The Global Economy, as we know/ believe/ are told, is in recession/ downturn/ meltdown....and the corporate and global leaders are trying their best to repair/contain the damage. Ordinary people around the world are told that everything will work-out fine with the new initatives where the government and industry leaders are working hand-in-hand... They will, so to speak, put the humpty-together again!
Of course, these are complex decisions, having wide-ranging impact on the national and global economy; most people don't know/understand how these decisions are taken.
Here are some examples!!
Fed Hires Failed Bank Executive
The Federal Reserve Bank is drawing jeers for hiring a former top executive from the now-defunct investment bank Bear Stearns to help it gauge the health of other banks.
The Federal Reserve Bank has hired the former head of risk management for Bear Stearns, which imploded this spring.
Michael Alix was head of risk management for Bear Stearns for two years until the institution imploded this spring, a victim of its (risky) subprime-mortgage related investments.
Last Friday, the Federal Reserve Bank of New York quietly announced it had hired Alix to advise it on bank supervision... [Read on...]
...On Private Jets to Plead for Public Funds
The CEOs of the big three automakers flew to the nation's capital yesterday in private luxurious jets to make their case to Washington that the auto industry is running out of cash and needs $25 billion in taxpayer money to avoid bankruptcy.
Even as their companies fail, Ford and GM CEOs continue lavish lifestyles.
The CEOs of GM, Ford and Chrysler may have told Congress that they will likely go out of business without a bailout yet that has not stopped them from traveling in style, not even First Class is good enough.
All three CEOs - Rick Wagoner of GM, Alan Mulally of Ford, and Robert Nardelli of Chrysler - exercised their perks Tuesday by flying in corporate jets to DC. Wagoner flew in GM's $36 million luxury aircraft to tell members of Congress that the company is burning through cash, asking for $10-12 billion for GM alone.... [Read on...]
AIG Execs At Posh Resort After $85 Billion Bailout
News cameras watched as American International Group, or AIG, executives were once again living it up at a fancy resort in Phoenix.
Cocktail parties, limousines and dinner at a top Phoenix restaurant were part of their latest retreat.
AIG instructed the hotel to keep everything secret, no signs with its name were allowed.... AIG made significant efforts to disguise the conference, making sure there were no AIG logos or signs anywhere on the property.
An AIG spokesperson said there were no AIG markers in order to minimize signage costs and to lower the company's profile.
A hotel employee told ABC15, "We can't even say the word [AIG]."... [Read on...]
$500 wine at White House Financial Crisis Meeting?
The global economy may be undergoing a significant downturn, but the White House's dinner budget still appears flush with cash.
After all, world leaders who are in town to discuss the economic crisis are set to dine in style Friday night while sipping wine listed at nearly $500 a bottle.
According to the White House, tonight's dinner to kick off the G-20 summit includes such dishes as "Fruitwood-smoked Quail," "Thyme-roasted Rack of Lamb," and "Tomato, Fennel and Eggplant Fondue Chanterelle Jus."
To wash it all down, world leaders will be served Shafer Cabernet “Hillside Select” 2003, a wine that sells at $499 on Wine.com.... [Read on...]
Thursday, November 20, 2008
...putting the Humpty-Dumpty/ Global Economy together again!
Sunday, October 26, 2008
The "Free-Market Oracles" say it was all wrong!! - part-2
Continuing from the previous posting:
Almost two decades back, in a 1989 essay, Francis Fukuyama had declared The End of History (a thesis which he later elaborated in a book titled The End of History and the Last Man). His basic constention was that with the dawn of Liberal Democracy and Free Market Capitalism, mankind had achieved the fundamentally most effective and the final stage of human government and method of organising the economy.
With this achivement, he stated, all competing ideologies have fallen, or will fall. He wrote:
"...What we may be witnessing is not just the end of the Cold War, or the passing of a particular period of post-war history, but the end of history as such... That is, the end point of mankind's ideological evolution and the universalization of Western liberal democracy as the final form of human government."
Such a momentus claim about the triumph of western (American) politico-economic system made Fukuyama something of a celebrity, and a poster-boy for the neo-liberals...
Recently, however, like Alan Greenspan's self-enlightenment that free-market capitalism is not flawless, Fukuyama too accepted that along with the Wall Street, the utopian vision of capitalism has also collapsed.
Excerpts from his article The Fall of America, Inc. (Newsweek, October 13th,'08)
"The implosion of America's most storied investment banks. The vanishing of more than a trillion dollars in stock-market wealth in a day. A $700 billion tab for U.S. taxpayers. The scale of the Wall Street crackup could scarcely be more gargantuan. Yet even as Americans ask why they're having to pay such mind-bending sums to prevent the economy from imploding, few are discussing a more intangible, yet potentially much greater cost to the United States — the damage that the financial meltdown is doing to America's "brand."
