A Golden Opportunity

By Daniel Longenecker

Market analysts would love know the future. The problem is—they can’t. So how can a prospective investor know what to expect in the coming years? I believe that investors should investigate proven market factors like supply and demand. In the gold market, several factors have surfaced that indicate shifts in the supply curve and demand curve for gold. Market forces of supply and demand can be trusted to accurately predict prices in a free enterprise system. Thus, decreases in gold supply, increases in gold demand, and the history of demand spikes all suggest that the price of the precious metal will rise in coming years.

How could gold supply decrease when gold mines operate around the clock? The answer lies in the decreasing available supply. China recently has bought up billions of dollars worth of gold from the west. One estimate states that China has increased its gold holdings by more than 1,600 metric tons in the past five years, a change worth more than 77 billion dollars [1]. Instead of allowing gold price to rise, gold ETFs (commercial commodity hoards, often comprised of natural resources, which trade ownership similarly to corporate stocks) have exported heaps of gold to the Far East, to meet their demand. But since gold is a scarce good, the ETFs are depleting irreversibly [2]. Thus, this supply shifter, the move from commercial ownership of gold to governmental ownership of gold, indicates that available supply is decreasing dramatically, and when supply decreases, price rises (Figure 1).

Figure 1. Supply Decrease Curve [3]

Pareto Optimal and Perfectly Disgusting

By Daniel Gurevich

One of the fundamental measures of efficiency in economics is Pareto efficiency (or Pareto optimality). A society is called Pareto efficient if resources have been allocated in such a way that it is impossible to redistribute them so that at least one person is better off and nobody is worse off. In other words, Pareto efficiency implies that any “improvement” requires a value judgment. One could argue that any Pareto efficient distribution could be considered optimal by some definition.

In 1951, Nobel Prize-winning economists Kenneth Arrow and Gerard Debreu published a mathematical proof that a perfectly competitive free market results in Pareto efficiency in the long run. So there is proof that free markets really do work! But not so fast – according to 1998 Nobel Prize winner Amartya Sen, Pareto efficiency is not all it is chalked up to be. In his 1970 magnum opus, 'Collective Choice and Social Welfare', Sen writes, “An economy can be optimal in this sense even when some people are rolling in luxury and others are near starvation as long as the starvers cannot be made better off without cutting into the pleasures of the rich. . . . In short, a society or an economy can be Pareto-optimal and still be perfectly disgusting.” Sen asserts that freedom and equality are far more important than Pareto efficiency, and he is right.

Consider Qatar. With the world’s highest GDP per capita (over $100,000), an official unemployment rate of 0.1%, and no residents below the poverty line, it could pass for a Pareto efficient paradise. Pareto efficient it might be, but a paradise Qatar is not. The restrictions on freedom in Qatar, especially for non-citizens, are appalling. According to the United States Department of State’s Trafficking in Persons Report (TIP) for 2014, immigrants who come seeking unskilled work live in conditions of effective slavery:

The Old Lady of Threadneedle Street

By Deepa Mathew

She is comfortable in her position in Threadneedle Street, having been there since 1734. Walking up from the depths of Bank Underground Station one quickly makes her acquaintance. Her nickname came to be only in 1797, created from the creative mind of the cartoonist James Gillray. Yet there is much more to the Bank of England...

Her birth came in 1694 in order to help the government with raising funds during King William III’s war with France. This was achieved by collecting money raised from private investors. She has evolved over the years to give many more uses; issuing bank notes, storing gold and protecting the economy from shocks – as befits her job as a central bank.

Minimum Wage Raise: Hurt or Help?

By Caroline Kimbro

An overview of the minimum wage rates across the US.
(Click to enlarge image.)

As the possibility of raising the minimum wage from $7.25 to $10.10 an hour is discussed by US government officials, we hear much about the extra money it will provide for households all over America and the ways it will strengthen the economy. However, we know that most changes come with an opportunity cost and this change in wages is no exception. If businesses are required to pay their workers $2.85 more than they currently do, most will reconsider who they’re hiring. Since they have to spend extra money on employees, many businesses will want workers they think are worth this higher wage: in effect, a raise in the minimum wage will cause a shortage of jobs, particularly for the average American teenager, unskilled worker, and minority worker.

The Evolution of the Capital Asset Pricing Model: How an Economic Model Evolves and Improves

by Calvin Price

In 1964, William Sharpe and John Lintner developed a formula called the Capital Asset Pricing Model (CAPM) for predicting the pricing of stocks. It was mathematically simplistic and intuitive; it asked the right questions; it was an immediate success in the economic community. It was taught in virtually all business schools as the stand-alone method for pricing stocks. There was just one problem with the model: it didn't work. 

Models attempt to simplify the real world, find a rule, and then apply that rule in reality. Through this stringent means of testing and retesting, hypothesizing and theorizing – applying the scientific method - researchers can find rules that govern economics. To reduce the complex system of variables that apply in any situation into a linear formula is no easy task – but it is especially difficult, and probably impossible to do so for the stock market. The stock market is subject to a complex scheme of crowd psychology, moods, global affairs, and seemingly unrelated topics all have the potential to shift prices. It is highly doubtful that any theory would be able to accurately measure these effects and create a theory from that.

In 1994, a famous investment company called Long-Term Capital Management (LTCM) was founded and was praised as being the largest gathering of academic and practical knowledge on the stock market in existence. It had several Nobel Prize winners, professors from prestigious academic institutions, and weathered pit traders and quantitative analysts from Wall Street. They enjoyed risk-free borrowing from banks and had access to the latest technology. Within three years they were hailed as possibly being the greatest investment company ever founded having made unheard of returns on investments. In 1998, the company flamed out of existence in a period of less than a month in a relatively non-volatile market. They are one of the most well known examples of trading errors, are frequently examined in case studies, have been the subject of a book and numerous academic articles, and relied heavily on the CAPM.

Friedman & Health Care: A Modern Look

By Sarah Becker 

Milton Friedman

In 1996, when Milton Friedman wrote an article for the Wall Street Journal entitled "A Way Out of Soviet-Style Health Care," Milton very well describes America's current state of affairs when it comes to health care. How did he perform this feat? Did Milton know that recent legislation such as "Obamacare" would be passed or that we'd currently be facing a shortage of physicians? Probably not, but it seems that Milton saw America walking down a healthcare path that we have only continued on.

In this article, Milton argues that employers should no longer provide health insurance plans of the type that are currently being offered. In the current model, resources from the employer, or part of an employee's salary, is used to pay for a health insurance plan. Because a worker is enrolled in the plan through their employer, taxes on this money are able to be avoided. Americans, myself included, always want to evade the notorious and always-prowling tax man!

Vietnam over China?

By Dennis Fisher 

Image Credits: english.vietnamnet.vn

Where do most of your goods come from? If you asked anyone this question a typical response would probably be China. It feels like every time you look at a tag on a piece of clothing, shoe, toy, car part, or even furniture it will simply state “Made in China”, and in fact, the US spends about $29 Billion dollars on imports from China (1). Most big name companies will have at least some of their goods produced in China. Corporations such as AT&T, American Eagle, Coca-Cola, Dell, Gerber Foods, Hershey Foods, Honda Motor, Huggies, Ikea, and LG produce in China (2). The list goes on and on. The benefits of producing in China have been cheap labor on large scale orders, but recently another Asian nation has been attracting business away from China.