Wednesday, April 29, 2009

FOMC Statement- Economy still contracts!

The 100 day surprise!

Household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing. Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time.

Well, be thankful that we didn't have a terrorist attack!

Swine flu fears....

I never thought I would be writing on this swine flue issue, but it has taken up allot of the news as of late. And, more importantly to this author, someone has died from it in the USA as well to add to the 50 or so odd folks who died in Mexico already.

My office has been put under alert. One of our specialists had travelled to Mexico just recently for a conference. It is not known yet if he has been exposed to the virus, but he has been asked to stay at home until the symptoms appear.

Apparently, the virus has a 4-5 day gestation period. So, if someone has contracted the flu, it would not appear until 4 days later.

So, now, the office has put everyone on a special care alert. We are to have no external visitors for the rest of the week, or go on official meetings with people outside of the office.

We have to be careful and tell folks what has happened.

I pray for the best!

Specter is no more...

In case you have not heard already, Arlen Specter, Sen. from Pennsylvania, has decided to switch political parties. He will now be or become a registered Democrat.

Hard hitting news for the GOP and it certainly is demoralizing.

Sen. Specter has assured folks--not sure if it was a good idea-- that he will retain his independence during his public deliberations. Especially in regards to judicial review.

The main issue for his switch, I feel, was for the fact that he would have received strong competition from the GOP this year in this GOP Penn. primary.

The GOP are a little upset with him because he supports the Obama stimulus package and was a part of three GOP senators, who broke ranks to get the bill passed.

Even before this, Sen. Specter was a staunch advocate for stem cell research. Due to his personal issues, having being afflicted with cancer and having stem cell research be his saving grace, he has proposed that the research should be fully utilized.

The thing is though, the GOP is floundering. As mentioned by Specter, the last three congress-persons to have met, first, the scorn of the conservative GOP and then the challenge by a GOP primary contender, the winning contender, has gone on to lose the election.

This is not good news for the conservative base. What is the true motivating catalysts that turns the voters off from them right now, is yet to be fully determined.

I personally don't think that its about the gay issue, even though many would think so.

I happen to feel that abortion and higher taxes, are the issue of discussion and as of taxes, the management of the economy--who can create better, long term sustainable jobs.

Who's record has been better? And, who is REALLY looking after our kids and their future--born and unborn!

But, as it stands, Sen. Specter has cast his die. The ball is now in the GOP's court. To me, they should shut down the opposition and re-tool their ideas.

Tuesday, April 28, 2009

Free Trade not optimal?

Globalization and free trade has taken great importance within the last 10 years. The seemingly foregone understanding of free-trade is that it increases wealth and reduces poverty while globalization, is the facilitator for this push to produce the best for the cheapest to sell the cheapest for the most value. However, is this really optimal?

The Latin America and the Caribbean (LAC) countries, for all intents and purposes- and even the LAC countries that have been participating in the World Trade Organization’s framework for some time- is still grappling with finding the right mixtures, in regards to best benefits from free trade and harnessing the best practices from the linkages and synergies Globalization creates.

The LAC is also grappling with managing domestic issues and at the same time, maintaining international obligations to standard economic principles, as appreciated by proponents of the current international and macro-economic popular thought.

In order to appreciate the discussion, we need to separate the ideas and work of persons who study the issue.

For starters, it's obvious that Globalization and free trade aren't like terms. The former seeks optimal returns at the firm level and the latter, seeks optimal returns for both the consumers and the most efficient producers. They both are, however, issues that governments can affect the outcomes of. But, both ideals are segregated at their base level, as one is driven by the pull of the strength of the markets (Globalization) and the other is, theoretically, market forces driven by demand (Free Trade).

The general theme of persons pro free-trade, like Professors Jagdish Bhagwati and Razeen Sally of Columbia University and the London School of Economics respectively- the latter I had the pleasure of languishing through a few of his most boringly pedantic lectures cluttered with dry humour- are full throated and un-ashamed free-traders, from a comprehensive and systemic, multi-lateral standpoint. To add to this, their position on Regional Trade Agreements (RTA’s) in relation to the multi-lateral system (MLS) is also fundamentally pro-MLS and is at odds with the trade distorting effects of RTA's.

Their basic premise is that free trade produces optimum benefits for countries, as it sets in play market forces by allowing consumers to choose the best goods and services at best prices, ultimately decided through the basic interaction of supply and demand on the best and most efficiently produced product.

The most notable critics of "unfettered" free-trade on the other hand, is Nobel Laureate Paul Krugman with his prize winning work on economies of scale and the pioneering of the "New Trade Theory". And, slightly to the left of Professor Krugman, Professor Dani Rodrik of Harvard University, makes an additional counter argument that from an industrial policy development perspective, free trade, isn't always the first best option in the long term for weaker producing firms, exposed to international competition, where their domestic consumers depend on returns in regards to industrial policies that seek to create returns, in order to turn those over into other aspects of their economies- a best case scenario of a "beggar thy neighbour" policy ideals of sort.

To be fair, I think it would be hard to argue against the merits and benefits of free-trade, from a purely theoretical standpoint. I also think it would be negligent to suggest that there shouldn't be any form of tariff collection on goods and services, in the form of an optimal tariff, which amasses collective public wealth- for at least one trade partner- for that to be re-allocated into other weaker areas of an economy.

To go even further and to put the issue more realistically, connecting the obviousity Professor Rodrik's view, I think it would be very difficult to set a premise for free trade policy, industrial policy or new trade theoretical policy assumptions, aside from the understanding of rational choice considerations working within the system of public choice realities.

My argument is that free trade cannot be realistically optimized and, further, totally beneficial to the nation state, when we consider comprehensive national welfare and security implications. And, certainly, not achievable if we consider developing nation issues and concerns, in regards to tariff collection for development as a starting basis for which understanding when public choice theoretical considerations becomes a reality.

