Project: Do you think economics is difficult? It's not!

Source: http://internships-southafrica.co.za/wp-content/uploads/2016/08/economics.jpg

With this new project we are going to explain economic concepts in an easy way, so that everybody can understand. Every group will work on a part of the unit  to explain the contents we have studied in class in a creative way. You can choose the way to explain every part. It can be: 

- A video with drawings. 

- A theater play recorded on video

- Some songs (a mini-musical)

- A comic strip telling a story. 

- A radio program

... or any other ideas you have. 

These are the contents every group will work on: 

GROUP 1: Economics. economic activities and economic sectors

GROUP 2: Factors of production and economic agents

GROUP 3: Taxes, tax evasion, tax havens... You can include an advertising campaign to convince people about the importance of paying taxes. 

GROUP 4: Labour market

GROUP 5: Economic systems: subsistence economy and capitalism

GROUP 6: Economic systems: centrally planned economy and alternative economics

GROUP 7: Economic crises and basic vocabulary (inflation, CPI/RPI, GDP, sovereign debt, Stock Exchange Market)

Presentations about the economic organization of societies and economic sectors

These are the presentations that correspond to the units about Economics and the economic sectors. They will be useful for the new projects.

Debate: some questions to think about our current economic system

Source: http://www.socialpolicyconnections.com.au/?p=4119 

As we are studying the consolidation of capitalism in class, I think it could be interesting that you express your opinion about some current news about the predominiant economic system in the world. There have been several interesting interventions about this topic in class and I've thought that maybe some of you would like to think more about it. I've read some recent articles that give an overview of how the economic system works. Here you have the links and some questions to think about: 

- INEQUALITY: A report  by Oxfam says that 1% of the world population holds  half of the global wealth. Next year 1% of the population with own more wealth than the other 99%: 

http://www.theguardian.com/business/2015/jan/19/global-wealth-oxfam-inequality-davos-economic-summit-switzerland

Source: http://www.oxfam.org/es/campanas/iguales/actua-contra-la-desigualdad-logremos-un-sistema-fiscal-mas-justo

My questions: 

How much is it necessary to have a good life? Do people need to accumulate capital in such way? How could wealth be distributed in a better way?

- POVERTY: many people think that poverty is a matter of will and poor people have this situation because they don't make an effort to improve. But the fact is that many poor people are workers, people who struggle, but don't make ends meet. Here you have a link about this fact in Spain. We don't have to look to other countries to find many poor people around:

http://www.eldiario.es/economia/crecimiento-PIB-basta-reducir-pobreza_0_355214906.html

http://www.publico.es/politica/mas-12-millones-espanoles-riesgo.html

My questions: 

Is it fair that people who work don't even get the minimum resources to survive? Do you think poor people have what they deserve?  

- PRIVILEGES: We studied in class that privileges disappeared with the Ancien Régime and now we all are equal before the law. But everyday the news show us cases of privileges, of unequal treatment to people depending on their origin or economic resources. Here you have another recent example: 

http://cincodias.com/cincodias/2015/02/10/economia/1423596666_244639.html

Source: http://www.enemyofdebt.com/wp-content/uploads/2012/06/99-percent.jpg

My question: 

Can we say that privileges have disappeared or are we rather living in a new-feudal society?

- ECONOMIC GROWTH: rulers say that economic growth is good for the country and the people. Economic growth is always measured in terms of  percentage of the Gross Domestic Product (GDP). But there are countries with high economic growth whose population doesn't receive any benefit from this growth.

http://www.expansion.com/2015/01/20/economia/1421724578.html

Source: http://www.ektitli.org/2011/05/13/economic-development-vs-environment/




Source: http://elpais.com/elpais/2015/02/11/vinetas/1423674518_174612.html

My questions: 

What about the people? What happens if economic growth is high, but most of the population can't enjoy it? Is this good for humanity? What if economic growth endangers the survival of some species or the planet?

What would be the alternative for you? Could you think of a better economic system or the features a perfect economic system should have?

Come on! Dare to think!

More information about the different contemporary economic schools

I've found some charts that summarize the different predominant economic schools at present:

Source: http://econfix.wordpress.com/2011/10/19/a2-revision-new-classical-to-extreme-keynesian/

The following are some concepts to understand the previous chart: 

- Market clearing means a situation of balance in the market between supply and demand. 

