How to convert daily returns to annual returns? I have a task: to download daily stock quotations, create a portfolio and draw a CML-line. Risk-free rate was given: 6.5% of annual.
I decided to convert daily returns to annual returns, using formula from here:
$$AnnualReturn = [(DailyReturn + 1)^{365} - 1]*100\%$$
I found out, that result numbers are just insane. For example, for one company price 2017/09/07 was 27.025 , price 2017/09/08 was 27.77. Then
$$ DailyReturn = \frac{27.77-27.025}{27.025} = 0.0276$$
$$AnnualReturn = [(1.0276)^{365} - 1]*100\%=2069063\%$$
I suppose I did something wrong. Could you help me, please?
And there is one more question: can I convert a daily return to annual return like this?
$$AnnualReturn = DailyReturn*365$$

So, let me start with your second question.  No you cannot multiply by 365.  You could approximate it by $$\log(\text{Annual Return})=365*\log(\text{Daily Return}),$$ but for what you are doing, it does not make sense to do so.

You are correct in your annualized rate of return.  It is 2069063%. It should be obvious as to why you would not want to do this.

There are two solutions.  The first is to convert annual rates, such as the bond rate, from an annual format to a daily format.  So make your risk-free rate: $$\text{Daily risk-free rate}=1.065^{\frac{1}{365}}-1=0.0001725485.$$  The second is to search through the dates of your returns and find returns that are 365 days apart, so return would be $$r=\frac{p_{366}}{p_1}.$$

By annualizing daily returns, you are insanely increasing the variability, but it is artificial so it isn't a true increase, it is an artifact of the method you are choosing.

It is as simple as this:
Step 1:
Calculate Daily return % = (Today Close Price - Yesterday Close Price)*100/Yesterday Close Price
Example:
Yesterday Close Price = 200
Today Close Price     = 201
Daily Return %        = (201-200)*100/200 = 0.5%
Step 2:
Annual Return = Daily return % * 365
In Example above:
Annual Return %       = 0.5*365 %
= 182.5 %


Can quantative easing be summarized as "The state prints cash to pay its debt to private sector"? I find that most sources describe quantitative easing in an overly complicated way that obscures what it basically means.

As far as I understand a central bank is a public entity  owned by a state, so I don't see much point in distinguishing a state entity from a central bank entity.

Therefore, I tend to find that the traditional descriptions like  "the central banks buys government bonds from private banks in order to inject money in the economy" are ridiculously  convoluted and funny.

As far as I understand, if I have a government bond, it is a promise that the state will pay me back some money at some point. So when I'm hearing "the central bank buys government bonds", all I'm hearing is actually "the government is printing cash from nothing to pay me right now, and destroy its debt".

Is my interpretation correct? Why isn't my interpretation the standard official intuitive explanation of quantitative easing? Is it just for newspapers and bankers to sound "serious"?

Altough you are correct saying that the state "own" central banks, they should be independent from their government. This gives freedom to monetary policymakers from direct political or governmental influence in the conduct of policy.

Given that, I would say that your interpretation is a bit exaggerated and maybe biased somehow.

Quantitative easing (QE) is a monetary policy in which a central bank purchases government securities or other securities from the market in order to increase the money supply. This is made with newly created bank reserves, but doesn't mean that new currency (bills and coins) has been printed. In theory, with more liquidity, the domestic demand would increase and eventually promote economic growth. Then, the excess of liquidity is absorbed by the growth and inflation would remain low.

The problem is if the economic growth don't happen, there will be inflation.

Using a more informal language, it's correct to say that the government is creating money in the present, hoping that this fresh money will increase economic growth in the future.


How much revenue could an 100% land value tax be able to generate for the Indian government? So as a Georgist (follower of Henry George), I believe most form of taxation is immoral and economically inefficient except the land value tax (not to be confused with property taxes) and other pigovian taxes. However, I'm also a pragmatic person and therefore, it may not be possible to fund an entire government through these taxes alone as most Georgists believe.
That is why I want to ask how much revenue would an 100% land value tax be able to generate for the Indian government, assuming no changes in the current levels of the government.
I do realise such a tax would be difficult to practically implement due to poor land records in India but nevertheless, I'm interested to know if it is feasible in theory.

In Australia, Prosper compiled a survey of all economic rents and came to the conclusion that the Australian government could effectively be funded with rents alone.
This is without taking into account that abolishing taxes will further increase the value of economic rents, i.e. in the absence of taxation firms and households will have more net income to pay for economic rents (land, carbon, licences, fees) which further increases government revenues.
Mason Gaffney (2009) argues that all taxes come out of rents (ATCOR). According to this a tax reduction would increase rents by at least the same amount. This would imply that a government funded with taxes could just as well be funded with rents. See my question about ATCOR here.


Why is sugar cane still harvested manually in Brazil? I read that up to 70% of Brazil's sugar cane in the Sao Paulo area is still harvested manually. Some workers are paid $1.50 per tonne. Why is it still being cut manually? Some possibilities:

(1) farm owners lack the capital to buy mechanical harvesters

(2) human labor is cheaper

(3) regulatory or legal obstacles are blocking the use of harvesters

Although it seems that it necessarily boils down to the idea that labor is very, very cheap for some reason or another, it is often the case in these situations that workers unions, somewhat perversely, will block the firm´s replacement of labor with capital, in order to keep the workers employed.


How to interpret Employment Elasticity in this text? In this VoxEU text, «Promising ideas for future research on the employment effects of minimum wages », how do I interpret the elasticity of employment?

I would think of it as percentual change in quantity of labour demanded over percentual change in minimum wage. However, if I google the concept, I get % change in employment associated with a % change in output. Ok, Factor Incomes = Expenditures = Output. However, although at a national level they are the same, at a micro level, I don't see how both definitions would equate...

Any help would be appreciated.

I'm citing the first two lines of the article you refer to (emphasis mine):

  The debate among researchers about the employment effects of minimum wages remains intense and unsettled. There is clear variation in the magnitude of estimated employment effects across studies, with the debate often being between an elasticity for low-skilled groups equal to (or indistinguishable from) zero, or an elasticity in the range of −0.1 to −0.2.

Mechanically, you can always compute elasticities of any two variables w.r.t. each other at an initial point $b$, which is defined as

$$\eta_{a, b} = \frac{\partial a(b)}{\partial b}\frac{b}{ a(b)}$$

Simply googling employment elasticity gives you

$$\eta_{employment, X}$$

where $X$ is the unknown. What is it, that employment is elastic towards?

The article makes clear that indeed, $a$ in this context is the employment rate, while $b$ is the level of the minimum wage.

Instead of googling, you could have looked at any of the studies cited in the article. The first sentence in Dube et al (2010) actually states that

  We use policy discontinuities at state borders to identify the
  effects of minimum wages on earnings and employment in restaurants
  and other low-wage sectors.

So they're interested in two related elasticities, one of which was the one you initially suspected. Their table 2 will give you some estimates of those elasticities.

Employment elasticity is the growth of employment relative to growth of Economy. Reforms of 1991 is a shift in era in Indian economic realm. Post Liberalization the major change occurred is the shift in population from agriculture to Manufacturing and Services. India traditionally being an agrarian economy, the low growth and heavy population pressure on land, disguised unemployment have led to people waiting for opportunity to change to a rapid growth environment and liberalisation provided a medium.

Despite aspiring for an Industrial economy during Nehruvian era, there was a marginal growth which could not sustain momentum resulting in low productivity in manufacturing as well. Post liberalization period gave an opportunity for people to turn to services with the growth of banking, financial sector, BPO industry, coming of internet. Though new employment opportunities have come but the rapid rise of population, urbanisation have made it mandatory to raise the employment growth. So, unlike expected post liberalisation has led to stagnation in employment growth. With deregulation of sectors and removal of licenses, emergence of private sector and employment in trade and tourism etc also tried to provide employment. But overall Employment Elasticity in India has been flexible till 1991 and post liberalization has made it rigid and sectoral composition to GDP of the country changed especially with rapid growth in services sector and marginal growth in manufacturing, and not much change in agriculture. The low employed industry of services is contributing maximum share to GDP is an evidence that employment elasticity is rigid posing a challenge to the current Indian government and revival of manufacturing through 'Make in India' could be a great opportunity to meet the growing requirements.


How and when is M0 money created? The Federal Reserve Coin and Currency Service Website
describes their currency order process thus:

The 7.2 billion notes included in the FY 2015 order reflect the Board’s estimate of net demand for currency from domestic and international customers.
The print order is determined, by denomination, based on historical
payments to and receipts from circulation, destruction rates, and also
to build inventories of new-design notes before issuance.
Historically, most of the notes that the Board orders each year
replace unfit currency that Reserve Banks receive from circulation.
The estimated number of notes that Reserve Banks will destroy accounts
for nearly 85 percent of the proposed FY 2015 print order and includes
both unfit currency, as well as all old-design $100 notes received
from circulation.  The expected growth of Reserve Bank net payments
(payments less receipts) to circulation primarily accounts for the
remainder of the notes in the FY 2015 print order.

From this description, it is unclear to me how and when M0 Money is created. It seems this is tied to 'Reserve Bank net payments'.
How and when is M0 money created?

First it is helpful to provide some definitions.

M0 includes all paper dollars (plus coins and US notes).  Regardless of whether or not they they are held in the banking system.

