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The physics of economics

Put two economists in a room together and you’ll get three different opinions on the state and future direction of the economy. Surely economics, the dismal ’science’, could learn something from one of the true sciences, such as physics? Certainly there have been efforts to do so, particularly among large investment banks and hedge funds, who have used quantitative analysis tools running on powerful computer systems to try to tease out the signals from the noise of price movements, taking into account thousands of different influences from interest rates to tax variations, asset prices to currency exchange rates and much more, all on the basis that there is some underlying predictability, some ‘law’ that governs price movement. Which...

posted on: Mar 11, 2008 | author: Alex

An explanation of the carry trade

Those of you watching recent events in the financial markets might have seen the terms ‘carry trade’, ‘Yen carry trade’ and ‘YCT’ crop up a few times. This is often explained in the press as the process of borrowing money in a low-interest currency and investing it in high-interest one. Which is true, but there’s rather more to it than that and we have to step back a few years to find the full explanation. About 20 years ago Japan went through a period of property price inflation, a speculative bubble of investment driven by people who assumed that property prices only went up, particularly on a crowded island where there was little scope to build new homes (sound familiar?)....

posted on: Sep 1, 2007 | author: Alex