- Hysteresis is a term that comes from physics. In economy it refers to the fact that a simple disturbance affects the course of economy. If we are talking about unemployment, hysteresis would refer to the effects of increasing unemployment in economy. When unemployment increases, more people adapt their stardard of living, lowering their consumption levels, even if they are not unemployed. If people get used to a lower standard of living, they may not be as determined to achieve the previously desired higher living standard (they adapt their expectactions to the general situation). In addition, as more people become unemployed, it becomes more socially acceptable to be or remain unemployed. When the labor market recovers, some unemployed people may be disinterested in returning to the work force. I've found this information on the following link:  http://www.investopedia.com/terms/h/hysteresis.asp

And this one is a chart that compares Keynesian ideas with the Chicago monetary school, led by Milton Friedman: 

Source: http://econfix.wordpress.com/2010/10/15/a2-revision-keynesians-vs-monetarists/

Here you have some more links about these two economic schools: 

http://econ.economicshelp.org/2008/07/keynesian-vs-monetarist-theories.html

http://www.economicshelp.org/blog/1113/concepts/keynesianism-vs-monetarism/

The last link in English includes some of the main critics made to Keynesianism: 

http://econ.economicshelp.org/2008/12/great-keynesian-debate.html

This family tree includes the names of the main contemporary economists and a short explanation of their main ideas. Many of them have based their work on Keynes' ideas: 

Source: http://puntodevistaeconomico.wordpress.com/2012/03/01/la-familia-keynesiana/

And this one in Spanish includes the main members of the Austrian school: 

Source: http://puntodevistaeconomico.wordpress.com/2012/03/02/el-arbol-genealogico-de-la-escuela-austriaca-de-economia/

If you want to read a chapter to this Cartoon Introduction to Economics, click on the image below to enlarge the text:

Source: http://standupeconomist.com/cartoon-intro-macroeconomics/

And this one is a link in Spanish, where you can find the biographies and main ideas of the most important economists in history: 

http://www.eumed.net/economistas/s.htm

Currency wars

Source: http://socioecohistory.wordpress.com/2013/01/17/russia-says-world-is-nearing-currency-war-as-europe-joins/

Currency war was one of the effects of the Great Depression. In order to protect their own economies from foreign competition and make their products more competitive in the international markets, many governments increased tariffs, abandoned the gold standard (the correspondence with the gold reserves they had and the circulating money in their countries) and devalued their currencies. The governments tried to save their economies to the detriment of the other countries. This policy was known as "beggar thy neighbour" (impoverish your neighbour). The main fighters in this war were the former allies in WW1: the USA, France and the United Kingdom. The government of the UK decided to take the sterling pound out off the gold standard in September 1931, because their gold reserves had reduced and they decided to suspend the exchange of pounds for gold. Other countries like the Scandinavian ones and Japan did the same in 1931. The USA left the gold standard in 1933 and France and Belgium stayed on the gold standard until 1935. The studies about the Great Depression confirm that the economies of the countries which left the gold standard first recovered earlier and the depression was longer in the countries which left standard later. The 30s currency war ended with the signature of the Tripartite Agreement in 1936.

In the current crisis there is also a non declared currency war between different countries. The US dollar and the Japanese yen have been devalued several times since 2009 and the Chinese yuan has appreciated a little bit under the USA pressure. It seems that the euro is losing the war up to now. Here you have more information about this war: 

http://en.wikipedia.org/wiki/Currency_war#Currency_war_in_2013

http://online.wsj.com/article/SB10001424127887323336104578498850092225808.html

This chart summarizes the basic information about what a currency war is and its consequences: 

Source: http://www.zerohedge.com/news/2013-03-31/currency-wars-dummies

And here you have some more cartoons about the current currency war: 

Source: http://www.zerohedge.com/news/2013-05-08/us-vs-china-currency-war-dummies

Source: http://www.marketobservation.com/blogs/index.php/2010/11/13/title-239?blog=10

Source: http://socioecohistory.wordpress.com/2013/02/13/currency-wars-are-evil/

Source: http://socioecohistory.wordpress.com/2013/04/12/has-the-bank-of-japan-triggered-a-global-currency-war/

Source: http://www.japantimes.co.jp/opinion/2013/02/24/cartoons/currency-wars/#.UbD2K9L0GSo



Source: http://www.cartoonmovement.com/cartoon/10316

Source: http://www.dailypaul.com/280427/new-lampoon-the-system-cartoon-currency-war-race-to-the-bottom?from=lbp

