Everything you need to know about Interest Rates.

Executive summary:

This short article has been written to explain the idea of interest rates in a nutshell as well as clarify many common misinterpretations surrounding the base rate and the primary role of the Bank of England. Questions such as why the central bank use a base rate, how they actual change the rate, what the changes to this rate actually mean and how this can affect mortgage rates will be explored and answered so that next time you see a news headline or billboard discussing interest rates, you can understand it like an ‘undercover economist’. A few comparisons will also be drawn between the U.K. and other leading economies such as the USA, which is currently pursuing contractionary monetary policy by increasing the base rate to curb rising inflation and prevent the economy from ‘overheating’. On the flipside, Japan, which has suffered from persistent deflation over the last 20 years, has been experimenting with negative interest rates to try and ‘kickstart’ the economy and reverse the negative impacts of deflation.

The research referred to in this article is from well-established and trusted sources including the Financial Times, The Bank of England, The Guardian and the BBC. Figures used are up to date at the time of writing (August 2018). If you have any questions about the content discussed in this article please contact me at rajveersira@gmail.com.


Interest Rates:

An interest rate refers to the cost of borrowing money from a financial intermediary or the rate of return on savings. It is essentially where those who have extra cash can lend this to others who require this cash now in exchange for a financial reward. Banks facilitate this process, as people with excess cash do not directly lend to others, instead they deposit their money into an account where they receive a financial reward for holding it there. Banks use these deposits as loanable funds and the amount they charge to borrow is more than the amount they pay depositors allowing them to make a profit.


The Central Bank and The Government:

A central bank also known as a ‘reserve bank’ or ‘monetary authority’ is a financial institution, which enables a country’s economy to function. In the UK the central bank is the Bank of England (BoE) and in the US it is the Federal Reserve.

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The role of a central bank varies from country to country but in the UK the BoE is responsible for issuing banknotes, keeping an eye on the financial system to prevent systemic risk and most importantly setting interest rates at the right level. They hold other currencies to manipulate rates as well as gold reserves belonging to the UK. During the financial crisis they acted as the ‘lender of last resort’ to bail out banks such as Northern Rock and protect the economy from collapsing. Consequently their role is different to a conventional high street bank that aims to maximise profits.

Although the BoE is wholly owned by the UK government, the two parties are independent from each other. This means that they can maintain monetary and fiscal stability without a political mouthpiece. The current governor of the BoE is Mark Carney who heads up a committee of eight other members.

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Inflation and Interest Rates are inextricably linked:

The primary objective of the BoE is to meet the target of 2% (+/-1%) set by the government-often referred to as target 2.0. A committee known as the Monetary Policy Committee (MPC) meets eight times a year to agree on the rate at which the base rate is set to control inflation and provide stability within the economy. Of course political factors do enter the remit of such decisions, for example interest rates were cut by 0.25% following the 2016 referendum vote to prevent the economy entering a recession. Changes to the base rate filter through the transmission mechanism meaning that their effects can take up to 18-24 months. As a result the MPC tries to forward plan to overcome this; however, in many cases it speculation related.


Bank Rate, Base Rate, Mortgage Rate, Savings Rate……….?

Economists often like to use niche jargon to make something, which is actually quite simple, seem more complex. To clarify things, the bank rate is the rate at which the central bank in the country lends money to commercial banks and it is the rate of interest the BoE pays on reserves held by commercial banks at the Bank of England. For this reason, banks normally pass any changes in Bank Rate onto their customers. When the Bank Rate is raised, banks usually increase the interest customers have to pay on borrowing and the interest they earn on savings, and vice versa. Higher interest rates mean people will spend less in order to service their debts and benefit from good savings rates. This puts downward pressure on inflation. When interest rates are lower, the opposite is true. ‘Bank Rate’ is the single most important interest rate in the UK. It is set by the MPC, normally eight times a year and is often called the ‘Bank of England Base Rate’ or even just ‘the interest rate’.


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Why are loans not the same as the bank rate?

The number of different interest rates available when you borrow or save can be confusing.

That is because the interest rates that commercial banks set depend on more than just Bank Rate. For loans, these other factors include the risk that the loan will not be paid back. The greater the risk, the higher the rate the bank will charge.


What other tools do they have?

 There is no upper limit to the level of Bank Rate, but there is a level below which it cannot be reduced – this is known as the ‘effective lower bound’ or ‘zero lower bound’. The MPC currently judges this bound to be close to, but a little above, zero. This ‘zero-lower bound’ was experienced during the financial crisis whereby reducing interest rates further did not yield an increase in inflationary pressure. To help overcome this, they introduced unconventional monetary policy measures, namely Quantitative Easing (QE) which essentially involves creating money electronically (“Printing Money”), with the intention of stimulating the economy.


How do changes in this rate affect the economy and consumers?

The most recent change at the time of writing (Aug 2018) to the base rate is the increase from 0.5% to 0.75% – the second time that the base rate has been raised since the global financial crisis a decade ago. Four key Economic reasons why the MPC unanimously voted to raise the base rate include:

  1. Expectations of a strengthening economy- After the Beast from the East depressed consumer spending in the first part of the year, the Bank of England is now convinced that the British economy is regaining strength.
  2. Solid employment levels – the UK is estimated to be at the natural rate of unemployment of around 4.3% meaning there is a small positive output gap. If slack in the economy is dissipating, inflation may overshoot without a rate rise.
  3. More consumer spending – linked to rising confidence and real wage increases-Inflation 2.4% in June 2018.
  4. Argument that the Bank should raise rates now while the ‘going is good’, to give itself wriggle room when a recession hits in future.


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Generally, a rise in the Bank rate is good for the UK’s 45 million savers and bad for borrowers – but the reality is a bit more nuanced. Here are some of the main impacts of the most recent change according to the BBC:

  • Mortgages will become more expensive unless you have a fixed rate agreement. Across the UK, 9.1 million households have a mortgage. Of these, more than 3.5 million are on a standard variable rate or a tracker rate. These are the people who would be most affected, as their monthly payments would increase. The relatively small rise will not be particularly painful for the vast majority of householders, although debt charities say that some squeezed families will find this extra burden a real challenge.
  • The interest rate on fixed rate savings accounts, linked savings accounts, and cash ISAs should increase along with the new base rate – but it isn’t guaranteed, and the rate might not increase by the full 0.25%. (Savings rates didn’t increase by much the last time the base rate increased by 0.25%).
  • The APR on some credit cards is linked to the Bank of England base rate meaning a rise could follow.
  • Most personal loans are on a fixed interest rate, which means they’re unaffected by a base rate increase.
  • Any rate rise might also good for retirees buying an annuity – a financial product that provides an income for life.


 Clearly there are winners and losers with this outcome and as is the case in economics, there is no “one size fits all policy”; however, one can agree that this does seem like a logical decision which should help keep the economy on track. That said, with Brexit currently heading toward a ‘no deal’ outcome, the situation might deteriorate resulting in new measures having to be taken by the MPC. Although the UK is at a record low level of unemployment putting upward pressure on the price level, there are a significant proportion of underemployed workers primarily due to the expansion of the ‘Gig Economy’ and prevalence of zero hour contracts. This means that the actual level is masked, perhaps exacerbating the impact of a change to the base level, worsening final outcomes.