M0 is not a useful metric because it omits electronic dollars.  The two main liabilities to the Fed are electronic dollars (some refer to them as Fed Funds or deposits at the Fed which banks can hold) and paper dollars.

M0 + electronic dollars = MB.  MB is by far a much better metric for measuring what the government has created for money.

The Fed's balance sheet may be illustrative in showing how this works. Much of the Fed liabilities are MB, but only a much smaller part are M0. The difference between paper and electronic dollars is not significant.  If a bank asks the Fed to trade their electronic dollars for paper (or vice versa, the Fed will oblige.  If the Fed runs short on paper, they will have the treasury print more, but this doesn't expand MB.

Think of paper dollars as ice, electronic dollars as flowing water and MB as all the water in the system (frozen or flowing).  Whatever the form, it is not important as the total amount of water remains the same.

Let's try to answer our question specifically using a timeline and ledger entries.

Say the Fed buys some assets from a bank.  They acquire these assets (+Fed assets) and grant the bank new deposits (+liabilites aka bank deposits).  Now this is always done with electronic dollars to start.

Then say the bank has a lot of withdrawals and wishes to convert some of their federal despots assets into cash assets.  They ask the Fed to do this, which gladly obliges.  The Fed decreases their deposit liability and increases their paper note liability.  In this moment M0 was increased.  But it is not significant.  What was significant was when MB was increased after the Fed acquired the asset from the bank.

Physical Money

M0 is just paper and metal.  The paper is printed in D.C. and Fort Worth by the Bureau of Printing and Engraving and banks purchase it using electronic money they have in their federal reserve deposit accounts.  Nothing special there and the effective money supply doesn't really change when M0 changes.

How the Fed Increases the Money Supply

What it sounds like you are asking is how the Fed increases the money supply in general.  The Fed is constantly buying, selling, lending, and borrowing.  It does this through its open market operations desk at the NY fed and through other mechanisms such as lending to banks at the discount window and paying interest on deposits at the fed.  At any time you can look at how much money is flowing out of the fed (purchases, loans, and interest) and how much is flowing in (sales, redemptions, and borrowing) and compute the difference.  If they are buying and lending more than they are selling and borrowing, the money supply increases.  That's how it happens and it is going on continuously.  Sometimes they buy things for above their market price (or push the price up) if they are trying to inject a lot of money into the supply or buoy up a particular market.

If the Fed increases the money supply in general, then it is possible that the number of physical dollars in use will increase, which means the Bureau of Printing and Engraving needs to spit out some more paper.  This is not that important of a consequence, though.  The spitting out of paper is not what increases the money supply.  Every physical dollar is purchased with an electronic dollar, so the effective money supply does not change.

Where Fed Dollars Come From

The key to understanding the Fed is to remember that they are the only institution that doesn't really have a budget constraint.  When they buy something, they create brand new dollars to do so.  When they sell something, the dollars they receive effectively disappear.  Every other institution, including the federal government, must actually have dollars to spend or get them via borrowing.    Because of this property, every time they buy something or make a loan, the money supply increases.

By the way, the fact that the Fed can make up and destroy money is why it makes little sense to worry about or discuss the Fed's balance sheet.  It's the unique institution with the property that its balance sheet doesn't need to affect its behavior.


Why do low-income earners tend to spend more? I am reading an article in the Economist.
It is discussing the China's unbalanced economy especially the lower household consumption proportion in GDP than the global average. The writer thinks the poor social safety net in China plays a part in curbing the household consumption.
Then follows the below sentence.

As low-income earners have a higher propensity to spend, the lack of
support weighs on consumption more generally.

I don't quite understand why low-income earners have a higher tendency to consume.
I can't find any other supporting details in the article as if the writer takes it as a common sense.
Anybody could help to shed some light on it?
Thanks.

Marginal propensity to consume  is the proportion of an aggregate raise in pay that a consumer spends on the consumption of goods and services, as opposed to saving it. If someone gets extra income $\\\$1000$ and consumes  $\\\$750$ of this additional income their marginal propensity to consume is 0.75.
The marginal propensity to consume is higher for poor people since they have to devote higher share of an income to necessities. Suppose that person needs to spend at least $\\\$500$ a month for their living expenses. Now in such situation if a poor person would get a $\\\$500$ of income per month (relative to situation when the person would have nothing) they will have marginal propensity to consume 1 whether such person likes it or not as all additional income they get will be spend on these necessities. Person whose income would increase $\\\$1000$ (again relative to 0) will have to have at least marginal propensity to consume 0.5 and person with income increase of $\\\$10000$ (again relative to 0) at least marginal propensity 0.05. Of course, the richer people wont consume only necessities but the point is that as peoples incomes decrease the necessities become higher share of their budget.
At the same time as people get richer they spend a smaller proportion of their income as they already enjoy a high standard of living and thus are able to devote more of their income to savings.  You can read more about this in Blanchard et al Macroeconomics: a European perspective or any other macroeconomic textbook.

they do NOT spend more as that is impossible
they have a PROPENSITY  to spend which is normal as the less money you have the more you have to spend on rent food yada yada


Are there any examples of tariffs working? Nations have imposed tariffs on goods for many reasons throughout the ages.  Are there any examples of a tariff actually succeeding at its intended goals?

When I research tariffs, I find countless arguments that they never one have worked, and I find a lot of current events documents arguing why particular tariffs wont work, but I'm having it hard finding any economist pointing to a tariff that worked as intended.

Bonus points if the tariff worked as intended and was not considered to be a net loss for the country that imposed it.

I interpret your question more broadly as one about whether protectionism has ever "worked". Two economists that think it has are Chang Ha-Joon and Dani Rodrik. You can therefore look up their work.

Two arguments they use are:

The infant industry argument.

In a 2007 article, Chang gives various examples of protectionism "working", including the US in the 19th century:

  the US shifted to protectionism after the Anglo-American War of 1812. By the 1830s, its industrial tariff rate, at 40-50 per cent, was the highest in the world, and remained so until the Second World War.

The other oft-cited examples are East Asian economies like Japan, Korea, and Taiwan in the postwar era.

The second-best argument.

The world is a second-best place and so movements towards seemingly-freer trade may not always be a good thing. Classic example as told by Rodrik (2015):

  imagine that beef is supplied by the United States to Germany at a price of \$100. Assume that Germany imposes a tariff of 20 percent, raising the consumer price of US beef in the German market to \$120. France, meanwhile, can supply beef of equivalent quality only at a price of \$119. Prior to the preferential agreement between France and Germany, French suppliers, facing the same tariff rate as US producers, were outcompeted. Now consider what happens when Germany eliminates its tariffs on imports from France but keeps in place those on the United States. French-supplied beef suddenly becomes cheaper in Germany (\$119 versus \$120), and imports from the United States collapse. German consumers are better off by \$1, but the German government forfeits \$20 of tariff revenue previously collected on US beef (which could have been handed back to consumers or used to reduce other taxes in Germany). On balance, Germany gets a raw deal.

Two footnotes.

Evaluating whether something has ever "worked" is fiendishly difficult in economics.

First we have to decide what the goals of the policies were and what would count as "working". Then we have to do the empirical analysis and evaluate quantitatively the degree to which the policies "worked".

So while Chang and Rodrik might give examples of protectionism "working" (19th-century US, Japan, Korea, Taiwan), other economists might disagree that protectionism really "worked" in these cases. Indeed, I am not aware that Chang or Rodrik has actually conducted any empirical analyses on this matter.

Chang and Rodrik merely try to argue against the extreme position that free trade is always a good thing for everybody and in favor of the modest position that protectionism has sometimes "worked".

Most (all?) economists, including Chang and Rodrik, would agree with the following statements:

Free trade is generally a good thing for most people.
Tariffs are generally a bad thing for most people.

In contrast, a significant portion of the general public would disagree.

I think Germany is good example but not perfect, they have a strong system of trade and has high regulation when it comes to tariffs but still they are the 3rd largest exporting economy in the world.
https://atlas.media.mit.edu/en/profile/country/deu/
https://2016.export.gov/germany/marketresearchongermany/countrycommercialguide/traderegulationsandstandards/index.asp


Why does lowering the value of yuan against the USD disadvantage the US and benefit China In this article : https://www.epi.org/blog/trumps-china-tariff-confusion-it-wont-solve-chronic-trade-deficits/ they claim that depreciating the value of the yuan to the USD bolstered China’s economy. The key excerpt is:

For a long time, the fundamental cause of this growing trade chasm
with China was Beijing’s deliberate currency undervaluation. Between
2000 and 2013, China invested more than $4 trillion—nearly 40 percent
of its current GDP—in foreign currency assets, primarily U.S. Treasury
securities.
And it paid off, since it drove down the value of the Chinese yuan
relative to the U.S. dollar. This served as a massive subsidy for
Chinese exports and a tax on U.S. products shipped to China.

My questions are:
(1) How does investing in US assets drive down the value of the yuan?
(2) If the value of the yuan to the USD diminishes, doesn’t that increase the purchasing power of US entities* for products in China e.g. A US citizen can purchase a house in China for less USD. So why is this deleterious for the US and beneficial for China?
*not sure if that’s the correct word to use here. Please feel free to reword q

The article reflects a consensus view of the trade situation between US and China.  Personally I see it differently :  China has been willing to make and ship trillions of dollars’ worth of goods to US in return for entries in a computer (Treasury bonds).  This is undoubtedly good for US consumers, as you say.

