Thursday, 2 April 2015

The Great Penny Debate Part I: Why Pennies Should Be Kept.

The penny coin. The cent coin. Whatever you call it, we're all undoubtedly acquainted with the coin that holds the lowest value in your currency, whether you're from America or Britain or pretty much anywhere else. Except Canada, and a number of other countries who have decided to abolish the penny from their currency. But why have they done it, and does it mean the penny holds no point in our modern economies?

In this first of a two-parter, we'll look at the reasons why pennies should be kept in our economies.

1) 'Rounding Tax'
Perhaps the most prominent argument of the pro-pennyists, much research suggests that removing the penny from the currency would cause a change in price; naturally, if the penny was to be abolished we would no longer be seeing any '.99' prices. Instead, we would see either '.95' or '.00' prices- and considering that businesses would have to lose .4 on any purchase should they round it down, rounding up would seem an attractive option. This would have rather insignificant effects on the consumer in the short term, but in the long term it has the potential to further weaken those closer to the bottom of the economic ladder.

Data from the Federal Reserve indicates that Americans earning under $10k and also those with less than 12 years of education, use cash for over half of their purchases. This is opposed to credit cards, particularly spending online. Credit card real world spending would also be affected by 'rounding tax', though as no online transactions are made in cash they would be unlikely to be affected. This would put online spenders at a very slight advantage, whereas for the more disadvantaged it could make a huge number of tiny differences to their spending. These may not directly cost them in the short term, but in the long term the cost can aggregate into something considerable.

Canada has implemented a system of 'rounding' that charges credit card users differently from cash users in the real world- for example, something costing $2.98 would be rounded up to $3 for cash users, while the price remains the same for credit card users. This is an example of the potential imbalances that could arise and, in the long term, harm those who use cash.

2) Charity
The 'Common Cents' campaign has seen considerable success,
like many other charities, thanks to the penny.
Abolishing the penny is a move that is likely to work against the interests of charity organisations. Many charities rely significantly on spare change for funding, and though it may seem small, the total power of the penny shouldn't be underestimated: in 2009, the Leukemia and Lymphoma Society of the USA celebrated raising $150 million- entirely in the form of 1.5 billion pennies. The organisation 'Common Cents' organises what it calls 'Penny Harvests', and was able to collect $756k in 2009 exclusively by collecting pennies.

The penny holds a special place in this respect because in a way respect is just what it lacks; it is one of the most common items given to charity, and arguably one of the most beneficial for all parties. No one has bankrupted themselves by giving a penny to charity- yet all the pennies put together have been shown to make rather significant differences. The 'Common Cents' guys call the penny "the philanthropic property of young people"- and it seems they do have a point, so abolishing the penny could indeed harm charitable organisations.

3) Appeal to Tradition
This is not so much a practical argument for keeping the penny, but rather a sentimental one. Many feel an attachment to the penny, for various reasons- whether it is its role in infant numeracy development (who doesn't remember playing with penny coins while learning numbers), its historical/cultural value (Lincoln holds a cherished place on the penny in the USA) or just the traditional side of everyone who dislikes change (or should I say likes change, see what I did there? No? Sorry.).
Even one of the staunchest of critics of the penny, Professor of Economics at Wake Forest University Robert Whaples, admits this, stating "The vast majority want to keep a penny... it's a sentimental attachment."

Wednesday, 18 March 2015

3 Things to Note From the 2015 Budget Announcement.

Chancellor George Osbourne with his red Budget Box of policies. [EPA]
It's Budget Day! Today saw the announcement of the British Coalition Government's budget for the forthcoming fiscal year, by Chancellor George Osbourne. The Budget, in essence, evaluates the past year and sets out the plans for the next year with regards to economic policy; things like whether taxes on certain things should be raised or lowered, whether the government will invest further in a project and so on.

The whole event gives itself much reason to be sceptical; they are often used as more politically charged electioneering events, and even moreso with Britain just a couple of months away from an election. Here are three things I took away from the Chancellor's speech today.

