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China Tomorrow
The Economist's Free Exchange blog has a handy table showing you when China's GDP will overtake America's. You can manipulate it by changing the projected growth figures, though under any reasonable assumption, China will become the world's largest economy in the next 8-12 years.
Dropping to second won't in itself hurt the US — it's not a zero-sum game and Americans, individually, will continue to be much wealthier than Chinese. But how to manage the transition from one global leader to the next?
Exactly once in the history of the industrialised world has a dominant great power lost its status to another dominant great power, and that already tiny sample size is of limited use in informing us about the future. Britain and America shared a language, a culture, and a general political philosophy of liberalism and democracy. They were explicit friends and allies. Perhaps most important, they were both rich, in per capita terms. Chinese culture is alien to Americans, and its primary political values appear to be quite different from those of the world's current hegemon. The two countries are not enemies, but their relationship is explicitly adversarial. And while America is rich, hundreds of millions of Chinese citizens will remain extremely poor at the time China assumes the top spot in the GDP league tables.
The Economist has written on the challenges likely to accompany this looming handover, but I think it's easy to underestimate just how unprecedented and historic a peaceful transition would be. The natural urge is to advise both countries to plan ahead, so as to make the process as easy as possible. But there is little in the way of past experience to suggest what the best approach ought to be. I'd generally recommend that America invest time and energy in building international institutions. But Americans are likely to view this as a preemptive relinquishing of power, and the Chinese may rightly see it as an attempt to tie their hands. Every step is fraught. One can only hope that the two nations perceive the clear mutual benefits of a cooperative relationship. But the clear gains from peace and trade did not prevent a breakdown in the international order in 1914.
China Today
“The money supply is too large,” said Andy Xie, an economist based in Shanghai who formerly worked at Morgan Stanley. “They increased the money supply to stimulate the economy. Now land prices have jumped 20 times in some places, 100 times in others. Inflation is broad-based. Go into a supermarket. Milk is more expensive in China than it is in the U.S.”
In Shanghai, where the average monthly wage is about $350, a gallon of milk now costs about $5.50.
The article is a good survey of some Johnny-come-lately China skeptics.
The Economics of Seinfeld
The website "The Economics of Seinfeld" (notice the URL is yadayadayadaecon.com) is operated by three economics professors (two at Eastern Illinois University and one at Baker University), and they explain it here:
"Seinfeld ran for nine seasons on NBC and became famous as a “show about nothing.” Basically, the show allows viewers to follow the antics of Jerry, George, Elaine, and Kramer as they move through their daily lives, often encountering interesting people or dealing with special circumstances. It is the simplicity of Seinfeld that makes it so appropriate for use in economics courses. Using these clips (as well as clips from other television shows or movies) makes economic concepts come alive, making them more real for students. Ultimately, students will start seeing economics everywhere – in other TV shows, in popular music, and most importantly, in their own lives."
Dozens of Seinfeld episodes are identified for highlighting specific economic principles like price ceilings, incentives, imperfect information, moral hazard, marginal analysis, cost-benefit analysis, game theory, arbitrage (the famous "Bottle Deposit" episode), free entry and exit, etc.
via Carpe Diem
The Bank to Beat: PayPal?
If you take a look here at this Wired article where the announcement of PayPal was made, one may have just brushed over it and think nothing of substance but another eventual dintless foray of an internet startup's attempt at pitching their next idea during the last internet craze. Fast forward to more than a decade later, PayPal is looking much more like a bank, which is making quite a few people angry.
LAS VEGAS-Credit unions must unite against PayPal by offering alternative payment services that members are willing to pay for-before the online giant makes off with all the profits. That was among the sentiments share at the recent CUNA Technology Council Summit here. The TMG CUSO "is working with some credit unions to explore alternative payments and to compete against PayPal," Russell added. "Payments are the key to your future with your members," and will most likely migrate to the mobile channel. With non-sufficient funds and interchange fees dropping, credit unions need to make money by charging for services, he continued. "Free checking is over. How do we create a bundle of services that our members are willing to pay for?"
Nonetheless, PayPal had always posed itself to be a challenger of the dormant banking institutions and even governments, as Peter Thiel puts it: "The founding vision of PayPal centered the creation of a new world currency, free from all government control and dilution — the end of monetary sovereignty, as it were."
