Archive for January, 2009

Wiki Page

Tuesday, January 27th, 2009

Here’s the link to the wiki page that we worked on yesterday:

Deadline fail

Monday, January 26th, 2009

I didn’t like my previous post that occupied this place, so I’m rewriting it. The only part that I still like is this:

Also over the weekend, I decided that Rush Limbaugh and Karl Marx were, ironically, similar in their choice of audience and rhetorical techniques. They speak to a mass of people, and turn them against a priveleged elite. The only difference is that they are polar opposites on the political spectrum, and one understood things in general.

For the past decade or so, Americans have been living well beyond their means. While this created a problematic lending system domestically, as I previously ranted about, which is unsustainable, we also have been importing increasingly more than we have been exporting. Just in 2007, it appears that we have been running a trade deficit of greater than 100 trillion dollars. Logically, it makes sense that as aggregate income decreases, U.S. spending on both domestic and imported goods will decrease. This is one way of looking at it, at least. In that case, the countries from which we import our goods will lose money, causing their companies to record losses of revenue and adjust their allocation of funds. This will cause a decrease in incomes, and will ultimately lead to worldwide underemployment and recession.

What if we don’t decrease our spending on imports? The theory of demand accounts for changes in quantity of goods demanded given income, but also includes the availability of substitutes. What if these individuals who have been living outside of their means consider (more expensive) domestic goods as superior substitutes for (relatively inexpensive) imported substitutes? There are some items people can do without – people in troubled times won’t be buying the fancy new Guitar Hero guitar, or the illegal LED lights for the bottom of their cars; frivolous (luxury) spending will decrease. But for the items they can’t do without – toothpaste, food, etc. – they will substitute inferior substitutes. Instead of getting the unnecessarily exciting invigorating toothpaste in the shiny package, they will get the dubious, imported Wal-mart brand toothpaste for half the price (or less? Walmart is satan – I haven’t been in a while).

The general consumer is unconcerned about the ethics of shopping at Walmart – that is, the fact that their money is being transported to swindling sweatshop owners in the third world, allowing them to purchase their products at extra-strength low prices. Nor do they think about the fact that, by favoring Walmart to more expensive alternatives, they are taking their money away from U.S. production facilities and sending it abroad. If consumers are largely this complacent or desperate, more money will flow out of the U.S., causing increases in revenue for overseas firms. In the case of Walmart-style production, that money will just go to the factory owners, causing greater income inequality. Not all factories are like that, however, and in some cases I’m sure it will increase income levels at all levels of production. Either way, foreign economies that have become more competitive in international markets will increase their incomes, and therefore their demand and consumption.

Another alternative depends on government policy. The government could decide to defend domestic industry by implementing protectionist measures to artificially increase the world price of less expensive, foreign substitutes. I’m not entirely sure how this would impact the world market. I believe that it would cause consumer spending to decrease more evenly between domestic and imported goods, causing a situation more like the first scenario I described. What would that do to domestic economic conditions, however? Prices would be raised overall, and they would have to eliminate more items from their budget, I suppose. I’m not sure… inflation? deflation? you tell me! I think it’s a price effect, though, and that prices will fall as aggregate purchasing power decreases.

I think I’m also assuming throughout this entire thing that most U.S. consumers are irresponsible, and have been spending beyond their means to the extent that they have to be overly cautious. I’m also focusing on trade, not financial markets. There are altogether too many facets to rant about in one go. How would an individual representative of aggregate economic consumption decisions be characterized, I wonder? I think the savings rate has recently dropped to below 1%, so I find it hard to imagine him being that responsible… but maybe I’m mistaken.

