How will Obama be remembered?

This image is licensed under the Creative Commons Attribution 2.0 Generic license – The photographer is Will White.

On January 20, 2009, the United States of America finally turned its back on George Bush and appointed Barack Hussein Obama as their 44th President. At the time, it was looked at as a landmark occasion; the first African-American President in the history of the most powerful country in the world. Many now say that this victory for equality has been overshadowed by backwards, regressive policy that has gone against the very agenda of progressivism that Obama stood for election for. However, others instead espouse the idea that Obama has laid the proverbial stepping stones for future progressives to unite America through economic policy. Regardless of whichever side you take, it’s undoubtable that the Obama administration has divided opinion like almost no other in contemporary politics and economics. Obama’s tax cuts for the wealthiest in society are something which have been campaigned for by many in the past, but some on the left side of the spectrum still regard him as far too business-friendly to be in any way compatible with the vision of equality for all Americans. In this regard, many of his policies have not necessarily been the most popular, yet it is still important to take into account the economic climate which the 55-year-old inherited from his Republican predecessor; the images of widespread depression and angst certainly add context to the debate, context that is needed when analysing any presidency from an economic perspective.

Today, in a global economic environment of stagnation and extraordinarily low interest rates, many are justified in claiming that we have never really escaped the proverbial wreckage of the Great Depression. Yet more economists than not claim that Obama’s Keynesian fiscal stimulus package to the tune of $787 billion, largely in the form of tax cuts to families, was instrumental in making sure that America did not stuck in a period of prolonged economic stagnation, amidst an environment of lesser trust in the prospects of the economy, and therefore less investment. According to James Feyrer and Bruce Sacerdote of Dartmouth College, the multiplier effect (the increase in final income arising from any new injection of spending) was between 1.96 to 2.31 for low-income spending, 1.85 for infrastructure spending, and finally in the range of 0.47 to 1.06 for stimulus as a whole. While this was not the only study carried out on Obama’s fiscal stimulus package, the methodology of the survey the two economists used is significant because they not only compared employment growth at state and county level, but they also compared month-by-month data to see how employment figures were changed at the point when the stimulus was injected into the economy. The significant upward trend generated by the stimulus here is thereby significant as it supports heavily the claim that the package was needed in order to usher America out of the stagnation that it previously endured; so Obama doesn’t seem to have done too badly so far.

The Dodd-Frank Financial Reform Bill also was a significant piece of legislation that Obama signed during his presidency. Described by the Washington Post as “the most ambitious overhaul of financial regulation in generations”, there’s no denying that the Bill has had and will continue to have significant effects on the way financial firms think about their operations going forward. However, it does not ameliorate the problem of the massive moral hazard which banks are allowed to possess when analysing whether to cut down on their portfolio risk or not. In the former Governor of the Bank of England, Mervyn King’s book “The End of Alchemy: Banking, the Global Economy and the Future of Money”, King argues that this is precisely what could lead to another catastrophic recession, and argues instead for a “pawnbroker for all situations” solution, one in which banks have to take significant measures before having any chance of being bailed out. Whilst I would suggest that one reads King’s book for more insight into this claim, the fundamental underlying principle is that banks will take risks if you allow them to, putting taxpayers at risk of having to bail them out once again, and for this reason, I argue that the legislation Obama approved has not gone anywhere near far enough.

And now we come to perhaps the most contentious issue of all: Obamacare. Although the program still has its glaring faults and areas where it should really be improved in order to improve the accessibility of healthcare for every American, it has to be said that the healthcare program has had overwhelmingly positive effect. For example, businesses with over 50 employees are required to have a health insurance program, with tax credits for these businesses also being put in place to help them finance this program. In my opinion, this strikes a near-perfect balance between stamping the need for increased healthcare coverage for the most vulnerable members of society and easing financial constraints on business, allowing these firms to flourish and expand their operations. If I had to summarise Obama’s economic policy in a few words, I’d use the phrase “getting there”. Whilst the African-American has made key policy moves that have steered America in the right direction, there are still large gaps that need to be filled and policy moves that need to be implemented to progress America’s economy further. He hasn’t done it all, but he’s definitely laid the foundations.

