Volume 3 Issue 52: Two-Cent Economics

Sexless Love?

Surely an interesting notion. While it appears easy to dismiss and laughed at, the notion of men having relationships with virtual girlfriends, it is also important to remember the following observations made by very smart people:

Then president and CEO of Digital Equipment Corporation Kenneth Olson at the annual convention of the World Future Society in 1977: "There is no reason for any individual to have a computer in their home."  

Years earlier, Thomas Watson, Sr. (then CEO of IBM) estimated that the worldwide market for personal computers was fewer than ten.

And the rest, is history. The motivation for today's post is the this article:

In the most recent government study, published at the end of last month, the percentage of unmarried men spiked 9.2 points from five years ago. More telling: 61% of those unwed men reported not having a girlfriend, and 45% said they couldn't care less about finding one.

Why the generational malaise and indifference to sex? Theories abound. The most provocative to me, a Japanese-American and longtime Tokyo resident, is that Japanese women have become stronger socially and economically at the very same time that Japanese men have become more mole-ish and fully absorbed in virtual worlds, satiated by the very technological wizardry their forebears foisted upon them, and even preferring it to reality. "I don't like real women," one bloke superciliously sniffed on Japan's 2channel, the world's largest and most active internet bulletin board site. "They're too picky nowadays. I'd much rather have a virtual girlfriend."

Virtual girlfriends became a sensation last summer, when Japanese game-maker Konami released its second-generation of its popular Love Plus, called, aptly, Love Plus +, for the Nintendo DS gaming system. Konami skillfully arranged for an otherwise deadbeat beach resort town called Atami to host a Love Plus + holiday weekend. Players were invited to tote their virtual girlfriends, via the gaming console, to the actual resort town to cavort for a weekend in romantic bliss. The promotion was absurdly successful, with local resort operators reporting that it was their best weekend in decades.

As I said, it is easy to scoff at the idea of a real person being replaced by a virtual personality. I mean, the common arguments would include, "How will we derive emotional satisfaction?". I won't deny that human companionship is a unique experience presently. The desire for human contact is probably one that is built into our DNA for the very simple reason of maintaining our species. Nonetheless, that is not an emotional notion, but an instinctive one.

Why exactly do we need love from a human being? How is that different from love from a virtual being? You may say that a virtual being does not know what love is. But this begs the question, do we ourselves know what love is? Based on anecdotal experience, we very often hear our friends complain about their partners (wife, girlfriend, boyfriend, husband). That is an indication of mismatched expectations and the lack of acceptance of one's shortcomings. We have a tendency to want we can't have. This is our natural instinct. It is then no surprise that couples tend to become dissatisfied with each after long periods of time (some longer than others).

Let us take the virtual girlfriend example to the extreme. As with all thingamabobs and gadgets these days, they are fully upgradable and at an amazingly scary pace. A new tablet or smartphone becomes out of date six months down the road. What about a virtual girlfriend? Our tastes and preferences may differ from day to day, just like how we prefer a change in ice-cream flavors every once in a while even though our favorite is chocolate ice-cream. I am not so dumb to suggest this as a reason to pursue extra-marital affairs, but I am pointing out the fact that a customizable girlfriend has her advantages.

There is not even the need to do the emotional tango of tit for tat that usually happens with a real girlfriend. A typical scenario would be a romantic evening with roses and a string quartet and whatnot followed by a gentle request that could possibly turn the whole night into a gigantic nightmare because of a poorly worded sentence (i.e. "Honey, can I not take you out to shopping next week?" vs "Honey, would it be OK if we go out shopping the following week?"). While the first question may also contain the intention to postpone the shopping weekend, the poorly constructed sentence could potentially lead to a disaster. All the effort with the roses and the romantic evening is completely forgotten.

If only this was a virtual girlfriend. Not only will the evening be pleasing, but I am fairly certain that the virtual girlfriend would not retaliate to a poorly worded question. In fact, the experience of making a supposedly harmless request is made infinitely more pleasant without the fear of being rejected. All the romantic gestures and roses and string quartet is an added bonus to please the person you love. It should be seen as a genuine gesture to make the person you love happy to soften the blow of the potential bad news that you are about to deliver. Yet, the constant rejection that many people experience has transformed this situation into a case of bribery. In some cases, the girlfriend would even accuse the boyfriend of trying to "buy" her approval.

Is it a wonder if men resort to virtual girlfriends if they had to endure such an emotional roller coaster of a partner? For the pure romantic, they would claim that such an emotional roller coaster is part of the fun and surely, there is very little or no logical reason that can defend such an argument. But then again, love defies logic.

Volume 3 Issue 51: Two-Cent Economics

The Kettle Retaliating Against The Pot?

Who would have thought that the US, the country shouting about China's supposedly dumping practices, is practicing dumping itself?:

China will levy anti-dumping and anti-subsidy duties on certain US vehicle imports, the commerce ministry said Wednesday, a move likely to fuel tensions between the world's two biggest economies. 

The tariffs will be applied for two years to passenger cars and sports utility vehicles with engine capacities of 2.5 litres or more and will take effect Thursday, the ministry said in a statement. 

The decision will affect vehicles produced by General Motors, Chrysler Group, BMW Manufacturing, Mercedes-Benz US International, American Honda Motor and Ford Motor.

But then again, I can't say I am surprised. The US has typically treated every problem they have faced by blaming it on others, and never on themselves. America's trade deficit with China is only one of 88 countries which the US has deficits with. Why single out China?

