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    Greek Haircuts

    Jul 6 • Economic Debates, Economic History, Financial Markets, Government, International Trade and Finance • 506 Views

    When people talk about haircuts and Greece, they are no longer referring to the female beauticians that retired at 50 with a generous state pension because their work was “arduous.” Instead, they are discussing the losses, known on Wall Street as “haircuts,” that Greek bondholders might be force to take.

    A WSJ column presents 3 default alternatives and 4 key issues.

    Default Alternatives:

    1. Selective default: Some bond payments are postponed while others are paid on time.
    2. Organized default: All bondholders take a “haircut” within a predetermined plan.
    3. Disorganized failure: All bondholders take a “haircut” but there is no predetermined structure.

    Key Issues

    1. Greek financial obligations: Greece still is living beyond its means. If it defaults, how will it pay wages and provide public services?
    2. Greek banks: Greek’s banks own a lot of Greek bonds. A default would threaten Greece’s entire banking system. (This FT column is excellent.)
    3. European banks: Many euro zone banks that own Greek bonds have not yet recorded their true value on their balance sheets.
    4. Contagion: If Greece defaults, will investors, worried about risk, make borrowing much more expensive for Ireland, Portugal and other financially weaker euro zone countries?

    Saying that Greece has been rather forthright about its dire financial straits, NY Times financial journalist Floyd Norris characterizes the lenders who own Greek bonds as the group that is avoiding reality. Their policy? “Delay and pray” or “Extend and pretend.”

    Finally, an historical perspective from Harry Truman in 1947. “Should we fail to aid Greece and Turkey in this fateful hour, the effect will be far reaching to the West as well as the East. We must take immediate and resolute action.”

    And long before 1947: The first of many times that Greece defaulted on her debt was during the 4th century B.C.

    The Economic Lesson

    A bond is an IOU, a promise to repay a loan. The value of the bonds Greece has promised to repay is close to 155% of its GDP. Because GDP represents the value of goods and services that the Greek economy produces during 1 year, comparing the 2 provides an idea of whether they are living beyond their means.

    An Economic Question: The Greek government plays an active role in the economic life of its country through the salaries and entitlements it pays and the businesses it owns. Do you believe in considerable or minimal government economic intervention?

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    A Mongolian Cosmo?

    Jul 5 • Businesses, Demand, Supply, and Markets, Developing Economies, Government, Households, International Trade and Finance, Labor • 511 Views

    Selling for 7,000 tugriks, the Mongolian edition of Cosmopolitan has arrived in Ulan Bator.  Stephen Colbert tells us that, “With their Cosmopolitan subscriptions, Mongolian women get half off the newsstand price, plus a free goat bladder phone.” (You can watch the entire clip here.)

    Although per capita income is close to $2,000 and the ratio of livestock to people is 16 to 1, Mongolian women can shop at Louis Vuitton, Hugo Boss, Burberry and Emporio Armani at their new Ulan Bator luxury mall.

    Why Mongolia?

    It is all about copper, gold, coal and uranium. Home of massive mineral deposits, Mongolian wealth has begun to soar. With foreign investment from the Australian-British corporation, Rio Tinto and Canadian based, Ivanhoe Mines, the Mongolian government has received $1/2 billion in taxes and fees.

    Other Mongolian facts: GE has begin selling MRI equipment to Mongolian hospitals. Education? 98% literacy rate. Ease of doing business? The World Bank gives it #73 out of 183 countries. A stock market? The London Stock Exchange is managing the Mongolian Stock Exchange.

    The Economic Lesson

    Previously known for its nomads and high quality cashmere, now, the Mongolian economy is changing. The world wants Mongolia’s resources. In response, how will the Mongolian economy evolve?

    U.S. economic development unfolded during 2 centuries.

    It was fueled by:

    1. agriculture (early 19th century),
    2. capital formation (later 19th century),
    3. consumer goods 1st half 20th century)
    4. services (contemporary)

    An Economic Question: As a Mongolian political leader, how would you manage the emergence of Mongolia’s economy?

     

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  • Celebrating Economic Independence

    Jul 4 • Demand, Supply, and Markets, Developing Economies, Economic History, Economic Thinkers, Financial Markets, Government, Macroeconomic Measurement • 431 Views

    Alexander Hamilton must have been worried. In 1790, as Secretary of the Treasury, a troubled economy had become his responsibility. He had a huge federal debt to fund, a banking sector that was distressed, and manufacturing to stimulate.

    Sound familiar?

