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    Translating the Fed

    Sep 23 • Money and Monetary Policy • 414 Views

    I just discovered the Slate Plain English tool. Still under development, its function is to transform unintelligible jargon into normal English. To see how it works, you might want to look at a Slate/Planet Money translation of Tuesday’s Federal Reserve statement.

    When you go to the Slate translator, just click on a Fed sentence and you will see it in everyday English. For example…

    From the Fed: “Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak.”

    From Slate: “Companies are buying more stuff, for now, but they’re not building new factories or offices.”

    The Economic Lesson

    Based in NYC, the Federal Open Market Committee (FOMC) is responsible for determining the Federal Reserve’s interest rate policy. Usually, they decide to boost economic activity by buying treasury and federal agency securities in financial markets and/or lowering the discount rate. (A good way to remember–boost and buy) If they want to sink economic activity because of excessive inflation, then they sell treasury and federal agency securities in financial markets and/or raise the discount rate. (sink and sell)

    The term for buying and selling treasury and federal agency securities is open market operations. One consistent goal of open market operations is a federal funds rate target– an interbank loan rate goal.

    Typically released on a Tuesday or Wednesday, at 2:15 after a Federal Open Market Committee (FOMC) meeting, a narrative of the Fed’s assessment of the economy and policy is publicized. The FOMC has scheduled 8 meetings for 2010.

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    Speculators, Thomas Jefferson, and President Obama

    Sep 22 • Demand, Supply, and Markets, Economic History, Financial Markets, Regulation • 801 Views

    Thomas Jefferson and President Obama had similar concerns about financial speculators. In 1790, Thomas Jefferson opposed funding the domestic part of the Revolutionary War debt if the financial speculators who bought bonds at a depressed price would benefit. Instead Jefferson hoped that the original buyers of the bonds would get some money even if they no longer owned them. Fast forward to this week’s town hall meeting. Referring to the depressed housing market, President Obama said, “And we think it’s very important that speculators…that they’re not getting help.”

    The similarity between Jefferson and Obama? Both wanted to be sure that when government acted, speculators would not profit.

    Alexander Hamilton’s response to Jefferson also relates to today. Hamilton believed that whoever legally purchased the Revolutionary War bonds, legally owned them, and could legally profit from them. He was not concerned with speculators.

    The Economic Lesson

    Many call the U.S economy a market system but a mixed economy would be more accurate. Together, the market system and the government guide economic activity. We could say that we have a continuum with government at one end and the market at the other. Since 1790, we have moved to the left and right along that continuum, continually debating the role of government.


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    It’s Official

    Sep 21 • Economic History, Macroeconomic Measurement • 501 Views

    We now know when the recession officially ended. But I still wonder whether we are moving along a “V”, a “U”, a “W” or an “L”.

    According to the National Bureau of Economic Research (NBER), the recession began during December, 2007 and ended June, 2009. 18 months, this recession was the longest since WW II. The 1973-75 and 1981-82 recessions lasted 16 months with the 1981-82 recession a part of a “W” which we could call a double dip. Lasting 8 months, the 2001 recession was the same length as the 1990-91 contraction.

    I thought it would be interesting to see the connection between (selected) recession years and politics. 1920: switch from incumbent Democrats to Republican Warren G. Harding; 1932: Herbert Hoover loses to Franklin Roosevelt; 1948: incumbent Harry Truman wins; 1980: Ronald Reagan beats Jimmy Carter; 1992 (after 1990-’91 recession): Bill Clinton defeats George H. W. Bush. (“It’s the economy, stupid.” was posted in Bill Clinton’s campaign headquarters as a reminder of their winning message.)

    The Economic Lesson

    The traditional definition of a recession is 2 consecutive quarters of a shrinking GDP. The NBER, though, uses additional variables such as “aggregate hours of work” and other production and employment data to identify the length of a recession. The 2001 recession, for example, did not have 2 consecutive quarterly GDP declines.

    The path of a business cycle moves through an expansion, peak, contraction, and trough. As a result, during December, 2007, we experienced the peak of the previous business cycle and the beginning of a contraction. We now know that the trough, the very bottom of the current cycle, took place during June, 2009. Since then, we have been expandng. With a sluggish expansion, I guess we can eliminate the “V”.  

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  • Opportunity Cost and the Sunday Papers

    Sep 20 • Businesses, Environment, Regulation, Thinking Economically • 368 Views

    Articles in the Sunday papers may not have referred to opportunity cost but it was everywhere.

    Do you agree that judges should know the dollar cost of a prison sentence? Is it good or bad that dishwasher detergents have become less effective because of environmental legislation? Should climate change be left to Congress or the courts? Does it matter that the FDA will not tell us at food counters that salmon has been genetically modified?  You could use opportunity cost analysis to decide.

    The Economic Lesson

    The opportunity cost of a decision is the next best alternative that was sacrificed. Doing opportunity cost analyis involves looking at the benefits of the decision and the benefits of the sacrificed alternative. Only then can we really know whether we are willing to do without the benefits of what we decided not to do.


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    The Afghan Votes Market

    Sep 19 • Demand, Supply, and Markets, Developing Economies • 387 Views

    In Kunduz Province, the price of a vote was $15 while in Kandahar, it was closer to $1.  Do we have a market?

    Just like shoes or shirts, it appears that the price of an Afghan vote was determined by demand and supply. For the Afghan election, according to the NY Times, the 2500 candidates were the buyers. The sellers were the voters. The price–the point where quantity demanded and quantity supplied intersected–varied. The average income of the local voting population influenced the supply curve.

    As a consistent reader of marginalrevolution.com, I was reminded of their “markets in everything” link that appears occasionally. In addition to citing Afghan votes, they have also linked to “nothing” having a price on eBay, and a proposed market in high speed driving in Nevada.

    The Economics Lesson

    Through a demand and supply graph with price the Y-axis, quantity the X-axis, a downward sloping demand curve, and an upward sloping supply curve, we can picture the price of an Afghan vote. A supply schedule would list all of the different prices that voters were willing and able to accept. On the demand side, the amounts that candidates were willing and able to spend would be listed. Hypothetically speaking, the graphs would differ from one locale to another.

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