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February 2005
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March 2005

Auctioning loans

Via Mises Economics Blog: A Bank That Isn't, Zopa is an online lending exchange for dealing with micro-credit. It deals with risk of default by spreading risk among a group of fifty borrowers and fifty lenders. Right now, this is only available for residents of UK.

The Washington Mutual, a major bank, had started using eBay auction to set interest rates for its CDs (certificate of deposit or fixed deposit).

Maybe it is a good idea for eBay to do what Zopa is doing in UK.


Is Trade Deficit harmful?

Karlsson answers the question on Trade Deficit in a very clear and illuminating way.

Also, see John Tammy's other articles, More Current-Account Confusion and Trade Charade. He also addresses Buffetts worries about trade deficits. According to me, Buffett was more worried about impact of trade deficit on US dollar than on the US economy.

I had a good discussion with Mr. Tammy on this. He convinced me that the value of US dollar is largely determined by the Federal Reserve as they have monopoly on its issuance. The Fed can always absorb dollars by selling the bonds from its portfolio to neutralize selling of dollars by Asian central banks. Also, he thinks that increasing or decreasing money supply by the Fed will not always result in inflation or deflation:


As for Fed money creation, remember that the demand for money shifts back and forth all the time. Simple money creation is decidely not inflationary if the economy is growing such that it needs lots of
money.
That's what happened in the late '90s: the capital gains cut in '97 put the economy into high gear and while monetary aggregates suggested the Fed was loose, gold, treasuries and the dollar's value vs. foreign currencies suggested the Fed was way too tight.
Conversely, the Fed extinguishing dollars is not per se deflationary if the economy is growing so slowly that extinguishment by the Fed should be even greater.
That's why we can inflate in a slowing economy (see Irrational Exuberance Is Not Inflationary), and we can deflate even if money creation seems high. I'm for a gold exchange or gold standard for that reason - let the gold price be the indicator for how much or how little money the Fed should be creating.

Mr. Tammy also made an simple but interesting point:

Consider Gillette. It’s top-of-the-line M3Power
Razor sells for $13.99 in the U.S. In England, the same product sells for $17.78. The 27 percent markup is without a doubt a positive for Gillette and its shareholders, but for those who calculate trade imbalances, the $3.79 gained overseas would add to the U.S. trade deficit.
..
remember that exports are counted in terms of their value when they
leave our shores. The $13.99 is the value exported, the $17.79 is what returns to us; thus whether we buy Rolls Royces from England or whether we convert Pounds to dollars and buy Nissan cars, positive trades will always increase the value of imports we bring in in
exchange for our exports.

This makes sense. We always export what is less valuable to us and in return import what is more valuable to us. Thus even in case of "balanced" trade each trading partner will have a trade deficit.


National Independence vs Individual freedom

Nicholas Kristof has a great article, A Morsel of Goat Meat, in New York Times!
When a white racist government was oppressing Zimbabwe, the international community united to demand change. These days, a black racist government is harming the people of Zimbabwe more than ever, and the international community is letting Mr. Mugabe get away with it. Our hypocrisy is costing hundreds of Zimbabwean lives every day.

And read this:


The hungry children and the families dying of AIDS here are gut-wrenching, but somehow what I find even more depressing is this: Many, many ordinary black Zimbabweans wish that they could get back the white racist government that oppressed them in the 1970's.

"If we had the chance to go back to white rule, we'd do it," said Solomon Dube, a peasant whose child was crying with hunger when I arrived in his village. "Life was easier then, and at least you could get food and a job."

This probably was repeated in many countries as they got independence from the Colonial rule! The problem here seems to be that soverignity of the nation is not based on soverignity of the individual! International Community feels that its job is done if a country gains independence from the occupying power. However, unless and until there is freedom at the individual level our job is not done.

To give an more current example, Kashmiri separatists group are demanding "independence" from India. But I am pretty sure, Kashmiri people have more freedom today at the individual level that they will ever have under "independent" rule!


Gmail keeps getting better

I started giving Gmail a try few months back after using Yahoo! mail. So far, Gmail looks impressive, especially its search and label features and of course, its 2GB size. It is fast too! However, what clinched the deal in favor of Gmail was its anti-phishing feature.

