On breaking up the large banks

It appears some people would like to break up the large banks.  It might be wise to interpret this to mean increasing competition.

This would be a good thing for consumers.  For there to be perfect competition no player in a market should be large enough to influence prices either by withholding a product or service or by refusing to purchase. So to make the case for breaking up the large banks one should evaluate their effect on pricing in each market in which they operate.

If the case can be made then the thing is to increase competition which means looking at licensing.  Licensing programs are one of the ways in which governments restrict competition.  They way to deal with too large banks would be to allow more players onto the field.

Competition also requires that all players in a market should know everything.   Therefore we should require banks to make more disclosures about their own financial conditions.  This would be difficult because the greatest fear of every bank executive is a run by depositors demanding the withdrawal of their money.  I predict there are very few bank managers who would hesitate to lie to hold off a run on their banks.

In dealing with banks we also need to remember their involvement in money creation.  This gives them a great deal of power because our economy depends upon adequate money and because bankers get to determine whether or not a project goes ahead and who gets to do it.

Breaking up the large banks, or rather increasing competition in their markets, would be good for consumers although it may not be so good for at least some people in the industry. I wonder which group are most effective at lobbying.

Overpopulation

With the world’s population about to reach seven billion, famine in the Horn of Africa and reports we are using 150 per cent of the resources required for sustainability, we have to be sensitive to overpopulation.

Probably there are too many people on this planet and as individuals the only thing we can do is to limit the size of our own families.

Agriculture and environmental issues

Since writing the previous post I came across this article on environmental issues associated with agriculture.  There are even more reasons to be concerned although one must note agriculture is supporting more people than ever and at least some people are living longer than ever.

What’s happening in agriculture?

With supermarkets, big box stores, fast food outlets, convenience stores, farmers’ markets and Wal Mart all overflowing with food, some of us (especially those of us with access to the internet) tend to take food for granted and ignore what is happening on the farm.  But how would we fare if the North American food factory were to break down?  Famine is something that happens in far away places.

We like to think our’s is mostly a service and information economy.  However, we can put time and effort into these things only  because of efficiencies in agriculture.   When I studied European economic history, the prof  placed a lot of emphasisi on improvements in farming techniqes.  (He then went on to write an excellent book on the Industrial Revolution:  The British industrial revolution in global perspective by Robert C. Allen.  Cambridge University Press, 2009)

There are a number  of  potential problems in agriculture: monoculture,  topsoil depletion, soil erosion, climate change, short-term extreme weather, the use of chemicals and subsidies.  It may be that farmers, like the rest of us, act in their own short-term interests as opposed to the long-term interests of everyone.

It could be that these problems are a greater threat to us than other concerns such as nuclear war, environmental degradation or global warming.   We should be probably be paying more attention to what is happening on our farms and if necessary be prepared to put pressure on farmers to ensure the food supply does not come to a halt.

Women in the boardroom

The Economist has  an article examining why there are so few women the board rooms and executive levels of business.

It may be there are so few women in the higher ranks of business because many women are smarter than men and know better than to take on the extra repsonsiibility and  stress.  Some women also know there are more subtle and effective ways to get what their way.

Resource projects and natives in British Columbia

B. C. first nations need to embrace natural resource projects

This is the headline for a column on the front page of today’s Vancouver Sun in which  Barbara Yaffee   argues that British Columbia natives should embrace rather than oppose three high profile and controversial projects in the northern part of the province – a mine, a oil pipeline and a tanker port to export tar sands oil.

It is not just native peoples who are against these projects but when the economy is tough the search is on for scapegoats.  It is sad that the way we have treated natives and the way their leaders have demanded they be treated is setting them up to be scapegoats.  But then maybe societies need someone to blame when things get difficult.

Ms. Yaffe points out Canadian natives suffer from lack of clean water (that is not the case in Kitamaat village near where the port would be located), high unemployment, high suicide, high incarceration and a lower life expectancy than the rest of us Canadians.

It is not clear to me that these project would solve any of those problems.  There will be shor-term  benefits but these projects could well be against the long-term interests of all of us.

Yes, we do have to make tradeoffs and sometimes they should be in favor of environmental concerns.

The strength of the economy

In the lead  to a report on Barack Obama’s speech at the University of Maryland the CBC quotes him as saying the strength of the economy will depend upon how the U.S. deals with its debt.  I couldn’t find any reference to that in the story but  whether or not he said it, I want to disagree.

