Chilean miners rescue is a triumph of Capitalism and Free Trade---What else did you expect me to say....

From Carpe Diem:

 ""It is the great multiplication of the productions of all the different arts, in consequence of the division of labour, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people.""
The Wealth Of Nations, Book I, Chapter I, p. 22, para. 10.

"It needs to be said. The rescue of the Chilean miners is a smashing victory for free-market capitalism.
If those miners had been trapped a half-mile down like this 25 years ago anywhere on earth, they would be dead. What happened over the past 25 years that meant the difference between life and death for those men? Short answer: the Center Rock drill bit, from a private company in Berlin, Pa. that has 74 employees."

          The drill's rig came from Schramm Inc. in West Chester, Pa.

The high-strength cable winding around the big wheel atop that simple rig is from Germany.


Japan supplied the super-flexible, fiber-optic communications cable that linked the miners to the world above.


Samsung of South Korea supplied a cellphone that has its own projector.allowing the miners to see films or videos of loved ones


Cupron Inc. in Richmond, Va., supplied self-sterilizing socks made with copper fiber that consumed foot bacteria, and minimized odor and infection.
In an open economy, you will never know what is out there on the leading developmental edge of this or that industry. But the reality behind the miracles is the same: Someone innovates something useful, makes money from it, and re-innovates, or someone else trumps their innovation. Most of the time, no one notices. All it does is create jobs, wealth and well-being. But without this system running in the background, without the year-over-year progress embedded in these capitalist innovations, those trapped miners would be dead." (HT: Carpe Diem)

Link between the price of corn and the price of beef and pork---Your " Baconator" at Wendy's is about to increase in price...better get it today!

Meat Market Corn Crunch Means Costliest Beef in Quarter Century

""Meat prices are poised to extend a 14 percent rally this year that drove U.S. retail costs to the highest levels since the 1980s as surging corn futures prevent livestock producers from expanding their herds.""

Corn is a necessary input that goes into raising cattle and hogs. If the price of an input increases then the cost of producing the final product will increase as well (assuming other costs are not cut to balance it out).  Example: Assume current market equilibrium price for a pound of beef and/or pork is $1.00 per pound ("lb") and the current equilibrium quantity (quantity demanded = quantity supplied) for beef/pork is 100 lbs. Embedded in the market price of $1.00 is the cost of all the inputs and a "normal profit" earned by the rancher.  This is shown in the graph below:

Now, assume the price of the corn feed increases by $.50 per pound of meat produced.  This means to produce the same 100 pounds of meat, the cost (price) is going to increase by $.50. So 100 pounds of meat will cost $1.50 to produce. What is true at 100 pounds is going to be true at ALL quantities of beef/pork supplied. At any point on the current supply curve we can add $.50 to the cost (price).  If we do that at every quantity supplied we will have a shift of the supply curve to the LEFT, indicating a DECREASE in supply ("Supply 1"). See graph below:

We cannot ignore out market demand curve!!  As the supply curve shifts to the left, we move along our demand curve up and to the left until we reach a new market equilibrium at $1.25 (NOTE: On the graph above I have "P1" at $1.50. IT SHOULD be $1.25 NOT $1.50!!).  Our demand curve tell us that at $1.00 our quantity demanded was 100 pounds of meat, BUT at $1.25 our quantity demanded is 75 pounds. This is consistent with the Law of Demand (price varies inversely with quantity demanded).

The food chain continues. Beef and pork are inputs into making a "Bacon-ator".  Well, I don't have to tell you what is going to happen to the market price of that bad boy!...Unless Wendy's (1) counters the increase of beef/pork with efficiencies and/or cutting some other cost or (2) takes a reduction in profit, then you will pay more for that menace to health and well-being in America.

#%#&#t^*(&# BLASTED Ethanol!! We are about to get more of it for our cars! That means less corn for food...I apologize in advance to all you starving people on "The Margin".

A nice example of interest group politics intersecting with economics.  Two interest groups (Farm Lobby and an ethanol lobby (fronted by a former presidential candidate) )exerting a disproportionate amount of influence over a policy that is roundly condemned by virtually everyone else on the planet, from the auto industry and consumer groups, to environmenalists. 

More Ethanol to Be Allowed in Cars

 "The agency's move is likely to be strongly challenged by livestock ranchers, auto makers and oil refiners. While the groups have varying motives for opposing greater corn ethanol production, they—along with many environmentalists—generally say the government hasn't conducted sufficient testing to warrant higher concentrations of ethanol in motor fuels...While the groups have varying motives for opposing greater corn ethanol production, they—along with many environmentalists—generally say the government hasn't conducted sufficient testing to warrant higher concentrations of ethanol in motor fuels. 

It is going to create a two-tier system at the pump...This won't cause any confusion...or will it?

