No 192: Some suggested reading from Other Teachers

SOME of the teachers in the Economics Department suggested to me that the following articles would be very useful for you to read.

Firstly Mr Bowen passed on this very interesting interview with Mervyn King, the Governor of the Bank of England. He gives his views on the Credit Crunch, and what he thinks about the current economic situation. He also does not seem to like the Banks much!


Notice the picture of Merv on the left - let me know if you can think of a good title for it!


http://www.telegraph.co.uk/finance/economics/8362959/Mervyn-King-interview-We-prevented-a-Great-Depression...-but-people-have-the-right-to-be-angry.html

Next, Mr Gray has suggested this article written by the Nobel Prize winning economist, Paul Krugman. In it he presents a moderate Keynesian view criticising the effect of austerity measures on economic recovery. It's very readable and very relevant!

As you can see, the person who wrote the title to this picture on the right, doesn't quite agree with Mr Krugman's views...... 

http://www.nytimes.com/2011/03/04/opinion/04krugman.html?_r=2

No 180: BBC TV Show About Ireland

LAST NIGHT'S BBC Panaroma show was about the crash of the Irish economy.

The 30 minute show is really worth watching if you have the time. It details how the bubble in the property market burst leading to economic disaster.

Especially interesting is the interview with an Irish property speculator who refuses to apologise for his behaviour (like most Irish politicians). Mind you, he does personally owe 154 million euros due to the property market crash....

Here is the link to the programme on the BBC I Player:
http://www.bbc.co.uk/iplayer/episode/b00z0fyd/Panorama_How_to_Blow_a_Fortune/

Be quick though, it's only available to watch for 12 months!!!

No 175: About Loose and Tight Policy

AS YOU will know if you took the Module 2 exam on Wednesday, the first question in it asked about "loose" monetary policy.

It occured to me that the terms "tight" and "loose" may not be that familiar to you, since they don't always appear in textbooks.

But then I remembered all of you are of course doing lots of Economics reading, so have looked at this week's Economist........


This extremely relevant article (which you should read and all my students will be reading) starts:

THE script for 2011 had been well rehearsed. The Treasury’s fierce fiscal retrenchment would  undoubtedly hurt the economic recovery. But the Bank of England would add balm by maintaining an extraordinarily loose monetary stance. Just three weeks into the new year, however, surging inflation has disrupted the story. The worry is that this could endanger the recovery by forcing a premature tightening in monetary policy.

So exactly what do these terms "loose" and "tight" refer to, and in which situation can they be used appopriately to describe government policy?

The first thing to say is that "loose" policy is also often referred to as "expansionary" policy, and that "tight" policy is often called "deflationary" policy.

The second basic concept is that loose and tight as terms can be used to refer either to monetary policy or fiscal policy.

Imagine a government controls 2 "taps" called a monetary tap and a fiscal tap. 

The monetary tap works mainly by controlling credit in the economy through manipulation of interest rates.

The fiscal tap works by alterations in taxation, government spending, and any borrowing it requires.

Both taps influence the amount of demand that flows through the economy, which in turn affects the amount of goods and services produced, and therefore also the levels of profit, wages and jobs.

  

Here, the government (or in the UK, more accurately the Bank of England) has loosened the Monetary Policy tap. Lower interest rates encourage households and firms to take out credit and then spend it, increasing the flow of demand in the economy.









Here, fiscal policy has been loosened. Taxes have been cut, and/or government spending has been increased. This gives people more money, therefore adding to the flow of demand.

During the Credit Crunch, various factors - lack of bank lending, falling wealth, plunging confidence, lack of profits - all led to the total (or aggregate) level of demand being at an extremely low level.

So, it is generally agreed that the right government action in this situation to use both loose monetary and fiscal policy. It is hoped that the economy can recover from recession by the government causing demand to increase in the economy.

This is the current situation in the UK. The government has decided to tighten fiscal policy.

In its original (Keynesian) form, the idea was that loose fiscal policy in bad times would be paid for with money the government had saved up in the good times. Few governments do that now, meaning that money must be borrowed to pay for it.