I do believe that this is more what was expected initially. Hopefully I did not disappoint.

http://www.bea.gov/scb/pdf/2008/07%20July/0708_international.pdf

Brainstorming on the cause of US financial crisis and its affect on the global economy

Monday, January 26th, 2009

 

I remember back in the days when Dow hit 14000s in late summer of 2007 when I traded stocks as an individual trader.  I thought that times were good.  Whenever I watched CNBC and read Wall Street Journal, I never realized that US stock market faced any threat. However, things got ugly as subprime mortgage crisis unraveled.  Since then I would never realize that I will ever experience what happened to be a largest US financial crisis since the Great Depression.  Now that the Dow is hovering around 8000, 60% down from the all time high in the 2007 late summer, I would like to know how bursting of housing bubble could have such an immense affect on the US stock market and the economy. I cannot grasp and pinpoint the exact cause of the start of the US financial crisis but it seems to be the combination of all the misguided policies and greed. We cannot know or predict when this crisis will turn around.  Krugman offers the dire prediction that US economy will resemble what Japan had experienced in the 1990s, a decade long of growth recession.  According to Krugman the two major causes of US financial crisis resemble what other past financial crisis had been, which are asset bubble and housing bubble crash.  It started to make sense and provided me with a big picture that the US economy was long-ago already on an inevitable path to the current crisis.  The US economy, as the book states, a victim of a ponzi scheme.  Americans were disillusioned by Greenspan and the government. We borrowed so much money from other countries to buy their products and kept inflating housing prices and we believed everything was okay. Why a collapse of housing market in the US can create a global recession?  Despite BRICs and other emerging markets especially ones that experienced the financial crisis before, hoarded enough US and Euro currencies to prevent another financial crisis, these nations are still vulnerable to the US economic slowdown because much of their products and goods are exported to the US.  When times are good, we tend to ignore the pundits who warned and predicted the burst of US economy bubble and the inherent problems but keep enlarging the problem until the problem actually get us.  Maybe this financial crisis is another transition period for the US economy to advance into new financial era like back in the Great Depression.  Still, the US economy is in flunk as of now and it seems it is getting worse, not better.  We have to explore not only the past events that led to current crisis but also study the current development to understand the nature of the financial crisis.     

Brainstorming

Monday, January 26th, 2009

Some of the things we need to figure out/some questions we need to explore before we answer this broad question are:

  • What happened?-what lead to this financial crisis?, what is the history and background to this problem?, how long have the wheels been set in motion towards this crisis?
  • Who are the major players in this crisis? – domestic, international
  • What are the similarities between this financial crisis and past financial crises?  How were these crises solved/fixed?
  • What role does the United States play in international markets?

I am interested in learning and understanding how the United States got into this problem and what lead to it.  By the end of this class, I want to be able to explain to others the current problem and what impact this crisis will have on the current and future Unites States and Global economy.  I also want to learn more about international markets and what role the Unites States plays in them–How do other countries depend on the financial success of the United States and how does the United States depend on other countries?

Brainstorm

Sunday, January 25th, 2009

I think one of the important distinctions we need to make in this assignment is the difference between correlation and causation. In order to understand the implications of the current financial crisis, we need to understand which symptoms would have occurred regardless of the US crisis and which are dependent upon it. We need to know about what had been going on before our financial problems and what has been going on since then. In other words, we not only need to have a firm grasp of the causes and consequences of our own recession, but also an equal comprehension of the state of the global economy as a whole and the individual economies of other countries. Also, we should look at the implications on countries that may not have much interaction with the US but may with strong trade partners of the US; a kind of second degree implication. Obviously, we need to also think about what will happen. But I think understanding what has happened so far will be our main source for these predictions.

One thing I am personally interested in is how long will the effects of this crisis last? Is this something that will eventually settle out and go back to the way things were or has this permanently changed our economic system? If so, will it affect purely capitalistic countries in a different way than countries that also practice some socialist policies?

Also, would it be helpful to compare our current economic state to the 1980’s and the 1930’s? And perhaps even comparing our crisis to past crises in other countries? How are we doing in relation to past problems?

I’ve heard it said that this large recession has been caused by what is essentially a buildup of pressure from the lack of large recessions since the 80’s. I’m not sure I agree, but it’s something to look into.