Shrey Srivastava, 16

On obstacles to poverty alleviation in India

Step foot (carefully) on the streets of the Delhi megalopolis and you’ll find an explosion of colour and a cacophony of all sorts of weird and wonderful noises. In some ways, it’s the archetypal developing city, with disorganised shops lying around in wide, bending alleyways that look almost as if they’re the fruits of a child’s imagination. In others, however, Delhi has its own unique aura, the quintessential, all-encompassing Indian tinge that has had foreigners from the Mughals to the British flocking like flies to its soil throughout history. Despite this, however, there is an elephant in the room, lying wearily beneath the glitz and glamour of a hugely unequal and somewhat segregated Indian society. You probably already know what it is: poverty. 2012 Indian government projections suggest that 21.9% of the Indian population are below its official poverty limit – to put that into context, it means that almost 1 in 4 Indians are affected by the scourge of poverty. Despite substantial amounts of aid being given to the Asian country to help solve the problem, it’s not even remotely close to going away at all. This is because of deep and wide-ranging problems in the framework of poverty alleviation projects in India, one of which is information failure in the microfinance sector leading to excessively high interest rate loans.

Primarily in Indian rural communities, a large problem with regards to supplying loans to low-income  households is that loans are advertised at lower interest rates than they are in reality. Given the relative lack of education in these areas, exploitative moneylenders can easily demand money unlawfully from families, citing a higher interest rate than the borrowing family had initially thought. Hence, this asymmetric information between lenders and borrowers, combined with the high operational costs of face-to-face lending to these communities in the first place, results in interest rates that frequently reach levels above 50%. To combat this, it’s logical that the government could introduce subsidies for microfinance institutions to reduce overall costs, thereby resulting in the pushing down of interest rates through the competition of the free market mechanism (the sheer numbers of microfinance institutions involved makes this method viable for application). Furthermore, the Indian government could make efforts to introduce a database of sorts for each rural community, spearheaded by a government-appointed official, detailing each microfinance institution and the details of the loans that they are providing to people in these communities, decreasing the potential for exploitation of borrowers. Given that corruption is such a prevalent problem within almost every Indian institution that exists, deterrents such as substantial jail sentences should be given to anyone exploiting the system, along with many avenues for which people to complain about unjustly high interest rates without fear. Obviously, this wouldn’t solve the problem entirely, but it would go a long way to decrease interest rates and therefore provide a more sustainable alternative revenue stream for families starting businesses on the back of this loan.

Moreover, while children going to school and sitting in classes matters, the end goal of all of this is for them to have an education, gaining transferable skills which they can take to work, boosting the standard of living for themselves, their families, and the wider community. In India, however, while the number of children going to school has been increasing, the number of people getting an education is a greatly different story. In 2009, India ranked 73rd out of 74 countries sampled with regards to the extent of the children’s knowledge regarding various subject matters, indicating that although children are going to school, they are actually not learning very much at all. This is in part because teachers believe that they can get away with not working as hard as possible to educate their students, due to no system of rewards or punishments being in place to provide either positive or negative incentives to teach. Therefore, what I propose is as follows: establish a more rigorous, practical system of testing for Indian children by an independent organisation to each class in schools, with positive incentives in the form of bonuses being paid to teachers whose class performs significantly well. Due to negative incentives promoting negativity and eventual apathy in the school environment, it would be unnecessary to include them with the same frequency as positive incentives, however if a teacher’s class has been doing badly for a sustained period of time, they should take a compulsory training class and be forced to accept a decrease in wages, or leave the school entirely. To make the whole system fair, classes should be allocated based on a test conducted to determine each student’s aptitude when they enter the school, making sure that the aptitude levels of each class are relatively similar. Whilst there is no suggestion here regarding how to make more children go to school, this is because it is already happening in India on a large scale, and so therefore we now must focus on how to maximise learning from going to school itself, in order to pull more and more families out of poverty.

