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  • China and the Trade War: How Liquidity Reserves Can Affect the Game
    23 May 2019

    A country’s total reserves can have a dramatic impact on its economic policies. In this post, we’ll look at the countries with the top reserves, especially China, and how that should impact China’s trade wars with the U.S.

    • Liquid reserves allow countries significant leverage in economic policies and trade wars.
    • China currently holds over $3 trillion in reserves, far higher than Japan’s second-place $1.24 trillion in reserves.
    • China also holds a significant amount of U.S. debt, forcing them to walk a tight rope with the U.S.; they don’t want to rock the boat too much, but they have tremendous leverage to use if necessary.
    • If China were to sell off its reserves, it would have cascading effects on the economy, including driving up U.S. interest rates.

    You don’t fight a trade war without ammunition on both sides. In compiling the data of the largest reserves--or total reserves measured in U.S. dollars--you’ll find a keen perspective as to why the markets seem to react to every headline related to the U.S.-China trade wars.

    Why do liquid reserves matter? As it relates to trade wars, a country’s reserve stockpile has a large say in how much economic weight it can throw around. If China stockpiles a large amount of U.S. dollars, it can influence the value of its own currency, the yuan, which is pegged in U.S. dollars. Given that China holds over $3 trillion in reserves--far higher than Japan’s second-place $1.24 trillion--any movement from China can mean massive economic consequences for the globe.

    Top 5 Countries with the Biggest Liquidity Reserves

    1. China: $3.09 Trillion
    2. Japan: $1.24 Trillion
    3. Switzerland: $744 Billion
    4. Saudi Arabia: $496 Billion
    5. Taiwan: $462 Billion

    How (and Why) Countries Use Liquidity Reserves

    The reason any investor would want to hold liquidity is obvious: it makes an investor more flexible. It keeps one’s options open. But on a geopolitical level, liquidity has far-ranging uses. Countries can employ these reserves strategically to help manage the supply (and value) of their home currencies. This, in turn, can influence the price of exports. If a country like Japan manages its reserves well, it can compete with dominant exporters like China by making its products relatively cheap to consumers like the U.S. These reserves give countries economic power and financial weight for throwing around.

    We constructed this graphic according to IMF Data, which provides a comprehensive list of variables that go into factoring each country’s liquid reserves.

    How the Reserves Impact the U.S.-China Trade War

    Because the exchange rates between currencies have such an impact on a country’s exports, one can expect these numbers to have a drastic effect on trade wars. In particular: the U.S.-China trade war.

    Consider that China holds a significant amount of U.S. debt. This gives China leverage if they’re unable to otherwise respond to tariff threats from the U.S. China’s ability to buy up U.S. government debt also means that it has the ability to unload that debt in massive amounts at a moment’s notice. Drastically increasing the market supply with U.S. treasuries would, in turn, push down U.S. bond prices. With lower bond prices come higher yields, discouraging the free flow of credit in the U.S.

    If China were ever to sell off these reserves, notes Bloomberg: after a cascade of effects, such a move could also drive down the value of the U.S. dollar. Low currency costs would mean that U.S. products are cheaper and more competitive on the global marketplace.

    China faces a delicate balancing act with its substantial reserves. Though it could drive up U.S. interest rates, driving down the value of the dollar would also have adverse trade consequences. Watching how China manages its substantial reserves will be integral to understanding the progress of the trade war.

    Data: Table 1.1

  • How Much Life Insurance do You Need? It Depends on These Factors
    22 May 2019

    Everyone needs life insurance. But how much each individual needs varies from person to person. You will want to find the right life insurance policy that accounts for how much money you earn and the cost of living in your area.

    So how much coverage do you need from life insurance? Here’s the breakdown based on state and income levels to help you zero in on how much you should look to get from a policy.
     

    • Even the lowest wage group in the most affordable part of the country (Jackson, Mississippi) still needs at least $162,000 of life insurance.
    • Those high earners in Washington, D.C., need the most life insurance in the whole country, averaging more than $1 million. 
    • In Sioux Falls, South Dakota, the disparity between the high- and low-income groups is relatively low, with high earners only needing policies covering $200,000.
    • In other places, like Baltimore, Maryland and Los Angeles, California, the disparity is much higher since the wealth distribution is more extreme in those cities compared to some other places in the country.

    How much you want to spend on life insurance is a personal choice. But you should still weigh your particular circumstances to determine how much life insurance makes sense to protect your family’s long-term financial interests. The more money and assets you have and the higher the cost of living, the more you should consider taking out in life insurance.

    Highest Life Insurance Rates

    Low Income Group: 
    1. District of Columbia - $344,656
    2. Anchorage, Alaska - $254,630
    3. Seattle, Washington - $251,006

    Median Income Group: 
    1. District of Columbia - $621,026
    2. Boston, Massachusetts - $408,553
    3. Anchorage, Alaska - $394,820

    High Income Group: 
    1. District of Columbia -  $1,050,947
    2. Boston, Massachusetts - $685,022
    3. New York City, New York - $666,045

    Lowest Life Insurance Rates

    Low Income Group: 
    1. Jackson, Mississippi - $162,505
    2. New Orleans, Louisiana - $166,129
    3. Little Rock, Arkansas - $173,758

    Median Income Group: 
    1. Jackson, Mississippi - $246,428
    2. Little Rock, Arkansas - $257,681
    3. Charleston, West Virginia - $263,952

    High Income Group: 
    1. Jackson, Mississippi - $397,491
    2. Sioux Falls, South Dakota - $399,589
    3. Little Rock, Arkansas - $413,417

     In Washington, D.C., the cost of living is so high that even low-income earners still need an average policy that covers more than $300,000. In Jackson, Mississippi, where the cost of living is significantly lower, the highest earners don’t even need $400,000 in coverage on average. So if Washington, D.C.’s low earners need comparable amounts to Jackson’s highest earners, you can see that cost of living has a strong influence “in how much you should be paying in life insurance. 