The US trade deficit is merely a symptom of a much bigger disease. It has been around for the last 30+ years and only in the last decade or so has the US been making noise about it (see Chart 1)

Chart 1

This is because it has started to feel the crippling problems that come with the trade deficit:

THE answer to the basic question is "it depends" and I will let the others describe what the issues are. But I would like to use this opportunity to discuss the fallacy of measuring bilateral trade deficits. 

Consider the iPad. 

According to research by Ken Kraemer at UC Irvine, the component parts of the iPad are imported to China from South Korea, Japan, Taiwan, the European Union, the US and other places for final assembly. None of the component parts are made in China: it's only role is assembly.  

- Hal Varian, Chief Economist at Google

When are trade deficits not a problem?

TRADE deficits, or more concretely current account deficits, have to be financed by net capital inflows, and it is really the cause of the deficit and the nature of the financing that determines whether or not persistent trade deficits are harmful. If a country is running a trade deficit mainly because domestic investment levels are very high, the high investment levels should generate enough growth in the economy that the costs of servicing the foreign capital inflow can easily be covered. In that case many years of trade deficits are unlikely to be a problem. 

- Michael Pettis

A COUNTRY'S trade deficit and, for that matter, its current account deficit (the trade deficit plus the income earned by foreigners on their asset holdings in the country net of what the country's citizens earn on the assets they have invested abroad) are never a problem. But they may reflect a problem. To see this, suppose Raul Castro and his brother were finally to die and the country were to normalise relations with the U.S. and move to a market economy. A vast amount of capital would then flow into Cuba, where labour is cheap and vacation beaches are splendid. The equipment, building materials, vehicles, furniture—you name it—flowing into Cuba would all be counted as imports and show up as a huge trade deficit for Cuba. That wouldn't reflect Cubans spending beyond their means. It would reflect something terrific for Cuba—investment that will lead to jobs, higher wages, and higher living standards. The Cubans might have the highest saving rate of any people in the world and they would still run a massive trade and current account "deficit". But the term deficit is loaded because there is no sense in this illustration in which Cubans are going into debt by spending more than they earn.

- Laurence Kotlikoff, William Fairfield Warren Professor at Boston University

In essence, it all boils down to what the US has been importing. It doesn't take a genius to guess what is the reason that a country that has the highest obesity rate in the world spends its money on. No, not just food, but typically, consumption. Over-consumption and over-borrowing is the real problem behind the trade deficit symptom.

It's about time to start pointing fingers at oneself instead of blaming others.

Volume 3 Issue 50: Two-Cent Economics

The Next Generation Apple TV

The Old Generation Apple TV

As a disclaimer, I am no Apple geek and am no tech writer. I occassionally delve into techy stuff and indulge myself in Apple products once in a while. That is the extent of my Apple experience.

But recently, after some light-hearted discussion with more intelligent people, I came up with a possible idea for the possible Apple TV that Steve Jobs apparently cracked.

Nonetheless, let me first put down a few thoughts. Apple has never really been an inventor. They were not the first to invent a portable mp3 player (iPod). They were not the first to invent a touchscreen phone (iPhone). They were not the first to invent a music player (iTunes). They were not the first to allow music downloads (iTunes Store). What they did was put a bunch of really cool stuff together. So, what I came up with is not very different. I am combining a bunch of really cool existing technology and ideas together to form what could possibly change the whole TV-viewing experience.

1. Youtube, Netflix, iTunes

Video-streaming is the in-thing these days. It is fun and convenient because it can be like a box of chocolates. You never know what you're gonna get. More and more people are sharing videos of stuff they think are interesting or cool or worth watching. The Apple TV will contain video streaming, no doubt. Of course, by extending the idea of iTunes and Netflix, you can basically get a movie store that allows you to download/stream movies by paying a small fee. With increasingly fast internet speeds, this is becoming more and more possible.

2. Pandora, Amazon etc.

Now, combine the streaming experience, with a software that recognizes tastes and preferences. Of course, currently Youtube has some element of that, but very often, there are just songs and movies out there that we may like but we do not know that they exist. Using the Amazon-based idea of "Users who have bought Book A, also purchased Book B", we could create a whole new experience for the user. Now, users can find out movies that they like without having to look it up. Typically, the movies would probably be categorized by genre's actors/actresses, movies with twists, length of movie/video. And we can look them up based on these categories.

With the above two features, it is probably not a game-changer yet. You could probably do that with Netflix already. But very often, we forget that there are two components to the TV. Well, it is a recent phenomenon. There is the TV unit, and the very often forgotten unit, the remote. Essentially, the remote is the key determinant of the user's experience with the TV.

3. The "iRemote"

Now, imagine a new remote app called the "iRemote". Presently, most remote controls only allow you to navigate the TV screen using irritating arrow buttons that allow you to move up, down, left and right. But now you're going to have a touchscreen to navigate the TV. You don't even need an additional device. You just need your current iDevice, be it the iPod, iPhone or iPad. They can probably be connected through wifi or bluetooth, so you don't have to irritatingly point your remote at the TV to ask it to do stuff. Now, imagine coming home from a tired day and plopping yourself down on the sofa, busting out your iPhone or iPod, and voila, you can control your TV from there. No need to look for the remote in between the sofa seats and what not.