Ideas are one of our most important exports, and two fundamentally American ideas have dominated global thinking since the early 1980s... The first was a certain vision of capitalism—one that argued low taxes, light regulation and a pared-back government would be the engine for economic growth.... The second big idea was America as a promoter of liberal democracy around the world, which was seen as the best path to a more prosperous and open international order....
...But now the engine of that growth, the American economy, has gone off the rails and threatens to drag the rest of the world down with it. Worse, the culprit is the American model itself: under the mantra of less government, Washington failed to adequately regulate the financial sector and allowed it to do tremendous harm to the rest of the society."
Fukuyama goes on to justify that the Reagan-Thatcher revolution of unleashing the "free" market forces was appropriate in that historical context, but does accept that:
"...Like all transformative movements, the Reagan revolution lost its way because for many followers it became an unimpeachable ideology, not a pragmatic response to the excesses of the welfare state. Two concepts were sacrosanct: first, that tax cuts would be self-financing, and second, that financial markets could be self-regulating.
...Reaganomics introduced the idea that virtually any tax cut would so stimulate growth that the government would end up taking in more revenue in the end (the so-called Laffer curve). In fact, the traditional view was correct: if you cut taxes without cutting spending, you end up with a damaging deficit.... globalization masked the flaws in this reasoning for several decades. Foreigners seemed endlessly willing to hold American dollars, which allowed the U.S. government to run deficits while still enjoying high growth, something that no developing country could get away with.
...The second Reagan-era article of faith — financial deregulation — was pushed by an unholy alliance of true believers and Wall Street firms, and by the 1990s had been accepted as gospel by the Democrats as well. They argued that long-standing regulations... were stifling innovation and undermining the competitiveness of U.S. financial institutions. They were right — only, deregulation produced a flood of innovative new products like collateralized debt obligations, which are at the core of the current crisis.
....the downside of deregulation were clear well before the Wall Street collapse. In California, electricity prices spiraled out of control in 2000-2001 as a result of deregulation in the state energy market, which unscrupulous companies like Enron gamed to their advantage. Enron itself, along with a host of other firms, collapsed in 2004 because accounting standards had not been enforced adequately. Inequality in the United States rose throughout the past decade, because the gains from economic growth went disproportionately to wealthier and better-educated Americans, while the incomes of working-class people stagnated..."
Full article is available here
Thursday, October 23, 2008
The "Free-Market Oracles" say it was all wrong!! - part-1
Two "free-market" evangilists retracted their beliefs this past week...though slightly too late!
Here is the first one:
WASHINGTON (AP): Former Federal Reserve Chairman Alan Greenspan says the current financial crisis has uncovered a flaw in how the free market system works and that has shocked him.
Greenspan told the House Oversight Committee on Thursday that his belief that banks would be more prudent in their lending practices because of the need to protect their stockholders had proven in the latest crisis to be wrong.
Greenspan said he had made a "mistake" in believing that banks in operating in their self-interest would be sufficient to protect their shareholders and the equity in their institutions.
Greenspan said that he had found "a flaw in the model that I perceived is the critical functioning structure that defines how the world works."
Friday, September 19, 2008
So what happened to "Capitalism", "Free" Market economy, etc..
The "Market" is supposed to "correct" itself - so we have been told... And a good government is one which governs/intervenes the least in the "free" market dynamics!
But then, last week - actually last few months - at least one government, which has championed/ branded/ enforced the cause of the "free" market, has been interfering with the "free market" - actually bailing out companies (Countrywide Financial, Bear Sterns, Fannie Mae, Freddie Mac, AIG, etc. - many more to come)...
Here are some reflections/links - sent by some friends - on this changing paradigm...
"Not surprisingly, the atmosphere at this year's World Economic Forum was grim. Those who think that globalization, technology and the market economy will solve the world's problems seemed subdued.
Most chastened of all were the bankers. Against the backdrop of the U.S. subprime crisis, the disasters at many financial institutions and the weakening of the stock market, these "masters of the universe" seemed less omniscient than they did a short while ago. And central bankers, too, were in the Davos doghouse this year.
Anyone who goes to international conferences is used to hearing Americans lecture everyone else about transparency. There was still some of that at Davos. I heard the usual suspects – including a former treasury secretary who had been particularly vociferous in such admonishments during the East Asia crisis – bang on about the need for transparency at sovereign wealth funds (though not at American or European hedge funds).
But this time, developing countries could not resist commenting on the hypocrisy of it all." ...Read on
"The high priests of capitalism are in sackcloth and ashes, their belief in markets shattered, their catechism of risk-taking renounced. From Wall Street to Detroit, once-devout believers in unfettered private enterprise are running from their religion. Now that their greed has brought the economy to the brink of depression, they want government help.
What happened to those masters of the universe? What happened to their handmaidens, the Republican politicians who denounced government regulation and read from the holy scriptures as recorded by Ayn Rand?