Infrastructure has developed hugely in India since the pro-market reforms of 1991; nowadays in India, people have more opportunities than ever before due to more alternative routes to success. However, despite this, the lack of aspiration shown by some of the poorest people in India has continued on from previous years; they feel that high profile, white collar jobs that can pull their family out of poverty are out of their reach. This is because if the poor’s attempts to find a source of income do not work out, the loss that they could have faced both in time and monetary value could cripple them further than they already have been. While there is no silver bullet to fix this problem, the only way in which it could be somewhat ameliorated is through exposing the poor in these communities to people who have succeeded in the past. There is the potential that the effects of supplying information through media to these communities could have little to no effect, as the potential consequences of failing are so crippling. Hence, it is important to focus on other reforms so that people are more and more exposed to others who have succeeded, and the idea is that the allure of success would eventually drive some people to take risks, catapulting them out of the poverty trap. The most difficult thing about this process is the start; once we have a start, there will be a virtuous cycle, hence the burning need to focus on other ways in which to overcome the Indian obstacles to growth.

While growth continues in India at a breakneck pace, the most important thing now for the country is to increase the quality of living of the poorest within society. That can only be done through overcoming inherent obstacles; maybe, just maybe, once we’ve beaten these, growth and prosperity will increase like never before.

What do you think? Please leave a comment below with your thoughts, whether you’ve been attracted or repulsed by my propositions.

Why central banks should target 4% inflation

Photo by Remy Steinegger

It is October 29, 1929 , also known as Black Tuesday. The Great Depression, one of the largest economic downturns in history, has just begun. Unbeknownst to the everyday man and woman, this will last a backbreaking decade, during which these everyday people will see their dreams slashed in the face of lower wages. That is, if they even find a job in the first place; unemployment will reach almost 25% in America at the height of the depression in 1933. During this time, it’s obvious that we will start looking to policymakers for solutions to this problem, however, even they have been silenced by the lunacy of the gold standard: there are no solutions in the pipeline.

Time for a voyage into the future. 1990, specifically – New Zealand. The Reserve Bank of New Zealand has just introduced a pioneering measure that will shake up monetary policy: the inflation target. They say they target a rate of price increase of 0 to 2%. Fast forward 22 years, and on the 25 January 2012, Ben Bernanke, the chairman of the most famous central bank in the world, the Federal Reserve, has introduced a 2% inflation target. Nowadays, the magic “2” is the norm, with central banks from the Bank of England to the Bank of Japan adopting the target. The problem? Well, there’s more than one, but the most arresting drawback is that we’re veering into very dangerous territory should we be even slightly amiss in meeting these targets.

Say we undershoot from our inflation target. That can happen, right? People make mistakes – even big, bad central bankers. If prices, therefore, appreciate by only 1% a year, that’s not too bad. But say we adjust the degree of error even more, and then we’re veering dangerously into deflationary territory – a nightmarish decrease in prices. In both my opinion and the opinion of many others, deflation is far worse than even high levels of inflation. This is because a deflationary slump in an economy causes people to think twice about purchasing goods and services, reducing demand for these goods and services, decreasing their prices to levels lower than they already are. Intuitively, this causes job layoffs as the reduction in demand causes a corresponding reduction in corporate revenue, and so the freshly unemployed aren’t very likely to buy non-essentials like a bottle of Coke or a packet of gum, let alone a new house. The ensuing vicious downward price spiral amidst a plethora of redundancies has historically been extremely difficult to get out of; deflation can batter an economy like nothing else. Where do we look for an example of this? Back to the past, that’s right – the Great Depression, where prices plummeted and redundancies soared due to a collapsing banking sector.

Moreover, recessions happen. We can’t prevent all of them, and it’s a fact of life that the average person is overwhelmingly likely to experience at least one or two in their lifetimes, if not many more. It’s how a central bank deals with the recession that defines how strong and robust their monetary policy is, and when you can only decrease interest rates by a small amount, then you’ve got a problem. Take the Bank of England. Interest rates currently sit at staggeringly low levels: 0.5%, to be precise. Let’s assume they meet their inflation target of 2%, and so the nominal interest rate (the interest rate when we don’t take into account inflation) will be 2.5%. Now, let’s hypothesise that they increase their inflation target to 4% and meet it (I know, I’m optimistic about their abilities). Now we have a wiggle room of a whole 4.5% should we face a recession, so we have a greater chance of stimulating the economy and getting it back on track. Even taking into account that central banks may not meet these targets, it’s logical to believe that they’ll at least achieve a higher inflation rate than before, and so regardless of the scenario, the overwhelming likelihood is that we’ll have more chance of beating back a recession than before.

