10 years on and the financial system is still fragile

Nassim Taleb of “Black Swan” fame has a new book out entitled “Skin in the Game”. Below is an interview with John Solman of PBS ‘Making Sense’. In this he argues:

  • a financial system works only if the people who are running it have a stake in the outcome.
  • a society should be built around risk and reward – if you make good decisions you do well but if something goes wrong you are penalised.
  • Currently profit is privatised and loss is socialised, where the taxpayer only has a downside and will never have the benefit of what’s going on.
  • The financial system is at risk if people can make money transferring risk to others and aren’t penalised. Dangerous, unfair and immoral
  • The Federal Reserve tried to cure debt with debt, transferring debt from one to the other, from the private to the public.
  • The system loaded — laden with debt and with pseudo experts will collapse eventually.

Global Debt – 225% of GDP

The New Zealand Parliamentary Library publish a very good monthly economic review and in the July edition the topic of the month was The International Monetary Fund’s Global Debt Database.

The IMF publish their Global Debt Database which provides the gross debt levels since 1950 for 190 advanced economies, emerging market economies and low-income countries. It covers 99% of global GDP in 2016. Currently, total debt levels have reached a new high, standing at around US$164 trillion, or 225% of global GDP with USA, China and Japan accounting for more than half this figure – $92trn out of $164trn – see table.

The big change is China with debt having gone from $5trn to $26trn in the space of 10 years – this equates to 3% of global debt in 2007 to 15% in 2016. Private debt has nearly tripled since 1950.

Government vs Private Debt in New Zealand

New Zealand government debt has been on its way down which is in contrast to its private debt – see figures and graph below. Not surprisingly the IMF is concerned about private debt and the effects of the country’s inflated housing market despite the strong economic outlook. They said “Household debt remains high under the baseline outlook and would amplify the impact of large downside shocks, notwithstanding recent improvements in its risk structure after macroprudential policy intervention. Such shocks could also trigger a disruptive housing market correction,” The main risks to New Zealand are an economic slowdown amongst developed countries and China, the fallout from increasing protectionism and the Mycoplasma bovis cow disease.

Source: New Zealand Parliamentary Library – Monthly Economic Review – July 2018

World Cup – the economics of faking an injury.

As the World Cup enters the quarter final stage we have seen the same old tricks played by players to try and influence the decision of the referee.

  • France’s Lucas Hernandez admitted to flopping in France’s 2-1 win against Australia in an attempt to get Australian midfielder Mathew Leckie sent off.
  • Spanish defender Gerard Piqué accused Portugal’s captain Cristiano Ronaldo of exaggerating a fall to secure a penalty kick in their 3-3 nail-biter. Piqué said Ronaldo has a habit of “throwing himself to the ground.”
  • Neymar rolling around in what seemed to be excruciating pain when there was contact on his ankle and that was on the sideline. What would he have done if it was in the penalty area and Brazil were 0-1 down?

That being said it was hoped that the VAR system would start to see this sort of tactic removed from the ‘beautiful game’. Some of the techniques of faking an injury are below – HT to Kanchan Bandyopadhyay.

The Economist has looked at this area and I thought that I would delve a little deeper. There is no doubt that if you study the costs and benefits of faking an injury there are certain sports where it is perceived as quite worthwhile – i.e. the benefits outweigh the costs. Cost benefit analysis is part of Unit 3 of the AS Level course. What is cost-benefit analysis (CBA)?

Cost Benefit Analysis (CBA) refers to estimating the private and external benefits of an investment project – airport, rail link, road etc against the private and external costs. Once these costs/benefits are established a decision is made as to whether the project should go ahead.

CBA can be applied to any decision you make and below is a table outlining the cost and benefit of faking a peanalty or injury in particular sports. I see the benefit in soccer of diving in the box and being awarded a penalty outweigh the costs by a significant amount. Firstly, if the appeal for a penalty is turned down it is very unlikely that the referee will administer any punishment to the player faking a foul. In too many cases they are happy to let the game play on as they feel under so much pressure anyway for not awarding it. Whilst in ice-hockey a suspension of either 2 or 4 minutes has acted as a deterrent to those caught “embellishing” . I have put some values in the end column which will no doubt encourage a lot of discussion – remember Warren Gatland, the Welsh coach in the Rugby World Cup 2011, considered informing a player to fake an injury so there would be no pushing in the scrums. This was after their captain, Sam Warburton, was sent off early in semi-final against France.

However, with the perceived benefits of diving in soccer it does encourage players to even practice this activity. This reminded me of a great advertisement run by the Guardian Newspaper for the Euro 2004 Soccer Cup – see below

 

 

US and China trade war and what it means.

Doing trade barriers with my NCEA Level 2 class and below is a good clip from Al Jazeera about the issues that are arising from it and who will lose the least from a trade war. The last ten years saw a marked improvement in trade between the United States and China. But Trump’s battle of the tariffs is threatening that. And there are fears of an all-out trade war. The U.S. is putting tariffs on 50 billion dollars worth of Chinese imports. The president says he wants a fairer trade with China. But Beijing’s fired back with a tit-for-tat response. It’s published a list of more than 600 American products it plans to hit with its own taxes. Is it a case of who blinks first in this economic brinkmanship? And what will it mean for global trade? The comments by Philippe LeGrain are particularly good.