Moreover, my position on the issue isn't in the argument over the merits of pure free trade. But, within the extent to which welfare distorting tariffs and subsidies, produce sub-optimal results as well as to what extent is the term globalization, totally beneficial to the ideals of the tenets of free-trade, as free trade relates to realities under rational expectations in regards to public choice.

In order to bridge this train of thought, a case study by Robert Wade (2004), divided the "Globalisers", comprising of India and Bangladesh and then the "Non-Globalisers", Honduras and Kenya, on the variable of trade openness as determined by global standards and trade to GDP.

His study- while acknowledging scantily that free trade and globalization are two separate terms- exhibits a paradoxical relationship between the internationally accepted standard of what constitutes differences between a Globaliser and a Non-Globaliser.

In his study, the Globalisers had higher GDP growth performance and at the same time considerably more trade distorting barriers in regards to the global criteria of what constitutes an "open" free-trade country, during their entrance period into the global markets between the 1970's and 1990's. For example, they had stricter capital controls and significant levels of protection. While Non-Globalisers, exhibited opposite patterns while also having double export to GDP percentages over and at the same period of measurement.

The issue is that- barring Wade’s conclusions on population, geography and factors of production differentials- what has been accepted as pro-growth free trade globalization at work, doesn't represent a complete explanation under all circumstances.

This should be fully reconciled as it relates to the LAC as it is clear that the the theoretical benefits of free trade, requires greater qualification.

Jumping back to Professor Krugman's work on economies of scale to date, while it outlines revolutionary new details about perfectly competing developed economies under internationally competing markets, the effect of which that is to be transposed to the development realities of the LAC and devbeloping aggregate, is yet to be fully examined.

Most glaringly, is the reconciliation that the economies examined by Professor Krugman are developed countries, who have already established production differentiation patterns in goods and services to that of above- or equal to- global standards as well as have the access to additional markets to export those goods and services.

In addition, there must be further discussion about the glossing over of the possibilities of lower returns to relative scale and externally driven diversification to development ratio's, within developing countries due to the triad's- the USA, Japan and the EU- concentration of production specialization within their markets. The latter point is what globalization is supposed to address for developing countries.

In a nutshell, the great diffusion of knowledge and technology has not been reconciled as the rapid catalyst under which globalization through the free-trade proxy, supposedly reduces real and relative poverty. It also hasn't adequately taken into account the concentration of the production patterns in that of the triad, for that to be examined to show, unequivocally and regardless, current relative growth in universally dispersed global production patterns of diversification of standard bearing goods and services to the greater benefit of developing countries.

The positions of protectionism, globalization and free-trade, need to be re-examined under free trade assumptions to that of rational expectations under public choice in relation to the developmental nexus of developing economies, under the existing global framework, with flexibilities and valuable linkages within RTA networks, considering present circumstances.

UK Banks to hold more capital...

This is the nail in the coffin of Gordon Brown!

He will be forcing UK banks, some of the largest as the FT reports from Downing Street that Chancellor Darling admits.

He also plans on breaking up some of the big banks. Well, they can throw away contributions from the City this election season.

This is admitting that your policies, thus far, are not working the way you explained that they would. This also would infuriate the City, if the bank break-ups are less than equitable and costs current established businesses their market share--especially if foreign banks benefit.

It's over for Brown and Labour. Sad to see the end of an era....former PM Tony Blair gave him no strong vote of confidence, either.

Markets do NOT know best!

FT Article from Henry Kaufman on the failures of the FED and their libertarian views.

How COULD a supervisory institution, leave the concept of regulation up to the folks they were put in place to regulate?

In any event, Mr. Kaufman goes from point to point and builds a strong case.


Sunday, April 26, 2009

Zuma pledges unity!

I guess it was a no brainer that Jacob Zuma won the South African Presidency. But, what was unusual was his call for unity within South Africa?

I guess the rifts go deeper than the ousting of Mbeki? In any event, he has the power to seek unity by not going after Mbeki on anything from his tenure.


Umshini Wami!


Thursday, April 23, 2009

BOE- "Agents’ summary of business conditions."

More bad news for the UK economy. Earlier this week we saw the Consumer Spending and "Trends" analysis. This was just, to me, a follow up on what we already know!
• Consumer spending had remained weak, but there were some further reports that the rate of contraction
of retail sales had eased.

• There had been a further pickup in housing market activity — albeit from a very low base.

• Investment intentions remained weak.

• Export volumes had shrunk further, as the slowdown in global demand outweighed any gains to
competitiveness arising from sterling’s depreciation. Imports had continued to contract sharply.

• Destocking had continued throughout the first quarter.

• There was little change to the picture of sharply contracting output across the manufacturing,
construction and services sectors.

• Credit conditions had continued to be a major concern for many firms, with no signs of easing in recent

• Labour demand had continued to shrink. While many firms had made further cuts to average hours,
headcount had also contracted. Cuts in average hours, lower bonuses and low pay settlements had left
per capita labour costs lower than a year earlier.

• On average, there had been little change in the rate of inflation in materials prices. Inflation in output
prices had slowed further as weak demand conditions had continued to press down on suppliers’ margins.

• Consumer goods prices: promotional activity had continued to push against the impact of rising import
prices, and of increases in the prices of some products to pricing points seen before the VAT cut.

Tuesday, April 21, 2009

The Crisis Response!

The International Monetary Fund released in April their "Global Financial Stability Report" (GFSR), which examined the state of global credit crisis on economic activity and banking institutions.

The extent of the report was based on the issues involving the systemic risk that the world and in particular, the emerging market economies were exposed to as a result of this crisis and how, in particular, credit flows from the developed countries have dried up to those smaller markets.

The IMF GFSR reports that cross-border bank lending from major markets to emerging markets have begun to contract. In another unrelated IMF press release in March, the IMF states that global activity is now projected to contract by 1/2 to 1 percent in 2009 on an annual average basis—the first such fall in 60 years.

