Saturday, October 9, 2010

Not an Onion Article--Postal Union delays election--ballots got lost in the mail...

Postal Union Election Delayed After Ballots Lost in the Mail
"Irony alert.
The American Postal Workers Union has extended its internal election after thousands of ballots appeared to have gotten lost . . . in the mail.
The union's election committee was supposed to be counting those ballots this week in downtown Washington, D.C., following a tradition mail-in election. But the union announced that only about 39,000 ballots were turned in -- and that "a large number of union members had not received their ballots." As Federal News Radio first reported, the union has responded by extending the deadline to Oct. 14. Workers now have until close of business Thursday to ask for a new ballot. It's unclear whether the mail mix-up will become an eleventh-hour campaign issue.
The union of postal clerks is separate from the National Association of Letter Carriers, which comprises postal workers who deliver the mail.""

It is NOT possible to get out of debt...EVER...How does it feel to be an indentured servent with no end?

   I need your thoughts on something and extra credit will be awarded on the next test for a reasonable explanation.  Currently,  the way our banking/financial system is set up, when the Federal Reserve prints a dollar that dollar goes to the banking system where it gets loaned out to a person, business or government to buy something in the economy (a house, car, equipment, build a factory, a nuclear bomb, etc).  When those entities borrow money they have to pay it back with interest  to the bank.  The interest rate is the cost, or price paid, for money borrowed.  Got that?
    Keeping this in mind, rewind the process wayyyy back to the FIRST day it was invented.  Lets start with the very first dollar.  A Central bank (i.e. The Federal Reserve) prints $1.00, and ONLY $1.00 and it flows to a bank. The bank then loans this dollar to me at a 10% interest rate for a period of one year.  Remember, this is the first and only dollar in circulation.
     In exactly one year I return to the bank with the one dollar (no one had heard of this thing called a dollar and would not take it for in exchange for any good or service) to pay back my debt, but I have a problem! I owe an additional $.10 in interest BUT there is no money to pay it, because there is only one dollar in circulation--- the one I borrowed!  I CAN'T repay my loan.  Yikkkes! I am going to be thrown in debtors prison!
    I realize this is a simplistic example, or is it??? What is the difference, whether it is $1.00 or $5 Trillion dollars, IF the money gets into circulation the EXACT same way for each dollar? If all money is borrowed at the point of origin and an interest rate is charged for the use of that money, is it not true there will NEVER be enough money in circulation to pay it all back...ever?  Is this a problem or am I just seeing ghosts? Where am I going wrong? Your thoughts are welcome. 

(HT: The New Arthurian Economics)

Thursday, October 7, 2010

To inflate or not to inflate---We all have a "Real" "Interest" in the outcome...

    The Federal Reserve continues to contemplate an unusual strategy to get the economy moving forward:.

 Fed Officials Mull Inflation as a Fix
""The Federal Reserve spent the past three decades getting inflation low and keeping it there. But as the U.S. economy struggles and flirts with the prospect of deflation, some central bank officials are publicly broaching a controversial idea: lifting inflation above the Fed's informal target.
    The reasoning takes aim at an AP students best friend when it comes to the AP Macroeconomics test in  May.  A simple math formula that can be used to figure several parts of the AP test.  From memory, I would say it helps with two or three parts of the FRQ's. The formula is: Real Interest Rate = Nominal Interest Rate minus Inflation.  That is it! Simple enough.  This is how the Federal Reserve looks at manipulating this equation:
""The rationale is that getting inflation up even temporarily would push "real" interest rates—nominal rates minus inflation—down, encouraging consumers and businesses to save less and to spend or invest more.""
   Essentially they are looking to increase the opportunity cost of saving money.  Let's say you have $100 in a savings account earning a 10% simple interest rate (the "nominal interest rate").  After a period of time you will have the original $100 plus an additional $10 in your account. Assume during the time you had your money in the bank there was NO inflation.  The $10 your earned has the full purchasing power of $10 because none of the purchasing power was eroded away by inflation.  Your Real Interest Rate is 10% (10% nominal interest rate minus 0% inflation rate)  
   Now assume instead during your period of saving money, the Federal Reserve increased the money supply so much that the inflation rate increased to 10%. Now all the things you might have bought with the original $100 now cost $110.  Your earnings from the 10% nominal interest rate given to you by the bank is REDUCED by the 10% inflation rate.  In other words, your $10 in interest earned was met by a $10 increase in the things you might purchase so you have neither gained nor lost (10% nominal interest rate minus 10% inflation rate equals a 0% REAL interest rate). 
     The Federal Reserve is banking on (forgive the pun) you coming to the conclusion that it is not worth it to save (you did not come out ahead by saving) so you will spend the $100 instead.  Spend the money today, it increases Personal Consumption Expenditures, businesses have to replace inventory, factories have to produce more, and more people will be hired to produce those new goods. A very nice story indeed!! But will it work? What do you think? A good strategy or not? What might be some of the pitfalls of this strategy?  Extra credit for good responses!

