Dec 29 2011

Year of the Euro

Category: Economy,Politics — Admin @ 00:56

2011 is dedicated to the eurozone’s fortitude. Despite the surmounting pessimism surrounding the fate of the 17-nation area and a prediction from Credit Suisse’s Fixed Income Research team last month that “we seem to have entered the last days of the euro”, the eurozone is showing signs of a long term makeover more so than signs of impending failure.

Avi Tiomkin of Forbes Magazine quoted in a 2008 article, “It is only a matter of time, probably less than three years, until the euro experiment meets its end…Tensions between inflation-obsessed Germany and growth-hungry Latin countries will spell its end.” As rising inflation continued to plague the eurozone in 2008, comparable to today’s eurozone environment, Avi Tiomkin’s argument was that the “Latin” countries’ (France, Italy, and Spain) thirst for growth ran counter to their more inflation-wary counterparts in the German bloc (Austria, Luxembourg, the Netherlands). Although he makes a valid point for the demise of the euro, he ignores the fact that the much stronger German bloc has both the most to gain if the Euro survives and lose if the Euro fails. For example, Germany’s competitiveness and balance of payments have far outpaced those of its eurozone counterparts since the introduction of the Euro than if it were to have a stand-alone currency.

Talks of a eurozone bailout from other countries and the ECB, earlier this year, have since dissipated significantly due to the potential moral hazard and increased inflation risk they pose, respectively. Unlike the 1997 Asian “capital account” Crisis, global financial contagion, in the event of a eurozone member default, is more of a threat in the current European Debt Crisis due to the highly intertwined and indebted Western financial system. Raising capital via the debt markets has been and continues to be a challenge for eurozone members due to the likely exploitation of the Crisis by bond speculators. 2012 is no doubt crucial for the future of the eurozone, and as the ECB continues to lend cheaply to eurozone banks, risk exposure will only increase; however, default by a member state is no longer a viable option.

At the end of the crisis, many expect the complete dismantling of the monetary union, but I think a slimmer eurozone is more realistic with Portugal and Greece being the first victims. However, before this process can begin, borrowing costs must decrease as recently experienced during Italian bond auctions.

Jun 01 2011

Summer Hurt in Short

Category: Economy,Politics — Admin @ 19:17

An unnamed person in favor of one-party political systems once pointed out that opposition parties only do one thing: oppose. With the recent rejection of a preliminary House bill, intended to increase America’s debt limit, by its very proponents, the GOP, that point rings true. The combination of the current European sovereign debt crisis and an uncertain U.S. debt landscape will only encourage a highly volatile environment for the financial markets, in particularly bonds. The Capitol Hill political sideshow should continue  through the summer to eventually end in a Faustian-esque ‘midnight’ deal from both parties prior to the August deadline set by Treasury head, Tim Geithner.

Furthermore, the Fed’s QE2 stimulant program is scheduled to end by the end of June amid rising food and gas prices and high unemployment.

Jan 15 2011

2011 & Beyond: High Stakes

Category: Economy,My Web Log,Politics — Admin @ 12:09
In matters pertaining to the future, I’m not certain as to whether the “good news” and “bad news” category is an appropriate vantage point or not; after all, both “good” and “bad” are relative terms. However, I believe the term “High Stakes” better captures my perspective on such matters, because 2011 and the upcoming decade will be pivotal in determining the future global opportunities for the post-Gen X generations and in defining a new paradigm for global affairs.

The world economy still remains fragile as key economies continue to maintain near-zero interest rates amid record food and commodity prices, increasing natural disasters, and global political instability. To elaborate on the political instability issue, the International Crisis Group (ICG), a non-governmental organization, estimates that there are about thirty three ongoing conflicts in the world today, ranging from Afghanistan to the drug war in Mexico. The organization expects these conflicts to only exacerbate and new ones to begin in 2011. Of their predictions for 2011, three that are of concern involve the Ivory Coast, Sudan, and Guatemala.

  • The Ivory Coast(Cote d’Ivoire )—> The ICG expects President Laurent Gbagbo to either step down and concede defeat or stay and risk civil war; but, I think that that the former, which would be the best case scenario, is unlikely to happen after the failed diplomatic talks. A power-sharing agreement such as Zimbabwe’s may be the next best scenario for both parties.
  • Sudan—> With Southern Sudan leaning closer towards becoming the world’s newest country, the ICG believes that there isn’t much cause for celebration yet. “The border remains undecided — no small matter since the contested middle ground happens to sit on a large oil field. Meanwhile in Juba, the nascent capital, institutions and services would urgently need to be built from scratch.”
  • Guatemala—> As Mexican cartels continue to expand the drug war into South American countries such as Guatemala, the ICG sees the potential for increased corruption during Guatemala’s upcoming Presidential elections in August, which currently has no clear frontrunners from its ~20 candidates.

Despite the ongoing conflicts, there is still a lot to look forward to in the upcoming decade such as space tourism, the advancement of existing and new technology, and an ever more cooperative Taliban, to name a few. However, the most anticipated event of this decade is set to occur by the end of the decade. The consensus among the world’s top economists is that China’s economy will supersede the United States’ as the world’s largest by 2020. There is no need to reiterate China’s impressive resume or its growing importance on the global stage, but China is a country that is hard to ignore.

