national+economy+2015s

The National Economy

Venturing into Macroeconomics

A popularised and politically incorrect version

PETROLEUM ECONOMICS

2015

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Why economics?
Most countries need economic growth only to keep pace with the population increaseMost people in most countries need economic growth to improve the standard of livingEconomic growth requires the best use of limited resources (as does the environment!)Economic growth can only be achieved when there is value added in the production process
Value added

PETROLEUM ECONOMICS

2015

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Why economics?

2 + 2 = 5 ?
Economic growth takes time Added value can only be measured using market pricesEconomic growth requires that obsolete industries are shut down and obsolete products are phased outEconomic growth requires that new industries and new products are encouraged to bloom
PETROLEUM ECONOMICS

2015

Why economics?
The overall objective should be work for everybody (your lecturers philosophy)In a balanced economy companies go bankrupt and the employees loose their jobsand school-leavers cannot expect to find their preferred job immediatelyBut the economy must be so well-managed that long-term unemployment is kept at a minimumand that any school-leaver or jobless person has a good chance of finding employment within a reasonable time
PETROLEUM ECONOMICS

2015

The Purpose of Economic Activity

Added value !!!!

Energy

Input: Resources

in limted supply

Raw

materials

Qualified

labor

Production

facilities

Process

Services

Goods

Output

Investment

in plant

Consumption

Value of consumption and investment in plant must be greater than the value of the input, the difference being added value.

Final use

Environment

PETROLEUM ECONOMICS 2015


Added value: Best possible use of input

Energy

Input: Resources

in limted supply

Raw

materials

Qualified

labor

Environment

Process

Services

Goods

Output

Investment

in plant

Consumption

Added value can only make sense

if market prices are used

Final use

If not, you stand the risk of using up more input than you have output !

Production

facilities



Physical output and use

Services

Goods

Output

Investment

in plant

Consumption

Who can save in substantial volume ?

Final use

Rich people, companies, institutions (pension funds), and the government

- and the sum of all small savers

Money use


Saving

Spending

Savings and Investment
What happens when investment drops and savings go up ?=> significant drop in demand for goods and servicesEconomic growth requires the best use of limited resources (as does the environment!)Economic growth can only be achieved when there is value added in the production process
Value added

PETROLEUM ECONOMICS

2015

*


Energy

Input: Resources

in limted supply

Raw

materials

Qualified

labor

Environment

Process

Services

Goods

Output

Investment

in plant I

Consumption C

Final use

Abroad

Exports X

Imports M

Gross Domestic Product GDP = C + I + (X M)

Note that C and I include government consumption and investment, normally denoted G

Production

facilities



Energy

Input: Resources

in limted supply

Raw

materials

Qualified

labor

Environment

Process

Services

Goods

Output

Investment

in plant I

Consumption C

Final use

Abroad

Exports X

Imports M

Gross Domestic Product GDP = C + I + (X M)

GDP + M X = C + I

Production

facilities



Trade balance and Current account

Trade balance: Difference between payments for imported goods and services and money received from export of goods and services

Current account: Difference between money flowing into the country and money flowing out. Includes trade balance, loans, interest on loans, and income from investments

Capital account: Difference between money for investments flowing into the country and money flowing out.



Balance of Payments

Invisibles: All money flows except payments for goods

Balance of payment:

Current account + Capital account

Invisibles include:

Payment for services

Loans, interest, investments

Tourism, smuggling of money

Norwegian individuals buying houses in Spain



Trade balance and Current account

All countries have the objective of a balanced or positive current account

But this is globally a 0-sum game, so that is impossible to achieve for all countries at all times. This means some countries will be in debt

In practical life, countries with surplus buy up companies, property and shares in companies in countries with deficit (oil exporting countries and China buying up in the US). This reduces the debt burden of the country in deficit.



