Economics, Trade, and Finance

Ryan Lafferty

Overview

1. Econ 101
2. Trade
3. Finance
4. Recessions
5. Ongoing Trends*
6. Case Studies*

Sad Announcement: this will (maybe?) be the least fun presentation of the summer :(

hehehe but it’s econ and econ is FUN guys so clearly it’ll balance out…

Sad Announcement: many of these slides are denser than a textbook full of Grecian philosophy :(

WARNING #1: Do NOT use jargon in place of analysis

(weird thing I do: take jargon-y terms and make my word processor flag them as misspelled)

WARNING #2: As the economic concepts you argue about become more complex, spend more time explaining them!

Warning #3: This shit sounds hard, but it’s actually pretty easy once you know the lingo

Warning #4: Lots of digital explainers of econ (esp. finance) tend to be very (and needlessly) complex

If you ever want an economic concept explained (e.g. MMT), hit me up on Discord!

Warning #5: Economics is incredibly, incredibly dehumanizing. Paint a story to make economic arguments more meaningful!

Warning #6: The VAST, OVERWHELMING MAJORITY of this presentation is ABSOLUTELY not needed for 99.7% of high school debates…

THREE DISCLAIMERS

#1: I’m not an expert, I also don’t have any real clue how markets work so don’t use any of this information to invest. I promise you, if I knew what I was doing, I would be making zillions of dollars on Wall Street, but alas, I’m not!

#2: Most of these topics are more complex than I have time to properly explain—so, do your own research! Do your own reading! It’s better to understand these concepts on your own than just blindly follow what I say in this presentation!

THREE DISCLAIMERS

#1: I’m not an expert, I also don’t have any real clue how markets work so don’t use any of this information to invest. I promise you, if I knew what I was doing, I would be making zillions of dollars on Wall Street, but alas, I’m not!

#2: Most of these topics are more complex than I have time to properly explain—so, do your own research! Do your own reading! It’s better to understand these concepts on your own than just blindly follow what I say in this presentation!

#3: WE WILL NOT BE TALKING ABOUT NFTs BECAUSE I THINK THEY ARE CRINGE AND STUPID AND WEIRD AND I ACTUALLY DESPISE THEM

Quick Note…

• The best way to get better at any type of debate, but especially econ-heavy debates, is to practice them!
• You can always reach out for help/advice on econ cases!

lastly…

Name???? karl!!!

get used to seeing this sexy boi

Section 1

Econ 101

Econ 101: Part 1

Fundamentals of Economics

I told you this would be quick…

Bread/Butter, Vanilla/Chocolate, Supply/Demand!

• Demand: how much do consumers want to buy a product? And how much money are they willing to pay for it?
• Higher price? Lower demand. �Lower price? Higher demand.
• True in inverse: as demand goes up, prices go up (and vice versa)
• Higher income? Higher demand.�Lower income? Lower demand.
• Optimistic? Higher demand.�Pessimistic? Lower demand.
• Elasticity: when the price changes, how much does demand change?
• Inelastic: price changes don’t significantly change demand (necessities)
• Elastic: price changes do significantly change demand (luxuries)

• Supply: how willing are producers to produce/supply a product? And how much money are they willing to charge for it?
• As supply goes up, prices go down�As supply goes down, prices go up
• The more companies there are making a product, the lower prices are
• Commercial market pressures (i.e. competition between firms) drives prices down
• Companies are profit-driven: profit is revenue – cost of production (i.e. how much it costs to make something). Companies will increase supply when the cost of production goes down!

evil greedy suppliers🤑🤑🤑

sad penniless consumers😔😔😔

happy equilibrium!

Example: TH supports pharmaceutical price controls

GOV: “Recognize that demand for pharmaceutical products is inelastic—in other words, you’ll spend through the roof to get these types of products. Why? Because when you’re suffering from chronic pain, or facing a life-threatening form of cancer, money is simply a secondary concern to the more immediate medical issues confronting you. But the fact that the patent system grants de facto monopolies to companies in the industry allows for price gouging: companies know their consumers have no choice but to pay even when prices go way up, and they also know that there’s no other company to out-compete them by offering a lower price—since, almost by definition, there is no other company in the industry, offering a cure/treatment for the same illness! That’s why price controls are needed—because they make medicine more affordable.”

Weaponizing Supply/Demand In Debate

• People understand the concept—but do they understand how to apply it?
• 1) Think about multiple actors in a market: how do producers respond? how do consumers respond? how do intermediaries respond?
• EX: THW substantially decrease labor regulations (e.g. the minimum wage) in times of economic crisis → e.g. GOV should make arguments about increased supply due to a lower cost of production
• EX: THS a universal basic income → e.g. GOV should make arguments about increased demand due to higher levels of disposable income
• EX: THR the narrative that home ownership is desirable → e.g. GOV can make arguments about increased demand for real estate (e.g. mortgages)
• 2) Think about how spending habits (i.e. demand) or production habits (i.e. supply) change as a consequence of perception!
• EX: THS unconventional monetary policies in times of recession → e.g. GOV might say that say that when central banks embrace unconventional policies, they signal their commitment to do whatever it takes to stabilize the economy, which gives consumers and businesses the confidence to buy, to produce, to invest
• EX: TH regrets the rise in global energy prices → e.g. GOV might say that upward-spiraling energy prices decrease people’s disposable income, thus decreasing demand for other goods/services

NEWS FLASH: 90% of all economic arguments ever are basically just supply & demand arguments!

Competition

• Competitive markets (i.e., many companies are producing the same type of good/service, e.g. clothing):
• 1) Consumers have more options, e.g. ugly orange shirt, ugly blue shirt, ugly pink shirt, ugly white shirt
• 2) Prices are lower (since companies have to compete for market share by lowering prices below their competitors’ prices)
• 3) Innovation is higher (since companies need to make their products better to beat other companies)
• 4) Quality is better (since consumers will opt for the product with the optimal ratio of price-to-quality

Monopolies

• Monopolies
• 1) Monopolies—arise through unnatural market distortions, e.g. mergers/acquisitions (buying out other companies), predatory pricing (temporarily lowering prices to kill off competitors), legal barriers, etc.
• Vertical integration—merging with suppliers (cheaper inputs)
• Horizontal integration—merging with competitors (less competition)
• 2) Natural monopolies—arise through network effects (more users equates to better quality of service, e.g. social media), economies of scale (cost advantages gained by large companies due to their scale of operation), high fixed costs (difficult for new businesses to enter because it’s very expensive), etc.
• Examples: utilities, airways, etc.

• Harms of monopolization
• 1) Price fixing/discrimination (since there’s little/no competition)
• 2) Decreased innovation, decreased quality of service (due to lack of competition)
• 3) Bad for workers (since they don’t have alternatives)
• Solutions
• 1) Antitrust legislation/trust-busting (breaking up monopolies into smaller companies)
• 2) Regulation (e.g. limiting prices, requiring government oversight, etc)
• 3) Nationalization (takeover by the government, very common in natural monopolies, e.g. utilities)

Example: THBT developing countries should privatize their state-owned enterprises (e.g. utilities, railways, airlines, etc.)

OPP: “Most nationalized industries tend to be natural monopolies by nature. That’s because things like utilities have very high costs of entry and because most of these services can, realistically, only be provided by a single company (for instance, running an electric grid is so expensive that only one company can exist in the industry and be profitable). That’s why state control is so important: the government lacks the private sector’s profit incentive, so it has incentives to make things like rail tickets accessible even to the poor, but private companies will likely jack up prices, knowing that people need these services (e.g. you need to take the subway to get to work), but there’s no other company competing against them.

Example: TH opposes the general approach of companies to grow by massively sacrificing short-term profitability with the hope of gaining a large portion of the market

OPP: “Counterintuitively, this strategy is necessary for combatting monopolization and promoting deconsolidation—i.e., making the market more competitive. That’s because the only way to compete with established, dominant companies (e.g. the taxi industry vs Uber/Lyft) is to abandon the goal of short-term profit and instead focus on stealing a share of the market from these large monopolies. Traditional business models make this nearly impossible, since existing, monopolistic companies are already so deeply entrenched that the only way they can be challenged is through a radically long-term approach to corporate expansion.”

