3 Hours of Sex, Drugs and Economics

If you haven't seen this 180 minute extravaganza yet, it's definitely worth a watch. 

The story is of a Wall Street broker (Jordan Belford) who loses his job after Black Monday and with no other great opportunities available to him, a career in Penny Stocks is the best way forward. 

From securing an IPO at Stratton Oakmont (His own brokerage firm) to the simple concept of demand and supply for a pen, this film consists of all aspects of basic economic theory to complex laws and regulation of money transferal. 

Stratton Oakmont is known in the finance world as an over-the-counter brokerage house. This simply means a trade that is carried out between just two parties and their is no supervision of the exchange. Therefore this allowed Stratton Oakmont to con those involved by taking their money and not paying them back. Jason Belford wasn't a stock broker, he was a salesman. His ability to persuade the rich that he was selling them something worth buying made him a multimillionaire. The use of an illegal trading scheme, known as the 'pump and dump' allowed his firm to make money both easily and quickly. A pump and dump scheme consists of artificially inflating or 'pumping' the price of a stock to benefit those that own it. Once the price has been pumped up, owners quickly sell off the stock or 'dump' it at a huge profit causing the price to plummet. Jordan Belfort would often buy large amounts of worthless stock and then, using his flock of stockbrokers at Stratton Oakmont, spread rumors and positive statements about the company. This caused the price of the stock to rise rapidly. Once the stock reached record highs, he and his associates would sell it off, causing the price to reach record lows.

The ability of making money effortlessly didn't last forever. Joseph Borg, a financial administrator who served for the securities comissioner of Alabama, investigated the firm from 1994 due to overwhelming number of complaints regarding Stratton Oakmont. Following an investigation into their illegal trading schemes they were taken to court and prosecuted soon after. Belford spent 22 months in prison and was ordered to pay over $100 million in restitution to his victims (which he has apparently failed to do). As the film depicts, he became a motivational speaker after leaving prison; at the seminar in the movie, DiCaprio as Jordan is introduced by the real Jordan Belfort.

As well as the record breaking number of F-bombs being dropped, the film contains numerous scenes of nude women and prostitutes. Drugs are the norm throughout and being sober is a rarity. For those wanting to work in the city, take a leaf out of Jordan's book. 

(Sorry to those of you who thought this may have been about the book; Sex, Drugs and Economics. Sadly, it is not.) 

What is wrong with our economy?

Many people will have different answers to this question and in a way, there are many answers, but for me there is one answer in particular that screams out the loudest, maximising short-term  profits. 

Since looking at this in our current A2 syllabus I have come to believe that those who are not prudent and forethought may be better off themselves but as Pareto's theory suggests, it is impossible to make any one individual better off without making at least one individual worse off. 

This is what is happening; Multinational corporations (MNC's) are obsessed with maximising their profits that long-term growth is something of the past. It is the employees of these companies that are suffering the most. Employees are people who devote their lives to creating money for customers, shareholders, and colleagues. Therefore, in return, at least in theory, they share in the rewards of the value created by their team. 

However in reality, it is far from this. Employees aren't regarded as people of a team anymore. Businesses nowadays see their employees as "costs" due to the ever increasing obsession towards maximising short term profits.  For the greatest profits costs are to be kept at a minimum. In order to do this, reducing costs as much as possible is something that has to take place (expect the "costs" of salaries to senior management and shareholders). 

The problems with this increasing short-term profit maximising is what it leaves us for the future? If these MNC's -of which some could be referred to as monopolies- are more focused on creating abnormal profits which pays for the luxury lives of those that run them then how are the firms to develop? Abnormal profit is supposed to create money towards R&D (Research and Development), so without this firms cannot progress. In the long-run this is likely to cause competition that would diminish these abnormal profits being earned but this will take time to happen. 

More so, cutting "costs" to create this short-term profit is having a huge affect on the working class population. For those lucky enough to be kept in labour, their wages are still reduced to keep costs at a minimum. This is effectively removing their purchasing power, coincidentally stunting the growth of these same corporations making the choices. 

If consumer expenditure is being reduced then businesses can't grow. Right now, firms aren't concerned about the growth of their companies but more so maximising their short-term profits. In the overall aspect of an economy, aggregate supply is likely to decrease due to the fall in labour force, thus resulting in an overall decrease in economic growth and the development of these companies in the future. 

Is the penny worth it?

In the UK, there are 11.3 billion 1p coins in circulation, together worth £113 million. This accounts for nearly 40% of all coins in the system. In the US, an estimated 150 billion 1 cent coins are being circulated, that if stacked on top of one another, would stretch 60% of the distance to the moon. 

