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    Preventing a ‘Flash Crash’

    Aug 21 • Businesses, International Trade and Finance, Regulation • 328 Views

    Do you remember the ‘flash crash‘? On Thursday, May 6, for close to 20 minutes, markets everywhere wildly fluctuated.  It began at 2:23 when certain stock prices started moving oddly. With Apple trading at approximately $250 a share, at 2:44, the stock plunged $23 while at another moment one share was selling for $100,000. At 2:47, Accenture PLC shares dove to 1 cent from $40 a share. During that day, the Dow Jones Industrial Average opened at 10,862, dropped to 9869.62, and then closed at 10,520. Some say it felt like a roller coaster.

    Financial markets are not supposed to feel like roller coasters. Instead, at the NY Stock Exchange, for example, different “specialists” oversee the buying and selling of different firms’ stocks. Historically, the specialists’ job was to maintain an “orderly market” by buying or selling the stocks themselves when price was not gradually moving up or down. So, if everyone wanted to sell a stock and there was no one to buy it, the specialist (in theory) stepped in to buy it temporarily so that price could change smoothly. 

    Now though, with computerized trading, worldwide markets selling the same companies’ stocks and bonds, and a group of firms called “quants‘ that speed trade based on complex computer models, it appears to be impossible for one group to maintain an orderly market. Yes, much of the time, markets tend toward rational ups and downs. However, during the ‘flash crash’, they did not.

    The Economic Lesson

    Why should we care?

    Accenture says it all. If one stock, for no apparent reason, can drop from $40 to 1 cent in seconds, then investors will be less willing to allocate their savings to stocks. However, our market economy needs dependable financial markets for savers and businesses. We need to invest in order to save for college, for retirement, for emergencies. Correspondingly, businesses need investors’ money as start-ups, when they expand, and for everyday operations.

    Knowing that the continued possibility of a ‘flash crash’ diminishes investor confidence, a final report from the SEC and Commodities Futures Trading Commission should be completed during the next several months.

    Please note that for Accenture PLC and other firms that experienced an erratic stock fluctation on May 6, those trades were canceled.


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    The World’s Biggest Economies

    Aug 20 • Developing Economies, International Trade and Finance, Macroeconomic Measurement • 244 Views

    The Chinese leader Deng Xiaoping said, “It doesn’t matter what color a cat is as long as it catches mice.” Explained in the Teaching Company’s “Why Economies Rise or Fall,” Deng cared about results more than economic ideology as he propelled the Chinese economy toward capitalism.

    Through Deng’s leadership, China allowed farmers to keep and sell excess crops, productivity swiftly rose, and agricultural markets evolved. Then, as infrastructure emerged to connect these markets with factories, and education and technology developed, “Made in China” became a household term in the U.S. Throw in currency control, low wages, and you get a country whose economy is now #2 in the world.

    Ranked by GDP, the U.S is #1 (close to $15 trillion), China is #2 (close to $5 trillion), and Japan is #3 (close to $5 trillion but less than China). Completing a list of the top 10, then we have Germany, France, the U.K., Italy, Brazil, Canada, and Russia.

    If China continues to grow at a 10% rate while the U.S. growth rate remains close to 3%, then China will be #1 in 2 to 3 decades. However, the Chinese per capita GDP and average standard of living will still be far behind most of the world’s largest economies.

    The Economic Lesson

    It can be tough to compare economies. Even if GDP comparisons use the same components (consumer spending, business investment, government spending, and exports minus imports), still we have to remember that purchasing power differs. Also, we can use per capita (per person) comparisons and other indiviudal standard of living yardsticks.

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    Unopened Stimulus Packages

    Aug 19 • Economic History, Economic Thinkers, Government • 254 Views

    Economists recently have been debating whether the $787 billion 2009 stimulus package has helped the economy. Perhaps first they should ask what has been spent.

    For a variety of reasons, recipients of stimulus money are not spending it. Dollars destined for energy efficiency in Detroit have barely been used.  Worried that next year they might not be able to afford teachers hired with stimulus money, school districts in NJ, Texas, NYC, and CA have said that they are not spending it. Other places have just not figured out what to do with their money.

    Responding to criticism about slow spending, the Obama Admnistration points out that the stimulus package had 3 sections. They say that: 1) $360 billion in tax breaks and other help for businesses and individuals has been paid out. 2) The $296 billion that targeted unemployment assistance, food stamps, and other aid programs has mostly been spent. 3) $170 billion meant for infrastructure projects has not been spent while $66 billion has.

    You might want to look at the Obama administration’s stimulus website to identify local projects. Have you seen any spending near your home?

    The Economic Lesson

    Fiscal policy includes government spending, taxing, and borrowing. During the 1930s Great Depression, President Roosevelt and the Congress used fiscal policy to try to stimulate economic growth and to create jobs through the TVA and other government funded projects.



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    A Little Sunshine at General Motors

    Aug 18 • Businesses, Developing Economies, International Trade and Finance • 248 Views

    A question: How are a little Sunshine and the U.S. taxpayer similar?

    The answer: Both are helping General Motors grow.

    The Wuling Sunshine is the most popular car in China. Manufactured by General Motors with 2 Chinese partners, it is a no frills minivan that sells for as low as $4,500. With AC a $366 extra, thinner bumpers, no airbags, a top speed of 80 mph, and lots of hard plastic and plastic liner, the Wuling Sunshine is what the rural Chinese small business person is willing and able to pay for. As the most popular car in China, it is a profitable low cost prototype that General Motors plans to replicate in India and beyond.

    The Economic Lesson

    While the global reach of U.S. multinational corporations extends around the world, so, too, do the activities of foreign multinationals. Called foreign direct investment (FDI), in China, General Motors has 10 joint ventures, 10 assembly plants (11 in U.S.), and 32,000 employees (77,000 in U.S.).

    In 2005, the latest year for which we have detailed data, 5.5. million Americans were employed by foreign firms doing business in the U.S. Led by the UK (think BP), other firms with a major U.S. presence are Japan (autos, for example), Canada (banking and finance), the Dutch (oil), Germans (media), and the French.

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    Utilities Included

    Aug 17 • Demand, Supply, and Markets, Economic Thinkers, Environment, Households, Thinking Economically • 296 Views

    In NYC, there are 250,000 housing units that use more electricity than most others. The reason? Buildings without meters for each apartment have leases that say “utilities included”. So, whether tenants use more or less power, the rent is the same.  Consequently, they perceive that their electrical consumption is “free”.

    What happens when we think something has little or no cost? We tend to use more of it.

    Elinor Ostrom, winner of the Nobel Prize in economics wrote about how people abuse a good that appears free because it is owned by all of us. Called the tragedy of the commons, for a pasture, we overgraze our cows. For a workplace refrigerator, we create a mess. Factories tend to pollute more when there is no cost. Parking is tough to find when no one has to pay for a space. Dr. Ostrom believed though, that when people care about their common pasture or refrigerator or air, they can willingly formulate a solution together.

    The Economic Lesson

    With price as the y-axis and quantity as the x-axis, a demand curve is downward sloping. Lower prices make us willing and able to purchase more of an item. With a lower price, the item requires less sacrifice and we have more to spend elsewhere.

    According to British economist Arthur Pigou (1877-1959), the tragedy of the commons can be solved with a fee or tax that makes an overused commodity more expensive. For those NYC overusers of electricity, individual meters that connect cost to usage would eliminate the extra expense to landlords and diminish the ease with which additional greenhouse gases can be created.

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