Nice interactive graph on world debt...When will the madness stop???

Click on THIS LINK to go to the interactive function for this graph.  See how debt has increased and the rate at which it has increased in the last 10 years...

Source: The Economist

     ""The clock is ticking. Every second, it seems, someone in the world takes on more debt. The idea of a debt clock for an individual nation is familiar to anyone who has been to Times Square in New York, where the American public shortfall is revealed. Our clock shows the global figure for all (or almost all) government debts in dollar terms.
     Does it matter? After all, world governments owe the money to their own citizens, not to the Martians. But the rising total is important for two reasons. First, when debt rises faster than economic output (as it has been doing in recent years), higher government debt implies more state interference in the economy and higher taxes in the future. Second, debt must be rolled over at regular intervals. This creates a recurring popularity test for individual governments, rather as reality TV show contestants face a public phone vote every week. Fail that vote, as the Greek government did in early 2010, and the country can be plunged into imminent crisis. So the higher the global government debt total, the greater the risk of fiscal crisis, and the bigger the economic impact such crises will have.""

Where does YOUR money go every month? These are averages. How do you measure up?

How The Average Consumer Spends Their Paycheck

Wednesday, October 6, 2010

Why you should NOT play soccer with the President of your country---it happens at the 35 second mark...

HT: Kids Prefer Cheese

I may get burned for saying this, but I REALLY like Solar Power! Nice job, White House!

I don't know why I am such a sucker for solar power, but it seems like tapping into this infinite (infinite in terms of as long as humans exist)  resource is a no-brainer.  I certainly understand the technology is not there yet for widespead adoption to run our economy, but it seems like the most promising frontier.  I am not a "green" person by any stretch of the imagination, but we have to get off of fossil fuels everntually, so I think it is good forward thinking policy (nationally and internationally) to move on it as quickly as possible...Where am I going wrong? Go ahead, pop my dream bubble! Extra credit for good counter-examples. 

USA Today: White House to get solar power

""The Obama administration announced Tuesday that the White House will have solar panels to generate electricity and a solar water heater atop the living quarters by spring 2011...""

Tuesday, October 5, 2010

Actual Real GDP vs Potential Real GDP...VERY nice interactive graph for this IMPORTANT concept

     These graphs below are part of an interactive available HERE on the relationship between ACTUAL RGDP and POTENTIAL RGDP.  In addressing the problems in our economy, it is critical to understand the difference between the two.  I can see the Production Possibilities Frontier, Short-Run Aggregate Supply and Long Run Aggregate Supply implicitly and explicitly through-out.  I have copied and pasted the two most important parts below, but if you go to the link you can build the models yourself step by step. 
     In the first graph, the ideal situation is for the lines to run parallel to each other with no gap. This means that our actual GDP production is equal to our potential to produce GDP given our resources and full-employment of those resources (people first and foremost).  When you see blue, we are actually producing beyond our potential. Unemployment is very low, which can be a good or bad thing  (more on that in class). Where you see pink, it means actual GDP is below potential GDP---we are in a recession and unemployment is high. This is where we currently find ourselves.

Graph copied from Ezra Klein
     This second graph below shows the data from the graph above PLUS how unemployment would be affected given different GDP growth rates.  If our GDP increased at an annual rate of 6% we would reach the Natural Rate of Unemployment("NRU") of 5% rather quickly (2012). The NRU is considered the lowest unemployment rate we should reach if we are fully employing all our resources.  It is impossible to reach an actual unemployment rate of 0%. There is always some frictional and structural unemployment no matter how good the economy might be performing.  However, NO reputable economist is predicting that high a growth rate anytime soon.  It seems more likely we will be in between 2%-3% average growth rate for the foreseeable future and we won't reach full-employment until the mid to late 20-teens.  Hmm...about the time the class of 2011 graduates from college...that is the good news...

Graph copied from Ezra Klein
""Compared with a healthy economy, about 7 million working-age people and 5 percent of the nation’s industrial capacity are sitting idle, not producing what they could. The economy is growing again, but at a rate — less than 2 percent in recent months — that’s too slow to keep up with a population that keeps increasing and workers who keep getting more efficient.
This is the output gap, the divide between the amount the United States can produce and what it is actually producing. The gap, currently $900 billion, explains why we feel so miserable more than a year into what is technically classified as an economic recovery.""

