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    Yuan or Yen

    Mar 27 • Demand, Supply, and Markets, International Trade and Finance • 198 Views

    Harvard professor Niall Ferguson, called China a currency manipulator in a recent interview. Next month, Treasury Secretary Tim Geithner will let us know if he agrees. The United States has not formally called China a currency manipulator since 1994.   

    According to a Planet Money podcast, this is why China could be called a currency manipulator:

    1) A U.S. business buys Chinese made goods. 2) The U.S. business pays for its purchase in dollars. 3) Needing yuan and not dollars, the Chinese factory uses its dollars to demand yuan at a local bank. 4) Here is the tricky part. Lots of quantity demanded for yuan should shove its price up.  But it does not. Why? Because the Chinese government adds to the yuan supply which shifts the supply curve downward and maintains the price of the yuan. China’s intervention could be called currency manipulation.

    Next question.  Why should we care?  We care because when a currency is too cheap, world demand for that nation’s goods soars and production elsewhere suffers.  If left alone, though, currencies self-correct. As quantity demanded increases for a cheap currency, it becomes more expensive. Soon, people buy fewer goods from that country and more from other nations whose goods become relatively cheaper.  Like a seesaw, currency values go up and down, always equalizing as long as governments do not interfere.  

    The Economic Lesson

    How does money become more or less expensive? As always, it is all about demand and supply. Buyers want more goods and services that they buy for yuan or yen when they are cheap and less when they cost more.

    Yuan or yen?  If each fluctuated freely, it would depend on demand and supply.

     

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    The Tip of the Iceberg?

    Mar 26 • Government, Macroeconomic Measurement, Thinking Economically • 182 Views

    Growth or a safety net? Thinking at the margin, an increasing number of European policy makers are debating a change.

    The result is a classic economic dilemma. Unemployment and medical insurance, pensions, licensing protections, and job guarantees can each tug GDP downward if they are government mandated. Between 2000 and 2007, eurozone economic growth averaged a sluggish 1.7%. By contrast, though, millions of individuals lead better lives because of government support. Thinking at the margin, the tradeoff is more growth or a bigger safety net. Because of scarcity, we cannot have everything.

    Greece’s fiscal problems are a consequence of enlarging the safety net. One Chinese official is quoted as saying the Greek fiscal crisis is only “the tip of the iceberg.”  Implying that the choice has to be a smaller safety net, he believes that the spending problem extends far beyond Greece to the entire eurozone.  

    Interesting facts:  According the OEDC, average number of actual working hours in 2008:  US: 1792, Netherlands: 1389, France: 1542;  But why is Greece 2120? Korea exceeds all and has the least vacation time.

    The Economic Lesson

    Economically speaking, the definition of scarcity is limited quantities. Because there are limited quantities of the factors of production (land, labor, capital), whenever we allocate resources for one good or service, we have less to use elsewhere.  The only remedy is economic growth.

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    A New Fed?

    Mar 25 • Financial Markets, Money and Monetary Policy • 197 Views

    “Independent” is the first word that comes to mind when I think about the Federal Reserve. Overseeing the supply of money and credit, the Fed is supposed to be an independent Federal agency.

    I wonder how the following basics of the Dodd committee’s financial reform proposals will affect the Fed’s efficacy and structure.

    1. A financial consumer watchdog agency would become a unit of the Fed. Having some independence, its head would be appointed by the president and confirmed by the Senate. (Organizationally, how would a new independent agency function within the Fed?)

    2. The Fed would regulate the larger banks.  The FDIC and the OCC (Office of the Comptroller of the Currency) would regulate the smaller ones. (As a result, certain regional Fed banks could lose authority over most of the banks they now regulate.)

    3. The Fed (with the FDIC and the Treasury) would be involved in a liquidation process for large banks.

    4.  A new council to assess systemic risk would place high-risk non-bank firms under the Fed’s oversight.

    5.  The Fed would implement the policy of an inter-agency financial council chaired by the Treasury. (Is independent, non-partisan action feasible here.) 

    An interesting note: Dr. Bernanke hopes that the concept of a living will, written by each large financial institution, would be considered.

    The Economic Lesson

    Rather similar to the human circulatory system, healthy banks are a fundamental necessity because they pump the money and credit around our economy that we need to produce goods and services.

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    Costly Behavior

    Mar 24 • Economic Thinkers, Environment, Government • 243 Views

    Do you approve of Pigovian taxes?  These are taxes levied on seemingly undesirable behavior in order to compensate for their negative impact on society.

    soda tax: Among other municipalities, New York State and Philadelphia are proposing soda taxes.

    bag tax:  Implemented in Washington D.C. as of January 1, a five cents tax on plastic bags. 

    911 tax:  In Tracy, CA, if you call 911, it will cost you.  Some people are deciding that a cab is cheaper.

    elevated library late fees: In San Jose, CA  an overdue library book could cost you 50 cents a day.

    The Economic Lesson

    Pigovian taxes, named after economist Arthur Pigou (1877-1959), are based on the idea that undesirable behavior creates a cost for society. Therefore, a tax is essentially a “payback”  that offsets the cost and/or minimizes the behavior because it becomes more expensive.  The negative result is also called a negative externality.

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    Random Recession Notes

    Mar 23 • Businesses, Demand, Supply, and Markets, Macroeconomic Measurement • 181 Views

    The impact of a recession might not be entirely what we expect.

    A recent study from the University of Ottawa suggests that we sleep more during a recession. Canadians slept two hours and 34 minutes more per week.

    Hypothesizing that it makes people happier, a U.K. hairdresser saw a 67% “surge” in blond hair dye sales. 

    Daniel Gross believes that Americans, in what he quotes a sociologist as calling the “great reset”, want to be healthier.  As a result, they are buying more vitamins. 

    Rather interestingly, perhaps contradicting the healthy theory, Daniel Gross also points out in the same Slate article that McDonald’s sales rose during the recession.

    Finally, I heard during a podcast that because we vacation less during a recession, shark attacks have diminished.

    The Economic Lesson

    Does all of this take us back to demand, supply, and prices?  During a recession demand and supply shift, mostly downward, but not for everything. 

     

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