1) Britain's economy is doing relatively well.
As Osbourne proudly announced today, Britain had the fastest growing economy of any developed nation in the world, as deemed by the International Monetary Fund, who estimated Britain's unemployment and inflation rates to be lower than they turned out. These two numbers are in fact lower than ever, with unemployment expected to fall to just 5.3% this year and inflation below 2%. But with regards to employment, there is a problem; because many of the jobs 'created' have been what are known as 'zero hours contracts'- these are job contracts within which the employer is under no obligation to give no minimum number of hours to its workers.
According to the Office of National Statistics, 697,000 people (over 2% of the British workforce) are employed under ZHCs, and over one third of them are unhappy about the number of hours they are receiving. These employees often receive so few hours that they are unable to afford the rising cost of living, but their employed status puts unemployment benefits out of their reach. Their lack of status as a full employee then puts them in a position where they can't access benefits such as holiday pay, leaving many in a worse financial situation than they would be if they were out of work. A significant proportion of the jobs created under the Conservative government have been ZHOs, with over 100,000 being created between 2013-14. So employment may be higher, but with cases such as those of Zero Hour Contracts, one must think more about the quality of employment being created than the job alone.

2) "Football, beer, and above all gambling, filled up the horizon of their minds. To keep them in control was not difficult."
I'm often reminded of this poignant quote from George Orwell's literary masterpiece, 1984, whenever rumours are abound of government plans to reduce taxes. No doubt Osbourne and Co. have announced this with the election fast approaching in mind, and with the Chief Executive of the British Beer and Pub Association calling him a "hat-trick hero" because of it, there's no doubt it will work in gaining Tory support with many. As Osbourne announced tax duty of a pint of beer and cider are to drop by 1p and 2p respectively. For the third year in a row, Osbourne announced tax duty of a pint of beer and cider are to drop by 1p and 2p respectively. He claims it has the potential to create 3,800 jobs in the forthcoming year, but I wonder: is this really the way we should go trying to create employment?
The government seems to be continuing (rightly IMO) its efforts to minimise the nation's consumption, following up on its previous promise to increase tobacco duty by 2% starting today, but why is it doing the opposite with alcohol? Alcohol is an equally damaging drug, if not more damaging due to how much more common it is and its association with events such road accidents and street violence. One-third of the visitors to our already suffering A&E facilities are there due to alcohol- even more during the weekends. 2014 saw almost 6000 more people having to receive alcohol treatment than 2013. The total cost of alcohol-related harm to society is £21bn, and it is costing the NHS £3.5bn a year.
The state of our society with regards to alcohol, why it may not be spectacularly poor on a global stage, has much much to improve. And in my opinion, lowering taxes on alcohol, making it cheaper, is no way to solve the problems that are worth far more than 3800 jobs this could bring.

3) Google and Co. will soon have to pay their taxes
In 2012, Starbucks made profits of over £400m in Britain- yet paid £0 to the Treasury as corporation tax that every registered company operating in the country is obligated to pay. Google had a turnover of £395m in the same year, yet paid just £6m. And it's not just these two companies; six major technology firms including Apple, Google and Facebook made profits of over £14bn in Britain, but paid just 0.3% of this in the form of tax. It sounds scandalous, but the thing is that these companies didn't technically break the law- they didn't evade tax, they avoided it thanks to loopholes that allowed them to store their profits in accounts abroad, avoiding the tax radar of Britain. This left the government pretty powerless to prosecute, but what Osbourne has announced here today is a plan to close that loophole to prevent such behaviour continuing.
Dubbed the 'Google Tax', the 'Diverted Profits Tax' plans were announced today- to put it simply, companies will have to report themselves to the HMRC (Tax authorities) if they are making annual turnovers of over £10m, and will have to comply with investigations that determine how much of the profits have been moved abroad, and pay the taxes determined as a result. The government expects to make £3.1bn from this move over the next five years- not a significant amount, considering the scale of government finances, and it is something that clever corporate lawyers are probably going to flout sometime soon. But nevertheless, it's an important move from the government to let multinationals like Google and Starbucks know that there is no place for tax avoiders in Britain.

Recommended reads: 

Budget Calculator: How Will The Budget Affect You [BBC]

The Budget- Official Document

Alcohol treatment in England 2013-14

Tuesday, 10 March 2015

Why You'd Be Mad To Buy A $17000 Apple Watch.

