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This blog is for students, managers and those lay people who are interested to contribute to, comment on or simply share their workplace problems and are keen to learn about issues relating to public finance, corporate finance and macro-economic management affecting their lives.

Thursday, April 28, 2011

The Age of America comes to an end, finally.......

American dollar is losing to Canadian, Australian and even to Singaporean dollar and losing so fast that its parity changes before the flight originating from Los Angeles lands at Sydney. This rings alarms bells but nobody seems to be listening. Does the losing American dollar signal America’s loss of its economic hegemony? Will China be crowned as economic power much ahead of the estimates? Does it have anything to do with steady rise in the price of gold? The events are unfolding at pretty faster pace. The economic gurus had predicted China to be Number One economic power of the world by 2050. Some more ambitious had set this date somewhere closer to 2030. But the International Monetary Fund has rejected all those estimates and has just dropped a bombshell. For the first time, the international organization has set a date for the moment when the “Age of America” will end and the U.S. economy will be overtaken by that of China. And it’s a lot closer than you may think. According to the latest IMF official forecasts, China’s economy will surpass that of America in real terms in 2016 — just five years from now.

According to Market Watch, the IMF assessment provides a painful context for the budget wrangling taking place in Washington right now. It raises enormous questions about what the international security system is going to look like in just a handful of years. And it casts a deepening cloud over both the U.S. dollar and the giant Treasury market, which have been propped up for decades by their privileged status as the liabilities of the world’s hegemonic power. According to the IMF forecast, which was quietly posted on the Fund’s website just two weeks ago, whoever is elected U.S. president next year will be the last to preside over the world’s largest economy.

Most people aren’t prepared for this because they were looking at GDP to make comparison between China and the USA using current exchange rates. IMF analysis also looked to the true, real-terms picture of the economies using “purchasing power parities.” That compares what people earn and spend in real terms in their domestic economies. Under PPP, the Chinese economy will expand from $11.2 trillion this year to $19 trillion in 2016. Meanwhile the size of the U.S. economy will rise from $15.2 trillion to $18.8 trillion. That would take America’s share of the world output down to 17.7%, the lowest in modern times. China’s would reach 18%, and rising. Just 10 years ago, the U.S. economy was three times the size of China’s.

The report says that this is more than a statistical story. It is the end of the Age of America or its economic hegemony. We have lived in a world dominated by the U.S. for so long that there is no longer anyone alive who remembers anything else. America overtook Great Britain as the world’s leading economic power in the 1890s and never looked back.

China’s neighbors in Asia are already waking up to the new reality. The rise of China, and the relative decline of America, is the biggest story of our time. You can see its implications everywhere, from shuttered factories in the Midwest to soaring costs of oil and other commodities. Last fall, when I attended a conference in London about agricultural investment, I was struck by the number of people there who told stories about Chinese interests snapping up farmland and foodstuff supplies — from South America to China and elsewhere.

This is the result of decades during which China has successfully pursued economic policies aimed at national expansion and power, while the U.S. has embraced either free trade or, for want of a better term, economic appeasement.

“There are two systems in collision,” said Ralph Gomory, research professor at NYU’s Stern business school. “They have a state-guided form of capitalism, and we have a much freer former of capitalism.” What we have seen, he said, is “a massive shift in capability from the U.S. to China. What we have done is traded jobs for profit. The jobs have moved to China. The capability erodes in the U.S. and grows in China. That’s very destructive. That is a big reason why the U.S. is becoming more and more polarized between a small, very rich class and an eroding middle class. The people who get the profits are very different from the people who lost the wages.”

What the rise of China means for defense, and international affairs, has barely been touched on. The U.S. is now spending gigantic sums — from a beleaguered economy — to try to maintain its place in the sun. It’s a lesson we could learn more cheaply from the sad story of the British, Spanish and other empires. It doesn’t work. You can’t stay on top if your economy doesn’t. Equally to the point, here is what this means economically, and for investors.

The U.S. Treasury market continues to operate on the assumption that it will always remain the global benchmark of money. Business schools still teach students, for example, that the interest rate on the 10-year Treasury bond is the “risk-free rate” on money. And so it has been for more than a century. But that’s all based on the Age of America. No wonder so many have been buying gold. If the U.S. dollar ceases to be the world’s sole reserve currency, what will be? The euro would be fine if it acts like the old Deutschmark. If it’s just the Greek drachma in drag … not so much.

Related link:

Will China be the world's largest economy in next five years?

Wednesday, January 12, 2011

Who is the real beneficiary of POL price decision, ruling party or the masses?

The government has reversed the decision of increase in the petroleum prices. It is said that this has been done under the pressure of opposition parties and the allies in order to provide relief to inflation-hit people. Those who know the fact think that this is not a correct statement. As a matter of fact, the decision has been taken to save the government because the ruling party had lost the majority in the house and a moral right to continue in power. But will this decision provide any relief to the poor masses?

The answer is no. Any decision which is taken to sail through the current of present crisis will not help, rather it will have devastating effects on the economy and the people. The shortfall created by POL subsidy will be met through deficit financing i.e. printing of currency which will be more harmful for the economy as the governor of the central bank has already been saying very loudly. There is only one way to provide relief to the masses; mobilization of resources and making the rich to pay their share now.  Eminent economist Dr Ashfaque H Khan, in his article which appeared in the News International says that by backtracking on the fuel prices, the government has attracted severe criticism from all those who have interest in Pakistan’s economy. In so doing, the government has exposed itself as being a lame-duck government, desiring to stick to power at any cost and willing to be driven by the opposition’s agenda. It has also lost its credibility in the eyes of the international financial institutions.