The currency peg to the dollar would be strategic, for example, if China benefits from technology transfer and increased demand for domestic employment.


What is the government's ideal rate of growth for property prices? If property prices raise too quickly, it can price people out of the market, cause mortgage stress and financial hardship and create a property bubble.

If property prices fall too quickly, it can be devastating to the economy as property investors have investments worth less than their loan.

So ideally, does the government want property prices to go up or to go down and at what rate?

I can't speak for the rate at which you should set your prices.

However, borrowing some knowledge for my class of monetary economics, I would say pricesetting has a lot to do with expectations.

Just like in the exchange market, when people expect prices to rise a certain self-fulfilling prophecy occurs which raises prices. Why is that? When people expect prices to rise it gives them time to adjust themselves to the rise in prices.

For instance: Let's suppose that the dollar is at 1,5dollars/€
For some reason people expect the exchange rate is going to rise. when I say rise I mean an exchange rate of  for instance 1$/€ . Eventhough when the number becomes smaller because you need to spend more dollars to get the same quantity of euros.

People expect the exchange rate to rise. Well some people are scared of the price rise so they anticipate that by buying the euros at the current low price. This in turn raises the demand for euros and therefore raises its price. This is the self-fulfilling prophecy mechanism I was talking about.

I realise I haven't answered your questions completely. But I hope it helped you to know that even if you do you at which rate you should set the prices, it is still important to factor in the expectations of the population, however difficult that can be.


What is the relevance of economic growth? Economic policies often mention high economic growth as a desirable path. For example,

"We started to lay a new foundation for stronger, more durable economic growth."
-- President Obama, Speech in 2013

But also

"Jeb Bush pledged Monday to give the U.S. an economic growth rate of 4 percent a year"
-- Politico

and many others in the USA and abroad (Hollande, Merkel, etc.)
Politicians from different sides seem to agree that economic growth is desired. For example, some of them say that growth helps against misery. Some of them say that higher growth helps a government with paying back their debt.
How does economic growth help the economy and the society? Through which mechanism does that work?
See also How do economies grow?

World population currently is estimated at $7.3$ billion people, while world GDP at $74.5$ trillion USD (nominal). So the global average of per capita GDP currently stands at USD $10,205$, again nominal, not adjusted for purchasing-power-parity. But in any case, this number, although not negligible, it is small enough so that, even if we had absolute global equidistribution, we would hardly be in an "Affluent Society".

This alone could justify why Growth is still the main economic target of societies all over the world: even if inequality was out of the picture, we will still be far from living really "comfortably".

Add inequality to the picture, and one realizes that Growth is also seen as something that can help mitigate possible social tensions due to inequality: one accepts the existence of inequality easier, if ones sees his own fortunes getting better (this requires of course that everybody gets something out of Growth, even in unequal shares).

I think it's clear why a nation should aspire for economic growth. It's competition with other nations. Given that most other countries are growing, if you don't, then soon you will be unable to trade with them, which will lead to poverty in your own coutnry. Why the entire world as a whole needs to grow is a different issue. I don't think the world needs to grow, but it just happens to grow because of, again, competition at every level


Is net neutrality not important in a competitive market of internet providers? In my understanding, allowing ISP to throttle sites that use a lot of traffic is just price discrimination. The ISP will charge sites like Netflix, which will then pass the cost to Netflix consumers. So basically people who use a lot of data will get charged more--seems perfectly fine to me.

I understand the argument that in practice, the ISP won't build new infrastructure but simply put up roadblock to slow down the current speed. However, this seems like a problem only in the oligopolistic market of US internet providers. In a competitive market, putting up roadblock will cause an exodus to competitors.

So, am I correct in thinking that preserving Net Neutrality is not important in a competitive telecom market? Instead of fighting to preserve Net Neutrality, may be the correct fight is to encourage more ISP to enter the market.

Yes, if there were more competition then net neutrality would not be such a big issue. Any throttling would cause an ISP to lose customers to competitors.

Competition is a main assumption behind why markets work. However, in this case an ISP has market power which breaks the assumption. The market power allows them to easily put smaller ISPs out of business.

Here is a link to a rather long article on how ISPs get this market power. Essentially, the reason is that starting an ISP is entering an economy of scale, which requires a large amount of capital to start: http://arstechnica.com/business/2014/04/one-big-reason-we-lack-internet-competition-starting-an-isp-is-really-hard/

Real freedom on the internet would mean that you or any “democratic” group would not force an ISP to deliver content (or not) on the hardware he installs, maintains and owns. It would also mean no one could forcibly prevent his competitor from extending services in any area or jurisdiction it chose to serve.  The resulting freedom would allow a competitor to provide that which the first ISP does not.  Forcing an ISP to be a  common carrier introduces all the nightmarish regulations and geographic restrictions that limit competition, stifle innovation and encourage industry protectionism. No one wins when freedom from coercion is surrendered.


What is the relationship between economic growth and equality? Does economic growth create more or less equality?

More often than not economic growth will increase wealth and income inequality. This is because wealth is not uniformly distributed across the population, with a small percentage controlling a large share of the worlds wealth.
This small percentage of people tend to hold wealth in income-generating assets such as shares in top companies. This means that when the economy is during well and experience high economic growth, companies will be making a lot of profit. This profit is then paid out to their shareholders. This can increase inequality.
However, it's possible for government policies to break the link between economic growth and rising inequality. One way governments do this is with progressive taxes, where people with a higher income also face a higher tax rate. Another policy is inheritance tax rich limits the ability of rich parents passing on their wealth onto their children


Is any aspect of the cryptocurrency adoption violating a widely held economic tenet? This is not a homework question.  I am merely interested.

As an academic discipline, Economics refers to various laws and widely held beliefs including, but not exclusive to;

Production precedes consumption
Value is subjective
Production has cost
Money is not wealth
Supply and demand

Etc etc.

Is the rise of cryptocurrency refuting or violating any typically held economic beliefs?  Or, inversely, are cryptocurrencies/society acting exactly as Economics would logically predict?

There is quite a bit of research on it and a good argument as to why central banks should not issue cryptocurrencies, but should issue electronic money.  I would recommend reading https://research.stlouisfed.org/publications/review/2018/02/13/the-case-for-central-bank-electronic-money-and-the-non-case-for-central-bank-cryptocurrencies/

and

https://research.stlouisfed.org/publications/review/2018/02/13/blockchain-what-it-is-what-it-does-and-why-you-probably-dont-need-one/

https://research.stlouisfed.org/publications/review/2018/02/13/is-bitcoin-a-waste-of-resources/

Nothing about cryptocurrencies is surprising to me.  Indeed, the separate parts have been in use, in some cases, for hundreds of years.  Bitcoin is a clever combination of things that have long existed.  The other cryptocurrencies, such as Etherium, also offer self-executing contracts.  Those are also very old.  The simplest that you may physically see are sight drafts, which are common in the southeastern United States.  It is a draft printed on an envelope and is payable only when the envelope contains a properly executed document.

There is nothing surprising to me about how cryptocurrencies are behaving, but they cannot continue like this and they won't.  You should read "Good Money," by George Selgin, who writes about the creation of private money in Britain by button makers to meet an unfilled demand.

What you are seeing is a process by which people learn.  If you think this whole process through, you will find that you will not want to participate in this little revolution until supply and demand intersect.  By limiting the number of coins the various firms have created artificial scarcity.  However, we now have 759 cryptocurrencies and growing.  Each one makes the others just a little less valuable.  Although there is an argument against a central bank entering the market, if one did, the private money would vanish if the official money could be exchanged at a 1 to 1 rate.

Imagine the impact on Bitcoin prices if the Chinese or British central bank allowed people to walk in the door and exchange their cyptocurrency directly for cash?  No trading costs?  Think about how easy it would be to pop this bubble.  What if Bank of America were to offer one instead of an unknown, small, private company?  What if they allowed direct deposits and withdrawals?  What if they paid the mining costs to their own computers?

You are looking at the modern version of the South Sea Bubble or the Tulip Bubble.  When people are learning and making money, they do funny things.

To date, they're behaving exactly as we'd expect them to, given their nature as ponzi schemes in a speculative bubble.

Cryptocurrency adoption is not violating any widely held economic tenets: these ponzi schemes are behaving in line with the economic tenets that cover these things.

The speculative bubble of cryptocurrencies is very much in line with our understanding within behavioural economics of how foolish people with money behave when faced with a superficially appealing proposition that they don't fully understand.


What determines the exchange rate of two fiat currencies if the supply of each is known? In this blog post, economist Steve Landsburg posed a question about the value of Bitcoin which he didn't know the answer to.

Imagine a future in which Bitcoins (or some other non-governmental
currency) are widely accepted and easily substitutable for dollars, at
an exchange rate of (say) $X$ dollars per Bitcoin.
Then if there are $M$ dollars and $B$ bitcoins in circulation, the money
supply (measured in dollars) is effectively $M + X B$ .
Money demand is presumably $P D$, where $P$ is the general price level and
$D$ depends on things like the volume of transactions and the payment
habits of the community. (If it helps, we can write $D = T/V$ where $T$ is
the volume of transactions and $V$ is the velocity of money.)
Equilibrium in the money market requires that supply equals demand, so
$M + X B = P D$
Now $M$ is determined by the monetary authorities; $B$ is
determined by the Bitcoin algorithm, and $D$, as noted above, is
determined outside the money market.
That leaves me with two variables ($X$ and $P$) but only one equation.
What pins down the values of these variables?