However, at certain point, too much government debt endangers the ability of governments to borrow money in the future. This would be a disaster, since government would be unable to pay even for its most essential services such as health care and education.

Therefore, it was decided to tighten the fiscal policy tap. But some economists fear that fiscal policy has been tightened too early, and that this will damage the recovery.

If a recovery becomes a boom, a government will tighten monetary policy also. This is to avoid demand overflowing. If there is demand which is not realised (that is, there are not enough goods and services for everyone who want them), prices shoot up.

The resulting inflation is seen by many economists as an economic problem which can be even worse than unemployment.



There is increasing inflation in the UK at the moment, and this is worrying. However, the cause is not too much demand in the economy. Instead, it is due to rising prices of essential commodities such as food and oil, as well as a rise in VAT (part of the tightening in fiscal policy).

The government could decide to tighten the monetary policy tap to combat this.

However, the fear is that the economy is not strong enough to continue to recover by itself with both tight monetary and tight fiscal policy.

As with most economic policy decisions, it is not so much the policy you use as the time that you decide to use it.

No 173: Top 10 Economics Stories of 2010

CLICK on this link to get to a sideshow from the "Daily Telegraph" of its top 10 economics new stories of 2010.

Here is a list of which stories they have included:

1. Deficit, debt and austerity worries

2. Government debt problems for European countries

3. Currency wars

4. Global imbalances in trade

5. China's continued growth

6. Difficulties with job creation

7. Inflation and interest rate decsisions

8. Problems for the Bank of England's monetary policy

9. The formation of the Office for Budget Responsibility

10. Unpredictable UK growth

These stories will be the starting point of our classes on Macroeconomics this coming term (5 more days of holidays - use them wisely and enjoy - I myself am mostly watching cricket!).

Therefore, please make sure you have a look. There may even be an exciting quiz about them next week.....


If you want more, here is a link to the Telegraph's Top 10 Banking Stories of 2010.


And if you'd like even more, this is a link to "The Week" magazine's Most Newsworthy Dogs of 2010, including the sad story of Target, the war hero dog :,(

 

No 171: 2010 in 9 Charts

I HAVEN'T before simply just copied an article straight into this blog. However, this recent article from "The Economist" is so informative, so useful, that I believe EVERYONE of you should try to read it, even though it is fairly advanced in places.

CHARTS OF 2010 - A YEAR IN NINE PICTURES

THE global property bust that pulled the world into recession in 2008 began to lift in 2010. House prices turned up in Britain and stabilised in America (chart 1) but slid further in Spain. The process of deleveraging kept rich-world inflation subdued (chart 2) while robust demand and loose monetary policy let it accelerate in India and China. By late 2010 output and employment had turned up in most rich countries but not enough to regain pre-crisis levels (chart 3).

Bowing to American pressure, China allowed the yuan to rise slightly (chart 4); higher inflation meant that in real terms it rose considerably more. Japan watched in alarm as a rising yen (chart 5) threatened its export-led recovery. Europe trembled as its sovereign-debt crisis undermined the euro.

Rich-world budgets remained deeply in deficit but at least those gaps generally shrank, most of all in countries, like Greece, undergoing austerity (chart 6).

Sadly, austerity did not provide the hoped-for relief: peripheral European government-bond yields continued to rise relative to Germany’s (chart 7).

Bonds’ best days may be over everywhere. In emerging markets and America bond prices increased through most of 2010 (chart 8) then fell as America’s economy sprang to life and investors flocked to equities. Commodities trounced both stocks and bonds (chart 9). Bulls attribute this to global growth, especially in the emerging world; bears cite a desire for inflation hedges. The tension between them will drive markets in 2011.

No 152: Funny Videos About The Recession

FIRST of all, these Australian comedians discuss the debt problems of European Union countries:



Next, here are some British economies explaining financial markets and the credit crunch and why the banks needed to saved:



This (http://www.youtube.com/watch?v=mzJmTCYmo9g) links to many more Bird and Fortune videos.

No 149: Of billions, trillions and debts

I'VE been looking for some ways to visualise the huge amounts of money that governments owe.