Was this caused by the increase in globalization? Will this help or hurt globalization?

Alright, I’m done ranting.

Stream of Consciousness

Sunday, January 25th, 2009

How do we approach the question of causes and implications of a global economic crisis of the magnitude we face today from the perspective of undergraduate economics and business majors? We are far less than qualified, as professionals much more highly educated than ourselves are making careers out of formulating solutions, and coming up with more questions than answers. The problems faced today are unprecedented, and the consequences of decisions policymakers and politicians make today are uncertain. It is a terrifying time, and we sit as students trying to learn by teaching ourselves. This course is not required for any of us, which is an important starting concept. We are here by choice, meeting for an hour or so every other day to bounce ideas off of one another and come up with some sort of better understanding of where our world is and where it is going. This is significant because it is safe to assume that we will each contribute fully to the course, making the situation optimal.
From this course I hope to take a greater understanding of our economy, its international connections and workings, and its driving forces. I hope that we come up with some sort of preliminary understanding of the crisis that we are in, but rationally I can not expect an answer. It seems that in the case of this course we face many questions, and the way that we approach these problems will mold our comprehension. The means justify the ends (or lack thereof) in this case. Let’s hope so at least.

Brainstorming

Sunday, January 25th, 2009

I personally know very little about the current economic crisis. I have seen the stock market go down and I have seen seen employers cut down on the number of employees. But I do not know the economic causes behind these issues. So the first thing I think we should do is to look at the problems and causes just in the United States. Once we figure out those issues I think we would have a much better basis and idea for figuring out how our economic problems have spread to other countries. The United States is a very active participant in the global economy so it is without a doubt that this crisis has affected other countries, but the question is how much and to what extent.

I would like to just get a better understanding about the whole crisis. Learn from my peers and get a perspective on what is happening and what will happen in  the coming months.

Brainstorm

Sunday, January 25th, 2009

I think the most important thing to learn about this crisis is how it will directly affect us and how we, as students and young professionals, can adjust to and alleviate the effects of this crisis. The situation is so far reaching that obviously nearly all aspects of our lives have been at least marginally affected, but I don’t know if we understand what international implications have and may continue to occur. I know that for me, the field of accounting is still considered a strong position with relatively high hiring levels, but there have been many changes in recent years. Since 2002, FASB has been working to converge American and International accounting standards in order to provide better comparability between multinational companies. In 2008, the SEC announced that all companies would be reporting under IFRS by 2014; this is contrast to FASB’s original plan to simply reduce differences between US GAAP and IFRS. In the age of globalization the use of completely different standards among countries and companies which to business on a daily basis seems inefficient and ineffective.  International markets will run more smoothly if all the operators can understand and effectively analyze each other’s financial statements and reports. It would be interesting to see what steps countries take to increase comparability and to differentiate themselves in order to promote their own economies. This crisis could have the effect of countries becoming more open to achieving one global economy or pulling back in order to be more self-sufficient and avoid dependence on unstable markets. How will companies react in order to better predict financial instability within certain markets and prevent future financial collapses? Will using the crisis as a catalyst for change bring about improvements, or will these changes prove ineffective and pointless in aiding future financial circumstances?