As he suggests in parenthesis, this isn't a problem specific to Bitcoin, it's a general problem for non-governmental currencies that are perfect substitutes for dollars.
So does anyone know the answer to Landsburg's question?  Are there any models that shed light on what determines the exchange rate $X$ and the price level $P$ in a situation like this?

There isn't any good way to rehabilitate the quantity theory when there are other currencies that are perfect substitutes for dollars - so in that sense, there isn't any answer to Landsburg's question. Indeed, the irrelevance of the quantity theory under perfect substitutability - which has always been theoretically clear - has become a practical reality recently, as reserves become a perfect substitute for other short-term nominal assets once the nominal interest rate hits zero.

That said, I'd make two points.

1. Anything less than perfect substitutability rescues the quantity theory.

Suppose we replace the left side of Landsburg's quantity theory equation with the more general form
$$F(M,XB) = PD$$ where $F$ is a homogenous production function that produces aggregate "monetary services" using money $M$ and bitcoins (with value stated in terms of money) $XB$.

Landsburg's equation corresponds to the case of perfect substitutes, $F(M,XB) = M+XB$. In fact, there's another assumption that's implicit in Landsburg's formulation, which is that either $X$ is constant over time or, if $X$ varies, the risk-adjusted expected return on bitcoins relative to money is zero: otherwise, you'd strictly prefer to hold one or the other, whichever gives the highest return, given that they have equal transactional value. I'm going to continue assuming that this assumption holds for simplicity - but keep in mind that in a full-fledged dynamic model, allowing returns to differ and individuals to substitute on this basis might endogenously produce the extra equation that Landsburg seeks.

If money and bitcoins have the same returns, then anyone holding them will want to equate the marginal transactional value of the two, setting $F_M=F_{XB}$. This holds for any relative quantities of $M$ and $XB$ in Landsburg's perfect substitutes formulation, which is why he's struggling, but for general (homogenous) $F$ it will only hold for one ratio $M/XB$ of the two. This will pin down relative demand.

For instance, if $F$ is Cobb-Douglas, with $F(M,XB) = M^\alpha (XB)^{1-\alpha}$, then $F_M = \alpha F/M$ and $F_{XB} = (1-\alpha)F/XB$, and equating the two gives us $M/XB = \alpha/(1-\alpha)$. Suppose $\alpha=1/3$. Then we have $XB = 2M$, and it is trivial to solve for $P$ from $M$ and $D$:
$$F(M,XB)=PD\Longleftrightarrow M^{1/3} (2M)^{2/3} = PD\Longleftrightarrow P = 2^{2/3}\frac{M}{D}$$
Cobb-Douglas is just one parameterization I'm using for illustrative purposes, but we'll similarly be able to solve as long as $F$ has a declining marginal rate of substitution between $M$ and $XB$ - which would be true, for instance, if $M$ and $XB$ were almost perfect substitutes, but not quite. Landsburg's case of perfect substitutes is very much non-generic in this sense: it's probably not true that fiat currency and bitcoins will ever be perfect substitutes in absolutely every application.

By the way, the idea that two forms of currency combine in an imperfectly substitutable way to provide overall monetary services isn't just something I made up - you can see assumptions like this in the literature in a number of places, like equation (3) in Ireland (2011).

2. The central bank can pin down the price level in other ways, even without the quantity theory.

The modern view on monetary policy is that what really matters is the central bank's ability to set the short-term interest rate. Traditionally, this has been done by changing the supply of money through open-market operations, but that doesn't need to be the case. Indeed, Woodford's canonical text shows how it is possible to implement monetary policy even in a "cashless" world where there is no demand for money: the central bank simply pays interest on money. (By the way, this result is hard to escape when you try to microfound the "quantity theory" equation by writing down a dynamic, internally consistent model: you realize that the quantity theory operates in general equilibrium via the response of interest rates to money, and that by manipulating interest rates directly we can get the same outcome.)

Indeed, we're moving closer to Woodford's hypothetical world all the time: for instance, one of the options for the Fed when it decides to raise interest rates in the coming months will be to push up the rate of interest on reserves, while keeping its expanded balance sheet intact.

From this viewpoint, Landsburg's observation just isn't very relevant. The central bank is dedicated to price stability, and it'll enforce this by adjusting interest rates in response to deviations of inflation from trend. If it can adjust interest rates through the traditional method of adjusting $M$ via open-market operations, great. But if it can't do this (because we live in Landsburg's world of perfect substitutability), then the central bank will just adjust nominal interest rates by changing the interest it pays on reserves, and ultimately accomplish exactly the same thing.

That leaves me with two variables ($X$ and $P$) but only one equation. What pins down the values of these variables?

If Bitcoins are accepted as payment medium to all transactions where USD is also accepted (always speaking for one national economy), as Landsburg's scenario asks us to imagine, then, it must be the case that Bitcoin enjoys the exact same credibility like USD. If this is so, then their exchange rate cannot be anything else than unity.

If I feel equally safe in accepting Bitcoins and USD (safe as regards what can I do with Bitcoins), why should I ever accept an exchange rate different than unity? The moment I demand a different exchange rate than unity, it implies that the risk profiles of the two currencies are no longer perceived as being the same (risk profiles in the very broad sense, taking into considerations everything)

It's all about expectations then, what we project in the future for these two currencies.

This in turn requires modelling: on what foundations does the credibility of USD relies, and on what foundations does Bitcoin credibility relies, and "what we have in mind" for these foundations. This will eventually provide "the missing equation".


Debt bearing capacity In times of low yields and the prospect of rising yields, I asked myself if the european countries can ceteris-paribus cope with rising yields. Is there a way to calculate the effect of rising yields (ignore growth etc. for the time beeing), calculate a break-even yield where the debt burden becomes to much to cope. I thought about calculating the effect via government bond indices and the primary budget. Are there research papers about this?

There’s a huge literature on this topic. I would start by looking at the IMF Fiscal Monitor, and see what is interesting. Their research papers will refer to other papers that can be pursued. IMF Fiscal Monitor page.

Otherwise, you can search for papers on “fiscal sustainability.” As a disclaimer, I am not a fan of most the literature. This paper by Scott Fulwiler discusses interest rates and sustainability, and it critiques some of the technical issues in the literature - link to paper.

In any event, there is no “magic tipping point” for default. It is up to the government involved to decide at what point interest costs are excessive, and whether they will default rather than keep going. There have been almost no default of floating currency sovereigns, so there is no data set to work with. (Most sovereign defauits have occurred when they borrow in another currency; the euro area is discussed below.)

The euro area countries face a particular problem that is not really an issue for other developed countries: they do not have control of their domestic interest rates. Their debt may be issued at high spreads versus other euro interest rates, and so a default becomes a self-fulfilling prophecy (as seen in Greece). Most of the “fiscal sustainability” literature assumed that a country controls the interest rate it borrows at, so the situation is much less risky.

The break even point that I remember from the Japanese debt crisis was at the point that the interest on debt surpassed tax receipts. If there is a point at which you can calculate expected tax receipts and yearly interest on debt, that would be a breaking point. I’d also note (less precisely) That when the inflation rates surpasses the interest on debt for a period, that will also lead to higher yields making the issue worse, so inflation has to be a consideration in this analysis of WHEN the breaking point will come. For example, if inflation is excepted to be 4% in an EU country with massive debt in 2030, and a 4% yield would be more of a debt payment than projected tax receipts, that is a breaking point. The only two options are an inflation crises, or missing a debt payment.


The USA debt and the individual investor There is a lot of hype about the national debt of the USA being incredibly large, and I wonder if this has any implications about an individual investor? I understand that the risk of having a large national debt is that the government may be unable to pay for its bonds. But if an investor holds only stocks of private companies, does he have any reason to worry about this? If so, what can an investor do to protect against this?

Sure, government borrowing affects the small investor in many ways.

For starters, there is only so much money available for borrowing. The more the government borrows, the less there is available for everyone else. This pushes up interest rates and in some cases will make it impossible for the least desirable borrowers to get a loan at all.

If the government defaults on its loans, this would cause many problems. Details are debated by economists, but I don't know anyone who says it would be good for the economy.

As to what you can do personally to protect yourself ...

Of course there are political things you can do, like voting for and otherwise supporting candidates who campaign on economic policies that you believe are more desirable.

If you are worried about the government defaulting on its bonds, then don't buy government bonds.

If you are worried about the macro-economic effects of a government default, you could invest money in foreign countries that you believe have wiser debt policies.

Invest in companies that are more likely to survive or prosper in an economic downturn. Like, if there's a depression, people will still need food, so food-processing companies are probably relatively safe investments. If people are suddenly made poor, they're probably not going to buy frilly luxuries like video games, so those might be poor investments. But the rich tend to manage to get along no matter how bad things get, so services for the rich, like luxury yachts, might do well regardless. There are plenty of people out there who do research on this sort of thing that you could consult.

People who are deeply worried about government default often advise people to invest in commodities, especially gold. If the government goes bankrupt and takes large sections of the economy down with it, precious metals, especially gold, tend to hold their value.

