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In recent years, due to a multitude of factors, auto sales are up. One of the first factors that we considered is interest rates are at historically low levels. Because of these historically low rates, consumers have been financing new car purchases for cheap. There also may be a correlation between the falling unemployment rates and the rise in automobile purchases. As more people become employed, more people commute to work and need a car to do so. Furthermore, gas prices have been low which could also possibly correlate to a rise in automobile purchases. More people can afford to pay for gasoline and therefore more consumers will be in the market to purchase a vehicle. If you look at the very end of the auto sales line, there is a small drop off in recent years. Around the same time period, the graph shows bank prime loan rates beginning to rise. Moving forward, it will be interesting to see how these two factors (bank prime loan rates, and ride-hailing services) continue to affect the sale of cars in the United States. Passenger-car models are becoming less favorable. Instead of buying smaller sedans and convertibles, consumers are now purchasing larger sports vehicles and trucks. Therefore, more cars are being sold leading to more profits for automakers.

Autonomous cars and the rise of ride-hailing services have already begun to make an impact and have the potential to change the auto industry dramatically. New ride-hailing services are expected to drop annual growth of auto sales by about 3.6 percent in the coming years. In dense, urban areas, with cheap ride-hailing services, there is little need to own a car.


Do you think the economy will continue to see an increase in the sale of automobiles or will ride-hailing services like uber take over?

What do you think the next potential interest rate hike will do to new automobile sales?


On November 2nd, President Trump nominated Jerome Powell for the position of Fed Chairman. He had previously been a member of the Federal Reserve Board of Governors. Governor Powell will be replacing the current Fed Chairman, Janet Yellen, in the coming weeks. He will preside over the seven-member Federal Reserve Board of Governors who set the interest rate and control the U.S. money supply. It has been argued that the Fed chairman is the most powerful appointed position in the U.S. government. Over the past few weeks Powell has testified in front of Congress as part of the confirmation process. He has indicated that his policy decisions will likely mirror Yellen’s past decisions.

Yellen’s monetary policy focused on gradual interest rate increases aimed at curbing growing inflation. During his Congressional confirmation hearing, Powell said, “I think the case for raising interest rates at our next meeting is coming together. I think that conditions are supportive of doing that.” At the December meeting, he is likely to lead the Board of Governors through a raise in the interest rate, which is expected to lower inflation through a decrease in disposable income.

This graph depicts the inflation rate over the past five years and the anticipated inflation rate over the next five years:


  • Why would this increase in interest rates have this expected effect?
  • What are the risks of rising inflation?
  • Are there any other effects to the American economy with a transition of the Fed Chair position?

Anna Litvak & Gabby Smith


Have you ever realized that when you get on a plane and look around, there are little to zero empty seats? Or, have you ever heard an airline try to sell credit to passengers because they overbooked their flight? According to the Bureau of Transportation Statistics (BTS), the odds of seeing an empty seat next to you on your next flight are even slimmer than they were before. The load factor, which is the ratio of the average amount of some quantity and the maximum possible, has been increasing significantly since January of 2000. An empty flight would have a load factor of 0 and a full flight would have a load factor of 100.

The graph above illustrates the load factor of US domestic flights between the years of 2000 and 2017. The red line represents before seasonal adjustment and the blue line represents after seasonal adjustment. Each peak on the red line can be represented by a summer month when travel is most popular, and each low-point on the red line is represented by a winter month when travel is least popular. You can tell that the gap between these points has become smaller over time suggesting that airline's are becoming more efficient in improving their airplane capacity. If you look at the blue line, airlines are adjusting their business model seasonally,  mostly in winter months, to entice consumers to want to fly. As the load factor increases from 70 percent to roughly 85 percent, flights become more crowded. As flights become more crowded, the price per ticket goes down because the airline is making more money by selling more tickets. The Graph below shows how air fare increased steadily from 1989 to 2013 ( without considering the 2008 financial crisis). However, since 2013 air fare has decreased steadily. If you consider the above graph, this makes perfect sense because as load factor increases, price per ticket decreases. Obviously these graphs only have to do with US domestic flights, but is there anyway that load factor increasing could have any kind of effect on international flights? What do you think happens when airlines reach an average of 100 percent load factor? Will air fare lock at a certain price, or will it begin to increase?




