All posts by Joanna Ni

I am a Economics student at the University of Waterloo and am an avid reader of economic news from across the globe. My interests reside in foreign policy but I love to discuss economic topics of all areas.

Pros and Cons of Paperless Money

Money as we all know is an important unit of account and an essential tool for trade. Recently, there has been great speculation on the benefits of going paperless once and for all. Currency has been the fundamental pillar in our monetary system and has given rise to trade and investment. The reason why speculations regarding going paperless is more prominent than ever is due to the fact that we live in a virtual society. Money is often sorted through intermediaries and many trades and investments are made without actually physically seeing any coins or bills exchanged. What are the benefits of completely digitizing currency and what are the costs of abandoning our existing system?

Stimulating the Economy and Negative Interest Rates

One key reason for the removal of physical currency is the incentive that if all money is held in financial institutions then people would be forced to invest their money. Currently, people are simply able to withdraw any amount of money they possess and take it out of circulation by keeping it in their homes. The purpose of financial institutions is to bring people who have money but no time to create businesses and connect them with people with spare time and capabilities to create businesses but lack liquid capital. By withdrawing the money it is removed from circulation and a central function of banks is rendered useless. It has been proven that people would rather hold cash in their closet than place it in assets such as bank CDs and treasury bills offering 3-5% interest. [1] Harbouring money keeps it from being utilized for investments and has some effect in impeding the economic expansion.

Due to slow growth of the Canadian economy many are looking at alternative ways to stimulate expansion. In recent years there has been some success in European countries with negative interest rates. In Switzerland there exists 30 year bonds that offer negative interest rates directly contending the Swiss franc with the euro system in place. It is highly difficult to push interest rates into negative areas as vast amounts of cash are hard to maintain. Moving to a cashless economy could allow central banks more flexibility to push the interest rates as negative as preferred to induce an expansionary monetary policy during a recession or depression. Negative interest rates are difficult to achieve and require much more than simply going paperless but would give governing institutions the help they need in times of financial crisis.

Bypassing Hidden Costs

Another reason for why keeping cash is a burden is the existence of hidden costs. There are many costs associated with possessing physical money including the cost of maintaining the currency itself. Printing, minting, and redesigning currency are all costly projects funded by the government through tax payer dollars. The Bureau of Engraving and Printing produces 38 million notes a day with a face value of approximately $541 million USD. Although $541 million is printed 95% of that amount goes to replacing notes already in circulation. Adopting electronic processes saves the environment because it would make use of virtual currency that do not have a physical denominations. The elimination of cash also forces the discontinuation of paper receipts and reports which are frequently mailed. The cost of sending a receipt or replacing a financial document can waste time and resources. The accessibility of physical currency accounts for a minority of transactions and only 14% of exchange is done with paper  in US. [2] Eliminating that 14% can drastically benefit the US economy and allow them to focus on reforming the financial system for the 21st century.

Difficult for Illicit Activities

The elimination of cash would discourage people from illicit activities. It would be difficult for someone to transport a large quantity of money without being detected. Currently, transporting millions of dollars is an easy task. We have seen it in movies where a villain easily carries a briefcase filled with cash to a drop off location. If cash is eliminated then criminals would have difficulty transporting money and completing illicit transactions. If crime money is stored in banks it would leave a clear financial trail which is easily detectable. Eliminating cash also helps with preventing street crime. Thieves would have less initiative to rob people knowing that they would not be carrying cash. A study from Missouri during its mid 1990s transition with welfare benefits suggested that going from a cashable cheque to a debit card allowed the crime rate to drop roughly 10%. [2]

Drawback of Eliminating Cash

With all these positive features of a virtual currency why has it not been implemented?The one benefit of holding cash is anonymity, cash is nameless and offers no history of transactions. It allows people to make purchases that cannot be traced and is an essential freedom to our private lives. Hoarding cash also allows people with massive amounts of wealth to fool tax organizations or even family members. By going digital we are forgoing our right to private transactions. The concern is where the line on personal privacy lies and at what point is it no longer acceptable for a third party to have information on our daily lives. If cash is eliminated this would grant government entities who upkeep their respective currencies unlimited power to manipulate currencies. The existence of cash keeps government power in check and creates a buffer for monetary policy using natural market mechanisms.
Cash is an important part of any economy and serves an essential function in our everyday lives. Having physical currency is important and cannot be ignored when contemplating the future of the global economy. However, it is important to recognize the issues with our monetary system as it is. Money works best in an economy when it is treated as a hot potato, allowing it to circulate instead of it being idle.

