Economics help blog – Page 172

Favourite economist and book

18 November 201724 January 2014 by Tejvan Pettinger

Who is your ‘favourite’ economist, why? It may not be very original, but I would choose the man himself. John M. Keynes. Why? This is more interesting. Keynes was very practical. He saw a real crisis – the great depression, and he sought an effective solution. In looking for solutions he was willing to think …

Which will be best currency for an independent Scotland?

18 November 201723 January 2014 by Tejvan Pettinger

Readers question: Would Independent Scotland be better with the Pound, Euro or an independent currency? What are the risks for each scenario?

Scotland using the Euro

If Scotland use the Euro there will be some benefits from having a shared currency with the rest of the Eurozone.

Scottish business and personal users will have lower transaction costs when travelling to Europe.
Having the Euro could possibly encouraged foreign investment from European firms wishing to invest in a part of the British Isles now using the Euro.

However, these benefits of the Euro are significantly diminished by the new additional transaction costs of exchanging currency with the rest of the UK. Cross border trade with England is likely to dwarf the number of Scottish people travelling to the continent.

Also, given the ease with which business can convert currency and hedge against currency movements, I don’t feel that the UK has been at a significant disadvantage to retaining the Pound.

A much bigger issue for Scotland using the Euro is the very real concern that Scotland could face similar problems to other peripheral countries. What are the risks of Scotland using the Euro?

Scotland will have monetary policy set by the European Central Bank. You could argue the Bank of England don’t always set interest rates according to the interests of the Scottish economy. But, there is likely to be a greater divergence between Scotland and the rest of the Eurozone. If Scotland join the Euro and experience ECB interest rates (set for 16 countries), Scotland could face high interest rates when in recession or low interest rates when the economy is picking up with inflationary pressure.
Bond market. In the recent recession, the Bank of England has been active in buying government bonds. This has provided sufficient liquidity in the bond market. The consequence is that bond yields on UK debt have fallen to near record lows. By contrast, countries in the Eurozone have suffered from periods of very high interest rates. Markets fear the liquidity of Eurozone countries because the ECB has not always been willing to act as lender of last resort.

Note: Some countries have seen rapidly rising interest rates with reasonably low levels of government debt. Bonds spiked in Spain and Portugal, despite government debt as a % of GDP being relatively low at the time.
To some extent the ECB has overcome this issue by its greater willingness to intervene in the bond market. But, there is no guarantee the ECB will always have the willingness and ability to decisively intervene in the bond market.

There is a real concern that if Scotland adopts the Euro it will face two potentially very damaging problems

Higher bond yields, increasing cost of debt payments.
Greater pressure for austerity. Euro members have faced much greater pressure to cut government spending and balance the budget. The problem is that this pressure to pursue austerity in a recession has been economically very damaging. It has cause much higher rates of unemployment across Europe than compared to the UK.

Trade imbalances. Another feature of the Euro is that peripheral countries have often found themselves becoming uncompetitive within the Eurozone. For example, Spain and Greece saw rising wage rates and higher costs push inflation. But, because they cannot devalue in the Euro, they just became uncompetitive. This led to record current account deficits and lower economic growth. The process of internal devaluation to restore competitiveness has led to many years of low growth and high unemployment.

France vs UK recovery

18 November 201722 January 2014 by Tejvan Pettinger

Useful post from Paul Krugman about a comparison between the French and UK recoveries. It stems from comments by a Conservative cabinet minister that ‘the French economy is being run into the sand.’ For those who can’t get past the NY Times paywall, I’ll post the two graphs here. UK and France since 2010 The …

How is the economy affected by recovery of the underground economy?