Example: THP nationalizing tech giants to breaking up tech giants

GOV: “Companies like Facebook are de facto monopolies: they benefit from network effects and economies of scale, which means that breaking them up isn’t likely to work given that the benefit of existing on a digital platform comes from being on the same platform as millions (or billions) of other users. Thus, nationalizing these companies is the best solution since they’re natural monopolies—that is, these industries are just naturally more efficient when they’re dominated by a small number of firms. However, only through nationalization can we rein in the harmful outcomes of private profit incentives.”

Antitrust

• Sherman Antitrust Act of 1890—gives legal power to break up monopolies, stop anti-competitive business practices
• EX: Standard Oil was broken up in 1911
• Intended to promote competition
• Monopolies are inefficient, reduce innovation, charge higher prices, etc.
• Deterrence—even if antitrust legislation isn’t used, the threat of being broken up can promote changes in corporate policy!

• Consumer Welfare Standard (CWS): most antitrust regulators only break up companies when those companies directly pose an immediate (economic) harm to consumers (e.g. raising prices)
• Tech companies? Arguably monopolies, but don’t constitute a price harm to consumers (as of yet)...
• Pro CWS: very clear standard so it’s hard for governments to abuse antitrust powers, good to not break up natural monopolies
• Anti CWS: restricts trust-busting against e.g. Big Tech companies, difficult to win these cases in courts since standard is very absolute/strict
• Problem: how should antitrust legislation evolve in changing times? (e.g. telecommunications, FAANG, etc)

Big Companies are Bad (GOV to THW break up X firm…)

• Control over the entire supply chain (e.g. production, retail, distribution). Bad:
• 1) Hard for smaller companies to compete, e.g. they’re locked out of distribution networks, hard to get on shelves
• 2) Vertical integration lowers intermediary prices (e.g. car parts, semiconductors), makes competition much harder
• 3) Cross-subsidize losses (e.g. Amazon/Kindle), artificially deflate prices to kill off competitors
• Access economies of scale. Bad:
• 1) Enormous HR/legal departments; hard to enforce regulations, violate IP, toxic internal cultures, etc.
• 2) Promotes consolidation, harder for smaller firms to compete
• 3) Greater lobbying capacity, gut regulations (e.g. Volcker Rule)
• Too big to fail” mindset that comes from scale of operations
• Consequences: excessive risk taking, outsized bargaining power to push for tax breaks, subsidies etc (e.g. HQ2/Amazon, Disney manipulating copyright laws)
• Large size is associated with diseconomies of scale (e.g. higher communication costs across departments)

• Bad for workers:
• 1) Larger corporate hierarchies make executives far-removed from entry-level positions; less humanization, less social contact, makes subjugation easier
• 2) Out-compete SMEs, decrease options for workers
• 3) Massive HR teams, build up institutional experience on silencing scandals; large advertising budgets can displace negative focus (e.g. Amazon)
• 4) Power to crush unions (e.g. Starbucks)
• Bad for consumers:
• 1) Less innovation:
• 1) Innovators know they’ll be sued (and lose) or be outcompeted (high startup costs, need to recoup through high prices)
• 2) Harder to access funding — investors know this is a real gamble, so they don’t lend!
• 2) Worse-quality intermediate goods, because vertical integration means that you always have a guaranteed buyer

Big Companies are Good (OPP to THW break up X firm…)

• Vertical integration is freakin’ fantastic because it means you get cheaper goods:
• 1) Established in the market, no risk of failing, so you have established connections with suppliers: no search/info costs, no negotiation costs, no hold-up risk
• 2) Synchronize supply/demand across intermediary suppliers; guaranteed demand from large companies, decreases input price volatility
• 3) Economies of scale allow for increased production (higher supply) at a diminishing cost
• 4) Trusted by investors, so interest rates on debt are cheaper
• **Meta comment: weigh this for the least well off!
• Large companies are good for innovation:
• 1) More money, capital buffers, cheap access to debt—more capacity to innovate
• 2) Attract top talent, since they’re seen as prestigious—more capacity to innovate
• 3) Risk tolerance—even if a new product fails, you can cross-subsidize losses!
• 4) Long-term oriented—not afraid of near-term bankruptcy, so invest into multi-year R&D

• Unlikely to price gouge:
• 1) Intense scrutiny from media, fear of being broken up by antitrust bodies, government regulations
• 2) Competition still exists
• Rise of PE/VC means there’s always the threat of a new competitor entering the market
• 3) Goods are often elastic—most consumers are poor, so not in your incentive to gouge!
• Counterintuitively, large firms are good for smaller firms/entrepreneurs and inventors!
• 1) Create large networks with positive externalities, e.g. Apple’s App Store, e.g. Oracle’s Java library
• 2) Acquire smaller inventors with promising ideas, but lack business expertise to bring to market (e.g. computer programmer, brilliant scientist, etc)
• Good for society—this is good for innovation!
• Creates incentive to innovate—you want to get bought out by Google, Pfizer, etc (since you make bank)

Example: THBT the South Korean government should break up chaebols

GOV: chaebols are functionally oligopolies (i.e. very little competition), and exhibit anti-competitive behavior (e.g. Samsung and LG colluding to raise home electronics prices). Let’s break those suckers up!

​

OPP: chaebols are large companies, but face commercial market pressure (e.g. Samsung vs Apple) to remain competitive (but are still able to access all the benefits that come from vertical integration). That’s why they access all the benefits of economies of scale without the harms!

now that monopolies have monopolized our attention… let’s move on!

Inflation

• Inflation: prices go up (more formally, the purchasing power of your money goes down, i.e. the same amount of money gets you less far)
• Cost-push: as the cost of production goes up, companies raise prices to maintain profit margins
• Demand-pull: as people buy more stuff, companies raise prices to capitalize on increased demand
• Bad consequences—hurts the poor (decreased purchasing power), less incentive to save, can spiral out of control (hyperinflation)
• Inflation targeting (~2%)—meant to stave off deflationary spirals and encourage spending!
• Spiral: less demand → low prices → less revenue → bankruptcies → layoffs → less demand → low prices…

• Quantity Theory of Money: more money in circulation leads to higher prices [maybe?]
• Heavily disputed—major criticism is that the Quantity Theory of Money assumes that other factors (e.g. money velocity) are independent of the money supply and price level
• **Additional: prices are sticky (fixed) in short run (e.g. menu costs—inherently expensive to change prices!)
• Defense—as more money enters the economy, the purchasing power of each unit of money decreases, thus causing inflation
• **Better: EVEN IF a higher money supply doesn’t trigger inflation, the PERCEPTUAL FEAR of price hikes causes inflation to happen!

let’s talk about inflationary bubbles

sexi worker boi

Samsung Smart Fridge™

we love samsung smart fridges :)

hi :)

Before

After

Implication #1:

PRICE GOES UP

$100

$100

$150

$150

wait a second, i need a raise!

gee golly, my fridge collection getting hella expensive

heyyyy boss man i need a raise

ruh roh…

Implication #2:

COST OF PRODUCTION GOES UP

and what does that mean?

PRICE GOES UP

$150

$150

$200

$200

etc

etc

etc

Advice on Inflation Arguments

Making inflation arguments:

• Respond to “higher wages” arguments through the language of real vs nominal purchasing power (i.e., wages can go up, but not as much as inflation!)
• Inflation outpaces wages because multi-step supply chains multiply the added production costs
• Prove that inflation becomes circular (this is easy): inflationary trigger → more expensive to produce → workers demand higher wages → demand-pull inflation exacerbates cost-push inflation (and vice versa)
• [Wonky/Funky] Inflation causes central banks to raise interest rates, which causes currency appreciation, which fucks over developing countries (more vulnerable, so weigh heavier!) which owe debt denominated in foreign currencies!
• Frame inflation as a perceptual issue—inflation is often a self fulfilling prophecy (i.e. raise prices preemptively, even before inflation has truly set in, or use inflation as justification for raising prices!)