When ordinary Americans began to lose their homes several months ago, conservatives were quick to denounce them for being too stupid to understand a simple mortgage or too undisciplined to know how to live within their means. The right-wing talking heads had a field day denouncing plumbers and painters, teachers and personal trainers threatened with foreclosure: They’re idiots! They’re losers! They’re suckers!
Well, it now seems there were quite a few idiots among the brokers and bankers who bundled loans in complicated investment vehicles they didn’t fully understand. They actually believed they could vastly increase the financial rewards they received while virtually eliminating the risk of losses. That’s the very definition of “sucker.”"...Read on
"It's university graduation season again and invariably, many graduates I encounter want to become investment bankers.
In less than a year, financial stocks have plummeted by over 70 per cent in value. Millions of Americans and Britons have lost their homes. Countless millions more around the world have seen their net wealth drop precipitously, possibly never to recover within their working lives. Who to blame?
Investment bankers, of course, who devised all those sub-prime mortgages and other cute "products" with long, exotic names.
As someone noted, never in history have so many people lost so much money due to the actions of so few.
Why then would young graduates want to be investment bankers? Well, to begin with, because investment bankers reward themselves pretty well, regardless of how others are doing. Bonuses paid in London's financial district totalled f6 billion 6815.7 billion) this year, though the total losses of financial services companies were 10 times greater.
And in case you think that pay should correlate with performance, don't be naive. Last year, the CEO of a large private equity fund walked away with a US8350 million (SS499 million) bonus, though his just-listed company's share price had tanked by 37 per cent.
Nobel laureate Joseph Stiglitz recently noted that the Wall Street financial system "paid bankers to gamble. When things turned out well, they walked away with huge bonuses. When things go badly, as now, they do not share in the losses. Even if they lose their jobs, they walk away with huge sums".
To be fair to the maligned financial engineers, others also got rich during the good years. In 1994, the average American CEO was paid about 90 times more than the average blue-collar worker. Today, it is 180 times.
But it is still mainly bankers who buy the thousand-dollar wines and Bentley convertibles. In America's Fortune 1,000 industrial companies, CEOs make around two to five times more than their immediate subordinates. In Wall Street, the top dog earns around 20 to 40 times more than his immediate subordinates.
It's not surprising then that income inequality in the United States is at an all-time high. The share of the national wealth owned by the top 1 per cent of Americans has more than doubled – from 20 per cent in 1976 to more than 50 per cent today. Through changes to the tax system, an American private equity partner can today pay less taxes than the cleaning lady in his office, according to economist Paul Krugrnan.
How did all this happen with no one complaining?" ...Read on
Tuesday, May 13, 2008
The Fall of the Oil-Addicted Humpty-Dumpty
This article by Michael T Klare is worth a reading...
Since it is a long article, I have edited it substantially (the full text is available here)
------------
...Less than a month ago, the United States... lost its claim to superpower status when a barrel of crude oil roared past US$110 on the international market, gasoline prices crossed the $3.50 threshold at American pumps, and diesel fuel topped $4... an ex-superpower-in-the-making.
That the fall of the Berlin Wall spelled the erasure of the Soviet Union's superpower status was obvious to international observers at the time... The relationship between rising oil prices and the obliteration of America's superpower status is, however, hardly as self-evident. So let's consider the connection.
The fact is, America's wealth and power has long rested on the abundance of cheap petroleum..... Abundant, exceedingly affordable petroleum was also responsible for the emergence of the American automotive and trucking industries, the flourishing of the domestic airline industry, the development of the petrochemical and plastics industries, the suburbanization of America, and the mechanization of its agriculture. Without cheap and abundant oil, the United States would never have experienced the historic economic expansion of the post-World War II era.
No less important was the role of abundant petroleum in fueling the global reach of US military power. For all the talk of America's growing reliance on computers, advanced sensors, and stealth technology to prevail in warfare, it has been oil above all that gave the US military its capacity to "project power" onto distant battlefields like Iraq and Afghanistan. Every Humvee, tank, helicopter, and jet fighter requires its daily ration of petroleum, without which America's technology-driven military would be forced to abandon the battlefield. No surprise, then, that the US Department of Defense is the world's single-biggest consumer of petroleum...
....When it came to reliance on imports, the United States crossed the 50% threshold in 1998 and now has passed 65%.... this represented a significant erosion of sovereign independence... transferring such staggering sums yearly to foreign oil producers, who are using it to gobble up valuable American assets.....
...the United States is importing 12-14 million barrels of oil per day. At a current price of about $115 per barrel, that's $1.5 billion per day, or $548 billion per year....