4. Siri

This is the clincher. If you thought the "iRemote" was cool, imagine controlling your TV with voice command. The possibilities are limitless. There are just days that I come back home and just feel like I want to watch a movie but I don't know what movie to watch. I just know I need something relaxing and funny to take my mind of things. So what do I do? I just tell Siri to connect to the Apple TV and find me a movie that is funny and relaxing. As the Apple TV recognizes genres and my preferences, it will bring up a list of movies that I may like. I can even filter it by asking Siri to remove movies that have Jim Carrey in it because I find him irritating. Maybe narrow down the list to those that only feature Adam Sandler or Seth Rogen. All this from voice command, without so much as touching the remote or scrolling through an irrelevant list. I don't even have to care if I already have the movie or not because of the streaming capabilities. I can tell Siri to turn on the subtitles, or turn down the volume or change the brightness without having to even touch any button on the remote. OK, maybe I have to call up Siri.

Another way to use this is, very often, let's say we are just sitting around waiting for our friend or wife/husband or somebody to get ready and we have about 2-3 minutes to spare, we don't know what to do with it. Instead of just whining about it, call up Siri and ask it to find you a 2-3 minute video clip that has cute kittens or what not in it. Or show you your favorite band's latest music video. Or if you have 25 minutes to kill, you may even call up your favorite episode of How I Met Your Mother. You do not have to dig out a DVD, or scan through your hard drive for it. Siri and your Apple TV does it for you.

And all I did was to combine four very simple ideas and technology together and you already have an amazing device. I am certain that the brilliant engineers at Apple can come up with something a little bit better than this but I'd like some credit for my very own version of Apple TV.

Volume 3 Issue 49: Two-Cent Economics

The China Bears’ Feeble Growl

Taking a break from Eurozone posts. Although all eyes are probably more on Eurozone right now, I think there are still those who are keeping half an eye on China right now. China just cut its required reserve ratio last week, indicating a slightly less bullish scenario on the horizon. But is this the beginning of what is so widely touted as a asset bubble burst? Here is Yu Yongding, the current President of the China Society of World Economics:

"In recent months, bearish sentiment about the Chinese economy has surged, owing largely to three conjectures. First, China’s housing market is on the brink of collapse. Second, China’s fiscal position will worsen rapidly because of massive local government debt. And, third, the collapse of underground credit networks in bustling cities such as Wenzhou will lead to a broad financial crisis across the country. 

In fact, despite its problems, China’s economy remains in good condition – at least so far. Indeed, it is not yet near to hitting the rocks."

Why? The surge in house prices in China is not a full-fledged asset bubble. I say this because it is fueled by real demand, which is opposed to speculative demand. At the core, it is a reflection of the increase in the wealth of the Chinese peopled. Here is what Yu has to add:

But the fall in housing prices is unlikely to turn into a rout, because real demand for houses will remain strong after speculative demand is driven from the market. As soon as housing prices fall to an affordable level, buyers will enter the market and set a floor under the decline.

What about the problem with local debt?

A significant proportion of total local-government debt either has no direct relation to local governments, or cannot be guaranteed by them. Therefore, in legal terms, it is not government debt at all. In addition, given that local-government debt comprises 27% of China’s 2010 GDP, while central government debt and policy loans stand at 20% and 6% of GDP, respectively, the total public debt-to-GDP ratio is approximately 53% – lower than Germany’s. So, while China should not be complacent about local-government debt, panic is unwarranted.

...and shadow banking?

But the severity of Wenzhou’s underground credit crisis has been exaggerated. In fact, Wenzhou’s underground credit accounts for less than 20% of total credit in the region, while the region accounts for less than 1% of China’s GDP. The total volume of affected bank credit in the crisis was just above RMB3 billion – roughly 0.5% of bank loans in the Wenzhou region. So, the damage that the breakdown of Wenzhou’s underground credit networks has inflicted on the regional banking system is limited, with scant national impact.

Source: Project Syndicate

Volume 3 Issue 48: Two-Cent Economics

The Shit Which Is Eurozone

Time is not my friend today. But neither it is the Eurozone's. Here is a great summary of what's going on over there and why we are all going to die. No, not literally. But I think at this point, recession is just over the horizon.

Source: Ezra Klein

Volume 3 Issue 47: Two-Cent Economics

Pity The Wall Street?

This particular story makes the Wall Street bankers sound so sad:

Earlier this fall, Steve Ferdman celebrated getting a job offer from Credit Suisse in the usual Wall Street fashion. Over expensive oysters and dark rum cocktails at a trendy Manhattan restaurant with his parents, he toasted landing the full-time position after working six months as a consultant without benefits. 

A week later, Mr. Ferdman, 28, sat alone at the same place and ordered a gin and tonic to lament getting laid off by the bank, for the second time since 2008. When he told the bartender about his misfortune, his next round was on the house. 

... 

The mood is even darker outside the Ivy League. Matthew Slotnick, a senior economics major at Boston College, said that he had sent more than 100 résumés to contacts on Wall Street and received several interviews. But he has not gotten any offers. Mr. Slotnick, who has wanted to work at an investment bank since entering college, is now applying to smaller banks and firms outside of New York. 

“People are saying it’s sort of a 2007, 2008-type hiring climate,” he said. “I haven’t given up, but it’s a bit depressing.” 

Any sympathy for Wall Street’s huddled masses yearning to get rich should be tempered by the fact that financial sector recessions often deal a soft blow. Laid-off financial workers typically get large severance packages, including the use of outplacement services. During their job hunt, many can draw on substantial savings built off past bonuses, on top of collecting unemployment. 

But for those laid-off Wall Street workers whose golden tickets have vanished, the disillusionment is real.

