How Presidential Candidates are Dragging Down Healthcare Stocks

Anything related to healthcare is being absolutely crushed in the stock market right now. Biotech, healthcare services, and pharmaceutical companies are all down on the year; many industry leaders have even seen double digit losses.

So what’s the reason?

Well, there are many. But perhaps the most significant cause for such dismal stock performance is the fact that virtually every presidential candidate, Republican and Democrat alike, has vowed to take on the healthcare industry. Whether this comes in the form or repealing Obamacare, reigning in drug companies, or investigating pharmaceutical companies’ ties to Washington, negative rhetoric from powerful politicians has caused Americans to completely lose confidence in this sector of the stock market. And lost confidence, as we all know, is never a good thing.

If you’ve watched any of the presidential debates, you’ve seen this in action. Every Republican candidate has called for the repeal of Obamacare. Some have even called it unconstitutional. This is to be expected, and perhaps nobody has been surprised by this. But even the Democratic candidates have acknowledged Obamacare’s massive struggles, saying that although they support its existence, major changes and improvements need to be made. In the last Democratic debate, for example, Sanders and Clinton sparred on this topic for what felt like forever. Wherever you stand on this issue is irrelevant for this discussion. The point is that no matter who gets elected, Obamacare is in for some major changes.

Candidates from both parties have also called on the federal government to negotiate with drug companies for lower prices. This became a popular, widespread opinion after the notorious Martin Shkreli story. Perhaps most vocal in this fight has been Clinton, Sanders, and Trump – the three most popular, leading candidates in this race. Although it’s highly doubtful that any of these individuals would truly be able to reign in the large pharmaceutical companies, such negative rhetoric delegitimizes the entire sector.

The fundamental point is this: healthcare, and anything related to healthcare, is about to get real messy. It doesn’t matter who gets elected, or the current direction of the industry, or even the strength of relevant companies – nobody knows where this industry is headed. And when nobody knows what’s going on, people lose confidence, make emotional decisions, and stocks plummet.

It is in this way, through the use of widespread political rhetoric, that powerful politicians can influence the stock market. Remember: politics and financial markets are intimately connected, and this is a great example of that.

Mason Vierra | mason.a.vierra@vanderbilt.edu

What is Quantitative Easing?

This past weekend I read a few articles about the European Central Bank’s discussion of whether or not they were going to ramp up their quantitative easing program. It occurred to me that most people probably don’t know what quantitative easing is, despite the fact that since 2008 it has been one of the most important and controversial tools used by the Fed. So what exactly is it?

First, some background.

Up until the 21st century, countries’ central banks dealt with economic recession by lowering interest rates in an effort to spur economic growth. The concept is simple enough: like a domino effect, low interest rates lead to increased borrowing, spending, and money circulation. When these things happen, unemployment drops, inflation increases, and the economy grows. (This is a very simplified version of what actually occurs, but for the purpose of this post it’s enough.)

But what happens when lowering interest rates to near-zero amounts doesn’t spark economic recovery?

In the event that economic growth is desired but interest rates cannot be lowered any further, central banks turn to quantitative easing.

Quantitative easing essentially increases the money supply of countries’ central banks, thus encouraging other banks to make more loans.

Let’s use a hypothetical example to show how it works:

It’s a recession, and Bank X has $100 million in government bonds. However, consumers don’t seem to want these government bonds – remember, it’s a recession. Furthermore, Bank X has stopped providing loans to the American people. The rationale is simple: in a recession there is a high probability that individuals will default on their loans. Instead, Bank X decides to buy up safe, government-backed Treasuries.

The Federal Reserve hates to see these two things happen. It knows the the $100 million in government bonds needs to be used, but it doesn’t have the money to buy them up itself. So what does it do? Well, it does something that only central banks can do: it electronically creates money.

It creates this money not by printing physical dollar bills, but by reshuffling its balance sheet to increases both its assets and its reserves. This is a very complicated process, so for clarification, read: http://www.cnbc.com/id/100760150

The Federal Reserve now has $100 million dollars that it didn’t have before. So it decides to do two things:

First, it buys all of Bank X’s government bonds.

