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That’s an odd question. A £20 coin is ‘worth’ £20, isn’t it? Surely that’s the whole idea? I know from experience that one of the hardest jobs of an economics teacher is to communicate the idea of token money. Stated simply, most modern money is worthless. It’s just monopoly money. Several of you will already be puzzled by that statement.
A new £20 coin is being issued, and apparently the Bank of England is having considerable difficulty persuading people that it’s really ‘worth’ £20.
Here’s the story, and several other links to that strange concept: money.read more...»
Suyash Raj Bhandari profiles the Founder of the Grameen Bank, Mohammad Yunusread more...»
Here is an updated revision presentation covering aspects of the growth of microfinance and the role that it can play in driving developmentread more...»
Here are some resources linked to the announcement of the 2013 Nobel Prize in economics - this year the prize is shared between three economists who have developed insights into the volatility of financial markets. The 2013 Nobel Prize in economics has been awarded to Eugene Fama, Lars Peter Hansen and Robert Shiller.
Professor Fama, 74, is one of the fathers of the so-called efficient markets hypothesis which holds that the prices of stocks and bonds are “rational” because they reflect all available public knowledge about those securities at any given point in time.
Professor Shiller made his name by pointing to a persistent irrationality in such markets. He said that the value of securities tends toread more...»
Changes to key interest rates by central banks have a significant impact on economic activity during periods when the economy is expanding. Unfortunately, they seem to have virtually no effect during recessions – the time when the stimulus of monetary policy is most needed.
These are the central findings of research by Professor Silvana Tenreyro and Gregory Thwaites, published by the new Centre for Macroeconomics at the London School of Economics.read more...»
The new Governor of the Bank of England, Mark Carney, said last week that interest rates will not be raised until unemployment falls below 7 per cent, a process he thinks will take three years. The battle of Austerlitz in 1805 was one of Napoleon’s greatest victories, leading to his complete domination of Continental Europe. In the aftermath, the Prime Minister, Pitt, famously pronounced ‘Roll up that map of Europe, it will not be wanted these next ten years’.read more...»
The Governor of the Bank of England has announced a change in the handling of monetary policy for the UK economy. Although the inflation target remains the same (CPI inflation of 2%) and the Bank remains committed to maintaining price stability as their main macroeconomic objective, they have decided to introduce forward guidance in the setting of policy interest rates. This takes the Bank of England closer to the approach to setting interest rates taken by the United States Federal Reserve.
Download this chart
What is forward guidance?
Forward guidance means that interest rates will stay at their historic low level of 0.5 per cent and monetary policy in general will remain expansionary until the unemployment falls below seven per cent. More here from the BBC news website.
However, that link could be put aside if the inflation rate threatens to rise above 2.5% in the medium term. Another wind-check to this system is that if the Financial Policy Committee judges that the UK economy is in danger of experiencing another credit boom then the Monetary Policy Committee will also re-visit their decisions on interest rates.
According to Ed Conway from Sky News "The UK inflation target remains in place - in theory - but in practice it has become significantly less important." Developments in the labour market and real output growth are likely to become more significant in helping to shape the future path of policy interest rates and whether monetary policy is expansionary, contractionary or neutral in its effects on the wider economy.
Sky news - Forward Guidance, a Monetary Policy Gamble
Anatole Kaletsky (Reuters): Carney at the Bank of England confirms the end of monetarism and return of neo-Keynesian demand management
With the unemployment rate currently at 7.8% of the labour force and predictions from the Bank that the jobless rate may take between two to three years to drop to the 7% way-marker, we can expect the period of exceptionally low monetary policy interest rates to remain with us well into 2015 and possibly 2016. This is not good news for savers struggling to find any kind of interest rate that at least matches the current rate of CPI inflation.
Governor Carney's response to this is to argue that what the economy needs most is a return to growth - in his words an economy growing sufficiently quickly to achieve "escape velocity". The current recovery has been the weakest for decades and real GDP remains below the peak achieved before the Global Financial Crisis took hold.read more...»