    Hamilton submitted a 3-part report to the Congress for their approval. Focusing on public credit, creating a national bank, and encouraging manufactures, he had a plan for economic independence.

    Public credit was crucial. Created by the Revolutionary War, the debt was primarily owed abroad. He had to reassure our European creditors that they would get all of the money that was due them. By funding the war debt, he would establish our good credit, a requisite, he believed for sound finance.

    Hamilton understood that economic independence actually related to being dependable within a network of interdependence. The Congress and President Washington followed his lead, implemented his ideas, and the rest is history. The U.S. has never defaulted on a loan.

    On this July 4, as we celebrate political and economic independence, let’s applaud Alexander Hamilton, the father of our economy.

    The Economic Lesson

    Sovereign debt is created when a nation sells bonds. Because banks typically purchase these bonds (governments, households and businesses buy them also), the health of the banking sector can be tied to the bonds that banks own.

     

    An Economic Question: Keeping in mind Greece’s long history of defaulting on its sovereign debt, why would German and French banks want a Greek bailout?  

     

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  • The Sugary Beverage Debate

    Coke and Pepsi

    Jul 3 • Businesses, Demand, Supply, and Markets, Regulation • 1854 Views

    Pepsi has discovered that “fun for you” (chips and soda) increases revenue more than “good for you” (oatmeal, fruit juice, Gatorade). According to the WSJ, with Pepsi losing market share to Coke, they will focus more advertising dollars on “fun for you.” During 2010, Coke’s soda advertising cost close to $253 million while Pepsi spent almost $154 million.

    The WSJ tells us that Pepsi’s CEO, Indra Nooyi cares about “good for you” and believes the consumer wants healthier products. Add to this soda taxes in most states that are supposed to encourage us to eat healthier foods. Or, new federal calorie labeling requisites. Or soaring obesity and diabetes numbers. Bloomberg Radio recently reported that big-and-tall men’s sizes are now being emphasized more by clothing retailers.  What to do?

    Coke has 42% of the beverage market, Pepsi, 29.3%, and Dr. Pepper Snapple, 16.7%.

    The Economic Lesson

    Duopoly. When 2 large firms dominate a market with close to 80% of all sales, we can call them a duopoly. One economist has suggested that when deciding whether a duopoly is harmful to consumers and rivals, we should consider innovation, prices and profits.

    Some current and past duopolies:

    • Fedex and UPS
    • Coke and Pepsi
    • Home Depot and Lowes
    • Kodak and Fuji Film
    • Gillette and Wilkinson Sword

    An Economic Question: As a duopoly, do Coke and Pepsi have too much power? Explain.

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    “Made in the USA”

    Jul 2 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic Thinkers, International Trade and Finance, Labor, Macroeconomic Measurement • 657 Views

    According to USA Today, “The two ‘most American’ cars are Japanese.”

    Cars.com has an American-Made Index. Ranking vehicles by sales, where they are made, and the origin of their parts, they concluded that the Toyota Camry is the most American car you can buy while #2 is the Honda Accord. Each is composed of 80% American parts, and with plants in Kentucky and Indiana (Camry), and Ohio and Alabama (Accord), they create jobs for many Americans because their sales are substantial.

    By contrast, it is likely that the full size Ford pick-up you drive was assembled here but primarily has foreign parts.  And your Chrysler minivan, Chevy Camaro, and Ford Fusion were assembled in Canada or Mexico.

    Where am I going? To the Bay Bridge. Connecting San Francisco and Oakland, the bridge was described as a structure that would be “made-in-China.” But, according to the web site of one of its primary contractors, a U.S. based construction firm, while the steel is sourced in China, the new bridge actually has Asian, European, U.S. origins. Still, many of the reader comments after the article expressed disapproval of the Chinese connection. To save jobs, they sought a “made-in-the-USA” bridge.

    At the end of a 2002 report from the Dallas Federal Reserve Bank called “The Fruits of Free Trade,” is a chart that conveys the cost of policies that save domestic jobs. For apparel and textiles, 168,786 jobs are saved. The cost though, is $33,629,000,000 or $199,241 per job. Why is the cost so high? Because consumers are paying more when there is no competition.

    The Economic Lesson

    David Ricardo (1772-1823) stated the classic defense of free trade when he expressed the principle of comparative advantage. Trade, trade, trade, he said because each nation then can do what it does best (where it has the comparative advantage) and the whole world benefits through greater efficiency.

    An Economic Question: What are the costs and benefits of NAFTA, the free trade agreement the U.S. has with Canada and Mexico?

     

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