....at a moment when credit is scarce and economic growth has screeched to a halt, the oil regimes... are depositing their mountains of accumulating petrodollars in "sovereign wealth funds" (SWFs) - state-controlled investment accounts that buy up prized foreign assets in order to secure non-oil-dependent sources of wealth. At present, these funds are already believed to hold in excess of several trillion dollars; the richest, the Abu Dhabi Investment Authority (ADIA), alone holds $875 billion.
The ADIA first made headlines in November 2007 when it acquired a $7.5 billion stake in Citigroup, America's largest bank holding company. The fund has also made substantial investments in Advanced Micro Systems, a major chip maker, and the Carlyle Group, the private equity giant. Another big SWF, the Kuwait Investment Authority, also acquired a multibillion-dollar stake in Citigroup, along with a $6.6 billion chunk of Merrill Lynch. And these are but the first of a series of major SWF moves that will be aimed at acquiring stakes in top American banks and corporations...
....Foreign ownership of key nodes of our economy is only one sign of fading American superpower status. Oil's impact on the military is another.
Every day, the average GI in Iraq uses approximately 27 gallons of petroleum-based fuels. With some 160,000 American troops in Iraq, that amounts to 4.37 million gallons in daily oil usage, including gasoline for vans and light vehicles, diesel for trucks and armored vehicles, and aviation fuel for helicopters, drones, and fixed-wing aircraft. With US forces paying, as of late April, an average of $3.23 per gallon for these fuels, the Pentagon is already spending approximately $14 million per day on oil ($98 million per week, $5.1 billion per year) to stay in Iraq. Meanwhile, our Iraqi allies, who are expected to receive a windfall of $70 billion this year from the rising price of their oil exports, charge their citizens $1.36 per gallon for gasoline.
When questioned about why Iraqis are paying almost a third less for oil than American forces in their country, senior Iraqi government officials scoff at any suggestion of impropriety. "America has hardly even begun to repay its debt to Iraq," said Abdul Basit, the head of Iraq's Supreme Board of Audit, an independent body that oversees Iraqi governmental expenditures. "This is an immoral request because we didn't ask them to come to Iraq, and before they came in 2003 we didn't have all these needs."
Needless to say, this is not exactly the way grateful clients are supposed to address superpower patrons.
Certainly, however, our allies in the region, especially the Sunni kingdoms of Kuwait, Saudi Arabia, and the United Arab Emirates (UAE) that presumably look to Washington to stabilize Iraq and curb the growing power of Shi'ite Iran, are willing to help the Pentagon out by supplying US troops with free or deeply-discounted petroleum. No such luck....
...As far as they're concerned, we're now just another of those hopeless oil addicts driving a monster gas-guzzler up to the pump - and they're perfectly happy to collect our cash which they can then use to cherry-pick our prime assets...
Worse yet, the US military will need even more oil for the future wars on which the Pentagon is now doing the planning... the future US war machine will rely less on "boots on the ground" and ever more on technology.
... To put this in perspective: The average GI in Iraq now uses about seven times as much oil per day as GIs did in the first Gulf War less than two decades ago. And every sign indicates that the same ratio of increase will apply to coming conflicts; that the daily cost of fighting will skyrocket; and that the Pentagon's capacity to shoulder multiple foreign military burdens will unravel. Thus are superpowers undone.
-------------
The rest of the article goes on to describe the rise of Russia since the fall of the Berlin Wall, and ends with:
....Whether we know it or not, the energy Berlin Wall has already fallen and the United States is an ex-superpower-in-the-making.
Wednesday, December 26, 2007
What is "Global" in "Globalization"?
Pankaj Ghemawat's blog has some interesting - and revealing - statistics about Globalisation.
(for those who are not in the know, Pankaj Ghemawat is a Prof at Harvard Business School, and currently on sabbatical with IESE, Barcelona)
In one of his posts, Globalization Myth vs Reality, he mentions:
"...most types of economic activity that could be carried out within or across national borders are actually still concentrated domestically... of all the capital being invested around the world, how much is foreign direct investment by companies outside of their home countries?... The fact is, the ratio is generally less than 10% and, while it may be pushed higher by merger waves, has never reached 20%."
He goes one to put some statistics on key parameters of cross-border activities - telephone calls, long-term migration, university enrollment, stock investment, and trade as a fraction of gross domestic product (GDP) - look at the blue bars in the diagram below. "they fall much closer to 10% than the levels close to 100% that one would expect if one took the gurus of globaloney at their word."
and what are the figure shown by the green bars?
"... 400 respondents to a poll about globalization levels on HBR.org came up with the responses summarized in green in the chart... Note the systematic tendency to overestimate globalization levels, and by a wide margin: the responses (the green bars) averaged 30% versus real values (the blue bars) that averaged 10%. And to aggravate matters, respondents with more than 10 years’ experience actually are farther off the mark than ones with less experience!
So perhaps, "Globalisation" is not so global, as the hype around it show.... Or as Pankaj Ghemawat puts it:
"...managers assume the world to be more globalized than it actually is..."
