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Investing and Economics Blog

USA and European Economies

Who are the champions?

Compared with the awesome strength of America and the raw power of emerging Asia, Europe is sometimes portrayed as a has-been, excelling in luxury goods, fine food, wines and fashion but weighed down by too many old industries and old ideas.
…
America enjoys awesome advantages over Europe. It is a huge, truly single market with a relatively youthful, growing population. It is the world’s economic superpower, with much higher productivity than its competitors (though productivity growth has recently been disappointing, and last year was slightly below Europe’s). It has world-class universities that work hand in glove with business. Americans have not only won more Nobel prizes, they have turned more scientific advances into profitable businesses than anyone else. Many of these firms have gone on to become the giants of modern business.

It may have been a British scientist, Sir Tim Berners-Lee, working at a laboratory in Switzerland, who invented the world wide web, but America is the home of the internet and all the business sectors it has spawned. And even where Europe is holding its own against America, it seems unable to retain its advantage.

I thought the aritcle was then going to say equally positive things about Europe. It did say positive things but not really with the same gusto. It is good to remember that most countries has strong and weak factors economically. The USA continues to take advantage of the best minds from elsewhere but I believe this flow will reduce and in fact flow in both directions increasingly. Tim Berners-Lee works at MIT now.

February 12th, 2007 by John Hunter | Leave a Comment | Tags: Economics

Growing Size of non-USA Economies

Developing nations poised to challenge USA as king of the hill

For more than half a century, Americans could take for granted that the world economy would orbit around them. No longer. The USA today produces about 30% of world output at market prices. That figure already is down significantly from about 46% in the aftermath of World War II, when European and Japanese factories lay in ruins. And it is headed lower still as China and India continue their ascent.

Over the next generation, fast-growing developing nations are expected to see a significant uptick in their share of world output from 23% today to about 33% in 2030, according to a recent World Bank study.

This trend is among the major economic and investment forces over the next several decades.

Related: Science and Engineering in Global Economics – China now the 5th Largest Economy – Top 10 Manufacturing Countries

February 8th, 2007 by John Hunter | 1 Comment | Tags: Economics

Bangalore’s Boomtown Blues

Bangalore’s Boomtown Blues:

The hi-tech industry has also introduced a new phenomenon in Indian life for those who are on-the-up – the weekend break. Previously, everyone spent six days a week in the office, but the high-paid IT workers only do five.
…
Bangalore’s public infrastructure has lagged woefully behind the pace of private sector investment. Every Bangalore IT company has to have a private generator and uninterruptible power supply to cope with the daily power failures of the grid.
January 28th, 2007 by John Hunter | Leave a Comment | Tags: Economics

State of the nation? Broke

State of the nation? Broke:

If you want to correct for the $185 billion collected by Social Security as surplus cash flow in 2006 — that is, the taxes came in today to pay for benefits promised in future years — then you have to look at the on-budget deficit, which Walker calls the “operating deficit.” The on-budget deficit came to $434 billion in 2006. The on-budget deficit shrank from 2005 to 2006, just as the unified budget deficit did, but the drop was much smaller: to $434 billion in fiscal 2006 from $494 in fiscal 2005.

Both of these still understate the size of the deficit. The Bush administration has been adamant about keeping certain costs out of the budget figures. Spending on the war in Iraq, for example, has been included not in budget resolutions but in special emergency spending bills. They are “off budget” in the language of Washington. That spending, estimated by the Congressional Budget Office at $360 billion overall and $95 billion in the fiscal year that ended in October 2006, aren’t in either of these two budget figures. And Iraq funding for fiscal 2007 won’t be included in the budget the president will introduce next month, either.

January 26th, 2007 by John Hunter | 4 Comments | Tags: Economics, Financial Literacy, Taxes

World Saving Glut – Effect of Oil Price Declines

Do lower oil prices mean the end of the saving glut?:

I am not sure whether there is a global savings glut or a global drought in non-residential investment or a bit of both. But I am quite confident that there is a savings glut in China. Savings seems to be above 50% of China’s GDP – which is nuts. And most of that isn’t household savings. There is no investment drought in China.

There is also clearly a savings glut in the oil exporting countries. Lahart – drawing on work by Higgins, Klitgaard and Lerman of the New York Fed – notes that the oil exporters saved about ½ the surge in their oil export revenue over the past few years. The result: the current account surplus of many oil exporters surged to over 30% of their GDP.
…
The oil exporters seem to have gotten noticeably less frugal over time. They were very frugal in 2004. A bit less frugal in 2005. And even less frugal in 2006.

As usual a good post by Brad Setser. The details of understanding the “savings glut” get complicated but essentially the idea is that huge savings from China, OPEC countries… create huge sums looking for investments (and fund the huge USA debts – public and private). And to some economists create the market for the debt (for example, without the savings glut their belief is there would not have been money to finance the huge questionable mortgage market over the last few year). As stated in, The Global Savings Glut:

Generally, the flow of surplus global savings to the United States has caused Americans to spend more and save less. In recent speeches, Bernanke — a member of the Federal Reserve Board and nominated as head of the White House Council of Economic Advisers — has shown how. In the 1990s, some of the savings surplus went into the hot U.S. stock market, boosting prices further. Feeling wealthier — because their stock portfolios had fattened — Americans decided they could save less and shop more.

And nearly all economist agree the “savings glut” creates the very low interest rates we have seen the last few years around the world.