Further Reading:

If you enjoyed reading this article and are looking to expand your knowledge of economics by reading similar articles, check out: https://rsira-economics.com and make sure to subscribe if you haven’t already, where a wide variety of topical economic issues ranging from Brexit, a world without oil and common economic themes such as the invisible hand to more esoteric concepts such as Akerlof’s lemon theory, are discussed. As a starting point, you may wish to read the post on the causes of the 2007-8 financial crisis and some of the precautions banks are now required to take in light of this. Arguably one of the greatest financial meltdowns in recent times, it took many economists by surprise, yet by understanding what went wrong it can help us to analyse future situations and prevent the same happening again. Alternatively you may wish to read the post on quantitative easing to get a more in depth and technical understanding of how this works.

The Petrol Industry: Past, Present, Future

Background on oil

 Oil prices are volatile primarily due to the fact that they are determined by the market forces of supply and demand. These forces can be influence by a range of factors; for example conflict in Middle Eastern countries could result in political insatiability that may disrupt supply chains. Likewise economic sanctions may be placed on certain countries, which limit supply and put upward pressure on prices. On the flipside, oil prices may fall when governments are pressured to consider ‘cleaner and greener’ options or when new oil wells are discovered. Consequently when we fill up at the pump, the price per litre is rarely exactly the same as it was last time. Companies e.g. petrol station owners and even consumers must factor in this volatility to ensure that profit and utility are maximized.  Despite these short-term challenges, there are greater and perhaps more important issues to consider such as the options left for conventional refueling stations as the market changes to adapt to alternative energy in light of the 2040 UK ban on the combustion engine.

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The Petrol Industry:

The demand for petrol can be considered relatively inelastic in demand since alternative technology e.g. electric cars and the charging infrastructure that this requires is not up to scratch yet and such projects/investments still remain expensive.

Therefore in the short term, petrol stations are somewhat protected by the fact that there are few suitable substitutes. 99% of trucks on the road use diesel engines and there are estimated to be only 200,000 electric cars on the road by the end of this year. However, this does not mean that petrol stations are ‘protected’ or shielded in the long run. In fact in 2040, when the UK introduces a ban on diesel and petrol engines, fuel stations will need to rethink their strategy to prevent becoming obsolete. Many consumers are likely to make the switch to such technology before the due date as the government rolls out tax breaks and offers trade in values in exchange for their combustion engine.  Although this ban does not include hybrid vehicles the demand for conventional fuels will be extremely low and such stations will need to make an investment to cater for the new emerging ‘green’ market.

Moreover many brands e.g. Volvo are looking to move toward hybrid plug in vehicles by 2020 with highly efficient engines meaning fewer fill ups and thus lower revenues.


What can petrol stations do?

When even the boss of Shell says his next purchase will be an electric car, one could be forgiven for thinking the game is up for petrol stations.

The main stations in the UK include Shell, BP, and Esso together with supermarket providers and independent stations. In terms of ‘future proofing themselves’ shell seems to be ahead of the game. There are a variety of fronts that they have taken these being: Hydrogen, Electric and convenience services. Below are some examples of the ventures that have been undertaken/planned:

  • Shell is part of a joint venture with Daimler and others to commercialise hydrogen gas for powering hydrogen fuel cell vehicles, which are electric cars that have a range nearer that of conventional cars than battery-powered cars. The Berlin-based joint venture has eight sites and plans to have hydrogen-fuelling pumps at 400 locations across Germany by 2023.
  • There are areas where it’s clear that there is a growing demand for battery electric cars, particularly in California and parts of Holland, so they are working on developing supercharging technology.
  • Shell is running trials in China to generate all the energy needs of a site from solar panel canopies.
  • In today’s digitally connected on-demand economy, retailers must work harder than ever to attract customers. Almost every UK Shell station now has a Costa coffee concession and around 30 have a Waitrose store attached. There is a huge number of people coming to service stations who are not filling up their cars but instead are coming in to buy breakfast, to get a cup of coffee, to get their car washed. Their need for convenience retail is more frequent than their car’s need for fuel.”
  • Shell sold 60m cups of Costa coffee last year. In the UK there are some Shell-branded stations that are already making more money from selling products other than fuel. With that in mind, Shell is experimenting with different ways of luring customers to its stores and encouraging them to spend more time there. The company has two sites in Bangkok that sell only V-Power, Shell’s highest quality fuel, alongside a luxury cafe. Each customer gets two attendants – one to serve them and one to service their car.
  • Increasing the retail offering of service stations will become even more important as cars become more efficient, needing to refuel less frequently. This means that revenues from fuel will be on a downward path until the switch is made or revenues from non-fuel products take over.
  • Shell is preparing to open Britain’s first “no-petrol” service station in the capital next year as part of its drive towards cleaner motoring.
  • Later this year Shell plans to roll out high-speed electric vehicle charge points across a selection of its 400 UK service stations, allowing drivers to charge their electric vehicle batteries by up to 80pc in 30 minutes. The group is about to begin an 18-month pilot scheme to test what the forecourt of the future might look like. Service stations will be presented ambitiously as “retail destinations”, providing good quality food and coffee alongside high-speed Wi-Fi. The trial will also include collection points for online shopping deliveries to improve convenience and perhaps even the addition of a post office or pharmacy to “transform” into a retail hub rather than a traditional fuel station.


Potential problems:

  • Tesla, although a niche segment of the market has its own network of superchargers, meaning such customers may be reluctant to use other “inferior” charging stations. That said the network still remains small and these owners will inevitably have to use other stations.
  • Other manufactures may develop their own charging networks e.g. BMW/Audi reducing the need to visit a ‘transformed station’ but instead to use the manufacturer’s network. That said, it is unlikely every manufacturer will build a network, rather they are likely to collaborate to prevent a misallocation of resources and focus and expanding the network as much as possible.
  • Independent stations may struggle to invest and stay ahead of the game especially if they are slowly experiencing a fall in their revenues and cannot afford to make adequate investments.
  • In the short term, the government may look to introduce a more hefty ‘carbon tax’, squeezing consumers further and perhaps forcing them to consider moving towards renewable options. This could drastically reduce profits for petrol stations owners from fuel sales.
  • Apple, the first company to hit $1trn could launch the iCar within the next 5 years. Apple has a trend for disrupting the market e.g. the death of blackberry, and some rumors suggest that this car may be entirely powered by solar power eliminating the need for on route charging stations.



Overall it is clear that in the short term, conventional petrol stations are not going anywhere soon, in fact there have been a number of setbacks with alternative energy, together with the technical & ethical issues of driverless cars meaning that such a transformation to a new automotive market could take time. However with the 2040 ban in the pipeline, the clock is ticking and as we’ve seen in the past with the revolution of smartphones and social media, once technology takes off, there’s no looking back and only those that have read the market correctly will be left standing. The impact of this is not solely on petrol station owners but on the government.  The Treasury stands to lose up to £20billion of fuel duty and VAT every year if retail sales of petrol and diesel evaporate meaning that it has less to ring-fence and put toward grants to help embrace this change.