Jim over at NetBanking says that PayPal's may just become the dial tone of internet and mobile banking. True, but that's only if Facebook does not partake in the action. With an estimation of a billion dollar in potential revenue with just Facebook Credits, if executed right, Facebook can in due time take PayPal for its money (pun intended).
Facebook Credits are poised to be this generation’s American Express: an “affordable luxury” lifestyle brand and credit card with reward programs, frequent flier miles, and other incentives built right in so that the more you use it, the more you earn. ”Facebook Platinum”, anyone?
In any case, last week the "PayPal dial-tone" got even louder with the announcements at their second annual PayPal X convention for developers of a few initiatives:
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PayPal Mobile enhancements: PayPal Digital Goods: Two-click checkout for low-value digital goods eliminates the hassle of logging in
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PayPal Embedded Payments: Pay without leaving the merchant's app PayPal Business Payments: Electronic payments (non-credit card) of any size for just $0.50 per transaction
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PayPal Apps: Allows companies to embed applications into the PayPal website: where Expensify, and Bill.com are participating.
Including a partnership with Discover that provides Discover cardholders with the ability to send money to family and friends directly from their Discover online account or mobile device. The Credit Unions seem to be already in disarray and looking for innovative ideas to hold on to their diminishing shares of the payment market. In all likelihood, I'll hold my bets on a device, most likely the iPhone, which relies on the Facebook platform or iTunes credits which is funded by PayPal - the online financial transaction company.
A Looming Food Crisis
Haitians are a resilient group of people. The evidence is very much clear as it was back when I was there five years ago and, even today, as I browse the news that's coming from the despoiled anomaly island.
As it was distinctly predicted, one of the recent earthquake's many repercussions is already in sight. Food scarcity now leaves many in desperate situations where families are resorting to eating stored seeds to feed the unending arrivals of the estimated 500,000 people who migrated to the rural areas after the quake. When compared to two years ago, when prices had risen by 56% compared to 12 months prior, that raised the expectation of starvation and mass hunger, violent unrest had swept through Haiti and the spectre of famine soared. This predicament at this moment seems very much real again. The effects of a 30% price increased in bread last week sparked riots in Mozambique which left 13 dead.
International food prices were up 5 per cent in August, the biggest one-month increase since last November, said the United Nations Food and Agriculture Organization in Rome, which has called a one-day meeting on Sept. 24 to examine the global markets for grains and rice. European wheat prices hit more than €231 ($308 Canadian) a tonne last week, which was close to the two-year high of €236 set in August, largely because drought has hammered the crop in Russia. Corn prices are at their highest level since mid-2009. Sugar and oilseed prices are also climbing.
This all comes after the recent extension of the Russian export ban on cereals. The FAO however maintains that this is not to be held as a 'crisis' and attempts to pacify the threat as the it could cause unintended market overreactions, which, the FAO claims, is what drove up the prices of the last food crisis.
It seems to me that the supply side may be the culprit this time around as it was argued that the causes of the 2007-2008 food price crisis was due to unforseen changes in the demand side where population growth, shifting diets (the nutrition transition), urbanisation, unsustainable lifestyles, and increasing private investor demand contributed heavily. We are indeed about to inaugurate what Dupont and Thirwell called 'a new era of food insecurity.' Yet I have no fear in terms of Haiti's withstanding yet another hardship whether natural or not.
Evidence that Banks Create Credit Out of Thin Air
(1) William C. Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, said in a speech last July:
Based on how monetary policy has been conducted for several decades, banks have always had the ability to expand credit whenever they like. They don’t need a pile of “dry tinder” in the form of excess reserves to do so. That is because the Federal Reserve has committed itself to supply sufficient reserves to keep the fed funds rate at its target. If banks want to expand credit and that drives up the demand for reserves, the Fed automatically meets that demand in its conduct of monetary policy. In terms of the ability to expand credit rapidly, it makes no difference
(2) On February 10th, Ben Bernanke proposed the elimination of all reserve requirements:
The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system.
Of course, Bernanke’s proposal is the exact opposite of the 100% reserve system proposed by Nobel prize winning economist Milton Friedman and Laurence Kotlikoff, former Senior Economist for the President’s Council of Economic Advisers.