Brainstorming International Finance Crisis

Saturday, January 24th, 2009

I think that there are several important questions that need to be answered in order to go about solving (or at least attempting to find a solution) to the current financial crisis. After reading Krugman’s book, I think it is important to find out what the origins of the current crisis are by looking at past crises. The crises Krugman highlights seem to be affecting us (the USA/the World) in some form or another. What started the current crisis? When did it start? What got the “ball” rolling in the wrong direction? What exactly is the shadow market?  I have been also reading the George Soros book called “A New Paradigm for International Markets” which, although I have not finished, has shown me new perspective on the situation. In his book, Soros perpetuates his Theory of Reflexivity. Without delving into details, he says that humans are incapable of attaining perfect knowledge because they are a part of the system in which they are trying to understand. This is significant because Economics attempts to solve problems in the way that natural sciences do by testing objective statements using empirical data and trying to use theories based on perfect knowledge until they are falsified. However, in the natural sciences there is a separation between participants views and the actual course of events. In the world of financial markets, there is so much influence on what people feel, or speculate, that it is impossible to separate participants from the course of events that they are participating in. This introduces a high level of uncertainty if the IV and DV variables cannot be controlled from an outside observer like in natural sciences and that is why economics based on perfect knowledge and the idea that markets tend toward equilibrium and deviations from it are random, is INCORRECT, according to Soros. How this relates to my brainstorming is this: Are their patterns of human behavior that influence financial markets and how so? If economics is based on perfect knowledge, but perfect knowledge is unattainable, then do we question the validity of our knowledge about how international markets work? If our knowledge was correct, wouldn’t we have been able to avoid this crisis? Why did governments not take more steps ahead of time to correct the crisis? Or is they did, why didn’t it work? Also, how does this crisis effect the individual? Employment, income, spending, credit, bills, etc… On another note, how does the crises affect developing countries? If there really is a core-periphery relationship between developed and underdeveloped countries, then wouldn’t this financial crisis rock the socks off Third World countries? How do we avoid crisis like these in the future?

Brainstorming ideas

Saturday, January 24th, 2009

I think that the financial crisis and subsequent recession is definitely having a negative impact on economies around the world.  Countries around the world are trying to figure out how to get themselves out of this mess, that in my opinion, was created by greed.  One thing positive is that after all of this is over, hopefully lessons will be learned from it and there will be tighter standards to prevent something like this from happening again in the near future.  I don’t know if the financial crisis actually started in the U.S. or not, but I think that a lot of foreign investors throughout the world might not be so quick to jump into investing in U.S. companies after seeing what has happened over the past year.  Of course its not just the U.S. banks and companies struggling right now, its happening in different countries around the world.  I think that part of the international problem might be that some other countries attempt to imitate the U.S. in certain economical aspects, and when the U.S.’s economy is struggling, others may as well.  Also, there are other countries that peg their currency to the U.S. dollar.  The dollar’s fluctuation due to bubbles or recessions, or interest rates, or changes in the money supply might affect other currencies as well.  Politics have definitely been affected too, because any party that was in power or is currently in power during this crisis, is likely to not be re-elected.  We saw this in the U.S. with Obama handily defeating McCain.  I’m not saying that McCain would have won if our economy was booming at the time, but a lot of people just wanted to vote a different party into power that would hopefully offer some new ideas and solutions.  What is happening in the short-run is that the U.S., and probably many other developed countries around the world, are cutting interest rates to almost zero in order to get people and businesses to start borrowing and spending again, there has been and will be a whole lot of money pumped into the economy from the government plans, and people are getting help from the government to stay in their houses by making deals with the mortgage companies because of government mortgage bailout money and large failing companies are getting rescued by the government.  I think that all of this and other stuff that has been occurring will lead us to a pretty high economic boom within the next 3 or 4 years and it will also end up leading to inflation which the Fed will have to control by raising interest rates back up quite a bit.  As far as international goes, I think that in the short-run, other countries might not view the U.S. as being a totally safe place to invest their money, but in the long-run, the U.S. will once again prove that it can overcome any economic crisis that comes its way, and it is my understanding that even as bad as U.S. stocks have been doing over the past year, a lot of other countries have been doing much worse, so I guess that looks good.  I hope at least some of what I wrote makes sense.  This was definitely just me typing up my thoughts.  Anyways, I would like to have the question focus on international investing during the crisis and predicting how it will be affected after the crisis.  I think that it will be interesting to see how foreign investors have been reacting to the crisis, and how U.S. investors have reacted as far as there international investing strategies.  Are people actually investing more in the U.S. now since the stock market is hopefully at or close to its bottom, or are investors scared of the U.S. right now?  I will post more after doing more reading on the subject matter.