Potential questions:

  1. The Government is boosting its push to promote electric and driverless cars with a draft law requiring petrol stations across the country to install more charging points. Have do independent petrol stations plan to insulate themselves from the expected future changes to the market such as the roll out of electric cars following the 2040 ban on conventional combustion engines?
  2. How will they compete with the big players within the industry who have access to large amounts of capital to invest and embrace this new change? (Shell invests £1billion a year on renewable energy)
  3. Supermarkets now dominate the petrol-selling market – Tesco alone sells 15%. They often undercut their rivals on pump prices and sometimes run at a loss with the sole aim of attracting customers to their stores. If customers make a move towards electric vehicles it is likely Tesco and others will make large scale investments to ensure their customer’s can ‘shop and charge’. How will independent stations compete with this competition? Would they consider merging with other services e.g. post office/pharmacies?
  4. Finally, the Number of petrol stations has fallen from 14,000 in 2000 to 8,500 today. If new charging points become ubiquitous e.g. in every office, car park, supermarket, the future for such stations could look even more bleak. What could they do to ensure their profits remain in tact?



Amazon to patent a wristband which measures productivity.

Hello readers,

Welcome back to my blog,

I recently came across an article in the New York Time about the idea of measuring productivity in the labour market. As this was so relevant to the theory I was learning in class, I thought I would research this further and share with you some of my findings. Before we being it is useful to define what we mean by productivity, in particular labour productivity. This is essentially, output per worker per unit time. In other words how much one worker can produce in a given period of time. This is useful for a firm to understand where they can cut costs or how they can increase revenue or profit depending on their business objectives. We should also note that capital productivity refers to output by capital products such as machinery and thus it is important not to confuse the two or use them interchangeably .

As things currently stand, it is very difficult to measure productivity in the work place. Although with certain blue collar jobs it is easy to count the number of items produced in a given time period by each worker, there is still asymmetric information. This being the lazy worker who can still get away with distractions, taking too long in the bathroom, fidgeting or making basic errors on the job. To counter this amazon has recently been granted a patent for a wristband, similar to a FitBit which measures worker’s productivity more rigorously, assesses how hard they actually work rather than how hard they claim to work and even nudges you when you place an item in the wrong zone.

This means that firms which have a more productive labour force can produce more with the same output, allowing them to reduce X-ineffcieincy (using more resources than necessary for a given level of output) or to offload unproductive/extra workers who are no longer needed, providing trade unions are not able to challenge the monopsony power that employers may have.

Although we have heard a lot about the gender pay gap in recent times, this is another prime example of wage differentials in action within the labour market. According to the marginal revenue product of labour theory (MRPL), an increase in productivity leads to higher pay for those who are more productive and a decrease in pay for those who are less productive. More productive workers can subsequently demand a higher salary as a reward/incentive for producing more and increasing the profits of the company. This idea is similar to how John Lewis issue all their employees shares to incentives them to be more productive and work hard so that the whole company benefits and thus they receive more in shareholder dividends, except amazon’s band is primarily for very low skill, blue collar work.

Although this sounds like a utopian situation for employers and could allow them to maximise supernormal profits in the long run, it comes at the expense of workers’ privacy and there are a number of drawbacks that should be considered as these could potentially offset some of the benefits of this band.

Firstly in the case of Amazon, they already have a reputation for a workplace culture that thrives on hard-hitting management style which pushes workers to meet delivery targets. This has resulted in many workers feeling undervalued or overworked for the amount they are payed and subsequently may cause employment issue down the line if people can find easier jobs in similar companies which have a different ethos.

There is also the issue that technology today is not 100% reliable and things can go wrong in terms of hacking/tampering or with mis-measurements. This extra layer of surveillance would also result in an envision of privacy as well as employees being treated more like robots than human beings which would lead to lower morale, workers feeling less morale, thus worsening productivity and also people leaving their jobs, creating disruptions to delivery and production lines.

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Companies are increasingly introducing artificial intelligence into the workplace to help with productivity, and technology is often used to monitor employee whereabouts. Currently this new band bridges the gap between full scale AI and current workers. In Wisconsin, a technology company called Three Square Market offered employees an opportunity to have microchips implanted under their skin in order to be able to use its services seamlessly. Its only a matter of time before the labour market undergoes a technological epoch resulting in a revolution in the way goods and service are produced. Perhaps the updates version of this news article will consider difference in the productivity of robots or how human capital may soon be redundant. On that note, if you are interested in reading further into the role of automation in the future, I would recommend Susskind’s, ‘The Future of the Professions’, which not only considers who blue collar work is chaining but have professions such as doctors, lawyers, bankers and accountants could be at risk in the near future. He provides a practical and logical scenario using statistical information and ‘big data’ to evaluate the potential effects on society and also raises some key questions about the ethics of using AI.

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Sources Used:


Can Migration and Piracy be effectively managed?

Hello Readers,

Welcome back to my blog. As our world becomes ‘smaller’ and more interconnected there is significant overlap between human geography and economics. This issue is brought home with the very topical issue of the flow of migrants through the mediterranean to Europe, as well as the emergence of piracy off the horn of Africa. I recently studied the issues of piracy and migration in geography and found that there were a number of significant links to economics such as Tragedy of the Commons, disruption to trade in particular around chokepoints, economic growth, rising debt levels, increased burden of governments and many more. It is quite a lengthy piece of research but is certainly worth a read if you are interested in these issues which have global ramifications.

The oceans have arguably been the biggest victims of humanity’s hubris. In today’s world they are characterised by a number of hazardous obstacles including treacherous journeys taken by migrants in an attempt to flee persecution and economic hardship leading to a mass influx of refugees, particularly in Mediterranean countries such as Italy and Greece; as well as piracy by ‘ex-fishermen’ caused by the crippling poverty occurring in war torn, failed states such as Somalia. Interpretations of these two ‘obstacles’ can vary, thus for the purposes of this essay, piracy will be defined as ‘an act of robbery or criminal violence by ship or boat-bourn attackers upon another ship or coastal area, with the aim of stealing cargo and other valuable items or capturing innocent members of the crew/civilians in exchange for a ransom’. Migration on the other hand will be defined as ‘the flow of people and ethnic groups (diasporas) from their home country to another country usually to seek refuge and apply for asylum status or for socio-economic reasons. In both cases, the problems are ubiquitous and the impacts are wide-ranging thus intervention is not a straightforward process. Furthermore, we should also consider what we mean by ‘management’. If we are referring to implementing policies, which restrict flows of people to dampen the socio-economic factors on host countries, or polices that primarily focus on stopping piracy through armed vessels and military action to reduce the economic toll of disruption to shipping then this only scratches the surface of the issue. The grass roots of the issues lie much deeper than this. Many people often oversee the fact that migration and piracy are the product of poor governance, instability, corruption, persecution, injustice and a lack of human rights, as they tend to look out for their own self-interests. Therefore even though we have seen a decrease in piracy along coastlines previously at risk or around chokepoints across the globe and more control/support for the migrants crossing the oceans in recent years, this does not necessarily imply effective management, and is quite myopic. Consequently, this essay will explore some of these policies but will more importantly focus on management strategies such as those being adopted by the European Commission and the United Nations (UN) to promote ‘voluntary solidarity’ which tackles the underlying root causes. That said, even though the latter policies are more desirable and could be termed as promoting ‘effective management’, in reality, they are much harder to achieve as they often require unanimous global cooperation which is difficult when there are so many different players, laws, governments, ideas and cultures; partly the reason why short term strategies have dominated-to bridge the gap until a long term solution, if any, can be found. We should also address long-term policies suggested by supranational institutional bodies with a degree of caution, as the world we live in is so dynamic and many targets/future goals could be termed over ambitious and nothing more than a utopian pipeline dream.

