joi, 19 noiembrie 2015

Gold and money

A great article from The Telegraph explains why gold  is a great investment in nowadays economics especially in countries where the currency is about to be subject of strong devaluation processes:

http://www.telegraph.co.uk/finance/markets/questor/11992563/Gold-remains-the-best-insurance-for-a-crisis.html

Gold and money

A great article from The Telegraph explains why gold  is a great investment in nowadays economics especially in countries where the currency is about to be subject of strong devaluation processes:

http://www.telegraph.co.uk/finance/markets/questor/11992563/Gold-remains-the-best-insurance-for-a-crisis.html

vineri, 13 noiembrie 2015

The Chronicles of Debt from "The Economist"

This week's "The economist" has a very cool series of articles related to the crises that occured and will occur due to the debts various countries (or group of countries) have. 
By the way, if Adam Smith would live today, his book could be named "The Debt of Nations" ;)

The Chronicles of Debt from "The Economist"

This week's "The economist" has a very cool series of articles related to the crises that occured and will occur due to the debts various countries (or group of countries) have. 
By the way, if Adam Smith would live today, his book could be named "The Debt of Nations" ;)

luni, 9 noiembrie 2015

Romanian agriculture meets E.U.

When Romania became a part of the EU, the European Union promised to direct large amounts of money in order to decrease the differences between Romania and the EU with the so called "cohesion funds". I'm not the type of guy that reads statistics carefully, but it's pretty obvious that this country has a low absorbtion rate in most of the areas.

But even in the areas where it did a good job in getting EU money (like agriculture) huge issues still exist. Here are some:

  1. Although many farmers got funds from EU, they do not have the know-how needed to get a competitive edge against german, french and even hungarian farmers
  2. Also, Romanian farmers have to buy agricultural equipment and livestock mostly from foreign producers/breeders, so basically, you could say that the EU funds are a subsidy that European governments give to their own breeders/manufacturers of agri machineries,
What does that mean? It practically menas that even if local farmers got moeny, they did not knew how to maximize their value. Plus, since most of the farming infrastructure and producst were bought directly or indirectly from abroad, they practically supplied their competitors with money

Romanian agriculture meets E.U.

When Romania became a part of the EU, the European Union promised to direct large amounts of money in order to decrease the differences between Romania and the EU with the so called "cohesion funds". I'm not the type of guy that reads statistics carefully, but it's pretty obvious that this country has a low absorbtion rate in most of the areas.

But even in the areas where it did a good job in getting EU money (like agriculture) huge issues still exist. Here are some:

  1. Although many farmers got funds from EU, they do not have the know-how needed to get a competitive edge against german, french and even hungarian farmers
  2. Also, Romanian farmers have to buy agricultural equipment and livestock mostly from foreign producers/breeders, so basically, you could say that the EU funds are a subsidy that European governments give to their own breeders/manufacturers of agri machineries,
What does that mean? It practically menas that even if local farmers got moeny, they did not knew how to maximize their value. Plus, since most of the farming infrastructure and producst were bought directly or indirectly from abroad, they practically supplied their competitors with money