References

[1] http://www.rcwfinancial.com/cashless-society
[2] http://time.com/money/4307717/getting-rid-of-cash/

The Aftermath of COP22 – A Reality Check for Fighting Climate Change

Amid the Trump elections and fake news outrage, a summit was held in Marrakech Morocco dedicated to Climate Change. The summit named COP22 was held in November 2016 and presented a significant reality check for the ambitious goals  that were set by the Paris Agreement. With 2018 as the next major checkpoint, the United Nations Framework Convention on Climate Change (UNFCCC) began to: reevaluate those ambitious goals set by the Paris Agreement, and ratify it to add  more countries. With the commencement of the summit, the ratifications made during the Paris Agreement have been passed into law, as the number of national commitments surpassed 55% of global emissions. [1] The newest members who have ratified the Paris climate change agreement include Australia, Botswana, Burkina Faso, Djibouti, Finland, Gambia, Italy, Japan, Malaysia, Pakistan, and the UK.

One major cause for concern during the summit is skepticism regarding whether or not goals set by the Paris Agreement will be met as well as the transparency of the cooperations between nations. Voluntary national emission targets have not had the desired effect as countries like the USA that  contribute over 16% of global emissions for CO2 have yet to commit to cut back their emissions. [3] With only a year left until the next checkpoint, the COP22 summit focused on improving current agreements to make countries more accountable instead of laying down more policies. On the bright side, improvements were made to the agreements of the Climate Vulnerable Forum, which is a coalition of developing countries committing to ultimately reach 100% renewable energy. The proposed strategy was to have rich nations contribute USD 100 billion to developing countries so that they can transition to renewable energies. This will reduce the need for developing countries to consume and invest in cheaper fuel options. One clear problem with this commitment is Climate Finance. The US, Germany and, and UK contributed: USD 50 million to improve carbon accounting in developing countries, USD 23 million for a centre to share clean technology expertise, and Germany single handedly replenished the adaptation fund with USD 80 million. [5] Although these numbers show progress, it is only a drop in the bucket for the goal of USD 100 billion by 2020, set by the Paris Agreement. The COP22 summit did not produce any significant new financial pledges for ratified nations but instead worked on clarifying financial contributions nations need to make, highlighting the need for adaptation funds to the poorest nations who are being affected by climate change the most.

The summit marked the emergence of clear demands from African countries. These demands include more funding to enforce the goals set by the Paris Agreement and mechanisms to move away from dependence on foreign aid. The ambitious African Renewable Energy Initiative (AREI) will be a self-sustaining initiative that plans to achieve 10 gigawatt of additional generation capacity by 2020 and 300 gigawatt by 2030. [1] This initiative will attract investors in public and private realms due to its highly ambitious results and profit margins.

Now that the summit has ended and U.S. presidential elections are finished many questions are being asked as 2018 approaches. Trump has famously proclaimed that upon his ascension to the presidency he would disengage the United States from the Paris Agreement established by Obama administration. Moving forward, if the Trump administration sticks to their claims it would mean the loss of support from the USA who carry the second highest emissions in total kiloton, up to 5,335,000kt in 2014, the USA accounts for approximately 16% of global CO2 emissions and without their support on this agreement it would be almost impossible to achieve the goals set by the Paris Agreement. [4]
Just north of the USA, Canada is holding firm to commitments made in the Paris Agreement as well as spearheading other initiatives. Canadian Minister of the Environment and Climate Change, the Honourable Catherine McKenna, stated during the summit that since COP21 Canada has negotiated an amendment to the Montreal Protocol to phase down hydrofluorocarbons in air-conditioners and refrigerants. [5] Canada has also co-chaired the Climate and Clean Air Coalition, and are implementing new measures to reduce emissions from aviation under the Civil Aviation Organization. Like many developing nations including China who are investing billions into renewable energy, Canadians are also committing more resources to increase innovations in climate resilience and adaptation technologies. The future although still uncertain, is without a doubt moving towards a low carbon way of life. [2]

References

[1] http://www.climatechangenews.com/2016/11/10/7-things-you-missed-while-trump-hogged-the-headlines/
[2] http://www.davidsuzuki.org/issues/climate-change/science/climate-change-basics/climate-change-101-1/?gclid=Cj0KEQiA56_FBRDYpqGa2p_e1MgBEiQAVEZ6-87_35Dye_ytxNfP-dKANh_5pTRa88YNDFzLchAUvvkaAveA8P8HAQ
[3] http://www.ipcc.ch/index.htm
[4] https://www.epa.gov/ghgemissions/global-greenhouse-gas-emissions-data
[5] http://news.gc.ca/web/article-en.do?nid=1155259

