Tag Archives: economy

Fisher equation and the paradox of bitcoin

There is no lack of comments about the significance of Bitcoin. Some treat Bitcoin as an apparent speculative fad, while others argue that Bitcoin could become as revolutionary to monetary system as email is to information system. Being bombarded by all kinds of assertive ideas and well-structured arguments, I think it is crucial to have one’s own stance on this issue. According to what I have learned about currency, bitcoin is losing its function as a transaction media and evolving into a speculative tool. If a currency is not transferable and become an speculative tool, sooner or later the use of this currency will die out.  Once the bubble burst, this super nova will step down from the stage of history .

Over the past three years, bitcoin’s price skyrocketed from a few cents in 2011 to a high of more than $1,100 in December 2013. As a electronic currency, bitcoin does not really need to posses any intrinsic value to be exchangeable. But the surge of price from a few cents to more than a thousands is evidence that people are not using bitcoin as a means to facilitate exchange. Rather, this surge of price could only be explained by speculative activity.

To illustrate my point using fisher equation, now imagine we are all citizen in a nation that use bitcoin as official currency, and the only goods being exchanged in the economy is U.S. dollar.Recall how the face value of a certain type of currency is determined. By fisher equation, we have:  M*V=P*Q

where:

M is the total bitcoin supply in the virtual nation

V is the number of times per year each bitcoin is spent (velocity of money),

P is the average price of all the good (i.e. U.S dollar) sold during the year, denoted in bitcoin, of course

Q is the quantity of goods (U.S. dollar) sold during the year.

supposed that we fixed M (this is realistic since the anonymous creator of the currency capped the number of total possible Bitcoins at 21 million). How will the price of our dollar change in response to change in  Q and V ?

Suppose now we have more dollar in the economy (or more dollar poured into the economy by some magical power, you could also see this as more people buying bitcoin using dollar from outside of the economy), then the quantity of dollar (Q) increased overtime. Holding other variables fixed, to make the equation balanced, we now have a smaller P.

Now suppose people preferred to hold the bitcoin in reserve than to frequently trade it for dollar, we now have smaller V.  We can see this as analogy to people in this virtual economy becoming less and less inclined to consume goods (dollar) that they “produced”. As V decreases, to make the equation balanced, we now have even more smaller P.

This is exactly what we see in reality. More and more people buy the fixed amount of bitcoin and hold it on reserve, waiting for appreciation of bitcoin rather than using it as a transaction media.  Therefore,  we see the price of dollar denoted in bitcoin become smaller and smaller, or put it another way, the price of bitcoin denoted in dollar become larger and larger.

This illustration is to support my argument that bitcoin is not used as a supplements to facilitate transaction, as it is originally intended for, but rather as an speculative assets.

The most important reason bitcoin become popular is because people believe it will replace traditional currency due to its merit of reducing transaction cost. But it is paradoxical to see that the bitcoin, while being valued for its merit of facilitating transaction, is gradually stepping out of circulation and ended up in investment portfolio. This paradox helps me explain my stance on bitcoin nature, a splendid castle-in-the-air that will gone with change sign of economy weather.

 

The Stimulus Bill 5 Years Later

After a speedy five years, the U.S. can finally look back at the $787 billion stimulus bill that was passed 246 to 183, with just 7 Democrats voting against it. Whether you think the bill has made a significant impact on our country or not, our country is still in a deep hole of debt with some serious losses that experts thought the bill would help turn around. However, we have seen a positive effect on our economy overall. Was the bill the true determinate that helped decrease the unemployment rate? Nevertheless, our government had a plan, and that was to bring back our economy, which I believe it truly has, to an extent.

“The goal at the heart of this plan is to create jobs. Not just any jobs, but jobs doing the work America needs done: repairing our infrastructure, modernizing our schools and hospitals, and promoting the clean, alternative energy sources that will help us finally declare independence from foreign oil,” President  Obama stated back in 2009.

The White House said on Monday that the law “saved or created an average of 1.6 million jobs a year for four years” and it raised the country’s GDP by between 2% and 3% from 2009 through mid-2011. “The spending ‘initiated’ 15,000 transportation projects and helped with the construction or improvement of nearly 6,000 miles of railway lines,” the Wall Street Journal mentions.

There have also been some major improvements in the stock market as well. We have seen record highs thanks to quantitative easing. Investors have ignored earnings because the Fed has been pumping the stimulus money into the market. But that is also something to look out for as we wait another year; if earnings don’t catch up, we are going to have a serious correction in the market.