If you're really worried you can build a compound in the wilderness, stock it with food and other supplies, and have an arsenal of guns to protect you from the marauding hordes after the economic collapse. :-) (Okay, I say that flippantly, but if you're convinced that things are going to get very bad, that would be a logical thing to do.)


Is it fair to compare 1950 US economy to 2016 US economy? In the last 2 days, bond market has declined a bit. All major news outlets published articles like these: Can We Ignore the Alarm Bells the Bond Market Is Ringing?

Such an event in bond market occurred back in ~1950 (according to the graph on that article). The stockmarket had a major dip around ~1932 due to the great depression but it has looked good since then till 2007.
Overall things also bounced back in 1950, 1960, slow down in 1970 due to energy crisis and then it recovered after 1982.

I am not an economist but trying to understand how will the economy will behave when it will face a similar situation. Is it fair to compare 1950 US economy to 2016 US economy?

Yes. It is a fair comparison.

Human nature, market behavior and principles of finance and economics have not changed much in the recorded history of mankind. For example, the principles set forth by Adam Smith in his opus The Wealth of Nations are just as relevant today as they were in 1776 when the book was published.


How does Bolivia maintain its high economic growth and the highest direct foreign investment in South America, despite its economic policies? Nationalization of industries has always been anathema to foreign investment yet Bolivia now has the highest foreign direct investment despite Evo Morales' policies. Also not that it is always bad but in many countries like the Philippines, Korea, Peru and Chile, it was nationalization that stagnated their economies and it was privatization that saved them from stagnation and unlocked huge economic growth. In my simple understanding, this is because privatization removes the corruption inherent in nationalized industries as well as attract foreign investors that provide new capital. President Evo Morales' economic policies were the opposite of this. I even remember reading  that he had a confrontation with foreign investors threatening to pull out of Bolivia because of his policies. Yet somehow and someway he was not only able to keep foreign investment but he was also able to increase it. Bolivian growth also experience widespread growth. This is in widespread contrast with Venezuela where similar policies under Chavez and Maduro is currently causing an economic crisis. How is Evo Morales and Bolivia achieving this growth contrary to Neoliberal and free market capitalism teaching?

This is what I gathered during my research of this topic:

Evo Morales' policies are more centered on economy than they appear. See, for example, an article from May 2017, which praises them for being fiscaly conservative and austere, despite socialist and anti-imperialist rhetoric.

  Even though Evo Morales is a self-described socialist, and (in theory)
  one of the most left-wing of Latin America’s Bolivarian wave, it was a
  shock when the Bolivian president embraced fiscal discipline.

  While the Morales government nationalized several oil and gas
  companies, they simultaneously developed a good enough relationship
  with the private sector. Overall, the government has been surprisingly
  fiscally conservative.

  Institutions like the IMF and World Bank, of which Morales is a strong
  critic, have praised his austerity.

[...]

  Even if Morales rails against neoliberalism, he is not moving the
  country toward a Marxist revolution. The fact is that he understands
  the role of the market in improving people’s lives, especially
  indigenous groups, since they are the most involved in informal
  economic activities.

[...]

  In general, Morales has a better relationship with both business
  leaders and social movements than other governments in the region
  could dream of, proving he’s not as far left as many might think.

It should be mentioned, however, that the public spending increased over 750% from 2006 to 2017 (source). The crucial difference is that this effect was not solely dependent on the price of oil, as in case of Venezuela, and the budget was more balanced (Venezuela deficit grew up to nearly 20% of GDP in 2014, prior to drop in oil prices), but with other factors, like:

investments in increase in production from natural gas (hydrocarbon gas, polyethylene),
social bonds,
strengthening internal demand (increase in internal consumption).

On the other hand, Bolivia's growth of GDP is not that signifficant. In fact, the four quarters average of GDP growth does not exeede 2,5% (it dropped below 0% after 2015) (source). Bolivia's economy is much smaller than Peru and Chile (according to CIA World Factbook, Bolivia GDP is about 83 bln USD, while Peru GDP is 424 bln USD, Chile is 452 bln USD), so there is some kind of 'base effect' as regards measuring the GDP growth in relative values

All in all, the last ten years were preety good for the global economy. In the age of low interest rates the capital was looking for developing countries like Bolivia to invest in. The real test for the Bolivia economy will come, when the bull market ends.

I would dare say that Bolivia maintains its high economic growth not despite its economic policies, but because of them.

  Nationalization of industries has always been anathema to foreign
  investment yet Bolivia now has the highest foreign direct investment
  despite Evo Morales' policies.

I don't think that nationalisation of industry is necessarily anathema. If the bulk of value is not added in direct production, but elsewhere, capital is not necessarily uncomfortable with nationalisation (think of outsourcing: companies do not shy from getting rid from activities that are less lucrative by contracting them with smaller companies. Other than political risk, why should they automatically reject such kind of transference to local State companies?)

  Also not that it is always bad but in many countries like the
  Philippines, Korea, Peru and Chile, it was nationalization that
  stagnated their economies and it was privatization that saved them
  from stagnation and unlocked huge economic growth.

I am not familiar with the cases of Philippines, Korea, or Peru, but the Chilean case is more complicated than that and involved nationalisation or renationalisation of companies to put an end to the crisis the ultra-liberal first fase of Pinochet's dictatorship had caused.

  In my simple understanding, this is because privatization removes the
  corruption inherent in nationalized industries as well as attract
  foreign investors that provide new capital.

I fear that corruption is inherent in any capitalist economy, regardless of nationalisation or privatisation. And to attract foreign investors, a country needs to have a reasonable infrastructure, which will not be developed by private companies - which, in conditions of natural monopolies, tend to be even more corrupt than public companies.

  President Evo Morales' economic policies were the opposite of this. I
  even remember reading that he had a confrontation with foreign
  investors threatening to pull out of Bolivia because of his policies.
  Yet somehow and someway he was not only able to keep foreign
  investment but he was also able to increase it.

If foreign companies are investing in Bolivia, it must be because they are making profits there. Which means that Morales policies are providing an institutional environment favourable to that.

As an educated guess, I suppose that his policies have been deconcentrating wealth and consequently widening the internal market, resulting in a more attractive environment for foreign companies.

  Bolivian growth also experience widespread growth. This is in
  widespread contrast with Venezuela where similar policies under Chavez
  and Maduro is currently causing an economic crisis. How is Evo Morales
  and Bolivia achieving this growth contrary to Neoliberal and free
  market capitalism teaching?

Well, a patient with a common headache will respond favourably to treatment with aspirins, while a patient with brain cancer will not. So even if the policies of Morales and Maduro are really similar, the results can differ widely if the initial conditions of each country are different. Notably, Venezuela's economy is much more dependent on a sole export commodity (oil) than Bolivia's. About 95% of Venezuela's exports are oil, which makes it a stronger possibility of Dutch disease than Bolivia. And so, even if the policies were otherwise the same, just paying more attention to keeping a diverse economy would probably result in different outcomes in each country.


Why is airbnb more expensive than priceline? Some might say I have an addiction to Priceline Name Your Own Price, however, what I can tell you is that NYOP rates for 2.5* and 3* hotels are always better than the room options offered through airbnb.

What I cannot understand is why do so many people believe otherwise, claiming that going with airbnb is cheaper?

Likewise, why the landlords are asking for such high rates all the while NYOP and even published Express Deals are often half the price, yet include gyms / pools / breakfasts for the whole family.

It should not be at all surprising that different people choose different offers: the short-stay accommodation market (let's say 1-30 nights) is characterised by a great deal of product differentiation and yield management. Airbnb has reciprocity at play, as guests and hosts switch roles. Additionally, hotels and airbnb hosts have different cost structures and different business models.
Furthermore, consumers have different amounts of information: bounded rationality and satisficing are at work. So even if the offers were identical (they're not), and people's preferences were identical (they're not), then people would still make different decisions.
product differentation
Although you always prefer a lower-cost hotel-room to airbnb, some other people will prefer airbnb, even when presented with identical information. That's because they are not identical offers: they have many  different characteristics (flexibility, physical space, presence of host, services offered, location, the P2P feelgood effect, doing business with individuals rather than faceless chains, staying in someone's unique home rather than just another clone room that looks almost identical in most of the world). And different people weight those characteristics differently: no two consumers have identical preferences.
yield management
Different people will also be booking at different times, with varying flexibility. Hotel rooms, (like airline seats), are one of the paragons of yield management, used in many textbooks' explanations of it.
reciprocity
Because with airbnb hosts can become guests, and guests can become hosts; and because reputation plays a major role in the market, there is reciprocity at play: both sides are incentivised to deal fairly with each other, rather than the practice of many hotels of making repeated attempts at getting more and more money from the customer from additional goods and services sold in addition to the basic accommodation, sometimes by using deception in the initial offer.
cost structures
On the supply side, airbnb and hotel rooms have different cost structures: an hotel room that's empty for the night is a wasted asset, and there may be little opportunity to reduce associated costs. Whereas a home without an airbnb guest is still a home, the residents get to have it all to themselves, and don't have to do any additional hosting, laundry, cleaning or tidying.
business models
A hotel's entire income is dependent on it renting its rooms out and selling associated services. For an airbnb host, the airbnb income is usually an additional source of income, a bonus rather than the thing that keeps a roof over the head and puts food on the table. So there is not an urgent and immediate need to find a guest, allowing them to set higher prices and tolerate a lower take-up.

