient growth. Therefore, it is more reasonable to limit the increase rate in the public debt level below the nominal economic growth level. However, this is not always the case. Depreciation becomes another way to lower the real value of debts which are borrowed from foreigners.

Overall, it is not surprising to see that economies with strong growth rates have higher public debt increasing rates. However, higher public debt levels could lead to sharp depreciation of one country’s currency, and this prevent the currency from being the globally acceptable currency.

How bad could the US president damage the US economy?

How bad could the US president damage the US economy?

There is an article on Financial Times named as 'America is now a dangerous nation' (https://www.ft.com/content/308e0f90-80ce-11e7-94e2-c5b903247afd). The author, Gideon Rachman, suggests that the danger of America comes from the domestic crisis as well as the foreign policy crisis. The domestic crisis is from the conflicts between different social classes and even races. The foreign policy crisis comes from Russia and North Korean. The author believes that the US president Trump is only making these problem worse.

In terms of domestic influence, the US president Trump has relatively more limited influence, as the bills have to be passed by the Congress his power is also limited by the two houses in terms of domestic policies. However, his influence in terms of foreign policy has less limitation, as he is the Commander in Chief of the armed forces, he has the power to start military actions without an official declaration of war, though official declaration of war has to be  approved by the Congress. From this point of view, the worst damage that Trump could do to the US is to get America into a dangerous war against another nation. A war could let the US economy fall into a disaster, the only possible benefiter would be the US national defence industry. Other industries would face losses from the US dollar depreciation, the financial market shocks and increasing prices in fossil fuel and other sources of energy and raw materials. This is based on the situation where the US is  able to win the war. If the US falls into a similar situation as the Vietnam war or even worse, the damage to the US economy is unpredictable.

The domestic problem in the US has been a long lasting problem. Instead of saying the US president Trump making the situation worse, it is better to say the domestic crisis led Trump win the US election. Not only in the US, in many developed countries, white supremacy has its market and supporting base. This is because there is a group of white people who find themselves have no competitiveness in the current world society. When there is such social conflict in the US, it implies some of American population do not have sufficient consumption power. Therefore, the US economy may need to rely on exports in order to sell out its domestic production, especially when the US president intends to move more manufacturers back to America and push up American production.This could lead to more volatile trade wars with other nations, including China and the European Union.

To conclude, the current crisis should not be completely blamed on the current US president Trump, as many of the international and domestic problems are long lasting. It is partially correct for Trump to say that he inherits many American problems from his previous government. In my opinion, the US economic growth could face some opposite force. If the US companies are multinational companies, they could be impacted by the more intensive international politics, the only possible benefiter under current situation would be the national defence industry.

The future production costs

There has been a theory for enterprise or innovation that the minimum cost of producing a product is equal to the costs of its raw materials and companies should aim to reduce their costs of product closer and closer to the minimum costs. This target is not that impossible to achieve, the field of software and smart device application development seems to have achieved this goal. Though the software development field is very easy to achieve because it does not require continue investment in labour during its selling period, it sets an example for other sectors if AI and machine can replace labor forces to do some repeating jobs, once a product has been design, its production process is a repeating work and is very likely to be done by machinery. Therefore, if this became true, the cost of production would be reduced to its minimum.

From this point of view, I think that in the future, the costs of investment and production would be a combination of a large proportion of lump sum costs and a small proportion of marginal costs for individual production. Machinery and technology development and application would consume a large amount of resources from companies as well as the society. This would increase the risk of companies as they have to pay large amounts of lump sum costs for their productions before they start their businesses. To reduce such risk, it is important to be more specialized and generalized. To be more specialized, the development sector and the manufacturing (production) sector will be more separated, even the sales sector could be separated from these two sectors. Under such circumstance, each sector is only responsible for its individual unique function, this can divide the general risk into many small parts and each individual reduces its individual risk. To be more generalized, I mean manufacturers can produce products for larger ranges of products, designers and developers also need to consider more about their products' compatibilities. 

Therefore, future jobs and investment would be concentrated in the lump sum costs, more and more resources will be pulled into developing new products and machinery.

