On a slow boat to Hawaii

Your observer has just returned from a 15-day cruise from San Francisco to Hawaii and back via Mexico.

Most of the crew seen by passengers (housekeeping, food service staff and deck attendants) are from Eastern Europe. South America and Asia.  It appears we get these reasonably priced holidays because the companies are able to employ cheap labor.  There are no labor laws at sea but at least they have jobs.

DSCF5580 I have it in my mind that for crew members the ships are prisons.  Employees are there for up to 10 months at a time, must be on the ship every night and can get off, if at all, only for a few hours at a time.  (Fifteen days was too long for me.)  On a previous cruise a number of workers said they were going to do just one more contract.  We didn’t hear that this time.

The length of contracts varied from six to ten months and appeared to vary according to where the person came from.  People from Eastern Europe appeared to have six month contracts while people from the Philippines are Asian countries were on the ship for 10 months.  No one was able to explain the difference.

At least some of the workers from Eastern Europe had degrees.  Two girls from Ukraine had degrees in international economics.  This world needs people who understand economics more than it needs waitresses or hand washing police.

(With 2,600 passengers and 1,100 crew in a small space hand washing to prevent the spread of disease was very important.  A major concern is the buffet where many people handle the serving utensils.  Therefore a disinfectant station and an attendant were placed at the entrance.  On returning home I read an article about concerns for a world pandemic.  Perhaps we do need more hand washing police.  But do they need to be trained in economics?)

There’s an ancient American law, to protect the railways from competition for passengers, which prevents foreign ships from carrying passengers between American ports.   Therefore our ship stopped for four hours in Ensenada, Mexico.

There are several things which make cruising a nice holiday.

Gambling.  I figure the casino is a form of entertainment and for most people no more expensive than attending a symphony concert.  Even so we tried to avoid walking through the casino.

Food.  There is lots of it, some more healthy than the rest.  The assistant cruise director said the number one thing you don’t hear passengers say is “I am on a diet.”  A guy in the elevator said “I haven’t eaten for an hour.”

Entertainment.  There are lots of games, contests and entertainment.  Many different types of music, much of it too loud for me although the volume was down one notch since last time.  The ventriloquist pointed out the Captain was doing eight wedding vow renewals in one day to which the dummy replied, “I didn’t know they expired”

Socializing.   We enjoyed chatting with strangers at meal time.  Most of the tables were for six and as a lot of people were traveling as couples, a lot meals were shared with others.

Family.  For us it was an opportunity to visit with my step-son and his wife, both of whom are entertainers on the ship. (Their contracts are for five months.)

This was not the holiday we would have chosen for ourselves but we did thoroughly enjoy it.

The basics of banking

Somebody has questioned how it is that banks can/should make their profits on the spread between deposits and loans.  Sometimes, when we are familiar with a subject we ass u me that everyone understands all the basics.

In the jargon of economics banks are financial intermediaries which means they are the facilitator between people who have money to lend and those who want to borrow.  People with money they don’t want to spend immediately can deposit that money in a bank.  The bankers then lends that money to somebody who has an use for it.

Bankers charges interest on the loan.  Some of that money is paid as interest on the deposit and the balance, the difference between the two interest rates, is the spread with which the banker pays his expenses and takes his profit.  It is very similar to the retailer who purchases goods wholesale and marks them up to sell at a retail price.

DooFi_PiggybankThat is the core business of banking.  Boring.  However there are a couple of additional factors which make banking  very important and very risky.

The first is that banks operate under the fractional reserve principle which means they are required to keep a percentage of deposits as cash or in a form which is immediately available.  This is just in case many people want their deposits returned at the same time.  Loans cannot always be called in quickly.  A “run” on the bank has to be most bankers worst nightmare.  I believe all bankers would lie about the financial health of their banks  to try to prevent a run.

I try to avoid dealing with bank loans staff but a couple of times I have asked how it feels to be creating money.  They cannot believe they are creating money in making loans but to those who have studied economics of money and banking that is what they do.  The process is explained  in the essay “LETS got to market: Dealing with the economic crisis.”  I figure the process is a Ponzi scheme and responsible for a lot of economic evils.  It also gives bankers a great deal of power.  Because banks create money it makes them so essential for the economy they cannot be allowed to fail.

The second complication is that making loans is a risky business in that borrowers are not always able to repay their loan.

This can be a problem for the economy as a whole  because if the banks have to write off  a large quantity of their outstanding loans,  the money supply can drop quickly and without money the exchange of goods and services stops.

Risk also  makes it easy for bankers to take for themselves some huge profits.  The general rule is that the longer the term of a loan or deposit the higher the interest rate charged or paid  because the risk is higher.  Prudent banking requires bankers to match the terms of their loans and deposits so that a loan for five  years is matched with a deposit that is committed for five years.  Thus the depositor gets more interest because he/she is carrying more risk.  In an ideal world the spread will be the same for all time periods.

But bankers can make huge profits by financing long-term loans upon which they receive a high interest rate with short-term deposits upon which they pay low-interest rates.  This way they increase the spread and take the rewards of the  higher risk.  This  tactic increases the risk as interest rates can go up above the returns from the loan or depositors may decide to withdraw their money.  I know of a Canadian financial institution that purchased some government bonds (made a loan) at ten percent.  Management expected interest rates to go down so that the interest received would be greater than what they had to pay on deposits – a nice profit,  This was just before interest rates went up to 19 percent and for a while the loses were considerable for the size of the institution.  Just before the financial crisis of 1907/08  at least some of the Wall Street banks were financing long-term sub-prime mortgages with low-cost overnight deposits.  As it became apparent a housing crisis was in the making the depositors stop renewing their deposits.

Of course when risk becomes reality and banks are faced with huge loses they are so important they cannot be allowed to fail and taxpayers end up paying for the risk.

So there you have it.  Prudent banking is simple and boring.  Breaking the basic rules brings in huge profits and ends with a major crisis.

Counting money

Bank tellers tend to be very fast and very accurate at counting money.  Economists have a more difficult time of it.  They can’t even agree on a definition.  This post was prompted by this article criticizing The Fed on how it measures the money supply.

Once upon a time I worked as a journalist.  I used to say there are two types of figures.  One kind we photographed and put on the front page and they help to sell newspapers.  The other kind help to put things into perspective.  When I got to university and wanted to study economics I found I didn’t have the calculus skills to do econometrics so I have stayed with my idea that statistics help with perspectives.

mystica_Coins_Money_Economics is about relationships.  It is about the relationships that go with the exchange of goods and services and since some exchanges involve the state it is also about our relationships with governments.

Not all exchanges can be recorded let alone measured therefore statistics are of limited use.

Mathematical concepts are useful in that they can simplify the analysis of relationships and help us understand what is happening.  Sometimes statistics can be useful for evaluating things we want to believe.  One should be leery of drawing conclusions from emotional accounts of events.  For example, a former professor claimed that during the industrial revolution things got worse for working people before they got better.  One of his arguments was highly emotional newspaper accounts of children dying in poverty.  I would have been more convinced it he had produced statistics of child mortality rates before, during and after the industrial revolution.

Back to money.  For economists it is difficult to count because there are so many things including cigarettes and candy have been used and there are a number of economic  definitions  depending upon what types of bank deposits are included.  I figure money should be defined as anything that represents purchasing power including and especially computer impulses.

Money is my favorite subject although I have never wanted to be a bank teller.

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