Paul Craven discusses aspects of behavioural finance in this 25 minute talk from Nudge Stock at Digital Shoreditch in London. Find out how a piece of grilled cheese went for $28,000 on eBaY! This is a superb talk for students and teachers interested in behavioural finance and the common biases in people;s behaviour in markets.read more...»
John Kay looks at the lack of evidence for the effect of quantitative easing as a driver for economic growth. He is excellent on some of paradoxes of the impact of QE on the macroeconomy of countries where it has been tried.
The main effect of QE according to Kay is to boost asset prices and the one certain consequence of this is that those who have assets - such as homeowners and stocks and shares - will benefit.
We strongly recommend that ambitious students take a look at some of the other articles written by John Kay - check out his web site by clicking this linkread more...»
Here is an interesting report on the rise of digital currencies. Bitcoin, a decentralised, virtual currency, is gaining increasing interest from investors and entrepreneurs. The currency is not controlled by a government or a central bank and is traded on the internet.
In this short news video, the FT's Maija Palmer reports from a Bitcoin conference on where the currency is heading including the use as a person to person medium of exchange. In technology savvy cities in the USA, there is no a bitcoin ATM that allows people to swap standard currencies for bitcoin credits. Will retailers latch on to the new currency?
Regulators seem wary about what Bitcoin is and how it might be used, fearing for example the use that might be made of anonymous and untraceable digital currencies for illegal money laundering by terrorist organisations.
A super resource from the Economist. KAL, The Economist's resident cartoonist and animator, explains the dangerous history of bubbles.
A bubble is said to happen when the prices of securities or other assets rise so sharply and at such a sustained rate that they exceed valuations justified by fundamentals, making a sudden collapse likely (at which point the bubble “bursts”). Typically this is seen in property markets where housing valuations can rise to unsustainable levels relative to income or long-run average prices. Speculative demand driven by positive price expectations has the effect of amplifying market demand and driving prices higher - especially when supply is restricted and unresponsive to short-term price movements.
Bubbles are common in other asset markets such as for stocks and bonds. And increasingly we find that world commodity prices exhibit bubble tendencies with high levels of volatility in the prices of foodstuffs, oil and natural gas and metals.
The bursting of a bubble - such as a collapse in property prices - can have important demand-side effects on wealth, confidence and aggregate demandread more...»
IT’S not all fun and games at the Co-op Bank. Just over a month ago, the bank was serious about acquiring 632 branches from Lloyds. Now its debt has been downgraded six notches to junk status, and veteran HSBC banker Niall Booker has been brought in as replacement chief executive after Barry Tootell resigned.
Inquests have begun, and it is only human nature to look for a scapegoat other than the large amount lost on the bank’s new IT system. Management has delved into its hat, and, hey presto, here is the old Britannia Building Society, merged with the Co-op in 2009. It is, we are solemnly told, the bad debts on the Britannia’s commercial property portfolio which are the problem.
"All money is virtual, and always has been – because money is just a set of ideas."
What is the real nature of money? In his new book 'Money: The Unauthorised Biography', Felix Martin suggests the modern approach to money - what we think it is and how it works - is wrong. He tells the FT's Andrew Hill why the conventional economic view is misguided and dangerous. Martin believes that we should view money as a social technology, a set of ideas and practices for organising society.
Martin argues that we shouldn't be afraid of using monetary policy as a deliberate technique for the re-distribution of income and wealth, for example for using higher inflation targets for "sweating off debt" as an alternative to persistent austerity. How might a different (unconventional) conception of money affect the types of banking system that we might want to emerge after the crisis? To what extent should the state radically narrow the range of financial institutions to which it is prepared to offer emergency financial help?read more...»
The post global financial crisis period is seeing a burst of innovation in the financial system as new platforms of funding especially for businesses seem to be gaining some traction even if they remain very small contrasted with the scale of established banks. This short report from the FT visits a conference on behavioural finance held at Oxford University and quizzes some leading figures on key developments in embryonic, emerging financial businesses. Having watched the video engage in some independent research on peer to peer lending and other fast-growing markets.read more...»