The US Federal Reserve published their consumer credit report on April 7, 2009, stating that consumer credit decreased at an annual rate of 3-1/2 percent in February 2009 with revolving credit decreasing at an annual rate of 9-3/4 percent, and non revolving credit increasing at an annual rate of 1/4 percent.

The Bank of England's latest "Trends in Lending Report" for the month of February, 2009, on the other hand, reports that repayments of unsecured lending, were greater than gross lending flows, so that the stock of unsecured lending contracted for the first time since their monthly series started recording the data in April of 1993.

The premise is that if credit within both of the largest economies has decreased to even their domestic consumers and backs up the overall credit contraction scenario in the April GFSR, without doubt this will impact credit to persons outside of their markets.

Consumer credit in democratically, mature and free market oriented societies, are a keen barometer for measuring overall net lending.

Consumer credit, serves as the engine that aids the purchasing of consumer goods and services. If there is less access to credit for average consumers, there is no need for production of goods and no need for persons to render services, which in turn causes cut-backs in production and is when a credit squeeze, can become a full scale economic recession and depression.

While most of the Caribbean has warm cross-border relations with both of those English speaking developed countries, both diplomatic and commercial, this has, on the other hand, affected our ability to do business with other larger non-English speaking developed countries and emerging markets. This has also left Anglophone Caribbean countries, handicapped due to language and cultural barriers in regards to the ability to attract foreign direct investment. Also, Caribbean countries are left over-exposed to US and the UK’s economic and political shocks and contraction more than they need be.

It’s fair to say that the Caribbean is not immune to economic contraction from the major markets. In fact, we are more vulnerable to these credit contractions than that of Asian and other Eastern European countries because we have less, on scale, economic viability as well as exhibit differences in cultural values which dictates our level of competition, dependence and value on skill levels.

There have been, however, policy maneuvers by different developed and emerging markets to combat the effects of this crisis. One of the obvious responses has been to borrow money from international banks like the World Bank and the IMF.

Of course, borrowing increases public debt. Public debt, raises a whole host of other issues about concerns on how do to pay back the money borrowed, where do we spend the money and under what premise does one expect strong returns from our investment in order to pay back money borrowed.

Countries like Brazil, India and Argentina are either currently loan recipients, or in negotiations for loan assistance from either the IMF or World Bank. Even now Russia is currently in negotiations with the IMF for a multi-million dollar loan- could be in the billions by the end of negotiations.

The first course for public spending from borrowed money is to invest it in public projects and government infrastructure. While economists can debate the merits of Keynesianism and its relation to the scourge of increasing government borrowing and spending, the salience of this argument- at least for the developed countries- has engendered a sense of nostalgia as to how it was back in the old days and how John Maynard Keynes saved the world. Or so it seems!

Another response has been to allow central banks to cut key interest rates. And, for that matter, for central banks, as they have- especially in the developed countries like the US Federal Reserve, the Bank of England and the European Central Bank- become more nuanced and pro-active in their interventions.

Central bank involvement is one of the more viable options, as central banks have powers to supply and contract the money supply, through interest rate manipulation, quantitative easing methods and, if they are in sync with the private sector and public sector agencies, coordinated market targeted activities as well as lobbying for pro and counter-cyclical service charge flexibility for government revenue posts.

This week the Bank of India cut its central rate 25 bps as well as other emerging markets, already having cut their prime rates since October of last year with Russia, about to begin the ‘trend of rate cuts’ by the end of this fiscal quarter.

Yet another response- although one that has not been very salient- is to simply print more money. The US has been printing money for quite some time now. While it has not been employed to a large extent and in fact anathema to most modern economists globally, printing money, considering that the middle class depend on services to keep their standard of living and to keep them off of the poverty threshold, is not a farfetched idea as it may have been considering the circumstances.

What makes a middle class is their access to key services and their ability to afford niche goods. Services like decent health care, affordable education and in some cases, security services, home care as well as items like the weekly cup of designer coffee for $5.00, or that brand new washing machine for mom or brand new set of 22' rims for her son to replace the ones he got two years ago, are items that we have used to demarcate the middle class from the poorer classes.

In fact, on the flip side, about 80% of all production in the Caribbean can be pegged to services and service related activities like merchant services and sales.

Of course there's a down side to just printing money. Least of which is set in the conservative mindset that a country should earn its way to prosperity. I happen to think that investment to prosperity happens just the same.

Investment engenders the concept of assistance. Assistance whether it is financial, philanthropic, sharing information in intellect or time.

There is also a risk of devaluing the currency and inflation. But, I posit, if an economy is primarily service based, that economy- as slightly different with one that manufactures- is valued on the merit of the services it renders. In the market place, there are cases of imperfect pricing on goods as it is with services. In fact, imperfect pricing and other related inflated pricing issues, is one of the key issues which led the US to drag everyone down into the abyss of a recession.

In this case, putting priority on the value of the services, not only creates positive returns in regards to countries allowing citizens to purchase the necessary goods such as food and other amenities from abroad. But also, it, in a competitive and in some cases glutted service economy, can also boost skill levels if all levels of top tier training are made available in a coordinated meritocratic promotion path.

Investment targeted inflation as well as making aware the realization that all means of production are valued more productively, is a good thing.

Can the Caribbean bolster its service economy and protect it with an artificial injection of liquidity, in light of this credit and economic disaster, as the major markets did with its financial services sector?

Perhaps to some extent the Caribbean should find a way to protect its service economy from a development aspect of things.

That's an issue that needs to be seriously discussed.

UK Trends in lending by April!

The latest report from the BOE about trends in lending in the three main areas, mortgage, business and consumer lending, shows trends of more slowing.

The overall picture shows that the lending to individuals and businesses, Chart A and Chart B, show net lending sharply down in the last 6 months. More importantly, the Chart shows lending from the late 60's to today.