Why housing prices in some cities can increase at incredibly fast rates?

Housing prices in large cities are super high without doubt, and higher housing prices make these cities become very expensive places to live; however, every year, tens of thousands of people are still rushing into these large cities to find their places to live despite the high costs of living. Why? This is because large cities have more opportunities and people expect they can get higher incomes when they move to large cities. We can see as long as people expect their incomes will be high enough to compensate the higher living costs in large cities, they will move to large cities to seek opportunities. Therefore, the demand for housing and rental in large cities will continue to increase, until people’s expectations of increases in their incomes are merely equal to people’s expectations of increases in their living costs in large cities. Of course, individuals have different risk preferences, when the population is more risk loving, the prices in large cities are more likely to increases faster than some places where the population is more risk averse.

In addition, as long as an economy is expanding and growing, people will expect their incomes to increase in the future, this will lead people to move to large cities or countries where they expect have higher economic growth rates, as higher growth rates can make their incomes more likely to increase faster. Even within one economy, different regions have different economic performances, therefore people in different will have different changes in their incomes. It is more likely to have higher income growth in large cities than in small cities. Moreover, people will continue to expect there will be future economic growth and large cities will be the largest winners; under such circumstance, more and more people are going to move to large cities in order to get higher incomes and more wealth. When people are moving to large cities, the demand for housing in large cities is going to keep increasing, this will lead to a decline in the demand for housing in small cities, as the population is constant. Therefore, housing prices in large cities will increase in an incredibly fast rate compared with housing prices in small cities and median cities.

To conclude, as long as we believe our economy will be growing over time, housing prices in large cities will continue to increase at an incredibly high rate. (Of course, if the population drops sharply, housing prices will be affected, but housing prices in small and median cities will drop further than housing prices in large cities)

Resource sharing in the future

It is impossible for any of us to fully exploit the utilities of our consumption; therefore, there are several ways to sell some utilities to others in order to further exploit the utilities of our consumption. Uber is a classic example that when people cannot fully exploit the utilities of their cars, they use their free time to use their cars for the use of other people. However, this is not an effective way to improve the efficiency of exploiting utilities. This is because when people are trying to further exploit the utilities of their consumption, they have to add extra resources to it. For example, in the case of Uber, although people do not fully exploit the utilities of their cars, if they want to use their cars to earn extra incomes by being Uber drivers, they have to spend their individual time on driving their cars and the extra resource here is people's individual free time. Therefore, since the foundation of Uber, there have been some professional Uber drivers, and Uber becomes a new type of taxi company with a modern information concept instead of a company allowing people to share their cars when their cars are not in use. Here, we can see the best way to solve the problem is to make cars driverless, so people can share their cars when they do not need to use their cars and do not have to spend extra resources.

I think this may be a concept for the future AI development that people can use AI to reduce the costs of using resources. As we can see from the Uber example that people have to spend extra resources to share or sell or even use their products. Without time, we are not able to exploit any utilities; in some cases, we even have to use other resources for exploiting the utilities of our consumption. This may lead to more inefficiency of use of resources, at least this is not effectively to improve the efficiency of our use of resources. There are many types of resources: human (time, quality of time), land (including natural resources), capitals. I exclude enterprise from my factors of production, as I think that enterprise is part of human resources, human resources involve labor as well as enterprise. Once we can save more resources, it means we may have more free time to spend, more resources available to us, and more available capitals.

Some people believe once AI can take many jobs from us, human beings, and lead to an increase in the unemployment rate. This is not good for ordinary people, but it is not good for capitalists either. Since the majority of the entire consumption power comes from ordinary people, when the employment rate drops, consumption will drop as well and the capitalists will be hurt. Therefore, we have to figure out a way to use the freed resources to create more wealth. In the mean time, as many of our societies are entering the aging population, it means more wealth need to created to pay for the pensions. Moreover, since the technology used for daily work and use becomes more and more advanced, it is not surprising that people may have to stay at school for longer time in order to fit into the labor market or even just to fit into our society. Therefore, in the future, we may see a decline of the number of employable people in the labor market, this will improve the employment rate in our economy.