Refuting inflation arguments:

• Counter-inflationary measures:
• 1) Monetary policy adjustments, e.g. quantitative tightening, rate hikes, etc
• 2) Fiscal policy adjustments, e.g. tax hikes
• 3) Automatic stabilizers (e.g. as prices go up, tax obligations rise on businesses, pushing prices back down)
• 4) Markets are cyclically self-correcting, e.g. higher prices bring demand down until a new equilibrium is reached
• Even if prices go up, increases are small(er than wage increases):
• 1) Price increases are distributed across many consumers!
• 2) Companies compete; market pressures keep prices in check!
• Inflation isn’t inherently bad—incentivizes consumption, stronger currencies allow cheaper imports which self-corrects for inflation!

advice: always illustrate the real, human impact of inflation—don’t just say “prices go up,” use emotional language to demonstrate!

Unemployment

• What do you call someone who works for the United Nations? UNemployed!
• Types of unemployment:
• 1) Cyclical—lose your job during a recession/crisis
• 2) Frictional—unemployed temporarily while moving between jobs
• 3) Structural—lose your job because your skills are no longer useful (e.g. butter churning)
• **Insofar as there’s always structural unemployment, there’s always a labor surplus, driving wages/benefits down and decreasing the bargaining power of workers!
• Trend: automation/AI poses a rising threat to labor/workers!
• **Common misconception—white color jobs are NOT immune from the harms of automation/AI

• UBI (Universal Basic Income)—all citizens (“universal”) receive money from the government (“basic income”)
• Good: money is good, less bureaucratic than means-tested welfare/easier to justify politically, buttress against automation, leverage against employers
• Bad: inflationary (especially because rent goes up), inefficient (CP: targeted, means-tested welfare), discourages work, politically unpopular
• FJG (Federal Jobs Guarantee)—the state acts as an “employer of last resort”
• Good: buffer against automation, work is good (sense of meaning, purpose), gives people money, gives the state workers to fill shortages in certain sectors (e.g. social work)/avoid profiteering contractors, leverage to private-sector workers
• Bad: politically unpopular, inflationary, ableist, likely to criticized as inefficient/bureaucratic

Econ 101: Part 2

Stock Economics Arguments

Common Types of Arguments

GROWTH

What side best maximizes economic growth into the long term? Creates jobs? Maximizes financial returns?

RECESSIONS

What side best limits the likelihood of future crises? And what side best responds to recessions when they happen?

​

What side best minimizes inequality (of outcomes, opportunity) between the rich and the poor? Boosts the middle class?

INEQUALITY

What side best protects the rights of workers? What side creates good working conditions, livable wages, and fair outcomes?

RIGHTS

I’M GONNA ARGUE ABOUT RECESSIONS

Low vs High Wages

• Better for the poor—more disposable income, better mental health, etc.
• **Contingent on proving that nominal wages (i.e. not adjusted for inflation) keep pace with rising prices!
• Increases demand for goods and services, drives/empowers business growth
• Also, increases productivity/efficiency when workers feel fairly compensated
• Uniquely good for small businesses
• 1) Often already paying above minimum wage (poach talent, lived experience); now, they’re competing on a level playing field!
• 2) Rally political support for small businesses, e.g. subsidies, “shop local,” etc
• Empowers liberal parties? (fulfill campaign promise, energize progressive base, etc)

• Unemployment goes up because some businesses simply die out
• 1) Decreases labor flexibility/options
• 2) Weighing: low wage is better than no wage!
• Small businesses collapse
• 1) Disproportionately hit by higher wages (less buffer capital, narrower profit margins, etc)
• 2) Larger companies seize on this, temporarily lower prices to “finish off” SMEs
• Bad: small businesses are good for workers/local communities, and have specialized knowledge of local needs
• Inflationary spiral
• 1) Demand-pull (i.e. more $ = more demand)
• 2) Cost-push (i.e. higher wages = higher production costs)
• 3) Companies use this as an excuse to raise prices
• **Weighing: unemployed are the most vulnerable, and are hit the hardest!

Raise Wages

Don’t Raise Wages

Economy vs Environment

• Magnitude—the impact of environmental damage infinitely outweighs economic harm (especially because the right to life is a facilitative right, and climate change kills)
• **Natural world is deserving of moral concern (e.g. animals can experience pleasure and pain); they don’t benefit from economic-oriented policies, but do benefit from environment-oriented policies
• Reversibility—it’s easier to fix e.g. economic crises than it is to fix climate change
• e.g. automatic stabilizers, monetary/fiscal policy adjustment, etc.
• Timeframe—the economy stabilizes in the long run (e.g. the market is cyclical, recessions end, etc), but environmental harm lasts into perpetuity!
• Vulnerability—growth asymmetrically benefits the rich, but climate change asymmetrically hurts the poor!

• Economic stability/prosperity is a prerequisite to achieving environmental reform
• Lots of political capital (i.e. votes) required to get the most important environmental measures passed, e.g. investment into green tech/energy
• This requires people to have empathy for future generations/the world of tomorrow; when they’re worried about their next paycheck, there’s limited political willingness!
• Political opportunity cost—even if helping the environment is good, GOV’s measure comes at the expense of other, similarly good environmental measures
• Thus, the environmental impact is quite marginal (i.e., passing the motion comes at the expense of passing any other environmental reform, given limited political will), so weigh economic harms above environmental harms
• [SKETCHY] The planet is already fucked, so just salvage the economy?

Environment

Economy

Recessions vs Growth

• Recessions disproportionately affect the least well-off, whereas the majority of gains that come from growth accrue to the rich/powerful
• Especially in developed economies, the benefits of growth are marginal and diminishing in nature, but the potential harm of economic devastation is infinite!
• Therefore, the relative marginal utility
• Recessions might occur infrequently, but have years-long consequences, especially for developing economies (e.g. Greece in 2015 still reeling from ‘08 crisis)
• Poor recession response disincentivizes investment in the future—investors fear government mismanagement in a future crisis!

• Recessions are inevitable since many crises are exogenous (e.g. COVID, oil price shocks, geopolitical instability, etc)
• Given that recessions anyway, focus on growth as a priority!
• The best way to limit the impact of a recession is to develop a strong economy (e.g. more buffer capital/extra money, more wealth means people don’t sell off as fast, etc)
• Solving crises—given that they happen on either side—is best achieved through focusing on growth!
• Lots of ways to mitigate crises (e.g. lowering interest rates, quantitative easing, etc) but stimulating growth is harder!

Minimize Recessions

Maximize Growth

Ways to Fund Shit

• Taxes
• Value-added tax—already exists in the EU, Andrew Yang proposed this to fund a US UBI
• Carbon tax—doubles as beneficial for the environment (arguably…)
• Raise the capital gains tax (#PersonalFav)—basically, tax the fuck out of rich people’s investments
• Unrealized capital gains tax—for instance, tax the yearly increase in the value of a billionaire’s mansion!
• Wealth tax—e.g. tax the assets of multi-millionaires/billionaires
• Funding
• Slash the military budget (e.g. $80m goes to soldiers’ Viagra…)
• Non-orthodox spending strategies
• MMT—we’ll cover this later…
• Sovereign wealth fund—basically, a government piggy bank that makes money (e.g. Norway has a $1.3T (!) sovereign wealth fund)

(especially good for parli)

Nationalization

• Better incentives—profit incentives (e.g. price gouging, poor quality products/services, exploitation of consumers, mistreatment of workers) VS democratic accountability (e.g. fair pricing, public sector unions)
• Better capacity to manage these industries well—cross-subsidize losses, more money (e.g. cheap access to sovereign debt, tax revenues)
• Better accountability—subject to lawsuits, more heavily scrutinized by the media (especially because people are very distrustful of the state!), governments have to be transparent
• Better longtermism—parties have long-term incentives (and strict party discipline is the norm in most liberal democracies), whereas short-term investors shorten the time horizons for most companies
• Less risk-inclined (not necessarily good)—more likely to act in a risk-averse way due to electoral pressures, wanted to avoid big fuck-ups (bad optics, fucks with your campaign!)

