I answered a question in linkedin on the 22nd October 2008, where I predicted that Dollar would loose value to Euro in the near future.
It's time to do the math.
22nd Oct 2008 - 1 Dollar = 0,7786 Euro
26th Nov 2009 - 1 Dollar = 0,6635 Euro
So, Dollar devaluated to Euro 15% in the last 13 months
Click here to see this question on linkedin forum.
So, in 2008, I recommended a "Great Deal" to India, as you can read bellow.
The question was:
Would it be a good strategy for India to borrow trillions(or whatever is available) of dollars?
And my answer was:
It could be a great move if:
- India borrow in Dollars
- Buy immediately another solid currency as “Euros” with those borrowed Dollars
- And by keeping the original debt in Dollars, is expected that Debt will have a value decrease automatically if India previously converted those financial assets to another currency as “Euro”.
Note that although European Central Bank also pumped some millions of Euros to the market, it wasn’t even close of the sum that American Federal Reserve pumped into the market, so it is expected that Dollar depreciate more to the Euro.
To all Americans that read this, Dollar depreciation also could bring good news for you.
Although the goods that America imports are going to be more expensive, your products made in America will look cheaper to the rest of the world, and so is expected a increase in your exports, boosting American Economy.
However there is a great risk that with dollar depreciation, America Demand worldwide will decrease even more and that could affect other economies that are dependant of their exports to the US, creating a “Domino effect” of recession worldwide.
In my opinion, with globalization, fewer countries are exclusively dependant of one country to export their goods, and so, with the actual economic scenario almost all countries will suffer a little with America demand decrease, but only a few countries will suffer a lot, and probably that will not generate a “Domino effect”.
2009-11-24
Should the Government Increase the Minimum Wage? Why or why not?
Increasing the minimum wage is a popular political policy that is 95% financially supported by the private sector, because usually, the minimum wage employees work in the private sector. So, it can be an evil mean of government propaganda (government receives appreciation from the electors but it is the private sector that pays the bill).
There are arguments in favour and against of this kind of policy.
In favour:
- Many political deciders and some “left wing” economists believe that corporations are always looking to exploit the employees, specially the less skilled employees, which have less job options, therefore even with big profits, corporations don’t care enough by those employees in the bottom of the structure.
- By increasing some people’s income, it will have a good effect on consumption increase, therefore stimulating the economy.
Against:
- Increasing the minimum wage will affect much more the smaller companies than the big ones. And smaller companies are already under pressure by companies from other countries with cheaper labour costs. It is expected that some smaller companies cannot afford the extra cost and will loose competitiveness in the market, and could even close their doors. The final result of minimum wage increase could be unemployment increase, therefore contributes negatively to the economy, because it will generate less consumption and increase government welfare costs with unemployed people.
My opinion:
- Both arguments have merit, therefore it is a question of when is more appropriate to increase the minimum wage, achieving the purpose of the policy with minimum effects on unemployment.
The answer of "when" depends of each country economic status, but surely that minimum wage increase is a bad policy during an economic downturn, because it will contribute even more for the downhill.
There are arguments in favour and against of this kind of policy.
In favour:
- Many political deciders and some “left wing” economists believe that corporations are always looking to exploit the employees, specially the less skilled employees, which have less job options, therefore even with big profits, corporations don’t care enough by those employees in the bottom of the structure.
- By increasing some people’s income, it will have a good effect on consumption increase, therefore stimulating the economy.
Against:
- Increasing the minimum wage will affect much more the smaller companies than the big ones. And smaller companies are already under pressure by companies from other countries with cheaper labour costs. It is expected that some smaller companies cannot afford the extra cost and will loose competitiveness in the market, and could even close their doors. The final result of minimum wage increase could be unemployment increase, therefore contributes negatively to the economy, because it will generate less consumption and increase government welfare costs with unemployed people.
My opinion:
- Both arguments have merit, therefore it is a question of when is more appropriate to increase the minimum wage, achieving the purpose of the policy with minimum effects on unemployment.