It is always difficult to sympathize with the big bonus-guzzling junkies on Wall Street. There is a reason for Occupy Wall Street. It is an industry which has been "lightly regulated" (more like unregulated) while they make tonnes of profit. As with all "frauds", as long as they keep making money, we allow them to keep doing it. Just ask Nick Leeson or Jerome Kerviel.

Even those who do not have the intention to cheat are given a huge benefit of the doubt, despite taking excessive risks, as long as they continued to make huge profits. Ask LTCM. The excessive risk-takers were probably allowed to roam free because the regulators themselves were possibly having a small piece of the action. With so much money piling up, there is bound to be some spilled over.

As for the smarties who were not able to procure jobs on Wall Street, perhaps in many years to come, they may consider it a blessing in disguise. Because on Wall Street, in the pursuit of the millions and billions of dollars, many of these geniuses lose themselves instead of finding what they were looking for.

Source: Dealbook

Volume 3 Issue 46: Two-Cent Economics

Price of Women's Underwear - Part 2

Two issues ago, I wrote a post attempting to explain why the price of women's underwear has kept on rising. It is all quite academic. There is no obsession with women's underwear. I received a comment on something that I actually missed out in my analysis.

But before that, here is a picture of Miranda Kerr and the US$2.5 million "Fantasy Bra" that's going to be released:

I had claimed that I could not think of goods that are related to women's underwear but I had totally forgotten about the models that parade those very garments. While it may be true that the models are being paid for their looks, this article here reveals that it is a lot more than just that:

So here's what it really takes to be an Angel: Lima, 30, has been working out every day with a personal trainer since August. For the last three weeks, she's been working out twice a day.

"It is really intense, it's not really the amount of time you spend working out, it's the intensity: I jump rope, I do boxing, I lift weights, but I get bored doing that. If I am not moving I get bored very easily." 

She sees a nutritionist, who has measured her body's muscle mass, fat ratio and levels of water retention. He prescribes protein shakes, vitamins and supplements to keep Lima's energy levels up during this training period. Lima drinks a gallon of water a day. For nine days before the show, she will drink only protein shakes - "no solids". The concoctions include powdered egg. Two days before the show, she will abstain from the daily gallon of water, and "just drink normally". Then, 12 hours before the show, she will stop drinking entirely.

"No liquids at all so you dry out, sometimes you can lose up to eight pounds just from that," she says. 

"It's like they're training for a marathon," says Sophia Neophitou, the British fashion editor who is chief stylist for this year's show. 

"Adriana works really hard at it. It's the same as if you were a long-distance runner. They are athletes in this environment - it's harder to be a Victoria's Secret model because no one can just chuck an outfit on you, and hide your lumps and bumps.

I mean, I knew that it wasn't easy being a model. But this is what it takes to be a world class model. It is no surprise that the models get paid A LOT. It is becoming clearer why women's underwear have shot up in price.

Volume 3 Issue 45: Two-Cent Economics

Roubini The Prophet (again?)

OK, I take it back. Roubini is not a loser. He does make a lot of extreme forecasts, but some of them actually make sense. For example, he spoke at Davos in 2006 about the dangers that the Eurozone was facing. I doubt anyone listened to him at that time. Here are some highlights:

In summary, there is serious growth divergence in the Eurozone area. This performance divergence is leading to serious tensions in fiscal and monetary policy. Given the growth slowdown and the political difficulties of fiscal adjustment when growth is mediocre, larger fiscal deficit are emerging in many laggard countries. These persistent violations of the GSP are a medium term threat to EM and to the ECB no bailout rule. Also, economic divergence and the tensions it is creating is leading to political pressures on the ECB to do more to stimulate growth, as the reaction of EU finance ministers to the ECB December 2005 decision to hike rates by 25bps shows. 

This growth divergence is becoming a serious threat to EMU. As an increasing number of European observers are suggesting, different countries are coping differently to these challenges. Daniel Gros has shown that Germany has reacted with corporate restructuring, cutting labor costs and “competitive deflation”. I would argue that Italy has done little and is experiencing “stagdeflation”, a combination of stagnation and deflation. Indeed, as shown by Daniel Gros Italian labor costs have increased by 20% relative to those of Germany since EMU while Italy’s trade market shares have fallen by 20% relative to Germany. Similar competitiveness problems are faced by Greece, Portugal and Spain.

... 

In conclusion, my view is that EMU can work and has worked for the Eurozone countries that have reformed and are reforming. But, unless Italy and other Eurozone laggards change their policies to pursue serious economic reforms that restore competitiveness and growth, they will eventually be forced to exit EMU. This would be a disaster but a disaster that may become unavoidable unless policies change. And I am currently pessimistic about the chances that such changes may occur given the policy makers and policies currently in place in countries like Italy.”

In 2006, I guess I was still in the peewee leagues in terms of analyzing economies. Nonetheless, five years later, in 2011, the fact that things are turning out to be closer and closer to what Roubini described  is enough to prove to me that he is no loser.

But I can't say that he is alone in seeing this problem. I don't know enough about the Eurozone issues. But I think the fact that he saw this as a competitiveness issue shows some deep insight. I always feel appalled when I read about people saying that the trouble with Eurozone is that they have a monetary union without a fiscal union. That doesn't even begin to scratch the surface of the problem.

The lazy PIGS are quite simply, lazy and complacent. They have brought this upon themselves through years of resting on their laurels. It is going to be a painful period for the Eurozone, and for the rest of the world. Personally, observing the way things are going with the Eurozone right now, it feels a lot like watching a tragedy in slow motion. It is agonizingly painful. It would seem like you know a disaster is coming but you can't avoid it. Something like being on the Titanic as it is sinking.