Privatization

• Regulation is a preferable (and less politically intensive) alternative: you get the efficiency of the private sector without the downsides of profiteering!
• Better incentives—governments have incentives to be racist (e.g. appeal to majoritarian electorates) whereas companies have to find a niche in the market (which often requires them to provide services to minority demographics)
• Governments are often quite corrupt (e.g. patronage networks, heads of SOEs are appointed based on nepotism rather than ability), which creates inefficiencies; comparatively, companies have to cut down on bureaucratic bloat & corruption to get investment and stay competitive
• Better capacity to manage these industries well—governments often face pressure to cut down on costs, trim the deficit, etc, which constricts the availability of funding, whereas companies can more easily invest, access debt, etc; more importantly, governments are often highly bureaucratic and inefficient (think DMV!)
• Government red-tape, endless checks/regulations slow down the passage of policies
• Companies offer higher salaries (e.g. Wall Street), attracting top talent; they also offer stock options, whereas public-sector promotion is far more limited!
• Better longtermism—companies have long term incentives (e.g. long-term executive compensation, institutional investors have long time horizons), so they’re willing to do R&D (which takes lots of upfront capital but doesn’t pay off for years), whereas politicians have short-term incentives to win elections

enough of this macro shit, let’s turn on some dolly parton and see how workin’ 9 to 5 is

Supply & Demand in Labor Markets

• Product markets: sell iPhones, plastic bags, Jif peanut butter, etc.
• Producers: provide a product/service
• Consumers: buy a product/service
• Labor markets: sell and buy labor!
• Companies: pay people for their work
• Employees: are compensated for their work
• Supply of labor
• Restricted by qualifications (e.g. occupational licensing), education (e.g. doctors, lawyers), skill-level (e.g. manual labor versus skilled labor)
• High supply? TERRIBLE TREATMENT (think sweatshops, for instance)
• Limited supply? Good treatment!

• Demand for labor
• When demand for labor (i.e. how many employees companies want) outpaces the supply of labor (i.e. how many employees actually exist in a field/industry), companies incentivize/entice workers through high wages, good benefits, etc
• Conversely, when labor markets are oversaturated (i.e. more workers available than workers needed), companies can threaten to push you to the curb and hire someone else
• TREND—Automation means that companies demand (i.e. need) increasingly few human employees

Example: THO a post-COVID norm of working from home

GOV: “Virtual work depresses wages (i.e. how much money people can make). Why? When the geographic component of work is eliminated, the only thing you need to get a job is a laptop and a stable WiFi connection. This means that when WFH is the norm, the potential pool of workers for any given job is way higher. Why’s that bad? It means the supply of labor is huge, so companies are able to pay lower wages and treat workers worse since, after all, if you won’t accept such conditions, someone else will!”

Example: In developing countries, THW legalize child labor

GOV: “We agree with OPP: child labor is horrible. Children should never have to work, they should never be forced to slave away rather than enjoy the wonders of childhood. But that’s not what this debate is about. This is a debate about whether child labor is something that should be regulated, be conducted in a safe and supervised and scrutinized way, or whether child labor should be confined to the shadows of society. In 1993, the US Senate nearly passed a bill that would have banned imports from countries where child labor was legal. In response, Bangladeshi factors released over fifty-thousand child workers. And what was the outcome? Did these children get to go to school? Get to attain an education? Get to experience the carefree joys of the archetypal childhood? No, they didn’t. Oxfam tracked what happened to those children—and do you know what happened? Displaced child workers ended up in even worse jobs (such as in unregistered/subcontracting garment workshops) or on the streets—and a significant number were forced into prostitution.”

Unions

• Collective bargaining—individually, workers have limited power to bargain for better conditions/wages, but as a collective, workers (through unions) do have the power to bargain for better conditions/wages
• Can threaten to strike—this is bad for companies (production stops, hiring new workers is expensive because of replacement/training costs), but also temporarily bad for workers (forego pay), so unions collect “union dues” in part to ensure that workers don’t, like, starve while going on strike
• “Crossing the picket line:” breaking the strike and working for a company while employees are on strike
• Problems with unions:
• 1) Competition between unions (when multiple unions exist)—the relative bargaining power of each union goes down!
• 2) Union dues are often prohibitively expensive, create a barrier to entry for the least well-off workers
• 3) Often plagued by corruption—e.g. union representatives being bribed, closed-door sweetheart deals, etc
• 4) Unions don’t cover everyone, e.g. rise of the gig economy, e.g. management prerogatives
• General trend: declining union membership in the US, e.g. 1980s (~20%) to 2020s (~10%) saw a >10% decrease!
• Still, unionized workers earn ~19% higher wages (on average) than non-unionized workers
• Public-sector unions (e.g. teachers unions) tend to be stronger/more common than private sector unions
• Increasing trend of private-sector union busting (e.g. Amazon, Starbucks)

Why are chemists so anti-labor?

Because they hate things that are unionized…

When Ronald came to town

He wore a big frown�Because there was a strike

Which he did not like

​

​

So he got real mad

And said “UNIONS BAD”

And busted up air traffic

Not caring it was graphic

​

Section 2

Trade

What is Trade?

• Exchange of goods/services—not just between individuals (micro), but at the level of nations (macro)
• Important to understand: “international trade” does not literally mean that countries “trade” different goods for each other (e.g. X trades apples to Y in exchange for bananas), but rather, countries open up and allow the flow of goods/services across borders
• In the absence of free trade agreements (FTAs), countries often pursue protectionism—deliberate efforts by governments to protect their economies from global competition
• Economic integration is the process of removing those barriers to trade—as countries relax protectionist measures, trade becomes “freer”

Barriers to Trade (aka protectionism)

• Tariff barriers
• Country A and Country B exist. Country A makes peanut butter and tries to sell some peanut butter to Country B. But then, Country B realizes that Country A’s peanut butter is cheaper than Country B’s peanut butter, and Country B wants its people to be buying the Country B peanut butter! So, Country B slaps a “tariff” on Country A’s peanut butter (for instance, Country A’s peanut butter might normally be $5, and now it’s $8 with a $3 tariff!)
• Non-tariff barriers
• Import quotas—countries can restrict foreign imports
• Licensing—countries impose license requirements on foreign producers to limit the inflow of imports from abroad
• Subsidies—countries often provide favorable support to domestic suppliers (e.g. US farm subsidies, agricultural produce market committees in India)

Not Afraid of Trade

• Specialization

​

• Cheaper products

​

• Integration

Not Afraid of Trade

• Specialization

​

• Cheaper products

​

• Integration

oy mates i gotta churn some butter AND make some pencils

oy mates i gotta churn some butter AND make some pencils

Protectionism

Not Afraid of Trade

• Specialization

​

• Cheaper products

​

• Integration

ooh lah lah maybe things are gonna change!

ooh lah lah maybe things are gonna change!

Integration

Not Afraid of Trade

• Specialization

​

• Cheaper products

​

• Integration

oy mates i gotta churn some butter and then trade for some pencils!

oy mates i gotta make some pencils and then trade for some butter!

Free Trade

Not Afraid of Trade

• Specialization

​

• Cheaper products

​

• Integration

Specialization makes economies more efficient: some countries are just better at producing some things, and when countries trade, they can specialize in the things they’re good at making (and then trade for the things they’re not good at making!)

Not Afraid of Trade

• Specialization

​

• Cheaper products

​

• Integration

`

eyyo mates i rly could go for a nice juicy Widget rn

Not Afraid of Trade

• Specialization

​

• Cheaper products

​

• Integration

`

oh no my country doesn’t have free trade it costs a zillion dollars

Not Afraid of Trade

• Specialization

​

• Cheaper products

​

• Integration

`

Free trade (generally) brings prices down, since competitive market pressures between companies are amplified when domestic producers have to compete against foreign producers (and when they can’t be protected through tariffs anymore!)