Second, it buys up the existing Treasuries in the market.

So how does this spur the economy?

In buying up the Treasuries in the market, the Federal Reserve has effectively decreases the Treasury yield. To Bank X, Treasuries are no longer quite so attractive. At the same time, the Fed’s purchase of Bank X’s government bonds leaves Bank X with $100 million in cash. With Treasuries off the table and excess cash reserves in pocket, Bank X is suddenly very willing and able to increase its supply of loans. Individuals take these loans, increase their spending, and the economy grows. Interest rates have not been changed, but the supply of loans has increased. As a result, people borrow and spend, and the economy grows.

In short: quantitative easing is used by central banks to spur the economy when near-zero interest rates are no longer sufficient. It involves increasing the money supply in order to encourage banks to make more loans.

Quantitative easing is tremendously complicated, and the merits of such a procedure are entirely unclear. Some top economists hail it as revolutionary and incredible, while others find it to be entirely insignificant. I am certainly in no position to pass judgment or make any claims, so I will not do so. What you should know, however, is that since 2001, this policy has been used by Japan, the United States, the UK, and Europe. It is becoming an increasingly popular tool to use during economic recession, and I wonder if it represents the new normal.

Mason Vierra | mason.a.vierra@vanderbilt.edu

We Can Learn From Libya

The Syrian Civil War is messy, to say the least. Western-democracy-backed rebels are fighting against Russian-backed President Bashar al-Assad, a ruthless dictator who has killed thousands of his own people. The country has been ravaged, ISIS is spreading throughout the region, and thousands of Syrians are fleeing the country as refugees. The United States and its Western allies have called for the removal of Assad from office, but large scale military intervention has largely been avoided. There is no easy solution to such a widespread and politically difficult problem. However, I think it’s important to reflect on our recent history, and recognize that our military involvement in foreign affairs, particularly in the increasingly unstable Middle East, has often done more harm than good.

Our 2011 military intervention in Libya is the most recent example of this fact.

In the few years leading up to 2011, Libya was a country on edge. Ruled by Muammar Gaddafi, a heavy-handed dictator who had taken power in 1969, there was widespread dissatisfaction over political corruption, economic inequality, and human right’s abuses. Waves of protests and demonstrations were cropping up all across the country, and Gaddafi was losing legitimacy among his political allies.

Towards the start of 2011 these tensions escalated and came to a head. Protests turned violent, various government officials stepped down, and Gaddafi begin murdering his own people. Rebel groups developed and civil war broke out.

In response, an international coalition of Western democracies created a no-fly zone over Libya, began bombing Gaddafi’s military strongholds, and started to covertly supply financial and military aid to rebel forces. The supposed goal was to save the non-violent Libyan civilians who so desperately wanted Democracy. With international support, rebel forces were able to gain steam, recruit members from the military and police force, and eventually capture and kill Gaddafi.

Though Gaddafi’s death was initially hailed as a victory by U.S. officials, both Democrats and Republicans now recognize the intervention as a massive failure. Indeed, though Libya was by no means a haven under Gaddafi, the country had some sort of stability and structure. Gaddafi actively fought terrorism, agreed to disband his nuclear and chemical weapons programs, and had provided his country with economic growth for 40 years. Besides, he was likely on his way out of office.  At 69 years old and not terrible healthy, he would have soon been replaced by his son, Saif, who had planned to Westernize many aspects of Libyan law and politics. Pre-2011 Libya was highly imperfect, but it was a functioning, legitimate country with a structured political system.