duminică, 1 noiembrie 2015

John and Maynard’s Excellent Adventure

http://krugman.blogs.nytimes.com/2015/03/14/john-and-maynards-excellent-adventure/
When I tell people that macroeconomic analysis has been triumphantly successful in recent years, I tend to get strange looks. After all, wasn’t everyone predicting lots of inflation? Didn’t policymakers get it all wrong? Haven’t the academic economists been squabbling nonstop?
Well, as a card-carrying economist I disavow any responsibility for Rick Santelli and Larry Kudlow; I similarly declare that Paul Ryan and Olli Rehn aren’t my fault. As for the economists’ disputes, well, let me get to that in a bit.
I stand by my claim, however. The basic macroeconomic framework that we all should have turned to, the framework that is still there in most textbooks, performed spectacularly well: it made strong predictions that people who didn’t know that framework found completely implausible, and those predictions were vindicated. And the framework in question – basically John Hicks’s interpretation of John Maynard Keynes – was very much the natural way to think about the issues facing advanced countries after 2008.
So let me talk about where Hicksian analysis comes from.
What many macroeconomists don’t realize, I believe, is that Hicks on Keynes actually grows directly from Hicks’s own work on microeconomics — not mainly macroeconomics — embodied in his book Value and Capital. V&C was a seminal work on the economics of general equilibrium – that is, getting past one-market-at-a-time supply and demand to the interactions among markets. Hicks didn’t invent general equilibrium, of course, but he sought to turn it into a useful tool of analysis.
What’s the minimum interesting general equilibrium problem? The answer is, an economy with three goods, which means that there are two relative prices. You can think of such an economy as having three markets, but because of adding up you only need to look at two – if any two are in equilibrium, so is the third.
Geometrically, you can represent equilibrium in a three-good economy in a space defined by the two relative prices. Say that there are three goods, X, Y, and Z. Choose Z as the numeraire – the good in which prices are measured. Then we have the price of X on one axis, the price of Y on the other. There will be many combinations of those two prices at which the market for X clears, defining one schedule in this space; you can similarly define a schedule representing prices at which the market for Y clears, and yet again for Z. Where all three lines cross (remember the adding up) is the equilibrium for the economy as a whole.
What does this have to do with macroeconomics? Well, as Hicks realized, a minimal model of macro issues involves three markets: the markets for goods, bonds, and money (or, better, monetary base). If we assume that all three are gross substitutes – the most natural though not inevitable assumption – we get Figure 1:
Photo
Credit
We can make this more familiar by putting the interest rate – which moves inversely to the price of bonds – on the axis, which flips the figure upside down, and by removing one of the markets; what we get is Figure 2, which is basically IS-LM:
Photo
Figure 2Credit
Wait, you say, isn’t IS-LM usually presented as a model of output, not the price level? Yes – but you can get there by invoking sticky prices and/or wages, so that there’s an upward-sloping aggregate supply curve, without changing the figure. In practice we think that AS is very, very flat in the short run, so that you do better by just putting GDP on the axis, but this is good enough for my purposes now.
A different kind of objection involves what, exactly, is going on behind these curves. On one side, can we just assume sticky prices without deriving them from first principles? Actually, yes – the evidence is overwhelming. Meanwhile, the demand for goods involves intertemporal decisions, driven by expectations about the future, so don’t we need to specify all of that explicitly? Well, no – of course we want to understand such things as well as we can, but is it really unreasonable to assume that lower interest rates mean higher demand under pretty much any detailed story?
A foolish insistence on microfoundations at all times and no matter what the issue is the hobgoblin of little minds.
So what is the payoff to this application of miniature general-equilibrium theorizing to macro? Even in normal times, this approach, Mickey Mouse as it looks, offers a big step up in sophistication from a lot of what you hear – including what you hear from economists who are all teched up but have no idea how to apply their equations to anything real. In particular, a lot of what you hear about macro issues is monocausal: money drives the price level, borrowing drives interest rates. What we already have here is an understanding that there isn’t that kind of clean separation, that money can affect interest rates and spending affect output.
But the really big payoff, as Hicks realized all the way back in 1937, is that this framework tells you what happens when interest rates get close to zero. We’re all doing a lot of head-scratching lately about negative rates, but still, it’s clear that there’s something like a floor, so that the picture looks something like Figure 3:
Photo
Figure 3Credit
And that in turn says that once you hit that flat section – once you are in a liquidity trap – the rules change. Even huge increases in the monetary base won’t be inflationary – they shift MM to the right, but it makes no difference. Large budget deficits, which shift GG, won’t raise rates. However, changes in spending, positive or negative – e.g., harsh austerity — will have an unusually large effect on output, because they can’t be offset by changes in interest rates.
All of this was predicted in advance by those of us who understood and appreciated Hicksian analysis. And so it turned out. I call this a huge success story – one of the best examples in the history of economics of getting things right in an unprecedented environment.
The sad thing, of course, is that this incredibly successful analysis didn’t have much favorable impact on actual policy. Mainly that’s because the Very Serious People are too serious to play around with little models; they prefer to rely on their sense of what markets demand, which they continue to consider infallible despite having been wrong about everything. But it also didn’t help that so many economists also rejected what should have been obvious.
Why? Many never learned simple macro models – if it doesn’t involve microfoundations and rational expectations, preferably with difficult math, it must be nonsense. (Curiously, economists in that camp have also proved extremely prone to basic errors of logic, probably because they have never learned to work through simple stories.) Others, for what looks like political reasons, seemed determined to come up with some reason, any reason, to be against expansionary monetary and fiscal policy.
But that’s their problem. From where I sit, the past six years have been hugely reassuring from an intellectual point of view. The basic model works; we really do know what we’re talking about.