FOREX and some stories of money speculation and currency devaluation

Source: http://nsanmartin.com/primeros-pasos-en-forex-1/

Here you have the link to the FOREX, the Foreign Exchange Market, where the price of all the world currencies is established every day. The value is fixed with respect to the strongest currencies (mainly the euro, the dollar, the yen and the sterling pound). The FOREX  is a decentralized, continuous (it operates 24 hours a day from Monday to Friday) and online market which moves around 3 billion dollars (3,000,000,000,000 dollars) a day. As every other free market, the price of the "products" depends on supply and demand. Most of the transactions are between banks or between banks and other financial companies. 

http://www.forex.com/index.html

This is a link to an online game based on the Forex market. You can download it and play the game to learn how your decisions can affect the evolution of the market. I haven't played it. If any of you does, please, tell your experience: 

http://www.ababasoft.com/flash_games/forex01.html

And this is George Soros' story and how he became very rich attacking the British pound: 

In September 1992 Soros sold 10,000,000,000 sterling pounds and bought German marks and he also spread the rumour that the British pound would lose value. Many other investors sold their pounds and the Bank of England had to spend a lot of money trying to defend the pound from the speculators' attacks. They had to spend 15,000,000,000 pounds to avoid the fall of the value of their currency. Finally, on the 16th September (known as the Black Wednesday in the United Kingdom ), the British government surrendered and left the pound fluctuate in the markets. The pound lost 15% of its value with respect to the German mark and 25% with respect to the US dollar. When the pound was devalued, George Soros used his German marks to buy pounds and earned 1,000,000,000 pounds (1,100,000,000 dollars) with the transaction. This attack to the sterling pound also obliged the UK to leave the European Exchange Rate Mechanism (a system designed to achieve monetary stability in the European Union and prepare the ground for the monetary union). Other European currencies had to be devalued as a consequence of the monetary storm started by Soros: the Italian lira, the Spanish peseta and the Irish pound. 

Source: 

http://www.ibtimes.com/occupy-wall-street-george-soros-understands-protesters-pain-321097

If you want to learn more about this story, here you have a link to a file in Spanish: 

http://webcache.googleusercontent.com/search?q=cache:24XGavUXhNEJ:edu.jccm.es/ies/cifuentes/attachments/EL%2520ATAQUE%2520ESPECULATIVO%2520DE%2520GEORGES%2520SOROS%2520CONTRA%2520LA%2520LIBRA%2520ESTERLINA.doc+&cd=1&hl=es&ct=clnk&gl=es

And here you have a short history of the different devaluations of the peseta until 1992. After this date, the peseta was devalued two more times (in 1993 and in 1995):

http://elpais.com/diario/1992/11/22/economia/722386813_850215.html

And finally, here you have a short summary about what happened in Argentina after the so-called corralito in 2001: 

As many Argentinians were sending their savings abroad (flight of capital), the Argentinian government decided to restrict the money withdrawals from banks to 250 dollars per week. This meant that all the bank accounts were frozen and people couldn't have access to their money freely. 

The situation became more serious when the government decided to change the convertibility of the peso with respect to the US dollars in January 2002. Since 1991, 1 peso was equal to 1 dollar. If someone went to the bank and exchanged pesos for dollars, he/she received the same amount of dollars. This meant that if you had 10,000 pesos in the bank, you could exchange them for 10,000 dollars. When the government approved the Convertibility Act in January 2002, the convertibility of 1 dollar was established in 1.40 pesos. As the corralito continued to exist, people couldn't have access to their money. The peso devalued and in March its value was 1 dollar=4 pesos. This meant that your 10,000 pesos, which were equal to 10,000 dollars until January, had become 2,500 dollars. When the corralito ended in December 2002, people had lost 3/4 of their savings. But as the peso had lost a lot of its value, the merchants and providers of services like electricity, water and phone companies had increased their prices or asked for the payments in dollars. This meant that the people became poor overnight. 

At the moment 1 peso= 5.28 pesos in the official market, but as many Argentinians don't trust the economic policy of the government and are afraid of a new corralito, the price of the dollar in the black market is more than 10 pesos. Many Argentinians cross to Uruguay to exchange pesos for dollars (they can buy 1 dollar for 6.5 pesos) and they sell them later in the black market in Argentina. Here you have more information about this; 

http://www.elmundo.es/america/2013/05/15/noticias/1368642887.html

All these stories show that the big figures hide a lot of individual stories behind. The so called "markets", that is, the individuals who make decisions to earn more and more money, influence the real people's lives and speculation condemns many people to poverty. For those who like Ethics, this is an example of how what is good for some can be very harmful for most people. 

