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    A Different Kind of Currency Crisis

    Dec 12 • Developing Economies, Money and Monetary Policy • 423 Views

    Our story begins with the United States announcing that it would be issuing a state-of-the-art new $100 bill. Designed to thwart counterfeiters, the new bill has 3-D interactive features. Move the bill and certain shapes and colors shift.

    The bill, though, has encountered a huge glitch that delayed its production. Because it creased on the assembly line, parts were blank. Not all were defective, but no one is sure how many. With more than one billion bills being printed, a manual check could take 20 years. The goal now is to develop a mechanized check-up system. Summarizing the situation, one official said, “There is something drastically wrong here.”

    A Planet Money podcast points out that anyone abroad who does not trust the local currency tends to hold US dollars. The chairman of the Fed, Ben Bernanke, said that, “We estimate that as many as two-thirds of all $100 notes circulate outside the United States.” The Fed, though, has a “missing currency” puzzle because they can approximate how much currency should be circulating but are not exactly sure of who has it.

    According to the Federal Reserve, $100 bills typically have an 8.5 year life span. Who then will be affected at home and abroad if worn out bills cannot be replaced?

    The Economic Lesson

    A dollar bill is just a rectangle made of cotton (3/4) and linen (1/4). However, we call it money because it has three basic characteristics. 1) It is a medium of exchange. 2) It is a unit of value. 3) It provides a store of value.

    Knowing that 100 U.S. dollars will consistently be worth close to 100 dollars makes U.S currency universally desirable.

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    Gas Prices

    Dec 11 • Environment, Households, Macroeconomic Measurement • 458 Views

    Have you been paying more for gas? Looking at this map, you can see that gas prices around the country have been rising in most places.

    Economist James Hamilton suggests that the price of gas is directly connected to the GDP. Citing the BEA breakdown of consumer spending, he points to 4% as a threshold. If consumer outlays on energy goods and services exceeds that 4% level of total spending, then the economy will “stumble.” The auto sector, he says, is especially vulnerable because SUVs and light trucks are again sales leaders.

    This takes us to a fundamental dilemma. Higher prices mean less energy consumption but they tug GDP growth downward. As this analyst states, “…the administration has to decide whether climate change is the most important matter at hand, in which case any energy-induced recession is worth the price; or whether the health of the economy is of paramount importance, and any climate policy must be subordinate to that.”

    Agreed? Or a third alternative?

    The Economic Lesson

    In a reader friendly (but lengthy at 70 pages) paper, “Reflections,” the Bureau of Labor Statistics (BLS), describes the changes in consumer spending during the past century. Looking at NYC and Boston, in 1901, a typical family earned $750 while by 2002-2003, that same family would have taken home $50,302. Adjusted for inflation, the increase was close to a 4.5 multiple. So, from $750 in 1901, a NYC family would have been earning, in real terms, $3023 annually in 2003. The report conveys great facts about consumers then and now.

     

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    A Unique Gift Idea

    Dec 10 • Government, Thinking Economically • 402 Views

    Would you like a bus stop named after you? In Chicago, you could do it.

    The message here is that naming opportunities have been created in order to raise money for municipalities. You could catch a train at an AT&T subway stop in Philadelphia. Or, you might visit the Nestle Juicy Juice State Park in Brooklyn. Near a newly renovated store in Chicago, Apple is negotiating ($3.9 million) for the name of a train stop. More traditionally, parks and schools are possibilities.

    Critics perfectly express where a slew of new names could take us. “The whole situation raises the frightening prospect in the near future that, instead of riding the Broad Street Subway to City Hall to Pattison, people will take the Coca-Cola Trolley from Pizza Hut to AT&T.”

    The Economic Lesson

    An economic lens takes us to opportunity cost when evaluating the proliferation of naming rights. On an opportunity cost chart, the alternative choices are, for example, The Broad Street Stop or the Pizza Hut Stop. The benefit of Broad Street is locational information. The benefit of the Pizza Hut name is municipal revenue. Which are you willing to sacrifice?

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    A Rule About Gold

    Dec 9 • Businesses, Demand, Supply, and Markets, Developing Economies, International Trade and Finance • 521 Views

    Yes, gold is a part of Dodd-Frank financial regulation but not exactly the way you would expect.

    Dodd-Frank says that businesses have to tell the SEC if the gold, tin, tantalum, and tungsten (the 3 Ts) in their supply chain provide income to rebels in eastern Congo. Because Tungsten is crucial for making cell phones vibrate, Best Buy Co., for example, could be affected. Other firms using the 3 Ts and gold include manufacturers and sellers of laptops, airplane parts, ballpoint pens, and jewelry.

    As explained by The Wall Street Journal, the law “aims to pressure companies to spurn so-called conflict minerals…” Firms avoiding conflict minerals can label products “DRC conflict free.”

    Your opinion?

    The Economic Lesson

    An economist could explain the impact of the new regulation. Step one would be to characterize the current price of conflict minerals as a market failure. Then, by increasing the cost of using them through additional regulation, firms are forced to recognize their “true” cost. On a demand/supply graph, the supply curve would shift leftward. 

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    How the Fed Helped Harley

    Dec 8 • Demand, Supply, and Markets, Financial Markets, Money and Monetary Policy • 408 Views

    Have you ever thought about how, every month or every week, businesses have money for paychecks? One answer is commercial paper.

    It is amazing that commercial paper is central to so much economic activity and few people have even heard of it. Simply defined, commercial paper is just a short-term IOU. Any institution that needs money for a brief time period can go to its investment banker and say, “I would like to sell my commercial paper.”

    So, if the Glove Company is low on revenue during the summer, instead of using its own money that it wants to keep, it can ask XYZ Bank to sell commercial paper to the bank’s clients. Now, everyone is happy. The Glove Company is pleased because it gets its payroll at an interest rate it can afford. The XYZ Bank is happy because it gets a fee for being a financial intermediary. And The Bathing Suit Company (with extra revenue), that bought the paper, is happy because it gets interest payments for a relatively secure investment.

    All was okay until the commercial paper market froze during 2008. Realizing the magnitude of the crisis, the Federal Reserve stepped in and bought the paper that banks were no longer selling. On December 1, because Dodd-Frank legislation said they had to, the Fed released data on the loans they provided when the financial crisis was at it peak.

    Harley Davidson, McDonald’s, Verizon and Toyota were among the firms that borrowed money from the Fed because they had no commericial paper market to use. The Wall Street Journal tells all here.

    The Economic Lesson

    A market is a process that enables the interaction of buyers and sellers to determine the price and quantity of a good or a service. During 2008, many financial markets stopped functioning because sellers did not want to expose their money to any risk.  For the commercial paper market, many business firms needed the money to continue functioning. The Federal Reserve decided it had to intervene and provide those loans.

    During 2008, the Fed, traditionally only the banker’s bank, did many things it had never done before. Some say that it temporarily became a bank for the world’s financial system.  The Fed also participated in the market for commercial paper.

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