Remember that "budget deficit" refers to the money a government borrows over a year, wheareas "national debt" is all of the money a government owes from borrowing in the past.

I've already posted about the UK debt clock (see Post 67 and http://www.debtbombshell.com/) and the Billionpoundagram visualisation (see Post 67 and billion-pound-gram).

Here's an article about current UK government borrowing: uk record borrowing. This is the key information:

"TheUK's budget deficit rose to the highest level since at least 1993 reaching 15.3 billion pounds in August....

"...economists expect the deficit to be .... 149 billion pounds in 2010."

This sounds a lot but it's hard to imagine. Economists usually compare these big numbers with the total value of all production in the country. On this measure, the deficit for 2010 will be equivalent to about 10% of UK GDP. In other words, the government borrowing for this year will be the same value as 10% of all the goods and services made in Britain.

However, a billion of something is hard for us to imagine. This video may help....



Trying to find visualisations of a billion then led me to trying to do the same about a trillion. Whenever I hear the word "trillion", I often think about the US national debt, currently about $13 trillion!

Here is the debt clock for the USA: http://babylontoday.com/national_debt_clock.htm.

I am now going to pause writing this blog and see how long the clock will take to increase by $1 million.....





Right, back again, it took 22 seconds. Therefore, US national debt is increasing by $1 million every 22 seconds!

Much of this is interest payments, calculated to be around $383 billion this year. Of course, this leads to an enormous opportunity cost where money that could have been spent on providing government goods and services is spent on interest payments. But also remember that if a government doesn't pay its debts (known as "defaulting") it won't be able to borrow money in the future, or if it can, it will be at even higher levels of interest. And then it won't be able to pay back the interest so they can borrow more money to make the interest payments.......

There is a clock in New York which shows the US National Debt. A couple of years ago there was a problem with it:



If a billion is hard to imagine, a trillion must be even more difficult.

These 2 visualisations may help:





One last number to draw attention to: the total cost of the government spending caused by the credit crunch so far has been .... $10,000,000,000,000 (10 trillion).

Although actually this is only up July 2009 (see this BBC article).

Recently, some economists have been arguing that the Bank of England needs to put even more money into the economy to make sure we do not fall back into recession (time for more QE?).

No 139: Lending

UK BANKS have been announcing their yearly profits over the last few weeks, and they are all making profit again, including those who are partly owned by the British taxpayers.

For example

(See http://www.bbc.co.uk/news/business-10889684 and http://www.bbc.co.uk/news/business-10878694 for more.)

However, as the diagram below shows, this doesn't seem to have been accompanied by more lending to businesses:

Economists argue that lending to businesses is essential for the recovery stage of the economic cycle. For a while when climbing out of recession, a lot of businesses do not need new capital goods since those they already have are likely to have extra capacity that can be used.

But once consumer demand picks up beyond a certain stage, businesses must first purchase extra capital goods in order to produce more goods for consumers.

The diagram above shows this is not happening.

Many people think this is because the banks are refusing to make loans available to businesses. However, the banks are arguing that they are offering funds, and that the lack of business borrowing isn't their fault.

Can anyone guess who the banks are blaming for the lack of business borrowing in the UK economy? (I'll try and give one of my amazing prizes to whoever has the best answer......)

(Here is the Economist article I took the diagram from http://www.economist.com/node/16693862)

No 110: Advanced Article About Behaviourial Finance

ONE of the areas of economics that I find most interesting is called "behaviourial economics".

It attempts to use ideas and experiments from psychology to explain the behaviour of consumers and firms in economic situations.

In my opinion the book "Predictably Irrational" - about this - is the best economics book published in last five years, and very funny as well. ( http://www.amazon.co.uk/Predictably-Irrational-Hidden-Forces-Decisions/dp/0007256531/ref=sr_1_1?ie=UTF8&s=books&qid=1270245070&sr=8-1 )

Anycase, here is an article using this approach to argue that events like the credit crunch happen every ten years, and that human psychology ensures that people do not learn from the past.

(Read the rest here.)