As Tim Duy points out:

There is no solution, no magic summit at hand. At this point, it is a choice between severe recession and depression. There is no happy ending to this story.

 Good times ahead.

Volume 3 Issue 44: Two-Cent Economics

Price of Women's Underwear

Simply amazed the kind of data you can get on the Internet. I don't know what this chart tells us exactly, but it is certainly interesting to note:

As you can see, the price of women's underwear has shot through the roof. It has far exceeded the price of outerwear and even the headline CPI, which includes the prices of fuel etc. It begs the question, why the heck are women's underwear so expensive? Well, breaking it down to supply and demand, I think it is safe to say that it is not due to the lack of supply. So, it must be due to higher demand.

So, what caused this higher demand? Well, we most certainly cannot attribute it to women's knack for shopping because the price of women's outerwear has pretty much stayed where it was. Here are my guesses based on principles learnt in Economics 101 (although I never actually took that class).

1. Price of related goods
I don't really know what are complements to women's underwear. Not sure what the substitutes are either. But the Business Insider guesses that it is possibly due to the increase in the prices of other luxury goods. For example, a cheap luxury handbag is still cheaper than an expensive bra. This is possible, but I don't think it is that likely. But women, if you are reading this, please let me know if I am wrong.

2. Personal disposable income
I also don't think personal disposable income has increased in the last four years, especially during a recession.

3. Consumer expectations about future prices and income
This suggests that women buy more underwear if they expect the prices of underwear to go higher in the future. It would seem a bit absurd. This would mean that they would be treating underwear like a stock. But then again, who am I to judge the female mind?

4. Tastes and preferences
This is the most likely scenario. Though, I think its a modification of that. I wouldn't say I have done extensive research into the variety of women's underwear, but I would venture that there is an increasing variety of exotic women's underwear. These days, you can find all kinds of visually enhancing, physically enhancing and emotionally enhancing underwear. If you think "emotionally enhancing" sounds a bit far-fetched, let me remind you of the advertisements that tell women that they can now "feel confident" by wearing a certain kind of bra. Not only that, now, there is now an increasing number of purposes for women's underwear, i.e. sports (remember Anna Kournikova's "only the ball should bounce" commercial?), bedroom sports, Halloween (!?) etc. With increased variety comes increased product differentiation. This allows certain companies to carve out a niche market (i.e. Victoria Secret).

5. New market?
This is not really one of the reasons given in Economics 101. What do I mean by new market? While e-commerce has been around for a really long time, I think previously, shopping online for clothing was usually a women's thing. I am being stereotypical, but men in general do not like shopping. In fact, I seriously doubt men would even shop for women's underwear. But e-commerce has facilitated that. Many men feel embarrassed about walking into a lingerie shop and picking out lingerie for their partners, mistresses and whatnot. But now, they can not only browse online, but make purchases discreetly. I don't know much about men who wear women's underwear, but I think it is increasingly popular that men buy underwear for their female partners. I guess the reason is that they buy what they would like to see their partners in. Kinda like women picking out shirts and pants for men. So, there is an entirely new market out there, but I really don't know if this is enough to boost the price up that high.

Another thing about shopping is that men do not know the actual price of these things. In fact, I would venture to say that men would even pay a premium for something that they like. Getting the best bargains is not really men's forte. Also, there really is a lack of alternative. As mentioned above, men generally shy away from walking into a lingerie store and grabbing something for their partners.

All in all, I think it is a combination of a few of the factors mentioned above. This is just an exercise and an application of economic knowledge in the real world. Please enlighten me if you find something that I missed out.

Perhaps, it could be as simple as the fact that women's underwear have been undervalued for a really long time and is only starting to realize its value.

HT: Business Insider

Volume 3 Issue 43: Two-Cent Economics

Chuck Schumer, The Big Fat Bully

Another great piece from Scott Sumner. If you have been keeping up to date with the currency debate, Chuck Schumer would be a familiar name to you. He is one of the strongest proponents of China being a currency manipulator. He has brought it up so many times since 2004 that I can't even remember. It is always some lame excuse with no backing whatsoever.

Scott Sumner calls him the big bully in high school:

If only it were true. There really isn’t any “problem” at all, but the perception is that the yuan is getting increasingly undervalued. Back in 2005, Chuck Schumer said the yuan was 27.5% undervalued, and he demanded a revaluation. China has more than complied with this request; the yuan has increased by nearly 30% in nominal terms and more than 50% in real terms. So is Chuck Schumer happy now? Not quite. He now insists the yuan is 32.5% undervalued, and demands another massive revaluation. All this despite the fact that the previous revaluation didn’t reduce the deficit by 1 cent; indeed the deficit got bigger. 

Remember the high school bully that would pick on the nerdy kid? You know, the one that would promise to stop beating him up if he just did what the bully wanted. Then when the victim complied, the bully would just issue more demands, and keep picking on the poor boy. That’s Chuck Schumer.

Volume 3 Issue 42: Two-Cent Economics

Mark Cuban Talks Sense About Occupy Wall Street

Pretty good read throughout. Slightly long article, but worth it. Here's one of the interesting ideas that I like:

2.  Push to Make All Financial Institutions Partnerships

We should make all investment banks become reporting partnerships (meaning they still have the same reporting requirements they have today ). I would have no problem with our government loaning money to the partners of Goldman Sachs and Morgan Stanley and other Too Big To Fail Institutions so that they can buy back all public shares of their stock. Of course all those  partners would become personally liable for repaying that money back to the government.  It would probably be about 120B dollars in total to take these 2 companies private. That is far, far less than a possible bailout would cost. 