Today, however, Libya is a failed state of terrorism, anarchy, and political instability. The UK Guardian sums it up quite nicely:

“Four years since the 17 February 2011 Benghazi uprising that led to the overthrow of Muammar Gaddafi, Libya is wracked by violence, factionalism and political polarization – and by the growing menace of jihadi extremism. Two rival governments, parliaments, prime ministers and military forces claim legitimacy. One side is the Islamist-dominated Libya Dawn coalition in Tripoli, the capital. The other camp, Dignity, which is recognized internationally, is based in Tobruk and Bayda. Hundreds of rival militias exist across the country. In recent months the homegrown fighters of Ansar al-Sharia have been challenged by Islamic State (Isis), who released a video showing the beheading of 21 Egyptian Christians. Oil production, the source of most state revenues, has declined massively. Cash is running out and basic services are facing collapse as the financial situation deteriorates. Hopes for change generated by the Arab spring and the demise of Gaddafi’s dictatorship have faded into despair and dysfunction.”

In short: Libya is in bad shape.

An overzealous United States failed Libya. In fixing one problem we created a far worse one, one that we have seen before and we will probably see again. We must understand that disposing of a country’s ruler leaves a void to be filled. Unfortunately, that void is rarely filled by Democracy-loving, peaceful civilian’s intent on Westernizing their economic and political structures. Time and time again, foreign military intervention from well-intentioned Western democracies has led to anarchy and political disarray. I recognize the impracticality of the United States taking an isolationist position in the world. However, we must carefully calculate those battles that we fight so that we do not hurt the very people that we are trying to help.

When evaluating the current situation in Syria, then, let us look to our history in an attempt to understand the implications of overthrowing Assad. There will always be bad guys in the world, and perhaps it is not our duty to hunt them all.

Mason Vierra | mason.a.vierra@vanderbilt.edu

Can Increasing Taxes on the Rich Solve Our Problems?

It seems to me that among American citizens, there is a general consensus that the top 1% do not pay their fair share of taxes. In an increasingly polarized political race, this might be one of the few issues that actually has bipartisan support. Republican and Democratic candidates alike have endorsed the idea that raising taxes on the “millionaires and billionaires” is fair, justifiable, and economically sensible. Hell – Donald Trump and Bernie Sanders agree on this idea.

But how much money would a tax increase on millionaires and billionaires really bring in? The numbers might surprise you.

Let’s take a hypothetical circumstance: anyone in the United States earning more than $1 million dollars a year is to be taxed at 100%. Every cent of their income is taken. So what happens?

According to Politifact and Forbes, taxing millionaires and billionaires at 100% would bring in anywhere from $600 billion to $800 billion. I recognize that this is a huge discrepancy, but evaluating “rich peoples’” earnings is quite difficult due to complicated tax returns. Now this seems like a tremendous amount of money, and it is. But not when compared to our government’s federal budget.

From a purely numberical standpoint, taxing millionaires and billionaires at 100% would:

-Fund the government for less than four months.

-Barely make a dent in our $16 trillion+ debt.

-Keep Medicare running for less than 5 years.

-Come close (but not all the way) to paying off our $1trillion+ student loan debt.

There is certainly an argument to be made for a reformed tax code that increases taxes on wealthy Americans – and perhaps one of these days I will touch on that.

The point of this post, however, is not to debate tax reform, but to instead use a hypothetical situation to demonstrate how much money the rich truly have. I believe that there is a general consensus that the “millionaires and billionaires” can solve our country’s problems. And perhaps they can solve some of them – their political power, access to resources, and industry knowledge absolutely gives them far more ability to affect change than the typical American. But even if we were to take all of their money, we would find ourselves only slightly better off.

Want to increase taxes on the rich? Sure thing. But it won’t solve our country’s problems.

Mason Vierra | mason.a.vierra@vanderbilt.edu

Why Has 2016 Been so Bad for US Stocks?

The year of 2016 has been absolutely dreadful for US stocks – the first two weeks has been the worst start to a single year in US history. But if you recall, US stocks rallied towards the end of 2015…so what has happened?

The answer comes down to three fundamental things: a slowing and increasingly volatile Chinese economy, dwindling US manufacturing, and incredibly low oil prices.