The credit crunch is widely regarded to have started during 2007 and is certainly not over yet! Indeed the period of severe constraints on credit availability and rising borrowing costs most notably for smaller businesses has now lasted longer than the Second World War. It represents a major barrier to sustained and hopefully more robust economic recovery. This short streamed presentation looks at the importance of the credit squeeze on the UK economy.
A number of new government policy initiatives have been introduced but doubts persist about their effectiveness. Underneath the surface new forms of business finance are taking shape including peer to peer lending and the rise of retail bonds issued by a number of businesses.read more...»
It is now over four years since the Bank of England cut their policy interest rate to 0.5%. The Bank along with other central banks has seemingly moved away from changes in interest rates to policies aimed at manipulating the base supply of money in the economy / financial system. Others are focusing on managing the exchange rate. Monetary policy has undergone big changes in recent years as this revision note explains.read more...»
When is the right moment to start tightening monetary policy by gradually raising interest rates? Some macro economists believe that in the UK, the Monetary Policy Committee has already delayed the first upwards nudge in policy interest rates for too long with the result that inflation has remained persistently above target for most of the last five years. Others argue that fundamental economic weakness makes the recovery fragile and vulnerable and that raising interest rates now is the wrong option.
Check out some key macro charts here
An increase of one percentage point in the interest rate that a firm faces during a financial crisis increases its chances of failure by more than five percentage points. Young firms, firms with high bank dependency and firms that don’t export are particularly vulnerable to changes in their debt-servicing costs.
These are among the findings of research by Alessandra Guariglia, Marina-Eliza Spaliara and Serafeim Tsoukas, to be presented at the Royal Economic Society’s 2013 annual conference. The study looks at a large data set of mainly private-held firms in the UK tracked over several years.
The Bank of England has held short-term interest rates very close to zero for several years, with devastating consequences for the incomes of millions of frugal people. The Bank’s latest wheeze suggests that savers pay the banks for the privilege of holding their money. The Bank has pumped hundreds of billions of pounds into the economy through quantitative easing.
All these policies are open to question. For example, quantitative easing has many critics amongst distinguished monetary economists.
Despite this, the actions of the Bank are deemed to be a Good Thing, for the Bank is independent. The decisions of its experts are untainted by the touch of mortal, corrupt politicians. Yet just how expert is its expertise?
The loss of triple A status on UK government bonds has intensified the demands for a Plan B. So-called Keynesians demand an increase in both public spending and the public sector deficit.
What might Keynes himself have said about the current situation? Lacking a Ouija board, I am unable to communicate directly with the great man himself. But we can get a very strong hint from the title of the first major work which Keynes published when confronted with the 1929 financial crash. It is the Treatise on Money. His most famous work was not published until 1936, when the Great Depression was well and truly over. Its full name is the General Theory of Employment, Interest and Money.read more...»
This is great for understanding key shifts in global trade and investment. The Economist offers this short video on the rising prominence of Chinese money in property and currency markets and FDI from Chinese businesses within the EU.read more...»
Are you following important macroeconomic developments in Japan? The new government of Shinzo Abe is reforming monetary policy - including a change to the inflation target - and undertaking more aggressive fiscal measures. Will it work in lifting the Japanese economy to a higher growth plane after two decades and more of sluggish growth and the debilitating effects of price deflation?read more...»
An updated glossary of key terms for AS macroread more...»
Forecasts of the end of the world have an even worse track record than predictions in economics. Some followers of the Mayan calendar believe the world will end next week.
But we have been here before. In 1956, an American group, led by a suburban housewife, believed that a catastrophic flood would destroy the world on a specific date. Concealing his true identity, a leading American social psychologist, Leon Festinger, had joined them several months previously. When the flood failed to happen, he noted that, far from abandoning their beliefs, the members became even fervent in their view that the world was about to end.
The Chinese renminbi is not yet as recognisable as the US dollar or the Euro but with China's continued growth and rising influence as a major global economic power, their domestic currency is becoming more widely used when settling accounts in trade in goodsand services. In this new Financial Times video Denise Law explores the benefits of using renminbi in trade even though the renminbi is not yet fully-convertible in world foreign exchange markets.read more...»