Not Afraid of Trade

• Specialization

​

• Cheaper products

​

• Integration

`

i hate u

i hate u

Not Afraid of Trade

• Specialization

​

• Cheaper products

​

• Integration

`

i hate u

i hate u

but i need u to do my homework…

but i need u to do my homework…

Not Afraid of Trade

• Specialization

​

• Cheaper products

​

• Integration

`

Free trade tends to decrease conflict and increase political/social integration: countries become mutually codependent on each other and engage more productively on the global stage!

Afraid of Trade

• Nascent industries

​

• Corporate capture

​

• Race to the bottom

Especially in poorer countries—but also in developed ones, too!—opening up to free trade poses risks for smaller, nascent industries that haven’t yet had time to get off the ground and grow/develop. Foreign producers can run them into the ground by charging vastly lower prices, which kills off jobs as these smaller, less-established companies fail!

Afraid of Trade

• Nascent industries

​

• Corporate capture

​

• Race to the bottom

When barriers to trade are reduced, powerful, Western MNCs (multinational corporations) often gain massive amounts of political influence over the governments of developing states through mechanisms like lobbying and campaign finance. This is often terrible because these companies use their influence to push for bad measures!

Afraid of Trade

• Nascent industries

​

• Corporate capture

​

• Race to the bottom

When multiple countries enter into a free trade agreement, they each experience a “race to the bottom” effect: each country wants to attract corporate investment, but the way to do that (e.g. the way to get a company to build a factory in your country) is to gain a “leg up” compared to the other countries, which means you have the incentive to slash working conditions, gut your minimum wage, etc!

Major FTAs

• Europe: EU (European Union), EAEU (Eurasian Economic Union)
• Africa: AfCFTA (African Continental Free Trade Area)
• Lots of other, smaller regional trading blocs, e.g. SADC, ECOWAS, etc
• Asia: RCEP (Regional Comprehensive Economic Partnership), ASEAN (Association of Southeast Asian Nations), CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership)
• North America: USMCA (United States–Mexico–Canada Agreement)
• South America: Mercosur (Southern Common Market)

Pathways to Industrialization & Development

• Dueling conceptions of development (that is, how a country goes from poor and agrarian to rich and industrial)
• Export-oriented industrialization (EOI): develop a robust export sector by aggressively exploiting areas of comparative advantage, thus bolstering domestic industry!
• Asian Tigers—South Korea, Taiwan, Hong Kong, Singapore—experienced 7%+ annual GDP growth due to EOI during the second half of the 20^th century
• Import-substitution industrialization (ISI): substitute domestically-produced goods for foreign imports, thus bolstering domestic industry!
• Latin American structuralism—post-WWII pursuit of ISI resulted in substantial economic progress throughout the ‘50s and ‘60s, e.g. the Mexican Miracle—but largely failed by the 1980s due to the Latin American debt crisis and the “Lost Decade”
• FDI—foreign direct investment—plays a(n arguably) significant role in facilitating economic development in poorer countries
• This looks like factories being set up—providing jobs, importing technology, boosting export sectors, increasing domestic purchasing power, etc…
• Debate Comment™—impacting out to increased FDI tends to be a rather good strategy!

Section 3

Finance

warning: just like watching cis white men debate about social justice, finance gets really ugly, really fast

Mini Overview

01

03

02

04

06

05

Financial Instruments

Regulations

Monetary Policy

Bubbles

Currency

Real Estate

Financial Companies

Borrowers

Middlemen

Monetary Authorities

Investment Banks

Commercial Banks

Insurance Companies

Individuals

Businesses

Governments

Brokerages

Stock Markets

Clearinghouses

Central Banks

Regulators

Lenders of Last Resort

Commercial Banking

gee golly, mama mia, I sure would love to save my money haha lollzzzz!

Commercial Banking

heyyyyy, I’ll take your money—and even pay you some extra money for it!

Commercial Banking

swag, here’s $100

Commercial Banking

low key need some dough…

money gets paid back with interest soonsies

Commercial Banking

money gets paid back with interest soonsies

hi mr douchebag I MEAN MR BANK i am in need of a loan… 🥺🥺🥺

Commercial Banking

money gets paid back with interest soonsies

‘tis your lucky day, we gotchu fam, we can give you a loan!

Commercial Banking

money gets paid back with interest soonsies

money gets paid back with interest soonsies

Commercial Banking—Part 1 (TL;DR)

• Accept deposits from savers (i.e., people who want to save their money for the future aka depositors)
• In exchange, commercial banks pay interest on those deposits—e.g., a $100 deposit grows 1% annually
• Remember compound interest from math class? Yeah, that shit really does matter!
• Using the money they get through deposits, commercial banks lend out (some of that) money to borrowers
• In exchange, borrowers pay interest on those loans—e.g., a $100 loan given out by a bank is paid back within several months/years with additional interest on top

Commercial Banking—Part 2 (Financial Mechanics)

• Fractional reserve system: retail/commercial banks accept deposits from savers, and then act as lenders by lending a fraction (i.e. percentage) of those deposits out to borrowers (e.g. by providing loans!)
• “Reserve ratio” requirement—central banks stipulate that a certain percentage of a bank’s deposits must be kept (these are known as “required reserves”)
• The lower the reserve ratio is, the lower the percentage of deposits banks must keep “in reserve” (aka, they have more money to lend out)
• As more money is lent out by banks, the money multiplier effect kicks in
• When banks lend, borrowers get money. They then spend/use that money—which means that someone else (e.g. another bank, another business) gets that money—and then they too use that money
• TL;DR—as money starts flowing through the economy, it generates multiplicative growth!

Commercial Banking—Part 3 (Retail Banks in Crisis)

• Bank runs occur when depositors worry that banks will potentially collapse because their loans/investments won’t be repaid
• Rationale: since banks operate on a fractional reserve system, the amount of money that banks have on hand at any given moment in time is LESS than the amount of money they owe depositors
• For instance, if I deposit $100 into a bank, and that bank lends $90 out to you, and I then immediately come to the bank and try to withdraw my $100, the bank will find itself in a tricky place—it only has $10 remaining!
• During periods of market instability (or where depositors fear that the banks they’ve deposited their money in may be at risk of bankruptcy), people rush (“run”) to banks (“bank run”) to withdraw their money now, before the bank goes under and before their deposit is lost!
• Regulation
• In the US, the FDIC (Federal Deposit Insurance Corporation) insures deposits up to $250,000—in other words, even if a bank becomes insolvent (i.e., goes under!), the government will intervene and make sure that all deposits up to $250k in value are covered (i.e., depositors don’t lose their money)

dang they’re running kinda slow: bank run? nah, more like bank stroll

Investment Banking

Investment Banking

• Investment banks, unlike commercial/retail banks, do not accept deposits and do not provide loans—rather, they provide more bespoke services, like asset management, financial advising, corporate consulting, etc
• Commercial banks make money when their loans are paid back with interest
• Investment banks make money when their clients pay fees/commissions
• In general, investment banks provide services to institutional investors (e.g. pension funds, mutual funds) or corporations, whereas commercial banks provide services to regular individuals and companies
• On average, investment banks tend to engage in riskier practices than commercial banks
• Since investment banks (and other similar financial institutions, like mutual market funds) aren’t deposit-accepting institutions, they’re not subject to the regulations that most commercial banks are subject to

Financial Markets

Financial Markets (e.g. stock markets)

• Buyers want to meet sellers—that is, buyers want to buy, and sellers want to sell
• Financial markets—like stock exchanges!—connect buyers and sellers (and often use sophisticated technology to make near-instantaneous transactions occur!)
• Middlemen, like stock brokerages and clearinghouses, play a crucial role in facilitating the exchange of financial assets (e.g. stocks, bonds, securities)—they ensure that orders are efficiently processed, buyers are matched with sellers, etc…
• Major institutional investors
• Pension funds—people put money into funds, those funds get invested, and paid out to people for their retirement!
• Mutual funds—individuals/companies buy shares in a mutual fund, that money then gets invested into a portfolio of investments, and the returns are given to the fund’s shareholders!
• Hedge funds—where rich people put their money; only accredited investors (read: rich people) can invest in these funds, which tend to be far more risky than mutual funds. Returns are higher, but risks are greater!
• Other major investors
• Venture capital—provide capital to emerging startups with high growth potential in exchange for ownership/equity stakes
• Private equity funds—invest into non-publicly-traded companies through “leveraged buyouts” (debt is used to purchase large amounts of equity (i.e. ownership) from the company, with corporate assets used as collateral!)