The unemployment rate has been one of the major topics when looking back on the stimulus bill. The unemployment rate has dropped below 7% from a peak of 10% in October 2009, but that is also because so many people have stopped looking for work. Many Americans have still been asking “where are the jobs?” House Speaker John Boehner mentioned in a statement on Monday that “a new normal of slow growth has set in.”

Maybe we have seen as new normal of slow growth set in, which has been the main cause to our somewhat positive turnaround. But in retrospect, America went through a serious recession back in 2008. Something had to be done to help the country get back on its feet. Although the large stimulus bill may not have solved all the country’s problems, the economy has gotten back up on its feet.

The US to be No. 1 oil producer…still illegal to export it

Due to advances in technology, American companies have found ways to extract oil that was previously too expensive.  Due to these advances, it is predicted that the United States could become the world’s number one producer of oil by the year 2015.  However there is something holding back the US’s energy dominance, and that is an outdated law from a time when America was dependent on foreign oil and was desperately trying to conserve it.  This is no longer the case.  In order to encourage economic growth, employment, and stability the United States should reverse its policy on exporting petroleum.

There are three main reasons to remove the ban on exporting petroleum.   First, oil exports would increase net exports, raising the country’s GDP.  It translates into more of the money Americans (and the world) spend on gas coming to the US.  Second, the expansion in capacity would create jobs.  The most significant effects may be those on the price of oil.

There are two effects that lifting the ban could have.  One of those effects is to stabilize the price of oil.  The extraction shale oil on the United States oil imports has been evaluated in a recent report released by Fitch Ratings, reported by MarketWatch, as having a stabilizing effect on prices.  As stated in the report (taken from here):

“…all oil-consuming countries benefit from the stabilizing effect of increased U.S. output on world oil prices. This is the benefit of energy interdependence — the linkage of U.S. and world oil markets through reduced imports of crude and increased exports of products.”

This effect would only get stronger if the ban on exports is lifted.  It should be noted that the price most likely wouldn’t decrease significantly as a price of about $85-$90 a barrel is needed in order to make shale oil projects viable.  Price stability is still a welcome benefit for consumers.

There are those that are for keeping the ban in place however.  They believe that exporting oil harms America’s chance at energy independence, arguing that every barrel we export would have to some how have to be made up in imports.   This is not accurate, and it can be argued that exporting the oil is better then refining it ourselves since our refineries are not set up for the type of oil, and it would be better for our environment to have it refined else where.  The end result is still the same:  money flowing into America.  Who could be opposed to that?

The attacks on lifting the ban come from the refiners who currently make all the money from exporting the heavy oil that we have been importing.  While exporting petroleum is illegal, there is no such ban on the refined products.  Exporting oil cuts them out of the shale oil profits, but these are profits that they aren’t even prepared to take, since they aren’t set up to refine it anyway.  That is not a sufficient reason to continue to ban exports when America needs growth now.  The United States should lift the antiquated ban on oil exports in order to grow the economy and provide price stability to consumers and the world.

 

 

 

 

Recovery on hold with profits overseas

The United States’ recovery from the recession of 2008 has been painfully slow. It has been a period characterized by persistent unemployment that has weighed on the economy.  Companies are not adding the jobs they shed during the recession.  During this same period American companies have made healthy profits.  However, what modest growth there has been has not translated into jobs.  Below is the labor participation rate, which is a measure of what portion of the population is working.  The shaded areas are recessions, and coincide with drops in the participation rate.  The recoveries that follow show sharp increases in the rate.  After this most recent recession is clear that this recovery is different.

Civilian employment to population 16 years or older ratio.

 

One thing that is different now then in the past was that companies like Apple, Google, and Exxon Mobile weren’t  hoarding their profits overseas (an estimated 1.9 trillion as of May 2013). All this “cash on the sidelines” could stimulate the economy and create jobs if it was just put to use.

When multinational companies bring their profits back from over seas, the government takes what is called a repatriation tax. This tax rate is currently 35% of what ever is left after the company pays taxes in whatever country it earned them.  This is one of the highest in the world.  Since the money is taxed as soon as it is brought into the country, then there is going to be over a third less of it when it gets here.  Further eroding these mountains of cash is the debt that is taken out to do share buy backs and pay dividends to shareholders.  Investors want some of the profits if the company isn’t going to use them, and borrowing is cheaper then moving the money and paying taxes.  If the government is serious about stimulating the economy, it may have to get out of its own way.

