January 18, 2012
Inflation Dashboard
By Cindy Ivanac-Lillig
Check out the Atlanta Fed's inflation dashboard. It visually depicts where inflation is in the context of a longer term trend. As you drill down into the component parts, you get a flavor for not only which direction the indicators are moving, but how similar indicators relate to one another.
In this case, a picture really does say a thousand words! Let me know what you think --
January 13, 2012
Groupthink and Economics
In today’s NY Times op-ed, “The Rise of the New Groupthink,” Susan Cain bemoans the fact that many workplaces and schools champion the idea of teamwork and group projects. The article points out that there is little scientific evidence that better ideas or greater achievements are produced in groups. It actually may be the opposite. “Privacy makes us more productive,” says Cain.
This is interesting, but not terribly surprising to anyone who has sat in a corporate “brainstorming” session. Cain says that group brainstorm sessions suffer from groupthink: “People… instinctively mimic others’ opinions and lose sight of their own…”
A neuroscientist, Gregory Berns, discovered that is partly chemical. We activate a small organ in our brain that is associated with the fear of rejection. However, the one exception that Cain points out is “electronic brainstorming.” On the Internet, it appears that groups outperform individuals, especially really large groups. Presumably, this is because we lose our fear and therefore can combine what is powerful about individual thought with the sheer number of ideas from large groups. Cain writes of electronic brainstorming, “It’s a place where we can be alone together – and that is precisely what gives it power.”
Now, you are thinking, how does this relate to economics? After reading Cain’s piece, I was reminded of an econ blogging session I attend at last week’s American Economics Association conference here in Chicago. Panelists made the case that blogs’ more informal nature allowed current events and current policy prescriptions to be discussed with various levels of depth in a remarkably short period of time. A panelist noted that today, economic journals are of little use to economic policy-makers whereas blogs are helpful in flushing out ideas quickly and efficiently. The panelist also alluded to the fact that by virtue of the number of contributions, blogs have avoided what many academic journals have been accused of --groupthink.
The idea of further democratizing journals and economic policy discussion captured my imagination and left me wondering how we could best use “electronic brainstorming” and other methods of electronic discussion. Electronic publication is one thing; finding ways to capitalize on large groups of experts’ ideas is still quite awe-inspiring and difficult.
What do you think about the groupthink dynamic and electronic brainstorming? For my econ friends, what is the middle ground? What could the field do better to try and generate the best ideas and promote interdisciplinary work? And finally, if you are an educator, how has the Internet changed your group assignments? Have you found a way to encourage “a place where we can be alone together”?
December 23, 2011
Back to the Basics: Interpreting the Bond Market
By Cindy Ivanac-Lillig
Investors generally have two choices in the financial market. They can purchase a piece of a company by buying what’s called a stock, or they can lend money to a company, city, state, or country by buying a bond. Under the most basic bond structure, you buy a bond, and the bond issuer pays you interest at agreed-upon intervals. And at the maturity date, the issuer pays you back the principal. Bonds are also often referred to as fixed income investments because of these regular interest payments. (By the way, there are also other types of debt investments that are securitized pools of debt with similar features, such as mortgage-backed securities, but I will leave those aside for now for the sake of simplicity.)
It’s interesting to note that more than half of the bonds out there are not government ones, but rather corporate bonds. That means many large multi-national corporations find better financing options by selling bonds than by going to a bank to ask for a loan. In addition, keep in mind that bonds are not available to everyone. Many bond investors are what the industry calls institutional investors. These are typically financial firms that buy bonds as investment vehicles for pension plans, mutual funds, etc. Many of us, in fact, are bond investors through our mutual funds, pensions, and 401K accounts. However, we can’t go out on our own and buy a bond issued by, say, a large Mexican oil company.
Another important point to keep in mind is that the bond market is much larger than the equity market. The global equity market is somewhere in the neighborhood of $25-55 trillion, depending on the source. Since the recession, the figures have tended to be on the lower end of this range. The bond market, in contrast, is somewhere in the range of $80-95 trillion. And unlike the equity market, the bond market is more obscure, less developed and more closely traded.
So, why spend this much time discussing the bond market? Well, I have had many conversations with my Italophile friends regarding the bond market and I realized that it may be helpful to revisit some of the basics as we digest the latest headlines. I do believe the Italian bond market will be judged based on the country’s economic fundamentals, its ability to grow, its ability to service its debt, etc. However, I also believe that understanding some of the basics of this rather intricate market better prepares us to evaluate some of the policy proposals being discussed. Further, I wonder if the rather unique structure of the bond market makes it more or less sensitive than the equity market to certain policy actions. Think about that for awhile and then share your thoughts. In the meantime, when you read that Italy’s bond auction drew yields above 6%, you’ll now know that means that Italy has to make larger interest payments on its bonds to increasingly more counterparts. And you will also know that those counterparts are a global group of largely financial firms/investors.
What are your thoughts on the recent slew of Italian bond market headlines? Did the walk through some of the bond market basics help? If you are an educator, please share how you have incorporated the recent EU sovereign debt troubles into your economics or finance classes.
Check out this interesting private report on the structure of global financial markets from Russell Index: (http://www.russell.com/indexes/documents/research/structure-global-equity-markets-July2010.pdf)
SIFMA (Securities Industry and Financial Markets Association) Statistics: http://www.sifma.org/research/statistics.aspx
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