Where Europe’s Banks Make Their Money

A great research article from WSJ on  how do some of the biggest banks in Europe make their money:

http://graphics.wsj.com/european-bank-earnings-2015-3q/

Where Europe’s Banks Make Their Money

A great research article from WSJ on  how do some of the biggest banks in Europe make their money:

http://graphics.wsj.com/european-bank-earnings-2015-3q/

Milton Friedman, Irving Fisher, and Greece

http://krugman.blogs.nytimes.com/2015/07/07/milton-friedman-irving-fisher-and-greece/
I continue to be amazed by how many people regard debt relief and devaluation as wild-eyed radical ideas; of course, it matters most that so many influential people in Europe share this ignorance. Anyway, for the record (and for my own future reference) I thought it would be helpful to post what Milton Friedman and Irving Fisherhad to say about the Greek disaster. OK, they weren’t writing specifically about Greece — Friedman was writing in 1950, Fisher in 1933. But their analyses ring truer than ever.
First, Friedman (why oh why isn’t there a full electronic copy of this essay online?):
Photo
Credit
That tells you everything you need to know about why “internal devaluation” has been such a costly strategy — and why the ECB’s failure to move aggressively early on to achieve and if possible surpass its 2 percent inflation target was a major contributing factor to this disaster.
Then Fisher on why austerity hasn’t even helped on the debt:
Photo
Credit
The basic story of the European periphery — not just Greece — is one of a poisonous interaction between Friedman and Fisher, which has produced incredible suffering while failing to reduce the debt/GDP ratio, which even in star pupils like Ireland and Spain is far higher than when austerity began; the only success has been in suffering long enough so that some growth has finally resumed, and they can call it vindication.
The bizarreness of the whole thing is how flaky, speculative ideas like expansionary austerity became orthodoxy, while applying the economics of Fisher and Friedman became heterodoxy bordering on Chavismo.

Liquidity preference, loanable funds, and Niall Ferguson

http://krugman.blogs.nytimes.com/2009/05/02/liquidity-preference-loanable-funds-and-niall-ferguson-wonkish/