The Law of the Maximum

Poster announcing decrees of the National Convention

Source: http://www.marelibri.com/t/main/3306727-posters/books/AUTHOR_AZ/600?l=en

In September 1793 the National Convention, controlled by the Jacobins, passed a law to try to stop inflation, hoarding and shortage of basic products. The pressure put by the sans culottes and the Jacobin will of guaranting the right to survive of the population inspired the decision of intervening economy.  The products considered essential were the following: fresh meat, salt meat and bacon, butter, sweet oil, cattle, salt fish, wine, brandy, vinegar, cider, beer, firewood, charcoal, coal, candles, lamp oil, salt, soda, sugar, honey, white paper, hides, iron, cast iron, lead, steel, copper, hemp, linens, woolens, stuffs, canvases, the raw materials which were used for fabrics, wooden shoes, shoes, turnips and rape, soap, potash and tobacco. The National Convention also established the maximum wages that had to be paid in the production of these goods and forbade exporting these goods as long as the war continued. 

This law was an example of a well-intentioned idea which had bad results: many peasants hid their harvests to avoid selling them at lower prices and the same did merchants. Black market developed. The supply of products at low prices wasn´t assured and law could only be enforced with the threat of the guillotine. The effects of theis law could be compared to the ones the war communism policy had in Russia during the 1918-1921 Civil War. 

Mercantilism and gold reserves

Mercantilism was the first economic theory in history and the predominant economic policy developed by the  first State-nations between the 16th and 18th centuries. It was based on the idea that the power of a country was related to the quantity of precious metals it could accumulate. The wealthier a country was, the more powerful it would be. And the best way of getting more precious metals was reducing imports, promoting exports and developing international trade. That´s why the main European powers built colonial empires, supported trading companies during the 16th-18th centuries and imposed tariffs to the foreign products  that arrived in their ports. This policy could be considered a precedent of protectionism. 

Jean- Baptiste Colbert promoted mercantilism in France

Source: http://economyblog1.blogspot.com.es/

If you want to learn more about mercantilism, you can visit the following links: 

http://www.econlib.org/library/Enc/Mercantilism.html

http://www.investopedia.com/terms/m/mercantilism.asp#axzz2DSm8UA6t

The States started accumulation gold and silver reserves during the Modern Era. In the 17th Sir Isaac Newton, the famous scientist, was the first to establish the gold standard (the correspondence between the gold reserves a country had and the amount of coins that could be minted and circulate). But the gold standard wasn´t officially adopted in Great Britain until 1774. In other countries gold and silver standards coexisted until the 19th century. The British were also the first to create a central bank, in charge of minting the official currency of the country. In 1844 the Bank Charter Act established that every currency minting had to be supported by gold reserves. That was the origin of the gold reserves every country stores in their central banks. In war times different countries left the gold standard temporarily, in order to print more banknotes to be able to buy the resources they needed. In the Spanish case, the government of the Second Republic had to transfer 510 tonnes of gold (72.6% of its gold reserves) to the USSR to finance supplies and weapons to defend legality against those who had rebelled against the government. This was the so called Moscow Gold

As the USA became the main world economic power after World War 2, many countries started accumulating dollar reserves (foreign exchange) together with gold. But this created a problem to the USA, because they didn ´t have enough gold to cover all the dollars stored in many countries. In 1971 USA president Richard Nixon decided unilaterally to suspend the direct convertibility of the dollar to gold and this meant the end of gold standard as the way of organizing the international monetary relations. However, the States continue to accumulate gold reserves. Here you have a graph where you can see the top 20 countries in gold reserves: 

Source: http://www.moneymorning.com.au/20121122/china-is-now-the-worlds-biggest-gold-producer-and-consumer.html

And here you have a more complete list: 

http://en.wikipedia.org/wiki/Gold_reserve#Officially_reported_gold_holdings

The price of gold has increased a lot in the last years, because it is considered to be a refuge value, a safe investment. If Spain sold its gold reserves (281.6 tonnes), the price would be around 11,335 million €

Bank of Spain gold vault 

Source: http://elpais.com/diario/2007/09/16/economia/1189893604_850215.html

Gold is supposed to be a safe value, but we shouldn´t forget that it´s only a scarce metal humans have decided to consider very valuable. 

If you want to learn more about gold reserves, here you have another interesting link: 

http://goldratefortoday.org/history-gold-part-1-ancient-history-mediaeval-times-early-modern-times/

Bailed out?