I had received an email from "Paypal Member Services" asking me to verify my Paypal account to my Yahoo! as well as Gmail account. Yahoo! mail did not give me any warning about the authenticity of the sender and I was about to click on the account verification link in the email as it looked very authentic. Good that I got an attack of paranoia and decided to directly go the Paypal website and check my account. When I received an similar email to my Gmail account much later, it flagged the message with a warning!

By the way, I have 50 Gmail invitations left. Just drop a request in the comments section if you need one!


US Health Care: Quality comes at a price

Arnold Kling argues, in an superb article The Myth of Massive Health Care Waste, that Americans are getting better health care compared to other developed countries. The article is full of gems like this:
Instead, I am prepared to make the following bet: ten years from now, it will be objectively clear that the United States provided significantly better health care to its citizens between 1990 and 2005 than did other developed countries. From the vantage point of 2015, the policy blunder of the past fifteen years will not be that the United States spent too much on health care, but that other countries spent too little. The socialized systems, forced to ration health care because tax revenues are not sufficient to pay for state-of-the-art care, are constraining their citizens from being diagnosed and treated as well as Americans.
He explains the reasons why health care is expensive in US:
Physicians are paid more than twice as much in the United States as in other developed countries. Because physician services are about one fourth of all health care spending, we could eliminate one eighth of our health care spending by reducing doctor salaries to the levels of other countries.

The other big factor is utilization of high-tech procedures, such as MRI's, CT scans, and open-heart surgery. If Americans would cut back on the utilization of these procedures, that would reduce health care spending by hundreds of billions of dollars.

The question is whether our medical care would deteriorate if we were to pay our doctors much less while at the same time reducing our utilization of expensive capital resources. It seems reasonable to conjecture that the quality of diagnosis and treatment ultimately would suffer.

On measures of health care quality:
Longevity calculations are not a sensitive measure of improvement in medical care. In my essay on lifespan, I showed how the longevity number is calculated as a peculiar weighted average of the survival rates for different population cohorts. I produced a simplified example in which the longevity number came out to be 68.9 years. In that example, suppose that 10 percent of the people who otherwise would die at age 60 instead receive treatment that allows them to live at least to age 80, when they die at the rate of other 80 year-olds. In that case, the overall longevity number would increase by less than 1.5 years, to 70.3 years. In international comparisons, such an increase easily could be swamped by other demographic and genetic factors.

Moreover, even if we controlled for other factors, the increase in longevity due to medical treatment will take many years to work its way into the actual longevity calculations. For example, my wife was treated for breast cancer a few years ago. If she had not been treated, she might still be alive today, but she would almost certainly have died by age 55. As of today, therefore, her successful treatment counts for no increase in longevity as it is conventionally calculated. In twenty or thirty years, however, the difference will be quite noticeable (certainly to me).

In another ten or fifteen years, it may be possible to document a significant increase in life extension for people over the age of 55 in the United States compared to what is now occurring in other countries. However, as the example of my wife illustrates, superior medical care will not necessarily show up in the backward-looking statistics that are calculated currently.


TypePad trial

I am test driving the TypePad. I have already started liking it and I am very tempted to switch to TypePad at the end of the 30-day trial period. But the Basic account costs $4.95 per month, so I will have to think about it. Any suggestions, thoughts, and comments are welcome to how, why, or why not switch to TypePad are welcome!

Here's my first post at TypePad, "US Trade Deficit and inevitable decline of the US dollar".

Update: Don Boudreaux continues on the US trade deficit thread.


US Trade Deficit and the inevitable decline of the US dollar

Don Boudreaux criticizes Warren Buffett for confusing trade deficit with debt.

Buffett no doubt believes that dollars held by foreigners represent debt owed by Americans to foreigners.  Only in the most irrelevant and formal sense is this belief valid.  Each U.S. dollar is a Federal Reserve Note, issued by a U.S. government institution (the Fed) and formally redeemable by that U.S. institution.  But redeemable for what?  Answer: another Federal Reserve Note of the same value.