The Thatcher administration in the 1980's, even in the throes of the oil shock of the mid-70's early 80's and the Iran Iraq War, has still out performed the mid-90's and 2000's by far. In fact, lending has been dramatically decreased and remained at modest levels during the Blair era compared to the Thatcher era.

What we also see in Chart 1.3, the credit squeeze--at least in respect to corporate finance-- has been been in full play since Q2 2007. Even with rates at their lowest, from the LIBOR to the Bank official rate, credit has not yet been visible to businesses.

Business lending, goes hand in hand with consumer credit, in my estimation. The lending to businesses, are a bell weather for any other consumer type lending because if a bank, is not willing or unable to lend on the premise of a corporate equity balance sheet or projected income from a corporation, they are not going to extend consumer credit. And, as the report states, consumer lending--credit cards and personal loans-- has plummeted and lenders, have retrenched in order to recoup come of their losses.

The nationalization has not worked. The capital injection has not been enough, or ill-targeted--liquidity is up. What next for Brown, Darling and King?

It appears as if the corporate community has back lashed against the Labour Party. It appears as if its not the season for business.

IMF says losses at $4 trillion!

Their global financial stability reports, states that financial companies have lost about $4.1 tr.

The amount of toxic debt as well as eroding loans are the major causes.

FT Article

Sunday, April 19, 2009

Industrial and Construction output in the US/EU!

The beige book for US production and consumption, states an overall picture--albeit not based on the opinions of the other Fed Reserve Banks other than Dallas-- of the US economy. (In case you did not already know)

The information was sent out last week, and sorry for posting it today.

As with the Industrial production report (IPR), it states that Industrial production is down 1.5 percent in March, the beige books states that manufacturing is down across the board in several districts in particular. Most particularly in the The Boston, Philadelphia, Richmond, Atlanta, St. Louis, Minneapolis, and San Francisco Districts.

The IPR states that In March, manufacturing output decreased 1.7 percent, and, for the first quarter as a whole, manufacturing output dropped at an annual rate of 22.5 percent after falling nearly 18 percent in the fourth quarter.

This sets up my other argument, in that the same IR states that car manufacturing, in particular, is up.
"The only major component of durable manufactures to increase production for the month was motor vehicles and parts; nonetheless, output in this industry fell at an annual rate of about 67 percent for the quarter as a whole"
Is this a reflection of the bail-out for automakers? The IPR also states that manufacturing in transport related items, were also up. The US stimulus plan was geared around transportation public sector spending and green technology in auto-part manufacturing.

The thought is that these auto parts makers, are producing in the event of the uptick in demand--perhaps already in motion, as spending from the stimulus package, the American Recovery and Investment Act of 2009, has already begun.

On the other hand in the EU and Euro zone, production is also down in February 2009 compared to January 2009 Construction output down by 1.8% in the euro area Down by 1.6% in the EU27.

Dragged down by Germany, who are just now mulling over the idea of having much larger stimulus packages, after month's of rueing the idea that others have at their expense in the Euro zone, as well as, Germany, thinking about, in the open, a full scale financial bailout for one of their mortgage lenders, Hypo Real Estate.

In any event, the monthly comparisons state that among the Member States for which data are available for February 2009, construction output rose in six and fell in five. The most significant increases were registered in Bulgaria (+2.0%), Germany (+1.9%) and Slovenia (+1.1%). The largest decreases were recorded in Romania (-8.6%), Spain (-5.3%) and Czech Republic (-2.0%).

Annually, Among the Member States for which data are available for February 2009, construction output fell in nine and rose only in Poland (+2.2%) and Sweden (+2.1%). The largest decreases were registered in Slovenia (-25.0%), Germany (-20.9%) and Spain (-15.4%).

The Spanish case, in this authors mind, is due to the softness in the travel industry, which was a big part of their construction and commercial real estate portfolio. If you have declining tourists or second home builders because your construction was geared around it, then you will have a weak construction sector.

Friday, April 17, 2009

Liberia cuts foreign debt!

Fantastic news!

Wall St. Journal has it that the international organizations, plus a few developed countries, helped them to consolidate. The debt is now $1.2 billion from $4.9 billion in November of 2007.

Now, the country finance Minister is boasting debt to be as low as between $100 to 200 million dollars by end of next year. Yea...right!

But, I do glory in what has happened thus far. Not all the time you hear a good story and certainly, not a good economic story in these times.

Thursday, April 16, 2009

Hot news round up....

The FT has a treasure trove of news today....some of which, may have one a little confusing.

They are all not equally worth any analysis, but for the college students that visit this site--which appears to be allot of them--this may help you to get some wind of the information that's out there and how to put it all together!

JP Morgan reports a $2.1bn dollar profit in the first quarter. They, Goldman Sach's and Wells Fargo, all made substantial profits. Better than expected.

On the other side of the equation, UBS, a Swiss bank, lost $1.75bn in their first quarter and about to cut 11% of its global work force.

I guess you can say the US bank bail out, bolstered by their support for the economy, has worked to keep the big banks in the US solvent and profitable. On the other end, you can say that the Swiss UBS--which was on the ball at the beginning of the bail out-- has not yet seen itself out of the red.

Could it be an issue of regional government support? Weaker EU economy? The UBS investment banking arm has been their bane. Their unwinding of their positions, has probably done nothing to help them if the government did not oversee it.

The US not only put a halt on investment's in illiquid assets for companies on the TARP, but they also put a halt to certain derivatives trades and futures swaps. While on the other hand, the EU and the Swiss, have not. This has led to the pervasive nature of the exposure, which apparently has not abated.

The EC may have to step in for UBS. Sad, but true! Re-tooling the UBS business model, may not be out of the question as well.

And, speaking of Europe, UK borrowing is set to rise by 175 bn pounds (about $260 bn). Don't worry about the deficits, worry about inflation is the call. I agree.

While Brown has not been stellar, his leadership through the crisis has been fantastic.

I have to tip my hat to he and Darling. The level of government intrusion, is greater than that of the US and perhaps, this was why he was successful!?!