In addition, once more of our time is freed by AI, it means there is an increase in the demand for more luxury consumption, more production, innovation and services will be demanded, this actually will add more opportunities in the world economy and create jobs to compensate the jobs taken away from AI. 

To conclude, in the future, the development of AI and other new technologies will not have negative impacts on our economy and society including the employment rate in my opinion, as it can help to free more resources by improving the efficiency of use of resources.

Future manufacturing and emerging markets' performances

The UN research (http://www.unido.org/fileadmin/user_media/Research_and_Statistics/WPs_2010/WP_1_2016_FINAL_fb.pdf)finds the share of manufacturing and manufacturing jobs in the average developing economy has fallen but the share of manufacturing and manufacturing jobs is at a record level. From this point, we can find that China are absorbing more and more manufacturing work and jobs from the entire world economy. I think this is a great piece of news for the Chinese economy but a sad piece of news for other emerging economies. This is not only because the study finds the Chinese economy takes a high proportion of jobs and work in manufacturing but it also implies the potential economic performance for China as well as other emerging markets.

In the future, many experts, companies and economists expect that the future world will belong to machinery and AIs. This is not out of many people's mind. Since the Industrial Revolution, people have been working with machinery for centuries. During the Industries Revolution, many people were afraid many people would have lost their jobs, but the history teaches that the development of machinery creates more jobs when we fully observed the use of the technology, more jobs were created and technology contributed to a great economic boom and a population boom; therefore, we may be a bit too pessimistic about the coming innovation of AI and machine learning. It is very likely to see a short term decrease in jobs and increase in the unemployment rate, but a long term increase in jobs and further economic expansion.

In China, enormous amount of resources have been pulled into the development of AI and machine learning. Such investment matches the future development trend, gives China an early start in the development of AI and machine learning. Because China had an early start than other emerging markets in the manufacturing sector, China has accumulated more resources and wealth than other emerging markets and given itself more advantages in the next generation. Moreover, if we believe that the manufacturing will be reshaped by the innovation of AI and machine learning, since China has kept the majority of manufacturing of the entire world economy and has the advantages in the development of the new technology, China can maintain its dominating position in the new era without too many challenges from other emerging markets. Therefore, I am quite confident that China can remain its dominating position among other emerging markets. Moreover, since the development of AI and machine learning will reduce the advantage of cheap labours, the countries with more skilful labours will experience greater economic growth in the coming era of AI and machine learning, this will limit the future development of emerging markets if they want to use their cheap labour forces to copy the success of China. From this point of view, some Asian countries, like India, may be able to catch up with China and the developed world; however, other emerging markets including some Africans will be left further back from the rest of the world.

What could we learn from the financial crisis?

Some media is discussing what we can learn from the financial crisis at this time of 10 year financial crisis anniversary. I am going to talk about the financial crisis as well, as it is always good for us to learn from the history, especially when the financial market is in boom at the moment.

In 2007-08, many experts believed that the decision of the US Fed to increase the rates caused the collapse in the US housing market. However, I think this conclusion is too simple to describe the crisis. I think that the most serious issue in the crisis is that many financial institutions did not understand the risk of the assets they held. However, this is only the surface issue not the core problem. Some may argue it is because of asymmetric information in the financial market; I think this is only partially correct, the core issue is conflicts of interests within the financial industry.

In all sectors, conflicts of interests exist as it is almost definitely that employers and their employees have different interests and goals; however, only in the financial market, the situation is slightly different from other sectors as the employees are more likely to behave in a more different way from the way their employers want them to behave. This is because in the financial markets, either employers or employees design their strategies in the financial markets based on their individual risk preferences. However, employees are more often taking strategies at a higher risk level than thee desirable risk level that their employers are willing to take. This is because as any fund is provided by the employees’ employers or clients, and the employees do not face the direct risk by themselves, to compare the risk and the potential risk, compared with their clients, their relative potential returns are higher than their clients and the risks they are taking are defintely lower than their clients or employers’ as they do not make direct financial activities by their own wealth. Therefore, even when employers and their employees have the same risk tolerance, the accumulated risk conducted by the employees will be higher than the risk tolerance of their employers, and due to the existence of asymmetric information, the employers are unaware of this situation.