China has recently entered a bear market, in which the Shanghai Composite Index has declined by 20%. Prices are falling, the yuan is losing strength, and consumer spending seems to be stagnant. Chinese policy makers have done a poor job of combatting such trends, and investor confidence has taken a significant hit. As the world’s second largest economy, China is tied to not only the US, but the global economy as a whole. If the Chinese aren’t buying, the US isn’t importing. If the Chinese economy slows, US investment is hurt. Indeed, China’s fall from grace has dragged the US, as well as the global economy, with it.

US manufacturing is also quite weak. With the US dollar incredibly strong, the manufacturing sector has been hit hard. (A strong US strong dollar makes US goods comparatively more expensive than foreign-made goods, and global demand thus decreases.) Furthermore, stringent domestic regulations and high corporate taxes have resulted in many companies, particularly tech companies, moving large portions of their operations overseas. Revenues in the yuan or euro are not as valuable as revenues in the dollar, and many domestic companies have seen declining profits as a result. This combination of decreased foreign demand and increased reliance on foreign revenues has exploited US manufacturing stocks in the past two weeks.

Lastly is the issue of oil. Though low oil prices leave Americans with more disposable income, the increase in consumer spending is greatly offset by the decrease in energy-sector investment and growth. The US, now one of the world’s largest oil producers, contains dozens of large oil companies that make up a significant portion of the US economy. Low oil prices have caused these corporations to lay off workers, cut spending and investment, and contract business growth. The result is a lagging industry that has sloshed over into the US economy.

Though this is purely speculative, there is perhaps one more driver of the poor US stock performance: the surge of Donald Trump and Bernie Sanders. With US primary elections inching closer, investors might be getting worried that Donald Trump and Bernie Sanders are, in fact, the real deal. Trump still holds a commanding lead despite his inflammatory rhetoric, and Sanders has seen his poll numbers rise as his campaign gets a second wind. It is my belief that the election of either of these candidates would alone destroy any sense of confidence in the US economy. Maybe this prospect is giving investors cold feet?

Mason Vierra | mason.a.vierra@vanderbilt.edu

Why is College So Expensive?

Today, the average annual cost of college tuition is upwards of $32,000 for private universities and $23,000 for public universities. For “elite” universities the number is closer to $50,000. We have $1.2 trillion dollars of student debt and $1 trillion in federal student loans. Millennials suddenly cannot very easily pursue that thing which is so important to our country’s prosperity: higher education.

How did this happen?

Once upon a time, higher education was affordable. During the 1960’s and 70’s, annual tuition was about $10,000 for private universities, $2,000 for public universities, and $1,000 for in-state students. Students paid their way through college with the money they made from their summer jobs. Washing dishes, bartending, baby sitting – these were viable options for paying for one’s tuition. In certain circumstances, truly low-income students could obtain small loans from the National Defense Student Loan Program. However, this program was so narrowly focused and small in scope that it did not significantly affect the market. Students worked and learned, and our country had a golden age of higher education.

But in the late 70’s and early 80’s federal aid subsidies were expanded tremendously. The most significant of these was the 1978 Middle Income Student Assistance Act, which provided financial assistance to not just low-income families, but middle-income families as well. This act set the ball rolling on a dangerous path of bloated federal assistance programs aimed at making college more affordable. Indeed, after 1978, financial aid programs were not just relegated to low-income individuals applying to cheap schools, but to virtually any middle-class individual applying for any school, regardless of the tuition. Universities responded to this large availability of federal money by increasing tuition. Why? Because universities knew that an increase in tuition would be covered by overly-generous federal aid programs. Pre-1978, if a university were to increase its tuition to say, $30,000 a year, almost nobody would apply. But afterwards, universities could charge a high price, the federal government would subsidize prospective students for that higher price, and there would be no drop in enrollment. Former Secretary of Education, William Bennett, first articulated this development in what became known as the Bennett Hypothesis: “Increases in financial aid . . . have enabled colleges and universities blithely to raise their tuitions, confident that federal loan subsidies would help cushion the increase.”

