Friday, January 09, 2015

Nine Two Assets

Some things are much more expensive in some countries than others. To figure out cost of living or how far money goes, you can't just adjust using the exchange rate. The idea of 'Purchase Power Parity' adjusts the exchange rate to try compare the buying power of the currency in different areas. So a developing country, for example, may have a higher Gross Domestic Product (GDP) if adjusted for purchasing power than if you just compared them using the exchange rate. For various reasons demand is higher in place that have strong currencies. It is not the number of units of a currency that makes it strong. The units are actually arbitrary. It is how much that currency can buy and how well it tends to keep that value and not get eaten away by inflation.

In the long term, the economic assumption is that Purchase Power Parity should pull prices together. If something is cheap in one place, people will go there to buy it. Because more people want to buy it but there isn't more of it available, the price will go up. So in theory, the price for the same thing should be the same in the long run. Theories normally simplify things in order to look at one specific factor and shouldn't ever be taken as gospel. The long run never actually arrives and supply and demand don't tend to balance each other out evenly everywhere because of obstacles - i.e. other things the model ignored matter too.

A great example of supply and demand in action is the Uber pricing curve from New Years Eve. Uber has flexible pricing. As demand surges, the prices go up in order to encourage more drivers to drive. The more supply surges, since more drivers get attracted by the higher rates, the more the prices fall. This is an incredibly efficient way of getting the best price - i.e. the one that gets the most people where they want to go. We tend to think of the price in terms of the input - how much effort there was, what the costs were. That is not how price works. A price is simply the amount agreed upon by the buyer and seller and supply and demand are much more important factors than effort or value. The person who wants to leave for the New Year's party at 9pm and come home at 2pm may feel hard done by that the prices are so expensive. They are not hard done by. If they went out at 7pm (or 11pm) and came home after the rush, they would get a good deal.


The same thing exists everywhere else. With investments, you need to be careful when you are buying what everyone else is. Cash and Bonds are a great example. Because everyone thinks they are 'risk free', governments and banks basically only have to pay close to zero percent interest to get people to leave their savings with them. If you take inflation into account, in many cases you are actually paying them to use your money.

The other obvious Nine Two (9pm, 2am) assets and investments seem to be houses in cities and private education. When you have to work in a certain area you are a captive audience. A commute is not a factor taken into account in Purchase Power Parity models. Restrictions on more houses being built also mean not many more drivers are going to be missing out on their New Years kisses. Sitting round with your friends who all insist that their is really no other option to expensive private education means you are going to have to leave a couple of hours after midnight.

There is absolutely nothing wrong with going out at Nine and coming home at Two. It does mean you have to earn the bucks to do it. To earn the bucks there will be certain things you need to do. What is important in all this is that you make the choices consciously

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