However,, there is one parameters, which Ghemawat seems to neglect in his analysis:
The movement of the most unregulated commodity - currency/Forex - across borders
Bank of International Settlements' Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity in 2007
Daily "turnover in traditional foreign exchange markets increased by 71% between April 2004 and April 2007 to reach $3.2 trillion."
$3.2 trillions/day!!!
... Which is quite a global activity, considering that according to WTO's International Trade Statistics 2007:
..and the value of entire annual world global trade in merchandise and commercial services turns out to be $9 trillion....
Or in other words, global trade of Forex in 3 days exceeeds the annual global trade of goods and services!!
A couple of years back, I had made a post on this global trade - Living in a Global Casino - and how it differs from other trade activities:
"The FX market also differs from investments in goods and services, in that speculators make money from money alone. No jobs are created and no services provided. The losers are often those least able to pay the price - the poor and marginalised who are the victims of financial crises triggered by (a) "capital account convertibility", normally a condition for loans by the international financial institutions, and (b) the rapid withdrawal of funds from emerging economies by speculators."
Wednesday, November 28, 2007
Iran, Venzuela, Warren Buffet, Taj Mahal & supermodels - and US$
Of course, anyone following the global financial news will know that the 50-year old global romance with US$ is coming to an end... The signs were there since quite some time...
What has changed is that what could be earlier explained as a geo-political or high-end financial investor pheonomenon, is now trickling down to mundane affairs.
The snap-shots of this worn-out/wearing-out romance look like this:
1. Earlier, it was the Communists/"Axis of Terror" countries, who started terminating the relationship
E.g.,
etc., etc..
2. Then, the financially-savvy investors started moving away
E.g.,
etc. etc...
3. The friendly countries/allies start bidding farewells
One can dismiss the above since countries like Cuba, Iran or Venezuela have a political point to make against US. And investors, at best, would be following their self-interest - they would move away from a weak dollar and come back once the dollar picks up.
But more recently, even the friendly countries are getting disenchanted with US$
E.g.,
4. And now these minor reverberations!
Nearer home in India, two developments took place during last couple of months.
And last but not the least, a news from Brazil:
Related Posts:
Thursday, October 04, 2007
Tipping Point for US$?
There is an interesting video discussion with the investment expert, Dr Martin D Weiss at "The Great Dollar Panic of 2007-2008" (Click to watch)
Some excerpts from the transcript:
- "this credit crisis is many times larger.... Back in 1998, Greenspan was dealing with a small tumor in our financial system that could quickly be isolated and contained. Today, his successor, Fed Chairman Ben Bernanke, is dealing with a cancer that has already spread throughout the financial system...
...Back in 1998, Greenspan was dealing with a crisis that was isolated and easily contained. Now, in 2007, Bernanke is dealing with a crisis that is already spreading out of control to 20,000 cities and towns across America.
In 1998, the epicenter of the crisis was small Asian markets. This time, the epicenter is right here in the United States, with financial markets that are at least a hundred times larger.
In 1998, Greenspan was dealing with just one major hedge fund in trouble. He was able to sit down with the big banks. They were able to hash out a bailout. They were able to nip the crisis in the bud.
Now, Bernanke is trying to cope with at least a thousand hedge funds in this sector. If even just one-tenth of them are entangled in this mess — and there's every indication they are — that alone is 100 times more than 1998. Plus, this time, we already have 140 mortgage companies in trouble, bankrupt or mortally wounded.
Greenspan's 1998 crisis was a ripple. Bernanke's 2007 crisis is a tidal wave....
...It's already striking. Bernanke is facing a tidal wave of foreclosures in the $824 billion subprime mortgage market... the $722 billion Alt-A mortgage market... the $517 billion jumbo mortgage market... and, ultimately, in the entire $13.5 trillion mortgage market.... Not only the $13.5 trillion mortgage market, but also the $2.2 trillion U.S commercial paper market... the $2.4 trillion consumer credit market... the $10.1 trillion corporate bond market … and, biggest of all, the $144.8 trillion in derivatives held by U.S. banks alone.
So apparently, this may be, for all you know, the history in making... the concluding part of a trend that was quite apparent in the long-cycle over last many decades:
Friday, January 05, 2007
The Collapse of U$D Economy?? - Part II
More than 2 years back, I had written about The Collapse of Dollar Economy?
The reasons for such a blasphemous statement were as follows:
Finally, I have found a taker of this argument in none other than David Walker, the Comptroller of the US. In an accompanying note to the Financial Report of the United States Government, realeased on December 15th, 2006, he cautions:
- Despite improvement in both the fiscal year 2006 reported net operating cost and the cash-based budget deficit, the U.S. government’s total reported liabilities, net social insurance commitments, and other fiscal exposures continue to grow and now total approximately $50 trillion, representing approximately four times the Nation’s total output (GDP) in fiscal year 2006, up from about $20 trillion, or two times GDP in fiscal year 2000.