Because women usually book for the family trip, and AirBNB specifically targets women really well with its "social" appeal. Also, Women enjoy looking at photos of the apartment instead of focusing solely on features, and AirBNB allows them to examine a ton of them before making a booking. In contrast, Priceline/Hotwire does not even let you know which property is going to be booked when you browse, and this significantly reduced the "shopping experience", so to speak.


What is the estimated propensity to consume out of wealth, and how does it depend on income levels? What is the estimated propensity to consume out of wealth, and how does it depend on income levels?

To make sure we are talking about the same thing: I am asking what estimates we have on what percentage of their wealth people turn into spending (on pure consumption - not investment) annually. And I want to know how it depends on income levels. Do poor people have a higher percentage than others, since otherwise they'd starve? Do middle income people have a higher or lower percentage than high income people? And how big is that difference, if it exists?

This is the "wealth effect". It has been shown empirically that as one's assessment of their wealth increase, the more they spend. An important point to be made is that this may be disconnected from actual wealth. If you are counting on a big inheritance that may lead you to spend a higher % of your wealth now in expectation of the future payoff.

There's a good paper that empirically looks at the correlation between wealth and spending but it's important to understand that the factors that influence an individual to spend money are numerous and it's virtually impossible to completely remove the signal from the noise.


MLE estimation with serially correlated errors I want to estimate the parameters of $a_t = a_{t-1}+\theta+\epsilon_t$ using MLE. Assume errors $\epsilon_t$ are serially correlated, then how would I choose the likelihood function?

This is model is known an GARCH(general autoregressive conditional heteroskedasticity) where the AR component of the observable series $\{a_t\}$ is equal to unity.

The likelihood is determined by your model assumptions on the innovation terms $\varepsilon_t$ and $e_t$.

If you are looking for a canned function to estimate an GARCH see https://www.kevinsheppard.com/MFE_Toolbox. If you are looking for some more theory on how to form the likelihood see http://www.math.elte.hu/probability/markus/AlkmatTS1/ARCH_GARCH_Eload.html.


If there was world war 3, which stocks should I short? With the Trump administration, Turkish dictatorship, North Korean nuclear weapons, and general tension around the world, we might think that there is a likelihood of something like a world war happening soon. If this were the case, and someone wished to profit from such a situation, which stock or commodities would be the best short (or invest in)?

Gold is generally the best option for expected political and economic strife as it generally reacts inversely with the markets. Here's a good article on the connection between war and the value of gold.

Another thought would be to buy stock in companies involved in the defense industry. Raytheon, Boeing, Northorp Grumman all jump during wartime due to the anticipation for more demand for weapons production.

An even safer bet would be to buy stocks in metal production such as steel given that in a wartime economy demand for these goods spikes as production of ships and vehicles will increase for a period of time.

If you're not looking exclusively at purchasing real assets, then taking a long position in an ETF/ETN tracking the volatility index could be a great move.  Symbols include UVXY or VIXY.  Remember that you are greatly exposed to Counterparty Risk on assets of this type.

Technical note: these assets don't track the VIX directly, rather they are based on an index of a rolling 30-day VIX futures positions.


Why can't a government print money to pay its debt? I have written an explanation to one of the famous questions "why can't government print money to pay its debt".

Is my explanation correct?

Is this the similar situation which happens in real life?

Is there really a foreign exchange bank?

Do companies like Verizon really buy other countries' currencies?

In Country X, President thinks we have too much debt to be paid to USA. Let us print money and will pay the debt off. Country X uses currency Y.
After printing money, since X has to pay to USA in dollars, X goes to foreign exchange bank and try to catch some "fool". Suppose a telecom operator in USA say Verizon wants to expand business in  X, wanted to buy Y since X may need that money to construct office, hire people, bribe politicians etc. So Verizon buys it from X in return for USD. Now X pays its debt off to USA in USD and sleeps happily.
Now Verizon expands business in X, effectively returns the money they got it from X to the people of X, by paying for construction, employees, etc.
So people of X have more money but the production of X remained same. This is a classic case of inflation. So countries tend not to print money to pay off debt!

Your get the basic intuition, but real-life situation is a  bit different.

First, I didn't really understand what you meant by "try to catch some 'fool'", but what you are calling foreign exchange bank is actually called the Foreign Exchange (market), and consist of buyers and sellers that are basically ready to buy and sell any currencies (almost all currencies in fact) provided that the price aligns with their expectations. Classic laws of market apply to this market, and if X's government (its central bank to be more precise) prints a lot of money, money supply increases. The result is a decrease in the price of money relative to other money, which is the exchange rate.

Money may be hard to understand, but it is actually a right to future cash flow of a given country. It is a sort of perpetual debt with zero coupon issued by a given country. So, if the country issues more money, it means that it issues more debt, so as a dilution mechanism it yields less cash flow to each unit of money, and since the price of money (as the price of any debt) is the expectation of future cash flow, the price will decrease.

Then, this will indeed result in more inflation. I expose two ways of seeing that. First, you can think about the price of goods as the price of goods relative to the price of money. Indeed, you're going to pay $x$ for a particular good because the seller knows that it will receive $x$ and that $x$ will give him the right to a certain amount of GDP (cash flow of country). But if the amount of GDP that the money represents is lower, he will ask for a higher price. Second, traditional monetary research has derived, a long time ago, the following formula which represents what I explained in my first point, but more formally. The following is always true, it is an accounting relation :
\begin{equation}
M\cdot V = P\cdot Q
\end{equation}

$M$ is the amount of money, $V$ is the speed of money, $P$ is the price level and $Q$ is the output or quantity of goods exchanged.

Without entering into too much details on this equation (there are extended information on Internet), you can see that increasing $M$, holding $V$ and $Q$ constant, results in inflation.

To come back to your question, countries don't (only) print money to repay their debt, because they are afraid of inflation. There is a big debate on inflation (You can read it on Internet), but loosely speaking inflation seems hard to contain. So to avoid hyper-inflation situation, they try to maintain inflation (in general below 2%).

Your story does not need another company investing in  X because, as you said,  people will end-up with more money, but X's production  will effectively increase. But it is true that companies buy currencies for investment purposes in their own country. Even local company may end-up buying their own currency, if for instance they sell product in USA (exportations), and sell the USD they receive against buying their own currency. This is why import and export (worldwide) are good indicators of exchange rate fluctuations.

Printing money to pay debt is a complicated question, and I only tried to sketch some insight here. For more information, read more on money creation and inflation (either in the academic literature or in economic textbook for instance).

The easier you  explain shows your skills and intelligence...
I'll give you a very short and strong example:-
India wants alot of Jet Fighters from America... There's no way Indian Rupee will be accepted by US  without a very very good reason ..But let's assumed  there a good reason  for instance and India printed money Just for the price of Jet fighters and..they have print alot of money and hapily taken the jet fighters....
Now, the problems just begun, what would American do with the Indian rupees, of course it is of no used unless they buy a products from India or invest in India with the INR... Hence India will soon faces inflations due to increasing supply of Money in the country.. Hence The purchasing power of money will decrease in India ... That's means money devaluation and international exchange rate will be muchuch more in terms of INR.... Hope you got what I'm saying... I try to used least economic terms incase you are from a different subject or different streams or may be just a random guy with no economic knowledge....


People pathologically hoard so much cash that they impoverish the entire nation "If a man has an apartment stacked to the ceiling with newspapers we
  call him crazy. If a woman has a trailer house full of cats we call
  her nuts. But when people pathologically hoard so much cash that they
  impoverish the entire nation, we put them on the cover of Fortune
  magazine and pretend that they are role models." - B. Lester

My aunt posted this to her facebook page. She believes that people are poor because some other people are rich. I know that is totally fallacious, but I don't know how to explain it to her. Can any one help me to explain it to her?

But when people pathologically hoard so much cash that they impoverish
  the entire nation

This sentence seems to imply that we should fault the rich not because they are rich, but because they do not spend their riches.

Ok, let's scrutinize this assertion, and not go into philosophical and sociopolitical arguments about inequality, justice, etc, which is a totally different discussion and off-topic on this site (although I suspect that your aunt may in the end has something like this in mind...)

Who said rich people don't spend their riches?

1) Last time I heard, we are all too ready to criticize them for "lavish life-styles". But lavish life-styles cost a lot of money, so it appears they do spend a lot...so part of their riches becomes income for the rest.

But they are still rich!

2) Yes, because most of their wealth is invested in productive economic activities (directly or indirectly through mutual funds etc).

It follows that wealth is NOT "hoarded" - because hoarding means "stash away wealth, don't spend it, don't invest it, just stash it away from any interaction with other humans and economic activities". A "Scrooge McDuck" kind of situation.

This is not what is happening in today's world, and so the specific sentence from this excerpt is simply factually wrong.

Now, the fact that even without hoarding, rich people may stay rich or become richer, the fact that there are people dying of hunger while others live lavish life-styles, in other words the issue of wealth and income inequality could be certainly an on-topic subject here if, indicatively,

a) It was examined as regards its effects on economic efficiency (there is growing evidence that efficiency and distribution are linked and that inequality affects negatively efficiency and economic growth, see for example this recent IMF report)

or

b) It was placed and studied in the context of normative economics (and "normative" is not a synonym for "value judgements" or "opinions"). I would suggest to check this meta-thread on the matter.

