Tuppence

The first memory I have of figuring out the financial system was while watching the movie Mary Poppins. The children's father, George Banks, works at Fidelity Fiduciary Bank, and he tries to get Michael to invest his tuppence in the bank. Michael refuses to and inadvertently causes a bank run.

In class, we haven't had much of an opportunity to discuss what panics are, or how they happen, but this clip gives us a pretty good picture of what it would look like. As Krugman explained in his book, when you put your money in a bank, the banks end up lending your money to others. They expect interest on the loan so that you get back your money and they get to make money on it. Banks do keep a fraction of the money in reserve, but not enough to give everyone their money back. A bank run says that everyone who has money in this bank asks for their deposits back at the same time, in which case could cause a bankruptcy because it runs out of cash in its supply and can't ask for the loans to be repaid immediately. Ben Bernanke states that the crash of 1929 was mostly attributed to bank runs because people were convinced that their money wasn't safe, so they pulled all their money out prematurely which caused the banks to collapse (a self fulfilling prophecy). People tend to be flighty and panicky when it comes to money, and as we've touched upon in class animal spirits is what helps drive the panics because their panic causes a domino effect. Japan and Korea are good examples of this animal spirit driven economy; during the Asian Crisis, people were pulling out from countries like Thailand, Malaysia, and Indonesia because of their weak banking system and economics uncertainty. Korea and Japan, however, had relatively stable economies that could've been untouched had it not been for western banks premature panic; they grouped all of Asia together and ended up being the cause of the Korean economics crisis. It's important to remember that no matter the perceived strength of the economy, finance is a game of chance. Things can come crashing down as quickly as they boomed, and panic will be the only response. 

Disinflation vs Deflation in the Current Economy

On a brief sidenote, in class we discussed inflation and deflation. While we agreed that both were bad, it was discussed that deflation was the worse of the two because no one would spend any money, since prices would be going down every day leading to total economic collapse. On a video from Bloomberg News, panelists discuss the disappointing week I discussed before and whether or not it would lead to deflation. Michael McKee from Bloomberg news says that it isn't deflation, it's disinflation which is the rate of inflation. This completely changes the landscape; deflation is obviously a greater cause for alarm than disinflation, but they both are a cause for concern. The panelists chalk this week up to market over reactions and that they expect Europe to bounce back. While Trish Regan smartly brings up the deflation of crude oil and lowering of energy costs/prices both Michael McKee and Monica Dicenso make it an opportunity for the consumer to turn around the market because they'll have more spending money, in this way firms (excluding energy firms) that aren't affected by exports will also benefit. As Trish Regan remarked, "It's like one big giant tax cut for everyone".
Bloomberg Video

A Very Bad Week

In the past week, Wall Street traders held their breath, hoping that a new recession wasn't in the cards. On Wednesday British and German stocks fell 3%, Greece fell 6%. Everyone's eyes then looked towards the US stock market. The indicators didn't look too good, retail sales, the producer's price index, and the manufacturing report were all disappointing. Interest rates on the 10 year bond fell more than 16% to an interest rate of 1.86. This type of volatile market is not a good sign for the global economy, with the Great Recession still fresh in everyone's minds. It's easy for the US to panic, but they need to remember their position among the world. Europe, save Germany, wasn't doing very well in the first place, and the Eurozone hasn't been able to recover from the Great Recession as well as the United States has been able to. The biggest elephant in the room, though, is Ebola. The Andrew Ross Sorkin wrote that it's almost impossible to model the economic consequences of this disease. In a normal model, it is assumed that the people are rational, but during an epidemic people's rationalities will be called to question, and an accurate model would be hard to make. The reason that the US stock market was so volatile in the past week also has to deal with the rise in the value of the dollar. As we discussed in class, this rise in value makes it more expensive for foreigners to buy American goods which will hurt net exports lowering GDP and the producer's price index/manufacturing report. This does hurt the economy, albeit just slightly. An upside to this lower price is the fall of gas prices, which means that consumers will have more money to spend. The US economy is stronger than the European's or Asian's, while this week has been a scary one in terms of markets, it'll go down as just another volatile week, not a major setback.
The New Republic

Two States Are Better Than One

This week, Sweden's Prime Minister stated in a speech that Sweden will officially recognize Palestine as a state of its own. This makes Sweden the first long-term EU nation that will recognize Palestine as an official state. The United States has refused to recognize Palestine even going so far as stating that it doesn't recognize the Palestinian government because according to former Secretary of State John Kerry, "That would recognize a state, and there is no state." Stefan Lofven, the current Prime Minister, stated that the only way to create a peaceful two state solution requires equal representation. The United States recognizes the need for a peaceful solution but argued that the only way for a peaceful solution is through negotiations. Even though Hungary, Poland, and Slovakia have all recognized Palestine as a sovereign state, it was before they had joined the EU bloc, so Sweden sets a bold standard by being the first long term member-state to formally acknowledged the existence of the Palestinian state. Sweden has always been seen as one of the more progressive European nations especially politically because of their Socialist policies, and humanist reforms in fields such as same sex marriage, gender reassignment, and gender equality. Sweden provides universal healthcare and tertiary education for all citizens. It should be no surprise then, that they promote the create of a two state solution with emphasis on the word state. Israel and Palestine's situation has been touchy for a long time, and things finally came to head this past summer with formal ground strikes and launched missiles. Hopefully this action by Sweden will start a new conversation on the relevance of Palestine, the need for equality.
BBC
Ynetnews