An important parameter when assessing country risk is Government net debt as % of GDP



2 Ireland 37.96 .

8 Azerbaijan 15.91 .

22 United Kingdom 10.06 .

24 Spain 9.66 .

25 Greece 9.40 .

27 United States 8.93 .

33 France 7.83 .

36 Japan 7.66 .

39 Portugal 7.42 .

44 Iceland 6.76 .

58 India 6.06 .

65 Nigeria 5.51 .

68 Russia 5.36 .

74 Italy 4.99 .

88 Brazil 4.36

103 Germany 3.63 .

134 China 2.11 .

Rank Country %

Another important parameter when assessing country risk is Budget deficit as % of GDP

In the EU, it should be maximum 3 %

China is not member of the EU


The Big Mac Index

Global Exchange Rates

THE Big Mac index was invented by The Economist in 1986 as a lighthearted guide to whether currencies are at their correct level. It is based on the theory of purchasing-power parity (PPP), the notion that in the long run exchange rates should move towards the rate that would equalise the prices of an identical basket of goods and services (in this case, a burger) in any two countries.

For example, the average price of a Big Mac in America at the start of 2015 was $4.37; in China it was only $2.57 at market exchange rates. So the "raw" Big Mac index says that the yuan was undervalued by 41% at that time.


The Big Mac Index

Global Exchange Rates

Overvalued

Undervalued


Interdependencies in the National Economy

Interest rate

Exchange rate

Inflation

Share prices

(incl. Trade balance)

Employment

Current account

Growth


Interdependencies

When inflation is higher than in other countries, the exchange rate of own currency must go down (depreciate)

When the exchange rate goes down, imported goods become more expensive

higher inflation
Inflation and exchange rate:

Interdependencies
Exchange rate and interest rate:
Higher interest rates are necessary to attract deposits in local currency when the local currency depreciates,

and to stop flight of capital to other currencies

The government (the national bank) will try to keep the exchange rate up to avoid higher inflation

This may lead to overnight interest rates of 5,000 % on an annual basis and is normally (read: always) a lost case


Interdependencies
Inflation and interest rate:
Real interest rates must remain positive

So when inflation goes up, interest rates go up, in order to maintain current i > f

Higher current interest rates mean less to spend on goods and services for those who have loans

inflation may go down

but unemployment increases

so the question arises


i - f

1 + f

Real interest rate i =

do you prefer pest

or cholera ?


and this is what people answer:


Financial crisis - why ?

China and other emerging economies as well as oil exporting countries export much more than they import

USA and some other industrialized countries import much more than they export

so that the currrent accounts of many of the importing countries have deteriorated over a long period of time

Meaning that the US owes lots of money to China

(and to a number of oil exporting countries)


Imbalance in the Trade balance

Physical output and use

Chinese

goods

Output

US

Consumption

Final use

Money use

Norwegian

oil

Chinese

banks

Norwegian

banks

US

banks

US banks owe USD to Chinese and Norwegian banks

but the USD never move outside USA !!!

so the US banks have lots of deposits and need to find borrowers


US deficit

Chinese and Norwegian accounts in US banks may

1 Remain as bank deposits

(Chinese banks have deposits in US banks.

Cash in StatoilHydros balance sheet)

But in the the case of 2 and 3 the money will only end up other US banks as deposits

2 Be used to buy shares

(the Norwegian State Pension Fund)

3 or property

(Chinese property developers in California)

needing to find borrowers

Remember: The demand according to 2 and 3 above helps drive prices of property and shares up


US deficit and financial crises

Also, interest rates reflect expected inflation, and efficient and rapidly expanding Chinese production has kept inflation down in the importing countries

even in a period of growth and high employment

meaning that consumers borrow more for houses and cars and save less

Supply and demand:

We have a huge supply of money

Interest is the price for money,

so interest rates are forced down.