The strength of the economy depends upon the quantity of goods and services which can be produced and that depends upon such things as the state of agriculture, the resource base and the energy required to extract  those resources.  Money is important because it facilitates the extraction of resources and the exchange of goods and services.

Following is the CBC’s lead in paragraph and here is the link to the actual report

U.S. President Barack Obama says the strength of the economy will depend on how the country deals with its massive $14.3 trillion debt — in remarks after the Senate rejected the Republican’s budget-cutting plan. 11:36 AM ET video

A business for our times

As I reads the headlines these days I keep thinking the best business to go into is market gardening.

Import or export motivated trade

The following quote about trade is from an essay on economics at the time of Odysseus in archaic Greece. It is interesting to note that at that time trade was motivated by a need for imports whereas to us it is based on the need to export in order to maintain or create jobs.

Here in British Columbia where a lot of our economy has been based on forestry, mining and fishing, we might be better off if we had taken the first approach and looked for other ways for out people to have a comfortable standard of living.

Odyssean trade differed from the various forms of gift-exchange in that the exchange of goods was the end itself. In trade things changed hands because each needed what the other had, and not, or only incidentally, to compensate for a service, seal an alliance, or support a friendship. A need for some specific object was the ground for a transaction; if it could be satisfied by other means trade was altogether unnecessary. Hence, modern parlance, imports alone motivated trade, never exports. There was never a need to export as such, only the necessity of having the proper goods for the counter-gift when an import was unavoidable.

(The quote of from M.I. Finley, The World of Odysseus, Chaper 3 , reprinted in Tribal and Peasant Economies, Readings in Economic Anthropology, edited by George Dalton and published in 1967, page 411.)

Debt reduction problems

Deleveraging or debt reduction is the topic of an editorial in The Economist. It lists three ways in which debt can be reduced – paying it off, defaulting or inflation.

 Debt can be reduced in several ways. It can be paid off with the help of higher thrift (though not everyone can spend less than they earn at the same time). Its burden can be reduced through higher inflation or faster growth. Or it can be defaulted on. In practice, rich countries seem to be using different combinations of these approaches.

While debt reduction is a highly desirable goal there are two serious problems with which to deal.

First, if it is achieved either by write offs or inflation, then some where some how or the other some people are going to loose some of their savings. No doubt a few people will easily cope with that but probably the pain will be felt mostly by people upon whom it with will inflict considerable suffering.

The second problem is that our money supply is based on debt and reducing debt will probably mean a reduction in the amount of money in the economy (with a multiplier effect. Of course with less money a lot of exchanges won’t take place and people will be out of jobs and there will be even more suffering.

Who is responsible for our health?

These thoughts started with reading an article about government requirements on food labelling.

To what extent should we take responsibility for our own health and what is the government’s role in encouraging or forcing us to live a healthy lifestyle and to provide medical services?

Most of us do things which may eventually contribute to our demise. It’s easy to know what to do to improve our health but often extremely difficult to do them. It can also be difficult to sit back and watch another person do something we think is wrong. Sometimes even for little things.

He or she who pays the piper calls the tune. When we hand over responsibility for health care,   the government and its bureaucrats could seek the right to dictate our lifestyles. If you smoke you will probably require more  health care and the rest of us have to pay for it – or at least there will be less for other people.

Economics provides partial guidance. Perfect competiton requires perfect knowledge. Therefore governments should require that as much information as possible should be available to all citizens with respect to all aspects of healthy living. This includes food labelling,

If we had a perfectly competitive economy medical insurance would be private and people who smoke probably would have to pay a higher premium. As to drivers with lots of accidents.

 

The debt ceiling, least squares and the Eliot wave

Considering the United States debate over the debt ceiling, it may be appropriate to have another look at an earlier post.  Sooner or later the debt bubble is likely to break. The larger it gets the more damaging will be the explosion.

When I studied economics I learned about least squares regression. Later when I took an interest in market behavior I learned about technical analysis and the Elliott wave theory. It may be that the Elliott wave theory is better at explaining our economy and may provide better guidance for economic policy.

The least squares regression takes a series of data points and draws the best fitting line through them. Once you know the formula for the line it is easy to project the trend into the future. This technique is used extensively in economic forecasting.

Here is a chart from Wikipedia and its article on this.

This approach assumes (ass u me) economies will grow continuously and forever. Economic policy then should try to smooth the data points so that they are all on the line.

