Wednesday, September 9, 2009

On Fed's Quantitative Easing

Over the past year, you may have heard the term quantitative easing quite often in business news reporting. But what exactly is it?

When the Central Bank, in US case, the Federal Reserve, cut their interest to zero, and the economy is still contracting. They may start to employ a technique call Quantitative Easing. In layman's term, it is essentially the central bank start to print money to buy stuff. Normally, these stuffs include treasury bond, corporate bonds and other fixed income assets.

During the current crisis, the Fed added about $1 trillion money to our financial system (most of these $1 trillion dollar has not been printed per se, but was credited to financial institution (just like a check written by the Fed). So where did these money go. About $267 billion is used to purchase US treasury bond, and another $624 billion used to purchase mortgage back securities(MBS).

So what does this do to the economy. By buying $270 bn of treasury bond, the Fed is essentially supporting the Federal Government's $787 billion stimulus plan put in last year. Without such a purchase, the US government will need to raise extra $270 billion from the market, causing interest rate to go higher across board. So the Fed print money, hand it to the federal government, federal government spend that money on infrastructure project or give it to state, either way, some workers out there are getting their pay.

But what about the $624 billion to buy MBS? Let's take a look at MBS. First you take out a mortgage for your home, then your bank bundle your mortgage with other people's mortgage (a lot of mortgage paper), then these huge trunk of mortgage becomes a securities (one big paper). Before the Crisis, there are ready buyers of these big papers (Fannie Mae, Freddie Mac, investment banks and whatnot). But after the crisis, these people don't have the ability to buy these anymore (because they figure out some of those papers in some of the big papers are having problem, their big paper can only be sold at a loss). So what happen, mortgage would be hard to get. Then their goes the calvary, the Fed. They print money to buy those big paper, so that money can flow from big banks to local bank and to whoever wants to buy a house. That way, people can get their money if they want to buy a house, and so house price will not fell too much. Also, by buying the MBS, the Fed also supports the financial institutions who own those big papers because it kind of support the price. So those who may have to sell their MBS at a loss can now dump it to the nice Fed.

Now, is it really that simple? Can we really just print our money to spend, to lend, and be a great country? I don't know. But I don't believe in such a good deal. However, printing money seems like our only option in the short run. But don't we need to think about some long run solution too? So that we won't have to put us in a situation where printing money is the only way to save our economy.

some popular job sites

Major job sites

some popular job search engine

Tuesday, September 8, 2009

Free Credit Report and Credit score

Knowing your credit standing is important, even if you are not considering a loan. You should check your credit status at least once a year. That way, you can make sure you are not a victim of credit fraud. Or if you are, at least you would find out about it early on.

Free Credit Report – According to the FTC, The Fair Credit Reporting Act guarantees you access to a free credit report from each of the three nationwide reporting agencies — Experian, Equifax, and TransUnion — every twelve months. And AnnualCredit is the ONLY authorized source to get your free annual credit report under federal law. Checkout . Hence you should go to every year to checkout your credit standing. The credit report will show you status on all of your loan/mortgage. If you found out some loan account you are not aware with, or a bad credit record you are not aware of, you should dispute the record. Checkout How to Dispute Credit Report Errors at

Free Credit Score- There are a lot of pop out ad on the Internet that provide free credit score. But you should know that most are for a trial period and ask for your credit card info. So far, I only find that does not ask for your credit card info, and its free credit score is not for trial period. It will show you your credit score, credit report card, credit snapshot etc. It is pretty detail, especially for a free service.

some drama movies to watch

1) The Shawshank Redemption - surprise after surprise, a lot could happen in prison
The Rock - Action and drama, very interesting
2) Wall Street - If you study finance or work in finance, this is a good one to start, "Greed, for the lack of a better word, is good"
3) The Last Castle - IMDB didn't give it a very high rating, but the climax of this movie is great. In my opinion, this is also a very good prison movie.
4) Seabiscuit - Inspiring movie and from a true story
5) Little Miss Sunshine - A quiet, interesting dark comedy for those who are down on their luck. It should let you realize that you may always lose, but you still move on. (like a broken old car)
6) Con Air - I think if you like The Last Castle, you should like that too.
7) Forrest Gump - I don't know why, but it's just worth watching