Though there has been substantial debate over the truth behind the Bennett Hypothesis, new evidence seems to confirm its validity. In 2015, The Federal Bank of New York found that for every additional dollar of federal financial aid spent, universities raise their price by 55-65 cents. Further studies have demonstrated that increasing university-specific scholarships or discounts simply results in tuition increases to cover and “hide” the lost dollars.  The intentions of these federal assistance programs are certainly noble, but the results have been disastrous.

A number of smaller factors have also played a part, however.

The technological boom of the past 20 years has greatly increased the demand, and thus the wages, for skilled workers. These skilled workers solve problems with their brains rather than hands, a trait that can only be attained by a college degree. (You certainly don’t need a college education to perform these “high-skilled” tasks, but a degree shows proof of concept.) In fact, The Bureau of Labor Statistics reported that in 2014, the median salary for someone with a bachelor’s degree was $70,000, while workers with a high-school diploma only earned $35,000 a year. In case you skimmed that, that’s a 100% difference. Numbers like these, as well as the ease with which once can attain federal assistance, only increases the demand for higher education. Like any good, increased demand means increased prices, which in this case, is tuition.

But this increased tuition has done little to actually better the quality of higher education. Indeed, though wages (tuition) and prices typically rise with productivity, higher education itself has changed very little in the past few decades. Yes, classrooms have some cool new gadgets, but students still primarily learn the same material, through the same methods, with the same quality of teachers, as they did during the 70’s. And let me make this clear – there’s nothing wrong with that. The system works. College students learn a tremendous amount from quality teachers in creative environments. That’s why there are no news headlines that read, “College Graduates Are Less Qualified than their Parents.” No, our problem isn’t education. It’s money.

But with rising tuitions, where does the money go?

Most of the new money being brought in goes to two places: hiring more administrative staff and improving the décor of the campus. Administrative costs have increased by 60% in the past 20 years, and with increased enrollment, this is perhaps justifiable. Updating facilities and constructing new buildings is also defensible, as it can be argued that these things attract better students and more qualified teachers. Plus, with little ability to actually improve the classroom experience, where else would the money go? It could perhaps go to professors, but it hasn’t; wages have barely increased since the 1970’s, and professors don’t seem to mind. (Ever heard of a professor protesting “stagnant wages?”) After all, they work the same hours and teach the same number of students as they did 40 years ago. No, the universities are not the culprits in this giant mess. Like any business, they adjust their prices based on the demands of the market. Unfortunately, bloated federal aid programs and increased demand for higher education have distorted the market, allowing universities to charge premium prices without a loss in customers. This problem is important, and it needs to be fixed.

In short, a combination of failed government programs and market-driven increases in demand is responsible for the absurd prices of higher education. As a current college student, my education is similar to that of my parents; I just pay a hell of a lot more for it.

Mason Vierra | mason.a.vierra@vanderbilt.edu

Why are Oil Prices so Low?

Anyone who owns a car or has invested in the stock market has probably heard about falling oil prices. For the past two years, and especially the past six months, global oil prices have plummeted as global production has increased and demand has stagnated. These low prices have affected the global economy, many energy corporations, and even individual consumers.

Today, crude oil dropped to $30 a barrel, reaching a 12-year low. To put this in perspective, from 2010-2014 prices were upwards of $100 a barrel. How did this happen, and what are the consequences?

The answer is actually simpler than one might imagine; it’s really just a matter of supply and demand.

About six or seven years ago, US domestic oil production begin to increase at alarming rates. This was the US’ “shale oil boom,” in which a number of domestic companies used new technologies, such as fracking and horizontal drilling, to drill into untouched oil reserves. They pumped away with a new found enthusiasm, thereby increasing global supply.

OPEC, The Organization of the Petroleum Exporting Companies made up of 13 oil-rich countries, saw this US oil boom as a potential encroachment of its market share. Controlling 80% of the world’s crude oil reserves and responsible for nearly 45% of the world’s crude oil production, OPEC can manipulate its output to influence global oil prices. In an attempt to drive US companies out of the market, OPEC decided to increase its supply and thus decrease global oil prices. The rationale was that it could survive thin margins and low prices longer than US oil companies could, and was willing to take the “short-term” hit in order to decrease competition. (For comparison, this is what Walmart often does when moving into new towns.)