Crowds in the air

Written by Chris Randall and Danny Mitchell



Why do expectations matter so much? Because predicting the future has to be really precise to serve as a reliable basis for building a new plant or otherwise undertaking "I" investment. The following is from an online discussion forum in which someone claims to have "the" value for a company, or rather the publicly traded shares in it.

... Always be skeptical! ...

A wise man once said: In theory, there's no difference between theory and practice; in practice, there is.
It's true, the fair value of a company is based on how much cash it can generate over its lifetime. But it's impossible to even roughly estimate this cash generation. The discount rate is also difficult to estimate, and somewhat subjective.
If you're off by even 1% on any of your assumptions, your fair value estimate can be off by as much as 50+%, depending on how far out your estimate is.
My advice: Beware of delusional Tesla bulls bearing discounted cash flow models.

09 Nov 2017, 11:59 AM
Boris Marjanovic, [Seeking Alpha] Marketplace Contributor

The bottom line: you can use formal spreadsheet analysis to highlight assumptions, but in the end the yes/go is based on the expectations of senior management for which scenario is likely, and which (money-losing) scenarios are unlikely. Because such managers read the same publications and interact with each other and give interviews, investment "I" in our macroeconomic sense (and investment in the little "i" stock market sense) reflects social behavior and correlates across firms and individuals. Always be skeptical!


On Wednesday, we ended class on the assertion that Bitcoin is in fact a Ponzi Scheme. Some of us have heard of the famous Bernie Madoff case, or have some other background knowledge on schemes, but what is a Ponzi Scheme, really? How does it operate? In this blog, we dive into Ponzi Schemes, explain how Bitcoin is effectively a scheme in and of itself, but question other institutions in our country, such as Social Security, and explore elements within them that make them similar to Ponzi Schemes themselves.

In short, a Ponzi Scheme is investment fraud. A man, such as Bernie Madoff, or a company will lure in investors with the promises of major payoff down the road. The schemer will then attract more investors and pay back the initial investors with the newer investors money, boasting of their success in the market relative to their “competitors” who are actually investing the money. From then on, the cycle repeats, and the scheme grows, with each wave of new investors paying off the “investments” of those who came before them. Not a single real investment is made--the whole thing is fraud--the schemer gets rich, the newest investors get scammed, and the whole scheme unravels and collapses when it runs out of new investors to supply cash for its previous investors.

Bitcoin is a complicated and confusing new form of “digital currency” that operates on the dark web. In theory, it brings down the cost of buying goods online. People purchase Bitcoins because they believe their worth will eventually skyrocket as it becomes more common. The first people who went in on bitcoin tend to hoard their own bitcoin for this reason, waiting for this skyrocket in value and popularity. They recruit new investors in bitcoin and encourage them to spend all their bitcoin in order to facilitate this. In short, past investors are waiting to cash in on newer investors spending for their own financial gain--sound familiar? For this reason, many economists come to the conclusion that Bitcoin has become nothing more than a Ponzi Scheme. While it may have been intended to be a shining beacon in the growing trend of digital currency, Bitcoin has faltered, has suffered extreme volatility and recent depreciation in value, and could turn out to be a giant scheme, leaving countless losing significant amounts of their own money.

Thinking now of some elements Ponzi Schemes in terms of other things we have learned about this past semester, why isn’t Social Security considered to be a Ponzi Scheme? Retired people, people who used to be in the labor force, are profiting off of tax revenue from people currently in the labor force. The government literally takes your tax money with the promise of payoff up to 45 or 50 years down the road. We have even discussed how Social Security is going to run into trouble as the workforce shrinks down and the system runs low on taxpayers to support the system. This sounds dangerously close to a Ponzi Scheme. But why is it not a Ponzi Scheme? Certainly every taxpayer in America hasn’t been duped by a mere scheme since before the Second World War, right? Right.