So just earlier today, Apple announced to an excited bunch of journalists in San Francisco their plans to release their new Apple Watch in the coming months. The much awaited product is to go on sale on April the 24th, with a wide range of watches and accompanying straps ranging from £300 to a whopping £13500 ($350 and $17k in the USA respectively).
The lower end of that price range gets you an Aluminium watch case, and a 'Sport Band', something that appears to be essentially rubber/plastic strap (though probably one very well made). But it gets more spicy looking at the higher end of the range- for £13500 you can get an 18-Carat Rose Gold Case with a 'Rose Grey Modern Buckle' (a leather strap, pictured). Especially considering this watch performs no more or fewer functions than its £300 sibling, it seems a steep price to pay indeed.

But no, Apple are not going crazy with their pricing strategy. The watch is one of the widest ranging products in the world; you can get a £10 classic from your local Argos, or opt for something like this Blancpain Tourbillon (I'll let you check the price of that one for yourself). Watches can be quite extraordinarily luxurious goods, along with things like Fountain Pens and perhaps cars.

So why spend such extravagant amounts on a timepiece? An argument that holds for most other consumer goods is that the product's function is better if more is spent on it. A basic example is how spending more money on a TV will probably get you a bigger screen, or how a more expensive sports car is likely to be faster than a cheaper one.
However this fails to hold for most luxury goods, simply because there is usually a limit to just how good something can be. Much is made of the precision and smoothness of higher end timepieces, but for most people this is a bogus excuse for buying a watch. The owner of a cheap watch is very unlikely to be disadvantaged in comparison to a Rolex owner because his time is a few seconds inaccurate, or his watch hands don't move in a buttery smooth way. Being honest, the function of a cheap and expensive watch is usually identical; yes, more expensive watches may gain you extra gauges and measurements, but the basic function (that is, telling the time) is not improved upon in a way that reflects the extra premium.

However, the design is, of course, a significant area of difference between cheap and more expensive watches, as is quality of material- and this is indeed a more significant reason why people buy expensive watches. They are more likely to look good, and the quality is likely to be such that they last for a much longer time. This allows, in many cases, for watches to be passed on as family heirlooms, as items passed down through generations.

The Six Million Dollar Patek Phillippe
And that long-term aspect brings me onto a significant economic reason for buying an expensive watch. Expensive watches are arguably very strong investments to make; if they are kept safe and maintained well enough, their price can rise exponentially over time as they become rarer and more cherished. The world's most expensive watch was a vintage Patek Philippe- sold in 2010 for almost $6m, kept since the 1940s. Investment is where expensive watches are necessary- firstly a cheaper watch, even if it is 100 years old, is unlikely to have much visual or brand appeal, and secondly it would be far less likely to be in working order after a long period of time. Expensive watches, integrated with various precious metals and crystals to keep it durable, are thus far more likely to be appreciating assets.

This brings me to the $17000 Apple Watch Edition. Here are just a couple of reasons why you may want to buy it, and my opinion why you'd be mad to:

1) The looks. Not only do you want the latest Apple device on your wrist, but the most expensive and shiny one. You overlook the fact that the actual software, function and quality of timekeeping of your watch you spent thousands on is pretty much identical to the $350 base Apple Watch, and not so different from a cheaper smart watch either. Not $17k different, anyway.

2) Investment. Though a more credible reason than just simply wanting to show off, you'd have to use it pretty conservatively to keep it maintained for a significant time enough for it to appreciate. Being a used luxury product it is likely to steeply depreciate for the first few years, after which numerous iterations of the Apple Watch are likely to have been released and yours will be running far from perfectly (anyone who owns an Apple product more than 3 years old will know this). Vintage watches are usually running as they were when new- but being a battery operated, software-running device, it is unlikely that there will be much interest in a laggy 20 year old Apple Watch, if it even still works. Too much modification to the watch (new batteries, hardware) will be likely to remove the original 'vintage' appeal of the watch and thus fail to increase its value, if anything decrease it.

3) You are an Apple fan with genuinely too much spare money to spend, and you buy it knowing you're gonna buy the next Apple Watch when it comes out anyway. If so, good for you mate.

Of course, this isn't to say you shouldn't buy an Apple Watch Edition or an Apple Watch generally. If you have the money and the interest in the product, go ahead, as I'm certain many people will. The functionality and competence of the watch against its smartwatch competitors would be unquestionable, Apple is likely to be at the forefront of this new technology with companies like Pebble, Samsung and Motorola.