I am not a total believer in the Elliot wave theory but I do like that it shows markets as being fractal and moving in a series of ups and downs. Here is a chart from Elliot himself and the link to the Wikipedia entry.

It seems to me this is a more realistic way to view the economy. Clearly the economies with which we are most familiar have had ups and downs and this has been happening for millennia with the rise and fall of civilizations. It would be nice if we could be the exception but probably our turn will come.

One of the features of these waves are that they are fractal which means that with in each trend there is another whole series but on a shorter time scale and each trend itself may be just a small part of a larger trend.

This fractal nature of markets, and the economy, make forecasting extremely difficult although there is a concept of fractal dimension which can be calculated. Noting when fractal dimension changes for different time series may help with predictions.

Now to economic policy.

If one can accept the least squares method of forecasting the policy is easy. When there is a down trend you apply lots of government stimulus spending and when there is an up trend you try to slow things a little.

Policy if one accepts the wave theory is more difficult. We may be able to detect some of the turning points but we don’t know which fractal we are on or how severe the down trend is likely to be.

The policy during a downtrend depends upon the severity of the trend and should be a generally cutting back of living standards. The question is who should make the cutbacks. Generally it should be everybody except me. The sad thing is that cutbacks apply mostly to the poorer segments of society. If you happen to be a government employee you don’t have to worry too much – yet.

The danger is that if we apply stimulus going into a major down trend, we are likely to bring forward and make worse a major crash.

Wouldn’t it be nice if the least squares approach were the one?

The real and financial sides of the economy

When my macroeconomics professors stood in front of the blackboard they drew a graph with two lines – one representing the real or physical side of the economy and the other the financial side. It’s an important distinction but as soon as we get away from the blackboard we tend to analyze things only in terms of money.

What we really need to look at is what is happening in the resource base. There is some evidence that physical resources being depleted or more difficult to extract and that human resources are increasing. So the prices of the first are going up and the prices (wages) of the other are going down. How can there not be economic problems around the world.

 

 

 

Worrying about pensions

Pensions are a major concern for many people in the industrial countries. I wonder what percentage of the world’s population has a pension and what the rest do.

Our standard of living in retirement will depend not upon how much “money” is in our pension fund but on the ratio of population to the quantities of goods and services our economies will be capable of producing and our ability to obtain a share of that.

There are two things that could take away our retirement savings – inflation or the failure of financial institutions.

Maybe the best pension fund would be a market garden.

Pig-headed politicians playing poker or are we really cooked?

In the lead editorial of the June 18, 2011 issue, .The Economist holds pig-headed politicians playing poker responsible for our economic future. (Thanks to a mail strike I just received my copy)

There is a real risk that the politicians’ pig-headedness could lead to disaster. The odds of a catastrophe—harsh fiscal tightening in America, or a crash in the euro zone—may not be high, but neither are they negligible. Though economic logic suggests that the world economy is just going through a sticky patch, squabbling politicians could all too easily turn it into a meltdown.

Politicians like to take credit for a growing economy and voters like to blame them when things are going badly. And, current leaders may be pig-headed, but are they any more pig-headed than their predecessors? I figure the economy happens due to factors other than politicians. A more likely explanation for current economic problems is that we are depleting our resources. See an earlier post on The Living Planet Report.

The following quote is from Ernest Hemingway’s A Farewell to Arms. (Chapter XXl).

 He said we are all cooked but we were all right as long as we did now know it. We were all cooked. The thing was not to recognize it.

Hemingway was talking about the Italians during the first world war but this comment could apply to our current economy. If we are “all cooked” and we knew it, then we might be able to manage the crisis so as to minimize suffering. As that is an impossible dream, we might be better off not to know it. Let’s join The Economist in blaming everything on pig-headed politicians.

 

Subsidies distort prices

Subsidies are a major feature in our economy but they are a  problem as they distort prices and cause inefficiencies in the economy.

As price is one of the things we consider in making purchases a  price which reflects the true cost of the item helps us to make wise decisions which reflect the best use of resources according to our indivdual values.

When subsidies are given, the person(s) who hands out the subsidy gets to make decisions as to what is produced according to his/her values or according to which producers has been the best lobbier.

Another problem is that when prices are distorted those who are not receiving them are at a disadvantage and thus there is less competition.

Subsidies are frequently given to protect or create jobs. Rather than giving subsidies to producers they should be given to consumers. To be fair they should be available to everyone perhaps in the form of a guaranteed annual income.

%d bloggers like this: