• 15496_canningSmall

    Big and Little Worries

    Feb 27 • Thinking Economically • 305 Views

    1.  Sovereign debt: Contemplating big worries, I could place sovereign debt at the top of the the list. Should we currently be concerned about Greece, Spain and other EU nations with excessive obligations?  Beyond, should we be focusing on the U.K. and the U.S.? Referring to the U.S. stimulus, one article quotes Lois Lane saying, in flight, to Superman, “If you’ve got me, who’s got you?”
    2.  State and local debt: Within the United States, are state and local obligations unmanageable or, will the pressure to cut costs be therapeutic?
    3.  Exit strategy: Should the Fed’s exit strategy make you lose sleep?  Is there a productive way for the Fed to diminish the portfolio it gathered when it was flooding financial intermediaries with cash through quantitative easing?
    4.  Inflation: Perhaps, instead, inflation looms large as the next big worry.  Having deployed a massive stimulus, will inflation hit us on the rebound?
    5.  Housing:  Housing also might make us pause.  When the Fed stops buying mortgage backed securities, will potential liquidity for new construction evaporate?
    6.  Iran: Or, should we just think about Iran and the possibility that oil prices will soar if there is an attack on their nuclear facilities.
    7.  China: Maybe though, China is the big worry. Will they continue purchasing our debt?
    And finally, a small worry…
    Will I ever again buy tomato sauce??

    The Economic Life
    While people repeatedly say, “This time is different,” it never is.  The market system will always be subject to business cycles.  With GDP relatively high, it will hit a peak.  Next a contraction will unfold, then a trough, and finally the new expansion.  From Adam Smith onward, these cycles have recurred.  Returning to our worry list, I suggest optimism. 

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  • 15498_captchaFunky

    Default Records

    Feb 26 • Economic History, Economic Thinkers, Financial Markets, Government, Thinking Economically • 277 Views

    Seeing current concerns about the money owed by Greece, I wondered about her past record.  Until 1932, it was not good.  The first report of Greece defaulting on her debt was during the fourth century B.C.  At the time, ten Greek municipalities defaulted on their debt to the Delos Temple. More recently,  Greece defaulted five times: 1826, 1843, 1860, 1893, 1932.

    Even worse, Spain holds a “default record” with seven nineteenth century defaults after having six defaults during previous centuries.

    These default records led me to wonder why investors still buy these securities. I found the answer by looking at the actual and potential returns which sometimes are more lucrative than more secure securities.

    The Economic Life

    Alexander Hamilton surely knew about sovereign debt defaults and wanted to avoid them. Reading about his plan to fund and refinance the United States’ revolutionary war debt reveals his commitment to establishing our good credit.  His approach was varied, including issuing new bonds to pay for those outstanding and servicing the interest promptly on the foreign debt.  It worked.  Even those in Holland, then the financial capital of the world, displayed confidence in our public credit. Adhering to the Hamiltonian philosophy, the United States has never defaulted on its debt.

    Sovereign debt: government debt;  money owed (or guaranteed) by a country to investors who purchase its bonds.


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  • 15490_peachSmall

    Micro Matters

    Feb 25 • Thinking Economically • 298 Views

    Listening to recent podcasts on Haiti from NPR’s Planet Money,  I started thinking about the large impact that something very little can have.
    The first story involved a small loan through which a Haitian woman had created a “consignment” business.  With $5000 Haitian dollars ($600 US) of micro credit, she purchased items at the Dominican Republic border.  Then, transporting the goods by bus, she brought them to Haitian shopkeepers. Fifteen days later, the shopkeepers paid her. Until the earthquake destroyed her customers’ inventory, her business was successful.
    The second story was about the difference a small plastic crate could make.  If Haiti produced more mangoes, the U.S. would buy them.  Haiti’s mango growers are small farmers, each with three or four trees.  If a farmer piles mangoes outdoors and it rains, the fruit gets damaged.  If the ride from the farm is too bumpy, more damage.  Because of damage, forty percent of Haiti’s mango crop is unusable.  Not as simple as it sounds, the solution is to put the mangoes in crates.

    The Economic Life

    Muhammad Yunus and the bank he founded won the Nobel Peace Prize in 2006.  An economics professor and a Bangladeshi banker, Dr. Yunus developed the concept of microcredit.

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  • 15488_snowSM

    Snow Storm Stats

    Feb 24 • Thinking Economically • 315 Views

    According to Floyd Norris, snowy weather can affect job numbers. He explained that while the February employment report appears to represent the month of February, actually, it reflects one week in February—a week with horrible weather. Between February seven and thirteen, the East Coast was hit by blizzards so severe that they shut down Washington, D.C. For that week, fewer people will report that they were working. And, that is the week on which the employment numbers will be based.

    Interestingly, Norris cited January, 1996 for a similar scenario. Then, because of the days affected by severe weather, the economy lost 206,000 jobs. At the time, no one was sure whether it was weather or an impending recession.

    The Economic Life
    You can refer to the alphabet when describing your economic prediction. A “V”? You are an optimist. A “W”? Double dip as we experienced in 1980 and 1982. Or, are you a pessimist? Then select an “L”.

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  • 15486_greekCoinSM

    California and Greece

    Feb 23 • Thinking Economically • 273 Views

    An SAT question:
    California: US = Greece: EU.

    California and Greece are similar because…
    1. California and Greece have debt problems.
    2. Both have government employees with salaries and massive pension liabilities that they have to cover.
    3. Both would benefit from a central authority guaranteeing any future borrowing.

    When California asked the Obama administration for guarantees in order to borrow more money, they said no. As a result, last July, California had to issue IOUs temporarily to pay some of its obligations.

    Similarly, Greece would benefit from financial assistance. Most expect Greece will receive support from other EU countries.

    Saying that, “we already share: our Mediterranean climate, our spectacular wines and our Austrian-born governor,” the LA Times suggested that California try to join the EU.

    The Economic Life
    The dilemma is timeless. The questions are the same. How can we enforce central monetary power when fiscal authority is decentralized?

    In 1787, functioning under the Articles of Confederation, we had thirteen states with individual currencies and governments and taxing authority. If a state wanted to borrow more than it could afford, no one could stop it. If a state did not want to collect its federal taxes, no one could make them. If they did not want to contribute to payments on the national debt (from the Revolutionary War) they did not have to. And yet, the actions of individual states affected everyone else. Believing we needed a stronger central government, Alexander Hamilton and others like him convened a constitutional convention during a very hot summer in Philadelphia. We wound up with our Constitution and a powerful central government.
    Now when California has a major debt problem, central monetary and fiscal power can be used. As a result, on an SAT, while we probably should not equate California and Greece, the issues are similar.

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