Entries Tagged 'Economics and Investing' ↓

Word of the Day – Comparative Advantage

Comparative Advantage is a bedrock economic theory of trade that says whenever nations vary in goods they grow or make, they gain when they trade with another nation that cannot grow or make those goods. This is a win-win situation. Both nations benefit when they sell another nation their main products that the other doesn’t have.

What makes nations different? Their locations around the globe, topographical geography, traditional cultures, their status in terms of being developed or less developed nations, education, values, and a host of other factors.

What comparative advantage relies heavily upon is weather. And that’s really a problem right now. Climate change is happening, no amount of denial can keep it from happening. Climate changes are affecting the comparative advantages of nations around the globe.

Capitalists are ignoring climate change at their peril. Donald Trump seems to have thrown out the whole theory of comparative advantage (if he every knew about it in the first place). He is using numbers instead of rational reasons to promote his trade wars.

Real trade is not based on using threats of gigantic monetary penalties to punish other countries – real trade is based on the comparative prices for which things of value are traded by countries who each need things others have. Continue reading →

Word of the Day – Zero Sum Game

A situation in which one person or group can win something only by causing another person or group to lose it. (Source: Mirriam Webster Dictionary

The definition of this economics term is simple, but spotting the reality of being in such a game is not so easy.

We’ve all seen shell games. If not in person – on TVs or movies. 

In these games, watchers are invited to bet on whether they can see where the con man places a ball under three containers he is shuffling around. 

The financial markets essentially do the same thing. We are invited to bet that we (or someone we pay who we think is smarter than we are) can predict where some kind of investment is going to land by a stipulated amount of time.  

The probability of any random event, e.g. rain on any particular day is actually 50/50 over the long run 

We know this from the law of large numbers used in statistics – where a coin is tossed Ad infinitum, the results ultimately move towards 50/50 heads/tails.

But of course, on some days it is easy for us to see that rain is more likely than not and vice versa. 

So we bet on stocks (or futures contracts or commodities or currencies, etc.) within short periods of time where the law of averages (i.e. large numbers) does not yet make the odds 50/50

After the end of each time period we choose, (a minute, hour, day, week, month, etc.) the result is always a zero sum game. The total payout for bets is zero. The winners cancel out the losers.

There may be differing amounts of winners or losers in each time period (i.e. higher or lower volume of bets) but the total amount of money they all bet will sum up to zero.

Winners win at the expense of the losers. Winners (including the Brokerages who take out their cut first) are not necessarily those who will have better knowledge of factors affecting the bets they make. They may just be lucky. But losers are those who, by definition, make poorer choices. Continue reading →

Word of The Day – Asset-Price-Inflation

Investopedia defines Asset-Price-Inflation this way:

Asset price inflation is an economic phenomenon denoting a rise in price of assets, as opposed to ordinary goods and services. Typical assets are financial instruments such as bonds, shares, and their derivatives, as well as real estate and other capital goods. 

Investopedia adds this caveat:

Ordinary goods and services are excluded and do not count as assets in this sense. Most standard measurements of inflation, such as the consumer price index (CPI), do not account for rising asset prices.”

I don’t know about you, but for years I’ve been feeling that our whole economy is becoming more and more like a house of cards. The financial sector has doubled since 1947 from 10% to 20% of our American Economy. 

Millions of Americans work in this sector or benefit from it, but daily many of us feel poorer than ever before. This is particularly the case in big cities across the United States. 

Living in the most expensive area in this country, I’m saddened by seeing the prices of housing rise while friend after friend leaves this area because of its absolutely surrealistic housing prices.

A long time ago I owned a condo that I sold after a decade for four times the amount I bought it for.

The problem I faced then, was that by the time I paid for renovations inside, legal and other fees, and paid off the mortgage interest and equity on my loan, buying another property was out of reach for me. This is what happens when housing asset-price-inflation sets in. Continue reading →