Bardonomics

Last week, I argued against any premature interest rate rises by central banks. A couple of objections to extremely low interest rates—on the basis that they are ineffective in spurring current growth—were addressed. However, there is a potentially more pressing, and certainly quite well publicized, fear regarding interest rates. Many contend that reserve banks have kept benchmark rates artificially low through their unprecedented quantitative easing programs. Some worry that these low interest rates, and asset purchases by central banks, could be distorting markets and precipitating another calamitous bubble.  At a basic level, QE floods the financial system with new money in the hope that this will give succor to bank lending and consumer spending. This is all meant to boost confidence in the economy, which creates a virtuous cycle of more lending and more spending.  However, the resulting low interest rates may also encourage unproductive over-investment in th

In an address to the country on the evening of November 8th, Indian Prime Minister Narendra Modi made a shock announcement that 500 and 1000 rupee notes were, from the following morning, no longer to be legal tender. The move to take the bills out of circulation—“demonetization” being the economic term—led to a frenzied aftermath.   Most of the money circulating in India comes in 500 and 1000 rupee notes, rendering colossal sums of cash worthless unless exchanged within a relatively brief window of time till the end of the calendar year. Astonishingly long lines formed at once outside bank branches across the country, with some waiting for over several hours to exchange small bundles of notes. The government’s objective was to expose illegally acquired “black money”—frequently the fruits of corrupt activity and the enablers of further shady dealings. Many real-estate dealings in India, for example, occur at least partly in cash to avoid leaving a traceable trail of

Image: YP Of the many stress-inducing questions facing investors and economists these days, one looms particularly large: when are central banks going to raise interest rates? Attempting to predict anything related to the economy is a rather perilous task – the late Nobel laureate Paul Samuelson once quipped that “markets have predicted nine out of the last five recessions.” Prediction has been a particularly hapless endeavour with post-crisis interest rates. Pundits forecasting an inevitable rates increase have seen themselves embarrassed repeatedly. So why are interest rates near zero per cent anyway? In response to the global economic crisis, central banks around the world, particularly in developed countries, slashed interest rates to record low levels. Cutting interest rates is the standard response to an economic contraction. For maximum effect, these interest rate cuts were combined with a series of monetary policies collectively known as quantitative easing.  The pr

http://www.economist.com/news/special-report/21707833-consensus-favour-open-economies-cracking-says-john-osullivan With protectionist and isolationist sentiments rising around the world, this week's special report on globalization by The Economist is timely and well worth a read. Yes, globalization has left many behind, particularly those working in the manufacturing sector of wealthy Western nations. A growing body of research shows that for those who lose their jobs to trade, the negative effect can persist for a lifetime. The benefits of trade are often more diffuse and felt less ac utely. Yet, in the aggregate, a decrease in prices, increase in consumer choice, and gains in efficiency more than compensate. Indeed, as the report notes, it is the poor, not the rich, who stand to lose the most purchasing power when borders are closed. The report also suggests that much-maligned economic migrants don't compete with native workers so much as they complement them.

Image: YP In another blow to Wall Street’s reputation with the public, it was recently uncovered that Wells Fargo employees had created over two million fake accounts for customers in an attempt to meet ambitious sales targets. The bank is to pay USD 185 million in fines and 5,300 employees have been fired.  Wells Fargo CEO John Stumpf was hauled before incensed lawmakers on the Senate and House banking committees late last month to testify on the matter. He has agreed to forfeit USD 41 million in pay and to end the banks controversial sales incentive program that purportedly led to the illegal behavior. Lawmakers lambasted the banks activities as akin to theft, and condemned what they saw as a weak reaction from Stumpf in handling the situation. Stumpf insisted at the hearings that the problem was not with the company culture, but rather with a set of dishonest employees. However, with 5,300 employees involved in the scandal, it is difficult to claim that there was not a

It would be redundant to comment on the shock dealt to financial markets around the world by the Brexit. No one was expecting it. And despite the best efforts of “Remain” campaigners—some are desperately hoping for another referendum—the hands of time are unlikely to run backward; Britain will be leaving the EU for good.   Article 50, the EU’s exit clause, requires that a country formally leave the EU within two years of signaling its intention to do so. Instead of performing an autopsy on the referendum, the focus must shift toward negotiating an exit that minimizes the harm done to the UK and to the EU.  The ramifications of Brexit extend far beyond trade relations—most notably to immigration policy and regulatory measures. These topics, and others, require lengthy articles to themselves, so I will focus only on the potential trade implications of Britain’s departure.  In leaving the EU, Britain is withdrawing from the group’s unified market. Member nations trad