Source: http://www.whatamimissinghere.com/archives/41365

https://www.crowdedcomics.com/node/5056/5057

Today the Eurogroup (the Ministers of Economy and Finance of the countries that use the Euro as currency) has announced an economic loan of up to 100,000 million € to the Spanish government, so that the Spanish financial system can "clean" the huge debts the banks have since the crash of the real estate bubble in 2008. The loan will be at low interest rate and will arrive in Spain through the EFSF (European Financial Stability Facility) and the ESM (European Stability Mechanism), emergency institutions created to help the EU countries with financial problems. The Spanish FROB (Fund for Orderly Bank Restructuring) will receive the funds and lend them at very low interest rate to the banks which need to "recapitalize" and the Spanish government will be the final responsible for this help and the use the banks give to the money. But is this a bailout? Is this something similar to what happened to Greece, Ireland and Portugal?

- The bailouts provided to Greece, Ireland and Portugal were mainly focused on reducing the State debts and included a lot of instructions to do it: reduction of the retirement pensions and civil servants´ salaries, increase of the VAT and other taxes, dismissals of public workers...


- The amount of money Spain is going to receive is similar to the bailouts received by Greece, Ireland and Portugal: 

• Greece received 110,000 million € in May 2010 and 109,000 additional million € in July 2011. 
• Ireland received 85,000 million € in November 2010
• Portugal got 87,000 million € in May 2011.

Source: http://teacherdudebbq.blogspot.com.es/2010/11/greece-ireland-portugal-spain-italy.html

- Apparently, the bailout to Spain doesn´t include additional conditions for the Spanish government, because the economic help has been presented as an injection of capital to the banks in trouble. It seems that the Eurogroup has decided to test a different solution for Spain, the 4th economy of the Eurozone and considered to be "too big to fail". The Eurogroup might have decided changing strategy and lending money to the banks directly and not to the country. This means that the banks would be the ones to fulfill the conditions imposed by the Eurogroup, not the Spanish government. 

 Source: http://www.cagle.com/tag/spanish-banks/

We should wait some days to realize the real implications of this bailout they don´t want to define as such. But if we look back, we´ll see that when the economic crisis started in 2007 and the USA banks had problems in 2008, the Federal Reserve bailed them out with 700,000 million dollars. The USA started its recovery first. The European Union decided to follow a different way: austerity and deficit control above all. This policy has brought a lot of cuts, the biggest attack to the Welfare State up to date, hundreds of thousands of unemployed... As we can see, the people who are in charge of the governments don´t want to learn from the past. Or maybe they forget about the parts of history that don´t fit with their plans?

Eurogroup statement on Spain: 

http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/130778.pdf

And here you have a complete report about Spain´s situation prepared by the BBC website. It includes graphs and a questions and answers´section:

http://www.bbc.co.uk/news/world-europe-18338616

http://www.bbc.co.uk/news/business-17549970

Something more about Keynes

Henry Morgenthau (on the left) and John Maynard Keynes (on the right) at the Bretton Woods Conference

Source: http://iconicphotos.wordpress.com/tag/alfred-eisenstaedt/

John Maynard Keynes is one of the most influential world economists, together with Adam Smith (considered to be the father of economic liberalism) and Karl Marx (theorist of Scientific Socialism). Keynes´s  ideas had an important role in the solution of the 30s Great Depression and the foundation of the so called Golden Age of Capitalism, which extended from the end of WW2 and the beginning of the 1970s decade. 

Keynes was a British economist who studied in Cambridge and belonged to the Bloomsbury group, a heterogenous group of intellectuals who lived, studied and worked together at the beginning of the 20th century. He had a lot of personal interests and worked as an investor and businessman. He opposed to WW1 from pacifism, but collaborated with the British government during the war and was sent to the Conference of Paris as financial representative for the Treasury. He resigned due to his disagreement with the ideas of revenge against Germany and the war reparations imposed to them (40,000 million dollars). His book The Economic Consequences of the Peace (1919) warned about the impossibility of paying these war reparations (2,000 million dollars per year) and the danger of reducing Germany to servitude. He considered that the hard conditions imposed to Germany would be very negative for the future. Here you have two excerpts of his book

The policy of reducing Germany to servitude for a generation, of degrading the lives of millions of human beings, and of depriving a whole nation of happiness, should be abhorrent and detestable.... Nations are not authorised, by religion or by natural morals, to visit on the children of their enemies the misdoings of parents or of rulers.... 