As this long-term fiscal imbalance continues to grow, the retirement of the “baby boom” generation is closer to becoming a reality with the first wave of boomers eligible for early retirement under Social Security in 2008.
Given these and other factors, it seems clear that the nation’s current fiscal path is unsustainable and that tough choices by the President and the Congress are necessary in order to address the nation’s large and growing long-term fiscal imbalance.
Meanwhile, a month old news-item in Financial Times reports that Oil Producers are gradually moving away from U$D... replacing it with Euros
Wednesday, April 27, 2005
Living in a Global Casino
A certain report (The Triennial Central Bank Survey of Foreign Exchange and Derivative Market Activity 2004) issued by the Bank of International Settlement quotes that "In traditional foreign exchange markets, average daily turnover in April 2004 was $1.9 trillion, a 57% increase at current exchange rates and a 36% rise at constant exchange rates compared to April 2001."
This is a huge volume of trade, if one considers that:
What makes it slightly scary is also the fact that by World Bank's estimates, 95% of these transactions are short term speculations, with 4 out of 5 trades completed in less than a week.
Thus, given the fact that every day, only 2% of FX transactions relate to any "real" economic trade of goods or services, we are actually living in a global casino, where 98% transactions are speculative.
Ever since the major world currencies became "float", and got commoditised, the global Currency Market or Foreign Exchange(FX) Market has emerged as one of the largest markets in the world. Currency traders obtain substantial gains by taking advantage of extreme fluctuations in currency price while using the well-known "buy lower - sell higher" principle. In comparing to other sectors of the financial world, foreign currency exchange is quite unique in that it is highly sensitive to many factors, open access to many classes of investors, high liquidity, and 24 hour access - and can transfer billions of dollars across continants at the click of a mouse.
The major players - and winners - in this market are the investment banks. The world's largest ten banks (which include Merrill Lynch, Citigroup and Chase Manhattan, etc.) control 52% of the global foreign exchange market. The value of foreign exchange transactions conducted by Citigroup Bank in 1998 - $8.5 trillion - exceeded the value of the GDP of the United States in that year. The banks operate in their own interest and on behalf of large corporate and private clients, insurance companies and superannuation funds.
The FX market also differs from investments in goods and services, in that speculators make money from money alone. No jobs are created and no services provided. The losers are often those least able to pay the price - the poor and marginalised who are the victims of financial crises triggered by (a) "capital account convertibility", normally a condition for loans by the international financial institutions, and (b) the rapid withdrawal of funds from emerging economies by speculators.
This global casino is a shadowy world, where rumour and mood can shift billions of pounds in minutes, once described by Citibank chairman John Reed as "a little like the physicist who created the bomb".
In the past, this global casino has triggered the foreign exchange crises which shook Mexico in 1994-5, Asia in 1997 and Russia in 1998.
In the Nov.'97 7th Summit Level Meeting of the Group of 15 the then Prime Minister Mahathir of Malaysia had made these observations about these speculations:
(while he was speaking in the meltdown of Malaysian economy around that time, but his remarks are true for all other "economic meltdowns")
"In Malaysia and in other countries of South East Asia, we spent decades of sweat, toil and tears since independence to develop our countries and grow our economies. Our countries recorded the highest growth rates continuously for many years. But all these seem to have come to nought when, in the space of a few months, currency traders impoverished our countries merely by devaluing our currencies... The rules of trading are devised solely by the traders and these rules have been designed to benefit them. Thus for every dollar that they deposit, the bankers allow them gearing of 20 times. Since the funds at the disposal of these traders run into billions of dollars they have more money to play with than the reserves of most developing nations.
...Weak fundamentals are often cited as if these can mysteriously on their own weaken currencies. The truth is that currencies weaken only if currency traders sell them for US dollars. These traders are not doing so to save their investments. In fact they have no investments in our countries. What they actually do is to borrow the particular currency from foreigners or locals and then sell this currency for US dollars.
... This deliberate devaluation of the currency of a country by currency traders purely for profit... reduces the purchasing power of the country concerned, as well as the incomes of the people, rich and poor alike. It leads to inflation and economic regression. ..."
"On the other hand the currency traders take billions of dollars of profits and pay absolutely no taxes to the countries they impoverish and make profits from."
Sources:
http://www.bis.org/publ/rpfx05.htm
http://www.transaction.net/money/book/
http://en.wikipedia.org/wiki/Foreign_exchange_market
http://www.southcentre.org/southletter/sl29/south%20letter%2029trans-03.htm
http://www.onlineopinion.com.au/view.asp?article=1954
Thursday, February 03, 2005
US$ vs. Bill Gates, Warren Buffet, George Soros, China
A couple of months back, I had made a posting here about the reasons for likely Collapse of the US$ Economy. Now it seems that the day of reckoning is arriving faster....