"As early as Wednesday, the Environmental Protection Agency plans to announce it will allow ethanol levels in gasoline blends to be as high as 15% for vehicles made since 2007, up from 10% currently, according to two people familiar with the matter.  Anticipating such criticism, the EPA plans to also solicit comment on how gasoline pumps should be labeled, so as to avoid or reduce the potential that drivers will put the wrong fuel into their cars, the people familiar with the matter said."

So, pumps will have to be re-labeled and precautions taken by businesses to make sure people put the right gas in their cars depending on the year their car was produced.  When it is introduced, I am going to take a lawn chair over to my local Walmart and watch people figure out which gas pump to pull up to...I wonder if the warning label on the pump will  also have a number to call the EPA for inquiries...I would hate to be on the receiving end of those messages...

Trade flows between the US, European Union and China in one easy graphic...It made my night to find this! Ummm, yes I DO have a life, thank you very much!

       Trade flows between the US, China and the European Union...follow the arrows.  Start in the US. We export to China $69.5 billion worth of goods and services and import from China $296.4 Billion.  The E.U. exports $141.3 billion to China and imports $312.8 Billion from China. The next effect is China is a net gainer in terms of "foreign currency reserves" (see boxed inset below and to the right).  In other words, they have lots of dollars and euros.  Many of those dollars come back to the US to buy our national debt or to purchase other "financial assets", like home mortgages or car loans.  Yes, the Chinese govt may be the actual owner of all/part of your house or car! Strange, but true.  Should we be afraid of this?  If you listen to the politicians right  now campaigning for Congress, you would think so.  My bet is that right after the elections next month, you will hear very little about the Chinese financial threat.  Congress will have start to draw up a new Federal Budget and they are going to need those dollars from the Chinese (and other sources)...Best not to bite, or bite too hard, the hand that feeds you...

Source: The Big Picture Blog

Gas prices getting you down? Want to know why it is increasing? Glad you asked....

    The price of gasoline has increased lately, if you have not noticed. There are several reasons for this, from refining problems, oil supply interruptions, price manipulation, and, well, the oil "man" is greedy.  All may be true in some capacity, but I want to focus on an actual contributor: The Depreciating US Dollar in the foreign exchange market. 
    Almost all major commodities (oil, wheat, cotton, copper, gold, etc) are bought and sold with dollars, regardless of the nationality of the buyers and sellers. In other words, if India wants to buy oil from Venezuela, or Canada wants to buy rice from Thailand, they must conduct the transaction using US dollars. The dollar is the currency of record for international business. I am going to use a very simple example to illustrate the problem of the dollars depreciation on the price of internationally traded commodities, specifically oil.
   I am the dictator of an oil producing nation and I depend on the revenues from MY oil to keep me in power.  My currency is known as "The Hayward, or the "TH"".  Right now in the foreign exchange market the exchange rate for the US Dollar to TH's is at parity, or $1.00 = 1.00TH (the reciprocal is also true, 1.00TH =$1.00).
    Assume currently the market price of a barrel of oil (about 42 gallons) is $50.00US.  So, when I sell a barrel of oil on the international market I get $50.00US. When I take that back home I can exchange it for 50.00TH and buy a new gun to protect myself for 50TH.  I am happy!
    What happens if the dollar DEPRECIATES relative to my currency?  If this were to happen then it means that it now takes MORE dollars to buy the same number of my currency, the TH.  Assume the new exchange rate is now $2.00 = 1TH. This means it now takes $2.00US to buy 1.00TH.  If I sell my barrel of oil for $50.00US on the open market and then exchange it back into TH's, then I will ONLY receive 25TH's! Not enough to buy another gun! Well, this is not acceptable.  The purchasing power of my currency has decreased. I am going to have to do something about it...
   I must raise the US dollar price of my oil to $100.00US just to get the same 50.00TH I got before ($2.00US fetches 1.00TH-- $100.00 divided by $2.00 equals 50TH).  I obviously cannot do this on my own. I don't have enough market power world-wide to do so.  The market forces of supply and demand (or market manipulation, if that is your perspective) will increase the dollar price of oil for me.  Other oil producers will face the same problem too.  The world price of oil increases, oil is a major input into making gasoline, hence the price of gasoline increases at the pump...Stuff rolls downhill...
   Most people don't link the value of the dollar to the price of gasoline.  Again, it is not necessarily the main cause, but it is contributor.  Feel smarter? You should--you now know something 99% of Americans don't know....

Supply and Demand analysis of the wheat and corn markets...What else are you doing on a Sunday morning? This weeks feature: Complements!!

This article (WSJ: Harvest Shocker Rattles Wall Street) is chocked full of basic supply and demand problems, including substitutes, complements, and the overall economic concept of opportunity cost.  This entry will focus only on a primary market and its affect on complements.

The commodities market reacted to a USDA report that downgraded its projections for the coming wheat, corn and soybean harvests. 

