Actual economic effects...

[Spinflight]

FTSE closed on Wednesday at 6138. Closed on Friday at 6138.

Long term borrowing rates have come down as brexit appeared more likely, 10yr ones from 2% down to 1.09% post brexit. Similarly all the European long term borrowing rates rose sharply. Lesson? We are a less risky and more credit worthy outside the EU than in.

One ratings agency did drop our credit worthiness, though oddly the last time they did was out of fear of Eurozone contagion. Seems completely at odds with the long term borrowing rates, which matter quite a great deal given our debts.

The pound dropped, quite significantly. It appears however that there was some 'unusual' activity in the market which forced it down whenever the Leave campaign polled well. To the extent of trying to sell it when there were no buyers.

Some people lost a great deal of money, probably dwarfing the millions contributed to the remain campaign, lets hope it was Goldman Sachs and JP Morgan. :)

Cote,

Why do you repeat others' posts back to them as if you are making a correction of adding an explanation?

Your last post is basically just agreeing with Basic's and adding nothing new.

I am sorry but it is an annoying habit.

larry - "I don't think anyone argued about costs being up. If so, maybe you could point me to the post?"

This whole thread has lately been about you and another trying to minimise the impact of suddenly higher raw material costs so yes, we are talking about cost here as well as revenues.

"if the costs which are up are 20% of your selling price and gbp devalues 10%, your product now costs 2% more to make (10% of 20%), so costs 102%. Your selling price (assuming a profit margin of 20%) goes up from 120% to 132%. So your profit margin has gone from 20% to 29%. This gives you the luxury of cutting your costs to increase volume or using the excess profit for further investment. Please explain the flaw in the above argument.'"

The paragraph above is such a mess that I don't know where to start. It's endearing that you are so confident there is no flaw in it whatsoever

(1) Price can't be 120% as prices are not quoted in percentages.

(2) "Your selling price (assuming a profit margin of 20%) goes up from 120% to 132%." is just nonsense because:
........ (a) Prices are numbers not percentages
........ (b) Selling prices don't go up 12 percentage points just because. And especially just because your currency just got hammered.

(3) And for the same reason your profit margin didn't just jump by 9 percentage points. I do love your optimism, though

(4) Even if you manage to increase profit margins in a time of higher raw material costs that won't give you "the luxury of cutting your costs to increase volume", since:
......... (a) better margin doesn't mean you can cut costs
......... (b) "cut" costs don't increase volume. Higher capacity, higher demand, or better efficiency increase volume.

"I think, Cote, the you know EllieMay was talking about production costs being mainly research. Pedantic nit picking"

Elly said "intellectual property", so I understood "intellectual property". If she had said R&D, that is what I would have understood. Those are very different items for accounting purposes, although they might look similar to people who have no experience in forecasting financial statements.

Am I not allowed to agree with people, larry?

It's hilarious that you find it annoying

Don't worry, I doubt if I'll ever agree with you on anything.

And anyway, I was not agreeing with Basic in that last post (about FTSE 100). But don't let that stop you getting annoyed.

Cote, not everyone on this thread is an accountant. And it isn't necessary for us all to be to join the conversation. If you wanted to chat with accountants only, I assume that you would be on a different forum, no? I think "lay people" can discuss this meaningfully. And I would point out that "accounting" and "economics" are two different topics.

Finally, expressing a change in prices in percentage terms seems perfectly reasonable to me for the purposes of expressing relative changes from a base price.

Cote,

If you weren't so hilarious, you would be even more annoying.

Firstly, expressing numbers in percentages is normal when making comparisons.

Secondly, clearly selling prices are up 12% when translated into gbp. I would have thought this was implicit.

Finally you have done exactly the same to one of my earlier posts where I stated that a 10% sterling devaluation led to a 4% increase in export volumes and you brilliantly translated this into a ped of -0.4, even though I had actually done the reverse translation in my post!

You are welcome to agree but maybe you don't realise that your 'agreement' sounds like didactic correcting.

The most up-to-date measure of economic output among UK manufacturers has slumped to its lowest level in more than three years following the EU referendum.

www.cityam.com/246588/uk-manufacturing-pmi-sinks-even-lower-after-eu-referendum

Are we having fun yet?