Friday, September 4, 2009

On the economic relation between US and China

Anybody who care to follow news should have a sense that the US has been running a huge current account deficit for sometime. And because China, as the final stop of the assembly line in Asia, runs the highest surplus; most politicians are pointing finger at the Chinese, specifically China's fixed rate exchange regime which led to an undervalue RMB.
For the past decade or so, US ship dollar bills oversea in exchange for Chinese products. Under a free float exchange regime, this should cause the USD/RMB exchange rate to fall hence dampening US demand for Chinese products. But the People's Bank of China, following a fixed rate policy, intervene in the market to sell RMB and buy dollar (they either print those RMB or issue RMB denominated
bond). As a result, the People's Bank of China has a lot of dollar in their safety box (figuratively) what economist called the FX reserve. Since we all know that it's stupid to keep cash, the PBOC decided they must put it in good use. As a prudent investor, they decided that they should put most of the money in US treasury, low interest but low risk (just like when you put most of your saving in CD if you risk averse). The huge inflow into treasury dampen US interest rate, further supporting US demand for Chinese products, causing trade deficit that ultimately brings more dollar to China. Many people, politicians and economists alike, worry that this vicious cycle could cause catastrophic economic trouble for the US down the road. This article beg to differ.
Most people worry that China could one day dump their dollar and dollar related asset in the open market thus causing economic Armageddon to the US. However, this is highly unlikely, in fact unimaginable. Such action will cause huge mutual loss on both side. And the Chinese probably build their FX reserve as rainy day fund for themselves rather than as a threat to the US.
Let's assume for some unforeseeable reason, China does decide to get out of all US dollar related asset. This could cause a spike in US interest rate, but the Fed can just come out and buy all whatever asset the Chinese are dump by printing a lot of US dollar, thus still maintaining a lower interest rate. Of course, such an action will cause the US currency to fell off a cliff. Now here's the thing, how low can US currency go? European policy makers start to feel uneasy when the Euro went above $1.50, will they see it go through $2.00? The Japanese may be able to take USD/JPY at 80, will they tolerate if it go below that very much? Hence, it is unlikely that the US dollar will fell heavily against it's major industrialize partners because those trading partners cannot stand a huge loss in competitiveness. So China with a lot of dollar bills at hand, what can they do? Option 1, The Chinese can't go buy Euro and Jpy since European and Japanese authority cannot see their currency rising rapidly against the dollar. Such action just exchange the US paper to European and Japanese paper. It does them no good. Option 2, buy a lot of RMB to get it appreciate against dollar. This will cause immediate loss on the book (remember the PBOC issue RMB bond to buy US Bond when usd/rmb is between around 7-8 rmb, now their asset is depreciated and liability appreciates). A sudden revaluation would also damage export, leading to job loss. So option 2 is probably not in the card. Option 3, buying US lands and companies? Probably not, because the US politicians cannot see crucial industry or vast amount of land go to Chinese hand. Option 4, go snap up all the raw materials around the world, boost up the price of every commodity. This could perhaps cause US to be miserable, but it benefits the commodity producer rather than China.
Conclusion, there is just isn't motive for Chinese to damp dollar. In fact, this is probably not the motive of the Chinese for accumulating FX reserves. The Chinese has only started to grow in the last decade of last century, while the US was industrialize since the beginning of last century and toward the end. Moreover, China has more than 1.3 billion people living in a land that is not much bigger than the US. I think it's better to consider China and US as two different family. One family is richer, and has work hard for a century. At the same time, the other has been poor due to domestic problems and robbery. As a result, the poorer family starts to work extremely hard when their problems are settled. They are willing to work at a much cheaper wage than the richer. The richer family, after a century of working, has accumulated good amount of wealth. They decided to take a break and let the poorer family do the hard work. So even though the richer family is making much less money in recent years and spending a lot of money, they are not necessary in a bad position because a century of hard work has more or less accumulate some good wealth. While for the poorer family, the shadow of the past is still there, they will continue to save and work until they feel they have save enough. And when that time come, they will let the richer family take some of their works.

A speculation on the cause of income inequality in the United States

According to the Census Bureau, the share of the Top 5% of US household is 16.8% of aggregate income in the year 1977, while their share in 2007 is 21.2%. For the Top 20%, the share of the aggregate income also grown from around 44% in 1967 to 50% in 2007. (source: At the same time we see the share of income for the top 5% and top 20% grow, the rest of the country, ie the other 80% of the population see their share of income decrease during the period 1977 to 2007. Why?