He not only saved Northern Rock, but averted an all out systemic collapse in the entire UK banking sector.

The reports on bank failures has not been as pronounced as that of the USA, but they do have a smaller and more concentrated market.

The situation with UBS, begs the question about why haven't the Swiss and EU government, done more?

But, government borrowing is government borrowing. The fact that the IMF would get a hefty dollop to lend to developed countries in the near and foreseeable future, would also lend to the premise of there being greater UK public debt.

This is on the heels of my earlier report by Willem Buiter of the LSE on his FT blog about this coordinated swap arrangement between the EU, UK, USA, Japan and the Swiss, has also raised concerns, to me, about government borrowing in the UK growing. (link to Buiter's FT blog in my own link).

His article is about the issues with the arrangement and why all of the redundant terms, but I saw that and something more!

Not only is the new arrangement a currency swap, but if not premised on future adjustments to inflation, government borrowing of the stronger currency to bolster the weaker one--which ends up in a cyclical dynamic of the stronger one, becoming stronger and as the interest rates rise-- makes debt more expensive to pay.

Not quite a round up, because I did not mention China and Japan. But, to nutshell it--production is at its lowest in Japan and China is experiencing lower employment with their loss of exports.

That's all for now...more to come later on!


Wednesday, April 15, 2009

Treasury International Capital (TIC) Data for February!

Here is the new Treasury International Capital Report. Very unsteady numbers.

Treasury Report

Investors haven't been snapping up the bonds. Well, they are undervalued. Better yet, they are under-priced compared to last year's prices. And, on top of that, no one has any money to purchase, we are in a season of lower prices and lower demand.

President Obama said he "saw the first green sprouts" of a new economic period of prosperity. Hopefully, it will be soon....

November and January were the worst months all around. with February, not picking up any significant slack in the process of things.

I think we have to see two months past February, for us to say business has picked up.

Plan to insure purchases!

As reported by the FT, Ex-Chequer Darling is set to unveil in his next budget a plan to boost credit insurance.

The plan will be put in place to mitigate against the risk of companies, losing money on delivered goods that have not been paid for.

Every now and then you get to hear some refreshing boldness about something so simple.

FT Report

Tuesday, April 14, 2009

Double Taxation Agreements: The other side of the coin!

Over the last few weeks there has been allot of debate about the Organization for Economic Development and Cooperation (OECD) and their recent tax haven crackdown successes.

While the OECD recognizes movement by countries that are even borderline (so called) tax havens, they claim that the movement, while welcomed, has not been substantial enough.

The issues spark debate about what does the OECD really want from offshore jurisdictions?

One option on the table has been to encourage countries to increase and enhance current Tax Information Exchange Agreements (TIEA's) with their developed country partners.

I think that it is silly to think otherwise from that of the OECD and consequentially the G-20, went through all of their work and effort on Harmful Tax Practices and Tax Havens, to put recommendations (ultimatums), most particularly in regards to the standard quota for TIEA’s, in that the quota being twelve (12) per country and that they would find it beneficial, hypothetically, for a country like the Cayman Islands to go ahead and sign TIEA's with North Korea and/or the Sudan or regimes like those.

Another and more abstract sub-issue has been the notion that the respective internal regulatory blockages that are seen as impediments that hamper the full implementation and execution of tax information exchange systems and overall tax transparency, need to be removed in order to come full circle in regards to total compliance with the OECD standard on this issue.

Yet another issue to emerge out of policy circles and to coeval with removing impediments to tax transparency regulations, has been the notion of offshore tax jurisdictions, increasing their number of double tax agreements (DTA's) in order to not only comply, but evolve to a new system of taxation as well as generate rents for public services, without unfairly taxing an individual or company twice- both in their country of domicile and in their foreign country of business. Hence the provenance of the term “double taxation”.

This "other side of the coin", has been made to work in effect in jurisdictions such as Barbados, Singapore and in the Philippines. All considered tax havens at some point in the recent past. They all now have put in place double taxation treaties, to be fair to both the investor and his or her earnings as well as use it as a form of regulatory modernization, in regards to becoming more stable by raising tax revenue for public services as well as becoming more globally competitive.

In a nutshell, the basic premise behind a DTA’s is to have entities exempted--both individual and corporate-- from paying taxes in both their country of domicile and their country of investment, if the country of investment were to be foreign.

A hypothetical example where double taxation may occur, is in the form of corporate entity A, paying taxes in country A as well as its employee’s being legal citizens of country A, but live and/or work in country B and also make not only income from salaries in country B, but investment gains and other wealth gratuities in country B.

In the case of the USA, entities, regardless if whether or not they were living in country A or country B, are required to pay their individual taxes on any income or additional earnings. If not, dire consequences are sure to follow, with an unmerciful wrath inflicted upon you and your household by the Federal Government via their Internal Revenue Service.

It gives this author visions of the well known caricature of “Uncle Sam”, with a white flowing beard, all adorned in a duck-tailed coat-suit with top-hat colored coded in red white and blue, rabidly frothing American virtues and patriotic values at a most feverish pitch, with mean blood-shot eyes and the stars and stripes wrapped around him as a sign of purity and wholeness. All at the same time, delivering a performance no short of super-spectacular, as one would see a U.S congressman- on the dishing out end of a congressional hearing- deliver a volcanic eruption of righteously indignant, better than you brimstone and hell-fire lectures on the merits of paying one’s taxes, while in the process, wagging violently his index finger as he follows it up with an abusive excoriation on the criminal and immoral act of missing tax payments.

While we all have our jolly fantasies of tax dodgers getting theirs, the broader issue of double taxation and the mitigation of such between countries, has to be taken into the context of both countries having in place existing domestic tax systems, which provides taxation for both corporate and individual income taxes, however they are to be defined.

