Investing Curiouscatblog

Tag: Economics

  • Curious Cat Investing and Economics Carnival #7

    Welcome to the Curious Cat Investing and Economics Carnival: we highlight interesting recent personal finance, investing and economics blog posts.

    • The 4% rule and other fallacies of retirement planning – “I might try a 5% withdrawal rate, which according to the Trinity study, would give me an 80% chance of not outliving my money. As time goes on, I’ll adjust up or down depending on what life and the market throws at me.”
    • The lesson of the Greek crisis: Every government cheats and no one wants to know by James Jubak – “The IMF projects that U.S. net debt as a percentage of GDP will be 66.8% in 2010, more than twice that for Canada, and gross debt will be 93.6% of GDP, still almost 14 percentage points above Canada’s.”
    • Renting 101: What You Should Know Before You Sign by Austin Morgan – “Renter’s insurance helps protect the items in your apartment in case of theft or damage. The renter’s insurance will also cover you in case a visitor in your apartment gets injured or their items get damaged.”
    • In the USA 43% Have Less Than $10,000 in Retirement Savings by John Hunter – “if you plan ahead you have a long time for compounding to work in your favor. Unfortunately most people continue to fail to make even the most minimal efforts to save for retirement”
    • The US Has A Spending Problem, China Has A Savings Problem – “Back in 2005 the savings rate in the US dropped to below 1%. That’s sad considering up until the mid 80s we were always above 5% and crested 10% a few times… Our savings rate is currently just under 5%… The savings rate in China is something like 30%; and this number has grown in recent years, “
    • When will the Fed raise interest rates? by Olivier Coibion and Yuriy Gorodnichenko – “given current information and barring political or populist pressures, one can reasonably expect the Federal Reserve to start raising interest rates toward the end of this year in its attempt to balance the risks of higher inflation against prolonging the current economic downturn.”

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  • “What the Financial Sector Did to Us”

    Nobel Prize winning economist Joseph Stiglitz explores the current financial system and the damage done to the economy due to that system. As he states in the video the credit crisis is not something that happened to the financial institutions. The credit crisis caused recession is something the financial sector did to us.

    He covers the topics he discusses in the video in his new book: Freefall

    Related: There is No Invisible Hand – Failure to Regulate Financial Markets Leads to Predictable Consequences – Market Inefficiencies and Efficient Market Theory – Congress Eases Bank Laws (1999) – Volcker on the Great Recession and Need for Reform

  • Initial 4th Quarter Data Show GDP Increased at 5.7% Annual Rate

    Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 5.7% in the fourth quarter of 2009, (that is, from the third quarter to the fourth quarter), according to the “advance” estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 2.2%.

    Real GDP decreased 2.4% in 2009 (that is, from the 2008 annual level to the 2009 annual level), in contrast to an increase of 0.4% in 2008. The price index for gross domestic purchases increased 0.1% in 2009, compared with an increase of 3.2% in 2008.

    The Bureau emphasized that the fourth-quarter advance estimate released today is based on source data that are incomplete or subject to further revision. The “second” estimate for the fourth quarter, based on more complete data, will be released on
    February 26, 2010.

    Related: China GDP up 8.7% in 2009 – 2nd Quarter 2009 USA GDP down 1% – Japanese Economy Grew at 3.7% Annual Rate in 2nd Quarter 2009

    The increase in real GDP in the fourth quarter primarily reflected positive contributions from private inventory investment, exports, and personal consumption expenditures (PCE). Imports, which are a subtraction in the calculation of GDP, increased.