The repatriation tax is preventing corporations from bring these profits back to the United States.   In order to stimulate the growth that the United States needs, the federal government should provide a tax holiday for corporations to bring their profits home.  This could amount to almost a trillion dollars returning to the United States.  Opponents to this may see it as only helping the rich; that there is not guarantee the companies won’t just pay lavish dividends to shareholders and boost their share price.  Some of that probably will happen, but at least those profits are being distributed, and most likely to a great deal of Americans.  With almost 2 trillion, companies will also invest some of the money in mergers and research for the future.  This is prosperity that has already been earned, it is just held back because no rationally operated company would pay a 35% tax unless it absolutely had to, they do owe that much to their shareholders. The federal government may hate the idea of letting that much money in with such a little slice going in its coffers, but how much of this cash do companies even need to bring back?

The United States government should provide corporations with the incentive they need to bring their profits back to the United States by providing a tax holiday for the profits they are currently keeping over seas.  They should also modify existing policies to make America competitive again with regard to corporate taxes.  It is only driving money away (IBM, Chrysler are examples). This money and these policies could be the missing ingredient for the United States recovery.  The wealth can’t trickle down through a border.

Will China’s Economy be Stable in 2014?

According to WSJ, China’s Inflation Rate Holds Steady, China’s inflation remained tepid in January. It surprised the public because CPI typically spikes around the Lunar New Year holiday, which fell at the end of January, but this year muted food prices helped to keep overall inflation modest. Meanwhile the producer-price index, which represents prices paid for finished goods at the factory gate, registered deflation for the 23rd consecutive month. The index fell 1.6% year-over-year after a 1.4% drop in December.

On the other hand, from Bloomberg China Said to Target 7.5% Export Growth in 2014: the Chinese government is targeting export growth of about 7.5 percent in 2014. The goal, based on the U.S. dollar value of sales, has been distributed to economy-related ministries and local governments to serve as an internal guideline for planning. Overseas shipments rose 7.9 percent in 2013, according to official data, as the government targeted 8 percent growth in exports and imports combined.

All those could be regarded as a sign of stable economy in China in 2014 because China is trying to maintain strong growth while rebalancing its economy. Due to years’ high speed growth rate, the Chinese economy mustn’t and can’t grow at the double digit rates we’re used to seeing. And in some regards slower growth is actually encouraging because it suggests that it’s moving to a more sustainable pace.

Also,Premier Li Keqiang said that Chinese economy and financial market will grow steadily in2014. For this, Li added, the government will maintain liquidity at a proper level, sustain the reasonable growth of monetary credit and social financing, as well as keep prices stable. We should have confidence in Chinese economy from all the information above.

However, there are still some concerns. A government-led investment boom has been a main factor driving China’s growth in recent years. Chinese banks, especially the big four state-owned lenders, lent record sums of money in the years after the global financial crisis in an attempt to sustain the country’s high growth rate. However, there have been concerns that part of that money has gone towards unproductive investments and that banks may not be able to recover those loans. There have been concerns over the rising levels of bad debt at Chinese banks. If they cannot, it could have a significant impact on growth, some analysts believe. (China economic growth rate stabilises at 7.7%There are also concerns over the growth of shadow banking – lending by non-banking companies – in the country. Critics have warned that shadow banking makes credit less transparent and poses a major risk to China’s economic growth.

Even though we are still not sure about the economy stability in China in 2014, we have confidence in the prediction. We hope China will finally gain a more healthier growth method in future.

 

Long-term unemployment a symptom of low growth

In her first meeting with congress as the charwomen of the FED, Janet Yellen made it clear that unemployment was a top priority.  Roughly 35% of the unemployed can be considered long term unemployed, which occurs when a person is jobless for 27 weeks or more.  This class type of unemployment is especially harmful, as research shows that the long term unemployed have a much harder time finding a job.  Being jobless for so long also takes a psychological toll on the individual and their families.  The FED made it clear that it will use more then the unemployment rate as a guide for its policies going forward, and turning the long termed unemployed into new hires should be their top of the considerations.

There are many economists that think the United States is experiencing an increased level of structural employment.  There is a great deal of evidence (like here and here) that this is not the case.  Before a solution can be found, we need to examine the problem of long-term unemployment.  The chief culprit can be found to be slow growth.  If a worker gets laid off and the economy doesn’t bounce back fast enough, taken with employers being tentative about hiring anyone due to uncertainty, a worker could very well be unemployed for 27 weeks or more.  Once someone has been unemployed that long, there is a stigma that works against them getting hired.  And while businesses say they are not hiring because applicants lack the proper skills, there is a lot of evidence that there is no skills gap.  While the picture looks bleak, the good news is that the unemployment is not structural, and the workers have the needed skills. What remains to be seen is what will be done to create the desperately needed growth.