But O Captain! My Captain!

​

Whatever on God’s green earth is sold on these “financial markets?”

Securities—aka, financial instruments—aka, things you can buy/invest in and make some cha-ching cha-ching

• Stocks
• Buy an ownership stake in a publicly-traded company. Entitled to a share of that company’s profits (e.g. through dividend payments) and have control over corporate decisions through voting rights!
• The price of stocks is set though the laws of supply and demand: when companies issue shares of stock, there’s a fixed “supply” of shares available for purchase by investors. As investors increase their demand for a company’s stock, the price goes up, and vice versa!
• Increasing trend of “share buybacks:” this is when a company repurchases its own stocks from current shareholders, thus increasing the price/value of their stock as the supply of outstanding shares decreases!
• Bonds
• De facto “IOU”—an investor/bank “loans” a specified amount of money to a government (or, more rarely, corporation), and in exchange, the “borrower” promises to pay back that money, with a certain amount of interest, by a certain date
• High interest rates (“high yields”): encourages investors to buy bonds!
• Low interest rates (“low yields”): discourages investors from buying bonds!
• Government bonds (“sovereign debt”) are a common way that governments finance budget deficits (i.e., when a government spends more than it brings in through taxes, it sells bonds on the open market to make up the difference!)

Securities—aka, financial instruments—aka, things you can buy/invest in and make some cha-ching cha-ching

• Derivatives
• Financial securities that have value based on some underlying asset (futures, swaps, options, etc)
• 2008: credit default swaps were used by major financial institutions to hedge against the risk of mortgage-backed securities failing—so when those MBSs failed, many massive insurance companies (e.g. AIG) got fucked!
• Can either be used to hedge against risk or to speculate
• Especially post-2008, many critics of financial derivatives have called for tighter regulation of derivatives—they’re widely seen as “bets” used to amplify risk!
• “OTC derivatives” (over the counter) are traded in non-transparent private exchanges where regulators and retail investors don’t have visibility!
• Securitization and collateralization
• Collateralization: securities (especially debt-based securities, e.g. mortgages) are “backed” by some asset that can be seized and sold off by an investor in the event that the security fails!
• Securitization: many different income-generating securities (e.g. mortgages, student loans) are pooled together into interest-bearing securities
• 2008: mortgage backed securities were securitized interest-bearing financial instruments used to generate revenue from thousands of mortgages
• Securitization has happened almost everywhere: CDOs, CMBS, SLABS, etc
• TREND: financialization has taken off since the 1980s/1990s

Random Ryan Rant

inspired by Hank Green

Roughly how much student debt is there in the US?

sawwy Canadians :(

How much debt does the average student have?

around $39,000

But here’s an interesting question…

Who is the most likely to default* on their loans?

*default means that you fail to pay back your loans

But… why?

What’s unique about this group?

What’s unique about this group?

They often weren’t able to graduate!

rant over

Central Banks

hubby material right here folks

Pray Tell, What Day Everloving Fuck is a Central Bank?

Left Bank

Right Bank

Central Bank

Monetary Policy vs Fiscal Policy

• Fiscal policy: governments (e.g. Congress, Parliament) change (raise/lower) tax policies and spending policies
• For instance, during the first wave of the COVID pandemic, many countries passed “fiscal stimulus” measures (e.g. stimulus checks in the US)—these count as fiscal policies!
• Monetary policy: central banks (e.g. Federal Reserve, European Central Bank) change interest rates and the money supply
• For instance, also during the first wave of the COVID pandemic, many central banks dramatically lowered interest rates (e.g. made it cheaper to borrow)—this counts as monetary policy!
• In short: central banks manage a country's currency and money supply!

Central Banking: Conventional Tools of Monetary Policy

• (1) Open market operations

​

• (2) Influencing interest rates

​

• (3) Reserve/ratio requirements

Central Banking: Conventional Tools of Monetary Policy

• (1) Open market operations

​

• (2) Influencing interest rates

​

• (3) Reserve/ratio requirements

Central banks BUY or SELL government bonds from COMMERCIAL BANKS

BUY BONDS: injects money into the economy! (expansionary)

SELL BONDS: takes money out of the economy! (contractionary)

Central Banking: Conventional Tools of Monetary Policy

• (1) Open market operations

​

• (2) Influencing interest rates

​

• (3) Reserve/ratio requirements

Central banks charge interest on deposits from commercial banks and act as the “lender of last resort,” so the interest rates they charge influence private-sector interest rates

LOWER INTEREST RATES: make borrowing cheaper (expansionary)

RAISE INTEREST RATES: makes borrowing costlier (contractionary)

Central Banking: Conventional Tools of Monetary Policy

• (1) Open market operations

​

• (2) Influencing interest rates

​

• (3) Reserve/ratio requirements

Central banks have regulatory oversight and set the percentage of deposits that banks must keep “in reserve”

LOWER RESERVE RATIO: encourage lending (expansionary)

RAISE RESERVE RATIO: constrict lending (contractionary)

Welcome to the Strange Lands of Unconventional Central Banking…

This is a yield curve

Everyone say “hi yield curve!”

Look at that curvy boi 😏😏😏

This is where funky stuff comes into play…

Why does this relationship between bond yields and maturation period exist?

Why does this relationship between bond yields and maturation period exist?

The longer a bond takes to mature, the more unknown variables there are—so investors demand higher yield rates to compensate for that risk!

The Fed already has pretttyyyy solid control over short-term interest rates

But this is where conventional open market operations just don’t do as much…

Introducing…

Quantitative

Easing

Quantitative Easing (QE)

• Large-scale expansionary market intervention undertaken by central banks to buy securities on the secondary market to depress long-term yield rates, facilitate borrowing, and boost asset prices
• In times of crisis, financial markets face a liquidity crisis (“credit crunch”): financial institutions tightly restrict borrowing (particularly due to pessimistic investor attitude), which creates a devastating cycle—as overnight interbank lending markets dry up, banks become unable to refinance their debts, and thus default, which further worsens investor fears, thus further exacerbating the shortage of liquidity!

SIRRRRRR WHAT DOES THAT MEANNNN

Quantitative Easing, Revised

Quantitative Easing During COVID

Size of the Federal Reserve's balance sheet

also…

negative interest rates????

Japan and Europe have both experimented…

Next: REGULATION

THIS IS SO COMPLICATED, LIKE THE DODD-FRANK ACT IS AN 848 PAGE LONG DOCUMENT—so, here’s the big ones to know!

• Regulations
• Dodd-Frank: passed in the aftermath of the 2008 recession, the Dodd-Frank Wall Street Reform and Consumer Protection Act imposed tight restrictions on Wall Street (incl. bans on proprietary trading, caps on ownership stakes in hedge funds/private equity firms, higher capital buffer requirements, etc)
• 2017—partially rolled back under the Trump administration!
• FDIC: created in 1933 to limit future bank runs by insuring consumer deposits at financial institutions
• *Glass-Steagall: passed in the aftermath of the Great Depression under FDR; forced banks to separate their investment banking wings from their commercial banking wings
• Repealed in 1999 under Bill Clinton; prior to repeal, had been heavily under-enforced by the Federal Reserve under Chairman Alan Greenspan (Travelers/Citicorp merger)
• Regulators
• SEC (Securities and Exchange Commission)—responsible for enforcing regulations against larger financial institutions, monitoring markets/exchanges
• Federal Reserve—has influence over the financial sector (e.g. Dodd-Frank stress tests, capital reserve requirements, etc)

Related—Shadow Banking

• Best argument (in my humble opinion) AGAINST regulations on Wall Street? They push financial institutions towards more opaque, less regulated “shadow banking” sectors of the economy
• What does this look like?
• Maturity transformation: take short-term debt securities (e.g. deposits) and use that money to finance long-term investments (e.g. loans)
• Conventionally, this isn’t a problem for insured depository institutions like commercial banks—if their long term investments fail, the government will cover their short-term debt obligations!
• Shadow banking institutions—non-deposit-accepting financial intermediaries, operate in the “shadow” of traditional banking regulations!
• Shadow banking firms also engage in maturity transformation—but since they aren’t insured depository institutions, they’re (1) more able to engage in risky behavior (think hedge funds, for instance!) and (2) less protected in the event their risky investments fail—since the government doesn’t have any legal obligation (e.g. FDIC insurance) to prop those banks up!