The thing with DTA's, has been that they appear to only be logically doable between countries, where investment opportunities are great but the fear of high tax burdens imposed by both country of domicile and country of investment, makes prospects and risk of investment, economically non-viable.

To put it more bluntly: one would need a system of taxation on all or most relevant wealth generating sources of economic activity, before you sign a double tax treaty, which would work to mitigate against the likelihood of an investor or individual being taxed doubly.

In this vein, if this is to be the route, new taxes on foreign earnings could be the start of not only income tax in countries that don't already have them. But, also, a way to earn revenue and a way to standardize the system in which you can provide a better platform for domestic taxation--if the case may be.

The case for domestic taxation--for countries that don't already have domestic income taxation--is another story, of course.

But, the issues put into a fuller context, is something to consider.

Monday, April 13, 2009

Buiter is back at it...

Prof Buiter from the LSE at his blog on the FT, opined on the sublte differences of the new swap arrangements by the FED, BOE, BOJ and the Swiss Central Bank, to be a little surprising.

In his reckoning, a swap is still a swap. I think so too.

Apparently, the major central banks--and not the non-central bank's instead-- will be borrowing foreign currency to support non central bank institutions, over the non-financials doing it for themselves or by request to the central bank's. Most likely the borrowing will help to finance public debt and increase government spending, or at least provide insurance for it.

I always thought they always did this. But, his major contention with this is that not only do the non financial bank's in the UK have heavy exposure to the US dollar, the risk of further losses is not yet determined.

The stand alone for the BOE is only $40 billion. By his estimation, this is quite a bit more than the exposure by the BOE, at least. It could be wiped out as Prof Buiter feels if it were used three months earlier and the risks, are still there.

I hope it works in stabilizing governments at this time. It appears as if no one knows where the first sign of recovery is going to show up.

But, it is a swap and, I would go further to say that it is more government borrowing--interest rate variables, even worse if it denominated in a SDR type fashion as the IMF uses, included.

Somalia over the Sudan and Darfur?

I don't know if the media is aware of what they are doing or not. But, they are side-stepping larger issues, to deal with minor issues in relation to the big picture.

For the last week and even before that, talks of Somali pirates, which prompted talks about the collapsed government in Somalia, has been taking centre stage.

It's all because these pirates disrupt commercial and shipping activity to Africa and South East Asia.

The latest ship, the Alabama, was captured for a short while on its way to Kenya. The ship hands' fought off their attackers and at one time captured on of the pirates, but the pirates took the captain hostage in a swap. He was later rescued by the US Navy, who shot and killed 3 of the four pirates. The ship made its way to Kenya, without their captain--only to be reunited a few days later.

All fine and good. However, this issue, an issue that has not just started, is no where near as important as the genocide in the Sudan or the teetering democracy in Zimbabwe.

While Somalia is a failed state. There is no mass genocide or rampant, urgent issue, on the scale of the Sudan, or, its most recent equivalent--Rwanda.

So, before we talk US officials into going into Somalia, again, I must say that we have, in fact, MUST go into the Sudan and watch Zimbabwe more carefully.

Sunday, April 12, 2009

Thailand's state of emergency!

The Prime Minister of Thailand, Abhisit Vejjajiva, has called a state of emergency in his country.

Thai politics is brain-numbingly confusing. You would have to not only go looking for the information, but have the concentration to sit through all of the issues which led to this state of emergency

Apparently, supporters of the People's Alliance for Democracy, who once banded together as a coalition to force former Prime Minister, Thaksin Shinawatra out of power, are back at it again.

They claim that the new People's Power Party at the time and their PM, Samak Sundaravej, were nothing more than puppets for former Prime Minister Shinawatra.

This has led to a host of leaders instituted by the Monarch and the dissolution of the PPP.

This is not yet the end. Abhisit Vejjajiva, the leader of the Democratic Party--to who the PAD is more favourable to-- has been undergoing severe pressure to put more policies in place that help the middle class

The issue is on the one side, you have the Thaksin-like supporters, who are rural populists and on the other hand, you have the Vejjajiva supporters who are mostly PAD party supporters, who favour policies towards a more free-market society and more towards the upper and middle class.

We cannot underestimate the power of the Monarch, Rama IX. It appears as if the monarch is on a populist wave of his own.

For one, he should have never buckled to pressure on any side and as a consequence dissolved the parliament at any time. Because of this, and after the coup of 2006 that ousted former PM Shinwatra, we have a very pro-PAD and Democratic party military, with rich men and women, about to--and some reports indicate that they have-- suppressed the rural and poorer classes and other supporters of PM Shinwatra.

Most likely the monarch was under heavy military and proletariat pressures. But, what he has done has caused more confusion and, perhaps, more upheaval.

The risk is now the PPP and the TRT parties, and their supporters, can now find the impetus to protest--as they have-- and now, form their own para-military groups to combat the overtures of the army.

I've seen it all before-- a populist/socialist like leader comes to power. Leads for a few significant years. The middle class and upper class use their money and influence over the media and business--most likely after they have been helped by the same policies they would be protesting against-- and work to undermine and overthrow a government.

What happens afterwards is what we are seeing now in Thailand. And, what will end up, is a growing political pressure. I have my own hypotheticals on what may happen if the Democratic Party gets away with too much. But, I wont share them now.

Say what ever you will about Shinwatra, he has led Thailand to great years of stability and prosperity, until his coup. They have not seen years like that before him or after him. And, at the rate this political impasse continues, they will never see years like this in the short term.

Sasha and Malia get new puppy...

Finally. President Obama and the first lady, got those young ladies that damn dog.

Apparently, its a Portuguese water dog, given to them by Sen. Ted. Kennedy. Ted Kennedy...water.....errr....nevermind!

They could have gotten a nice potcake from the Bahamas.

Saturday, April 11, 2009

Happy Easter!

Sorry for the late Easter Greetings. But, better late than never.

For those who don't know; Easter is a time where Christians world wide celebrate the death of the saviour Jesus Christ.