"The U.S. Department of Agriculture sliced its harvest projections for corn, soybeans and wheat, throwing fuel on a three-month-old commodity rally and deepening worries about rising food prices. The agency's decision to cut its month-old corn projection by 3.8% startled traders, who had expected a far smaller reduction. Prices of corn-futures contracts at the Chicago Board of Trade soared Friday by their daily permissible limit of 30 cents. The corn contract for December delivery settled at $5.2825 a bushel, up 6%."

For simplicity, in the first two graphs below I grouped wheat and corn into the same broad market since both are affected in a similar way.  The first graph show the market in equilibrium before the announcement:

Supply is affected mostly by the cost of the inputs that go into producing a good, such a labor, raw materials, and other production resources consumed.  However, there is one determinant of supply that is more general and does not directly affect the cost of producing --"extraneous factors".  This is a catch-all for anything else that changes supply--weather, terrorism, asymmetrical information, etc.  This scenario probably can be classified as the latter, because the market was not expecting this type of report on the projected crop yield. 

So, the USDA is expecting a smaller harvest, which would indicate a DECREASE in supply of wheat and corn. 

Graphically this would be shown by a shift of the supply curve to the LEFT representing a DECREASE in supply. 

The market quantity decreases and the market price increases because (1) we know the quantity supplied at every price decreases (relative to the previous curve) and (2) moving along our demand curve up and to the left we can see that the quantity demanded decreases as the price increases (Law of Demand).  We are now at a new equilibrium price of "P1".  The article suggests this is good for other businesses:

""The report sent ripples across Wall Street, where prices of stocks of food companies that buy large amounts of grain fell. Chicken giant Tyson Foods Inc. slipped 7.7% Friday. Meanwhile, the stocks of companies that supply farmers, such as tractor maker Deere & Co. and fertilizer maker Mosaic Co., rose 4.8% and 6.6%, respectively.""

There are SEVERAL supply and demand affects in this one paragraph! But we will only look at one--the affect on farm equipment producers such as Deere and Co. that makes and sells agricultural harvesting equipment.

""Economists expect farmers to respond to high grain prices by planting millions more acres of corn and wheat...""

If the price of wheat/corn increases, farmers will plant and harvest more of these two commodities.  At the margins they will need more farm equipment to harvest the crops.  Farm equipment is a complement, which means it is used in conjunction with another good, in this case wheat and corn.

""Meanwhile, the stocks of companies that supply farmers, such as tractor maker Deere & Co. and fertilizer maker Mosaic Co., rose 4.8% and 6.6%, respectively.""

Graphically, in the market for "Farm Equipment" we have an existing equilibrium (the first graph) . 

 

An increase in demand for Farm Equipment will shift the demand curve to the RIGHT as the graph below illustrates:

The market quantity increases and the market price increases because (1) we know the quantity demanded at every price increases (relative to the previous curve) and (2) moving along our supply curve up and to the right we can see that the quantity supplied increases as the price increases (Law of Supply). We are now at a new equilibrium price "P1".

 Want extra credit? Read the article and respond with a short analysis of other (1) supply and demand problems and/or other basic economic concepts you can find...Hey, it is like a scavenger hunt!  I think I will do this for my next birthday party!!

How many of you Americans could ACTUALLY pass the Citizenship test to become a US Citizen? HA! I thought so...See test here...

Can YOU pass this test to become a US citizen?  For many of us, it is a good thing we were born here, because we might not be able to get a passing score! Below is a small sample of the questions.  Go HERE to see the complete test and the answers..GOOD LUCK on becoming an American! :)




96. Who signs bills to become laws?
a) the Secretary of State
b) the Chief Justice of the Supreme Court
c) the Vice President
d) the President

95. What did Susan B. Anthony do?
 a) fought for women's rights
b) founded the Red Cross
c) the first woman elected to the House of Representatives
d) made the first flag of the United States

94. What ocean is on the East Coast of the United States?
a) Arctic Ocean
b) Indian Ocean
c) Pacific Ocean
d) Atlantic Ocean

93. What is the name of the Speaker of the House of Representatives now?
a) Hilary Clinton
b) Robert Byrd
c) Joe Biden
d) Nancy Pelosi

92. There are four amendments to the Constitution about who can vote. Describe one of them.
a) Citizens eighteen (18) and older can vote.
b) Citizens seventeen (17) and older can vote.
c) Only citizens with a job can vote.
d) Citizens by birth only can vote.

91. Who is the Commander in Chief of the military?
a) the Vice President
b) the Secretary of Defense
c) the President
d) the Attorney General

90. Why does the flag have 13 stripes?
a) because the stripes represent the members of the Second Continental Congress
b) because it was considered lucky to have 13 stripes on the flag
c) because the stripes represent the original colonies
d) because the stripes represent the number of signatures on the U.S. Constitution

85. How many amendments does the Constitution have?
a) ten (10)
b) twenty-three (23)
c) twenty-one (21)
d) twenty-seven (27)

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)

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

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...""

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.""