If it looks like a duck, quacks like a duck, and acts like a duck, then it is a duck—or so the saying goes. But what about an institution that looks like a bank and acts like a bank? Often it is not a bank—it is a shadow bank.

- IMF

Example: Regulation Q

hi i want 8% interest pwease

sawwy the government says 6% is the limit :(

1

2

3

BANK

Money Market Mutual Fund

hiiiiii, we’ll take your money!! and give you way more than 6% returns!

ooh yayayay i so happy now

4

housing????

there’s a doc for that!

asset bubbles????

there’s a doc for that!

Currency

• What is currency?
• Currency is money—it’s the dollars, euros, pounds, etc, that you use to buy stuff!
• Imagine a world without currency: if I wanted to get a Thingymazoo™ from you, I’d have to trade you a Madooodlebobber® but that assumes you want a Madooodlebobber®
• What if I want a Thingymazoo™ and can offer a Madooodlebobber®, but you only want a Fiddledinker©?
• This is why currency is useful—different people want different things, and without currency, we have to barter for things, with no centralized means of exchange
• Leads to a problem: what if there is no “double coincidence of wants?”

• What does currency do?
• Currency solves the problems of a “barter economy:” we can use a common thing (currency!) to exchange goods/services
• Currency is used to mediate and facilitate this sort of trade!
• But is that all? No! Currency serves 3 specific purposes:
• 1) Medium of exchange—trivially, money most directly lets us buy and sell things easily!
• 2) Unit of account—money lets us quantify and compare the relative value of different things!
• 3) Store of value—money has value now AND in the long term, so money lets people save for the future!

Currency Exchange Rates

Different Currencies

• Different countries use different currencies (e.g. US/dollar, EU/euro, South Africa/rand, China/yuan, Britain/pound)
• You can trade one currency for another (just like how you can trade one currency (e.g. US dollar) for goods/services)
• So… currencies are kinda like products, themselves!

• Different currencies have different values—some currencies can buy you a lot, some currencies can buy you very little
• Example: 1 US dollar gets you as much as ~130 Japanese yen—here, the dollar gets you MUCH more than the yen!
• When your currency is relatively “more valuable” (worth more than other currencies), your currency gets you far—but also means that things sold in your currency are harder to buy
• Easier (cheaper) to buy, harder (costlier) to sell
• When your currency is relatively “less valuable” (worth less than other currencies), your currency gets you less far—but it’s also cheaper for other people to buy things sold in your currency
• Harder (costlier) to buy, easier (cheaper) to sell

and here’s an important thing: when you trade internationally, you’re not just trading products—you’re also trading currencies

me want french fry

me want french fry

hullo good sir, this is your payment

are you fuckin’ with me, punk?? this shit is USELESS, get off my property ASAP or else i’ll stuff you full of baguettes

hi mr bank sir i need some money… some european mon€y

yessir yessir yessir

me want french fry

STEP 1

me want french fry

STEP 2

me want french fry

STEP 3

yay i am experiencing happiness

takeaway 1: international transactions require transactions of currency!

​

this means that currencies are, themselves, tradeable! which means… they’re subject to supply and demand rules!

takeaway 2: when there’s increased demand for something (e.g. product/good) made in/by a country, that’s coupled simultaneously with increased demand for that country’s currency

Appreciation and Depreciation: How do they Happen?

APPRECIATION—currency becomes MORE valuable

• Increased demand → appreciation
• REMEMBER: this doesn’t just mean that “people want to buy your currency more,” it means they want to buy things priced in your currency more (goods, services, products, etc)
• Common example: natural resource extraction causes demand for your currency to go up!
• Decreased supply → appreciation
• This always go hand-in-hand with decreased demand. Why? There’s a finite supply of your currency (e.g. only so many dollars out there!), so more demand means there’s less currency for banks to “supply”
• It’s not about the total amount of money in circulation, but the amount of money that banks can hand out!

DEPRECIATION—currency becomes LESS valuable

• Decreased demand → depreciation
• Why might people want to have less of your currency? Less demand for goods produced in your country, pessimistic expectations about your economy’s future, etc.
• Increased supply → depreciation
• This always goes hand-in-hand with decreased demand: when fewer people want to buy/use your currency, there’s excess supply

Appreciation and Depreciation: What do they Do?

Appreciation

​

Imports are Cheaper

​

Exports are Costlier

Depreciation

​

Imports are Costlier

​

Exports are Cheaper

​

THIS IS JUST SUPPLY AND DEMAND

Currency in Debate: Part 1 (Dollarized Debt)

• Original Sin: most countries cannot borrow (i.e. take out loans) in their own currency
• Crude analogy: if everyone in your neighborhood agrees to use pebbles to buy and sell things, where pebbles can be exchanged for real currency (dollars) if needed, when you go to the local bank, you can’t ask the bank to lend pebbles to you—instead, you have to borrow in dollars, and then exchange dollars for pebbles
• Why does this happen?
• 1) Transaction costs & network effects—dominant currencies (like the US dollar) are used in lots of different markets for lots of different things (e.g. transacting, investing), so 🤑investors🤑 (big rich dudes with big loads of money) borrow AND lend in these dominant currencies (USD/EUR) so they don’t have to exchange one currency for another when they wanna do something with their money (especially since exchanging one currency for another incurs a transaction fee, which is a big RIP for profits)
• 2) Currency volatility—investors don’t want to borrow/lend in non-traditional currencies because they fear that those currencies might be volatile, so the value of your loan will change significantly by the time you get paid back in a few months/years. More established currencies are much less volatile (due to the massive/consistent international demand), so investors trust them more and are willing to lend in them!
• What does this mean? Most DEVELOPING COUNTRIES borrow money… in a currency like the US dollar or the European euro, RATHER than their own currency!

translation: a strong (appreciated) US dollar is BAD because it makes it harder for poor countries to pay off their debts (since those debts are denominated in the dollar)

Currency in Debate: Part 2 (Currency Regimes)

• Floating exchange rate—the value of your currency is determined by the supply and demand for your currency (MARKET-DETERMINED VALUE)
• Risk: hot money inflows (i.e. investors dump cash in/out of your economy, hoping to capitalize upon temporary shifts in the exchange rate), currency’s value is volatile and unpredictable (especially in poor/developing nations), currency rebalancing
• Upside: able to strategically manipulate your exchange rate (IMF bans this, but seldom punishes), exchange rates are more responsive to shifts in the economy (e.g. depreciation during recessions), control over interest rates
• Fixed exchange rate—the value of your currency is locked in place and does not change, either up or down (CENTRAL BANK-DETERMINED VALUE)
• Risk: currency black markets arise when the officially stated value of the currency diverges from the real/on-the-ground value of the currency, lose control over interest rates, exchange rate isn’t naturally responsive to conditions of the market
• Upside: reduce exchange rate risk, force fiscal responsibility (i.e., governments can’t pursue irresponsible fiscal/monetary policy)

Currency in Debate: Part 3 (Dutch Disease)

• When your currency’s value appreciates, other countries have to spend more money to acquire your currency, and therefore they have to spend more money to buy your products
• Translation: a stronger/appreciated currency makes your exports more expensive—and that means it’s harder for companies within your country to compete on the global stage!
• MOST COMMON: natural resources!
• Natural resources are internationally traded commodities—so, when your country extracts resources, there’s large and consistent demand for your currency (since foreign nations desperately want to buy your resources!)
• Example: in 1959, the Groningen gas field was discovered in the Netherlands. Over the next two decades, as the Netherlands sold huge quantities of natural gas, investors bought up enormous amounts of guilders (the Dutch currency), which caused the Dutch manufacturing industry to decline precipitously as exports became too expensive to be competitive!