Related: The Global Saving Glut and the U.S. Current Account Deficit by Ben Bernanke – Savings Glut (The self-serving explanation for America’s bad habits) by Daniel Gross – Global Savings Glut Revisited – The Savings Glut

January 20th, 2007 by John Hunter | Leave a Comment | Tags: Economics, Saving

Social Security Trust Fund

The Washington Post really doesn’t like Social Security … by Brad Setser

Best I can tell, Social Security is in the best financial shape of any federal program. It is in far better future shape than Medicare. And it is in way better shape than the portion of the government that isn’t financed by the payroll tax. That part of the government has a $434 billion deficit. Social Security, by contrast, has a $185b cash flow surplus. Social Security’s revenues exceed its expenditures – and will continue to do so for several years. Its financial assets are growing – they will top $2 trillion at the end of this year.

This is not the way the story is normally told. Social Security is actually in good shape for at least 30 years. That doesn’t mean it is not a big problem after that but Brad Setser makes a good point that the huge increase in the rest of the debt has really made that problem seem minor. The main point? We need to fix the rest of the budget mess, and while I still think Social Security needs adjustment really that is not as important as fixing the rest of the spending money the government doesn’t have.

Related: Estate Tax Repeal

January 16th, 2007 by John Hunter | 2 Comments | Tags: Economics, Retirement, quote

Minimum Wage Example

For $7.93 an Hour, It’s Worth a Trip Across a State Line

Just eight miles separate this town on the Washington side of the state border from Post Falls on the Idaho side. But the towns are nearly $3 an hour apart in the required minimum wage. Washington pays the highest in the nation, just under $8 an hour, and Idaho has among the lowest, matching 21 states that have not raised the hourly wage beyond the federal minimum of $5.15
…
the state’s major business lobby, the Association of Washington Business, is no longer fighting the minimum-wage law, which is adjusted every year in line with the consumer price index. “You don’t see us screaming out loud about this,” said Don Brunell, president of the trade group, which represents 6,300 members. “It’s almost a no-brainer,” Mr. Brunell said, that the federal minimum should go higher. Association officials say they would like to see some flexibility for rural and small-town businesses, however.
January 11th, 2007 by John Hunter | Leave a Comment | Tags: Economics

When the lowest pay rises, what happens?

When the lowest pay rises, what happens?

Still, when all the effects are tallied up, economists say that the lowest-wage workers do get a real pay raise.

No kidding. Other effects are a bit trickier but that one is not tough to figure out.

His model suggests some of the complex ripple effects – and the possible magnitude of changes. The study predicts that, two years after the minimum of $7.25 goes into effect, total employment in the US would fall by 0.17 percent. That’s roughly the loss of one job in every 600. The pay gain for workers affected by the wage hike might approach 8 percent.

It is true jobs can be lost but at low rates that effect is very small. As the unemployment rate rises the job losses would increase with similar raises in the minimum wage. Raising the minimum wage to $7.25 now is a good idea – it should have been raised earlier.

January 10th, 2007 by John Hunter | Leave a Comment | Tags: Economics, Financial Literacy

What Do Unemployment Stats Mean?

Economic statistics, like all data, needs to be defined. The way to collect data (economic data or any other type) is to operationally define the terms. Statistics don’t lie. Statistics can be faulty, when those collecting the data fail to use good operational definitions and the data quality is poor (without a definition people make guess…). People can also just make up false number. And people can try to mislead by stating statistics in a way that seem to indicate something that is not the most accurate way to view the whole situation.

The way to cope with such problems is to understand statistics and data. The data can be wrong. So you have to access that possibility. And the data can mean something different than you assume (and often the data is not presented with the operation definitions). When that is the case be careful about your assumptions (with financial and economic data and other data too). But don’t decide to just ignore data because then you condemn yourself to ignorance of the many things which data shed light onto.

In, What ‘Unemployment’ Really Means These Days, the unemployment data is explored. The post does a good job of showing how you can get different measures of the “unemployment rate” depending on how you define what you will measure. I happen to believe the existing measure is best but you need to understand that it doesn’t factor in underemployment and people giving up completely… I believe the best way to deal with those weaknesses is to have supplementary measures that enhance your understanding of the unemployment rate. And too view it as only one measure of economic health. Look also at median wages, health care coverage, hours worked, vacation time…
Read more

January 6th, 2007 by John Hunter | 6 Comments | Tags: Economics, Financial Literacy, quote

Investor Protection Needed

In an instant, retirement savings vanish by Bob Sullivan:

With hacking of brokerage accounts increasing, the legal gap facing DeSmidt and other victims has regulators and critics debating the need for new consumer protections.
…
Few consumers appreciate the fact that, unlike credit card and checking account transactions, there are no federal consumer regulations specifically protecting consumers in the event of brokerage account hacking
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Both credit card transactions and electronic account transfers, such as online banking payments, are governed by Federal Reserve regulations that strictly limit consumers’ losses from theft. Consumers who report credit card fraud are only liable for $50
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Despite the lack of legal compulsion, some investment firms have taken to offering broad consumer protections anyway. Both e-trade and Charles Schwab offer credit-card style guarantees. Money stolen from Charles Schwab’s Web site will be returned to consumers as long as the theft is reported in a timely way, said Schwab’s Greg Gable.

This risk is something the government should address. The risk is to the economy at large, as well as having extreme consequences for individual investors. We need to do as much as possible to encourage retirement savings. Not providing government backing (such as provided by FDIC…) is a mistake. The funding should be similar to that for FDIC where member banks are assessed fees to cover the costs of the program based on the risks seen in that institution.

FDIC has done a great job of creating an environment that gives individuals confidence in the system and encourages economic development. Securities Investor Protection Corporation is another possible model but for something so important to the economic security of the country (and individuals lives) direct government involvement makes sense to me.

January 5th, 2007 by John Hunter | 1 Comment | Tags: Economics, Financial Literacy, Retirement

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