More importantly, if banks don’t make loans based on available reserves, but can enter into loan agreements first and then borrow any reserves needed, that means:
(1) This was never a liquidity crisis, but rather a solvency crisis, as I and many others have repeatedly tried to explain. In other words, it was not a lack of available liquid funds which got the banks in trouble, it was the fact that they speculated and committed fraud,so that their liabilities far exceeded their assets. If you don’t understand what I’m saying, please read this
and
(2) The giant banks are not needed, as the federal, state or local governments or small local banks or credit unions can create the credit instead, if the near-monopoly power the too big to fails are enjoying is taken away, and others are allowed to fill the vacuum.
Parisian women and behavioral economics
Psychology is also at work when you look at the women of Paris. The principle at work here is the assumption of style and the amplification of grace. Because you are in Paris, you assume that women are fashion-aware, which colors all your judgments about dress, hairstyle, and other factors of appearance. Because you suppose the most stylish of intentions behind whatever the actual outcome, you will find seductive and ennobling qualities behind almost everything and anyone. What would be a dowdy old hag or a trampy termagant in the wrong part of Baltimore is suddenly the epitome of French cuteness. It’s a sophisticated variant on the “Emperor without cloths” syndrome.
what we learned from the financial crisis
The economy is shaping up and looking a lot 'better' comparatively to 2008. It has been said to 'be moving toward escape velocity..' But, I asked myself, what have we ultimately learned from this slow down and reality adjustment? The answer is absolutely nada, zilch, null. For one, we are infatuated at talking about events that already happened and quick to render and dish out ex-post analyses about how the inescapable was just looming to happen.
Uninterestingly, the crisis had nothing new about it that could have caught anyone off guard. Its scale was just larger than most. Yet the same fools are pouring over forecasts that were manufactured by the same individuals who are convinced that they can see the future.
To elaborate, Nicolas Taleb adds:
Over the past twenty-five hundred years of recorded ideas, only fools and Platonists (or, worse, the species called central bankers) have believed in engineered utopias. We see that the idea is not to correct mistakes and eliminate randomness from social and economic life through monetary policy, subsidies, and so on. The idea is simply to let human mistakes and miscalculations remain confined, and to prevent their spreading through the system, as Mother Nature does. Reducing volatility and ordinary randomness increases exposure to Black Swans-it creates an artificial quiet.
Complexity in the markets has indeed risen to a point where it's become ever more difficult to explain to most the daily businesses of a bank. It is this increase in complexity which I can gladly welcome due to the nature of complex systems:
In such systems, there is no way to make things a little bit simpler - the whole edifice becomes a huge, interlocking system not readily amenable to change. Tainter doesn't regard the sudden decoherence of these societies as either a tragedy or a mistake-"[U]nder a situation of declining marginal returns collapse may be the most appropriate response", to use his pitiless phrase. Furthermore, even when moderate adjustments could be made, they tend to be resisted, because any simplification discomfits elites. When the value of complexity turns negative, a society plagued by an inability to react remains as complex as ever, right up to the moment where it becomes suddenly and dramatically simpler, which is to say right up to the moment of collapse. Collapse is simply the last remaining method of simplification.
elasticity of deaths due to natural disasters vs. income
Going back to hammer in the topic of economic freedom, Matt Kahn has a paper on the topic of the elasticity of deaths due to natural disasters vs. income which states this in the Abstract:
Though richer nations do not experience fewer natural disasters than poorer nations, richer nations do suffer less death from disaster. Economic development provides implicit insurance against nature's shocks. Democracies and nations with higher-quality institutions suffer less death from natural disaster. Because climate change is expected to increase the frequency of natural disasters such as floods, these results have implications for the incidence of global warming.
The paper concludes:
Death counts differ sharply by continent. African nations experience fewer natural disasters and all else equal, suffer less death from natural disasters. Unlike other Institutions play a role in shielding the population from natural disaster death. Future research should pinpoint the mechanisms. This paper has shown using several empirical models, that controlling for national income, less democratic nations and nations with more income inequality suffer more death. Controlling for a nation's population size and geography, I showed using OLS and instrumental variable estimates that a host of institutional quality proxies lower national death counts from disasters. One important hypothesis that merits future research is the role of government corruption in exacerbating death counts from natural disaster. Existing corruption indices are highly negatively correlated with national per-capita income. It is quite plausible that government corruption raises death counts through the lack of enforcement of building codes, infrastructure quality, and zoning enforcement.