    The change in real private inventories added 3.39 percentage points to the fourth-quarter change in real GDP after adding 0.69 percentage point to the third-quarter change. Private businesses decreased inventories $33.5 billion in the fourth quarter, following decreases of $139.2 billion in the third quarter and $160.2 billion in the second. Real final sales of domestic product — GDP less change in private inventories — increased 2.2% in the fourth quarter, compared with an increase of 1.5% in the third.
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  • Market Inefficiencies and Efficient Market Theory

    Find below some interesting thoughts on financial markets and the efficient market theory. That theory essentially says the market prices are right given the available information. I think markets are somewhat efficient but there are plenty of opportunities to profit from inefficiencies in the market. Still it is not easy to consistently exploit these inefficiencies profitably.

    Capital Market Theory after the Efficient Market Hypothesis

    People see high returns in a particular sector, and they cannot tell whether the lower returns they are receiving are due to their fund manager’s proper avoidance of risk, or incompetent management. As they increasingly conclude that incompetence is to blame, funds shift to the new sector and this creates a self-reinforcing process where prices are driven above their fundamental values, i.e. a bubble occurs. It seems like such reallocation of investment funds could, if driven by a strong enough incentive, be enough on its own to drive a bubble even without an external source of liquidity.

    Capital market theory after the efficient market hypothesis by Dimitri Vayanos and Paul Woolley

    Capital market booms and crashes, culminating in the latest sorry and socially costly crisis, have discredited the idea that markets are efficient and that prices reflect fair value.
    …
    Theory has ignored the real world complication that investors delegate virtually all their involvement in financial matters to professional intermediaries – banks, fund managers, brokers – who dominate the pricing process.

    Delegation creates an agency problem. Agents have more and better information than the investors who appoint them, and the interests of the two are rarely aligned.
    …
    he new approach offers a more convincing interpretation of the way stock prices react to earnings announcements or other news. It also shows how short-term incentives, such as annual performance fees, cause fund managers to concentrate on high-turnover, trend-following strategies that add to the distortions in markets, which are then profitably exploited by long-horizon investors. At the level of national markets and entire asset classes, it will no longer be acceptable to say that competition delivers the right price or that the market exerts self-discipline.

    Related: Nicolas Darvas (investor and speculator) – Beating the Market, Suckers Game? – Lazy Portfolios Seven-year Winning Streak – Stop Picking Stocks? – Don’t miss future gains just because you missed past gains

  • House Votes to Restore Partial Estate Tax Very Richest: Over $7 Million

    As I have said previously, capitalists support the estate and inheritance taxes. Not those that see themselves as nobility, and call wish to be called capitalists, that want to reward the children of the wealthy (because we all know they need more advantages than they already get). While the Democrats voted in favor of capitalism (letting those who earn wealth prosper) instead of supporting nobility, as has been the recent trend, they did so only for the richest few. So they decided Kings and Queens should not pass all their wealth to the kids (still they can pass more than 50% of it – oh don’t you feel sorry for those poor kids you might have to get just $3.85 million instead of the $7 million they “need”). So the Democrats decided all the children of Lords, Dukes, Earls… should not have to have their trust funds impinged in any way.

    The House voted 225-200 to indefinitely extend the current tax, which imposes a top rate of 45 percent.

    “We make the estate tax go away for 99.75 percent of the people in the country,” said North Dakota Democrat Earl Pomeroy, the main sponsor. Republicans who voted against the measure said they favored repealing the levy.

    Congress in 2001 decided to drop the estate tax in 2010 before reinstating it in 2011 at the previous higher top rate of 55 percent for estates valued at more than $1 million.

    Isn’t it amazing how little the children of wealthy are asked to share in the huge inheritances they get. But until the economic literacy of the country improves they are able to pretend noble blood lines passing down huge fortunes are not just those with the gold making the rules.

    You might notice the government is in pretty desperate need of money. But some still think asking the kids of the super rich to part with some of their inheritance is too much to ask. I wish they would learn about economics. It is not capitalist to reward being born in the right house with more cash than than many will every earn working 40 plus years (a 50% inheritance tax on the super rich is less than it should be – and it shouldn’t be just the super rich that pay inheritance tax). Maybe exempt $1-2 million and index that. The next million at 50%. Then increase the rate 5% every million. I don’t really see any need to give some kid $100 million because they happen to have been born to a rich parent. Capitalism is about rewarding economic productivity not the birth lottery.