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To understand the success of these management strategies, let us first consider the nature of the problem; assess some of the driving forces that underpin piracy and migration and recognize why we need to control them in the first place. With regards to piracy, poverty, dysfunctional governments, links to crime networks and loss of traditional fishing (Tragedy of the Commons) are the main reasons why young, economically active men tend to enter the piracy business. Overfishing is perhaps the most significant factor, caused by a lack of property rights and laws over international waters as it has enabled large scale fishing trawlers to scour the ocean beds leaving declining fish populations for the people living in coastal towns. One point to note here is that although large fishing organisations may benefit from this, we should consider “at whose expense?” and the damage that they are creating not just for people but for the environment. It is ironic in the sense that they have created the problem and are now having to invest in strategies to control the problem. Furthermore, maritime piracy costs shipping companies in the Indian and Pacific Oceans, some $13–$15 billion annually in losses. Premiums for a single transit through the Gulf of Aden, for example, have risen from $500 to as much as $20,000. If strict fishing laws were in place, piracy would be less of a problem, thus allowing firms to invest their money in innovation or wildlife conservation instead. Beyond the immediate threat to crews, property, and ships, maritime piracy endangers sea lines of communication, interferes with freedom of navigation and the free flow of commerce, and undermines regional stability. Piracy also is corrosive to political and social development in Africa, interrupting capital formation and economic development, abetting corruption, and empowering private armies. Left unchecked, the cumulative effect of piracy eventually can lead to the decline of vibrant commercial centres. In terms of migration, it is often a result of push factors such as violation of rights and deception by illegal smugglers who present the image of prosperity, education and safety in exchange for a payment around (US$750-3500). However the boats supplied are substandard, with over 400 people on one, intended for a crew of around 50. Pull factors include, successful migrants encouraging their families to move; however, this exacerbates the issue and since life vests are not issued and most people do not know how to swim it means the death toll is extremely high and the short term aid currently provided is vital to survival. If people are lucky enough to stay on board they are likely to get trampled, dehydrated, cuts from nails/wood on the vessel or physically abused by other desperate migrants. They are also misinformed and don’t understand that they will not immediately be accepted/given education. Moreover, like with piracy the effects are damaging particularly on women and children who are at risk of exploitation or death. One shall never forget the picture of the three-year-old Syrian boy, Alan Kurdi, whose body was washed ashore on a Turkish beach.

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By considering short-term management for migration first, NGO’s such as Medecins Sans Frontieres and SOS Mediterranee have arguably been the most important as they have played an active, pivotal role on the front lines. Missions ensure that vulnerable individuals who are desperate for a better life are not left to drown, thus directly preventing loss of life. Although this makes the crossing safer for migrants and ensures a reduction in death tolls, the scale of the problem is enormous and often rescuers have to make decisions on whom to save first as there are simply not enough resources. It also creates the issue of a ‘moral hazard’ as if people know they will be rescued when things get rough, they may be more inclined to take the risk, thus the ‘obstacle’ will continue. That said, NGO’s are working in countries such as Syria, Libya and countries in central and east Africa including Somalia, Eritrea, Burkina Faso and Mali to help alleviate famine and disease, although this too is short term and is expensive to sustain. What’s more is that with such management strategies, there is still a risk of migrants being attacked by pirates or being arrested by Libyan authorities. Migrants can also drift for days facing temperatures upwards of 32 degrees, with little water before help can arrive.

Another management strategy in the medium term that could be implemented is to address the issue of the traffickers. Traffickers provide the ‘oxygen of hope’ and say it “will be like a dream, almost as easy as flying”. Traffickers promise a way out when in reality they know that the boats will not survive in the open water of the Mediterranean. They are largely corrupt; involve violence, threats, and abuse and demand payments depending on where you come from. These militia groups could be termed the driving force behind the movement across the oceans as they facilitate the transfer. However, stemming this is controversial as you are then denying people any way of escaping their countries where atrocities are rife, arguably preventing people’s right to move. Also if international organisations were to impose minimum standards on vessels used this would be controversial, as you would be supporting a form of ‘human trafficking’ and could start political wars with local governments who do not want their citizens to leave and do not like the idea of foreign intervention in their domestic practices. Also laws/policies are rarely enforced in such countries and due to the crippling poverty, individuals have little regard for helping others or making the society safer and fairer for everyone but instead looking out for their own self interests, and above all trying to survive each day.

Nearly two-thirds of all international migrants live in Europe (76 million). Consequently, the role of the European Commission has been important, particularly influencing the long-term management of the crisis. Despite the fact that certain countries such as Greece, Italy and Turkey are most affected, its agenda on migration sets out a collaborative response to take the burden of particular countries. Within this they focus on: Reducing incentives for irregular migration by disrupting smuggler networks; saving lives and securing external borders by ensuring strong shared management of the external borders through full operationalization of the European border and Coast Guard; a strong common asylum policy to ensure a fully efficient, fair and human policy with a common and harmonised set of rules, including a more sustainable system for allocating asylum applications among member states; and a new policy on legal migration, which keeps Europe an attractive destination for migrants in a time of demographic decline via actions such as renewing the Blue Card scheme or by easing remittances. They also have four priority actions: operational measures which has seen presence at sea triple and management support teams becoming operational in Italy and Greece; budgetary support-total funding to address the refugee crisis in 2015 and 2016 was €9.2bn; and implementation of EU law, which has resulted in 40 new infringement decisions against 19 member states. Another aspect is the external dimension and this has focused on tackling the root cause of refugees via diplomatic offensive and an EU Action Plan against migrant smuggling is being implemented. Currently the EU is the world’s leading donor of aid. It has saved over 400,000 lives since 2015 and is working to change migration from a challenge to an opportunity by promoting the idea of ‘voluntary solidarity’. As outlined above, the work of the EU considers a range of time scales and puts together a cohesive and comprehensive plan to manage the problem. However, this is by no means a “one size fits all” strategy. The nature of migration is so complex such that it is difficult to address all flow and movements of people. Furthermore, budgets are still restricted and there are not unlimited amounts of supplies/asylum applications. Many refugees face years of uncertainty while their asylum is processed. As long as the inequalities persist and as long as the North-South and South-South cooperation do not improve, our societies will, unfortunately, continue to face more extraordinary challenges, thus putting in doubt the immense achievements of our civilization. Islamic State in Iraq and the Levant (ISIL/Da’esh) will continue to thrive unless the deep political roots of the Syrian conflict are resolved through a credible and comprehensive political process.

The management of migration also varies across the world and there are a number of contrasts within the EU between the 28 nations e.g. Italy & Greece vs. Sweden & Finland, where the former have been less receptive and welcoming whereas the latter view the influx of refugees as a boost to their economy. This contrasting opinion has led to such countries offering different levels of support-Italy’s sluggish legal system drags out the time spent in limbo. Australia deals with the influx of migrants from the South China Sea in a very different way that Europe accommodates them. In Australia, around 25,000 asylum seekers have arrived in by boat over the last 18 months. The country is represented by one political body and is seen as having a hard immigration policy, by forcing refugees to stay on Islands off the coast of Australia, which it has sovereignty over until their applications are processed. Conditions/provision of basic needs have been reported to be substandard. This is ironic considering Australia’s foundations were built upon immigrants/diverse origins and ethnic groups. What’s more is that today it is relatively under populated and could benefit from an influx of migrants. Australia’s more hard-line approach to immigration is spreading across to European countries such as Austria, France and perhaps even the UK, thus the ship to prosperity may already be headed in the wrong direction. Germany however, has set the bar high although this has created some political tension within the country with far right groups. The migration & “human rights at sea” debate is rather recent idea and countries accept varying degrees of responsibility due to differences in cultures, ideas and policies/levels of enforcement.