Oil exporters are the main drivers of global imbalances:

Source: The Economist * Largely OPEC, Norway and Russia



And here are the culprits:



2008



This created too much lending to property, based on property prices that were not sustainable

Rotten loans triggered the crisis, as houses were put on the market with few buyers

The fundamental reason for the financial crisis was the imbalance in trade between China and USA

And George Bush jr let Lehmann brothers go bust, causing total meltdown



And the US banks have even more deposits to lend to individuals

The subsequent demand for houses drives prices up

And the more house buyers borrow, the higher they drive the prices

US industry has been reluctant to invest after the dotcom crisis in 2000. That means they save relatvely more and borrow less

The banks see that house prices increase continuously, so they have no fear of lending more than they traditionally have done.



They had cooked the books (= creative accounting) to conceal it

That would normally mean 10 to 15 years in jail for those responsible, but

Lehman Brothers (Investment bank) was technically bankrupt weeks before they informed bankruptcy court

their auditors, Ernest & Young, had approved the cooking

Those who bought shares in Lehman brothers in the weeks in question sued Ernest & Young

(Remember Shell reclassification of reserves 2004)

(Also, Enrons auditors, Arthur Andersen, collapsed because they were sued by angry Enron shareholders)



Rotten loans triggered the crisis, as houses were put on the market with few buyers

American banks had made packages of their house loans and sold to banks and investors abroad

as they had with risky and complex financial instuments,

the investors being municipalities with high revenues from power production, who even borrowed to invest more



It is extemely important that banks have trust from depositors as well as from other banks

Should governments be lenders of last resort

(bail out banks and industry) ??

This also relates to companies insuring debts for the banks (AIG)

But will not low interest from the national bank be the start of another crisis later on ?

and is not government help to manufacturing industry (General Motors) unfair because it is distorting competition and keeeping alive obsolete production ?

Ford chose not to receive help. GM has repaid what they borrowed.


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Deflation

Deflation is when prices go down (negative inflation)

This is a fact within the Euro-area in 2015

It is a symptom of the economy developing poorly

Economists would like to to have a pull in the economy, like 2 pct inflation

23 European countries have negative inflation as of March 2015

PETROLEUM ECONOMICS

2015

Deflation

Why deflation now ?
Oil price downPrice of gasoline and dieselCost of oil based input makes other products cheaperCost of transportation makes other products cheaper Contiuously lower (or steady) prices for Electronic appliancesTextiles (clothing)
PETROLEUM ECONOMICS

2015

Deflation

Why deflation now ?
Service sector prices are still rising
The service sector relies much less on energy
As there is free capacity in production, increased production does not create inflationUnemployment means that there is no pressure upwards as for wages
PETROLEUM ECONOMICS

2015

Deflation

Is it only bad ?
People have more to spendFewer new companies establishedInvestment is low The boost to purchasing power from a short period of falling prices is welcome
But:
Durable goods suffer, because people postpone their purchases
PETROLEUM ECONOMICS

2015

Deflation and Interest rates

Remember the link between inflation and interest rate:
With current interest at -0.25, inflation at -0.5 real interest is 0.5
Several European countries now have negative interest rates, as has the European Central Bank
With real interest at 2 %, inflation at -0.5% current interest is 0.5 %
Note: Cash has current interest rate = 0

PETROLEUM ECONOMICS

2015

Current interest rate:

i = (1 + i)(1 + f) - 1

i - f

1 + f

Real interest rate i =

USA Quantitative Easing
USA has a flexible labor market, people move to where the jobs are, and there are limited welfare systems In order to stimulate the economy, the Federal Reserve has bought back government securities (bonds): Quantitative Easing, QE That means more money in circulation; increased consumer spending and investment Interest rates have gone down
PETROLEUM ECONOMICS

2015

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The economy has been stimulated:
Unemployment is down from 10 to 5.6 % Strong recovery for sale of durables (cars, furniture, appliances etc) Non-durable goods (food, clothes) are not so volatile The stock market is at all time high
(Dow Jones)
295,000 new jobs in February 3 million new jobs last 12 months
PETROLEUM ECONOMICS