The following are the excerpts from Bloomberg News, published in International Herald Tribune today (February 3rd, 2005).
"The world's two richest men have joined the ranks of the dollar's detractors, a stand that is raising eyebrows in Asia. Last week, for example, Bill Gates told the television host Charlie Rose, "I'm short the dollar."
Gates, the chairman of Microsoft, called the record $7.62 trillion U.S. federal debt "a bit scary" and lamented that the United States is in "uncharted territory" fiscally.
And he's right. Just ask Warren Buffett, the world's No. 2 moneyman, who has been buying foreign currencies since 2002, citing concerns about the U.S. deficit. The bet is paying off, too. Berkshire Hathaway, his company, reaped a $412 million pretax gain on the trade in the third quarter of 2004.
Gates and Buffett may not be reading from the same playbook as the financier George Soros, though their investments bear similarities. Soros has long given up on the world's reserve currency, and on President George W. Bush's competence on economic matters.
Yet the United States is managing to run afoul of an even more powerful force than wealthy individuals: the world's fastest-growing major economy. China, it seems, has had just about enough of Washington's bickering about its currency policy.
"Please leave it to us," Li Ruogu, deputy governor of People's Bank of China, said in Davos, Switzerland, when it was suggested that a stronger yuan would help China.... "The U.S. should take the lead in putting its own house in order," said the Chinese central bank adviser, Yu Yongding.
It is remarkable to see the United States being chastised by Chinese policy makers....
....The issue is coming to a head days before officials of the Group of 7 wealthy industrialized nations meet in London. The dollar's weakness, and the euro's resulting strength, is likely to be the center of attention. The European Central Bank president, Jean-Claude Trichet, has voiced concern about the dollar.
Until now, the United States has been able to influence currency traders with its deficits-don't-matter poker face. Yet it is losing its ability to keep investors - and central banks - in check. If central banks in Asia turn on the dollar, the United States is in for some very turbulent times as bond yields surge....
....Gates and Buffett, meanwhile, are warming up to China. Despite the nation's fragile financial system, inadequate transparency, lack of democracy and failure to halt the piracy of goods, Gates, speaking at Davos, described China as a "change agent" for the next two decades.
In September, Gates's $27 billion foundation received approval from China's foreign-currency regulator to invest as much as $100 million in yuan shares and bonds. Buffett, who visited China with Gates in 1995, made his first investment there in 2003, buying a stake in PetroChina.
Still, the biggest challenge for the United States is not to keep Gates or Buffett happy; it's persuading the central banks of Asia not to dump their roughly $1.1 trillion of U.S. Treasury holdings. If the banks do make such a move, the world's two richest men may also become two of its most prescient currency speculators."
Thursday, December 09, 2004
The Collapse of Dollar Economy??
Is the US$ - and the global dollar economy - heading for a collapse?
[This is continuation of a theme, on which I had twice written earlier: once, in April '03 about how the Iraq Invasion was/is a last ditch attempt to save US$[1], and then again, when a whole issue of Alternative Perspective in Feb'04[2] was devoted to this topic]
Even if the idea seems far-fetched, it is worth a serious thought.
Most such speculations focus only on the US Current Account Deficit, which has grown to disproportionate dimensions. It is true that US consumes more than it produces, imports more than it exports. Financing this deficit would require an inflow of $2.6bn/day... that, incidentally, is 80% of world's daily savings!!!...
In contrast, since lst year or so, US is able to attract only $1.7bn/day back into economy (Visit the U.S. National Debt Clock[3])
Perhaps a greater cause for worry should be the increasing cumulative US National Debt, which now is more than $7.5trillion, i.e., statistically, an average American child is born with $25,000 debt. 40% of this is foreign debt.
Interestingly, the US government's response to this impending economic disaster has been to keep increasing the permissible debt-limit.... This year in October, when US reached the $7.4trillion debt-limit set by the senate/congress, it just raised the limit to $8.2trillion. At the present rate of debt-accumulation, this is just postponing the debt-bubble to burst by just another 470 days... Given the present promises of the "foreign policy" - preemptive strike, regime change, "democratisation" of Middle-East, war on terror, etc. - this will keep on increasing.
Moreover, if one looks at the "hidden debt" - US Government's future commitments - the numbers are staggering. In 2008, when the 78mn baby-boomers start retiring, US will need more than $50 trillions to pay for the medicare, pension, social security, etc.!!!
It is not surprising that Stephen Roach (Chief economist of Morgan Stanely) predicts that America has no better than a 10 percent chance of avoiding economic "armageddon."[4]
So why is America, consciously and deliberately, continuing to slide down this path?
In my understanding, there are two mindsets/hope/assumptions behind taking these risks:
However, given the required inflows, these assumptions do not seem viable in the long run (or perhaps, even in the short run).