The Treaty includes no provisions for the economic rehabilitation of Europe - nothing to make the defeated Central Empires into good neighbours, nothing to stabilise the new States of Europe, nothing to reclaim Russia... The Council of Four paid no attention to these issues, being preoccupied with others - Clemenceau to crush the economic life of his enemy, Lloyd George to bring home something that would pass muster for a week, the President to do nothing that was not just and right.

Keynes, John Maynard (1919) The Economic Consequences of Peace

Source: http://www.johndclare.net/ToV6_British_reaction_sources.htm

His main ideas were explained on his book The General Theory of Employment, Interest and Money,  written in 1936. Due to this book Keynes is considered to be the father of macroeconomics. He wrote a smaller book called Essays in persuasion, where he explained his ideas in a simpler way. These are the most important ideas he developed: 

- He described the mechanism of crises, as it had been observed in 1929: prosperity is characterized by  investing euphoria and speculation, there is a credit expansion, which leads to overproduction. Those who got credits can´t give them back and crisis starts. The consequence is credit contraction and this leads to recession. 

- Keynes also talked about animals spirits, the human impulses which can´t be explained rationally and produce economic fluctuations, for example consumer confidence in some products or a reduction of consumption which can´t be explained rationally. 

- His most important contribution was the idea of the need for a State intervention when there is a macroeconomic void. The State has to intervene in order to correct the problems individuals can´t solve on their own and heal the system. The State intervention he defended didn´t mean ending with capitalism, but strengthening it to make it work better and more efficiently. Keynes didn´t think that the State had to own the means of production (as the Socialists said). The role of the State had to be the one of a regulator, to avoid risk and do what the individuals were not doing, to stimulate economy when it was depressed, in order to recover full employment. That means that the State has to act as an economic agent when the circumstances demand it. Keynes also defended the existence of institutions to control credit and money and collect economic data, so that the State could be ready to intervene when it was necessary. 

- Another important idea was that times of prosperity and economic growth  are the best moment to reduce deficit. If you do it during recession , you will make things worse. 

- Although Keynes wrote a lot of pages of economic theory, he was a pragmatist and considered economics as a practical and instrumental science, whose main objective is providing people with all they needed to live better and have more time to do other things. 

- Keynes also warned about the danger of overestimating the importance of economics. This could mean putting economic problems over other people´s needs. He was not an orthodox, but a flexible thinker, ready to prove other solutions if what was being done didn´t work. 

Keynes participated in Bretton Woods Conference, the meeting called to design the international economic system after WW2. He defended the idea of creating an International Clearing Union (a World Central Bank) to lend money to the countries in crisis and help them rebalance their accounts. He also proposed the creation of an international currency, the bancor. His ideas were rejected and the USA government imposed its opinion. 

As we have studied, Keynes´s ideas were very important to solve the crisis of the 30s and basic for the foundation of the Welfare States as an alternative to non-regulated economic liberalism and Stalinism. Keynes´s influence was decisive for more than 30 years. When a new crisis started in the 1970s decade, his prescriptions were forgotten and neo-liberal economists focused their interest on controlling inflation and public deficit. The recent recession has revived Keynes´s ideas and some of the most influential current economists, such as Nobel Prize Winners Joseph Stiglitz and Paul Krugman, define themselves as Neo- Keynesian.  

Here you have two curious videos about a theoretical combat between John Maynard Keynes and Friedrich Von Hayek (defender of the free market and the non intervention of the State in economy): 

The main part of this post is based on Joaquín Estefanía´s book La economía del miedo, edited by Galaxia Gutenberg-Círculo de Lectores in 2011. 

What the risk premium is and other questions

Source: http://acartoonaday.blogspot.com.es/2011/07/risk-premium-and-german-bonds.html

Today has been another stressful day for the Spanish risk premium. This has become a very common expression in the news since the economic crisis started. The media are constantly informing about the evolution of the Spanish risk premium and they say this evolution will be decisive for the economic future of the country. But what is the risk premium? What has been its evolution since the beginning of the crisis? How does it affect to our ordinary life? Let´s explain all these concepts in a simple way: 

WHAT IS THE RISK PREMIUM?

