Forgot to publish this. So now I am.
The Nazi's envisioned a Europe under their control. Fortunately their military ambitions were repelled. The then weakened Germany began it's road to recovery. One reaction to WWII was a call for a more unified Europe. This sentiment was common among many politicians and the roots of the EU began to take hold. After a few loose coalitions had success The EU proper was established with six founding countries. This brought a new era of cooperation between European nations and the longest peace the region has ever seen.
I think the biggest flaw in the EU was the adoption of a common currency. Seventeen nations currently use the Euro as their currency. The idea of a common university seems great at the first passing glance (The U.K. and Switzerland were criticized for not adopting the currency and still are today). However the reasons why the Euro should not exist are not too much harder to comprehend.
The most important reason is that different countries have different economic goals. In an earlier post I described how low exchange rates can be used to help a country that wants to export a lot and high ones can help an importer. All of the countries of the Eurozone are not either net exporters or net importers; there is a mixture of both using the same currency. This means that no matter how responsible every country in the Eurozone is with their money there will still be some countries wanting to change monetary policy.
Of course, as we have seen, not all of the countries that use the Euro are responsible with their money. Holders of Greek bonds had to take a 75% haircut off of the value of their bonds. The prices on Spanish bonds are now falling because investors believe a similar haircut is in the future. Italy has a debt to GDP ratio of 120%. This has led to some countries being grouped together as the P.I.I.G.S.(Portugal, Italy, Ireland, Greece and Spain).
Saturday, April 14, 2012
Friday, March 30, 2012
Measurements Mistakes
There are a lot of numbers that get thrown around on T.V. by politicians pundits and economists when they are trying to make their points. Most of the time they have complicated names. Most of the time these numbers are used correctly but sometimes people on t.v. can use the fact that many people might not know where these numbers are coming from to trick them.
Household income is often cited to show that people have been getting poorer(adjusted for inflation). Household income has been falling. Even in recent years.
[ http://www.census.gov/hhes/www/income/data/statistics/index.html ]
Sounds bad right? Not so fast.
The size of households has been on the decline in the United States. they have almost halved in the past 50 years. [ http://www.census.gov/prod/1/pop/p25-1129.pdf page 13] This means that even though there has been a decrease in household income the amount of money per person has actually increased. When people cite household income it is used to shock people in to following whatever policy they outline.
Unemployment numbers can also be deceptive. Unemployment is calculated with the following ratio(amount of people in the labor force that do not have jobs divided by the entire labor force). Because it is a ratio, changes in the numerator or the denominator can affect the percentage. This can mean that changes in unemployment can be deceptive. Take for example a time when wages are on the rise and things are looking good for the economy. Many people may join the work force because it is now worth it to them to work( e.g. an influx of housewives starting work again) the causes the work force to grow quickly. However there may not be enough jobs for all of them; this would cause the unemployment rate to go up even though there are more people working than there were before.
This can also work in the other direction. In times where the job market is looking very week some people may become discouraged and stop looking for work until the job market is better. This causes the size of labor force but the amount of people working will stay the same. Situations like these can make unemployment numbers go down without anyone getting a job.
We put a lot of trust into people on the news to tell us the truth. Most of the time their numbers are accurate but they are only telling part of the story. Sometimes it is the meaning behind the facts and figures that contain what we really want to know.
Household income is often cited to show that people have been getting poorer(adjusted for inflation). Household income has been falling. Even in recent years.
[ http://www.census.gov/hhes/www/income/data/statistics/index.html ]
Sounds bad right? Not so fast.
The size of households has been on the decline in the United States. they have almost halved in the past 50 years. [ http://www.census.gov/prod/1/pop/p25-1129.pdf page 13] This means that even though there has been a decrease in household income the amount of money per person has actually increased. When people cite household income it is used to shock people in to following whatever policy they outline.
Unemployment numbers can also be deceptive. Unemployment is calculated with the following ratio(amount of people in the labor force that do not have jobs divided by the entire labor force). Because it is a ratio, changes in the numerator or the denominator can affect the percentage. This can mean that changes in unemployment can be deceptive. Take for example a time when wages are on the rise and things are looking good for the economy. Many people may join the work force because it is now worth it to them to work( e.g. an influx of housewives starting work again) the causes the work force to grow quickly. However there may not be enough jobs for all of them; this would cause the unemployment rate to go up even though there are more people working than there were before.
This can also work in the other direction. In times where the job market is looking very week some people may become discouraged and stop looking for work until the job market is better. This causes the size of labor force but the amount of people working will stay the same. Situations like these can make unemployment numbers go down without anyone getting a job.