Although many countries readily accept China’s economic prowess, many, including Japan and the United States, are wary of its expanding military strength. This distrust of China’s current military growth is unfounded due to the fact that history has taught us that economic growth and military growth should have a perfect correlation. After all, in the early 1830′s, China was arguably the world’s largest economy but was easily defeated by the British and other foreign powers in the Opium Wars that began in 1839.

Despite what happens in the coming years, I look forward to a new decade of new insights and intriguing news.

Nov 26 2010

‘Tis the Season…Go Shopping!

Category: Economy,My Web Log — Admin @ 04:12

MAY I HAVE YOUR ATTENTION PLEASE! THIS IS A PUBLIC SERVICE ANNOUNCEMENT: It’s that time of the year again! To all shoppers: Beware of other shoppers! To all gift recipients: Beware of re-gifters! To everyone else: Beware of people bearing kindness! The temporary impulse to be kind is set to expire after the Holiday Season. Thank you for your attention…Oh! and Happy Holidays!

The Holiday Season, once rooted in family bonding, genuine relationships, and for the religious cohort, faith, has long been overshadowed by “one time only” sales, commercial jingles, and facetious acts of kindness. It’s not news that the Holidays are big business and can be used as an opportunity for a country to stimulate domestic consumption and economic growth, and recent global news only support this truism. In the West, the United States Federal Reserve recently initiated another round of quantitative easing by planning to inject $600 billion into the U.S. economy (aka QE2) up until the 2011 summer months, reports Bloomberg. In the East, China recently implemented various price control measures to counter rising inflation, reports the Xinhua News Agency. Conveniently, both measures were announced at around the start of the Holiday Season, which should arouse consumer confidence in the global economy and encourage domestic consumption in both countries.

Black Friday, an unofficial U.S. Holiday that occurs after the U.S. Thanksgiving Day, symbolizes the beginning of the U.S. Holiday shopping season. Thus, as the world’s largest importer, any increase in the United States’ demand for products and gift items will translate into economic growth for other countries. Also, with the QE2, the United States’ exports are also at an advantage, as well as jobs growth. For China, the world’s largest exporter and a country that doesn’t need an excuse or a holiday to shop maddeningly, its price control measures will increase the spending power of the RMB domestically, while its exports remain globally competitive. So, the Holidays shouldn’t be just about the selfish tendencies to spend time with one’s family and loved ones, but also an opportunity to stimulate the world’s economy and enable the livelihoods of many. So, Shop on!

Some of the world’s most popular gift-giving holidays during the Holiday Season (from November to February), excluding festivals, include Diwali, U.S. Thanksgiving Day, Christmas Day, New Year’s Day, Chinese New Year, and Valentine’s Day.

Oct 22 2010

Defending the Yuan

Category: Economy,My Web Log — Admin @ 05:26

As representatives from the G20 nations get ready to convene in mid-November, all focus seems to be on China, once again. A year ago at the G20 Pittsburgh Summit in 2009, the focus was also on China, but for a different reason: climate change. Members of the upcoming G20 Seoul Summit in South Korea have since had a temporary paradigm shift of China from “the world’s largest polluter” to “the world’s largest foreign exchange reserves accumulator”.

More so now than ever, since the global financial crisis, countries are on a race to make their exports more competitive and thus currency manipulation is one sure way to combat and prevent trade imbalances. Western powers, such as the U.S., have accused some of these countries of provoking a currency war, specifically China and its abnormal accumulation of international reserves. According to OECD* measures of Purchasing Power Parity, currencies, such as the Chinese Yuan, that are significantly undervalued, include the Indian Rupee, the Thai Baht, the Mexican Peso, the South Korean Won, and a host of others. Most of the Asian currencies, specifically the Yuan, get more attention because of their nations’ trade surpluses with the West. In fact, according to the U.S. Census Bureau, the United States has had a monthly trade deficit with China, consistently since 1987. Although not as large as China’s, the U.S. has maintained a monthly trade deficit with Israel consistently since 2000, but Israel’s currency, the Shekel, is not undervalued by OECD’s standards, thus currency devaluation should not used as the primary reason for trade imbalances.

I can argue about the benefits of a cheaper Yuan to U.S. and Western consumers in order to balance the argument, but I won’t. Instead, I will focus on the unfair scapegoating of China to explain Western economic woes. Most countries are guilty of some form of currency manipulation. The U.S. utilizes quantitative easing, i.e. prints more cash, to devalue the Dollar; earlier this year, Switzerland implemented a large-scale Euro purchasing scheme to lower the Franc’s value; last month, Japan flooded the markets with its Yen reserves; and Germany shields itself from such accusations due to its convenient membership in the EU with weaker economic counterparts such as Greece or Spain.

Currency valuation shouldn’t be treated as an overnight transaction. China, like most developing countries, is highly dependent on a devalued currency in order to maintain domestic stability. Countries should focus more on their competitive advantages, which for the U.S. is mainly the high tech industry. The U.S., along with other countries that formerly banned high tech exports, such as military equipment, to China, should consider lifting this ban to increase their exports or find another more competitively advantageous industry to export. In addition to increasing its high tech exports, the U.S. should focus on its abysmal national savings rate which is positively correlated to its trade balance.

*Organization for Economic Co-operation and Development

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