Those personal guarantees would change EVERYTHING in the banking industry. It would change the decision making process across the board.   There would be a moral hazard to every decision. Today , a wrong decision and they vacation on their yacht. As a partner,  the wrong decision and they are protesting right next to the OWS crowd as a 99pct er.  It would be the definition of having “skin in the game”.

Yup, make those bankers liable.

Volume 3 Issue 41: Two-Cent Economics

Scott Sumner Pwns Paul Krugman

The entire post is really long. Basically, Krugman has returned to his China-bashing ways with this article and personally, I don't see how a Nobel laureate can get it so wrong. As a result, Scott Sumner just bashes Krugman into the ground with his reply. Here are some excerpts:

But how do we know the yuan is undervalued? Its current value is not out of line with predictions of the Balassa-Samuelson Theorem, which predicts that countries with higher per capita GDPs will have higher real exchange rates. Krugman points to the huge Chinese trade surplus. But is their surplus actually all that large? After all, China is a very big country. As I pointed out earlier, the Germanic/Nordic current account surplus is vastly larger, despite the fact that the countries lying between Switzerland and Norway have a combined population only a tenth as large as China’s. The smaller East Asian countries also have vastly bigger surpluses on a per capita basis. So why focus on China?

...

What bothers me the most is Krugman’s assertion that China is “standing in the way” of an increase in US aggregate demand. This makes the Chinese seem like some sort of enemy of the US, even though the private actions of those thrifty Nordics are doing us far more harm, according to Krugman’s model. Even worse, it suggests that we are helpless victims, whereas even Krugman admits that the fundamental problem is that we don’t use monetary and fiscal policy to boost our own aggregate demand (AD.) So the “harm” being done is only harmful if our policymakers ignore textbook advice to keep AD at an adequate level. Yes, we are ignoring that textbook advice, but I’m having trouble seeing how that’s China’s fault. Again, I’m not arguing that there is any logical inconsistency there, but I can’t imagine that many of Krugman’s readers will connect the dots as I have. Most will assume that China really is “standing in the way,” not that we could offset any harm with the flip of a switch.

You can read the rest on your own. Personally, I think it is this finger-pointing that has got America into where it is right now. America is like a big bully in high school, or a jock, if you will. They have pretty much had things the way they wanted their whole lives and now, something doesn't go their way, they just can't get their heads around it. America needs to do a lot of soul-searching and accept a little bit of bitter medicine in the form of humility and understand that they themselves are the problem.

As Scott Sumner aptly puts it at the end of his piece:

The worst mistake the world could make right now is to descend into nationalistic posturing. We can all see what’s going on in Europe, and we all know how nationalism can end up hurting everyone. The last thing we should be doing right now is pointing fingers at foreigners.

We have the ability to solve our own AD problem; now we need to get on with doing it. If the Senate wants to do something constructive, give the Fed a mandate consistent with what the Senate wants the Fed to accomplish. If the Senate wants more AD, don’t try to take it out of the pockets of Chinese workers. Let’s do it the way economics textbooks say it should be done, with Federal Reserve targeting of prices or NGDP.

Don’t make policy based on zero sum thinking. The world needs growth, not trade wars. 

Volume 3 Issue 40: Two-Cent Economics

Greece Ran Out Of Ink

Now, Greece is in even deeper shit than they were. They ran out of ink to print tax forms. So, essentially, they don't even have enough money to collect taxes. So screwed.

Volume 3 Issue 39: Two-Cent Economics

Countering the Contagious Western Economic Illness

Here, Mohamed El-Erian says it exactly like it is:

The very fact that we are posing this question is novel and notable it its own right. You can add this to the list of previously unthinkable things that we have witnessed lately. That list includes, just in the last few weeks, America’s loss of its sacred AAA rating; its political flirtation with a debt default; mounting concern about debt restructurings in peripheral European economies and talk about a possible eurozone breakup; and Switzerland’s dramatic steps to reduce (yes, reduce) its safe-haven status. 

The answer to the emerging markets’ question would have been straightforward a few years ago. It is not today. 

In the world of old, the West’s economic malaise already would have pulled the rug from beneath most emerging-market countries. Indeed, the conventional wisdom – supported by many painful experiences – was that when the industrial countries sneezed, the emerging world caught a cold. 

Today, however, several (though not all) emerging-market countries are benefiting from years of considerable efforts to reduce their financial vulnerability by accumulating huge amounts of international reserves. They have also paid back a significant share of external debt and converted much of what remains into more manageable local-currency liabilities. 

This sharp balance-sheet improvement has been instrumental in enabling emerging countries to bounce back strongly from the 2008-2009 global financial crisis, whereas the West continues to hobble along. Indeed, until the recent renewed downturn in America and Europe, the emerging world’s major policy concern was too much growth, mounting inflationary pressure, and economic overheating. 

Today’s emerging countries have considerable policy flexibility and much greater latitude to act than they had in the past. Accordingly, faced with a weakening global economy, they confront two basic policy choices.

Volume 3 Issue 38: Two-Cent Economics

Even Economists Are Human



Some of you may know Steven Levitt, even those of you who are not economically-inclined. If he even remotely sounds familiar, that is because he is the co-author of Freakonomics and Super Freakonomics. This week, I thought I'd take a path off the serious issues and share a more human side of economists. Watch the video above and read the source here. Steven Levitt talks about the story about adopting his daughter from China.