Given that the quote is partially extraneous to the question, I am answering two elements:

  People pathologically hoard so much cash that they impoverish the entire nation

As others have pointed out, cash hoarding is unusual and impacts chiefly on the supply of physical money and its price. If we consider banked cash as a hoard, we would mostly consider this malinvestment and pathological as well. But does it “impoverish the entire nation?” No, it only impoverishes the proletariat of that nation by relative emiseration (Capital in circulation : wages; ie by increasing the organic composition of capital). She is advancing some kind of “exploitation” theory.

  She believes that people are poor because some other people are rich. I know that is totally fallacious, but I don't know how to explain it to her.

Well, it isn’t fallacious. Apart from the trivial pie division example that larger slices require smaller slices, there’s the classic difference between the price of socially average necessary labour power and the realiseable value embodied in that labour’s product. As noted in relation to relative emiseration, if you take a measure of money over time like %GDP/capita a growing economy with private ownership of capital will show a declining wage.

As far as explaining it to her, or even better talking with her, I’d suggest face to face after shouting her lunch, and with plenty of tokens and pen and paper.

I’d suggest size of the slice, versus size of the pie. The problem of effective demand versus real desires (ie: why the size of the slice matters, because real desires are normative not objective measures, thus share of social power is important,) and probably a simple explanation of Marxist exploitation, including that labour mustn’t get the full product of their labour due to capital depreciation etc.

If you can use these teaching models to help her figure out what she believes about the appropriate ordering for social power, you can equip her with a strong opinion from an allied political economy on whether the rich emiserate the poor and how money works. If you go in trying to re-educate her to your particular normative beliefs she will resist and refuse.


Inflation reasons beyond Friedman I think everyone know this Friedman's quote nowadays:

  Inflation is always and everywhere a monetary phenomenon in the sense
  that it is and can be produced only by a more rapid increase in the
  quantity of money than in output

However, things are not that simple. The US had emitted lots of money and has very little inflation. In some cases there's also a spiral effect. Some heterodox economists talk about lack of supply of goods too. And emission still applies only to the mid & long term.

To sum up, the questions would be:

Can businesses be an important cause of inflation, or is it a pure monetary effect?
In not-so-developed countries, there might not be much competition.  Can that generate inflation?

Edited. Original question: Can anyone help me understand when that quote is true and when other factors should be considered too?

The US had emitted lots of money and has very little inflation.

Are we talking about quantitative easing here?  It depends how broadly you are willing to define inflation.  Quantitative easing has caused asset price increases, just not consumer price inflation.  Look at stock prices, which are about 50% overvalued according to some well regarded investors (e.g. Warren Buffett).

A common complaint about quantitative easing is that it is overly focused on investments and not focused enough on people (Wall Street over Main Street).  It has been successful at propping up stock prices to the point that they have returned to their 2008 levels, when they were regarded as being in a bubble.  Quantitative easing is heavily focused on investment assets.  It doesn't seem to be getting money into the hands of consumers.  Household incomes are still low.

In short, I don't believe that the current US recession has disproved Friedman's statement.  The Federal Reserve has eschewed its traditional open market operations in favor of quantitative easing, which has affected investments without increasing the money supply available to consumers.  A better question might be why quantitative easing is widely regarded as expanding the money supply when it doesn't seem to actually do that--at least not the kind of money supply whose expansion causes consumer price inflation.

Note:  I'm sure that there is theoretical work disagreeing with Friedman's statement.  I haven't tried to cover that.  I was caught up in the questionable assertion that the US money supply has expanded without causing inflation.  I suspect that this is too new for a consensus to have arisen. This is my thoughts on one possible explanation.

There actually is and has been a very good correlation between the money supply and inflation.  The problem is that most people (including Friedman) who looked at this issue just considered narrow money (MB or M1).  Broad money is much more important.  Here is a graph with M3 and inflation:

http://www.shadowstats.com/article/money-supply-revisited

The original poster asked: "1) Can businesses be an important cause of inflation or is it a pure monetary effect?"

We have to separate private businesses into two.  Banks and non-banks.  No, non-banks don't cause much inflation.  Private banks on the otherhand cause the majority of our inflation (far outpacing other private companies and central banks).  This is because banks are allowed to create money which in turn creates inflation.  A more abstract way of looking at this is that banks engage in maturity mismatching by holding in their aggregate portfolios mismatched short term debt against long term assets.  The short term debt can never be redeemed (becuause it held against long term assets), so the banks have created that which has no redemption value and only trade value (they've created liquidity/money).

If the original poster is interested in learning how the phenomenon works, I suggest reading the works of Murray Rothbard (much of which are free online).


Why does competition work for capitalism? As far as I know, capitalism is based on competition:
If two(or more) companies produce similar products that compete against other, these companies are in a competition.
Because the objective of a company is to earn as much money as possible, the company will try to maximise the selling of their product. However, because normally there are more than a single company, every company has to sell their best possible product for the lowest price without making enough profit. That leads to a situation where the consumer gets a very good product for a very fair-realistic price.

My problem here is, that this only works if every company only can make the decision about what price they make for what quality once. Like in the prisoner's dilemma.
The prisoner (the company) will (usually; if he is sane) make the decision to betray his member (->Game Theory).
The point is the ideal strategy changes if this 'game' will be repeated forever (is identical to a situation where nobody knows, when the game ends). The strategy any sane prisoner would take is to not betray his gang-member, however, if his member betrays him he will betray him, too, until his member does not betray him anymore.
Because this is a simplified version of a real competition, real companies should act like the prisoners: make a high price until the competitor make a low price. However, no company would make a low price because although they would make better profit in short term, the company would make better in longterm if they made the unspoken deal with the other companies.

So why is it not like this in real world, or is it like this and I haven't noticed that yet?

When two companies produce commodities and/or services that are substitutes then they are simply producing for a market that allows the presence of two or more substitutes.

  "...If two (or more) companies produce similar products that compete against other, these companies are in a competition"

Two firms do not necessarily compete with each other when they are supplying substitutes in the market.

What needs to be clear is that qualifying a market as competitive amounts to making a series of statements about the way the participants in the market behave, their numbers, how potential new participants can interact with the market, the relevant time scale etc.

Narrowing the focus on two members of a market and claiming that they are in competition is not warranted by the assumptions. Nothing has been said about the structure of the market they are embedded in. They could eg be simply trying to flood the market with alternatives to a third commodity so as to narrow the market share of a third producer; the possibilities are really unbounded.

  "...Because the objective of a company is to earn as much money as possible, the company will try to maximise the selling of their product."

The objectives of firms are really as diverse as is the number of industries and producers immense. "Making money" is not always a single operative constraint. Firms have a plurality of goals and obtaining liquidity is one of them. How binding that goal is depends on a host of issues like the market they are embedded in, the firm's size and relative position in the market, probably its access on financing etc.

Profit maximization is an assumption about the behavior of firms which is historically relevant and analytically useful but it is not always the case that firms are maximizing profits. They may be going for market share, or they may be simply optimizing some other metric. And, of course it could very well be the case that they are just winging it!

  "...However, because normally there are more than a single company, every company has to sell their best possible product for the lowest price without making enough profit..."

Again, this claim is not universally true. The number of firms in the market is not always a guarantee of 'quality' and 'affordability'. What matters is the cost structure of the industry, the technology and the assumptions about the market structure. Also, profits that vanish to zero is, again, a feature of the competitive model; not what 'really' obtains.

Now, as far as the 'Prisoner's dilemma' is concerned: In an one-shot game the best thing to do is to 'defect'. In a repetitive setting, that is also open-ended (no predetermined end date) I think that anything goes. You would have to make more assumptions about the number of players and their strategies over time (and in response to others') in order to arrive at definitive conclusions.

The short and non-definitive answer to the question of why don't firms collude when involved into price-competition with each other would be that there are laws that prevent them from that ie the fundamental cost structure of the game is different than what the 'dilemma' posits.

I want to provide a more political aspect to the discussion by differentiating between a market economy, i.e. an economy where competition through markets is the main mechanism of creation and distribution of wealth/income, and that of a capitalist economy, defined as one where the ownership of means of production (ultimately, financial capital and equity) is mainly exercises through public limited companies.

I think the distinction is relevant, both from a theoretical and historical point of view. Theoretically, a market economy can exist within a pluralist range of forms of production (for example, there is a thing called Market Socialism). A market economy is perfectly compatible with a legal structuring of firms as cooperatives. Just look at how the other answers were silent to the legal organisation of firms.

Historically, because it is a misconception from the liberal and conservative defendants of capitalism (rooted surely in Adam Smith's conception of the Invisible Hand) that competition is a natural tendency within capitalism. Evidence indicates time and time again that capitalism engenders monopolies, oligopolies, and capture of political and cultural power. It is only organised labour movements plus state intervention (many times inspired on such movements, and not emerging from capitalists self-restrain and benevolence) which put checks on capital inherent desire for power and control.

Thus, what I am saying is that, yes, competition works for market economies, but competition does not work for capitalism.


Can an economy grow without its population growing? Assuming natural resources are not a limiting factor, can a country's economy keep growing if the country's population is not growing? What about the global population?

Yes, there can be economic growth without population growth.