Finally, we need to lend the companies that are the backbone of our economy a hand in being able to dish out nominal wage increases. Again, let’s take a scenario whereby we have higher inflation, say 3% (due to central banks undershooting the 4% inflation target) and the nominal wages of not very productive employees operating in, for example, McDonalds rise by 2%. In reality, they’ve still got 1% less purchasing power than they did before, however McDonalds’ 2% rise in wages keeps them happy and satiated; they won’t go on strike or resign or do all the things that corporations fear so much. Say we had a much lower inflation rate, perhaps 1%. Now, McDonalds is in hot water because they can only increase wages by a small, small amount, risking the ire of its employees. If the inflation rate went even lower, then we have even more of a problem; McDonalds cannot hand out relatively large nominal wage increases, as if they were to do so, their costs would increase, therefore enabling a reduction in profits. So now we have annoyed corporations, annoyed employees and perhaps an economy on the verge of recession, with very little room to alter interest rates when we enter one. All because of those dastardly low inflation rates.

Since 1990, the inflation target has become one of the key symbols of monetary policy and central banking. We need to increase it; I think it’s time to change this symbol for the better.

Do you?

Shrey Srivastava, 16

Lessons learnt from a 15 year old’s voyage into the financial markets

Having traded the financial markets in my holidays, and having made a little over five figures in that time, I feel that not only have I found a gratifying pastime, but also that my knowledge about financial markets has been vastly increased, from many mornings spent watching Bloomberg on a TV screen. The gains have been marvellous, the losses not so much. My general knowledge of global events and their repercussions to the markets has also increased. Above all, however, the most salient thing is that a sound base of knowledge has been built for, hopefully, a lifetime of trading on the financial markets. Many lessons have been learnt from experience, incipiently to ignore the brunt of what the news says. Continue reading “Lessons learnt from a 15 year old’s voyage into the financial markets”

Why millennials do not trust the stock market

About a month ago, Goldman Sachs released a poll which came out with some quite stupefying results. It showed that only 18 percent of the young adults trusted the stock market as “the best way to save for the future.” This means that investor confidence within this age group is at an all time low, and that the stock market has gone “out of fashion”, as it were, in that people do not want to invest their money in stocks, especially given the uncertain nature of the economic climate, instead turning to crowdfunding and community banks as a way to secure income for later years. Above all, there are some key reasons why this generation do not trust the stock market as a way to generate income, the first of which being the economic crash of 2008.

When stocks plummeted in 2008, many millennials saw their elders lose the shirts off their backs, which extirpated the trust that had been gradually built up in previous years. The cost of living is rising rapidly as it is, therefore people need a stable source of income now more than ever. It is unmistakeable that stocks cannot provide this anymore, especially when we look at the recent volatility that the Chinese markets have been experiencing, with quite a few investors gaining a great deal of wealth and losing it almost as quickly. As student loan is higher now than ever, aspiring and enterprising people are having to sacrifice a large chunk of their income just to pay back these loans, which means that a steady stream of “extra” income is needed, not   a rapid gain and loss of wealth.

The general populace is also aware of more information than ever before these days, especially with sites such as Wikileaks coming to the fore, revealing information which national governments did not wish to be released. As such, millennials now know that the stock market is at least somewhat rigged, with stock prices surging far ahead of economic growth over the past five to ten years. The market being rigged also means that there is no longer a level playing field when investing in the stock market, as some high profile investors are aware of more information than others, giving them a greater chance of making money than their not so sagacious counterparts. In my opinion, millennials need the knowledge that they have the same chance of making money as anyone else off the financial markets, and, as this has not been provided thus far, they have been disincentivised to invest, and risk their money to the whims and fancies of society’s higher-ups.