Volume 3 Issue 37: Two-Cent Economics

The Failure of Economists

Paul Krugman thinks that economists as a profession have failed the people. All in all, an interesting read.

Do you agree? Many people have claimed that success is a bad teacher. What about failure?

Volume 3 Issue 36: Two-Cent Economics

The Folly of Models... Sometimes - Part 2


Taken from Brad DeLong:

John Kay:

Economics: Rituals of rigour: "The two branches of economics most relevant to the recent crisis are macroeconomics and financial economics…. [Macroeconomics's] dominant paradigm is known as “dynamic stochastic general equilibrium” (thankfully abbreviated to DSGE) – a complex model structure that seeks to incorporate, in a single framework, time, risk and the need to take account of the behaviour of many different companies and households. The study of financial markets revolves meanwhile around the “efficient market hypothesis”… and the “capital asset pricing model”…. A close relationship exists between these three theories. But the account of recent events given by proponents of these models was comprehensively false. They proclaimed stability where there was impending crisis, and market efficiency where there was gross asset mispricing….

[M]istaken claims found substantial professional support. In his presidential lecture to the American Economic Association in 2003, Robert Lucas of the University of Chicago, the Nobel prizewinning doyen of modern macroeconomics, claimed that “macroeconomics has succeeded: its central problem of depression prevention has been solved”. Prof Lucas based his assertion on the institutional innovations noted by Mr Greenspan and the IMF authors, and the deeper theoretical insights that he and his colleagues claimed to have derived from models based on DSGE and the capital asset pricing model. The serious criticism of modern macroeconomics is not that its practitioners did not anticipate that Lehman would fall apart on September 15 2008, but that they failed to understand the mechanisms that had put the global economy at grave risk….

The academic debate on austerity versus stimulus centres around a property observed in models based on the DSGE programme. If government engages in fiscal stimulus by spending more or by reducing taxes, people will recognise that such a policy means higher taxes or lower spending in the future. Even if they seem to be better off today, they will later be poorer, and by a similar amount. Anticipating this, they will cut back and government spending will crowd out private spending. This property – sometimes called Ricardian equivalence – implies that fiscal policy is ineffective as a means of responding to economic dislocation.

John Cochrane, Prof Lucas’s Chicago colleague, put forward this “policy ineffectiveness” thesis in a response to an attack by Paul Krugman, Nobel laureate economist, on the influence of the DSGE school…. Cochrane at once acknowledged that the assumptions that give rise to policy ineffectiveness “are, as usual, obviously not true”. For most, that might seem to be the end of the matter…. But Prof Cochrane will not give up so easily. “Economists”, he goes on, “have spent a generation tossing and turning the Ricardian equivalence theory, and assessing the likely effects of fiscal stimulus in its light, generalising the ‘ifs’ and figuring out the likely ‘therefores’. This is exactly the right way to do things.” The programme he describes modifies the core model in ways that make it more complex, but not necessarily more realistic, by introducing parameters to represent failures of the model assumptions that are frequently described as frictions, or “transactions costs”.

Why is this procedure “exactly the right way to do things”? There are at least two alternatives…. Joseph Stiglitz – another Nobel laureate – and his followers favour a model that retains many of the Lucas assumptions but attaches great importance to imperfections of information…. Another possibility is to assume that households respond mechanically to events according to specific behavioural rules, rather like rats in a maze – an approach often called agent-based modelling…. Another line of attack would discard altogether the idea that the economic world can be described by any universal model…. [M]odels, when employed, must be context specific. In that eclectic world Ricardian equivalence is no more than a suggestive hypothesis…. The generation of economists who followed John Maynard Keynes engaged in this ad hoc estimation when they tried to quantify one of the central concepts….

Consistency and rigour are features of a deductive approach, which draws conclusions from a group of axioms – and whose empirical relevance depends entirely on the universal validity of the axioms. The only descriptions that fully meet the requirements of consistency and rigour are completely artificial worlds, such as the “plug-and-play” environments of DSGE – or the Grand Theft Auto computer game.

For many people, deductive reasoning is the mark of science…. But this is an artificial, exaggerated distinction. Scientific progress – not just in applied subjects such as engineering and medicine but also in more theoretical subjects including physics – is frequently the result of observation that something does work, which runs far ahead of any understanding of why it works. Not within the economics profession. There, deductive reasoning based on logical inference from a specific set of a priori deductions is “exactly the right way to do things”…. Economics is not a technique in search of problems but a set of problems in need of solution. Such problems are varied and the solutions will inevitably be eclectic. Such pragmatic thinking requires not just deductive logic but an understanding of the processes of belief formation, of anthropology, psychology and organisational behaviour, and meticulous observation of what people, businesses and governments do.

The belief that models are not just useful tools but are capable of yielding comprehensive and universal descriptions of the world blinded proponents to realities that had been staring them in the face. That blindness made a big contribution to our present crisis, and conditions our confused responses to it. Economists – in government agencies as well as universities – were obsessively playing Grand Theft Auto while the world around them was falling apart.

Volume 3 Issue 35: Two-Cent Economics

The Folly of Models... Sometimes

Jokes aside, while models hardly ever reflects truly what happens in the real world, they are still very important because it gives us a way to think about the real world. It is true that in the real world, there can be no ceteris paribus, but it does allow us to isolate certain variables and analyze their causes and effects.

If you really think about it, everything we do is based on models. For example, how do you know that the next time you push the door, your hand would not penetrate the door and you along with it? How do you know that the next time you turn your car keys at the ignition, the engine will start? Some of these things are done so often that we forget they are derived from models of what we do every day. The models are induced from past experience. Our past experience with doors suggest that when we push against the door, it will open.