We put a lot of trust into people on the news to tell us the truth. Most of the time their numbers are accurate but they are only telling part of the story. Sometimes it is the meaning behind the facts and figures that contain what we really want to know.
Friday, March 23, 2012
Minecraft and the Tragedy of the Commons
As a game minecraft tapped into something very primal. If you have played you will know what I mean. If not let me describe the game for you.
The world of minecraft consists of blocks about 3 feet tall. These blocks represent various materials (wood, stone, etc.) and can be collected by the player. Blocks can be placed back down or used to create different types of blocks(bricks, planks) or tools(pickaxes, shovels). There is no objective of the game besides to build whatever you want.
There is also a multi-player element where the mechanics are the same but just with more players. I have spent a decent amount of time on a server and noticed how well the interactions of players fit into Economics.
One pattern that I saw often was the tragedy of the commons. It is a very simple premise but it tends to be forgotten. If there are communally owned recourses then they will be used inefficiently.
I decided to test this by setting up a large communal farm. In minecraft in order to farm you find seeds(they are easy to find) and plant them on irrigated land(takes a little longer to make) and then wait(this takes a long time and not all plants grow equally). Plants ready for harvest are easy to distinguish from ones that need more time. Harvesting a plant that is ready yields wheat(which can make food necessary to survive in the game) while harvesting a plant that is not ready yields a seed.
I set up my farm with many signs telling people they were free to help themselves. When I would check back on my farm all of the plants would be harvested. The players that did this got very little out of harvesting plants that were not ready and the community could have done better overall if they had left the "unripened" plants.
This is why private ownership is so important for optimal use of resources. A private owner will try to maximize the benifit off of the things they own. If people share ownership they will take more than they need for fear of others doing the same. There is no incentive to conserve recourses.
The world of minecraft consists of blocks about 3 feet tall. These blocks represent various materials (wood, stone, etc.) and can be collected by the player. Blocks can be placed back down or used to create different types of blocks(bricks, planks) or tools(pickaxes, shovels). There is no objective of the game besides to build whatever you want.
There is also a multi-player element where the mechanics are the same but just with more players. I have spent a decent amount of time on a server and noticed how well the interactions of players fit into Economics.
One pattern that I saw often was the tragedy of the commons. It is a very simple premise but it tends to be forgotten. If there are communally owned recourses then they will be used inefficiently.
I decided to test this by setting up a large communal farm. In minecraft in order to farm you find seeds(they are easy to find) and plant them on irrigated land(takes a little longer to make) and then wait(this takes a long time and not all plants grow equally). Plants ready for harvest are easy to distinguish from ones that need more time. Harvesting a plant that is ready yields wheat(which can make food necessary to survive in the game) while harvesting a plant that is not ready yields a seed.
I set up my farm with many signs telling people they were free to help themselves. When I would check back on my farm all of the plants would be harvested. The players that did this got very little out of harvesting plants that were not ready and the community could have done better overall if they had left the "unripened" plants.
This is why private ownership is so important for optimal use of resources. A private owner will try to maximize the benifit off of the things they own. If people share ownership they will take more than they need for fear of others doing the same. There is no incentive to conserve recourses.
Sunday, March 18, 2012
Currency Wars
In election season candidates make a lot of promises(duh). With China's economic rise it has become popular to outline a plan to compete. These plans usually involve "bringing back American manufacturing" as the path to prosperity. This sounds really good to blue collar workers, many of which face a bad job market. Another popular promise is to maintain a strong dollar. This is popular with the middle class who want to have purchasing power. The fact is however, that these goals are opposed to each other.
Purchasing power refers to the value of a currency relative to another. This can best be seen through exchange rates. When a country with a low exchange rate exports a product to a country with a higher one then the product is cheaper for the importer because it cost less to make. This is why countries with strong currencies (i.e. US, UK and Eurozone nations) import so much.
An example with numbers helps to make this clearer.
Imagine a world with two countries Skyrim and Hyrule (to use a nerdy example) with currencies septims and Rupees respectively. Lets give them an exchange rate of 3 rupee to 1 septim. Hyrule's main export is milk and they pay their farm workers an average wage of 10 rupees a day. One can make ten bottles of milk a day. Because of the prosperity in Skyrim they are willing to pay 1 septim for a bottle of milk(a better price than they would get from local farmers). When the money gets back to Hyrule the product of one workers day is worth 30 rupees. The surplus of this can be used to pay management, increase wages or be reinvested by owners. This should serve to illustrate why it a weak currency favors exporting.