Another equally important hazardous obstacle in our oceans is piracy. For many poor people, the pay-offs from illicit activities are so high, and the licit alternatives so unrewarding, that interdiction and prison will not deter them from trying their luck again. The success of the Somali counter-piracy strategy has driven significant security sector reform throughout the Horn of Africa that has enabled over 1000 pirates to be prosecuted. Determining which state should prosecute pirates seized at sea is still particularly vexing. It is important that the use of force is appropriately used and naval forces should try to plan operations accurately in advance, to minimize loss of life.

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The modus operandi of pirates changes in the course of the years as they passed from hijacking of ships and armed robbery to kidnapping, a lucrative activity as they receive ransoms before releasing their hostages. What is clear though is that they are nothing more than fishermen with basic skills, using lightweight skiffs to carry out their attacks, as exemplified via the movie “Captain Phillips”. Hence, stopping acts of piracy in recent times has been successful by implementing private sector defence methods such as laser devices, water cannons, electric fences, stun grenades, nets, compressed air guns and foul smelling liquid. As hijacks for ransom were a big problem for shipping companies such as Maersk as well as insurance companies, in particular of the coast of East Africa around Somali waters, ships were permitted to carry armed guards (largely ex-marines). Although in most of the world’s seas this is illegal, the threat was great enough to warrant such an exception. The private maritime security industry has been a victim of its own success. Anti-piracy measures have been so effective that smaller security firms are going out of business.

In terms of public sector methods, the EU, US and British navy have been successful in reducing piracy. The UK is supporting counter piracy missions-NATO’s Operation Ocean Shield & the EU’s NAVFOR Operation Atlanta in the Horn of Africa, providing Humanitarian and development assistance to Somalia to counteract the root causes of piracy as well as supporting the recognition of Somalia’s Exclusive Economic Zone, which will help protect its natural resources up to 200 nautical miles from, is coastal baselines. Another long-term solution is the role of the UNDP Somalia-aimed at working to improve the livelihoods of various stakeholders in fisheries sector in Puntland. This will result in improved regulation and development through public-private partnerships with the aim to create 20,000 long-term jobs. The US has also undertaken many naval operations to counter piracy and armed robbery off the coast of Somalia, primarily to protect vital trade routes and ensure supply chains are uninterrupted. Like with migration, piracy is widespread, particularly in South East Asia where “organised crime” as opposed to opportunists offload diesel fuel, disguised as regular vessels. It is more difficult to intercept such types of piracy but as controls become stricter and checks become more stringent the level of piracy across the world is falling. Cross-border cooperation, information sharing and joint manoeuvres create trust between countries and new protocols are making it harder for criminals to seek shelter in a neighbouring jurisdiction, making interdiction hugely more effective.

In conclusion, both challenges are severe and present major issues for governments, economies and people living in ‘host’ countries and above all those having to migrate or engage in piracy. Whilst we may frown upon migrants “taking our jobs” or pirates hijacking multi million dollar cargo ships, we must remember that in most if not all cases, the individuals have no choice. Whilst recent global governance and intervention by a number of players primarily the UN Security Council and the US and UK navy has reduced piracy and stemmed flows of migration this does not solve the problem. Instead more complex and expensive strategies are needed to tackle the root of the issue. There is however light at the end of the tunnel if all countries ‘pull their own weight’. If Saudi Arabia and the Gulf States who have taken meagre numbers of migrants can shed their status of being rich, xenophobic and hiding behind barriers then perhaps the next generation will see fewer conflicts and an effective management strategies that promotes a utilitarian approach. Moreover, migrants could massively contribute to the tax base of host countries, helping to cover welfare costs in particular pensions for ageing populations. In terms of the ‘ex fishermen’, if property laws are established and economic zones implemented, it could allow them to go back to fishing, reducing the incentive to disrupt trade and promoting ‘bottom up’ development which is vital in the long run. The oceans could retain their historic significance as a meeting place of nations, trading freely and cross‑fertilizing cultures, or it could descend to a place where insecurity overshadows all such activity.

The Term Funding Scheme

Hello readers,

On reading the Economist this week, I came across the concept of the Term funding Scheme.[1] Although I have looked into monetary policy and quantitative easing in some depth, this is a concept that I was relatively unfamiliar with so I have done some research on it and have summarised my findings below.

The term funding scheme was introduced by the Bank of England in August 2016 following the results of the Brexit referendum. Under the scheme the Bank of England planned to lend £100 billion to banks at a generous rate close to the lower bank rate for four years.[2]After the referendum the the Bank of Endland cut the base rate from 0.5% to 0.25%. At such low base rates banks would struggle to offer savers an adequate interest rate and may even have to offer negative interest rates which would lead to customers understandably withdrawing their funds. Cutting the base rate to 0.25% squeezed the margins between what banks paid savers and what they charged borrowers This is also know as the net interest margin ( the gap between the rate at which banks borrow and lend).

The aim of the Term Funding Scheme was to accelerate the speed at which borrowing costs find their way through to the real economy. Mark Carney stated that following the interest rate cut and the term funding scheme that UK banks have “no excuse” to stop lending[3]. After a slow start, with only one bank drawing funding in the third quarter of 2016, the Scheme has seen banks and building societies draw a total of almost £80billion towards the end of 2017. In total 26 building societies registered for the Scheme, of which eleven have so far utilised the facility by the end of 2017. This includes eight of the ten largest societies. Building societies using the Term Funding Scheme have all increased net lending over the period.[4] Due to the success of the scheme, Mark Carney wrote to the Chancellor in August 2017 requesting a £15 billion increase in the scheme [5]. In November 2017 the Bank of England came to an agreement with the treasurery to increase the scheme by a further £25 billion bring the total value of ‘cheap credit ‘avaialbe to the banks to £140 billion.[6]

The Scheme is due to end in February 2018. Banks are less in need of help than they were in mid 2016 and there is overall lower usage of the scheme, and following the increase rate rise in November 2017 to 2018 there is less of a squeeze on banks’ margins.[7] The ability of banks to borrow at a low repayment rate meant banks didn’t need to rely on retail deposits (savers) for funding; hence reducing the need for banks to compete for savers’ cash, putting downward pressure on interest rates for savers. When the scheme closes, banks will need to offer more competitive rates for savers. The longer term impact will be even more significant. Banks have four years to repay money to the scheme, and will increasingly need to rely on savers during this time. As inflation currently is still above the bank of England’s 2% rise further rate rises are likely to follow soon, but as explained above ultimately the end of the term funding scheme may be more important than any future rate rise for savers.

In essense the TFS – or the Term Funding Scheme – was the big policy innovation announced by Mark Carney, governor of the Bank of England today, as part of a three-pronged monetary stimulus launched in the wake of the UK’s Brexit vote. While this is subtly different to the quantitative easing scheme in some senses (under QE the Bank printed money to buy assets; in the TFS it prints money to lend to banks temporarily, taking collateral in exchange), in other senses it is similar.


