Archive for the ‘Economy’ Category

Bitcoin and the Steady-state economy

Saturday, February 22nd, 2014

Bitcoin is rapidly gaining popularity. Despite the recent problems with the Mt.Gox bitcoin exchange, I think the Bitcoin protocol itself will prevail, and more and more people and businesses will start to use it.

I’ve started to experiment with using Bitcoin myself, and found that it works really well. For instance, the Android Bitcoin Wallet makes it easy to transfer money to friends (who use Bitcoin), or to merchants that accept them. New services are arriving in the Bitcoin ecosystem every day.

What does Bitcoin mean in the bigger scheme of things? Unlike most currencies, Bitcoin has the property that there is a fixed upper bound on the number of bitcoins that will ever by created. Currently, there are about 12.5 million bitcoins in existence, and there will never be more than 21 million.

Does this mean that Bitcoin is more well-suited for a Steady state economy? As there is a bound on the amount of physical resources the economy can use, and the environmental impact of economic growth continues to worsen, many, including myself, believe that an economy without the annual growth in energy and material use is desirable (the alternative being a crashing economy).

With Bitcoin, people who save money, are not immediately watered down. The fixed amount of bitcoins and the fixed amount of physical resources should give price-stability in the long run. A fixed amount of physical resources and an ever-increasing amount of traditional money supply leads to loss of value and an unhealthy incentive to go out and hoard resources. Which is exactly what rich people do today when they get their hands on more money: They run out and invest it in real estate, stocks, energy or materials.

Iran Next?

Thursday, March 29th, 2012

Tension between Israel & the US and Iran has been growing the past few months. The economic sanctions are really starting to hurt Iran, but they are also hurting the West with higher oil prices. Blocking Iran’s oil exports is a big sacrifice in today’s tight oil market. (more…)

Peeing Your Pants Just to Stay Warm

Thursday, March 15th, 2012

The US and Great Britain are back at it, releasing their strategic oil reserves “in an effort to prevent high fuel prices derailing economic growth in an election year”. Last year, they did the same thing while Libya’s oil production was offline. The effect on oil prices lasted for  a whopping two weeks back then. This year’s action is, if possible, even more short-sighted. (more…)

The Financial Crisis pt II

Tuesday, February 1st, 2011

It’s gearing up for the next round of financial crisis. While our so-called leaders have enjoyed their annual back-patting exercise at Davos, I have become exceedingly alarmed by what’s currently going on in the commodities markets. Food, energy and metals have all sky-rocketed during the last five or so months. While the financial markets have seen a 20% increase during that period, and this is touted as “the crisis is over”, the prices of raw materials have increased 50-100%. These are the real inputs that the economy and indeed our lives depend on.

Let’s look at some numbers:Corn pricesCopper pricesSilver pricesSoybean pricesSugar pricesWheat prices

And what has the S&P done?

S&P 500 index

This is looking to me like a very unhealthy market. It’s like the high commodities prices of the first half of 2008 all over again. Only this time, the economy is probably a lot less resilient towards high prices. If the economy tanks again, what instruments remain to bail it out? The “wealthy” nations of the world are already running close to 0% interest rates, and are up to their ears in debt. Printing money, as has already been done, is a surefire way to boost commodities even higher. Peak oil, the climate crisis (drought brought forth some of the high grain prices seen above) and general resource depletion are all converging to shake the foundations of our debt-based consumerist society.

The Davos growthsters have only one plan: Returning to the good old years of growth by “stimulating” the economy by ever more illusional money.

I have another idea: It’s time to question that old growth gospel and stop borrowing money and natural resources from our future.

Mutual fund fees cut your life savings in half!

Saturday, February 13th, 2010

Virtually all mutual funds (aksjefond in Norwegian), charge their customer some percentage of their total account balance at the end of each year. This annual fee is most likely in the 2 – 3% range. This may not sound much, but over the years, it does add up:


0.98^40 = 0.45
0.97^40 = 0.30

What this means is that if you start saving at age 27 and want to retire at age 67, a 2% annual fee will shave 55% off your retirement account. A 3% annual fee will take out more than 70% of your savings.

This model is too simplistic, since most people will save a certain amount each year and add to their retirement savings. These subsequent amounts are not subject to the fee as many times as the amount you put down in the first year, e.g the amount you save the 2nd year is only subject to the fee 39 times, the 3rd year 38 times etc.

The annual returns you get is another complicating factor. Given higher annual returns, these annual fees should matter less, right? Not so, it actually doesn’t matter at all what the underlying annual return on the investment is – the fees will cut the same percentage of your total life savings, since


(1+p)^n / ((1+p)*(1-q))^n = 1 / (1-q)^n
where
p := annual base return on investment
q := annual fee

I even created a more advanced model which takes into account inflation, increases in salary, various return rates on the investment etc. You can copy it and play with it from here: Google Spreadsheets

The spreadsheet model shows that the 3% annual fee is not as bad as the initial calculations show, but still ends up eating half your savings under reasonable assumptions (income = 100000, tax rate = 33%, inflation = 2%, pay increase = 3%/year, spend = 50000 first year, then increasing 3%/year, return on savings = 7%)

Do managed mutual funds offer higher returns than passive index funds, which have much lower fees (typically 0.1% – 1%)? Various studies have tried to answer this. A survey of the existing literature is given in Performance Persistence for Mutual Funds: Academic Evidence. The various papers quoted in this article show different results. At best, there is very weak evidence of some skill among the top fund managers, but no study found that the funds generated excess returns after fees were subtracted. It also shows that past performance is a very weak predictor of future performance – after two years, the is virtually no correlation at all. So if a fund performed great until now, there’s no reason to believe it will continue much longer into the future.

Let’s end with a few quotes:

“A respect for evidence compels me to the hypothesis that most portfolio managers should go out of business. Even if this advice to drop dead is good advice, it obviously will not be eagerly followed. Few people will commit suicide without a push.”
Paul Samuelson, Economist, Nobel Laureate

“If “active” and “passive” management styles are defined in sensible ways, it must be the case that, (1) before costs, the return on the average actively managed dollar will equal the return on the average passively managed dollar and, (2) after costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar. These assertions will hold for any time period. Moreover, they depend only on the laws of addition, subtraction, multiplication and division. Nothing else is required. ”
William F. Sharpe, Professor of Finance, Nobel Laureate

Will you continue to let banks, traders and fund managers fleece you, to the tune of half your retirement savings, for a service which can be fulfilled just as well by a monkey throwing darts? Or will you change to passive index funds, and give these leeches what they deserve?

Here is an alternative, if you want some market exposure: In the US, the ticker SPY tracks the S&P 500 index at an annual cost of 0.1%. In Norway, Handelsbanken offers its XACT OBX fund which tracks the main index at Oslo Børs for a fee of 0.3% a year. These trade like normal stocks.

I’m not saying this is a good time to get involved in the markets, but there’s never a good time to pay too much in fees!