What is Economics

Economics as a subject is to study how to locate scarce resources efficiently. Really? There are too many definitions and understanding about what Economics is about. However, back to the era of Adam Smith or even earlier, Economics was part of philosophy and the purpose of Economics was to make one's country wealthier than other countries. Nowadays Economics is about stabilizing the society by narrowing the wealth gap and mitigating economic downturn. There is never a single purpose of studying Economics. People's goals of studying Economics vary from time to time. Is there a benefit of studying a subject like this. Of course, there is. Always focusing on the most popular topic can make the subject attract people's eyes and absorb more resources from the society. However, because the goal always varies, Economics has become a "huge" subject that covers so many fields. We do not need an economist to study Economics, everyone could participate into Economics study. Recently we can see that many people who are mathematicians and psychologists have won the Nobel Economics Prizes. Economics is a combination of all studies that relate to wealth.

The US economic growth from last quarter was lower than expected, but external risks are still what we mainly need to worry about.

The US economy in the fourth quarter of 2015 is reported to grow 0.7 percent, which is lower than many economists had predicted 0.8 percent. The economy expanded 2.4 percent in 2015. I think the US economic growth fell under expectation because of external risks. Consumer spending has made up two third of the economic output, and the US employment is close to full employment. However, the cause of the slowdown is due to external risks. Investment fell 2.4 percent due to the slide of the oil price. Moreover, exports fell because of the US dollar appreciation. These are all external causes. In the new year, 2016, these external shocks will continue, such as the oil price shocks, the EM slowdown. However, the Fed's decision on interest rates may be seen as an internal risk. In general, I believe the US economy will still perform better than other developed countries.

China may have a "subprime crisis" starting from P2P platforms

Many Chinese P2P lending platform companies have grown rapidly in recent years. Now some struggling Chinese companies are turning to P2P platform in order to finance themselves. Internet financial industry is under-regulated. Many borrowers are usually considered to be high risk borrowers. Many of the struggling companies are raising money for their rollout programs. Because the interest rates on the P2P platforms are generally very high, many individuals lend their money on these platforms in order to have some high returns in the future. If there is enough money on the platforms for the companies to borrow, the companies can pay back their debts by borrowing more. However, if suddenly there is a company that is unable to borrow enough funds to pay back its loans, then it could lead to people questioning other companies' ability to pay back their loans. People would stop lending, and all the companies that use P2P borrowing as a rollout instrument will bankrupt. The individual creditors will lose some of their wealth. It may not sound as scary as the subprime crisis; however, they have a similar cause, "unreliable borrowers"; if the scale of P2P finance becomes larger, the effect of such problem will be multiplied and damage the Chinese economy.

The Fed is still trying to figure out the actual economy performance which is currently clouded by market shocks

The Fed's speech about opening choices of increasing interests offset the gains of the market from the oil price rise today. Under the current circumstance, everyone expects that the Fed will remain its current rates or even cut the rates, as the global economy is not performing well and the market has a very bad start of this year. I think the Fed wants to see how companies are actually doing and if the oil price could restore itself. If the finance reports released show that companies are doing relatively better than expected and the oil price rises back to its year ago level, then the Fed will continue its previous policy of gradually rising its rates. However, if the opposite things happen, the Fed will maintain or even lower its rates. Therefore, whatever the Fed is speaking of is not going to be the final decision. Actually I think even the Fed does not what its next move will be.

The risk of the Fed's increasing rates on companies' finance

Companies have two main types of financing: borrowing and equity. Usually companies only focus on using one or the other; because usually the interest rates are high when equity prices are high, the interest rates are low when equity prices are low. However, last year, there was a period of high equity prices and low interest rates, which means the two ways of financing companies became extremely cheap and easy. This was a period that was friendly to new established firms. However, currently we face an opposite situation. The Fed raised its rates last December and the market is experiencing the worst January in the history due to the continuously falling oil price. Maybe in the near future, the fall of the oil price could be stopped by the output cut. However, if the Fed still decides to increase rates "gradually", leading a fall in the market, many companies will face financing difficulties as interest rates will be high and the equity prices will be low. Therefore, companies which have not got a lot of cash from the good period will face financing difficulties, this could hurt the economy as a whole.

Will Iran be the rising star?

This January may become the worst January for the market in the history. The root cause is the oil price and the continued worries over the EMs. Iran's sanction has been lifted and Iran has had some positive moves this year. Iran plans to 114 Airbus jets and seeks investment in capital markets. Because of the previous sanction, the Iranian economy is not tightly linked with the rest of the world economy. Therefore, the economic slowdown of the EMs may not affect the Iranian economy. Maybe the falling oil price will reduce the profits earning from exporting oil; however, this will not damage the economy, as the profits are extra profits adding to the economy due to the lift of the sanction. Therefore, because Iran is relatively independent from the rest of the world, the Iran economy may become the new rising star among the EMs.

Tech companies first, banks second?

In Davos World Economic Forum, people want to hear from those famous tech companies and it seemed that many large companies wanted to move in the same direction as those tech companies. Around 10 years ago, people liked to hear from banks and other financial institutions. Does this mean that banks are now less important? I think that banks and the financial system are still very important; however, because of the 2008 financial crisis, people have realised the huge risk inside the financial industry and those big banks could bankrupt, the shareholders' expected profits of those big banks from holding the shares are lower, thus the share prices decrease. Meanwhile, the tech companies have made incredibly profits and people also see that how technology innovations have changed our lifestyles. Therefore, people expect more innovations in the future that can make a difference in our life. Compared with the tech industry, people generally know better about the moves of the financial institutions. In conclusion, banks are still important and necessary in our world economy but make fewer profits for their shareholders; meanwhile technology innovations have changed our life and raise our concerns about how our future life could be changed in both good and bad ways.