[1] https://www.economist.com/news/britain/21736521-opening-act-year-tighter-monetary-policy-bank-england-holds-fire-interest

[2] https://www.ft.com/content/7cc617e4-5aec-11e6-9f70-badea1b336d4

[3] https://www.ft.com/topics/organisations/Bank_of_England?desktop=true&ft_site=falcon&format=&page=2

[4] https://www.bsa.org.uk/media-centre/bsa-blog/august-2017/term-funding-scheme-to-close

[5] https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/635439/bank_of_england_governor_letter_August_2017.pdf

[6] https://www.insider.co.uk/news/bank-england-increases-term-funding-11556298

[7] https://www.economist.com/news/britain/21736521-opening-act-year-tighter-monetary-policy-bank-england-holds-fire-interest

[8] https://www.finance-monthly.com/2018/01/end-of-term-funding-scheme-more-important-to-savers-than-any-boe-rate-rise/

The Economics behind driverless cars

Hello readers, welcome back to my blog.

This week I will be looking at a topical yet controversial issue: driverless cars and their impact on the economy. With self driving cars becoming more and more of a reality, most notably Tesla’s model S and X and more recently the model 3, which all feature autopilot technology, it’s only a matter of time before other manufacturers can utilise this and develop more advanced technology. The problem however, is not with the manufacturers producing the technology but instead with the laws that need to be established and the economic implications associated with a driverless economy.

In this post I will explore some of the economics behind driverless cars as well as look at the issues/laws that could prevent this market taking off. I will also consider the idea of rational decision making by machines vs. the moral conscious of a human being. Rational decision making in economics for those who don’t know is an economic principle that states that individuals always make prudent and logical decisions. These decisions provide people with the greatest benefit or satisfaction given the choices available and are also in their highest self-interest. I will also briefly touch upon the reduction of carbon emissions and how the negative externality issue could be reduced (for more information on this topic see the Carbon Taxes and Negative Externalities post). It is estimated that by 2030 the majority of cars on the road will be electric and the combustion engine will have had its time. Many of these are likely to incorporate autopilot/self driving capabilities. Although Tesla currently seems to dominate the market, many conventional German car brands such as Audi, Mercedes and VW are in the development stages of building their cars and it is thought that we may see some new players enter the market such as Google, Apple and even Dyson.

When people mention driverless cars it often conjures two images: The first being the idealistic image of a world in which cars move around by themselves, allowing commuters to maximise their time travelling be it to check their emails or have a power nap whilst they travel to work. The dystopian view holds that these vehicles will put 5 million lorry drivers and cab drivers out of work. The outcome of this scenario most probably lies somewhere between the two extremes, although whatever the outcome research is showing that the global economy will see a big boost. Those at Intel and the research company Strategy Analytics suggest a $7 trillion boost.

Although carmakers like to talk about autonomous vehicles (AVs) as if they will be in showrooms in three or four years’ time, the reality is that they are unlikely to do so anytime soon. Despite their lightning reactions, tireless attention to traffic, better all-round vision and respect for the law, and the fact that they won’t get tired, drunk, have fits of road rage, or become distracted by texting, chatting, eating or fiddling with the entertainment system; too many obstacles lie ahead that are not amenable to brute-force engineering. It could be a decade or two before autonomous vehicles can transport people anywhere, at any time, in any conditions, and do so more reliably and safely than human drivers.

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What are the potential benefits to the economy?

  1. One of the biggest benefits of an economy with no drivers is parking. Driverless cars will drop passengers off at their destination and go find parking elsewhere (or remain on the road if they are part of a ride-sharing program e.g. Uber). The U.S. has about 144 billion square feet of total parking, which represents up to one-third of the total real estate in some large cities. A reduction in the demand for parking can result in reclaiming this valuable real estate for more beneficial social and economic purposes potentially increasing the supply of housing and dampen sky high prices in cities.
  2. Reduction in traffic accidents. In the US, traffic accidents cost $900 billion annually. In addition, we can also expect to see less traffic violations, which may lead to a decrease in the size of police forces or shift people and resources to more important areas of serving and protecting the public.
  3. Insurance: About 90 percent of car accidents are caused by human error. In the world of autonomous vehicles, we can expect to see a major reduction in the number of accidents, which will significantly change the insurance revenue model. As the risk of accidents drops, demand for insurance will be virtually non existant. In anticipation of this shift, some insurers are rolling out usage-based insurance policies, which charge consumers based on how many miles they drive and the safety of their driving habits.
  4. The need for lodging will drop as people sleep in their cars during overnight road trips. Utilizing cars as a moving hotel is much more cost-efficient and convenient than purchasing a hotel room. Audi’s vice president of brand strategy and digital business, Sven Schuwirth, has predicted that car interiors will “eventually be able to morph between driving mode and sleeping mode”, presenting a major obstacle for the hotel industry.
  5. More media consumption as autonomous cars transform into rolling living rooms. A report by McKinsey and Company finds each additional minute occupants spend on the Internet could generate $5.6 billion annually, totaling $140 billion if, for example, half of the time of a 44-minute average round-trip commute is spent online.
  6. For delivery services, there will be enormous economic gains: McKinsey estimates between $100 to $500 billion per year by 2025 from driverless vehicles in the U.S. trucking industry. (The bulk of this windfall will come from the elimination of truck drivers and their wages).
  7. With multiple sensors, no distractions and no drunk driving, self-driving cars will largely eliminate car crashes so collision repair shops will lose a huge portion of their business. Indirectly, the decreased demand for new auto parts will hurt steel producers and part manufacturers.
  8. Price of goods are likely to fall and become more stable. This is because transport costs will drastically fall due to less dependence on oil which is extremely volatile.
  9. Fewer people will buy cars. Instead, they’ll rely on on-demand taxi services to ferry them about, which explains why the number of miles people and things travel in vehicles is expected to rise in the autonomous future. The more cars move around, the faster they’ll wear out. Those that aren’t replaced will be repaired, which means lots of jobs for mechanics and others who keep cars motoring along.
  10. House price fall not only from increased space in urban areas allowing for developers to rapidly construct new developments but because people could travel overnight to work and sleep-(this idea was explored in The Economist a few weeks ago). Furthermore, we may see a reduction in rural-urban migration in particular in LIDC’s providing the price of this technology falls, putting downwards pressure on the population of major cities.
  11. The rise of the automobile helped people rethink how to use space and created new forms of employment, like pizza delivery drivers. The self-driving automobile could do much of the same. No one has officially yet predicated how many jobs the autonomous future will create, and that’s partly because this issue is all-econompassing.
  12. Uber will have a fleet of autonomous vehicles ready by 2030. A Columbia University study suggests that Uber would need just 9000 autonomous cars to completely replace all taxis in New York City, with consumers only having to wait 36 seconds, on average, for a ride. Cars are currently seen as status symbols, giving their owners freedom and a sense of familiarity and luxury that ridesharing cars do not. However, as ridesharing services become safer and cheaper, and wait times continue to fall, the end of car ownership is a real possibility, leaving consumers with much more disposable income, automatically boosting the economy in other sectors.
  13. Self-driving cars will significantly improve the life of disabled individuals, increasing their personal sense of freedom and their employment prospects due to increased mobility. It is estimated that British individuals with limited mobility could see their earnings increase by £8,500 annually, on average and there would also be a reduction in welfare benefits, improving government finances.
  14. Many of these cars will be electric in order to reduce carbon emission which will help tackle the negative externality issue associated with burning fossil fuels. This would not only keep the environmentalists happy but would have huge economic benefits as the “dead weight social loss” would essentially be eliminated, in other words things like respiratory issues associated with pollution or the blackening of buildings in major cities would be reduced.

