SW Q&A

I decided in this blog to answer some questions from my readers. I couldn't decide on what to write next so I decided to ask some of my readers if any of them would have anything in their mind related to economics, money, investing or the markets that they would like to know a bit more.

These questions are gathered from my readers and I try to answer them the best of my knowledge, spiced with my personal opinions. So let us begin:

The value of household deposits in Finland is currently over 80 billion euros, which is almost half of the Gross Domestic Product of Finland. Even though the interest rates of the bank accounts are practically zero, still they are one of the most popular forms of savings and investments. Where does this come from and is there anything that could be done to change this? - Sonja

A difficult question to answer. I think that main reason behind this is the unwillingness of us Finns to take risks with savings. The bad depression in the 1990's, the burst of the IT-bubble in the start of the new millennium and the black year of 2008 might still sound scary for the most of the potential investors. The money is considered to be safe when it is in a bank account.

Two solutions could exist. First of all people should be educated somehow to really know about what investing really is. What are the benefits of investing, how large the risks really are and how inflation really affects the savings in the bank account. Seems to me that people aren't aware of these things. Another point that boosts the flow of savings from bank accounts to the stock market, for instance, are the extremely low interest rates. At least in my job I've noticed that this really creates increasing incentives to consider investing for many.

What is your opinion on the current fiscal policy here in Finland? - Heikki

I sincerely think that our current government takes the right actions to tackle the problems in our economy. The actions are highly unpopular but I think they are a must so that the future of our welfare-nation wouldn't be compromised and our economy would be competitive in the global markets.. It is too soon however to say if the actions have a real effect, but we will see it in a couple of years or so.

I still honestly think that something has to be done on the level of wages in our economy as well to increase international competitiveness. Finland is a relatively open country, which means that most of the wealth is created from competitive export-products.

How do the fiscal policies of the large countries in the Eurozone affect the economy of Finland? -Eelis

I think that the fiscal policies of large countries in the Eurozone such as Germany and France have no straight effect for the economy of Finland, but for example the change in the tax-rates in countries where we have operations or export might affect the competitiveness of certain industries and corporations. But the economy of Finland is more depended on the monetary policy than the fiscal policies in the Eurozone.

How could we reduce the inequality in the finance of modern football? Is it ok for foreign millionaires poor money to the clubs and is there an alternative system that could be developed? -Tatu

Interesting question! The money that goes around modern football are soon getting out of hand. Even more and more money are paid on certain players and hundreds of millions of euros are going from one club to another despite FIFA's efforts to prevent this. This will lead to the situation where the most wealthiest football clubs (with the richest owners) can have the best players and the best baselines to win the leagues and earn more money.

I would prefer an alternative system. But what it is, I don't know. Maybe a system where all the clubs have a common owner might decrease financial inequality in football leagues? But organizing this would be very difficult if not possible. This is a question that I need more time to think about.

Is it a good idea to support for example wind-power with tariffs? -Eemeli

Feed-in tariffs are commonly used in Germany, for instance to support investments in renewable energy sources such as wind-power. Personally I'm not sure if it is the best incentive to produce and to develop renewable energy sources. If the market-price of electricity is less than the guaranteed price for the producers of the renewable energy, the consumers have to pay a higher bill from their electricity that comes from renewable energy sources.

Generally the tariffs and the costs of production decrease over time when the technology develops. But when it comes to wind-power, it rises the question on which wind-power itself is efficient and how well can it produce the electricity for consumption.

If someone would be interested to start investing, is there any tips that you could give? Or do you know a book that could be helpful to get things going? -Saana

The most valuable tip is "Buy and hold, never sell". The wealth is created through holding and buying more of your investments, but never getting rid of them. I would advice first of all to get familiar with different financial instruments: Bonds, stocks, ETF's, funds etc and to decide which one of those would suit for you the best. You need to also ask yourself how much time and effort are you willing to put on your investments when you are deciding your road to prosperity.

The book that taught me everything about investing is the Miten sijoitan pörssiosakkeisiin by Seppo Saario, which is also known as the Finnish "Bourse-bible". I can warmly recommend that to everyone.

Is the current monetary policy of European Central Bank just a great con game, because the expectations on inflation are still extremely low and the pace of current economic growth is very slow? -Tuomas

ECB is pretty much screwed right now. The quantitative easing will soon face an end, since the available bonds to buy are soon going to run out. The ECB has no option than to continue QE and to maintain low interest rates now when the Euro is currently strengthening against other currencies. Seems that the interest rates can't go any more lower and the possible rise of the interest rates would feed the strengthening of the Euro even more, which would harm the competitiveness of EU's export products significantly. ECB has to rely on FED and the value of the US Dollar on its monetary policy. If the interest rates in the US start to rise even more, ECB would have more space to breath with its monetary policy.

It is commonly stated that the growth of economic inequality is bad because it is but could it be justified in economic terms? In addition in what circumstances the "tricke-down"-effect could exist or is it just populism? -Anna

Economic inequality generally harms economic growth. A good example is the role of consumption in economic growth. When more individuals have more wealth to dispose on goods and services, this stimulates the economy when more goods and services are being sold and bought. According to some research, the middle-class does most of the consumption in the United States, for instance. They are the people who are paying on their food, housing and hobbies the most. The richest 1 % don't eat any more food than the people in the other income-classes, or in some cases they buy food even less if their family is small. Bill Gates still needs only 1 pillow for sleeping, even though his earnings are a bit more than the consumers in the middle-class. Their extra money can be however considered to form investments in the economy, which also stimulates the economic growth.

What about the trickle-down effect? The answer is more political than scientific. My personal opinion is that trickle-down effect could exist and I don't consider it as populism. By tax-cuts to corporations the costs of production and the costs of doing business would decrease. This CAN but necessary DOESN'T stimulate economy and create more jobs or investments. What if the businesses don't have any use for the extra money? In that case, the corporations wouldn't build new factories or hire new people; they could just pay the extra money as dividends to investors. Trickle-down effect thus exists in my opinion but not in all circumstances.



So here we are. Thank you so much for your questions! They weren't easy one and I hope that my answers are adequate and most of all, clear. If any of you have any additional questions or think that I didn't answer these questions well enough or have mistakes or I misunderstood something, you can also ask me additional questions. I'm happy to answer them.

Text: SW