Image: YP Markets pervade our society. For transportation we have Uber, for living space Airbnb, and for tickets Stubhub. Even the right to pollute is for sale, at 13 Euros per metric ton of carbon dioxide on the European emissions market. Michael Sandel, the renowned Harvard University professor, complains, “We have drifted from having a market economy to being a market society.” There are some who laud this expansion of market values. Libertarians believe markets promote individual freedom by allowing parties to engage in consensual and mutually beneficial agreements. The libertarian philosophy is that, as long as coercion is not involved, a trade of any sort will only occur if both parties stand to gain. Thus, any such trade should be permitted. An exception is made only for instances in which a deal beneficial to the transacting parties may harm a third party. For example, if my neighbors rented out their apartment to a nightclub, the ensuing late night noise wou

Image: FMSC In discussions about development, foreign aid is heralded as a remedy for the severe poverty facing hundreds of millions around the world. International organizations often assert that aid is a tested path to success, and that the main problem with foreign aid is that there is not enough of it going around to alleviate the world’s problems.  Every humanitarian crisis leads to more urgent calls for aid money from organizations such as the United Nations and the World Bank. There are indeed some resounding success stories.  The Economist  recently noted that foreign aid transformed Taiwan and South Korea into prosperous nations, and that it essentially eliminated smallpox and polio.   Foreign aid is conceived with lofty and noble ideals. The defined objective of aid is to alleviate poverty and to put underdeveloped nations on a path to prosperity. There is consensus that aid should not be distributed with an underlying aim of advancing the donor nation’s own p

Image: Shutterstock In 1930, famed economist and philosopher John Maynard Keynes wrote that by the time of his “grandchildren’s generation,” people in the developed world would be working no more than 15 hours a week.  Keynes predicted that rapid advances in technology would lead to high levels of productivity and efficiency. The amount of human labor required to produce necessary goods and services would thus be greatly reduced.  He envisioned a world in which, instead of being occupied with dreary work, humans would seek fulfillment through exploring the arts and pursuing creative endeavors. Keynes was optimistic about the future, but the proposition of advanced technology also worried him.  Keynes’ concern was that increasingly productive technology would lead to what he called “technological unemployment.” With machines allowing fewer humans to produce more, it followed that overall employment would drop.  Such concerns have resonated for centuries. Every rev

Image: Phil Broad On May 19, EgyptAir Flight 804 crashed into the Mediterranean Sea, killing all 66 on board. The past couple of years have seen a spate of fatal aviation incidents, and questions have been raised about the safety of air travel.   There is no doubting that any great fear about air travel is thoroughly unwarranted. Statistically, aviation is safer today than at any previous time in its history. It is also often noted that flying by plane is the safest form of transportation. The chances of dying in a plane crash are calculated to be around 1 in 11 million; you are orders of magnitude more likely to be involved in a fatal car or traffic accident.  At the same time, calls for greater aviation security and safety measures abound. Governments and corporations around the world have invested large sums of money into tightening security at airports and protecting planes against all manner of threats, from terrorism to mechanical failure to pilot error. Many of

Image: kennysarmy Around this time every year, one begins to notice a marked shift in the demeanor of students everywhere. Following a grueling period of studying and exams, we emerge from our rooms, battle-scarred yet relieved. Summer, once hopelessly distant, is now nearly within our grasp.   Some of what we have learnt and, by now, no doubt forgotten, may seem just a bit impractical. It is true that outside very specific career paths, it is supremely unlikely many of us will have to identify the production quantity at which a natural monopoly achieves allocative efficiency. (It’s where price is equal to marginal cost, for anyone wondering!)  Why, then, do we work so hard to learn material we may never use again? There is, of course, a deep satisfaction that comes with learning. Yet apart from that, there is also a fundamental economic concept at play.   Whether consciously or not, all of us taking APs, IBs, DSEs, or another one of the alphabet soup of tests, are in