Before we explain why social security is not a Ponzi scheme, let’s delve a bit deeper into the political elements of social security that make it appear to be a Ponzi scheme. Essentially, political gain made it expedient for politicians to promote the social security early in its development. It provided big payouts to retirees when the workforce was still large enough to bear the burden of the newly retired. As John C. Goodman says in his Forbes article titled “Why Was Social Security Designed like a Ponzi Scheme?”, “This [early year revenues that are much higher than the required payout] means that (like a chain letter), politicians can give retirees in the early years more than what was promised. They can also spend the extra revenue on other programs that confer benefits on their constituencies.” To put it in short, at the beginning of social security politicians gain valuable political capital by going above and beyond promises made at the onset of social security. However, political gain does not dictate a shift in policy until the well begins to run dry - a shift we’re beginning to see now. While political expediency did make social security into a perhaps inefficient system, it did not make a Ponzi scheme - as the next paragraph explains.

Social Security is not a Ponzi Scheme.  In real Ponzi Schemes, such as Madoff’s, everything on the books is fraud, and no real investments of any kind occur. The Social Security Administration describes Social Security as follows: “It would be most accurate to describe Social Security as a transfer payment--transferring income from the generation of workers to the generation of retirees--with the promise that when current workers retire, there will be another generation of workers behind them who will be the source of their Social Security retirement payments.” Ponzi Schemes, the investors’ money isn’t being invested in anything at all, but for Social Security, there are extremely detailed financial reports put out annually about the system, ensuring that no fraud occurs. So in conclusion, while Social Security may look somewhat like a Ponzi Scheme on the surface, this could not be further than the truth. When the government takes your money for Social Security, it is really investing it and putting it towards the cause it says it is going to. It is not fraud; it is not a Ponzi Scheme.


  1. What makes a Ponzi Scheme a Ponzi Scheme? How does it operate
  2. Research the Bernie Madoff case of 2008, how is this case exemplary of why such schemes eventually are doomed to collapse?
  3. Taking this information about Bitcoin into account, why should you be weary of just buying into Bitcoin today?
  4. Senator Rick Perry called Social Security a Ponzi Scheme during the GOP debates, why is he incorrect? What about the makeup of Social Security would lead people to believe him?
  5. Can you think of any other systems that may appear in some ways to be a scheme, while not being a scheme in actuality?


Robert Griffin
Matt Marshall


As Congress works on a package of tax cuts, it's important to think about whether our current deficit is sustainable. Now Japan is fast approaching a point where debt issues will overwhelm their financial system.Note The US is not Japan: we have a growing population, less debt, and smaller deficits. Nevertheless at some point we too will need to put our fiscal house in order.

...we don't need to run a surplus, but the current deficit isn't sustainable...

What follows uses a simple (but standard) arithmetic framework to clarify what matters. As long as debt to GDP is stable, we should be OK, because the demand for financial assets grows with the economy. In general institutional investors such as pension funds hold government bonds for good reasons, and that a particular bond has matured doesn't change that. So they want to buy new bonds to replace the old. In other words, at today's level of debt, the Treasury can "roll over" debt, issuing new bonds to replace old. There's not only no need to repay our debt, financial markets would be hard-pressed to find alternative assets if we did so. Indeed, 20 years ago, when the Clinton administration was running budget surpluses, Federal debt was declining rapidly. Tax cut proponents found Wall Street figures to wring their hands about how markets couldn't function debt was repaid.

Our economy is also growing. So even if the absolute amount of debt continues to rise, potentially debt to GDP will not. Indeed, that's what happened following WWII. By the end of the war debt surpassed GDP, but fell to just over 20% by 1974. This didn't happen because we ran budget surpluses. Quite the contrary, on average we ran small deficits after 1948. But we did grow, enough to outgrow our debt. But today we're running significant deficits and not growing.

Interest rates matter. In the 1950s and 1960s they were relatively low, so the interest the Treasury paid on our debt didn't offset growth. Today we again have low interest rates, but we also have low growth. So we need to ask whether that changes the situation.