1 July 202021 January 2014 by Tejvan Pettinger

Readers Question What if the underground money parked in Swiss bank is recovered. Will it destabilize the current economy? ‘Underground money’ I assume you mean money gained by illegal methods and money that will be frozen until someone can prove they legally own it. Recovering frozen money One scenario – If there is a large …

Ask an Economic Question 2014

18 November 201718 January 2014 by Tejvan Pettinger

You are welcome to ask any questions on Economics. Though you might also like to try google custom search (top right) to see if the topic has been covered before. I am looking to explain economic principles / ideas/ recent developments in economics. I can’t promise to answer, but will try if it meets the …

Labour plans for bank reforms – UK Bank market share

17 January 201818 January 2014 by Tejvan Pettinger

Readers Question: would you be able to comment on what the Labour party’s latest proposal to break up the banks to create competition? I can see some reasons that relate to safe guarding possible failures of large banks which can prove costly if the government are needed to bail them out. However, in terms of helping to stimulate economic growth, would it help or is it like shuffling a deck of cards? I would greatly appreciate hearing your opinion on this.

Labour bank reforms include:

A cap on the size of banks’ market share; this will involves splitting up large banks, such as Lloyds and RBS
The introduction of two new challenger banks with an 8% market share.
Refer the issue of banking competition to the Competition and Markets Authority (CMA), within one year of being elected.

Motive for bank reforms

The UK banking sector has become more concentrated in recent years. This has created less competition and more market power. If the government is able to reduce market concentration and increase competition, then they hope that consumers will benefit from more choice and greater price competition. If the banking sector becomes more competitive, the theory is that it will put downward pressure on the cost of borrowing, and upward pressure on saving rates.
The OFT found in a review of the current account market that, while the share of the four largest providers fell from 74 per cent in 2000 to 64 per cent in 2008, it then rose to 77 per cent in 2010.

A report by Bain & Company, showed that the market share of the top six banks together account for 91% of retail deposits. The problem of high market concentration of retail banks is that market power leads to dominance in related financial products, such as mortgages, loans and overdrafts.
Reducing the size of banks helps to deal with the issue of banks which are too big to fail. After the credit crisis, the government had to bail out large banks, at a cost to the taxpayer. Reducing the size of banks means that any bailout will be less costly.
Read more

Waterstones cafes and lessons in specialisation

18 November 201714 January 2014 by Tejvan Pettinger

I’m a big fan of Waterstones. It’s a good bookshop. It’s not Amazon; it even pays UK taxes. I like the atmosphere of bookshops and would be sad if they disappear from the High Street to be replaced by drones delivering books from anonymous warehouses somewhere off the M4. Even though Amazon is often cheaper, I do like to buy books from a proper bookshop like Waterstones because I enjoy browsing, and don’t like being a complete free-rider (enjoying the atmosphere of a bookshop to then go and save a couple of pounds ordering online)

I also used to spend a lot of time in the Costa coffee shops in Waterstones. It’s a good place to work and write some economics.

A while back, I noticed Waterstones were replacing Costa Coffee shops with their own brand of coffee shops. It makes sense to try it as a business idea. Selling coffee is, at least, one area free from the internet.

I don’t consider myself a coffee connoisseur like some of my Italian friends. But, I know what I like and I can tell the difference between good and bad coffee. I was interested to see how they would do because Costa Coffee have really got it down to a fine art. I though it would be really hard to improve on the coffee shop experience of Costa Coffee.

How did Waterstones get on as a coffee shop?

The first thing is that the Waterstones staff are unfailing friendly. You can tell they mean well and are trying hard. But, they don’t seem to have been on a barista course. When I ask for a ‘dry’ cappuccino they all look flummoxed. I try to explain it is a cappuccino with froth instead of milk. (It makes it more like a macchiato). Maybe I’m not very good at explaining, but they always end up making it like a traditional cappuccino. I’ve been in two Waterstone cafes in Oxford and Bradford. It’s interesting you get the same experience in both places. Also the coffee (especially first thing in morning, isn’t as hot as I would like.) At a Costa coffee I once noticed a file with a menu for all possible drinks – Costa Barista’s have to learn these menus. I’m pretty sure Waterstones staff don’t have this.

Often you get the sense that they are really trained booksellers who have been asked to make coffee on the side. Some are very frank and say “Sorry, I don’t know how to make coffee properly”.

Sincerity and honesty are very good. But, when you go to a cafe, you would prefer to be met with a confident barista who takes pride in the job.