What’s the evidence? Niall Ferguson “explaining” that fiscal expansion will actually be contractionary, because it will drive up interest rates. At least that’s what I think he said; there were so many flourishes that it’s hard to tell. But in any case, this is really sad: John Hicks knew far more about this in 1937 than people who think they’re sophisticates know now.
In any case, I thought it might be useful to re-explain why our current predicament can be thought of as a global excess of desired savings — which means that fiscal deficits won’t drive up interest rates unless they also expand the economy.
Here’s what I imagine Niall Ferguson was thinking: he was thinking of the interest rate as determined by the supply and demand for savings. This is the “loanable funds” model of the interest rate, which is in every textbook, mine included. It looks like this:
INSERT DESCRIPTION
where S is savings, I investment spending, and r the interest rate.
What Keynes pointed out was that this picture is incomplete if you allow for the possibility that the economy is not at full employment. Why? Because saving and investment depend on the level of GDP. Suppose GDP rises; some of this increase in income will be saved, pushing the savings schedule to the right. There may also be a rise in investment demand, but ordinarily we’d expect the savings rise to be larger, so that the interest rate falls:
INSERT DESCRIPTION
So supply and demand for funds doesn’t tell you what the interest rate is — not by itself. It tells you what the interest rate would beconditional on the level of GDP; or to put it another way, it defines a relationship between the interest rate and GDP, like this:
INSERT DESCRIPTION
This is the IS curve, taught in Econ 101. Now, we usually explain how this curve is derived in a different way: we say that given the interest rate, you can determine investment demand, and then through the multiplier process this determines GDP. What you’re supposed to understand, however, is that the derivation I’ve just given is just a different way of arriving at the same result. It’s just different presentations of the same model.
So what determines the level of GDP, and hence also ties down the interest rate? The answer is that you need to add “liquidity preference”, the supply and demand for money. In the modern world, we often take a shortcut and just assume that the central bank adjusts the money supply so as to achieve a target interest rate, in effect choosing a point on the IS curve.
Which brings us to the current state of affairs. Right now the interest rate that the Fed can choose is essentially zero, but that’s not enough to achieve full employment. As shown above, the interest rate the Fed would like to have is negative. That’s not just what I say, by the way: the FT reports that the Fed’s own economists estimate the desired Fed funds rate at -5 percent.
What does this situation look like in terms of loanable funds? Draw the supply and demand for funds that would obtain if we were at full employment. They look like this:
INSERT DESCRIPTION
In effect, we have an incipient excess supply of savings even at a zero interest rate. And that’s our problem.
So what does government borrowing do? It gives some of those excess savings a place to go — and in the process expands overall demand, and hence GDP. It does NOT crowd out private spending, at least not until the excess supply of savings has been sopped up, which is the same thing as saying not until the economy has escaped from the liquidity trap.
Now, there are real problems with large-scale government borrowing — mainly, the effect on the government debt burden. I don’t want to minimize those problems; some countries, such as Ireland, are being forced into fiscal contraction even in the face of severe recession. But the fact remains that our current problem is, in effect, a problem of excess worldwide savings, looking for someplace to go.

IS-LMentary

taken from http://krugman.blogs.nytimes.com/2011/10/09/is-lmentary/

A number of readers, both at this blog and other places, have been asking for an explanation of what IS-LM is all about. Fair enough – this blogosphere conversation has been an exchange among insiders, and probably a bit baffling to normal human beings (which is why I have been labeling my posts “wonkish”). 
[Update: IS-LM stands for investment-savings, liquidity-money — which will make a lot of sense if you keep reading]
So, the first thing you need to know is that there are multiple correct ways of explaining IS-LM. That’s because it’s a model of several interacting markets, and you can enter from multiple directions, any one of which is a valid starting point.
My favorite of these approaches is to think of IS-LM as a way to reconcile two seemingly incompatible views about what determines interest rates. One view says that the interest rate is determined by the supply of and demand for savings – the “loanable funds” approach. The other says that the interest rate is determined by the tradeoff between bonds, which pay interest, and money, which doesn’t, but which you can use for transactions and therefore has special value due to its liquidity – the “liquidity preference” approach. (Yes, some money-like things pay interest, but normally not as much as less liquid assets.)
How can both views be true? Because we are at minimum talking about *two* variables, not one – GDP as well as the interest rate. And the adjustment of GDP is what makes both loanable funds and liquidity preference hold at the same time.
Start with the loanable funds side. Suppose that desired savings and desired investment spending are currently equal, and that something causes the interest rate to fall. Must it rise back to its original level? Not necessarily. An excess of desired investment over desired savings can lead to economic expansion, which drives up income. And since some of the rise in income will be saved – and assuming that investment demand doesn’t rise by as much – a sufficiently large rise in GDP can restore equality between desired savings and desired investment at the new interest rate.
That means that loanable funds doesn’t determine the interest rate per se; it determines a set of possible combinations of the interest rate and GDP, with lower rates corresponding to higher GDP. And that’s the IS curve.
Meanwhile, people deciding how to allocate their wealth are making tradeoffs between money and bonds. There’s a downward-sloping demand for money – the higher the interest rate, the more people will skimp on liquidity in favor of higher returns. Suppose temporarily that the Fed holds the money supply fixed; in that case the interest rate must be such as to match that demand to the quantity of money. And the Fed can move the interest rate by changing the money supply: increase the supply of money and the interest rate must fall to induce people to hold a larger quantity.
Here too, however, GDP must be taken into account: a higher level of GDP will mean more transactions, and hence higher demand for money, other things equal. So higher GDP will mean that the interest rate needed to match supply and demand for money must rise.
This means that like loanable funds, liquidity preference doesn’t determine the interest rate per se; it defines a set of possible combinations of the interest rate and GDP – the LM curve.
And that’s IS-LM:
The point where the curves cross determines both GDP and the interest rate, and at that point both loanable funds and liquidity preference are valid. 