Sound to good to be true? Some of these benefits may be a little farfetched but are still a possibility perhaps not in the next 10 years but at least by the turn of the century. Lets take a look at some of the drawbacks mentioned at the start and explore the economic consequences that driverless cars may have on the economy.

What are the potential set backs?

  1. Significantly less money for cities through parking tickets. In 2012 alone, Washington, D.C. collected $92.6 million in parking ticket revenues. Whilst this may be a boon for consumers, it may have an adverse effect on government revenue. Morgan Stanley believes US governments could lose US$1.3 billion from revenue sources such as parking fees. This forecasted revenue loss also takes into account fewer registration fees, as American households are expected to reduce their car ownership from 2.1 non-automated vehicles to 1.2 driverless cars, on average.
  2. Insurers and injury lawyers will see their revenues fall.
  3. Major effect on the travel industry. Sven Schuwirth, vice president of brand strategy and digital business at Audi, proclaimed “In the future you will not need a business hotel or a domestic flight. After all, why fork out the money for a flight, and go through the hassle of seat selection, check-in, customs, boarding, disembarking and luggage collection, when your car can take you from Melbourne to Sydney overnight?”
  4. There will be plenty of safety concerns, and it’s unlikely that individuals will be comfortable sitting in the back seat of a self-driving car, let alone sleeping in one.
  5. In the accident that killed a Tesla driver in Florida last year, the driver either failed to respond in time to avert disaster, or mistakenly assumed that Autopilot meant more (as its name implied) than mere driver-assistance. Tesla continues to include the Autopilot sensors and software in its cars, but has deactivated the system while further testing is undertaken. The company plans to re-activate it in 2019.
  6. Lack of trust. Would you travel in a driverless cars which had to cross narrow bridges or drive through windy roads with cliffs on either side and is based on maths, risks and probability with some clever engineering? What about those moments when your laptop has a little blip or crashes when it boots up? Surely this technology will have similar issues. How would it cope with dirt tracks off the map, in blizzards, thunderstorms or pitch darkness, with animals bursting out of bushes, children chasing runaway balls and people doing irrational things?
  7. The recent Uber law case stands testament to the fact that even ‘small issues’ in the grand scheme of things to do with employment etc. are preventing this industry and making this idealistic image we have more of a pipeline dream.
  8. According to statistics from America’s Bureau of Transportation, there were about 35,000 fatalities and over 2.4m injuries on American roads in 2015. That may sound a lot but, given that Americans drive three trillion miles a year, accident rates are remarkably low: 1.12 deaths and 76 injuries per 100m miles. Since accidents are so rare (compared with miles travelled), autonomous vehicles “would have to driven hundreds of millions of miles, and sometimes hundreds of billions of miles, to demonstrate their reliability in terms of fatalities and injuries.
  9. “Safer than human drivers” ought to be a minimum requirement. Some would go further and require them to present no threat whatsoever to human life. That would imply it is acceptable for humans to make mistakes, but not for machines to do so. Such safety issues will have to be resolved before any regulatory framework for autonomous vehicles can be put in place.
  10. Carmakers could find themselves selling fewer vehicles to individuals, and more to operators of driverless fleets, who will run them 24 hours a day, seven days a week, and scrap them after a year or two. This may lead to more wasted resources as companies scrap old technology to upgrade fleets.
  11. Power-stations may not have the capacity to meet the demand to produce enough electricity. Also if energy is not being generated via green and sustainable ways e.g. solar panels, it defeats the purpose of having electric cars. Furthermore this change so far only applies to the automotive industry and not to planes/ships which due to globalisation play a big role in trade.

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What is the moral issue?

In economics, we often refer to the idea of rationality and assume in mathematical models homoeconomicus ( the concept portraying humans as consistently rational and narrowly self-interested agents who usually pursue their subjectively-defined ends optimally). For more information on this concept and its applications see my previous post titled “Key Economics Concepts”.

The issue with driverless cars is that they will be programmed to make rational decisions such as killing an old person who is sick and only has days to live rather than killing a child. Now although this may seem logically the right thing to do; it presents a serious ethical issue, why should a machine “play at God” and choose who lives and dies. “We think of humans as moral decision-makers. Can artificial intelligence actually replace our capacities as moral agents?”. That question leads to the “trolley problem,” a popular thought experiment ethicists have mulled over for about 50 years, which can be applied to driverless cars and morality: In the experiment, one imagines a runaway trolley speeding down a track which has five people tied to it. You can pull a lever to switch the trolley to another track, which has only one person tied to it. Would you sacrifice the one person to save the other five, or would you do nothing and let the trolley kill the five people? In the same way, will these cars optimize for overall human welfare, or will the algorithms prioritize passenger safety or those on the road?

Researchers at the Massachusetts Institute of Technology are asking people worldwide how they think a robot car should handle such life-or-death decisions. Their goal is not just for better algorithms, but to understand what it will take for society to accept the vehicles and use them. Their findings present a dilemma for car makers and governments eager to introduce self-driving vehicles. “People prefer a self-driving car to act in the greater good, sacrificing its passenger if it can save a crowd of pedestrians. They just don’t want to get into that car.”

What do I think will happen?

Overall it is clear that we are definitely going to see a change in the automotive industry. On one side we could see an economy whereby no one owns cars and instead driverless, electric vehicles are summoned like an Uber. On the flipside we may see a shift to electric cars however the driverless capability may not be rolled out for many years maybe even decades, as firstly many people would have a serious trust issue with such technology especially when we all know of times when technology can just fail on us at the most important times and secondly because of the moral “trolley problem” that occurs. I believe that the latter option will dominate but as this topic is so dynamic anything is a possibility. There are clearly economic consequences on both sides for using such cars most notably the number of job losses; however, as mentioned above these will more than likely be replaced by new jobs that we do not even know exist yet. This is an old problem that has happened throughout history and we have seen how it plays out. Admittedly we cant guarantee that history will repeat itself but it does seem likely that new technology is likely to create demand for workers. There will of course have to be major retraining and reshaping of the economy; although any major change in the economy is bound to have some disruption associated with it.

The disruption has begun though and whether we like it or not, there’s not much we can do about it to stop this revolution.  Although I have looked at a number of benefits and complications there are many others points that I have not even touched upon. This just highlights the complexity of the issue; changing the way the whole economy functions and operates every day was never going to be an easy task and it certainly won’t just happen overnight. Also, even though I have discussed more positives than negatives of the autonomous car industry, that’s not to say that driverless cars are overall better; the moral issue is a major problem and could hold back laws from being proposed. The future is unclear but for now car manufacturers will continue to develop and work on this technology. The battle we may win, is reducing carbon emissions by promoting electric cars through EV grants and subsidies, although Donald Trump’s ‘anti climate change’ mentality could act as a major obstacle.

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Sources used and quoted:








Thanks for reading, if you have any thoughts of your own you would like to share or have any questions that you would like answering please comment below.

Bitcoin-What’s the hype all about?

Hello readers, welcome back to my blog.