Again, what we want to look at is whether debt is stable relative to GDP. That is, if B is the stock of bonds and Y is GDP, is B/Y growing? On its own – assuming bonds are rolled over – the stock grows with accumulated interest: Bt+1 = Bt(1 + r), where Bt is the stock of bonds at time t and r is the nominal interest rate. Similarly, GDP grows at Yt+1 = Yt(1 + g) where Y is nominal GDP and g is the nominal growth rate. Hence debt to GDP will grow at:


To put this to use, we need three pieces of information: what is the level of debt, B/Y; what is the growth rate g;, and what is interest rate i. That will give us an indication of whether debt is sustainable, and if not, what level of surplus is needed to keep it within bounds.

The first is easy: Federal debt is approximately 100% of GDP, that is, debt to GDP ratio is 1.0 – convenient for arithmetic, as multiplying by 1 is easy. We then need to know the ratio (1 + r)/(1 + g). When r and g are single digits in percentage terms, as in the US, that ratio is approximately 1 + r - g. In other words, with our debt ratio of 1, B/Y will shrink as long as (1 + r - g) is less than 1. The critical issue then is the value of (r - g). If r > g then our debt level will rise, unless we run surpluses. If r < g then we can run (small) deficits indefinitely, as happened during 1949-1974, yet not see our debt level rise.

Now while it might seem that we ought to be able to earn better than the growth rate, this is fundamentally an empirical question. Thanks to the Great Inflation of the 1970s and 1980s nominal interest rates and nominal growth varied wildly. But real growth and real interest rates stay within fairly narrow bounds, except at the depths of our recent Great Recession. The graph below sets forth those data. Excluding the peak around 2009 we find that the average level of (i - g) is about -0.6%. If we include the peak, the average is roughly 0. Now as the graph below indicates, real long term bond yields fell over the past 15 years and are now on the order of 0.8%. Investors, rightly or wrongly, have not built strong growth into bond prices. So to date there's no evidence that the Fed's ongoing normalization of interest rates will raise real interest rates relative to growth. If so, we can run deficits of 0.6% of GDP forever.

To reiterate, we don't need to run a surplus. However, we do need to bring the budget close to balance. Unfortunately, our current deficit is about 3% of GDP. Now that's a vast improvement over the -10% of GDP level at the trough of the Great Recession. Employment growth and profit growth led to stronger income tax receipts, while the improved employment situation led to a drop in "safety net" expenditures. That combination lowered the deficit by a full 7% of GDP. Unfortunately we can't expect further gains, as profits are now high and (un)employment low. There is however downside potential. So we ought to count on the deficit averaging out at -3.5% of GDP, not -3.0%.

...that means we need to "enhance revenue" by 4% of GDP, not cut taxes...

That does not factor in the aging of the baby boomers, who haven't fully retired and whose healthcare expenses will continue to rise until offset by rising boomer mortality. Such retirement-related expenses will likely come to at least 1% of GDP. Hence we need a fiscal adjustment on the order of 4.0%-4.5% of GDP. Congress needs to "enhance revenue," not cut taxes.

Note: Hoshi, Takeo, and Takatoshi Ito. 2014. “Defying Gravity: Can Japanese Sovereign Debt Continue to Increase without a Crisis?” Economic Policy 29(77): 5–44.


The United States Census Bureau issued a 2014 report stating that between 2012 and 2050, the US will experience considerable growth in its older population. The proportion of people aged 65 or older in the United States population has already begun to grow.

As the generation of baby boomers, those born between 1940s to the 1960s, reach retirement age, America faces an oncoming labor shortage. The FRED graph below shows the decline in civilian labor participation rate starting in 2000, which can be partly attributed to the baby boomer generation retiring.

A steadily declining population can bode poorly for a highly advanced economy such as the United States. People above the age of 65 are typically in retirement and therefore do not contribute much to the economy. They are only contributing minimally to productivity and do not spend or consume as much as their younger counterparts. They also are less likely to be able to support themselves, leading to their dependence on others, whether it be on the government, on families, or on both.