VSI – Top 10 things you should know: Behavioural Economics

The Oxford University Press ‘Very Short Introduction’ series are excellent publications and particularly useful for extending students at A Level. Below is a video of Michelle Baddeley, author of Behavioural Economics: A Very Short Introduction, who gives her top 10 things you should know about the science of behavioural economics and how it relates to our everyday lives. You can find more videos on VSI here.

Shorter hours, higher productivity and yoga

According to surveys today’s millennial job applicants don’t want to work all hours – it seems that younger workers place a work-life balance ahead of career progression. During the GFC an applicant who asked a prospective employer about leaving work early on a Friday to go to yoga wasn’t taken seriously. However with the global economy growing at its fastest rate since 2011, qualified jobseekers are scarce so workers can start to make demands.

IG Metall – Germany’s biggest trade union – struck a deal that allows members to work 28-hour weeks for up to 2 years, typically when they have small children. Although Germany is unique, other national economies might follow suit if they have a limited supply of workers. It is important to note that in boom times the substitution effect comes into play as more people want to substitute money for leisure time – this is shown by the backward bending supply curve of labour. In most A2 courses income and substitution effects are examined. The textbook identifies each as follows:

Income effect – higher real wages might persuade people to work less hours and enjoy extended leisure time (see graph – SS2).

Substitution effect – people have an incentive to work extra hours because the financial rewards of working are raised, and the opportunity cost of not working has increased (see graph – SS1).

Work-life balance is typically discussed as a personal issue and again Germany has been leading the way:

1960 – average West German working year = 2,163 hours
2018 – average German working year = 1,363 hours

Furthermore once they leave work in the mid afternoon a lot of them are actually free of the office and more importantly emails. Daimler automatically erase emails to employees who are on holiday.

Workaholic countries slowing down

Countries that are renowned for working long hour – South Korea, China and Thailand – have already limited school homework. South Korea wants to reduce average annual working hours to less that 1,800 from 2,069 in 2016 – the most for any OECD high-income country.

Average wages are not above pre-crisis levels in all developed countries except the UK and Greece. The eurozone’s jobless rate is the lowest and US wage growth the fastest since 2009. Shorter hours won’t help the poorest paid workers, who can’t afford to work less but for the broad middle in rich countries a new working life is emerging. It could look like Germany – shorter workdays, high productivity and yoga.

Source: Why the 30-hour week is almost here – Simon Kuper – FT Magazine February 15 2018

Indifference Curves – Mindmap and Video

Been covering this topic with my A2 class and it is one of the more complex parts of the micro course. The video is particularly useful.


Income and Substitution Effects with Indifference Curves
Any price change can be conveniently analysed into 2 separate effects – the INCOME EFFECT and the SUBSTITUTION EFFECT.

Income effect of a price change: – when there is a fall in the price of a product, the consumer receives a real income effect and is able to buy more of this and other products in spite of the fact that nominal income is unchanged. If the consumer buys more of the good when the price falls it is a Normal good. If the consumer buys less of the good when the price falls it is seen as an Inferior good.

Substitution effect of a price change: – when there is a rise or fall in the price of a product, the consumer receives a decrease or an increase in the utility derived from each unit of money spent on the product and therefore rearranges demand to maximise utility. This is distinct from the income effect of a price change. For all products, the substitution effect is always positive such that a fall in price leads to an increase in demand as consumers realise an increase in the satisfaction they derive from each unit of money spent on the product.

Remember for normal goods, both the income and substitution effects are positive. But the income effect can be negative: if a negative income effect outweighs the positive substitution effect, this means that less is bought at a lower price and vice-versa. This good is therefore known as a Giffen good.

Giffen goods are generally regarded as goods of low quality which are important elements in the expenditure of those on low incomes. A good example is a basic food such as rice, which forms a significant part of the diet of the poor in many countries. The argument, not accepted by all economists, is that when the price of rice falls sufficiently individuals’ real income will rise to an extent that they will be able to afford more attractive substitutes such as fresh fruit or vegetables to makeup their diet and as a result they will actually purchase less rice even though its price has fallen.

Dairy debts make NZ Banks vulnerable

New Zealand dairy farmers are making banks worried about their ability to keep up with their mortgage payments. Four recent issues haven’t helped the cause:

1. Falling produce prices making it harder for farms to service debt
2. Mycoplasma bovis cutting productivity and profitability of the sector
3. Regulatory changes  – restrictions on foreign ownership and therefore reducing the value of dairy farms
4. Environmental regulations – increasing operating costs for farms

Whilst the last two might improve the long-term sustainability of the dairy sector they could reduce the profitability of highly indebted farms and their equity buffers.

Banks are closely monitoring about 20% of their dairy farm loans because of concerns about the borrowers’ financial strength. Although a dairy downturn is unlikely to threaten the solvency of the banking system, it does weaken their position if there is another external shock like another GFC. Bank lending in the dairy sector has been consistent over the last few year years but the proportion of loans on principal and interest terms has increased from 6% in January 2017 to 12% in March this year.

Although the average mortgage for most farm types has decreased in dollar value over the past six months, the average mortgage amount increased in the dairy farms – see graph below. The average mortgage for dairy farms is the highest at $5.1 million for the first time since the survey began in August 2015.

The table below shows the average current mortgage by sector over the years shown. Dairy farmers continue to hold the largest proportion of mortgages in excess of $2 million. They are also more likely to have a mortgage over $2 million – 62.5% of all dairy farms – and $20 million – 3.4% of dairy farms.

Source: Federated Farmers of New Zealand – Banking Survey – May 2018