translation: economies oriented around natural resources are often bad because they inhibit diversification

Currency in Debate: Part 4 (Currency Unions)

• Currency unions occur when multiple countries share the same currency
• What does that mean?
• Traditionally, every country has its own currency, and each country manages its own currency independently
• Within a currency union, countries agree to use the same currency—and in doing so, forfeit the exclusive right to manage that currency!
• What does that look like?
• Eurozone: nineteen countries in the European Union share the same currency (euro), which is managed by a single monetary authority (ECB, aka European Central Bank)
• How do currency unions work?
• Transition period—countries adjust to a new currency (most common mechanism: peg your currency while transitioning)
• Subsequently—a single monetary institution (e.g. ECB in Europe) manages the currency (e.g. foreign exchange reserves, interest rates, reserve ratios, etc)
• Advantages: increase intra-regional trading, enable poorer/less-developed nations to access cheaper debt, eliminates exchange rate risk
• Disadvantages: mismatch between fiscal and monetary policy breeds instability (and heightens risk of debt crises), larger countries dominate central banking policy, permanently cements winners/losers (no automatic currency rebounding)

Currency in Debate: Part 5 (Random Shit)

• Currency speculation—sometimes, the value of a currency goes up, and sometimes the value of a currency goes down
• Investors seek to capitalize upon this—for instance, you can buy large amounts of a currency in hopes of that currency appreciating in the future!
• Investors also short currencies—aka, they bet against currencies, and make money when the value of those currencies go down!
• “Hot money” refers to capital investments that flow in (and out) of a country within a very short window of time—i.e., the money is “hot” (think “hot potato!”)
• Risk: creates asset bubbles (i.e., unsustainable price increases!) fueled by bubbles bursting once hot money inflows dry up and investors dump money elsewhere
• Risk: this is an inherently unsustainable model of revenue generation for investors, insofar as exchange rates and interest rates cannot always be perfectly predicted!

Section 4

Recessions

Time for confessions: I’ve got some questions about recessions, so in this session, as we talk about economic depression, I’ll make a concession and abandon the impression I can argue about a recession, but alas, I’m on a digression. So, in a single expression, can you, with some discretion, substitute obsession for my intellectual repression?

What are Recessions?

Keynesian Economics

• Pre-1930s, mainstream economists were mega simps for (economic) classical liberalism—centrally, the belief that markets are naturally self-correcting, and the government should intervene minimally
• This is not entirely dissimilar from the contemporary Austrian school of economics!
• Then, the Great Depression 😭😭😭😳😳😳🥴🥴🥴😵😵😵 😞😞😞😩😩😩☹️☹️☹️hit, and everyone was like “woah yikes #not a #slay moment”
• Enter JOHN MAYNARD KEYNES
• Demand-side economist—he challenged the presumption that governments should just “sit back,” and instead advocated for aggressive government fiscal stimulus to spur consumer spending and increase aggregate demand!
• “The government should pay people to dig holes in the ground and then fill them up” –– Keynes!

Keynesian Theory in (Debate) Practice

• Pathway to growth? Increase aggregate demand!
• Particularly when the economy is in a slump… the best thing to do (according to Keynesian theory) is to increase government spending and stimulate consumption!
• THW temporarily and significantly relax minimum labour standards in times of unusually high unemployment, including workplace health and safety standards, minimum wage, working hours restrictions etc. GOV: this will empower consumer spending because more people will be able to access employment, which increases counter-deflationary consumption and thus increases aggregate demand!
• Counterintuitively, even “bad” things can often end up being “good” for the economy, when those “bad” things are followed by a Keynesian response!
• Criticism: Broken Window Fallacy (“Grazier’s Fallacy”)—there’s economic opportunity costs associated with “destructive acts” that spark subsequent economic growth!

then, the 1970s happened…

Quantity

Price

Supply

Demand

Let’s say there’s a recession…

Quantity

Price

Supply

Demand

Let’s say there’s a recession…

NEW Demand

Quantity

Price

Supply

Demand

Let’s say there’s a recession…

NEW Demand

To correct for the reduced level of demand… we need to increase demand!

But what if this looks a bit different?

Quantity

Price

Supply

Demand

Quantity

Price

Supply

Demand

NEW Supply

Recession!

Quantity

Price

Supply

NEW Supply

Recession!

Demand

Keynesian economics targets demand

Quantity

Price

Recession!

Demand

Keynesian economics targets demand

NEW Supply

Supply

But the problem is: sometimes supply side

Monetarist Criticism of Keynesianism

• During the 1970s, inflation reached historic highs, which caused “stagflation” (inflation and recession, simultaneously)
• This cast doubt on Keynesian economic theory—and gave rise to a new wave of “supply side” economic theory
• “Reaganomics:” favors tax cuts for corporations and the wealthy, with the theory that wealth will “trickle down” to the masses!
• 1) Ricardian Equivalence
• During recessions, when government spending goes up while tax revenue goes down, the government deficit grows—and as a consequence, people know that even though taxes are currently low, the government will inevitably have to pursue contractionary fiscal policy (e.g. higher taxes) in the future—so people, if anything, are less inclined to spend and more inclined to save, which defeats the very purpose of Keynesian stimulus!
• 2) Crowding Out
• During recessions, when governments pursue Keynesian solutions, they spend more and tax less and have to finance that deficit spending through debt. When governments borrow heavily, private-sector nominal interest rates go up—why? Because there’s only so many dollars that can be lent out, so when the government takes on a heavy debt burden, other actors face higher borrowing costs!

Recessions in Debate

• 1) Consider how policies work not only in the good times, but also in the bad times
• THW implement “job security” legislation
• OPP: this motion makes it more expensive to fire workers. In periods of general economic stability, this doesn’t have all that much of an impact—if a company wants to fire a worker, they’ll probably just bite the cost and do so anyway, on either side of the house. The biggest impact of this policy happens when the economy is in recession—that’s when companies have to lay off many workers all at once in order to stay afloat, but now, this motion puts companies in a double bind: either, they hold on to lots of workers, and end up going under because they can’t sustain all those wages, or they fire workers as they need to, but are then hit by higher severance costs in a way that makes them more likely to fail
• 2) Consider how policies affect the likelihood of recession
• THW abolish all government schemes that provide grants, tax-breaks or loans at preferential terms to home buyers
• GOV: these sorts of policies exacerbate housing/real estate bubbles by keeping demand for housing artificially high and mandating government-sponsored enterprises to pursue the bipartisan goal of homeownership regardless of the effects on macroeconomic stability (for instance, unsustainable increases in property values that eventually crash and precipitate crisis). By eliminating these measures, we’re less likely to face financial and economic recessions under our side
• 3) Consider how policies affect the severity and longevity of recession
• TH opposes bailouts during periods of economic crisis
• OPP: in the absence of bailouts, companies declare bankruptcy and fire huge numbers of workers, but more importantly, panic spreads through the market! Recessions will happen on either side of the debate, but bailouts are uniquely important to halting the (financial) bleeding!

Also… MORAL HAZARD! (absolute gem of an argument 😍it’s so great guys I promise)

• Excessive risk-taking is often a main, contributing factor to (financial) recessions
• Pre-2008: widespread deregulation of the banking sector contributed to the rise of overly complex and incredibly risky financial products, like collateralized debt obligations and credit default swaps, which imploded when the housing bubble burst
• Moral hazard exacerbates this: when banks anticipate a bailout (in the event that they fail/go under), they become more likely to engage in risk-taking behavior—since the potential benefits are greater, and the potential risks (which are, indeed, enormous) are tacitly insured by the government!
• Limiting moral hazard is critical for stopping future recessions: when private (profit driven) financial actors anticipate bailouts, they’re more inclined to engage in risky practices that jeopardize the health of the economy and exploit innocent, unknowing consumers!
• TOO BIG TO FAIL—the belief that an institution is so large, so interconnected, that its collapse would threaten the entire economy/financial system!

ok, enough

KAHOOT TIME