Nom Nom Nom, Crinkle Crinkle Crinkle...Sunchips is taking the crinkle out of the crinkle...

NomNomNomNom, Crinkle Crinkle Crinkle...Oh, here I am...The makers of Sunchips are changing the chip bags to less noisy ones.  It is no big irritant to me, but apparently to sound sensitive people it is a real problem.  A nice example of a business responding to customer complaints/dissatisfaction in "their own self-interest".  . 

""Roughly 18 months after Frito-Lay, with great fanfare, launched a biodegradable SunChips bag made from plant material that was billed as 100% compostable, the company is yanking the noisy material from the packages of five of six SunChips flavors immediately.
The company is returning them to their former bags that can't be recycled — but won't wake the neighbors — while it works frantically to come up with a new, quieter eco-friendly bag.
The noise of the bag — due to an unusual molecular structure that makes the bag more rigid — has been compared to everything from lawnmowers to jet engines. There's even an active Facebook group with more than 44,000 friends that goes by the name of "Sorry But I Can't Hear You Over This SunChips Bag."
"Clearly, we'd received consumer feedback that it was noisy," says Aurora Gonzalez, a Frito-Lay spokeswoman. "We recognized from the beginning that the bag felt, looked and sounded different..."(Source HERE)

Monday, October 4, 2010

Manufacturing UP! GOOD! Manufacturing employment DOWN! Not so good...Will it ever recover?

A machine shakes almond trees in an orchard in Buttonwillow, Calif. (Al Seib, Los Angeles Times / October 4, 2010)
 The graph below shows manufacturing output (right axis) relative to employment in the manufacturing sector (left axis) in the US from 2006 to the present.  The decoupling of these two variables starting in early 2009 is quite dramatic.  Manufacturing output is increasing at an increasing rate which is GREAT, but it was starting out from a pretty low base at the beginning of 2009.  The big question from this is: Is manufacturing employment going to recover and get back to what it was, even in 2006 or are those jobs, relevant just 3 years ago, lost forever?  Please see the excerpt from the LA Times below the graph for a real life look at one industry in California....Take note of the quote in red--this will be well discussed in AP Microeconomics in the Spring...(HT: Carpe Diem)   
Source: Carpe Diem (where else??)

The following comes directly from HERE:
From today's LA Times: Automation is increasingly reducing U.S. workforces

"Forced to cut costs during the recession, employers across the country are looking at ways to avoid hiring. They've accelerated use of computers and technology, replacing administrative assistants with software, cashiers with self-service kiosks and laborers with machines.

These structural changes mean some jobs that disappeared during the recession may never come back. Productivity gains are good for company profits and help the economy grow over the long run. But in the short term, the shift is exacerbating America's jobless recovery.

"Recessions tend to act as ratchets; they'll often speed the pace of fundamental changes that were going on in the economy anyway," said Erica Groshen, vice president and director of regional affairs at the Federal Reserve Bank of New York.

Ditching workers is an appealing prospect to many California farmers. Few states have minimum wages higher than California's $8 an hour. The heightened focus on workers' immigration status has increased farmers' administrative burden.

With the help of machines, though, growers can continue to boost output while reducing headcount. Farm labor in California has fallen 11% over the last decade, yet cultivation of heavily automated crops soared over the same period: almond production has more than doubled, to 1.6 billion pounds.

"If cheap technology is available, you substitute technology for people," said Allen Sinai, chief global economist at Decision Economics in Boston.

Automation has been a steady progression since the Industrial Revolution. Still, laying off workers is never easy. Recessions give companies a motive to move more swiftly than they otherwise might have to cut staff, outsource work to cheaper locations and implement labor-saving technology, Sinai said. When sales pick up, companies can help profits rise quickly by keeping a lid on hiring.

That's part of the reason that earnings at some large companies have soared over the last year while job creation has lagged behind. In August, U.S. private sector employers added 67,000 jobs, far fewer than the 100,000 needed to keep pace with population growth."

Sunday, October 3, 2010

The world "appreciates" the Brazilian currency (the "Real") but Brazilians are NOT appreciative! Are they ingrates? Maybe not...

     In the midst of a national election, the Brazilian government is worried that its currency has appreciated too much in the Foreign Exchange Market. WSJ: "Brazil's Surging Currency Figures in Election"

""Election time in Brazil once meant wondering whether the nation's historically skittish currency would crash. This time around, policy makers are wrestling with a different problem: Money so strong they fear it may hinder the country's export-driven economic.."

