Mutual Information » Economics

End of MAED (Mutually Assured Economic Destruction)

admin — Sat, 26 Sep 2009 20:52:18 +0000

The US government is dependent on the Chinese central bank for credit. Without the support of China, interest rates on US Treasury would be much higher than they are now. Also, the Chinese government, if it were to start dumping its bonds on the markets, could make it as difficult as it wanted for the US government to continue borrowing. Put it another way, the Chinese government has veto power over most US government spending (unless Congress were to clean up its act, of course, but that would take things like health care reform out of the picture for the next few years).

Until recently, it was always argued that the Chinese central bank would never abuse its position vis a vis the US because a US fiscal crisis would become a US economic crisis and that would hurt China through its export dependency. Mutual Assured Economic Destruction.

It turns out that China has, to a larger extent than previously appreciated, decoupled from the US. It’s not so export-dependent. A crisis can be pretty nasty in the US while China chugs along. So, MAED is not true. China could probably punish the US much more than it hurts itself.

I guess that people in Washington and Beijing have already started taking this into account in China-US relationships, but I haven’t seen it mentioned in public too often.

Parable of the Bond-holders

admin — Mon, 04 May 2009 21:44:03 +0000

Bond Holder was walking down the street when he was approached by a strange fellow.

“Give me your wallet” the fellow said.

“No” said the Bond Holder.

“Alright, I’m going to be reasonable. Give me half.”

And still the Bond Holder refused.

He was being unreasonable. After all, the other stake holder in the conversation had already compromised and was willing to take only half of what he had asked for in the beginning (a mighty sacrifice, you must agree).

Besides, the Bond Holder might not really deserve the money. Maybe he cheats on his wife. Maybe he serves over cooked pasta to guests. Who knows what sins he committed in the past.

Sentences of the Day

admin — Wed, 22 Oct 2008 15:53:29 +0000

Like most people I think that we are in a recession which is likely to get worse but we need to remind ourselves that recessions are normal. What is not normal is the current level of panic.

(Alex Tabarrok)

Money on the Ground

admin — Fri, 10 Oct 2008 02:14:47 +0000

1. Joke: Two economists are walking down the street. The younger onesees a dollar on the ground stoops to pick it up. The other one, an older Chicago economist, stops him: “If that was really $100, someone would have picked it up!”

2. Commenter Nigel points out that intrade puts Obama with less chances of winning than other markets. This is money on the ground. I can take $92 and buy Obama at 76% on intrade and McCain at 16% on the Iowa markets. This will give me $100 on election day, independent of whoever wins.

3. Is there really money on the ground here?

We Need More Regulation?

admin — Sun, 05 Oct 2008 16:04:55 +0000

[S]omething called OFHEO was set up in 1992 by Congress, and the sole job of OFHEO was to watch over Fannie and Freddie, someone to watch over them. And they were there to evaluate the soundness and the accounting and all of that. Two companies were all they had to regulate. OFHEO has over 200 employees now. They have a budget now that’s $65 million a year, and all they have to do is look at two companies. I mean, you know, I look at more than two companies.

(Warren Buffet)

Credit Crunch, Credit Growth

admin — Wed, 01 Oct 2008 22:32:08 +0000

1. There is a lot of talk of a credit crunch and the effects it might have on the real economy. As firms find it harder and harder to get credit, they cut back on investments, which affect other firms who cut back on investments, which affects yet other firms, which cut back on investments and so on.

2. However, the numbers show that credit is still strong. Banks are lending more than ever. There is, at most, a leveling off of growth.

3. Over at Coyote there is an explanation of why we might be seeing both a credit crunch and a growth in credit:

I am maxed on my line of credit, because the interest rate is low and I would rather have the money in hand and pay the interest rather than find out later my line is somehow revoked or frozen. The money is not needed for near term expenses, but I want to have resources in hand if the recession creates a business opportunity that requires funding. Does this worsen the near term crunch, the same way panic buying of gas worsens local gas shortages? Probably. And again, price is the key. Like with gas, I would rather rationing by price rather than shortage. In other words, I would rather my line of credit go up to a 15% interest rate, if that what it takes to put things in balance, than to be revoked entirely so a few businesses can still have 6% money.