In her remarks earlier this week, the chairwomen targeted unemployment as the sign that our recovery has a long way to go.  Even though she continues to follow the path laid out by the previous chairmen of less quantitative easing, She demonstrated in her first address to congress her ability to utilize the public forum as a way to pass information and reduce the uncertainty businesses face.  However since she is committed to the reduction in QE, and interest rates are already effectively zero (and will be for the foreseeable future), that may be all she is comfortable doing.  Because of this, the unemployment problem will most likely continue to linger until eventually the slow growth rate creates enough demand for labor.  Unfortunately, for many of those without a job or underemployed, the damage may already be done.

An advice: stop accepting advice.

There is one interesting article that I found on WSJ talking about how some advices are useless. The author Joe Queenan satirize on people’s inclination of seek advice that is not constructive, and providing advice that are unsolicited.

Why advice is worthless to follow? Here are some reasons for this that personally think is true and some I borrowed from Joe.

First, the person who provide advice might not be an expert,  in terms of both the thing he recommended for you and your very situation. In the latter case, he might never really know your situation. In the former case:  if he is  not an expert, find someone from McKinsey or find Warren Buffett(provided that he had time to think on your trivia and you can pay for his millions worth of words on a regular basis). The more important reason why there isn’t a lot of useful advice and reliable information is because information is mostly asymmetric, and the word flowing around seldom comes from the wise.  If someone know the truth, why they want to share with you?

I know this may sound extreme, there is some people so benevolent to share with your exciting truth. But once the truth is out there, will people respond actively to the advice? The more likely case is that people who seek advice already make their decision. Some people ask advice until getting the word they want to heard.(AKA. Confirmation bias rules) For example, you already know that you’re going to give up your job on Wall Street, but you solicit a bunch of other advices, such as your health, your quality time with family,   just to make your idea look good.

Thirdly, as Joe put it, “Success on anyone’s terms other than your own is failure.” This is because accepting too much advice make you lose sight of your speciality and uniqueness and eventually make you a common person that fit into the norm. The only way to succeed is not to seek(a lot of ) advice, but to try to find the truth on you own. This would certainly cause a lot of failure and rejection in the beginning, but good advice almost always comes in the form of rejection, that is when you will actually learn something new.

In the first several chapter of the book, Random Walk Down Wall Street by Burton Malkiel, the author listed several big bubbles in the history. The bubbles have a same pattern to trace: people follow advice from someone who themselves have no idea of what they are talking about, and then they pass that advice on to the next person. It is amazing to see how people know it is a lie while they continue to pass the lie to the next person. We can see from those cases how unreliable some word of advice is.

 

 

The Sochi Effect

Well the Olympics have already gotten off to a crazy start and many of the main events have not even begun yet. Where to start? There are many different opinions and views on what will happen with the Russian economy from the “Sochi Effect.” President Putin is embarrassed when one of the Olympic rings failed to open during the opening ceremony.

This Winter Olympics is being market as one of the most expensive investments into the games at about $50 billion. Rather than spending some money on schools, hospitals, and infrastructure that investors say is needed to revive growth, all the money available was put into one of the most breathtaking opening ceremonies ever. And of course, Russians can give a big thanks to President Putin. Many people believe that the Olympics will mainly boost the economy near Sochi. Although many believe that there is a lot of corruption involved as the overwhelming cause of the expansive budget. “Russia built 14 venues, including the main stadium and four ski resorts, adding 19,000 hotel rooms. More than 73,000 workers built 360 kilometers of roads, 200 kilometers of railway, 54 bridges, and 22 tunnels.” Even though this may be a great foot forward, there is still little hope that it will even boost the Sochi economy after the Olympics. “The reputational benefits of hosting the Olympics have been undercut by the high cost of the event and other bad publicity,” ratings agency Moody’s said. Many state companies and private investors, including wealthy Putin allies “who have sought political and financial benefits by investing in the construction of hotels and other infrastructure, may not cash in, Moody’s made clear.”

I believe there is too much corruption involved within Russia that it will have detrimental effects in the next couple years; not only for Sochi, but the Russian Government as well. And the biggest “wow” moment last night was when the opening ceremony kicked off. Last night I believe we saw a very standout performance. There was a new bar set by the entire theatrical performance during the opening ceremony. From the high definition projection on the field to the horses galloping in the air, Russia definitely wanted to make a statement. Many people said that Putin “is in danger of failing in his goal of using the Games to show Russia is a successful, modern state.