But does the decline in population actually stunt the economy?

The main effect on the economy caused by their retirement of the baby boomers is a labor shortage, which leads to dozens of more economic problems. As the baby boomers begin to retire, they are leaving the labor force much smaller than it was in their day, and while this may seem like a good thing because of the possibility of reduced unemployment, there are many downsides to a smaller labor force. To begin with, as more people retire, a larger percent of the population will be reliant on the government for support, meaning more social security and medicare. This is especially true as a large portion of baby boomers are not financially prepared for retirement.

Another effect of the retirement of baby boomers is less knowledge and expertise in the workplace. As of now, the baby boomers have spent the longest time in the workforce and therefore have the most experience and expertise in their fields of work. As they retire, new and inexperienced workers will enter the workforce with less mentors. The decrease in the level of expertise will lead to a decrease in labor productivity and  will have a very large impact on the growth of the economy considering rising productivity is key to long-term economic growth.  

With this being said, some economists still argue for the benefits that population growth presents for an economy, particularly in developing nations.  

We have listed just two examples of how the economy will be affected by the retirement of the baby boomers. What are the rest of the effects? For example, the real estate market and investment spending will both be affected, but in what ways? Will families be negatively affected? What about society as a whole?


Written by Annie Gianakos and Liza Lanier.




Investments make up approximately one-sixth of the U.S. GDP. These days Bitcoin is one way people are investing their money. Bitcoin is a form of digital currency with a market cap of over $7 billion. The typical investment strategy of buying low and selling high is utilized by traders of this cryptocurrency. Recently, Bitcoin has experience its toughest losses so far; the virtual token fell as much as 8.4%. This is in part due to the many inherent risks of BTC, decreasing the value of this new cryptocurrency.

There are several reasons to explain the phenomenon: first, it doesn’t have enough transaction volume, which makes it not qualified enough to be a currency. Second, it suffered from a series of hacker attacks, one of which caused the trading platform to crash down on June 15th, 2017. Security problem became the biggest concern for investors. Third, the overall technology market experienced a serious downturn during the past few months. Thus, some investment bankers were not optimistic about the future of Bitcoin’s worth. It’s important to remember the number one rule of investing is diversification. So whether or not you think Bitcoin is amazing, don’t put all of your eggs in one basket.

“So buying into Bitcoin has, at least so far, been a good investment. But does that make the experiment a success? Um, no. What we want from a monetary system isn’t to make people holding money rich; we want it to facilitate transactions and make the economy as a whole rich. And that’s not at all what is happening in Bitcoin.”  

——   Paul Krugman

  • What are other reasons for the depreciation in Bitcoin’s worth?
  • Is there any potential for Bitcoin’s past investment popularity to resurface in the future? Why or why not?
  • Would YOU invest in Bitcoin?

By Collette, Kaitlyn, Ruofan


Politicians, aiming to increase employment rates for their constituents, ought to be concerned with policies supportive of small businesses rather than large corporations.

The number of employees in small to medium sized businesses doubled from 2003 to 2016. In developing countries such as Afghanistan and Ethiopia, small and medium sized enterprises (SMEs) make up more than half of total employment. In other countries in which the economies are becoming more established such as Mexico, SMEs account for one third of total employment. Prior to 2009, SMEs outperformed larger companies in terms of employment growth.

However, the success of SMEs has dwindled since the recession. Why is it that politicians are overlooking the opportunity to increase jobs through supporting local businesses? Could current policies be negatively affecting corporations or small to medium sized businesses?

This graph shows the number of full-time employees in SMEs as well as their share of the employment "market."
Source: Bloomberg

Written by Campbell and Margot


Now what has been happening with growth? Over the long haul we can see:

  1. a declining trend
  2. lower volatility (variance, in statistical terms)
  3. longer spacing in between recessions (fewer negative numbers despite the lower average level)

This is a theme of Levinson's Extraordinary Time. But look and the graph and think about what has happened to volatility, can you identify a "Great Moderation"?