Finally, some millennials just do not have the knowledge required to invest in the stock market. The Goldman poll showed that 16% of people believed that they did not have the practical knowledge required to invest in the financial markets, which links itself to a lack of financial literacy education in high school. Let us take America as an example. Only 17 states require financial literacy education in high school, which means that not enough millennials are aware of the opportunities for wealth creation that the financial markets provide. It follows that people will definitely not want to risk their money in an environment which they do not understand in the first place, and would rather have a stable, albeit comparatively low source of income than a volatile, fluctuating base of wealth. It remains to be seen whether these concerns can be addressed, and perhaps then the stock market will return to its previous place as a viable alternative to secure income for later years.

I must stress that these reasons are not meant to be taken as fact, but rather as a strong personal opinion of mine as to why millennials just do not want to invest in the financial markets anymore.

My problem with using moving averages

One of the first things that traders learn when they are starting off is the technique of using moving averages. The statistical definition of one is “a succession of averages derived from successive segments (typically of constant size and overlapping) of a series of values.” Now, these are good if the price is remaining at about the same level over a period of time, but what if a stock is appreciating or depreciating rapidly?

The data that moving averages are based on is entirely from the past, and, as they say, you can’t predict what direction the market will go in. Yes, maybe it’s been bullish over the past month, but tell me about now. When a stock is volatile, moving averages serve little to no function, as a small spike in any direction can result in huge losses, and what past trends were does not affect that.

It does not take into account significant changes in supply and demand. A great example of this would be the price of crude oil. Great, you’ve used a moving average for when it was at $100/barrel, but how is that going to help you when supply has skyrocketed and the price has fallen to $50/barrel?

Even if a stock has been at the same level for a long time, how will moving averages help you then? There would just be a horizontal line. You could say that you should buy when the price goes above the moving averages, but stocks often exhibit cyclical behaviour, and the stock is just as likely to plummet as it is to skyrocket.

All in all, because of these reasons, I don’t believe that moving averages are a very effective tool, as all they are based on is past data and they just don’t work for volatile stocks.

Is it better to be conservative or reckless when trading?

When trading, there are some who are conservative, who look for the “perfect trade” which almost never comes. And then there are others who look at the tiniest changes in price and think “there we go, that’s my opportunity.”

But which one is it better to be? The low volume, low risk trader or the trader that opens positions with reckless abandon?

In actuality, my opinion is that it is the former who I would most likely place my money on to earn more. In trading, as in other areas of life, “less is more”, as they say.

Although there is potential of even the most meticulously planned trade going the wrong way, careful planning and a strong investment thesis reduce the chance of it happening exponentially.

The same can’t be said for the high volume trader, where even one failed trade will wipe them out.

Be safe, stay safe.

The issue of ethics in trading

Investing in fossil fuels has become an issue of ethics lately, especially with the issue of global warming plaguing our world today. The financial issues that investors face have now become more complicated with the additional dimension of ethics involved too.

Why do people think investing in fossil fuels is bad? They think that it’s unnecessary promotion of something that could be catastrophic to the world today. The issue of ethics isn’t just lodged in this one example, there are countless others.

Say it just came out that McDonald’s have been paying immigrants less than minimum wage to work 12-hour days,  for example. Some would say that this is cause enough for them to not invest in this company, as they would be promoting what essentially is a great evil in the world today.

My opinion, you ask? I wholeheartedly understand, but do not necessarily agree with the people who choose not to invest because of ethical reasons. Essentially, what they are doing is decreasing demand for the stock in question, creating a shift in the supply-demand curve and driving down prices.
Now, when prices are low (an example being WTI crude oil right now), people will invest. And when they invest, the price will be driven up again. So essentially, these people are not doing anything significant, rather, they perhaps might be worsening the cause they are supporting.

There is one scenario where I concur with these people, however – if they are doing it for their own personal reasons and gratification. They do not want to be associated with the unethical nature of a company and so will not invest in it, simply to give them a good guilty-free night’s sleep.

The majority, however, do it for the first reason which I have already explained. What these people don’t understand is that they are not having a monumental impact on prices, and their time would be better spent petitioning or protesting – that will have a far greater impact than simply not investing in a stock.