We witness two significant trends during the period 1977 to 2007, globalization and technological innovation. Let us examine what globalization do to the share of income. And let us use the clothing industry as an example. For argument sake, an employer invest $10,000 for machine, land and material, he than pay $5,000 for wages. The clothes is sold for $20,000. Hence, in this process, the labor's share is $5,000 and capital also earn $5,000. They each take 50%. After globalization, and for simplicity purpose, let's assume the employer still invest $10,000 as fixed investment. But instead of using $5,000 to hire domestic employee, the employer could spend $2,000 abroad and produce the same result. Hence, the employer can take home $8,000 on his investment while the workers abroad take $2,000. The domestic employee will went out of job and seek for employment elsewhere. And because of these excess supply of workers, the wage in the US in this industry is pressed down. The domestic worker who earned $5,000 will be willing to take $3,000 doing the same job for argument sake. As a result, the employer's share will be 70% and domestic labor share is only 30%. Although these figures are made up, it basically conclude that globalization tend to benefit the investors rather than labor. And since investors tend to be richer, we could therefore understand why the share of the income of the top 20% increase and the bottom 80% decrease.

Technological innovation pretty much paints a same picture. Automation procedure will free up labor, and extra supply of labor depress wage in general. Hence we see a similar picture as above.

This is not to say that technological innovation and globalization is bad, because both of these process tend to utilize resource better. Hence in general, standard of living will improve overall because economic output is maximize when resources are efficiently use. The problem, however, is that the distribution of income cannot be unfair for too long. Ultimately, income inequality could cause serious social problem. Policy makers should pay very close attention to the inequality figure and plan for policy before situation turns worse.

Thursday, September 3, 2009

The economy - why double dip are likely?

Purchasing Manger Indexs around the globe have shown some inspiring news in recent months. In the US, the ISM manufacturing has turn into expansionary territory in the month of August; while the ISM non-manufacturing has bounced sharply from the low 30s at the end of last year to print at 48.4 in August. Global consumer confidence, business confidence also show some improvements. Moreover, employment, home price and home sales seems to be stabilizing. Given that the United States are 19 months into the recession (NBER currently declare that dec 07 is the beginning of this recession, source:, and the fact that average post world war II contraction lasted only 10 months and the longest post war contraction lasted only 16 months, there may be an impulse for us to conclude that the economy will get better from here.

Evidently, the sizable expansionary fiscal and monetary stimulus around the globe since the beginning of this crisis have prevented a 1930s style depression. Yet it is too early for us to declare that the contraction is over. First, supply of credit will remain tight. Feds senior loan officer survey still indicating that banks continued to tighten standard and terms on all types of loan in second quarter. Once bite, twice shy, it is understandable that these banks will continue their prudence in lending until they see true economic expansion (such as increase in nonfarm payroll). Secondly, the consumers, the engine of US economic growth, is not showing much signs of improvement. Retail sales excluding food is still near the lowest level of this economic crisis print in December 08. Just like the bankers, once bite, twice shy, the consumer is not likely to go on a spending spree until their balance sheet is fixed and job market start to show some real sign of growth. And with plenty supply of existing homes and new homes on the market, residential investment is probably going to lag for a while. The expansionary policy around the globe has put a break on the free fall of global economy. But they have not yet lift the economy up, as evident by the continued job loss around the globe. And if the employment picture do not improve when the fiscal stimulus run out, consumer spending and private investment is likely to remain meager. Hence, we are not out of the wood yet and will not be out of the wood until we see nonfarm payroll growth.

In fact, a good indicator of economic growth is global trade in raw material. Because all production requires raw material. The Baltic Dry Index, an indicator of demand for shipments of raw materials is showing some interesting sign. The BDI fell off a cliff late last year, just before economic activity reach a low. It has bounce back slowly and reach a high in early June, but the high is still 60% off before the crisis hit. If there isn't much demand for raw material, how could the prospect of economic activity be good? The government stimulus will continue to provide support for the economy, perhaps into early next year. The final judgment on the economy can only be made at that time, when the stimulus fade out. If growth in the private sector cannot kick off (my guess is it probably won't), we could be in for another round of economic contraction. Maybe it's time to start planning another round of stimulus (as a contingent) now and instead of rushing through anything when something has to be done.