However, with the corruption we already believe is out there and the other bad publicity we have heard about, the final ring failure at the end of the ceremony was truly a big stir-up. “This could well become the symbol of these Olympic Games. It was supposed to be a breathtaking moment. One of the snowflakes failed to open and suddenly it was breathtaking in an entirely different way, as if everyone realized at the same moment that something had gone wrong. It was already trending on Twitter,” said NPR’s Tamara Keith. I couldn’t imagine what was going through Putin’s head when that occurred. After this occurred, a fake story went viral mentioning that the man in charge of the fifth ring was found dead in his hotel room already.

Overall the actual Olympic Games will dominate the scene as athletes begin to compete each day. And in the end, I do not believe that we will see Russia grow economically to the level that they might of hoped they would from the “Sochi Effect.”

Bad Weather Effect on US Economy

Ann Arbor was freezing cold during January as well as most parts of America, so how our life was affected because of the weather condition? This time I want to explore the effects due to the unusual bad weather in the United States.

In daily life, extreme weather hobbled daily life and travel plans. Thousands of flights were delayed or canceled, and Amtrak restricted rail service in some areas of the country. Schools closed and people missed work, as many businesses weren’t opening. Below-zero temperatures brought life to a virtual standstill across much of the Midwest.

These conditions will impact the economy due to lost productivity, lack of consumer spending and higher heating bills, Evan Gold, senior vice president at business weather intelligence company Planalytics.

According to WSJ (January U.S. Auto Sales Chilled by Winter Weather) , January’s severe cold spell in the U.S. punished auto sales with industry volume falling for the first time since September and most major auto makers blaming the harsh weather for temporarily depressing vehicle demand.

Industry executives said the U.S. car market remains strong and sales should pick up as the weather improves.

However, not only the auto sale was affected by the severe cold. US economy experienced a big challenge in January. Natural gas is affected a lot as well.

According to the news on Bloomburg(Natural Gas Futures Drop on Outlook for Milder February Weather), natural gas fell for a second day in New York as forecasts for milder weather in February signaled reduced demand for heating fuel.

Gas slid 1.4 percent as Commodity Weather Group LLC said bitter cold across the lower 48 states next week will give way to higher temperatures along the East Coast from Feb. 10 through Feb. 14. The Midwest will see still below-normal readings.

Even though we could not predict what would happen next, but if the extreme cold weather continues existing, the storage of natural gas in US will be less and less, price of natural gas will increase to reflect on the situation.

What’s more important, there is a relationship between the price of natural gas and oil price. Even though the correlation has been smaller and smaller, we still couldn’t ignore the relationship between the two prices. 

In this way, if the price of the natural gas increases, the gap between the price of natural gas and oil still has to reach a certain amount. Specifically, the gap should be 5.8 times. Thus, we could not keep a balance between those two.

Weather sometimes is a big issue to people.

 

 

Here comes another pointless debt ceiling disagreement

The fiasco that is American politics is about to get much more interesting.  Maybe masochistic is a better word for it.   The United States Congress needs to come to an agreement in order to increase the debt ceiling, something that up until the current administration seemed routine.  Yet it has become a regular obstacle during Barack Obama’s administration, which has needed to increase it only 5 times, less then Bill Clinton (7), George W. Bush (8), and Ronald Reagan (18) to name a few.  .  This post is not to address political ideologies, or the vastly differing utility function that their constituents seek to optimize.  Both parties need to negotiate.  The refusal to deal with this issue creates an artificial barrier that has cost this country billions of dollars, its credit rating, and embarrassment the world over.

February 7th marks the deadline to get the limit increased and the last time it came up, it took an extra 16 days to get a deal done.  During those 16 days the United States government shut down all non-critical services.   This resulted in lost economics activity as many of the private sectors dealing with the federal government where put on hold, as federal workers where furloughed. I believe we will see it again.  This time the government doesn’t have nearly as much breathing room.  Due to having to pay income tax refunds, the treasury will have lower balances.  While ultimately a deal will get done, how will it affect our hobbling recovery with turmoil in emerging markets and reduced quantitative easing?

There has been some argument as to what the previous government shutdown cost the country.  The low end has it at about 12 billion and .2% of GDP, the top end at 24 billion and .6% of GDP.  No matter which number you agree with, a self-inflicted wound is always too costly, and  it may have robbed the economy of any momentum it had.

The debt ceiling maybe nothing more than a manufactured crisis for political posturing, but it has real economic costs for not just the United States, but maybe the world.  For yet another year, the United States stands ready to grow, but another political grudge match may change that.  Even more maddening, is that it is really all for nothing, since it has been debated that the FED could step in and act due to the exigent circumstances clause in the FED Act, citing that it threatened the economic stability of the US (and world).  If that is valid, the only real effect of this whole mess is making the United States look like a joke, waste taxpayer money, create waves of uncertainty through out the world, and cripple the country’s recovery for nothing.