Fives years on from the collapse of Lehman Brothers, this is an excellent animated explanation of the genesis of the global financial crisis. For more comment - go to this piece from Stephanie Flanders of the BBC: Unhappy anniversary of the credit crunchread more...»
There was an interesting discussion on Keynesian insights for today’s financial markets on FT television today. The interviewee is the noted biographer of Keynes, Professor Robert Skidelsky.read more...»
This six minute news video report from CNN is superb, it focuses on pilot programmes to extend micro-insurance schemes for some of Kenya’s smallest and poorest farmers in a country where the agricultural sector is at high risk from the effects of drought. Kenya is the largest economy in east Africa but less than 4% of Kenyans have access to insurance. Many do not understand the concept of insurance, others cannot afford it or choose not to take it out when there are school fees to pay (opportunity cost writ large).
These pilot schemes offer hope for the future but insurance on its own is no panecea. Savings and access to credit are of equal significance in reducing vulnerability to extreme weather events.
The micro-insurance programmes embed mobile technology - for example the Kilimo Salama programme — Swahili for ‘safe farming’ — launched in 2011 provides small-scale farmers in Kenya with crop insurance by combining mobile phone payment with the data from automated weather stations.Kilimo Salama uses data from these stations to calculate the severity of droughts — or excessive rainfall. Eligible farmers then receive payouts via their mobile phones.
More here: Kenya pastoralists get insured for lossesread more...»
The rise in foreign currency reserves is largely the result of China’s enormous trade surpluses but also the consequence of intervention in currency markets by the Chinese central bank. To manage the value of the exchange rate it buys dollars and sells Yuan. China uses a large slice of their currency reserves to finance overseas investment including the role of Sovereign Wealth Funds to invest in developed and emerging countries including many in Africa. A rise in foreign currency reserves increases the money supply and has led to a surge in domestic lending including much money pumped into property developments.
A recent estimate valued Chinese foreign currency reserves at $3.2 trillion. In 2010, nearly two-thirds of China’s reserves were held in US dollar assets such as bonds, equities, money on deposit in US banks and property. But recently there are signs that Chinese investors have been diversifying away from the dollar.read more...»
The pay-day loan boom is a symptom of more than three decades of financialization in the UK economy. Households and also some businesses are using the loans made available by companies such as Wonga. But borrowing from them involves astronomical rates of interest on an annualised percentage basis. In this clip we see how pay day loan businesses are becoming an ever more frequent sight on our high streets - but are tehey targeting the poorest and most vulnerable in society? Should regulators get tougher on them? Are they a sign of these difficult times?read more...»
Barclays have been hit by record fines for distorting key interest rates including the London Interbank Offer Rate and the consequences of this appalling contamination of the market for interest rates for lending and borrowing between the banks are likely to be far-reaching for the banking industry as a whole. Barclays has agreed to pay $453m for using underhand tactics, including price-fixing, to rig the markets. Keep an eye on the new because this interest-rate fixing scandal is set to engulf HSBC, Lloyds Banking Group and Royal Bank of Scotland.
The Governor of the Bank of England has launched a scathing attack on the culture of the UK banking industryread more...»
A summer hat tip to Alan Fearnley for spotting this excellent teaching resource from the BBC. A recent Radio 4 Analysis programme was devoted to the issue of a return to the Gold Standard (a fixed exchange rate system). It was by Simon Jack who covers economic and financial matters for the Today programme. It is very accessible for Years 12 and 13. Here are the details for people wanting to access content from the programme.
Radio 4 Analysis on Twitter (Click Here)
See also: Duncan Weldon (Guardian): Back to the gold standard? It makes no economic sense
A revision blog on UK overseas trade in servicesread more...»
Professor Robert Schiller from Yale University spoke at the RSA in London tonight on the roles and responsibilities of the financial sector and built an argument that finance can be a root to addressing some of the toughest economic and social challenges of the age. Here are some brief notes from his talk.read more...»
“It is not that human beings are irrational, it is that they are human” Here is a terrific short film on the causes of financial instability and the cracking of faith in markets. The Institute for New Economic Thinking has just launched the first of a series of short documentaries on economics Click below for the first of themread more...»