But it would be wrong to treat it as a 'traditional' clockwork watch. It seems unlikely that it will be anywhere near as effective in appreciating over time. It appears the watch is evolving as we speak- we are indeed entering the new generation of timepiece, for better or for worse.


Apple Watch: Timekeeping

Why Watches Are A Timely Investment

Top 5 Best Investment Luxury Watches

Is A Rolex A Good Investment?

Wednesday, 18 February 2015

A Basic Guide to Tanking Petrol Prices.

Recent months have seen staggering developments unfolding in the petroleum market. The price of Brent Crude Oil has fallen from roughly $110 per barrel in July 2014 to its current rate of $62.04 (as of the 17th of February), a change that has had huge effects on businesses, individuals and entire economies.

Why has it happened?
Simply put, there has been an oversupply of oil in the market, exacerbated hugely by the decision of OPEC (the Organisation of Petroleum Exporting Countries) in November 2014 to avoid cutting output. More oil, more supply, means cheaper and more open availability.

Source: BBC News
How does it affect me?
Provided that you're neither a business owner nor a Head of State, the most likely effect has been that you will have seen the prices at the petrol pumps fall dramatically. In the UK, the past year has seen petrol and diesel prices fall by around 16.2%, making petrol far cheaper as it approaches the £1 mark. This has meant that, in general, the cost of living has fallen for the public- not only do we need to spend less on petrol now, but the fall in prices have stalled inflation rates. 
Governor of the Bank of England Mark Carney claims that inflation is likely to turn to deflation in the following months, highlighting the economy's deep dependence on petrol; something we must see as potentially threatening as well as beneficial as this appears. Imagine if petrol prices had risen. Devastating events like the 1973 Oil Crisis, when Arab oil producers enforced an embargo on Western Israel-supporting nations, leading to the quadrupling of oil prices in the USA, have shown the chaos our dependence on oil can cause.
Oil plays a massive role in all of our lives; directly through our own use, and indirectly through its use to create and bring to us what we consume. Therefore the fall in prices inevitably has knock on effects that change life for us.

Is there a threat of spiralling deflation?
Not quite. Spiralling deflation is usually caused by an oversupply of money, or overproduction of goods in the economy. A hole is dug that the economy must climb out of itself in this case. However, the deflation caused by falling oil prices is different. Oil prices are more in the hands of oil producing superpowers rather than most Western nations, which in this case is good. Oil prices will inevitably plateau and begin to climb back up, and this will provide the effective counterbalance to deflation experienced in the West. Provided that this occurs before any major deflationary disasters, this means we are relatively safe from spiralling deflation- we are in a hole, but think of it as a whole with an elevator out available to us.

How does it affect national economies?
The price fall has certainly been bad news for countries heavily dependent on oil revenues such as Russia, Venezuela and Iran. Collapsing prices for these nations hit them hard as it means falling oil revenues. The International Energy Agency (IEA) claims Russia will be the hardest hit by this the hardest, as the country is already being hit my Western economic sanctions and a suffering ruble. And indeed, earlier this month the Russian central bank estimated that the price drop will lead to a $160bn fall in government revenue over the next year. According to Alejandro Werner, director of the IMF's Western Hemisphere division, the fall in oil prices is having devastating effects on the Venezuelan economy as well- stating "each $10 decline in oil prices worsens Venezuela's trade balance by 3.5 percent of GDP, a bigger effect by far than for any other country in the region", causing spiralling inflation and intense economic turmoil in the South American oil giant.

How does it affect the environment?
Undoubtedly, the fall in oil prices will have negative effects on the environment. It will cause not just travelling by car but also by plane to become more affordable, and people are likely to try to take advantage of this while they can; leading to increased greenhouse emissions and further damage to the environment. Whether the period of low oil prices will be long enough to make this damage of a substantial nature is yet to be seen, however. 

So what does the future hold for petrol prices?
It is of course impossible to predict the future exactly, but it seems that a relatively unspectacular equilibration of the market will take place. As prices fall, consumers are likely to become more carefree in their spending, enjoying the reduced costs of travelling and goods in general. This will cut down the world's supply of oil, leading to prices rising once more and resurfacing to roughly where they were before they fell. On the other hand, deflation could spiral down if the oil producing nations maintain or increase their oil output, economic crisis could hit the world yet again and a global conflict could emerge as nations suffering from the falling oil prices seek to exact revenge for the world's relative lack of movement over the matter.
Let's hope for the former.