The States need money to finance their projects and general expenses (public works, the Social  Security, education, the administration). In order to get the money they need, the States collect taxes (direct and indirect taxes), but if the money they collect itsn´t enough, they issue bonds, treasury bills and debentures and sell them in the sovereign debt markets. These are the products the Spanish Treasury sells: 

http://elijo.tesoro.es/productos.html

As the States sell their bonds in markets, their price will depend on supply and demand. In critical times, such as the present moment, investors look for safety and they tend to buy the bonds of the countries they consider safer in the long term. Safety is related to the economic situation of the countries (unemployment rates, Gross Domestic Product, health of the financial system, sovereign debt...). In the Eurozone (the area which comprises the countries that have the Euro as official currency) Germany is considered to be the safest country to invest money. Economists have invented a rate to define the risk for the investors who buy public bonds of a country of not getting their money back. This rate is established in relationship with the 10 year German bonds and it´s called risk premium and it´s measured in basis points (integer number and two decimals).

Let´s see an example: 

If I buy a 10 year German bond today, the German government will have to pay me a yearly interest rate of 1.32 %. If the bond costs 100 €, this means that the German government will have to pay me 1.32 € per year and they will have to give my 100 € back in ten years. So in ten years my investment of 100 € will produce 13.2 €. This is not much money, but it´s a safe investment, because I trust in the German government ability of giving my money back in ten years. As there is a huge demand of German bonds, the German government can pay low interests. There have been days in which they sold bonds without paying any interest rate. For example, if the German bond costed 100 €, they didn´t offer any interest rate and they promised to give 98 € back, instead of the initial 100 € investment. This may seem crazy, but it shows the fear investors have. They prefer receiving less money, rather than risking their savings and getting higher interest rates. 

As the economic situation in Spain is bad, investors have less confidence in the ability of the Spanish goverment to pay their 10 year bonds. Today, the interest rate of the 10 year Spanish bonds has risen to 6.67%. This means that every investor will receive 6.67 € per year for ten years. Their final profit will be 66.7 €. This means that for every 100 € the Spanish government receives for the investors, they will give almost 67 € back. This is unsustainable in the short term. 

With these examples, we are ready to explain the risk premium concept: it´s the difference between the interest rate of the 10 year Spanish bond and the 10 year German bond. Today the 10 years Spanish bond interest rate has reached 6.67 % and the one of the German bond is 1.32%. The difference is equal to 5.39%. If we express this in basis points, we´ll have 539 basis points. 

WHAT HAS BEEN THE EVOLUTION OF THE SPANISH RISK PREMIUM?

Here you have a graph where you can see the evolution  of the Spanish risk premium in the last year. The graph shows the increasing distrust of the investors in Spain: 

 Source: http://www.elimparcial.es/

This graph also includes information about the figures the risk premium reached in the countries of the Eurozone that were bailed out just before their bailout. These figures are not reassuring. Greece, Portugal and Ireland were bailed out when their risk premium rose up to 500 basis points. The Spanish situation is a little better than the one in these countries, because the Spanish public debt is not so high (73.3% of the Gross Domestic Product  for 2012, while Greece´s debt is 157.5%, the Portuguese debt is 124.3% , the Irish debt is 122% and the Italian debt is 120%), but if the country has to pay more interests to get money from the markets, the Spanish debt will increase dangerously.  

Here you have another graph about today´s risk premium situation in the European countries that are going through bigger difficulties: 

Source: http://economia.elpais.com/economia/2012/05/30/actualidad/1338362319_465496.html

HOW DOES THE RISK PREMIUM AFFECT OUR ORDINARY LIFE?

If the risk premium continues to climb, Spain will need European funds to pay the State debts. This would mean another bailout. If Spain is bailed out, the European Union will impose stronger rules to reduce the State debt and this will mean more and harder cuts and sacrifices for most of the population. 

IS THERE ANY OTHER SOLUTION?

Source: http://openeuropeblog.blogspot.com.es/2011_07_01_archive.html

Of course there is. Remember what we´ve said today abouth Keynes´ ideas and the New Deal. The solution would be that the countries belonging to the Eurozone issue Eurobonds. The German reliability could be shared with the countries that are going through cash-flow problems, their risk premium would be lower and they could get money from the investors to finance their projects and start generating economic growth. Why aren´t the European leaders going this way? If there is a possible solution, why have they decided to let some countries fall down? As we know for previous experiences, this is a matter of choice. Choices determine the kind of people we are: supportive or selfish. 

Source: http://sandyyadav.com/tag/mortgage-backed-securities/

Source: http://www.englishblog.com/2012/05/cartoon-euro-vision.html#.T8aA27B1Brg

Presentation about the USA during the 20s-30s

Here you have it. Have a look on it. It includes a lot of images and cartoons about this period. Please, use it to ccomplete your schemes and exercises.