A sovereign wealth fund is a government or state run investment fund usually created by super-normal profits from natural resources such as oil, gas or minerals. Here is some brief background on them:read more...»
This morning’s headline on BBC Breakfast was the news that yesterday RBS raised the interest rate on three of its mortgage products by a quarter of a percent to 4%. Three days ago the Halifax wrote to its mortgage holders saying that it intends to raise the cap on its Standard Variable Rate (SVR) to 3.75% above base rate, rather than the current 3%. As the Telegraph reports, although this doesn’t guarantee that Halifax would raise the rate itself, brokers”… believe otherwise and suggested that this would soon happen for a million Halifax borrowers” – and the BBC are now reporting an expectation that the Halifax will announce a rise in the SVR with effect from 1st May. For A level economists this story has several implications.read more...»
At the World Traders’ Tacitus lecture last night, Terry Smith proposed a return to the provisions of the Glass-Steagall Act in order to reform the banking sector. The title of his lecture was ‘Is Occupy right?’, and while he clearly didn’t go along with some of the propositions of the Occupy movement, such as the imposition of a financial transaction tax, he did say that they have a serious point to make about the financial system.read more...»
This has to be amongst the best 60 seconds of Economics you’ll ever see on television. The superb Stephanie Flanders takes a leaf out of the RSA playbook to explain the basic theory behind quantitative easing. Wonderful!!read more...»
“All money these days is really a form of debt from somewhere else. We know now in 2012 that our debts cannot be repaid in full.”
Philip Coggan from the Economist was on fine form at the LSE last week when he spoke to a packed audience in the new academic building on the subject of his latest book. When trust in the monetary system breaks down we are in a very difficult place and, in a wonderfully broad historical sweep Philip Coggan offered some revealing insights into what a reformed global monetary system might look like in the years ahead.read more...»
Is the US dollar going to be knocked off its perch as the only true global currency? Professor Barry Eichengreen, the author of Exhorbitant Privelege argues that there are strong reasons to believe that the US dollars’ position in the world financial system will decline in the years ahead.
The US dollar has been for many years the world’s most powerful currencies but this power seems to be waning as other currencies rise in significance and the US economy struggles to recover from their financial and economic crisis and the fiscal challenge. Eichengreen argues that there will be three truly global currencies going forward - the dollar, the Euro and the remnimbi.read more...»
AS Economics student Freddie Bickford-Smith looks at some of the argument surrounding proposals to introduce a financial transactions tax in the EU. I will post another essay on this topic from a fellow student, offering an alternative perspective from that developed here!
Following the financial crisis of the past few years, and the amassing of blame on the financial sector for it, it has come to the attention of many - including the European Commission - that there must be a way of rectifying the situation, and promoting greater economic stability.
One popular suggestion is the ‘Tobin Tax’, an idea proposed by Professor James Tobin (the Nobel prize-winning American economist) for a tax on worldwide financial transactionsread more...»
How to deal with this in school? I cannot be the only teacher who is struggling to keep up with the eurozone developments myself, let alone help my students to make any sense of it. Some searching this morning has come up with a variety of articles, graphics and interviews which range from the very basic such as the one-minute video reports from Robert Peston, which might be helpful to an AS student who is just starting to get to grips with the principles of macroeconomics, to some analysis of actual and potential threats to the UK economy and graphics showing the interrelated borrowing between the eurozone countries, which might help the ambitious A2 students to stretch themselves. These are listed below, with a brief description of each one. I am sure that you will have many more to add to the list.read more...»
This week I am setting my AS micro students a question on proposals for a Tobin Tax - partly because it is hugely topical and also as a way of developing their evaluation skills on paper and coming to a reasoned final conclusion. Here are some of the links to suggested reading and some video shorts on this topic:read more...»
