• War and Money

    Mar 7 • Developing Economies, Money and Monetary Policy • 302 Views

    A ship carrying freshly printed Libyan currency was intercepted near the coast of Great Britain. Assuming that it would be used to fund the Gaddafi regime, the British seized the cash and stored it in a “secure location.”

    Like many nations, Libya outsources currency production. Making good currency is tough. Just keeping up with constantly changing counterfeiting techniques involves precise skills in which firms like Crane in the U.S. and De La Rue in Great Britain specialize. According to World Bank rules, printers cannot produce money for individuals. The order has to come from a central bank that has registered with the World Bank.

    The Economic Lesson

    Typically new money is used to replace worn out currency. The life of a dollar bill, for example, is approximately 1.8 years.

    During the American Revolution, new money was used to pay the troops. With a military guard nearby, and a warning “not to leave his press exposed when absent from it,” Paul Revere assisted the American Revolutionary war effort by printing Continentals. Perhaps, though, Revere’s greatest regret was that he was paid with the money he made. The money issued under the authority of the Continental Congress soon was “not worth a continental.” So much had been issued that, in colonial terms, “A wagon-load of money will scarcely purchase a wagon-load of provisions.”

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    A Reason for 23 Courses

    Mar 6 • Thinking Economically • 311 Views

    At one Chicago restaurant, Alinea, a serving of steak would weigh 2 ounces or so. 5 or 6 bites and you are finished. But then, you would still have 22 other courses to consume.

    Asked why he serves so small an amount, Chef Grant Achatz said, “Diminishing returns.” Given a 12-ounce steak, diners start enthusiastically downing the first bite and the second. Then though, enjoyment wanes until they are eating robotically. By preventing the onset of diminishing returns, Achatz enables his patrons consistently to savor every morsel.

    You might enjoy hearing Grant Achatz interviewed here by NPR’s Terry Gross.

    The Economic Lesson 

    Typically describing the limitations of mass production, diminishing returns refers to less extra output. For example, on one acre of land, if, one by one, you add farmers and shovels, at first your productivity will increase. Eventually though, because of crowding, extra output drops and then disappears.

    More broadly applied, diminishing returns can also refer to the extra pleasure we get from repeatedly performing an activity. For pizza or steak, we love those first few bites. The 37th bite, though, provides much less extra, if any, joy. Our total pleasure goes up by less and less as we eat more and more.

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    From China to Iowa

    Mar 5 • Demand, Supply, and Markets, Developing Economies, Environment, Money and Monetary Policy, Thinking Economically • 323 Views

    We can travel very quickly from China to Iowa.

    In an excellent report from The Economist on feeding the world, you can see how an increasingly affluent Chinese urban consumer affects many of us. One example connects more Chinese meat consumption to soaring prices for corn, wheat, and soybeans because of a growing demand for animal feed.  

    This takes us to Iowa where the price of farmland is skyrocketing. With escalating worldwide crop prices, low interest rates, diminishing lending standards, and investors who say the only direction is up, the price of Iowa farmland is nearing a 1979 high.

    Covering issues that range from population, technology and water to land and climate, the February 24th issue of The Economist ideally discusses “How Much is Enough?” It also returns us to the Reverend Malthus who might be saying, “I share your concern.”

    The Economic Lesson

    Perhaps one of the first environmentalists, Reverend Thomas Malthus (1766-1834) told us in 1798 that population grows geometrically while resource production expands arithmetically. Consequently, resource prices will rise and supply will become increasingly inadequate.


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    Oil Dilemmas

    Mar 4 • Demand, Supply, and Markets, Environment, Households, Macroeconomic Measurement, Regulation, Thinking Economically • 354 Views

    The good news? We are driving more again–more miles than any year since 2007.

    The bad news? We are driving more again–more miles than any year since 2007..

    Here are the facts from a WSJ article.

    With the recession and higher gas prices, mileage dropped by 3.6%.

    But then, the recovery began, unemployment slightly decreased, and confidence built. The result? We drove more. More driving means more demand for gasoline that will contribute to escalating gas prices.

    The solution? 3 possibilities.

    1. Increase the federal gasoline tax. It has been 18.4 cents since 1993. A higher tax means less driving and less dependence on Middle East oil.

    2. Release extra oil from U.S. emergency fuel reserves. Extra oil means cheaper gas, more driving and sustained recovery.

    3. Do nothing.

    The Economic Lesson

    This is classic demand and supply. During 2007-2008, skyrocketing gas prices decreased quantity demanded, the recession (that began during December, 2007) shifted the demand curve to the left and equilibrium price dropped. Now, with demand reversing and Middle East concerns affecting (perceptions of) supply, the equilibrium gas price is rising.

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    What is Best For Growth?

    Mar 3 • Businesses, Economic Debates, Households, Macroeconomic Measurement, Regulation, Thinking Economically • 258 Views

    What if the Congress decides to slash spending by $60 billion right now? Prominent economists are again disagreeing.

    According to Stanford economist John Taylor, we would have a resurgence of business confidence, renewed investment spending and new jobs. Assured that taxes and regulation will not increase, businesses will expand.

    On the other hand, economist Mark Zandi (Moody’s Analytics) says that we will lose 700,000 jobs because of spending cuts. He is against “too much too soon.” Referring to “fiscal drag,” economist Alec Phillips (Goldman Sachs) cites the rippling impact of less federal spending that will retard GDP growth.

    Who is right?

    The Economic Lesson

    Looking back and looking forward, the economic debate about fiscal policy is a traditional one. Looking back at stimulus spending since 2008, opponents point out that the stimulus will not only ignite inflation but also was not really necessary. Meanwhile, advocates say we are much better off because of it. Looking forward they differ on how businesses and unemployment will respond.

    Also, we should not forget about monetary policy. A similar debate surrounds Dr. Bernanke’s QE2.

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