How does your holiday plan change when your income changes?

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

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

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

What does the business of M&A booming indicate?

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

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

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

Short term costs are increasing over time

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

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

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

The costs of crime

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

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

New sales record

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

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

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

The US tax cuts

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

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

Inequality

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

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

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

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

Moral hazard and its cost

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

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

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

Is it possible to avoid bubble burst?

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

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

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

Problem of Index

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

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

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

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

Demand without free entry

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

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

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

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

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

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

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

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

Cost of communication, efficient outcomes

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

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

Expectation caused risk

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

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

The expectation and the risk

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

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

Therefore, the expectation itself is a source of risk.

Big banks’ uncertain attitudes towards Bitcoin

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

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

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

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

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

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

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

How might AI structure the labour market?

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

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

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

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

Labour, the most important factor of production

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

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

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

Being honest is the key of winning in the long term

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

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

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

Can economists make big money in the financial sector?

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

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

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

How should we compare data?

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

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

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