In this post I thought I would explore the idea of Cryptocurrencies, in particular Bitcoin. With its market price soaring past £10,000, something that many people did not even think would happen, it has certainly got everyone talking about it and wondering whether to invest in it. I’m not just talking about the economists who analyse and process the data from six computer screens whilst monitoring other currencies/commodities but everyday people who are looking to make a quick and effortless profit from their smartphones in the comfort of their own home or office. Its volatile nature however is what makes this quite a risky investment. That said you can yield some big profits if you buy at the right time and are not too risk seeking or risk averse. Although it is actually relatively straightforward to purchase Bitcoin via your smartphone using a coin wallet such as Coinbase, the mechanism behind it is actually rather complex and there is a lot of technical jargon that comes with it from ‘miners’ to ‘blockchain’ to ‘hash rate’.

In this post I will firstly outline what Bitcoin is, briefly summarise how it works, explain how it is different to conventional currencies and explain why it is suddenly growing in popularity. I hope this post clarifies some of the questions you may have about Bitcoin and if you have any further questions, please post them in the comments below. It is an interesting and topical issue which has the potential to replace traditional currencies  (aka Fiat currencies) whereby the central banks control the money supply. Already certain business are starting to accept payments in bitcoin and it was recently reported that people in central London have sold houses in the currency, therefore there is clearly potential. Others however argue its just a ‘craze’ or hype and that people will not be as confident in it due to the growing uncertainty about cybersecurity. Its recent crash last week proved that at some stage the bubble would start to bust, although could it rise again, and more importantly how high will it go this time round.

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Bitcoin was invented by Satoshi Nakamoto (the unknown inventor/ inventors of Bitcoin), who wanted to invent a peer to peer electronic cash system, in essence a decentralised cash system. Previous attempts at this had failed in the past until the invention of Bitcoin. It was created in 2009 and is now classified as a ‘cryptocurrency’. Numerous other cryptocurrencies such as Litecoin and Ethereum have been introduced although Bitcoin is by far the most successful one. [1]

A currency needs a payment network (accounts, balances and a record of transactions) as well as a central server or authority that verifies this network. In conventional currencies ( Fiat Currencies), this role is provided by the central banks such as the Bank of England. The challenge in a decentralised system is that every single transaction needs to be verified as if there are any discrepancies the whole systems will collapse. The game changing innovative feature of Bitcoin was that Satoshi Nakamoto  invented a system that could verify every single transaction in a decentralised system.

A brief summary of this is as follows:

  1. Cryptocurrencies are entries in a database that cannot be changed without fulfilling specific conditions.
  2. Bitcoin transactions are sent from and to electronic bitcoin wallets, and are digitally signed for security. Everyone on the network knows about a transaction, and the history of a transaction can be traced back to the point where the bitcoins were produced.
  3. The transaction is known almost immediately by the whole network. But a specific transaction gets confirmed after a certain amount of time. Confirmation is a critical concept in cryptocurrencies.  An unconfirmed transaction is pending and can be forged. Confirmation usually only takes a few minutes. Once a transaction is confirmed, it cannot ever be reversed, it is part of the so-called blockchain (database).
  4. Only miners can confirm transactions. This is essentially their job in a cryptocurrency-network. After a transaction is confirmed by a miner, it is added to the database and It has become part of the blockchain. For this job, the miners get rewarded with a token of the cryptocurrency.
  5. Anyone can be a miner, a decentralized network has no authority to delegate this task. Satoshi set the rule that the miners need to invest some work of their computers to qualify for this task.[3]

Bitcoin mining is legal and is accomplished by running complex computer programmes in order to validate Bitcoin transactions and provide the requisite security for the public ledger of the Bitcoin network.[4]

The Bitcoin network compensates Bitcoin miners for their effort by releasing bitcoin to those who contribute the needed computational power. The more computing power you contributed then the greater your share of the reward. In the initial stages of Bitcoin mining could be done on a personal computer. Today that’s no longer possible. Specialised computer hardware is now needed for Bitcoin mining. Mining with anything less will consume more in electricity than you are likely to earn.

Like traditional currencies, such as Sterling, Bitcoin has value relative to other currencies and physical goods. Whole Bitcoin units can be subdivided into decimals representing smaller units of value.The smallest Bitcoin unit is the Satoshi, or 0.00000001 Bitcoin. Bitcoin can be used to purchase goods from an increasing number of companies that accept Bitcoin payments. It can be exchanged with other private users for services performed or to settle debts. It can be swapped for other currencies, both traditional and virtual, on electronic exchanges similar to Forex exchanges. And, as it is untraceable, it can be used in illicit activity, such as the purchase of illegal drugs on the “dark web”.[5]

Recently there has been a surge in the value of Bitcoin the current valuation on the day of writing this is 1 Bitcoin is worth £10314.49. though there have been several large fluctuations in the price.[6]

Bitcoin was initially thought off as a niche product but the rest of the financial world is starting to take notice. A blog by Nieplet in the LSE Business Review [7], succinctly summarises the potential effect of Bticoin on Central Banks, he writes

‘Crypto currencies offer limited benefits for users who do not have overwhelming privacy needs. Their usefulness as money suffers from limited liquidity, which creates exchange rate volatility. As long as the number of people using crypto currencies is small, the incentive for others to adopt them too remains limited. But strong network effects may quickly disrupt the payments system once a critical mass of users coordinate on, and adopt a specific crypto currency.’ Central banks increasingly are under pressure to keep ‘their’ currencies attractive. They should let the general public access electronic central bank money, not just financial institutions (Niepelt 2015). To do this, they should embrace the blockchain.’

Why the sudden hype?

The latest spike was driven by the news that the Chicago Mercantile Exchange will trade futures in Bitcoin; a derivatives contract based on a notional currency. If more people trade in Bitcoin  that means more demand, and thus the price should go up. But what is the appeal of Bitcoin? There are three main reasons: the limited nature of supply (new coins can only be created through complex calculations, and the total is limited to 21m); fears about the long-term value of fiat currencies in an era of quantitative easing; and the appeal of anonymity. Perhaps is is time to reassess our relationship with money. Crypto currencies and Bitcoin may be the start of this revolution, if its volatility can somehow be ironed out. However, currencies need to have a steady price if they are to be a medium of exchange. Buyers do not want to exchange a token that might jump sharply in price the next day; sellers do not want to receive a token that might plunge in price. People are buying Bitcoin because they expect other people to buy it from them at a higher price; the definition of the “greater fool theory“. [8]

If you’re reading this from an investors point of view, my advice would be to play it safe and invest only what you can afford to loose. Although it has the potential to make you a millionaire overnight, it is extremely volatile and a crash like the one we recently saw is always a possibility if not a certainty. Its just a question of time.

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[1] https://www.chapman.edu/research/institutes-and-centers/economic-science-institute/_files/ifree-papers-and-photos/koeppel-april2017.pdf

[2] https://blockgeeks.com/guides/what-is-cryptocurrency/

[3] https://www.coindesk.com/information/how-do-bitcoin-transactions-work/

[4] https://www.bitcoinmining.com/getting-started/

[5] https://www.moneycrashers.com/bitcoin-history-how-it-works-pros-cons/

[6] http://www.xe.com/currencycharts/?from=XBT&to=GBP&view=1Y

[7] http://blogs.lse.ac.uk/businessreview/2016/10/21/bitcoin-may-have-implications-for-monetary-policy/

[8] https://www.economist.com/blogs/buttonwood/2017/11/greater-fool-theory-0