the costs of volcanic ash

Lately, the biggest story in the news is about the volcanic eruption in Iceland. The costs to Iceland are significant enough, but the real story is about the disruption of air flights in Europe.

The social cost of the flight disruption is phenominal. The cost of stranded travelers is enough, but there are also huge costs from the stranded cargo, like fresh fruit that can not get into northen Europe.

At least one industry is benefiting. In Europe, rental cars are in great demand now, and companies like Hertz are enjoying greater demand for their services. This is a clear example of a substitute good–obviously–but the real challenge of the economics here is how to measure the costs and benefits of the volcano.

It seems to me that the costs must outweigh any benefits by a great amount. Money costs lost by the airlines may be made-up by the gains from car rentals and other transportation, but the costs to delayed travelers and delayed delivery of goods is huge.

china’s security holdings growing slower

The first quarter of this year, China’s foreign reserves went up by only $7.7 billion. Sound like enough? Last year for the same period it was $153.9 billion. Reasons for this are numerous.

• Chinese investors are becoming wary of the safety of their foreign bond holdings.
• Exports from China are decreasing compared to imports, so less demand for the Yuan.
• Capital flight from China may be slowing.
• Non-Chinese investors are buying more US debt, keeping returns low.
• US consumers are saving more money, reducing the need for Chinese savings.

One Chinese economist was interviewed, and he was asked about the balance of financial power between China and the US. He replied–

“I think it’s mainly in favor of the United States.” (As John Maynard Keynes said) “If you owe your bank manager a thousand pounds, you are at his mercy. If you owe him a million pounds, he is at your mercy.”

Not sure I believe him, but I like the quote.