     When a countries currency appreciates relative to other currencies, its goods and services become more expensive for foreigners to purchase.  Note: nothing about the good or service has changed, only the value of the currencies used to purchase those goods or services has changed.
     In class, we learned that the prime mover of currency values are relative interest rates.  Interest rates in Brazil have been significantly higher than interest rates in many other stable, developed countries.  Brazil's "financial assets" are desirable, hence so is its currency to purchase those financial assets.  This has been one of the primary reasons for rapid appreciation of the Brazilian Real (the name of the Brazilian currency).
"For example, Brazil's 10.75% overnight interest rate is among the highest in the world. That encourages speculators to borrow in the U.S. and Japan where money is cheap, deposit it in Brazil, and pocket the difference. This so-called carry trade pumps up the real by attracting a flood of dollars."
The first graph below shows the Market for the Brazilian Real ("BRL") at equilibrium.  I will use the US Dollar as the other currency, but it could be any other currency.  Notice in the Market for BRL we price it in dollars ("USD/R$*).  You should literally read this as "the dollar price per BRL" or more simply "How many dollars does it take to BUY ONE BRL".  To keep it simple, let's assume the exchange rate is $1.00USD can buy R$1.00 and vice versa.  In other words the currencies trade at parity. 

As already established,  Brazilian financial assets have become more desirable because of the higher interest that can be earned on financial capital.  There is now going to be movement in the Foreign Exchange Market (FOREX) between the USD and the BRL.  Holders of dollars will want to take advantage of higher interest rates in Brazil. They will take their USD to the FOREX and exchange them for BRL's.  This will INCREASE the supply of USD in the FOREX and INCREASE the demand for the Brazilian Real. See graph below.

The new equilibrium price is now at "USD/R$1" We established that at equilibrium we could buy R$1.00 with $1.00. Just looking at the graph we can see that it now takes something more than $1.00 to buy R$1.00, say, $1.69 (the actual exchange rate as of 10/03/10). 
    When holders of dollars exchange for BRL's they have to pay $1.69 instead of the previous $1.00.  Consistent with the Law of Demand, as the price of BRL increases the quantity demanded of BRL decreases which means (1) holders of dollars will purchase fewer BRL's and in turn purchase fewer Brazilian goods or services and/or (2) the goods or services they continue to buy in Brazil will effectively be more expensive and the quantity demanded of those goods and services will decrease.  Either way, exports of finished goods or services from Brazil will be negatively impacted. 
     Can you think of any good news Brazil can wring out of an Appreciating currency?  There are some positives...Extra credit for responding and giving me one...or ten... :)

"Baseball been berry berry good to me"---especially batting .300 instead of .299

Motivation is everything! Baseball players entering the final at bat of the season with a .299 batting average demonstrate the power of incentives...NYTIMES


""Two economists at the Wharton School of the University of Pennsylvania, while investigating how round numbers influence goals, examined the behavior of major league hitters from 1975 to 2008 who entered what became their final plate appearance of the season with a batting average of .299 or .300 (in at least 200 at-bats).
They found that the 127 hitters at .299 or .300 batted a whopping .463 in that final at-bat, demonstrating a motivation to succeed well beyond normal (and in what was usually an otherwise meaningless game).
Most deliciously, not one of the 61 hitters who entered at .299 drew a walk — which would have fired those ugly 9s into permanence because batting average considers bases on balls neither hit nor at-bat.""

Tips for improving your chances of admittance to an "Elite" college---Take them for what they are worth...

Tips for High School students wanting to increase your chances of admittance to an "Elite" school (you define that as you wish).  Worth a look and it might help you in general in preparing for that next step... Here is the LINK and below is my personal favorite:
"If you've taken nine or more Advanced Placement tests, you're more than twice as likely to be admitted into an elite school as applicants who have taken no AP tests.
With nine or more AP tests, your chances are 36.2 percent. With three AP tests, they're 20.9 percent. With none, they're 15 percent. Number of AP tests taken "is a proxy for 'rich white kids,'" says O'Shaughnessy. "If you're a rich white kid, you have more access to APs. You're going to attend a high school where people live and breathe APs. You've got an advantage.”"

Nice graphic showing Federal Taxes paid and how much YOU pay for various budget items...Need to know information to be an informed citizen.

A graphic from THIS report (HT: Carpe Diem) showing an example of a taxpayer adjusted gross income (income AFTER various legal deductions) of $34,140 (median US Income) and how much of that income goes to pay Federal taxes and how much is allocated to a variety of budget items.  Note: these are not all the Federal taxes we pay. For instance, we pay lots of "unseen" Federal taxes by way of import tariffs on many/most imported goods.  Money well spent? Depends on what YOUR priorities are, right???

Source: Carpe Diem

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