China has gone to great lengths to keep their currency weak(this is often branded as "currency manipulation" by politicians) in order to have strong manufacturing.. America tries to keep its currency strong to allow for us to import. This symbiotic relationship is often called Chimerica. This relationship has benefited both nations but it has benefited China more. The question is how long this can last. With a growing middle class China may face pressure to strengthen their currency.
The claims by the republican candidates as well as Obama that they will restore American manufacturing while still giving the middle class the good exchange rate they want is pure pandering. Without a weak currency the US would have to increase manufacturing productivity enough to compensate(an unlikely prospect)
Purchasing power refers to the value of a currency relative to another. This can best be seen through exchange rates. When a country with a low exchange rate exports a product to a country with a higher one then the product is cheaper for the importer because it cost less to make. This is why countries with strong currencies (i.e. US, UK and Eurozone nations) import so much.
An example with numbers helps to make this clearer.
Imagine a world with two countries Skyrim and Hyrule (to use a nerdy example) with currencies septims and Rupees respectively. Lets give them an exchange rate of 3 rupee to 1 septim. Hyrule's main export is milk and they pay their farm workers an average wage of 10 rupees a day. One can make ten bottles of milk a day. Because of the prosperity in Skyrim they are willing to pay 1 septim for a bottle of milk(a better price than they would get from local farmers). When the money gets back to Hyrule the product of one workers day is worth 30 rupees. The surplus of this can be used to pay management, increase wages or be reinvested by owners. This should serve to illustrate why it a weak currency favors exporting.
China has gone to great lengths to keep their currency weak(this is often branded as "currency manipulation" by politicians) in order to have strong manufacturing.. America tries to keep its currency strong to allow for us to import. This symbiotic relationship is often called Chimerica. This relationship has benefited both nations but it has benefited China more. The question is how long this can last. With a growing middle class China may face pressure to strengthen their currency.
The claims by the republican candidates as well as Obama that they will restore American manufacturing while still giving the middle class the good exchange rate they want is pure pandering. Without a weak currency the US would have to increase manufacturing productivity enough to compensate(an unlikely prospect)
Tuesday, March 13, 2012
An Idea for Smarter Quantitative Easing
The Federal Reserve seems committed to their current low interest rate policy. In their recent press conference a graph showed the members of the board of Governors as well as regional directors predictions on where interest rates would be for the next few years. Almost all of the members predicted low rates for 2012 and 2013 with the numbers dropping off after that(i am inclined to believe these predictions since they are the ones who get to control the rates). When questioned by a reporter as to whether a new round of quantitative easing would be used to maintain these rates Ben Bernanke left the option on the table.
Now we can all argue till we are blue in the face as to whether this is a good idea or not, but judging by the board's opinions more cash will be coming the economies way soon. I just think they should go about it differently than they have been.
The Fed began paying interest on excess reserves in late 2006. This means that any money over the legally required ratio to deposits gets paid interest(the required also get interest but at a lower rate). They are doing this to better control inflation, which without this interest could go out of control. However, they are sacrificing a slower inflation over a long period in order to keep rapid inflation at bay. Despite this the money is still there and at some point people will have to deal with it. This is where there is an opportunity.
Quantitative easing is normally accomplished by buying financial assets (bonds etc.) in order to expand the money supply. Instead of delaying inflation the Fed should lower the interest on excess reserves. This would allow a monetary expansion while helping lessen the inevitable inflation.
p.s. I'll admit that this might be difficult to be accurate with so it would probably have to be done incrementally.
Fed announcement http://www.federalreserve.gov/newsevents/press/monetary/20081006a.htm
Now we can all argue till we are blue in the face as to whether this is a good idea or not, but judging by the board's opinions more cash will be coming the economies way soon. I just think they should go about it differently than they have been.
The Fed began paying interest on excess reserves in late 2006. This means that any money over the legally required ratio to deposits gets paid interest(the required also get interest but at a lower rate). They are doing this to better control inflation, which without this interest could go out of control. However, they are sacrificing a slower inflation over a long period in order to keep rapid inflation at bay. Despite this the money is still there and at some point people will have to deal with it. This is where there is an opportunity.
Quantitative easing is normally accomplished by buying financial assets (bonds etc.) in order to expand the money supply. Instead of delaying inflation the Fed should lower the interest on excess reserves. This would allow a monetary expansion while helping lessen the inevitable inflation.
p.s. I'll admit that this might be difficult to be accurate with so it would probably have to be done incrementally.
Fed announcement http://www.federalreserve.gov/newsevents/press/monetary/20081006a.htm
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