But this strategy hasn’t gone as planned. Low prices have only forced the weak, underperforming companies out of the market, so that the competition between industry leaders has intensified. US shale production techniques have quickly adapted and improved, allowing US oil companies to weather the storm and wait for OPEC to falter. It’s unclear when this stand-off will end, but some analysts say that oil prices will drop as low as $20 a barrel before OPEC decides to decrease its production.

So what does this mean for consumers, companies, and countries?

Consumers obviously benefit. Spending less money at the pump, however, studies have shown that most Americans are now spending their “gas money” on cigarettes, liquor, and comfort foods. So in some ways, maybe they aren’t benefitting.

Oil companies have clearly been hurt. A number of companies have cut dividends, sold assets, and laid off workers as they continue to see operating losses.

The 13 countries that make up OPEC have also been hurt, and have run into a difference of opinions amongst each other. Iran, Venezuela, Libya, and others have done especially poorly, requiring prices upwards of $100 dollars to balance their budgets. They have called for the cartel to curb production. However, other members, notably Saudi Arabia and Russia, have refused to do so, relying on their excess oil reserves and capital to keep them afloat.

For those who believe that oil prices will rebound in 2016 – don’t get your hopes up. Perhaps OPEC will have a change of heart, shale drilling technologies will plateau, or tensions in the Middle East will send prices skyrocketing. However, I wouldn’t count on it. How low can oil go?

Mason Vierra | mason.a.vierra@vanderbilt.edu

Three Non-traditional Ways to Evaluate the Job Market

This past week, the Labor Department stated that the unemployment rate was 5% for the month of December. The unemployment rate, defined as the percentage of the total labor force that is unemployed but actively seeking employment and willing to work, is the most commonly used indicator of job market strength. An economy with “full employment” is considered to have an unemployment rate of somewhere between 2-7% of the labor force. (The reason it’s not 0% is because there will always be “frictional employment – unemployment resulting from temporary transitions made by workers and employers. For example, a college graduate may have a job offer, but is holding out for something better.) By this indicator, the United States job market is close, if not already at, full-employment.

But some economists are skeptical, and believe that the unemployment rate may not accurately reflect the true strength of the job market. Indeed, most economists find the unemployment rate to be rather broad and imprecise, and instead use three other indicators: the U-6 Unemployment Rate, the Job Seekers per Job Openings Ratio, and the Employment-Population Ratio. (There are countless other measures that economics and analysts use, but I’ll only go over these three for now.) In theory, these three indicators give a more comprehensive evaluation of a country’s job market.

The U-6 Unemployment Rate takes the traditional unemployment rate and accounts for “marginally attached workers,” individuals who would like a job but have become too frustrated to continue looking, and “part-time workers” who are seeking full-time work but simply can’t find it. These disheartened and part-time workers may be a small percentage of the labor force, but they matter nonetheless. The U-6 rate for the month of December hovered around 10%, and has seen a relatively stable decline since 2008.

The Job Seekers per Job Openings Ratio measures the number of job openings against the number of unemployed people. Measured in the Job Openings and Labor Turnover Survey administered each month by the Bureau of Labor Statistics, its direction and magnitude is useful in measuring economic growth. During economic recession, businesses close their doors, lay off workers, and stop hiring new people. Thus, the ratio declines. During economic growth, the ratio increases as more businesses begin hiring. In a strong labor market, this ratio would be very close to 1. Currently sitting around 0.7, it has increased steadily since 2008 and has recently passed pre-recession levels.

 Lastly, the employment-population ratio is defined as the working population divided by the total population that is able to work. The value of this ratio has fluctuated in the past few years, and has dropped by just a slight margin since the Recession. A low ratio has worrisome implications, because it means that a smaller number of workers is supporting a growing population.