Oh look - a squirrel

"Finally you have done exactly the same to one of my earlier posts where I stated that a 10% sterling devaluation led to a 4% increase in export volumes and you brilliantly translated this into a ped of -0.4, even though I had actually done the reverse translation in my post!"

PED is always a -

Let me explain further, because it always shows a - on one side the final coefficient will be a -.

a 10% fall in the value of the pound therefore leads to a PED of -0.4 because the % change in QD/% change in P = 4/-10 = -0.4 . Which is price inelastic.

So we know that for an improvement in the balance of payments to occur that both demand for imports and exports must be elastic, and as proved above demand for exports is inelastic, which means that the Marshal Learner condition cannot be met. We also know that the demand for imports is inelastic, but not as inelastic as exports, this due to the fact that there are few domestically produced substitutes for imported goods.

Further to this, even if the ML condition is met we must consider the J curve, which shows that even with a depreciation in the value of currency that the BOP deficit will get worse before it gets better. Now as we know that our BOP will not get significantly better because PED for exports = -0.4, but it does means that our BOP may get significantly worse in the short term.

Now as (x-m) is a component of AD, and going with the scenario outlined above, we can see that any fall in a component of AD leads to a reduction in AD its self because of the multiplier effect. Thus a fall in the pound is not likely to boost the economy in this case.

Expanding further we can look at the current consumer confidence levels, and business optimism, combined with a government drive for austerity and come to the conclusion that a recession is about to occur, certainly short term. In the long term the length of the recession and the ability of the UK to recover from it is based in the outcome of the negotiations of the UK with the EU, it is further compromised by the fact that LR investment has currently stalled from many firms which means that the capacity of the economy to grow further once the recession is over is stifled.

We must also consider the impact of inflation on the economy. The SR effect of the fall in the pound may not be immediately felt by the economy, inflation may be the LR outcome. This is because of the cost of importing raw materials and factor inputs that help the economy to run. Petrol/Oil/gas for example are major inputs in transport, energy production etc, any fall in the pound increases the costs of these inputs to the producer which when passed on to the customer will cause an increase in inflation. Further to this, in a receding economy inflationary pay rises are unlikely to occur which will see the standard of living in the UK fall. This is particularly of concern as the current UK gini coefficient, which measures inequality, is one of the highest in the EU, this could lead to further civil unrest as was seen in 2011.

There you are Larry, nice bit of proper economics for you, keep up you pie in the sky optimism, but its not factually based.

:)

What are you, smallfox, one of those sneering elitist experts?

There you are Larry, nice bit of proper economics for you, keep up you pie in the sky optimism, but its not factually based.

So economics is factually based when I studied economics at university it was based on theories. That then applied to entirely new situations may or may not be accurate. Economics is not science.

I am also entirely unconvinced that you can work out PED by the drop in value of the pound compared with import and export volumes over the course of a single month. For a start this assumes that in local currencies the prices will have changed and very often they won't have.

It's not over a single month but the trend for UK exports when the pound falls over timemail and bank of England data backs this.

Theregards is of course margin for error but I thought as we were discussing economics we might as well have a proper analysis.

Smallpox,

If you are going to patronise, at least try to write sensibly.

Are you really telling me that the 10% fall in gdp caused the ped of -0.4? Because that is what you have written. Also it is clearly not inelastic, that would be a ped of 0. What you mean is (in your opinion) a ped of -0.4 is relatively inelastic.

By the way, I, and I suspect everyone else on this thread, knows that a negative number divided by a positive number is a negative number. Thanks for the condescension, though!

The rest of your out was just jargon and symbols. If you really want to make a point, make it clearly and explain it properly. Otherwise people may come to the conclusion that you are merely showing off your little knowledge.

As for the recession, which will 'definitely' occur, I would happily take the other side of that trade. I think it exceedingly unlikely.

OK that makes a bit more sense. I do think though that in a global economy with multinational companies and frequent international travel the whole simplistic imports/ exports/ bop stuff gets increasingly less clear.

In the eyes of many people low pound = bad full stop. For many the pound going down sounds bad ifyswim so there is an assumption that it is and the direct effect is their lower purchasing power abroad ..... Now I am accepting that it may due to increased costs of imports be negative overall but there are certainly both winners and losers if the £ depreciates.