The answer of "when" depends of each country economic status, but surely that minimum wage increase is a bad policy during an economic downturn, because it will contribute even more for the downhill.
2009-11-07
Keynesian school of thought
The question on linkedin forum was:While solving the current Macroeconomic problems, Keynesian school of thought has gained relevance in recent times. Does this spell an end to the New Classical school of thought which essentially relies on inherent forces in Market to play themselves out?
My answer:
Keynesian school of though has gained relevance, especially with the plans to “rescue” the world economy by U.S. president and the others G20 leaders.
Keynesian policies (increasing the public sector in the market by government investment and monetary growth) were successful in the past – F.D. Roosevelt policies during the Great Depression (1930’s).
But, those policies have not been successful in the crisis of the 1973-75.
Therefore, some economists believe (including me) that F.D. Roosevelt policies were appropriate in the 30’s, but those policies alone aren’t enough to solve the 2008 economic crisis, because:
- The causes of the crisis of the 30’s are not the same of 2008 crisis.
- The economic context is different. When F.D. Roosevelt invested in new highways or new railway tracks in the 30’s, that investment boosted the U.S. economy, because almost all jobs generated by those investments were absorbed by U.S. residents, and almost all industrial production and technological development was absorbed by U.S. companies with factories in the U.S. soil. Similar policies nowadays will result that generated jobs will be partially absorbed by labor from emigration, and a big stake of the industrial production will be imported from other countries, therefore, the current unemployment rate will not decrease as much as expected, and the national industrial production will not increase as much as predicted. So, U.S. investment in transports infrastructures like highways and railway tracks will boost U.S. economy, but not as much as in the 30’s (not even close), and this happens in the same way with other public investments in the other sectors, like energy for example.
I think that some Government intervention (inspired in Keynesian policies) is necessary to guarantee the market stabilization and restoring confidence, but, the guidelines to get back on sustained economic growth are:
- Regulate the markets to avoid speculation bubbles that resulted in the 2008 crisis. - Policies that attract more private investment in the economy.
- Policies to attract foreign investment in national soil.
- Policies that enable national companies to export more.
Market regulation can be defined by the G20, but the other policies mentioned will vary and will depend on each country economic characteristics.
My answer:
Keynesian school of though has gained relevance, especially with the plans to “rescue” the world economy by U.S. president and the others G20 leaders.
Keynesian policies (increasing the public sector in the market by government investment and monetary growth) were successful in the past – F.D. Roosevelt policies during the Great Depression (1930’s).
But, those policies have not been successful in the crisis of the 1973-75.
Therefore, some economists believe (including me) that F.D. Roosevelt policies were appropriate in the 30’s, but those policies alone aren’t enough to solve the 2008 economic crisis, because:
- The causes of the crisis of the 30’s are not the same of 2008 crisis.
- The economic context is different. When F.D. Roosevelt invested in new highways or new railway tracks in the 30’s, that investment boosted the U.S. economy, because almost all jobs generated by those investments were absorbed by U.S. residents, and almost all industrial production and technological development was absorbed by U.S. companies with factories in the U.S. soil. Similar policies nowadays will result that generated jobs will be partially absorbed by labor from emigration, and a big stake of the industrial production will be imported from other countries, therefore, the current unemployment rate will not decrease as much as expected, and the national industrial production will not increase as much as predicted. So, U.S. investment in transports infrastructures like highways and railway tracks will boost U.S. economy, but not as much as in the 30’s (not even close), and this happens in the same way with other public investments in the other sectors, like energy for example.
I think that some Government intervention (inspired in Keynesian policies) is necessary to guarantee the market stabilization and restoring confidence, but, the guidelines to get back on sustained economic growth are:
- Regulate the markets to avoid speculation bubbles that resulted in the 2008 crisis. - Policies that attract more private investment in the economy.
- Policies to attract foreign investment in national soil.
- Policies that enable national companies to export more.
Market regulation can be defined by the G20, but the other policies mentioned will vary and will depend on each country economic characteristics.
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