    Related: Rich Americans Sue to Keep Evidence of Their Tax Evasion From the Justice Department – Killing Capitalism in Favor of Special Interests – Ignorance of Capitalism – Charge It to My Kids – Buffett on Taxes

  • Diabetics May Double in 25 Years, Increasing Health Costs $200 Billion

    Diabetics in U.S. May Double in 25 Years, Tripling Health Costs

    The number of Americans with diabetes may almost double in 25 years, and the annual cost of treating them may triple to $336 billion, according to a study published today in the journal Diabetes Care.

    Without new programs to assure that people get health care to manage their condition, 44.1 million people in the U.S. will have diabetes by 2034, from 23.7 million today, the report said. The number of diabetics on Medicare, the government plan for the elderly, will reach 14.1 million from 6.5 million today.
    …
    The analysis by O’Grady and his colleagues included the impact of aging and obesity rates

    The broken health care system needs to be fixed. We continue to spend huge amounts of money and yet fail to take sensible steps to improve outcomes (see our recent post for another example of failing to focus on outcome measures).

    Related: USA Heath Care System Needs Reform – Deficit Threat from Health Care Costs – articles on improving the medical care system – USA Spent $2.2 Trillion, 16.2% of GDP, on Health Care in 2007 – Study Finds Obesity as Teen as Deadly as Smoking

  • Dollar Decline Due to Government Debt or Total Debt?

    With the dollar declining sharply, many are focused on the issue now. And the most common culprit for blame seems to be the federal debt. While I agree the dollar is likely to fall, the deficit doesn’t seem like the main reason, to me. The federal debt is large and growing quickly, which is a problem. But still the USA federal debt to GDP is lower than the OECD average. Even with a few more years of crazy federal debt growth the USA will still be below that average.

    Japan has by far the highest level of government debt in the OECD. The Yen is not collapsing. The debt is a factor but the lack of saving (USA consuming more than it produces) seems the biggest problem to me. China not only does not have large government debt it has large amounts of personal savings. People have been living far within their means in Japan and China (only by government intervention, due to desires to not have the currency appreciate has that appreciation been slowed).

    Thankfully we have been increasing savings a bit recently but it is a drop in the bucket so far (Consumer Debt Down Over $100 Billion So Far in 2009). It will have to increase in size and continue for years to begin to address the problems in a significant way.

    Related: The USA Economy Needs to Reduce Personal and Government Debt (March 2009) – The Truth Behind China’s Currency Peg – Who Will Buy All the USA’s Debt?

  • Using Outcome Measures for Prison Management

    What is the aim of prison? To keep criminals locked up so they can’t commit crimes in society is another. Punishment, in order to deter people from committing crime is one reason they exist. And you would hope to mold prisoners so they do not commit crimes when they are freed. But the payment for services does not factor in the results of releasing productive members of society. It seems like doing so could result in improvements.

    Better Jails by Andrew Leigh, economics professor, Australian National University

    Prisons do reduce crime, but mainly because of what criminologists call ‘the incapacitation effect’ (when you’re doing time in Long Bay, it’s harder to hotwire a car). There may also be some deterrence effect, but this is small by comparison. And there is little evidence of a rehabilitation effect.
    …
    To encourage innovation, we should start publicly reporting the outcomes that matter most. Rather than merely telling the public how many people are held in each jail, governments should publish prison-level data on recidivism rates and employment rates.
    …
    As well as focusing on the important outcomes, Australian states should rethink the contracts they write with private providers. At present, about 16% of inmates are held in a private jail. Unfortunately, the contracts for private jails bear a remarkable similarity to sheep agistment contracts.