Food prices are now rising by up to 10% a year in Britain and Europe and a new forecast from the United Nations predicts that prices can be expected to rise at least 40% in the next decade. Whilst conventional theories of changes in supply and demand conditions can be used to explain some of the increase in food prices, many economists are concerned that speculation by hedge funds and other investors has amplified the natural volatility of prices driving food prices away from fair values and contributing to a huge rise in global food poverty and hunger. These days, cocoa, fruit juices, sugar, staples, meat and coffee are all now global commodities, along with oil, gold and metals.
Is this the moment to legislate to limit the scope for speculative activity in food markets? The video below provides an excellent introduction to speculation in food markets - it features Neil Kellard, Professor in Finance at the University of Essexread more...»
Unsurprisingly, the UK will be hit hardest by this with over 80% of the revenues for this tax (estimated to raise £50 bn a year) to come from London, given its comparative advantage in financial services.
Is this really a feasible concept, in a globalised world, with mobile financial flows and footloose capital?
Cue the drain to U.S for many firms if it becomes a reality?
Bill Nighy appeared in this video last year supporting the idea of a tax on financial transactions.
The Bank of England has published a report analysing the impact of the £200 billion programme of quantitative easing on the UK economy. The strategy started in the spring of 2009 (coinciding with base interest rates reaching an historic low of 0.5%).
According to the BoE report (contained within their latest quarterly bulletin), the effect of asset-purchases designed to bolster the cash reserves of the banking system has see “a peak effect on the level of real GDP of between 1½ and 2% and a peak effect on annual CPI inflation of between ¾ and 1½ percentage points. QE is estimated to have had approximately an equivalent impact on inflation as a cut in Bank (interest) Rate of between 150 to 300 basis points. (1.5 - 3%) - although these estimate must be treated with a degree of caution.
£198 billion of the £200 billion asset purchase programme has involved the central bank buying gilts (government bonds) from the financial system - purchasing them injects cash or liquidity into the system and is designed to unfreeze the supply of credit hopefully flowing through to small and medium sized businesses needing finance to cover an expansion.read more...»
Is Europe and the United States facing a decade of very slow growth as their economies struggle to emerge from the global financial crisis? Peter Day’s In Business programme has been attending a conference of some of the world’s top Nobel Prize winning economists to hear their thoughts about approaches to stimulate innovation and growth and take economics as a discipline into new directionsread more...»
As major economies are buffeted by crisis again, the excellent Keynes vs Hayek debate held at the LSE last month is thrown into ever sharper context. You can hear the 30-minute radio programme made from the debate here on BBC i-player, or download it as a podcast. There is also an article here introducing the opposing arguments, which students could use in September to analyse the changes to the global economic situation - no doubt there are still many twists and turns to come in the next month for them to work with.
Significant effort is made by teachers, companies and the government to try and educate people about managing their financial affairs, but often to no avail. Indeed, the book Nudge suggests that even financial experts often struggle to make the ‘right’ or ‘best’ decision. A new experiment has been designed that aims to examine how people make financial decisions - and you can take part! Firstly, visit this BBC website to find out a bit more about the experiment, then look at what is being termed ‘money sanity’ here, before taking the Big Money Test.
Portugal has requested an emergency bail out from the European Union to address it’s sovereign debt crisis. It becomes the third Euro Area economy to require help from European partners in the wake of bail outs for Ireland and Greece.
The move came after the Portuguese government was forced to pay an interest rate of more than 5% for borrowing money for just one year and in the expectation of the European Central Bank raising policy interest rates in the near future. The Portuguese economy has a major state-sector debt crisis as our Timetric chart below shows. And the economy has been performing poorly for several years with rising unemployment and a steep fall in relative living standards. Already several of Europe’s new economies (including Slovenia and the Czech Republic) have overtaken Portugal in terms of income per capita (PPP adjusted). Portugal’s long-term credit rating was downgraded by Moody’s by one notch to Baa1 earlier on this week.
BBC: EU austerity drive country by country
Independent: Portugal seeks €80bn bailout as third nation falls to eurozone crisis
Guardian: Portugal’s bailout was all but inevitable
Bloomberg: Goldman Sachs Says Portugal Is Last Euro Nation to Seek Bailout
Independent, Sean O’Grady: If Spain fails, it will be too expensive to save