As a reminder: gross domestic product (GDP) is the total value of all of the goods and services produced within an economy over a period of time (usually a year). GDP growth is simply the tendency for the GDP to increase over time.

Roughly speaking, there are two ways for GDP to increase. The first is for each worker to keep producing the same stuff, but to increase the number of workers (i.e. population growth). But the second is to keep the population the same and increase the amount produced by each worker. This increase in productivity might happen because

workers become intrinsically more productive (i.e. through education)
workers have better tools to work with (e.g. through technological progress).

If you live in a subsistence society in which people tend the fields by hand and produce 100 bushels of grain per year and then someone invents a combine harvester that allows them to produce 500 bushels per year then the output of the economy will increase even if the population stays the same.

No it can not.
Obviously in the short term an increase in productivity through technology or upskilling the workforce can fuel economic growth,as can other factors, but not indefinitely. Population growth is the key. For example: How could the world in the beginning of the 19th century with a population of just 1 Billion have developed into a world with a GDP of $126 Trillion by 2017 if the population had not grown (now over 6 Billion). I believe the answer is "it could not". Our modern day economy depends on production and consumption and no matter what equations you choose to use, at the end of the day you still need PEOPLE to produce and consume in increasing amounts for there to be sustained growth.


Car prices haven't changed in 20 years, no inflation? I notice that there seems to be little or no change in car prices over the last 20 years and they seem to be unaffected by inflation.

For example, a Toyota Camry sold for about \$23,000 +/- \$2,000 (MSRP) around 1999-2000, and currently it sells for about the same.

Why is this?

Inflation is measured against a basket of goods. It's a symptom of what's going on in markets. Some products go up in price over time. Some go down in time. Some stay the same price, but change their specification.

So it's looking down the wrong end of the microscope, to ask why inflation hasn't affected car prices. Car prices are part of inflation. Changes in car prices affect inflation.

The causal link the other way is very very weak. Inflation puts pressure on wages. If this causes wages to rise, then the cost curve shifts, and equilibrium prices change. But for cars, wage costs are a very small part of total car manufacturing cost. And the market for labourers in the industry has shrinking demand and over-supply, so upward pressures are very weak.

The inflation experienced by car manufacturers is very different to the inflation experienced by the public. We've been through a global financial crisis and a super-cycle in commodities. A general-public inflation measure is a very poor measure of input-cost inflation for car manufacturers.

Lets start from the beginning, there is no such thing as inflation/economic growth ( TINSTAIEG, similar to TINSTAAFL ). Because when you expose the methodology, you get arbitrary view which depends on the judge who defines methodology. One rule have worked for ages, but only for long-long-distance - price of Money, i.e. the price of Gold/Silver troz. But this classic approach, though free from third-party risks, does not answer the question "What is inflation anyway?" entirely. Merely it does another definition.

If we go with the car price in gold ounces, we are having slow deflation over last decades. High gasoline was holding car sells in emerging markets, because of that many Korean manufacturers were bankrupt. Some of those are now Tata Motors - in India. In Russia major car maker AutoVAZ-Renault, was having problems in last 20 years to even sustain the quality of product.

From the other side, there is even more pressure in the market, Tesla is pushing with heavy weight to shift the market to their side, if Tesla succeed in the end, they will destroy traditional market. But they are fighting heavy battle with arabs, who control the petroleum market. Todays cars are mostly just the arm of petroleum "big politics".

High oil price will return, and it really does hold the car price. Inflation flows, just the other way.

Nice question, my Austrian colleague!


Is a loan lent with a rate under the inflation rate free money? Suppose we have an inflation in a country with an annual 2% and we get a loan for an annual 1% (real interest). Is the money we receive free?
This is a common practice in some European countries, where the mortgages are around 1% fix rate plus the Euro Interank Offered Rate.
If so, why? Are the banks loosing money by lending in such low rates?

Inflation: 2%
Interest:  1%

This means the real rate is 3%.
So no; not free money.

Free money would be negative interest rates.
Example: Inflation: 0%.
         Interest on loan I get from the bank: -1%.
This would mean they are paying ME 1% to take the loan from the bank.

Negative interest rates are a real practice, with many historical examples that can be researched.

The banks are theoretically losing 1%(+2% inflation) on the loaned amount, however it's important to understand that deals are made among negotiations with central banks in the background that can still produce gains from this.

You have the right intuition.

However, 1% is usually the real interest rate.

Real interest rate = nominal interest rate - inflation

So, you are actually, usually, paying a 3% annual rate.

If that is not the case, your question does not specify if 1% is nominal or real, then just having inflation of x% does not mean that you are increasing your wealth my that much each year.

Example: Inflation is 10%. The best investment opportunity provides a return of 0.5%. By the end of the year, I am still losing 9.5% of my wealth. But does that mean that I should not invest at all? If I don't then I will lose 10% which is wrose.

I hope that helps.


Effect of property tax on rent Suppose the government puts a tax on all apartment owners (e.g. a certain percentage of the apartment value), whether or not the apartment is rented. Will this tax cause an increase in rent?

From an economics point of view, it seems the answer should be no (at least in the short run): the tax has no effect on the supply or the demand so there is no reason that the rent should change. If landlords could take a higher rent, they would do so now. If they don't take a higher rent, it means that they cannot do so in the current market conditions, so they will not be able to raise the rent even when there is tax.

But from a psychological point of view, the answer may be yes. Why? Because landlords often don't raise the rent to the maximum possible level given the market conditions. Often, when a tenant rents an apartment for many years, the landlord prefers to keep the rent constant in order to keep good relations with the tenant. But, when there is tax, the landlords have an excuse to raise the rent. They can say "we are sorry, we would really like to keep the rent as it is, but we must raise it to cover the new tax".

Are these considerations correct?

What is more likely to happen in reality?

A property tax:

In the short run, a property tax will have no effect on rent, as the supply of homes is fixed (i.e., supply is totally inelastic in the short run), and demand is relatively inelastic but not completely so, so the incidence will fall on property owners. In the long run, a property tax will increase rental costs because supply of new units (i.e., construction) is highly elastic and long-run demand for housing looks just like short-run demand— relatively inelastic. As a result, the incidence of the tax will fall on occupants (both renters and owner-occupiers).

Intuitively, one could think of it this way: the cost of ownership will increase due to the tax, so for someone to see it as worthwhile to buy a newly-constructed home to rent out, the rental income would have to be relatively higher in the presence of a property tax than if one were not in place.

A tax on rental income:

The tax will increase rent; it will decrease the supply (and demand) of rental units (and increase the supply and demand of owner-occupied units). This will happen because the tax will reduce the return on apartments as revenue assets, causing some number of landlords to sell them to owner-occupiers, taking them out of the rental market. More importantly, though, there will be some renters who do not have the option of switching to owner-occupancy, and they'll bear the incidence of a tax on rental income.

I am assuming that there are three populations:

Landlords, who can choose to purchase homes for rent, but live elsewhere, so their choice to buy a unit to rent out can be analyzed separately from their own housing consumption
Renters, who must rent, due to some frictions (inability to afford a down payment, poor credit, unstable or difficult-to-document income history, etc.)
Potential owner-occupiers, who can choose between owning their own home and renting from a landlord, and who have some set of preferences between ownership and rental

Thus potential owner-occupiers and landlords compete for units for sale, while renters and potential owner-occupiers compete for rental units.

In this case, the choice of landlords to exit due to taxes will not pass through perfectly to the rental market due to the fact that while potential owner-occupiers who are currently renting can escape the tax by switching to ownership, there are some renters who are renting whose demand for renting is pretty inelastic— these people will bear the incidence of the tax.

Interestingly, in the US there is such a tax on rental income, though it's implicit. We have a bunch of incentives for home ownership, notably the exemption from capital gains for owner-occupied homes, but most importantly the fact that income on rental properties is taxed like any other business income, while owner-occupiers effectively rent their homes to themselves without paying tax on the implied rental income. (As an aside, people often point to the income tax deduction for mortgage interest payments, but this actually just creates tax equivalence between homeowners and landlords, who can deduct interest as a business expense.)

Ultimately it is the individual who pays taxes. I believe this is why the framers of the US Constitution vested the House of Representatives with the power to levy taxes.

From where do landlords obtain the money to pay the taxes? They obtain the money from the renters. So it is the renters that pay the taxes levied by government on landlords.

EDIT:For some reason I am unable to add the following as a comment on the comment given below, so I am putting it here.

In an economy,  with sufficient competition, the profit margin of the landlord is driven down to a reasonable level. Without profit the owner of the house is not motivated to rent out his property. It is not 'evil' for the house owner to receive profit. In my investment portfolio I own a REIT. From that REIT I receive a quarterly profit. Yet I, myself, am a renter of the house in which I live. As a renter I get to call on my landlord anytime that I have a problem with the house. For that privilege my landlord makes a modest profit. If I accept the profit from the REIT which I own yet deny my landlord his profit from the house in which I live then I am a two-faced cheat.


What would be the economic effects of a reduction in the general level of protectionism on the Australian economy? Protectionism methods including: tariffs, subsidies, quotas, local contents rules and export incentives

Would would be the effects of a reduction of these methods, not complete free trade.

Normally protectionism is never the answer as it doesn´t help in anyway.
If for example the subsidies for exportation were to be reduced you would see a drop in the price of items that are exported from autralia , i would place your question more in micro-economics then in macro. Not sure if that answered your question.