Economic cycles and cyclical crises

Cyclical crises are one of the features of capitalism. These cyclical crises are related to economic cycles, which are the fluctuations observed in economic activities. Since the beginning of the Industrial Revolution, several experts studied the evolution of economy and they observed some kind of cycles or events that repeated from time to time. The typical economic cycle (also called business cycle) includes the following stages: expansion, crisis, recession and recovery.

Source: http://peakwatch.typepad.com/decline_of_the_empire/2010/03/understanding-the-business-cycle.html

These are the most important facts in the history of study of cyclical crises:

-      In 1819 Jean Charles Léonard de Sismondi was the first to tell that there were periodic economic crises related to overproduction and underconsumption.

-        In 1860 Clement Juglar observed economic cycles of 7-11 years.

-      Joseph Schumpeter systematized the studies of different economists about cyclical crises and their explanations. Apart from Juglar´s cycles, Schumpeter added  Kitchin´s inventory cycle (3-5 years), Kuznets´s infrastructural investment cycle (15-25 years) and Kondratiev´s waves(45-60 years)

Source:  http://www.liberatedstocktrader.com/stock-market-cycles-business-economic/

Karl Marx, the most important theorist of scientific socialism, dedicated a lot of time to study capitalist crises and he concluded that they would be more and more serious, working conditions would get worse would  and this would lead to a proletarian revolution. 

The relativity of words

The beginning of a new school year is coming. Here you have some cartoons to warm up your neurons and think about how words don´t mean the same depending on the context. These cartoons refer to the economic crisis the world is going through and the debt ceiling, a very controversial issue during this summer:

Source: http://microfinancehub.com/2010/02/20/impact-microfinance-surviving-economic-crisis/

Source: http://www.cartoonstock.com/newscartoons/directory/d/debt_ceiling.asp

Challenge number 15

Source: http://blogs.telegraph.co.uk/finance/jeremywarner/100008620/stranger-and-stranger-grows-the-eus-bailout-fund/

This week you will have to research on the European Union currency. These are the questions:

QUESTION 1

What was the name of the previous European Union currency? When was the name "euro" officially adopted as the official currency of the European Union?

QUESTION 2

What´s the eurozone? What EU countries are included in the eurozone?

QUESTION 3

What other countries use the euro as official currency?

QUESTION 4

What are the requirements the EU countries have to meet if they want to adopt the euro as currency?

QUESTION 5

What institution is in charge of the eurozone´s monetary policy? Where is its headquarters located?

QUESTION 6

The Eurogroup (the group formed by the finance ministers of the eurozone) has recently approved bailouts to solve the economic problems of the financial systems of three countries whose currency is the euro. Which are these countries? What is the amount of the bailout they have received (or will receive)?

Low qualified workers and equity policies

As some people didn´t do their work, I´m going to include some links about some concepts we studied in last week´s lessons.

As we have studied, qualification is the most important condition for workers. Low qualification becomes one of the most important problems in times of economic crisis, because low qualified workers are the first to lose their jobs. Here you have some graphs about low qualified workers in the European Union. You can observe that Spain is among the countries that have more low qualified workers in the labour market. This may also be a reason to explain the high unemployment rate our country has:

 Low-qualified men and women aged 25–49 years, 2007 (%)

Low-qualified men and women aged 50–64 years, 2007 (%)

You can find a detailed report about low qualified workers in the European Union in the following link:

http://www.eurofound.europa.eu/ewco/studies/tn0810036s/tn0810036s_3.htm

Other important concepts we studied last week referred to equity policies and possitive discrimination. The following link will bring you to the European Charter of Fundamental Rights. There you will find a definition of possitive discrimination/ affirmative action and what the law says about equality in Europe:

http://www.eucharter.org/home.php?page_id=98

The following link offers a list of pros and cons related to positive discrimination/affirmative action. Some of them also appeared in the classroom when we discussed this subject:

http://www.idebate.org/debatabase/topic_details.php?topicID=40

And this is an interesting survey published in The New York Times last June. The survey shows that the theoretical equality between men and women doesn´t exist. Many people still consider that men have more rights than women to work outside or to get better jobs. There is still a long way to real equality.

http://miamericas.info/2010/06/30/equal-rights-for-women-survey-says-yes-but/

Source: http://www.dobhran.com/humor/GRhumor701.htm