Therefore, the nature of the financial industry determines that the employees are more willing to take higher risks than their employers do, this can create that institutions are not fully informed about the risk that they are currently taking. This is the major problem that is likely to lead to a financial crisis.

The US job report

The unemployment in the US continues to slip according to the latest job report and job creation mainly occurs in the restaurant and bar sectors. From this job report, I think that the US economic growth reaches its limit and the job creation in the restaurant and bar sector is not a sustainable job creation source.

I am now discussing how I come to this conclusion. Firstly, although it is unfair to say the jobs in restaurants and bars do not create actual value, jobs and work in restaurants and bars do not provide as many additional jobs as jobs and work in other sectors, this means the number of new jobs created by the increase in jobs outside restaurants and bars is much lower than the number of new jobs created by the increase in jobs in many other sectors. This means when the majority of new jobs are generated by by restaurants and bars, the future increase in jobs is very likely to slip. Moreover, the jobs in restaurants and bars are dependent of the exogenous factors, that while the economy is in boom and people are generally wealthy, more jobs for restaurants and bars are created; however, when the economy is slipping and people receive lower incomes, people will go to restaurants and bars less often, the demand for jobs in restaurants and bars will decline sharply. Therefore, I conclude that the future job increase in the US will be even much more slower.

In addition, when an economy is experiencing a sharp growth, the job creation will more concentrate in the sectors where can generate high levels of profits and even more jobs within their sectors and outside their sectors. This is how an economy can grow at an incredible fast speed.

Risk is not only from the market

Risk is never a negative term that people should hate and avoid. In the financial market, risk and return are two terms that are tightly tied with each other that investors seek for higher returns in order to compensate higher risk. Here risk is still not a neutral term as the term “compensation” is used. I think that risk is uncertainty with rough knowledge of possibilities of possible future outcomes and those future outcomes which are unknown are not counted as risk, instead they are black swan events that are usually ignored as it is impossible to predict and make reasonable expectations.

Some risk is zero-sum that there are only two kinds outcomes and one of the two is zero (losing everything). Under such risk environment, participants usually have more risk loving preferences in order to allow themselves to be in such situation. Such situation is usually related to gambling or similar activities. However, it is not necessary to consider such risk is “bad”, as under good management of risk, it could lead to positive expected outcomes and the losses could be lower than people’s bearable budgets.

When we are calculating expectation outcomes for future events, it usually involves these several elements: possible states, probabilities, discounted rates. However, if we believe any investment other sources of incomes should be spent on consumption for now and future. Therefore, once we design our investment and consumption plans, we have to ensure the lowest expected outcomes should be higher than the highest possible overall consumption; otherwise, we put ourselves in conditions where we are possible to bankrupt.

To us, discounted rate and future consumptions are also sources of risk, as they are uncertain and not entirely controlled by ourselves. As we are more able to control our consumption than the discounted rate as discounted rates are determined by exogenous factors, the discount rates for the future could be seen as a normal distribution that its future outcome could be any within a range.

Bitcoin and Bitcoin cash, which is more likely to dominate the future cybercurrency world?

To be honest, I still think that if only choosing from Bitcoin and Bitcoin cash, Bitcoin is more likely to dominate the future cybercurrency world, as Bitcoin has already had a relatively wide base of users and Bitcoin cash just appears. However, in the future, there might be a new and better-designed cybercurrency that are more likely to dominate the future cybercurrency world.

I always feel that there is one major issue in the designs of current existing cybercurrencies that the total amounts of existing cybercurrencies are designed to be fixed and the creation of cybercurrencies is based on the concept of mining, which I believe is outdated for the current and future world economic world. The reason for using precious gold as currency being outdated and unpopular is not because they are not easy to be carried around (as the Gold standard could be a perfect solution for this problem), instead the major reason is that the gold standard is not flexible enough to cope the rapid economic growth. Although the world economy have been growing significantly since the Industrial Revolution, the most significant and rapid economic growth occured after the Second World War, and this was the era when the gold standard collapsed in a world scale. This is because a monetary system with fixed supply cannot effectively encourage more consumption. When the production in the economy grows faster than the new money supply in the economy, the economy will face a deflation, at least a nominal deflation. Bitcoin and Bitcoin cash both face such issue that though Bitcoin cash increases its total supply is there a cap on the total potential supply of Bitcoin cash.

