Tuesday, August 31, 2010
Economics of Defense Spending
A fantastic (and funny) quote from the article (Defence spending in a time of austerity, The Economist, Aug 26th 2010) :
http://www.economist.com/node/16886851/print
“In a book published in 1983, Norman Augustine, a luminary of the aerospace industry, drafted a series of lighthearted “laws”. In one aphorism, he plotted the exponential growth of unit cost for fighter aircraft since 1910 (see chart 2), and extrapolated it to its absurd conclusion:
“In the year 2054, the entire defence budget will purchase just one aircraft. This aircraft will have to be shared by the Air Force and Navy 3½ days each per week except for leap year, when it will be made available to the Marines for the extra day.””
An interesting point to be made here is that like many major military powers, the US emphasizes (rightly from a strategic perspective) that major weapons system be entirely developed domestically. From an economic standpoint, if you have a captive buyer – the US government (with what sometimes appears to be an unlimited spending capability) – and few suppliers (facing little or no competition), it is a recipe for cost overruns and expensive production.
India Clocks 8.8% Growth in 2010 June Quarter - Economists Not Impressed
India's largely domestic driven economy is the world's second fastest growing major economy.
A good analysis is provided in this interview:
A good analysis is provided in this interview:
Monday, August 30, 2010
China's Lending Boom
Bank of China’s Chief Xiao Gang notes that government directives are not solely responsible for China’s lending boom:
“Profit is the main driving force of banks. Listed banks have shareholders and must pay attention to market value. Money must be made each quarter and each year to improve certain key performance indices, such as return on equity and return on assets. Like listed banks anywhere in the world, these banks must catch the eyes of new investors, and increase returns to existing ones.
In China, because of the non-liberalized interest rate, net interest margins on yuan loans are almost double of that on foreign currency loans in the international market. In such an environment, which bank wouldn’t want to increase its lending? The more banks lend, the more profits they earn. Simple.”
http://www.boc.cn/en/bocinfo/bi1/201008/t20100826_1126757.html
In China, because of the non-liberalized interest rate, net interest margins on yuan loans are almost double of that on foreign currency loans in the international market. In such an environment, which bank wouldn’t want to increase its lending? The more banks lend, the more profits they earn. Simple.”
http://www.boc.cn/en/bocinfo/bi1/201008/t20100826_1126757.html
In a financially repressed environment, where banks don’t have the freedom to set their own interest rates and savers have few options but to invest domestically, the behavior of Chinese state owned banks is not all that surprising.
It is always about incentives.
Source: PBOC via BIS
A Never Ending Debate - What Role Should the State Play in Economic Matters
Today’s NYT has an interesting piece on the increase in government intervention in the Chinese economy:
For a more nuanced take on the role of the state and the role of entrepreneurs in China,
see MIT professor Yasheng Huang’s http://www.wilsonquarterly.com/printarticle.cfm?aid=1573
see MIT professor Yasheng Huang’s http://www.wilsonquarterly.com/printarticle.cfm?aid=1573
Also, check out
See previous post as well.
Fed's Unconventional Policy Options
BBC provides a nice summary of Fed’s unconventional policy options
A brief note on interest rates paid on reserves:
The Federal Reserve began paying interest rates on reserves in late 2008. Originally authorized by the Financial Services Regulatory Relief Act of 2006, interest payments on reserve balances held (by depository institutions) at Reserve Banks was to begin in 2011. But, the effective date was advanced to October 2008 in response to the financial crisis by the Emergency Economic Stabilization Act of 2008.
Interest rate paid on required reserves is aimed at eliminating the implicit tax that reserve requirements imposed on depository institutions. Interest rate paid on excess reserves is actually a new policy tool available to the Federal Reserve. By varying interest rate on excess reserves, the Fed can potentially influence the quantity of excess reserves banks choose to hold (as opposed to lending it out).
Currently, interest rates on required reserve balances and on excess reserve balances have been set by the Federal Reserve Board at 25 basis points.
Barro on Unemployment Insurance
Harvard economist, Robert Barro, notes in his WSJ op-ed
(http://online.wsj.com/article/SB10001424052748703959704575454431457720188.html):
"In a recession, it is more likely that individual unemployment reflects weak economic conditions, rather than individual decisions to choose leisure over work. Therefore, it is reasonable during a recession to adopt a more generous unemployment-insurance program. In the past, this change entailed extensions to perhaps 39 weeks of eligibility from 26 weeks, though sometimes a bit more and typically conditioned on the employment situation in a person's state of residence. However, we have never experienced anything close to the blanket extension of eligibility to nearly two years. We have shifted toward a welfare program that resembles those in many Western European countries".
These previous posts also deal with the issue of unemployment insurance
(http://online.wsj.com/article/SB10001424052748703959704575454431457720188.html):
"In a recession, it is more likely that individual unemployment reflects weak economic conditions, rather than individual decisions to choose leisure over work. Therefore, it is reasonable during a recession to adopt a more generous unemployment-insurance program. In the past, this change entailed extensions to perhaps 39 weeks of eligibility from 26 weeks, though sometimes a bit more and typically conditioned on the employment situation in a person's state of residence. However, we have never experienced anything close to the blanket extension of eligibility to nearly two years. We have shifted toward a welfare program that resembles those in many Western European countries".
These previous posts also deal with the issue of unemployment insurance
Sunday, August 29, 2010
Is China a Challenger to US High Tech Leadership?
http://www.cnbc.com/id/15840232?video=1569316261&play=1
Also, check out:
http://online.wsj.com/article/SB10001424052748703428604575418680197041878.html
Interesting fact from the WSJ article ("In Toledo, the 'Glass City,' New Label: Made in China")
"China makes 45% of the world's glass, but it consumes virtually all of that amount. Every 15 minutes, its production is enough to clad a 100-story skyscraper".
A factor hindering US exports are the highly restrictive export controls (regulations that restrict sales of particular goods abroad for national security reasons). You cannot expect US companies to increase their exports significantly if they are not allowed to sell goods that foreigners actually want to buy.
http://online.wsj.com/article/SB10001424052748703959704575454313481209990.html
Also, check out:
http://online.wsj.com/article/SB10001424052748703428604575418680197041878.html
Interesting fact from the WSJ article ("In Toledo, the 'Glass City,' New Label: Made in China")
"China makes 45% of the world's glass, but it consumes virtually all of that amount. Every 15 minutes, its production is enough to clad a 100-story skyscraper".
A factor hindering US exports are the highly restrictive export controls (regulations that restrict sales of particular goods abroad for national security reasons). You cannot expect US companies to increase their exports significantly if they are not allowed to sell goods that foreigners actually want to buy.
http://online.wsj.com/article/SB10001424052748703959704575454313481209990.html
IMD’s THE WORLD COMPETITIVENESS SCOREBOARD 2010
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