In Canada however, the production of the one-cent coin was stopped earlier this year as it was determined by the government that the costs of its production were not worthwhile. According to the Royal Canadian Mint, the producers of the coin, each one-cent coin was costing 1.6 cents to produce. This meant every penny minted represented a loss for tax payers and resulted in a net loss of C$11m (£6.9m) a year for the Canadian government. This, as well as the hoarding of pennies and handling costs placed on retailers were enough to convince Canada that pennies just aren't worth it. Since February, change in retail has been rounded up or down to the nearest five cents. 

Canada are not the first country to have done this and are following in the footsteps of countries including Australia, Sweden, Brazil and New Zealand (who's also scrapped two and five cent coins). There are also many sceptics of the one cent coin in the US (which costs 2.4 cents to produce), and in Russia the central bank is pushing for the 1 kopek piece to be removed. 

In the UK, for many people the British penny seems like a beloved piece of history, as our older generation reminisce on childhood trips to the sweet shop to spend their pennies and half pennies. Half pennies were scrapped in the UK in 1984 to account for inflation. With the majority of transactions in sweet shops now priced by weight, and single items costing 2-3p, is it only a matter of time before pennies disappear too? 

The reality is that the purchasing power of pennies has been eroding rapidly and they are now nearing worthlessness. A 1p coin is now worth less than one-twelfth of its original value in 1971. Spending 1p in 1971 would be the same as spending 12p today. It seems the penny's existence is running a losing race against inflation.

It's not just the depreciating value that's turning people against the penny, for many people, pennies are simply irritating, weighing down their pockets and cluttering their purses. Research suggests that one-quarter of Britons would happily get rid of copper coins, while a similar proportion admit to hoarding them in jars and various scatterings around the house. Another poll found that up to one in five British adults aged 18-24 throw small 1ps and 2ps in the bin because they think it’s a nuisance. Consumers aren't alone in considering the pennies literal value to be less than their handling value, as many retailers feel the time and money spent handling and counting small change just isn't worth it.  

Despite this, unlike other countries, the cost of production of the penny in the UK is less than its face value, at under 0.3p to produce each penny. This is as a result as the penny being changed to be produced from steel, with a copper plating rather than purely from copper. This differs from the US, where one cent is produced from zinc, a more expensive metal. In the UK, the existence of the penny therefore doesn't seem to be damaging the economy, but it's disappearance could have some negative effects. Arguably the largest argument against the scrapping of the penny is the millions of pounds raised by charity through the collection of pennies and small change. Moreover, for those who do hoard pennies at home, when they are eventually cashed in a large enough stash of near worthless pennies will accumulate to a total that is certainly worthwhile. If the penny was scrapped, the cost of a good that was previously £9.99 would inevitably be rounded up to £10. Firms, in retail in particular, would face the "menu costs" associated with changing information on price tags and online. 

It therefore seems that as things stand, the removal of the penny from circulation is not worthwhile, despite the actual value of the penny growing exceedingly closer to worthlessness. The removal of the single cent in the US, however, seems much more feasible as a result of its higher production costs. Some people argue that we are more likely to see the end of coinage in general than the end of the penny alone as digital transactions are becoming increasingly popular. Currently, tangible money is still popular enough with the majority of transactions below £10 using cash. The increasing use of digital transactions, whether it be online or via credit or debit cards seems more likely to be the bigger threat of the UK's current spending normalities.

The Lipstick Effect

When studying A level Economics, you learn the difference between a luxury good and an inferior good. A luxury (normal) good is a good for which an increase in income leads to an increase in demand. The good is not necessary for living, but is deemed as highly desired within a society. An inferior good is a good for which an increase in income levels leads to fall in demand.

The lipstick effect is the theory that during periods of recession or economic downturn, consumers will be more willing to buy less costly luxury goods over more expensive luxury goods. For example, rather than splashing out on a new fur coat, women are more likely to seek material solace in small indulgences such as lipstick. L'Oréal saw its UK sales grow 5.3% in 2008, the heart of the most recent recession. People still buy luxury goods during economic hardships, but they are more likely to choose goods that will have less of an impact on their discretionary incomes. 

It explains why it is often the case that restaurants and entertainment industries do well during a recession. Consumers that want to treat themselves during a time of financial difficulty settle for a relatively cheap night out, for example through a cinema trip or meal out, over a more expensive experience such as a holiday.

In May of this year, "China Daily" reported that the lipstick effect had hit China as the Chinese economy began to slow. China's GDP rose 7.8% in 2012, the first time that the country's growth rate was below 8% since 1999.As the industrial and manufacturing sectors declined last year, fashion brands soared. The retail value of the beauty and personal care sector grew from 184.1 billion yuan in 2011 to 202.1 billion yuan in 2012. Again, L'Oréal saw its market share grow from 10.8% in 2011 to 11.2% in 2012.