The use of these three indicators results in three very different conclusions for the overall strength of the job market. It’s difficult to rank the merits of each, and so it is valuable to know them all. Next time the Labor Department release unemployment numbers, keep this in mind.

Mason Vierra | mason.a.vierra@vanderbilt.edu

The Paris Treaty Will do Little to Curb Climate Change

Almost 1 month ago, nearly 200 countries around the world pledged support to the Paris Agreement, which seeks to curb climate change by reducing global CO2 emissions. Specifically, the Agreement’s curbing of CO2 emissions aims to “hold the increase in global average temperature to well below 2 degrees Celsius above pre-industrial levels.”

Most climate scientists agree that in order to reach this goal, CO2 emissions would need to be reduced by over 5,000GT (Gigatons.) But estimates show that even if every country involved were to cut carbon emissions by the amount stipulated in the Agreement (remember, there are 195 of them,) CO2 emissions will be cut by just over 50GT by the year 2030. As you can see, even in a perfect world in which every country does its part, we will only be 1% closer to reaching our 2 degrees’ Celsius reduction goal.

The Paris Agreement is also enormously expensive. The UN Climate Panel estimates that cutting CO2 emissions by the amount stipulated will cost around 1 trillion dollars each year, making it the most expensive Treaty in the history of the world. Indeed, CO2 reduction, especially in the forms of Carbon taxes, are both expensive and negligibly beneficial. From Australia to Norway to British Columbia, we have seen time and time again that simply cutting CO2 is neither the most efficient nor the most effective way of combatting climate change.

So what should we do instead?

Perhaps the only plausible option is to invest heavily in green energy in order to make it cheaper than hydrocarbons and fossil fuels. Until alternative energy can truly compete with greenhouse-gas-emitting sources, it will always be in consumer’s, company’s, and government’s best interests to continue using fossil fuels. Indeed, so long as wind, solar, and other forms of energy are expensive and inefficient, no amount of Carbon cutting will significantly curb the effects of climate change.

Bill Gates has taken the lead on these types of green energy projects. He has developed two green energy initiatives, Mission Innovation and Breakthrough Energy Coalition, which are funded by private investors and a number of governments, including the US, Canada, China, Australia, and more. The purpose of these projects is to invest in R&D of renewable technologies in the hopes that a technological breakthrough will occur. Let’s just hope that this happens.

Lastly, it should be noted that despite these criticisms, it is encouraging that so many countries around the globe now acknowledge the existence of climate change, and feel the need to do something about it.

Mason Vierra | mason.a.vierra@vanderbilt.edu

 

 

Why is China Devaluing its Currency?

This past week, China decided to set its benchmark for the yuan at a five-year low. What’s the rationale behind this move, and what are the consequences? First, some background.

The Chinese Yuan is closely tied to the US dollar. This means that China essentially uses the US dollar as the standard for which they manage the yuan’s value. For the past few years, the US has economy has improved and the dollar has appreciated in value (in anticipation of increased interest rates.) China’s economy, on the other hand, has seen a dramatic slowdown in growth. Investment and retail sales are weak, exports have plummeted, and overall output growth is looking grim. A strengthening US dollar and a weakening yuan has made fixing the yuan to the dollar look increasingly nonsensical. Under mounting international pressure to address these issues, China decided to act.

The benefit of a devalued yuan is that it makes Chinese goods comparatively cheaper. This leads to increasing exports and overseas sales, which should hypothetically spur China’s lagging economy. Of course, this runs into two main problems. First off, increased demand for exports will increase prices, thus marginalizing the effect of the devaluation in the first place. Second, in order to compete with the low prices of Chinese exports, other countries might be forced to devalue their currency, thus creating a “currency war,” also known as “competitive devaluation.” In this circumstance, nobody wins.

In short, China’s devaluation of its currency should lead to increased exports and a boosted economy. The consequences of these actions will likely play out in the coming days and weeks.

Mason Vierra | mason.a.vierra@vanderbilt.edu