Interestingly the former Costa manager was offered the job at Waterstones, but she turned it down because she wanted to specialise only in coffee and not also be responsible for selling books.

Indian economy in 2014

14 March 201813 January 2014 by Tejvan Pettinger

I have quite a few readers in India, so I’d like to have a brief look at the Indian economy and it’s prospects for the coming year. After spending so much time looking at the (rather depressing) economics of austerity in Europe and UK, it makes a welcome change to look at a developing economy with a different set of challenges and problems.

GDP per capita (in 1990 Geary-Khamis dollars) (data range 1950-2003)

Indian economy in summary

For those not familiar with the Indian economy. In the post-independence era, 1947 – 91, India was a mixed economy with a high degree of state intervention – including nationalisation and price controls. The economic performance was mixed but generally disappointing. Since 1991, the economy has pursued a general approach of free market liberalisation and greater investment in infrastructure. This helped the Indian economy to achieve a rapid rate of economic growth and economic development. The economy has become more open, with significant growth in exports and imports. The economic growth has led to a boom in investment, real estate and a growth of the financial sector. To many, India is the second China and the economy has the potential to become one of the largest in the world.

However, at the present time, the Indian economy faces several challenges.

In the past couple of years, there has been a fall in the rate of growth causing concern that the period of high growth is coming to an end. (growth fell to a low of 4.4% in 2013 – bear in mind, India’s rising population mean GDP per capita is less impressive than just real GDP growth)
India has struggled to keep inflation low. In 2013, inflation was nudging near 10%, hurting the living standards of the poor who are particularly vulnerable to the price of food. High inflation is also harming confidence for investment.
Current account deficit. India’s growth has been at the cost of a persistent current account deficit (which reached over 6% of GDP in 2012). India needs to import crude oil, machinery and many other raw commodities. Its export sector has struggled to match the growth of imports.
Rupee devaluation. The large current account deficit has caused the Rupee to fall, despite very low-interest rates in the US and Europe.
Inequality / poverty. Parts of the Indian economy have made rapid growth, but it has proved difficult for the fruits of economic growth to filter through to all areas of the economy, especially isolated rural areas where there is poor infrastructure.
Government budget deficit. Despite years of economic growth, the government has found it difficult to balance the budget. The budget deficit is 4.8% of GDP in the year 2012–13. Public sector debt is 68.05% of GDP, one of highest for a developing economy. Tax collection is still limited by tax evasion and corruption (tax collection only accounts for 9% of GDP – one of lowest in the world). The government is committed to reducing the budget deficit, but this may be at cost of social welfare programmes.

More detail on the Indian economy

Economic growth

Indian economic growth is predicted to be around 5% by March 2014. From European standards, this sounds very impressive. But, is much lower than the rate of nearly 10% achieved in much of the recent decade. Growth of 5% reflects the fact there is much spare capacity and scope for improvement. Without a high rate of growth, the concern is that it will lead to unemployment and discourage future investment. Politicians have been predicting upturns in the rate of economic growth for a long time, hoping it would come in the next quarter. Unfortunately, this has raised and then broken expectations. However, growth did finally pick up to 4.8% in Q3 2013. (higher than previous quarter of 4.4%)

Inflation

Inflation is a real problem for the Indian economy. It has proved stubbornly high. Inflation reached 11.24% in November 2013 – the highest for years. Inflation did fall back to 9.92% in Dec, but there is concern about the stubbornness of high inflation, despite the relatively sluggish growth. The chief of the Reserve Bank of India, Raghuram Rajan has made control of inflation his highest priority and has increased interest rates twice since his appointment in September. Rajan argues that price stability is key to India’s long-term prosperity. However, the concern is that inflationary pressures tend to be due to supply side factors (e.g. rising vegetable prices) and the use of monetary policy may be limited in solving this. For Rajan to tackle cost-push inflationary pressures using interest rates may damage prospects for growth without tackling the underlying inflationary causes. To tackle supply constraints which are behind the cost-push inflation will prove much more difficult.