Apart from the simple economic reality that there is not enough surplus money in the world to continue supporting US debt, there are two other emerging reasons, which contradict these assumptions:
1. Crisis of Credibility & Legitimacy
US, admittedly, has been a debt-based economy since long. During last couple of decades, the deficit had kept on accumulating, but the US economy has continued to grow.
So what has changed now, that the rest of the world not continue to provide debt to US?
One simple reason why this may not happen, is because globally, US has been losing its credibility as a moderate, peace-loving nation - not only in the Muslim world[5], but even among its traditional European allies[6].
One reason for this loss of US legitimacy and moral supremacy has been its unilateral dismissal of multilateral mechanisms and treaties (see the list)[7]
In their recent article in Foreign Affairs (Nov/Dec, 2004), The Sources of American Legitimacy[8], Robert W. Tucker (Professor Emeritus of American Foreign Policy, Johns Hopkins University) & David C. Hendrickson (Robert J. Fox Distinguished Service Professor at Colorado College) observed:
"The 18 months since the launching of the second Iraq war have brought home, even to its advocates, that the United States has a serious legitimacy problem. The pattern of the first Iraq war, in which an overwhelming victory set aside the reservations of most skeptics, has failed to emerge in the aftermath of the second. If anything, skepticism has deepened. The United States' approval ratings have plunged, especially in Europe-the cooperation of which Washington needs for a broad array of purposes-and in the Muslim world, where the United States must win over "hearts and minds" if it is to lessen the appeal of terrorism. In both areas, confidence in the propriety and purposes of U.S. power has dropped precipitously and shows little sign of recovery.... Legitimacy arises from the conviction that state action proceeds within the ambit of law, in two senses: first, that action issues from rightful authority, that is, from the political institution authorized to take it; and second, that it does not violate a legal or moral norm."
The fallout of losing moral legitimacy on economic was summed up by the economist James Galbraith a couple of days back (Tompaine.com, Dec 6, 2004):[9]
"For decades, the Western World tolerated the "exorbitant privilege" of a dollar-reserve economy because the United States was the indispensable power, providing reliable security against communism and insurrection without intolerable violence or oppression, thus conditions under which many countries on this side of the Iron Curtain grew and prospered. Those rationales evaporated 15 years ago, and the "Global War on Terror" is not a persuasive replacement. Thus, what was once a grudging bargain with the world's stabilizing hegemon country is now widely seen as a lingering subsidy for a predator state."
Similarly, another article by Joseph Quinlan (Chief Market Strategist at Banc of America), Behind the Sinking Dollar: America’s Image as a "Rogue Nation? (The Globalist, Dec 7, 2004)[10] notes:
"...the dollar’s decline mirrors America’s plunging approval rating with the rest of the world. Concerns over the U.S.-led war in Iraq, the Kyoto agreement, the U.S. relationships with international institutions and its allies, U.S. visa restrictions and burdensome custom procedures all could have converged to taint America’s global image."
And one lends money only if one trusts the person's intentions, integrity and repaying capacity.
2. The Rise of an Alternative Currency - Euro!!!
Some of the reasons why, inspite of its "weak fundamentals", US$ has remained a global currency-of-choice, are/were:
However, since 1999, Euro has emerged as a strong contender for this spot. Starting weak at $0.85, over the last 4-5 years, it has been gaining strength over US$ to the current exchange rate of $1.33... And even though a strong Euro would hurt the European exports, and the European central banks would try to correct the situation), the global trade is gradually - and often imperceptibly - shifting to Euro. Consider, for instance:
And Most importantly, during the last three years, OPEC is also shifting to Euro. According to a report by Bank of International Settlement, "At the end of June 2004, OPEC members' Euro denominated deposits reached 44 billion Euro nearly doubled compared to 23.5 billion Euro held in the third quarter of 2001... By comparison, OPEC dollar denominated deposits stood at $132.1 billion, down from $145.3 billion in the third quarter of 2001."[11]
So do all these trends portend the end of global dollar economy?
References:
[1] http://www.geocities.com/madhukar_shukla/gulfwar2.html
[2] http://www.geocities.com/madhukar_shukla/alt/044.html
[3] http://www.brillig.com/debt_clock/
[4] http://business.bostonherald.com/businessNews/view.bg?articleid=55356
[5] http://people-press.org/reports/display.php3?ReportID=206
[6] http://people-press.org/reports/display.php3?ReportID=175
[7] http://alternativeperspective.blogspot.com/2004/10/american-multiple-unilateralism.html
[8] http://tinyurl.com/5p95u
[9] http://www.tompaine.com/articles/apocalypse_not_yet.php
[10] http://www.theglobalist.com/DBWeb/storyid.aspx?StoryId=4281
[11] http://www.washtimes.com/upi-breaking/20041207-031853-3224r.htm