In fact, dollars held by foreigners are not debt in any economically relevant sense.

"But can't foreigners spend these dollars on U.S. goods, services, or assets?!" I hear someone (Buffet, perhaps) asking.  Of course dollars can be spent in this way; that's the only reason foreigners accept dollars in exchange for the things they sell.  But this fact doesn't make dollars debt.

He argues that there is no difference between purchasing something from your neighbor vs importing something from abroad.

Suppose my next-door neighbor in Virginia agrees to mow my lawn for $10.  He mows my lawn and I immediately give him a $10 bill.  No debt is created.  I owe my neigbor nothing; my neighbor owes me nothing.  My neighbor can now spend this $10 bill on whatever he chooses.  I no longer have this $10 to spend.

Does anyone worry that my neighbor has an additional $10 bill in his wallet that he might whip out at any time to buy something priced in dollars?  This $10 can indeed be used as a claim on ten-dollars worth of U.S. output or assets.  But it ain't debt.  No one owes my neighbor anything as a consequence of his ownership of that $10 bill.

Change the example only slightly.  Suppose I live, not in Virginia, but in Maine just barely on the U.S. side of the Canada-U.S. border.  My next-door neighbor is a Canadian citizen living in Canada.  He mows my lawn; I pay him ten U.S. dollars.  As long as my neighbor holds that $10 bill, the U.S. current-account deficit is higher by $10.  (I outsourced my mowing to Canada -- importing $10 worth of services from abroad.)

Let's see what Warren Buffett really wrote in his annual letter to Bershire Hathaway's shareholders.

Berkshire owned about $21.4 billion of foreign exchange contracts at yearend, spread among 12 currencies. As I mentioned last year, holdings of this kind are a decided change for us. Before March 2002, neither Berkshire nor I had ever traded in currencies. But the evidence grows that our trade policies will put unremitting pressure on the dollar for many years to come  so since 2002 weve heeded that warning in setting our investment course. (As W.C. Fields once said when asked for a handout: Sorry, son, all my moneys tied up in currency.) Be clear on one point: In no way does our thinking about currencies rest on doubts about America. We live in an extraordinarily rich country, the product of a system that values market economics, the rule of law and equality of opportunity. Our economy is far and away the strongest in the world and will continue to be. We are lucky to live here.

But as I argued in a November 10, 2003 article in Fortune, (available at berkshirehathaway.com), our countrys trade practices are weighing down the dollar. The decline in its value has already been substantial, but is nevertheless likely to continue. Without policy changes, currency markets could even become disorderly and generate spillover effects, both political and financial. No one knows whether these problems will materialize.

Thus, Warren Buffett doesn't seem to worry about impact of trade deficit on US economy. He is only worried that US currency (dollar) will decline in the future.  He also makes clear that trade deficit can be "funded" either by borrowing or by selling assets.

If the U.S. was running a $.6 trillion current-account surplus, commentators worldwide would violently condemn our policy, viewing it as an extreme form of mercantilism  a long-discredited economic strategy under which countries fostered exports, discouraged imports, and piled up treasure. I would condemn such a policy as well. But, in effect if not in intent, the rest of the world is practicing mercantilism in respect to the U.S., an act made possible by our vast store of assets and our pristine credit history. Indeed, the world would never let any other country use a credit card denominated in its own currency to the insatiable extent we are employing ours. Presently, most foreign investors are sanguine: they may view us as spending junkies, but they know we are rich junkies as well.

Our spendthrift behavior wont, however, be tolerated indefinitely. And though its impossible to forecast just when and how the trade problem will be resolved, its improbable that the resolution will foster an increase in the value of our currency relative to that of our trading partners.

Why should Berkshire Hathaway continue to hold huge amount of US currency when atleast a part of the massive current account deficit is funded by the expansive monetary policy of the Federal Reserve? I would agree with Warren Buffett that the US dollar is likely to decline in the future. In fact, the US dollar has already declined compared to other currencies, such as the Euro.

Don Boudreaux continues to disagree with Buffett after having re-read his letter.