What happens when one day, we push against the door, and we fall right through it? The consequences would be mind-boggling. It will totally change the way we perceive doors. Economic modelling is much like that. When things are all fine and dandy as things turn out the way we predict, we tend to go along happily with our lives. When things don't quite turn out the way we expect them to, we become dumbfounded, and stricken with fear or shock. In the stock market, the first reaction of many "investors" would be to panic and sell.

This explains why we need to have good models and frameworks. A good model helps us to think of things in good times and in bad. It tells us when things are turning bad or when people are just panicking for no reason. It tells us whether the sky is really falling when chickens are running helter-skelter screaming, "The sky is falling". When you think about it, this applies not only in economics, but in real life as well. What is your framework for life?

Volume 3 Issue 34: Two-Cent Economics

China's Inflation Muddle

After the most recent inflation data from China which saw the year-on-year CPI growth accelerate to 6.5% is it time to start worrying about inflation? The worry has been there for a long long time and the China bears claim that China is going to hit a hard-landing while the China-bulls have been harping that inflation has peaked time and again after each acceleration in the CPI growth. 

The fact of the matter is, this is a delicate issue. This article pretty much sums it up pretty nicely:

While China’s inflation problem should not be exaggerated, complacency would be dangerous. Current inflation is more broad-based than it appears, regardless of the controversy surrounding the adequacy of China’s CPI basket in reflecting the reality of underlying price movements. In fact, annual increases in non-food prices accelerated to 3% in June, up from 2.9% in May. According to China’s National Bureau of Statistics (NBS), living expenses increased by 6.1% year on year in May. Many worry that non-food prices may rise higher.

Barring unexpected shocks, I believe that China’s inflation may peak soon. From a macroeconomic perspective, China’s current inflation is attributable both to demand-pull and cost-push factors.

...

To tighten or not to tighten: that was the question. The PBC continued to tighten. But the collapse of Lehman Brothers in September 2008 brought global economic growth to a screeching halt. China’s GDP growth fell dramatically, owing to the collapse of external demand. To offset the negative shock, the Chinese government enacted a four-trillion-renminbi stimulus package, and the PBC shifted its policy stance abruptly. There is no question about the necessity for the turnaround. However, with hindsight, one might ask whether an earlier loosening by the PBC would have been wiser.

With taming inflation its top priority, the PBC has raised banks’ mandatory reserve ratio six times this year. Commercial banks must deposit with the central bank 21.5% of deposits as reserves. Recently, the PBC raised the one-year lending rate and the one-year deposit to 6.56% and 3.5%, respectively.

Currently, China’s inflation is not as bad as it was in 2007-2008. The rise in house prices has begun to stabilize, and the impact of the rise in commodity prices is tapering off.

External demand in the second half of 2011 is unlikely to be strong, owing to the shaky global recovery. The steady increase in production costs, partly attributable to high borrowing costs, is squeezing enterprises’ profit margins of – small and medium-sized enterprises in particular. Declining profits and rising enterprise bankruptcies are posing challenges to China’s monetary authority.

The fact of the matter is, China will have to tighten. With the Western economies running around like a headless chicken with no solutions to their problems in sight, the global economy is headed into another recession. It's time to be prepared. One of a million things can go wrong, and we don't want to be caught in that kind of tsunami.

Volume 3 Issue 33: Two-Cent Economics

Why Malaysia Still Needs Manufacturing

We can all pretend that the services industry will provide the high value-added jobs. Following this, the next logical step is probably to focus on creating a lot of jobs in the high-skilled services sectors. That way, Malaysia will transform into a high income economy.

What is wrong with that argument? Here is the article which explains why every country, not just Malaysia needs jobs in the manufacturing sector:

We may live in a post-industrial age, in which information technologies, biotech, and high-value services have become drivers of economic growth. But countries ignore the health of their manufacturing industries at their peril.

High-tech services demand specialized skills and create few jobs, so their contribution to aggregate employment is bound to remain limited. Manufacturing, on the other hand, can absorb large numbers of workers with moderate skills, providing them with stable jobs and good benefits. For most countries, therefore, it remains a potent source of high-wage employment.

Indeed, the manufacturing sector is also where the world’s middle classes take shape and grow. Without a vibrant manufacturing base, societies tend to divide between rich and poor – those who have access to steady, well-paying jobs, and those whose jobs are less secure and lives more precarious. Manufacturing may ultimately be central to the vigor of a nation’s democracy.

....

The bulk of new employment has come in “personal and social services,” which is where the economy’s least productive jobs are found. This migration of jobs down the productivity ladder has shaved 0.3 percentage points off US productivity growth every year since 1990 – roughly one-sixth of the actual gain over this period. The growing proportion of low-productivity labor has also contributed to rising inequality in American society.

The loss of US manufacturing jobs accelerated after 2000, with global competition the likely culprit. As Maggie McMillan of the International Food Policy Research Institute has shown, there is an uncanny negative correlation across individual manufacturing industries between employment changes in China and the US. Where China has expanded the most, the US has lost the greatest number of jobs. In the few industries that contracted in China, the US has gained employment.

....

As economies develop and become richer, manufacturing – “making things” – inevitably becomes less important. But if this happens more rapidly than workers can acquire advanced skills, the result can be a dangerous imbalance between an economy’s productive structure and its workforce. We can see the consequences all over the world, in the form of economic underperformance, widening inequality, and divisive politics.