From the reality, it is clear that even Bitcoin holders do not have incentives to spend their Bitcoin on their consumption. Ten years ago, the value of one Bitcoin could pay a nice dinner in a fair restaurant, of course, no restaurant would let you pay by Bitcoin; however, nowadays, the value of one Bitcoin increases sharply and is able to afford a car. As a Bitcoin holder, when you see that the currency you are holding is likely to equal to tens of thousands of times today’s consumption power in the future, you will not use the currency to spend on any thing, as no single investment is better than holding the “cash”. Once holding cash is the best option, the currency will not be spent in the economy, a currency that no one uses for consumption is not a currency by the definition of money, and it will eventually lose its position as a type of currency.

Therefore, the ideal design of a cybercurrency in my opinion is the supply of the cybercurrency is dependent of the real world economic performance.

Which is better, a private monopoly company or a state-controlled monopoly company?

Yesterday, I suggested that in some sectors, it is inevitable for monopoly companies to exist; under such circumstance, is it better for us to have private monopoly companies or state-controlled monopoly companies? The answer to this question depends on several factors.

Firstly, the market price level is worth considering under the two types of market monopoly conditions. Usually the price level should be relatively lower under a state-controlled monopoly market than it under a private monopoly firm controlled market, as private monopoly markets’ primary goal is to maximize their profits and take as much as consumer surplus as possible, while state-controlled companies also need to consider the externalities in the market as they need to serve the governments’ policies and demands. Therefore, consumers are more likely to be benefited from the market prices under state-controlled monopoly markets.

However, sometimes customers do not need to pay charges for their services even in a monopoly market or an oligopoly market. For example, the Internet search engine could be seen as an almost monopoly market that the world search engine market is dominated by Google and in China, though Google is blocked from the authority, but the market is dominated by Baidu. They provide Internet search services without any charges, they gain revenues from advertising. Under this circumstance, the state-controlled monopoly companies no longer have their price advantages compared with private monopoly companies. Furthermore, it is more effective for other companies to do business with private monopoly companies than with state-controlled monopoly companies in terms of advertisement and other similar businesses. This is because private firms only need to make their decisions based on profits, but state-controlled companies have multiple goals and their decision making process is far more complicated and as they represent their governments to some degree, they have to consider public influence and politics as well.

Secondly, in terms of business growth, private monopoly companies are better at expanding their businesses, as any major changes in state-controlled companies are decided by governments and governments are relatively more conservative in terms of business expansion and usually they may even limit the expansion of state-controlled companies, as they want to contain nationalization in merely several particular sectors and they are afraid that a larger scale of nationalization could lead to a lower productivity due to a general reduction in competitions in the economy. However, private monopoly companies’ ambition of business expansion is not necessarily good for customers. This means that in more and more sectors, these private monopoly companies will expand their influences and create more concentrated markets, consumers will be limited to very limited options. From this point of view, in order to encourage more competitions in general in the economy, it is better to have state-controlled monopoly companies rather than private monopoly companies.

Thirdly, private monopoly companies are more likely to provide better services for their consumers. As state-controlled companies have many considerations (for example, politics, moral concerns) when choosing what to provide, private companies only consider about how to increase their revenues and profits, so they are more likely to provide products and services based on their consumers’ private interests. This is something that state-controlled companies are ineffective to do; however, once state-controlled companies are able to open the platforms for the market participants to develop and provide complementary products and services.Even they can open data sets limitedly, for example, they can give anonymous data to other companies to develop products and services that match interests of customers and the anonymous data are not able to be traced back to individual people.

To conclude, my opinion is that in general, state-controlled monopoly companies are better than private monopoly companies as they are more controlled with their monopoly power in the entire economy and allow more competitions out of their particular sectors; however, they should open their platforms for potential market participants and developers to create further products and services based on their platforms.