Greenspan had his hands tied

Is the US dolar exchange rate free to float? According to an HBS professor, its not. Let me explain. The Chinese central Bank (as well as other many Asian Central Banks), buys a very large amount of US T-bills to accumulate foreign reserves. This as well pemits the Chinese Central Bank to maintain its currency, the yuan, devaluated. This allows the Chinese to continue exporting at very low prices. This spurs Chinese growth. The demand for US T-bills allows the US to keep its interest rates low and hence push consumption forward. This impedes the US to have its own monetary policy. So for everyone that thinks that the crisis is Greenspan's fault, think again. He did not cuse it and could not impede it. The crisis was caused by the fact that subprime mortgages were not paid, which made mortgage backed securities to fail, which made banks go broke. The US and you may read in a post below, was running (and still does, since the government is spending so much, and the Chinese Central Bank still buys T bills) a Ponzi scheme. The effects of the crisis are just being pushed forward in time, if policy is no adequate, we might be facing a great depression.

The (mis)use of statistics

People (especially journalists) don't know that much about statistics. So we should beware of people that may want to mislead us using the art (or science if you will) of statistics. Statistics isn't anything but putting together a bunch of data and analysing it (using regressions -in the case of social sciences, particularly Economics, this is called Econometrics-, descriptive statistics, and a long etc.) Nonetheless, we should be very careful when dealing with real life data. Some of the usual fallacies commited by people that are not familiar with statistics include the following:

-Usually people think correlation implies causality. This is a big mistake. The fact that two variables are correlated does not mean one causes another. I'll make it clear with an example, once, I had a professor that showed us that Presidential approval and the sale of new automobiles in Mexico was highly correlated. Does this mean one causes the other? Not at all, both are probably caused by the performance of the economy.

- Quantity. When the A/H1N1 virus hit Mexico, people said its effects were harsher on the young (who are usually more prepared againt this type of disease). More young adults died than any other age group. Why? Young adults are the largest age group in Mexico. They were bound to have more dead if the death rate was uniformly distibuted among the population.

Only in Mexico

Recently, (on Saturday night to be precise) a cell of the Beltrán Leyva cartel enganged in a skirmish with the Mexican army in Acapulco. The results were 13 drug-cartel foot soldiers killed as well as two Mexcian army troops deceased. Nobel winning Douglas North says that a State should have the comparative advantage in the use of force (to let alone Weber's definition of a State). When drug-cartel foot soldiers have access to assault rifles, 9 mm guns, and granades, it it to be thought if the State still has a comparative advantage in the use of force. Maybe the opportunity cost of drug-cartels (and their private armies) is smaller than that of the state to engage in the use of force in Mexico. I say once again, Mexico IS A FAILED STATE. It no longer can control the use of force within its territory, to let alone take care properly of childcare centers in Hermosillo.

Books

You know I love to recommend books, and I love Economics, and I love happiness....

so here's a book on Econ and happiness that I'm reading...

It's called Happiness and Economics, by Frey and Stutzer (two Swiss economists) and its available on Princeton University Press.

Enjoy!

Overmathematized Econ...

It's been quite a while, but I'm back...and back to one of this blog's usual topics, Economics. This time it to critizise the missuse of Math dealing with Econ. Economics is the science of human decision, of how we allocate scarce resources. It should stick to being that. When we use mathematical models to model human behavior it is only to better express ourselves and to try to explain reality in a simpler way. When we use math incorrectly in our strife for nature's explanation, we are not doing Economics anymore, but applied Math. Where am I going?

It has become popular use to talk about a cotinuum of agents, a continuum of producers, or a continuum of goods in the [0,1] set. Here, when talking about a continuum of goods produced by a continuum of producers, the total output will equal the average output. What does this even mean? It is folly, useless to explain reality. Why do serious journals (as Econometrica, AER or the Journal of Political Economy) continue to publish papers with such kind of models? These models are unscientific in as much they do not ptovie insight to what happens in reality. But you know, this is just a thought.