What use is this framework? First of all, it helps you avoid fallacies like the notion that because savings must equal investment, government spending cannot lead to a rise in total spending – which right away puts us above the level of argument that famous Chicago professors somehow find convincing. And it also gets you past confusions like the notion that government deficits, by driving up interest rates, can actually cause the economy to contract.

Most spectacularly, IS-LM turns out to be very useful for thinking about extreme conditions like the present, in which private demand has fallen so far that the economy remains depressed even at a zero interest rate. In that case the picture looks like this:

Why is the LM curve flat at zero? Because if the interest rate fell below zero, people would just hold cash instead of bonds. At the margin, then, money is just being held as a store of value, and changes in the money supply have no effect. This is, of course, the liquidity trap.  
And IS-LM makes some predictions about what happens in the liquidity trap. Budget deficits shift IS to the right; in the liquidity trap that has no effect on the interest rate. Increases in the money supply do nothing at all.
That’s why in early 2009, when the WSJ, the Austrians, and the other usual suspects were screaming about soaring rates and runaway inflation, those who understood IS-LM were predicting that interest rates would stay low and that even a tripling of the monetary base would not be inflationary. 
Events since then have, as I see it, been a huge vindication for the IS-LM types – despite some headline inflation driven by commodity prices – and a huge failure for the soaring-rates-and-inflation crowd.
Yes, IS-LM simplifies things a lot, and can’t be taken as the final word. But it has done what good economic models are supposed to do: make sense of what we see, and make highly useful predictions about what would happen in unusual circumstances. Economists who understand IS-LM have done vastly better in tracking our current crisis than people who don’t.

luni, 12 octombrie 2015

Ce se intampla in vremuri de criza

Daca in economie in criza e nevoie de mai putini bani, de ce exista inflatie? In mod normal ar trebui sa existe deflatie. Si aceasta deoarece preturile scad. Cu toate acestea criza exista deoarece exista anumite dezechilibre in economie. 
Mereu exista dezechilibre in economie, asa se nasc afacerile. Daca nu ar exista dezechilibre intre cerere si oferta, atunci nu ar exista antreprenori si nimeni nu ar mai mai faliment si nici nu ar face avere.

Dezechilibrele nu afecteaza insa in mod real economiile deoarece ele au loc mereu. Crizele  sunt cauzate de excese ale ofertei, care stimuleaza irational cererea, ceea ce duce la o autovalidare a cererii prin adaugarea unei oferte si mai mari pe piata.

Problema este insa de unde vine oferta? Oferta (construirea si vanzarea unei case, spre exemplu) vine din accesul la finantare, care permite constructorului sa faca rost de banii necesari pentru a cumpara materiale de constructie si a isi plati muncitorii pana in momentul  in care va vinde casa.

Exista doua metode  de a crea lichiditate: "importul de bani" sau "ingineriile financiare". Iar cand cele doua sunt combinate, rezultatele vor fi dezastruoase deoarece preturile activelor vor creste pe baza faptului ca exista mai multi bani in economie dar si pe baza ingineriilor financiare facute.

Astfel, Hyman Minsky a explicat cele trei "trepte" ale finantarii:
  1. finantarea acoperita (cand fluxurile de numerar previzionate depasesc platile)
  2. finantarea descoperita (cand fluxurile de numerar previzionate pot sau nudepasi platile)
  3. finantarea de tip Ponzi (cand speri ca veniturile vor depasi incasarile)

Aurul

Este normal ca aurul sa creasca in perioade de recesiune sau de embargo in cazul unui stat deoarece este metalul cel mai usor de monetizat.

A detine aur este ca si cum ai avea bani lichizi sub forma solida.

luni, 5 octombrie 2015

What is this blog all about?

This blog was created to show my trades on both FX and stock markets

What is this blog all about?

This blog was created to show my trades on both FX and stock markets