2015

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US New York Stock Exange

PETROLEUM ECONOMICS

2015

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This means demand for US dollars from investors abroad (who hardly get any interest at home), and the USD appreciates Good for European exports ! But is it good for the future of America ? The Fed has reduced QE and said that they will increase Fed interest rates later this year Advanced-manufacturing jobs have dwindled as a share of Americas total employment
PETROLEUM ECONOMICS

2015

Euro Area
In order to stimulate the economy, the European Reserve Bank will buy back bonds (QE) But from banks in which countries ? Lower (negative) interest rates The economy may be stimulated if consumers have confidence and capitalists invest in Europe, not abroad Strong USD means more European exports but not so good for those with USD debt Anyway, that will mean more EUROs in circulation (lending from banks).
PETROLEUM ECONOMICS

2015

EU Countries

Germany
Has made reforms in the labor market Exports drive the economy The economy may go even better if the Germans could increase consumer spending Huge current-account surplus Unemployment from 10 down to 6.5 %
PETROLEUM ECONOMICS

2015

So whats wrong with Greece ?

The money is spent for unproductive uses, like welfare spending, because that makes politicians popular

The government borrows money to a great extent abroad (German banks)

Much is lost in corruption

Taxes are not collected, because that would make politicians unpopular

and because ordinary people think that the money is not spent as it should by the government



People do not pay taxes as they should (black economy) - 2015 worse than ever

People elect politicians that do not push tax collection

Politicians please the people by maintaining low retirement age

So, to pay for pensions and schools and hospitals and police and so on and so forth

The government employs people in public jobs but the need for these employees is hardly existant



In Germany and Norway the retirement age is moving upwards,

so 65-year old Germans and Norwegians have to work to pay for Greek 60-year old retired people who enjoy their coffee at the local coffeeshop

And do you believe we are pleased ?

And we have to still feed them loans to help them staying afloat


Greece exits the EURO Grexit ?

The first 9 months of 2014 there was albeit small growth in Greece.

Then the the politcal landscape began to change

A new parliamentary majority could form a government that might withdraw from the Euro

People withdrew their banksavings in fear that they would become Greek Drachme

So now the banks do no have funds to lend to business for investment and trade credits and to individuals for house building etc


Greece exits the EURO Grexit ?

Syriza won the election, but the Syriza-led governmenthas not succeeded in their negotiations with

IMF: International Monetary Fund

The European Central Bank

The European Commission

Domestic invstors have put projects on hold. Foreign investors have been scared away

And the economy shrinks again


How to Succeed in Business....

Some countries must get rich first in order that there are companies which can invest abroad.

There is no way to get rich without foreign investment

Deng Xiaopings visit to Singapore 1979

Deng Xiaoping:Some people have to get rich first


According to a source on Google

The de-industrialization of a nation's economy that occurs when the discovery of a natural resource raises the value of that nation's currency,

Dutch disease

making manufactured goods less competitive with other nations, increasing imports and decreasing exports.

The term originated in the Netherlands after the discovery of North Sea gas.

PETROLEUM ECONOMICS

2015

Dutch disease

First symptoms are
sharp increase in petroleum revenues increased wages and salaries a feeling of well-being and success increase in welfare
PETROLEUM ECONOMICS

2015

Dutch disease

Second phase of disease
Industries competing internationally have too high costs to be competitive Good job opportunities i petroleum sector and those not having jobs receive fat cheques from the welfare system .. as well as in the public sector
PETROLEUM ECONOMICS

2015

Dutch disease

Third phase of disease
Reduced petroleum revenues due to decline and/or lower prices for oil and gas Increased unemployment The government must borrow to pay for extensive welfare Depreciation of currency High inflation Disgruntled workers protest against lower wages or layoffs
PETROLEUM ECONOMICS

2015

Dutch disease

Hopefully not that bad

?

PETROLEUM ECONOMICS

2015

national+economy+2015s

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bloompetroleum economics

serviceseconomic growth

time added value

market priceseconomic

phased outeconomic growth

best use of limited

new industries

final userich people