    Providers are penalised if inmates harm themselves or others, and rewarded if they do the paperwork correctly. Yet the contracts say nothing about life after release. A private prison operator receives the same remuneration regardless of whether released inmates lead healthy and productive lives, or become serial killers.

    A smarter way to run private jails would be to contract for the outcomes that matter most. For example, why not pay bonus payments for every prisoner who holds down a job after release, and does not reoffend? Given the right incentives, private prisons might be able to actually teach the public sector a few lessons on how to run a great rehabilitation program.

    The idea of paying for outcomes is great. It makes sense for some pay to be based on keeping prisoners housed during their terms. But providing incentives for achievement in returning productive people back to free society is something we should try.

    Related: Lean Management in Policing – Urban Planning – Rich Americans Sue to Keep Evidence of Their Tax Evasion From the Justice Department – Randomization in Sports – LA Jail Saves Time Processing Crime – Measuring and Managing Performance in Organizations
    Quality Improvement and Government: Ten Hard Lessons From the Madison Experience by David C. Couper, Chief of Police, City of Madison, Wisconsin
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  • Hans Rosling Data on Economic Development and Health Results

    Hans Rosling uses his fascinating data-bubble software to burst myths about the developing world. Look for new analysis on China and the post-bailout world, mixed with classic data shows.

    “The worldview students have corresponds to reality the year their teachers were born”

    The software he uses, the very cool Gapminder world, developed by his son and bought by Google is available online.

    He also correctly congratulates the USA for providing free data it has collected worldwide, for decades, on world health. And correctly criticizes the World Bank for selling the data they compile using taxpayer funds.

    Related: Data Visualization Health Care Example – Economic Measurement Issues Arising from Globalization – Millennium Development Goals – Government Debt Compared to GDP 1990-2007

  • The Truth Behind China’s Currency Peg

    Peter Schiff does a good job of explaining The Truth Behind China’s Currency Peg

    The peg, they argue, offers China a competitive advantage by making its products cheaper in U.S. markets, thus allowing Chinese firms to gobble up market share and steal jobs from U.S. manufacturers. The thought is that were China to allow its currency to rise, American manufactures would regain their lost edge, and both manufacturing firms and the jobs formerly associated with them would return.
    …
    In fact, for the U.S., de-pegging would cause the economic equivalent of cardiac arrest. Our economy is currently on life support provided by an endless flow of debt financing from China. These purchases are the means by which China maintains the relative value of its currency against the dollar. As the dollar comes under even more downward pressure, China’s purchases must increase to keep the renminbi from rising. By maintaining the peg, China enables our politicians and citizens to continue spending more than they have and avoiding the hard choices necessary to restore our long-term economic health.
    …
    As demand falls for both dollars and Treasuries, prices and interest rates in the United States will rise. Rising rates will restrict the flow of credit that is currently financing government and consumer spending. This change will finally force a long overdue decline in borrowing.
    …
    De-pegging will force the hand of U.S. politicians toward pursuing realistic policies. The Chinese will come to their senses eventually because it is in their interest to do so. Meanwhile, the longer the peg is maintained, the more indebted we become, the more out of balance our economy grows, and the more our industrial base shrivels. In short, the longer they wait, the steeper our fall.

    I agree the largest impact of the currency peg on the USA is supporting our economy in the short run. If we didn’t go into huge debt it would actually be good for the USA for the long run too. Essentially China subsidies our purchases and borrowing. The problem is that we have taken a good thing too far and become used to living beyond our means. That is not sustainable – even with a subsidy from China.

    I disagree that the USA manufacturing base is hollowed out. It is strong in comparison to the rest of the world, except China. China’s manufacturing growth has been phenomenal, compared to that everyone looks weak. Manufacturing jobs are disappearing everywhere, not just in the USA.

    Related: Top 10 Manufacturing Countries in 2008 – China and the Sugar Industry Tax Consumers – Why the Dollar is Falling – Who Will Buy All the USA’s Debt? – Peter Schiff Answers Redditers Questions