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Archive for June, 2013


Interest rate increase

The media is abuzz with the news of an interest rate increase. Why are rates rising and what are the primary effects of rising rates? Rates are not rising because of some new Fed policy. To the contrary, rates are rising in spite of relatively constant (and peculiar) Fed policy. Rates are rising because the rate of return in the economy is rising. A recovery is finally underway. By the way, the first true indicator of this was the recent improvement in the housing market. This is quite typical of recoveries from recessions . . . the housing market responds first.

The primary effect of a rise in interest rates is that the value of most bonds or stocks that act like bonds (like utilities that pay constant dividends) will decline. The finance term that relates to this effect is “duration.” Duration refers to the sensitivity of asset value to a change in interest rates. Positive duration is when an increase in rates causes a decrease in values. The larger the duration, the larger the decline in value with a given increase in rates. Bonds with longer terms will have larger duration.



Is bitcoin a reasonable alternative money?

The first problem is that bitcoin appears to be created by useless work. Solving a mathematical puzzle is what earns new bitcoins.

The second problem is that the quantity of bitcoin is limited to a fixed amount. This suggests that ultimately there will be deflation in bitcoin. In other words, bitcoin will be worth more and more through time. If investors in bitcoin realize this, the spot bitcoin price will jump upward to reflect a rate of appreciation that is roughly the market rate of interest . . . but not the rate in bitcoin. What do you think the bitcoin interest rate will be? Will there be a bitcoin credit market?


Organ Transplant Shortage

Why is there a shortage of organs available for transplant? The answer is very simple. There is a shortage because the public sector controls the market so as to produce a wholesale price of zero. For those who hate markets, the big bugaboo is that they think that only the rich will be able to afford organs if there is a functioning market for organs. There are two answers for this critique. First, if there are a great many more organs available, the equilibrium price might be quite affordable. Second, there is the issue of what constitutes “rich;” it could be that the market would provide credits for donors that could be given to organ recipients. Thus, the new “rich” in this context might be those whose family, or church, or union, or some other association has made donations to the clearinghouse. We need a palpable incentive to get well people to donate organs as well as to get them to sign donation cards that would permit harvesting of their organs in the event of a fatal accident or illness. The incentive could be transferable credits that could be sold, given away, or inherited.

One has to realize that the wholesale price must be well below the retail price of organs. This requirement exists because those who harvest the organs, categorize them, and ship them, must be compensated for their work and for the facilities in which they work. Also, those who do the transplantation must similarly be compensated. Nevertheless, if there were vastly more organs available and transplanted, scale economies would drive down these costs.

With an abundance of organs for transplant, the entire business changes. First, organs would not be allocated to only the very, very sick. This would improve the chances of success tremendously. Second, the larger number of transplants would improve the skills of the transplant teams also improving the chances of success. Third, we may learn more quickly about avoiding rejection without taking drugs with huge side effects . . . drugs that suppress the immune system.