Friday past was good Friday and this Sunday, is Easter Sunday--the day he rose from the dead.

Enjoy the holiest of holy periods.


Wednesday, April 8, 2009

More than a TIEA?

The fast moving developments throughout the offshore financial sector world, in regards to the crack down on tax havens, has hit a particular twist.

The Organization of Economic Cooperation and Development (OECD) has announced that four more countries, Costa Rica, Malaysia, Philippines and Uruguay, have made commitments to removing the impediments to their regimes in regards to providing a base for more transparent tax exchange information systems.

Now, the offshore trust industries in those four countries, are minimal compared to the importance of the giants in the Caribbean like the Bahamas, The Cayman Islands and Bermuda. But, the issue is not only is there a sense in the air from the OECD that pressure for more Tax Information Exchange Agreements (TIEA's) are required. But, the impediments to carrying out the mandate for these agreements, is also crucially important to the OECD--which stands as a proxy organization for the G-20.

A recent train of thought has been to take a needs based approach to the matter, in regards to signing TIEA's, on the basis of working them into other bi-lateral arrangements with viable and participating trade partners, with which there are mutual interests. And, with this effort, stave off the process for as long as possible of dealing with full disclosure to the G-20 group and the OECD at large, while appearing to fulfil our obligations and at the same time avoid major capital markets who would use our services until the last nail knocks.

The atmosphere for tolerance in regards to this type of tactic, taking into consideration the work that has been undertaken by the OECD and the G-20 since the mid-1990's, apparently is sour. The tone for a need to do more is considerably loud.

As said with the recent commitments by the four countries mentioned in this article; they are not moving forward with TIEA's primarily, but, moving forward with the transforming their internal regulations, which sets the baseline for full and honest openness, in regards to tax transparency across the board and on the whole.

The idea of the "removal of impediments" to their respective tax regimes to come into accordance with the OECD standards seems openly abstruse, however. In fact, to go even further, it is as vague as everything else in regards to this recent effort to push offshore jurisdictions coming from the OECD, into offshore jurisdictions, being more transparent with their business operations.

To this date, since the initial push towards regulating offshore jurisdictions from onshore, started in the 1990's in earnest, there has not been a standardized code for what is "tax evasion", adopted by the chief proponent and focus point of the G-20, the OECD.

If there is no standard for identification of the genuine article, then how can one remove the impediments to its effectiveness?

The threat, in regards to when will countries be black-listed for non-compliance as well as what will be the actions taken, from the G-20 countries, in regards to the penalties, is also vague. In fact, to be fair, no one has a definite answer to what will be the ramifications.

One can only assume that there will be economic sanctions; embargo's; travel restrictions; increased diplomatic pressures and; non-international cooperation on a various amount of issues.

In light of this and to take the matter serious from a development standpoint, I have three recommendations, in regards to helping to prepare for the changes in the way offshore jurisdictions will be forced to doing business:

a) Governments should inform and coordinate with the relevant stakeholders in the industry, every step of the way in regards to a total and comprehensive strategy to tackle all of the issues regarding TIEA’s and the entire OECD standard on Harmful Tax and Transparency as well as lay out on the table the potential threats and sanctions to be levied, if there is to be a lag in compliance or, on the other end, a decision for non-compliance

b) There must be an alignment in regards to priorities and obligations to a country's Financial Services Industry, in regards making sweeping analyses on the economic impact of (i) losses in government revenue (ii) potential employment losses (iii) assessing the viability of the development of new financial products and services to mitigate against losses (iv) provide detailed assessments on the potential regional and international competitors to be impacted and the steps they have taken and; (v) provide details on the potential/projected impact the new standards to be imposed on the current tax regime.

c) TIEA negotiations, should not only be met and taken in the context and spirit of identifying other, wider international obligations and the procurement of goods and services for citizens, through international and regional trade agreements. But, also, taken into the broader context of modernizing tax regimes to be compliant with the way the global economy, "will" be, perhaps, working moving forward.

The truth of the matter is, is that regardless of the likelihood of the implications of the offshore countries, being decimated in a full scale internecine battle with the G-20 on tax evasion, the vagueness of the term tax evasion or the sanctions behind the term black-list, the merits of TIEA's or not, certain countries, are getting in line to do their best, in regards to complying with the OECD's mandate as much as possible.

Everyone should take this opportunity to not only comply, but move forward progressively.

Tuesday, April 7, 2009

US consumer credit report....

Consumer credit decreased at an annual rate of 3-1/2 percent in February 2009. Revolving credit decreased at an annual rate of 9-3/4 percent, and non revolving credit increased at an annual rate of 1/4 percent.
FED Report

Fiscal stimulus and Quantitative Easing techniques are still not working.

The spread between revolving and non-revolving credit, has to do with the bank's unwillingness to refinance loans in this still sensitive economic time.

Also, credit card issues have been going up, just slightly. Credit card payments, are, for the most part, due at the end of the month in full.

Companies handing out the plastic to their employee's for basic petty company services and unemployment benefits to persons, as a result of companies issuing credit cards over cash for unemployed persons, are first choices over handing out cash.

Also, bank's want their payments immediately, rather than let their credit be outstanding, to increase their liquidity and allow them to continue lending, at any level.

Zuma cleared of charges...

...don't even get me started.
Zuma escapes!

Umshini Wami!!

What's the truth about food?

World food prices have been unstable during this economic crisis. This affects crops and farmers, because they can't get fair market value for their produce. So, in that event, they lose out on either 1. over-production or 2. under production.

This FT reports, which echo's many other global development reports on food from the UN and WTO, primarily, “The issue of price volatility remains a crucial element for the world’s food security,” and... “There is a need for a fast increase of agricultural production in developing countries.”

Last week on this blog I said that the US farms showed a decrease in their acreage. Subsequently, cutting agri-production.

Tell tale signs indeed!

Friday, April 3, 2009

Sweeping IMF measures.

