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Archive for the ‘Economics’ Category

Armchair economics

Seeing as the battle over raising the debt limit seems to have hit yet another impasse, it is time for me to speculate what could happen should the US default on its obligations, or follow the silly “cap, cut and balance” approach, with no tax increase on the horizon.

These speculations are just that. The markets are getting jittery and already gold is worth a lot more than it should.

Just let me digress.

Scenario 1: the Aug 2nd deadline is missed.

My gut feeling is that the market will punish the US very heavily for being so irresponsible. Money will flee the US, and the cost to further borrow for the government would go up. A lot.

If the US does not pay whoever it owns money to, either people will go hungry (from cuts of their retirement checks, etc) and the capacity of the populace to buy stuff would go down. The other option is not to pay some of the bondholders in which case the US debt would be considered junk and the crisis in confidence will not be something the US can recover from in any reasonable term.

Either way, the prospects for the US economy to grow would be shot for the short term and probably also the intermediate term. The interbank loan rate should go up and interest rates for mortgages etc will also go up, thereby slowing the economy further. The dollar should devalue, but its likely that a race to devalue currencies would ensue: after all, the US market keeps many of the other world economies going. This is a situation where inflation would be king.

 Scenario 2: Cap, Cut and balance.

In this case, the US does not default (slightly less bad), but given that I live in California where a similar set of laws exists, I can not tell you how lousy this option is. This is, the US would not be able to borrow to stimulate the economy, it would have to fire a huge number of individuals in government and the recession will continue: no one will be able to afford stuff. Moreover,  funding for innovation would be cut down. The prospects for the US economy to grow would go down and shrink: for the US to grow one needs a clear signal that the US government is willing to stimulate the economy. Shrinking the participation of the government in the economy is not going to do it. Again, I would expect that the stock market would also punish the US because the economy will shrink. I mean, who’s going to be buying stuff in the store when the number of layoff is increasing?

Currently in California we require a 2/3 majority to raise taxes: under a mandated balanced budget formula and given that there is a political party that treats the ‘no raise taxes’ as a religious mantra, the only way to keep things running is to cut, and keep cutting, even when there is nothing left to cut. This leaves the future generations paying for the mistakes of today by dismantling their chances of education, or even their availability of health care. We’re already seeing this. The only way for the University of California system to cope is to increase tuition. This is a tax on poor people: in some sense it forces them out of the ability to be educated and condemns them to be poor forever. I don’t wish this on the rest of the US.

Overall, I think it is in the best interest of the US to not tie itself into a straitjacket and to be able to respond to crisis by borrowing to stimulate the economy. Worse case scenario just print money and take a bit of a hit on inflation.

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Opt in vs opt out.

I’m not a fan of Junk mail and much less so for e-mail Junk mail. I also prefer to have control over my personal information. This is why I get annoyed when I receive letters with an ultimatum: answer this or we will share of all our information on you with our partners.I’m also annoyed when I’m registering for a service and I have to scour the webpages to see where I have to opt out of junk e-mail. Both of these happened to me last week, so here is my rant on the subject.

I would be much better served if the law erred on the side of caution and forced the companies to have to work on the opt in model, rather than the opt out model. For those of you who don’t know, the opt out model is where you are offered a service automatically and you have to go out of your way to opt out. The opt in model,  you have to go out of your way to receive the service. I’m calling it a service, although I’ve never felt that I benefit from said services.

For example, you need to register for your phone service. When you do so, you are automatically `opted in’ to being able to spend money easily on your phone unless you restrict it. The case in point is calling numbers that charge for phone calls. There are various scams that exploit this standard setting. Sometimes they kind of register you through a promotion so that you end up spending money even if you didn’t want to do so. The phone company will just charge you for it and wash their hands since it is not their fault. So you have to opt out of the service by going out of your way and doing so. This is especially important if you consider the most recent virus on android enabled phones.

Of course, this does not protect against stupidity. But if you have to opt in for paying for such services by speaking to a representative, the cost to your wallet would go down in such an event because most people find bothersome to have to do anything.

It is clear why marketers like the opt out model: they have a direct line to serve you stuff (as much as they can try to funnel towards you without completely annoying you) as soon as you sign up unless you go out of your way to stop them. In the opt in model, you have to ask for your information to be shared.

The thing is that it is very hard to keep track of who has your information when you’re dealing with individual companies. However, if your information is shared a lot by default, you lose all control on that almost from the start.

Of course, you could always read economic papers on the subject that suggest that the opt out model is the most efficient for market economics. I’m not inspired by these studies into buying the opt out model: the studies do not seem to take into account the misuses of all that information.

I’m also not inspired by the recent developments where various governments around the world get an automatic pass on surveilance without court warrants. Current technological farming of information can be done on industrial scales at very low cost. This is very worrisome for freedoms that I hold dear: like talking nonsense on my phone without me having to worry on who’s listening.

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I don’t know how many of the readers here pay attention to what’s happening in Wall Street. Yesterdays trade was quite spectacular, although from many points of view it is terrifying and it is a day that will probably live in infamy.  From the academic point of view I’m sure it will be studied to exhaustion.

All in a day's work.

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