An Alternative Outlook on China’s Economy

In this era of rising globalization we are learning more and more about the affairs of other nations and how it impacts us at home. The perspective of news outlets that report these issues shape and mould reader’s opinions on foreign affairs. In the past China has isolated itself from world affairs by imposing strict censorship and restricted its diplomacy in order to support domestic organizations. Chinese technology giants such as Tencent, Alibaba, and Baidu have benefitted greatly from this censorship [1]. In the past Chinese officials chose to isolate their people from world affairs for fear of Western news moulding and shaping their citizens. However, in this world, it might be important to reconsider censorship since now more than ever people should understand the bigger picture.

There are many myths and negative implications that are often reported through the news regarding the Chinese economy and its affects on North America. Many Western politicians paint negative portraits of the Communist Party by highlighting that the Chinese markets are not free as a result of government control under the CPC (Communist Party of China). The CPC who founded the People’s Republic of China as well as acts as the ruling party carries all the political power within the nation and is therefore responsible for all of China’s political movements within the nation and on the global frontier.  Many American news outlets also highly stigmatize China’s involvement in climate change with respect to their inaction or delayed action in decreasing contributions to greenhouse gas emissions. However it should not be forgotten that China is a developing country with a massive population [2]. In regards to energy consumption, the amount of energy used to support one American can support thirteen Chinese citizens.

Risky and Unstable Investments

In recent turn of events the Chinese composite Index especially the Shanghai Stock Exchange Composite Index experienced some dramatic declines which caused investors to reconsider the growth of the Chinese economy. Although growth has indeed slowed it should be noted that the decline in growth is not representative of the economy as a whole. The Chinese stock market is mostly comprised of industries related to construction which amount to one third of its entire GDP. Putting the construction sector aside: consumption, household income, and the service sector continue to have stable growth.

In June 2015 the Shanghai stock market peaked in part due to government support. Since then the construction industry has run into more stringent reforms like taking on environmental causes and sustainable development. Although Shanghai stock market have dropped 40% since their peak, it is roughly where it was one year ago. Since then the market has shown stable growth and – with the recent freedom of government control – it is showing promising signs [3]. The volatility within the stock market should not deter investors into believing all investments will be risky. Shanghai’s stock market continues to show stable growth without government involvement and this should be indicative that investments can be stable.

Manipulating Currency

Political leaders from across the world have been accusing the Chinese government of currency manipulation. In 2016, the Chinese government has finally allowed the renminbi more freedom. This came as quite a surprise to the Western world because the release of control of the renminbi would mean more volatility for the renminbi. American politicians and popular news sources expressed opinions that this act of allowing markets more freedom was planned by the Chinese government as a means to soothe the world’s accusations of currency manipulation. Whether or not they will keep their word and cease intervention is thought to be unlikely [4]. This is a misconception because China like all other nations protect their currency against external factors. Choosing an appropriate time to allow the market more control and choosing a time to intervene is only in China’s interest of self-protection.

Cheap export driving Economic growth

Despite being one of the largest exporters of manufactured goods, the Chinese economy is shifting from one economic model to another. What used to be an economic model based on cheap export goods and low wages is now transitioning towards a service based economy with rising wages.

The US has a bone to pick with China because it has a large trade deficit with China that has risen to more than 350 billion dollars in 2015 [5]. It is overlooked that despite the large amount of export, an even greater amount of imports are present in the form of raw resources. China is not a resource rich nation so it needs to import large quantities of raw materials for the development of infrastructure and factories. These developments account for more than half of China’s growth within the last 10 years. With the introduction of more sophisticated products, China is increasing the value of work added thus raising wages altogether. Along with the increase of wages is the shift from a manufacturing economy to a service based economy.

Overall these three highly talked about issues within Western media are often summed up to one or two sentences portraying a certain image of China. In reality these issues are extremely complex and have multiple viewpoints.

 

References
[1] http://www.economist.com/blogs/economist-explains/2013/04/economist-explains-how-china-censors-internet
[2] https://www.theguardian.com/business/datablog/2010/aug/03/us-china-energy-consumption-data
[3] http://www.tradingeconomics.com/china/stock-market
[4] https://www.wsj.com/articles/the-myths-of-chinas-currency-manipulation-1452296887
[5] https://www.census.gov/foreign-trade/balance/c5700.html