The G-20 meeting did bear fruit. Allot of fruit. In fact, this meeting was more fruitful than many others in recent years.

I suspect there will be a follow up in the next few months. But, this is a good start--if there will be more to come. I suggest instead of more policies, after this announcement, there should be a monitoring meeting to address the effectiveness in the broad range of implementation.

See IMF press release here

Aside from the $250 bn in SDR to be injected. I for one thinks that global M), broad money, was way too insufficient in the first place. Anything that re-distributes that, is a fantastic thing for the world's poor and middle class.

Another good, but slightly weak new mandate, will be the economic surveillance of the IMF in regards to global finance.

The IMF can't do everything. But, this is what the IMF has been doing, in any event. Will they replace the role of ratings agencies, is another story. I doubt that they can, even if they wanted to. The private market, has a mind of its own in regards to the work THEY have to do--the IMF, unless it is going to be a global investment bank and manager, can't possibly be overall effective in this regard, over ratings agencies and other market related institutions responsible in this regard.

The other police points are somewhat general. There is no commitment on global financial regulation. The commitment to poorer countries, seems as if it would remain the same.

Other than that...good start.

Thursday, April 2, 2009

$250 bn in SDR for the IMF!

IMF Press Release. This is a part of an overall $1.1 Trillion dollars, the FT reports.

The drawing rights, which is denominated by a basket of currencies compared to the US dollar, will be used immediately.

No word on exactly how it will directed into stimulus. But, I guess it will be on a case by case basis.

Trade finance is an issue as well as special developing country credit, is also an issue.

ECB Rate cut!

G-20 induced rate cut was called after the first meetings of the G-20 leaders.

Most likely they got on the phone and said to Trichet--Obama said cut that rate. Forget about your inflation targets. You won't have one unless America gets it's rate cut for the Euro-zone.

The report from the FT says that it was due to the recession (yea, yea, yea) and primarily, due to Germany's falling exports. Sounds a little fair about the exports. Sounds like EU domestic protection. If tariffs or NTB's (non tariff barriers) are raised, then we would have a full scale war on our hands--trade war.

I am one who feels that rate cuts, should go hand in hand with deflation at this time. And, not just rate cut for the sake of cutting a rate--but, quantitative easing, to ensure a boost in private stocks. If stocks aren't deflating, then the need to cut a rate comes down to access to money for the domestic market.

I guess this is what they meant by a "coordinated" response. Because, we can't have one major G-20, cutting rates right left and centre--but the other, not cutting rates, bulking up their currency and then, leaving the possibility for protectionism.

Protectionism is on the rise, as many authors have stated--Razeen Sally, being the chief one.

Where does this take us? We don't know. But, it is taking us somewhere. And, the moral of the story is, when the US comes to the EU, things, happen!

Wednesday, April 1, 2009

Snapshot of the problems....

Here from the ICTSD and their weekly publication, Bridges Trade Digest. See article here

Developing countries are being hit not only by declining growth and demand for their exports, but also by the sudden jump in the cost of trade finance, a drop in remittances, reduced foreign direct investment, and outflows of portfolio investment.

Good little reminder. No analytical publication is given. But, it seems a bit believable.

Sally and Erixon!

Razeen Sally is emerging as yet another leader in the global economic challenge. I applaud his efforts.

His approach is more international than that of Krugman or anyone else out there; except for Buiter and at some times, Rodrik.

Even though he comes from a trade (free-trade) approach, his outlook gives us some snapshot into how the new global governance should look like, surprisingly, from a goods and transfer aspect of things as opposed to the dollars and cents approach by Buiter. Or, the development aspect of a Rodrik.

He and Fredrik Erixon have collaborated on a few recent articles in regards to assisting the system to get back to health.

What he proposes is some what of a paradox:
Finally, the new consensus espouses a renewed compact of “embedded liberalism” or “Keynes at home and Smith abroad” (Caplin 2008). Greater government macro and micro interventions at home are needed to stimulate recovery, reduce inequality and preserve social stability. And stronger international cooperation (or “global governance”) is needed to make this work in tandem with open markets abroad. This idea is based on a contradiction. Big Government at home means a new Age of Protection abroad. Keynes at home is also Keynes abroad.
There may be more to the issue than just the paradox. Perhaps I would have to review the Caplin literature to understand what that would entail. But, from the face of it, it appears as if it is going to be littered with heavy government domestic spending, greater deficits and lots of spending to go with it.

I think there are some structuralist traditionalist economists, who would have issue with this.

Kamalesh Sharma speaks...

Caribbean Net News Commentary

I met Ambassador Sharma at an event I hosted at the LSE, "The One World: Ambassador Series" back in 2007 when he was the Indian Ambassador to the UK.

A very tall and intimidating figure. Very short and to the point. A little stuffy too, but, I guess we all can't be Mary Poppins.

I am surprised he made it to Commonwealth Secretary. Congrats on his appointment.

He is suggesting a T-20 (Trustee-20) rather than reliving the G-20. This T-20 will be the new trustee's of the global economy. Born out of the G-20 of course.

He made some other great points by the way. Culminating in this final statement of grandeur:
The lesson of 2009 must be the need for a renewed global resolve to meet these challenges in a way that benefits all. Our current reality is partial globalisation; our shared goal is inclusive globalism. A new multilateralism is an imperative, not an option.

Could not have said this any better myself.

BOE HEW report: Negative investment.

The BOE reports that Home Equity Withdrawal, HEW, is down at 2008 Q4 is -£8.0 billion.

This means that persons, who invested in their home, but did not have the value extracted from that investment to go to other market purchases non home related--school tuition; financial products or any other non home purchase or home development investment, was down.

This means that persons are losing considerable value on their homes. Compared to -£5.9 billion in 2008 Q3, this is a sharp increase of just about 35%.

Homes are being devalued and persons, are not spinning this equity into tangible market purchases and investments.

Sharp decreases over the last three quarters as well.