    We compared three income groups based on wage distribution provided by the U.S. Bureau of Labor & Statistics. These buckets represent the 25th, median, and 75th percentiles of expected earnings for the average worker in each state.  Using the tool from SmartAsset we took a sample of people born in 1984 who do not own a house and have $25,000 in savings. The insurance assumes income over a 20 year period, where you receive 50% of the monthly earnings with no dependents. Lastly, we exclude Social Security Benefits, and assume inflation of 2% and an annual return on savings of 4%.

    Are you considering buying life insurance? Do you already have a policy and you’re considering revising it? It’s important for people to understand the averages, like in our map above, but it’s also helpful to hear personal anecdotes and stories. We encourage you to leave a comment and share your lessons learned for the benefit of our other readers.

    Data: Table 1.1

  • Does Your Country’s Production Still Stack Up When You Consider Purchasing Power?
    20 May 2019

    Beyond a country’s gross domestic product, economists also like to look at a metric known as purchasing power parity. Where per capita GDP shows roughly how much money individual people have, PPP demonstrates how much people can afford. PPP tries to give as much of an apples-to-apples comparison of what things cost in one country compared to another, controlling for factors like differences in currency valuations and inflation.

    To paint a picture of how people are able to live, you need to understand not just how much money they have, but how much they can buy with that money.Looking at the world map of per capita GDP adjusted for PPP, you come away with two insights: The first is that, by and large, an individual’s purchasing power varies tremendously by region. And second, if you compare the PPP map with the per capita GDP map, you’ll notice that they do not reflect each other in any specific way. Some countries that have a lower relative GDP might have a higher PPP and vice versa. We’ll explore that more as we look closely at each region.

    While the United States is the only North American country to earn between $50K-$99.9K in terms of GDP(PPP), it is not the only country in the region to claim one of the higher tiers. In addition to Canada, numerous Caribbean countries also have a GDP(PPP) higher than $20K. While there are still a number of countries that rank low, particularly Haiti, there’s more parity here than you might have expected.

    If you looked at the per capita GDP map, fewer countries in North America rank in the higher tiers than in the GDP(PPP) map. For instance, Panama’s per capita GDP is $15,877, where its GDP(PPP) is $25,675.

    So what does that mean? It means that while some countries in the region might have lower GDP and less overall money, goods and services are still relatively affordable for people who live there. This is a positive sign for the standard of living in those countries.

    In terms of PPP, South America is split between north and south. Individuals in the southern countries have an easier time affording essential goods and services compared to their peers in the north. The rescaling effect of the map also helps illustrate the fact that, while Brazil might be a massive country with a relatively large GDP, when you zoom in on individual level, Brazilians are struggling to afford things. Even though Uruguay is a much smaller country, it’s slightly bigger in size on this map to demonstrate that Uruguayans have greater purchasing power.

    Most countries in Europe are relatively well off, particularly in Western Europe. In this map, Luxembourg again reigns supreme with a GDP(PPP) of $106,705. Ireland is second with $78,785. With Ireland’s booming technology sector and smaller population, it is able to maintain a high purchasing power and improve the cost of living for its citizens.

    Eastern Europe continues to struggle. In addition to having low GDPs, essential goods and services are also relatively expensive in countries like Moldova, Ukraine, and Armenia. Some countries in the eastern part of the region, however, show dramatic improvements on the GDP(PPP) map. Turkey, for instance, jumps up dramatically when considering the affordability of life for people who live there. Despite a low per capita GDP, its GDP(PPP) is $27,956.

    There’s a distinct lack of parity in Oceania. Australia is first with $52,373, New Zealand is second with $40,135. The next closest country is Palau at $14,952, more than $25,000 less than New Zealand. While the average citizens of Australia and New Zealand live in relative prosperity, residents in the rest of the region can struggle to access even the basics.

    Asia is a mix of wealth and poverty. While countries like Qatar have strong purchasing power, other countries like Tajikistan have immensely low purchasing power. The disparity is even more dramatic considering how close in proximity some of the countries are. Whether they’re ravaged by war or they’re poor in natural resources, some countries in the region have low standards of living for their citizens because basic goods can be so expensive.By and large, Africa as a region has low purchasing power. While there are some exceptions (Seychelles, Mauritius, and Equatorial Guinea), most countries in Africa have difficulty providing their citizens with affordable goods. There is some variation within the continent. Countries in the north and in the south tend to do better than the landlocked countries in the middle of the continent. And those smaller island nations with booming tourism industries also do better than other countries in the region. But by and large, average Africans have low purchasing power and, as a result, often have a lower standard of living.

     

    Data: Table 1.1