Sunday, 8 February 2015

Pros and Cons #2: Quantitative Easing

One of the most prominent national economic policies that has emerged in the 21st century is Quantitative Easing. A practice originating from the Bank of Japan to fight falling spending that was causing damaging deflation in the 1990s, it consists of the purchasing of financial assets (intangible assets, such as stocks and bonds as opposed to properties) from commercial banks by a country's central banking authority. The money these banks gain, theoretically, will allow them to take increased risks in lending more money to individuals and businesses, who, in spending and investing the loaned money, will help spur economic growth. Essentially, the central bank is pumping extra money into the economy- but not, as popular belief goes, in the form of masses of newly printed cash, but rather electronic money that, sometime down the road, becomes part of the national flow of money.

QE is something of a last resort for a faltering economy. Usually interest rates are manipulated; in times of deflation, when more consumer spending is needed, interest rates are lowered, which makes borrowing money cheaper and thus more popular. QE comes in when interest rates head closer towards 0%, and cannot be lowered further.

So, for our second instalment of Pros and Cons, let's look at Quantitative Easing.

PRO - Economic Stimulus
More lending by the banks usually translates into higher spending by businesses. Whether it is on new facilities such as factories or retail stores, or office renovation, extra money is pumped into the economy. When deflation is becoming an issue, spending is low and business as a result is not good for most- however making money more available will mean businesses are more likely to spend more money.
Employment is a particular focal point for QE- hopes are that, being able to lend more money, businesses will invest in more jobs. With more people in work, consumer spending is likely to increase, further revitalising the economy.
It's a stimulus, like a bump-start for a car; the hope is that putting the economy back into motion, even by money created out of thin air, will allow it to recover itself and eventually become independent of such stimulus.

CON - Misuse
However, a dangerous possibility with regards to monetary stimulus such as QE is that the money will be misused; giving extra money to banks has not been such a popular policy in recent times, and perhaps rightly so. Despite the faltering global economy of the past decades, bankers' bonuses and bank profits as a whole have been booming- and there is certainly a strong case for arguing that QE, as well as the bailouts of 2007/08 have only contributed to this.
Companies who benefit from the greater lending power are also not guaranteed to use the money how theory suggests. Executive pay has been just as much an issue as that of bankers, and while it may not be considered a misuse, much of the extra money may go into investments abroad, such it into offshore tax schemes or outsourced employment- these may result in increased profits for the business but not the overall economic stimulus QE is designed to provide to a nation's economy.

PRO - Combat Deflation
The problem of deflation (which you can read more about here) is, in a nutshell, caused by a shortage of money supply in circulation. This means everyones' purses are tightened and thus spending in the economy falls with wages, and subsequently prices fall also. QE is primarily designed to act against falling prices and wages- by increasing the amount of money in the economy, the hope is that spending will recover and prevent spiralling deflation.

CON - Inflation
On the other side of the coin, there is a fear that monetary programs such as Quantitative Easing could tilt the economy the other way. If too much money floods the economy, its worth will fall too much, resulting in inflation, the drastic rise in prices. While the central financial authority can control how much money can enter the economy, it becomes very difficult once it becomes part of it- it's like adding a selection of straws of hay to a haystack and trying to pick out those exact straws after it's all been mixed up. While many claim inflation is a more desirable alternative to deflation, and central banks have of course made reassurances that inflation could be controlled at the end of a course of QE, the world's inexperience of whole QE cycles mean the inflationary potential of the stimulus remains a grey area.

PRO/CON - Alternative to Austerity
This is a more subjective pro; QE is an alternative to austerity with regards to dealing with deficit and growth issues. While a policy of austerity would involve cutting of government spending, balancing the books by cutting spending, the expansionist QE policy is designed more to deal with the deficit by boosting productivity, though at the cost of maintaining spending.
Austerity would be arguably a more risk-free way to deal with the deficits, but its negative effects on government services such as social welfare and public services such as education and health. On the other hand QE would maintain such services, and in many cases would lead to improvements in infrastructure as spending increases as a result of the more accessible money. However some doubt that spending extra to reduce the deficit is the optimal solution, due to risks it presents if the spending does not produce results. This is particularly an argument for those who believe in small government, that the private entities are more successful and efficient participants in the economy than the state.