Also it is clearly not inelastic, that would be a ped of 0. What you mean is (in your opinion) a ped of -0.4 is relatively inelastic.

Zero would be perfectly inelastic

Anyone want to place bets on tomorrow's pmi construction and/or Wednesday's pmi services data?

'Ped is always a minus',

Well, to be pedantic, no. Giffen goods have positive pecs. Off the point of the thread, though....

Basic,

Thank you, just googled it; clearly I am not an economist. Weird definition of inelastic, though, a long way from the maths and physics definitions!

This thread started out so good and has become so tedious...

No one could just stick with the facts.

Let's contemplate the Dunning-Kruger Effect.

CoteDAzur smallfox

The 97.4% margin was given as an illustration and I accept that such margin is only achievable when selling a brand new patented drug to an American consumer.

CoteDAzur - obviously Pzifer 11% is after all cost, including fat board salaries and taxes. Even that, Pfizer net profit margin after taxes was 23% (13bn sales, 3bn net) after everything last quater (ending April 16).

As for your technical argument about the accounting treatment of IP, it all depends though. If the IP is held in a tax haven and each dose is charged a royalty, then it becomes a 'P&L' line.

Lol Elly. But I got a Desmond 20 odd years ago

And i got my qualifications about the same time, not a desmond though, I'm a pretty heavy drinker.

"Are you really telling me that the 10% fall in gdp caused the ped of -0.4?"

Nope that would be the bank of England data, although the - is misleading, in economics with PED we tend to remove it and say that a 10% fall in gbp would lead to a 0.4 % increase in demand for British Exports.

"The rest of your out was just jargon and symbols. If you really want to make a point, make it clearly and explain it properly. Otherwise people may come to the conclusion that you are merely showing off your little knowledge."

Its AS economics larry, not Jargon and Symbols.

Basically the Marshall-Learner condition which basically states that an improvement in the balance of payments will only occur in event of a currency devaluation if both the PED for imports and exports is price elastic.

As the PED for UK exports is relatively price inelastic this suggest that a significant improvement in the balance of payments due to a fall in the currency is unlikely, unless the PED for imports is highly elastic, now as we know that this is not the case a great improvement in the BOP is not going to occur.

The J curve suggests that in the short term, a devaluation of a currency will lead to a short term increase in BOP deficit, before improving, which means that in the SR that exports will be of a lower value than imports.

Your point about recession? As we have seen today manufacturing has taken a hit, in previous discussions we have discussed that there has been a fall in both consumer confidence and business optimism this suggest that both consumption will fall.

Ok, so now another symbol/jargon bit. Aggregate demand ( the demand for the GDP of a country) is comprised of:

Consumption + Investment + Goverment Spending = (exports - imports)

Or C+I+G+(X-M).

Thus as stated, a decrease in consumption due to low consumer confidence, the same with investment, a government still committed to austerity plus the fact that in the short term export value is going to be lower than import value, that AD will decrease, and we will see a fall in GDP, and hence the recession.

The worrying thing is that further growth is hampered by the lack of G and I, because both of these will tend to increase the long term capacity of the economy.

Thanks for trying to correct my economics with Giffen goods though, I'd pretty much not bothered to include that because its not relative to exports.

Small,

Thank you for the explanation. It is helpful. Whether it is AS, degree level, or year 7, I still think that one doesn't just write symbols out without defining variables, especially as this is not a specialist forum.

Re the PED, you are still confusing cause and effect. The ped of-0.4 is caused by the nature of our exports. This ratio is then applied to the change index level. I assume the PED would be relatively constant across a range of gbp changes.

As for the recession, you have Goldmaas on your side, I have the head of Moody's and the the institute of accountants, both of whom think we will dodge a recession. That is the problem with economic forecasting, It all looks quite impressive until one looks at the subjectivity of the

Inputs.

" The ped of-0.4 is caused by the nature of our exports"

As the formula for PED is % change in quantity demanded/% Change in price, I'd imagine that it is to do with the change, and the bank of England data said that a 10% fall in GBP leads to a 4% increase in demand.

4/-10= -O.4