The article accuses the economic team of having failed to draw the line between profligacy and discipline, between bad and good economics, between reforms and status quo, and between expenditures of political and economic priorities. The economic team did not take any stand when the cabinet approved a 50-per-cent increase in the salaries of government servants, at a time when the country was facing severe financial difficulties. They just kept quiet and became party to this profligacy.

The also accuses the economic team of actively accommodating the Multan and Larkana Packages in the PSDP, but took no time in cutting the budget of higher education. In the process, they lost respect in the eyes of most educated members of the society. Despite the bad financial health of the Banks of Punjab and Khyber before us, the economic team, including the governor of the State Bank of Pakistan, gave the license to the government of Sindh to set up Sindh Bank, with Rs10 billion’s capital. At a time when bank mergers are taking place in Pakistan, the setting up of yet another public-sector bank was a bad decision. The new bank’s fate will not be different from the fates of the banks mentioned above. A bailout from budgetary resources cannot be ruled out.
The article has enumerated the following economic consequences of withdrawing the fuel price hike:

  • At the current international price of oil, the revenue shortfall will be Rs5 billion per month. The government has a collection target of Rs110 billion on this account in the 2010-11 budget. The government has thus far collected Rs35 billion and the remaining Rs75 billion is to be collected in the next six months. Under the assumption that the international price of oil remains at the current level, there would be a Rs30 billion shortfall in PDL.
  • The slippages on both the revenue and expenditure side are likely to take the current year’s budget deficit in the range of 7.5-8.0 per cent of GDP. In other words, Pakistan would need at least Rs1,300 billion to finance its fiscal deficit this year. With dwindling external inflows, the reliance for financing of deficit would be on the domestic side—more so on direct borrowing from the SBP. Thus, the printing machine of the SBP will keep on pumping money into the economy, with all the inflationary consequences of such an action.  
  • The government thought that by withdrawing the fuel price hike it provided relief to the people. But through printing more money it will fuel inflationary pressure with serious consequences for the same people.
  • There are indications that oil prices are likely to rise further in 2011 on account of the stronger than anticipated recovery of the world economy, including the United States’. The lame-duck government will not be able to pass on the high cost of energy to domestic consumers. This will be a replay of 2007-08, when the-then government, including the caretakers, did not pass on the high price of oil, and the country had to pay a high price for its inaction. The nation should therefore be ready for action replay.  
  • The agenda of tax reform, including the RGST, is dead, and as such, Pakistan’s relations with the international financial institutions, including the IMF, appear to have become strained. In such an environment, external inflows to keep the economy afloat are likely to be affected. A lame-duck government and its economic team are very damaging for the economy. They have lost the capacity to take difficult decisions. Time is not on our side.

Tuesday, January 4, 2011

Money can buy anything, even the weather of your choice…

Money can buy anything, even the weather of your choice. If you are fed up with hot and dry weather of the deserts, you can put science to your service and bring a nice change through artificially induced rain showers and even the hailstorms like the Chinese created snowfall sometimes back. It is like controlling the Mother Nature.  Time has reported that as part of a secret program to control the weather in the Middle East, scientists working for the United Arab Emirates government artificially created rain where rain is generally nowhere to be found. The $11 million project, which began in July, put steel lampshade-looking ionizers in the desert to produce charged particles. The negatively charged ions rose with the hot air, attracting dust. Moisture then condensed around the dust and eventually produced a rain cloud. A bunch of rain clouds. On the 52 days it rained in the region throughout July and August, defeating the weather forecasters who did not predict rain once.

While fascinating, this is not the first time scientists have attempted to mess with Mother Nature. The idea that countries in the Middle East could actually create rain in this water-poor region could go a long way to solving the area's problems with drought and is considered to be cheaper than desalination. But how controllable the weather can be is still in doubt, and the consequences of meddling with nature at this level are yet to be seen.

China did this a year ago. A Nov. 1, 2009 snowfall in Beijing — the city's earliest since 1987 — was due to a campaign of "cloud-seeding" to encourage precipitation. If true, it's the wettest success yet in a long-standing effort to bring moisture artificially to the parched northern regions of China. The same magazine in a separate story explains the phenomenon; colder air encourages precipitation, so when the temperature drops at high altitude, water naturally condenses out of the air. Clouds are formed when this moisture, suspended in tiny droplets or crystals, meets a condensation nuclei — small particles of dust or ice that are blown about the upper atmosphere. Without these small particles, clouds can't form. The method of cloud-seeding used by the Chinese involves dosing the atmosphere with silver iodide, a chemical solution either dropped from planes or shot up from the ground. 

The silver iodide particles supercharge cloud formation, as they act as excellent condensation nuclei. Once clouds form, they also start a positive feedback effect. As droplets freeze and are added to the cloud, they release their heat, creating an updraft which draws additional moisture from the ground into the atmosphere. That's the theory, anyway. The effectiveness of cloud-seeding is still disputed, because it's difficult to say with any certainty that cloud-seeding is responsible for a storm rather than Mother Nature. But if you choose to believe in cloud-seeding, the Chinese scientists may have even overdone it. The snowstorm lasted for 11 hours, disrupting flights in and out of Beijing and hampering shipping off the Chinese coast. Still, expect few complaints from the generally dry region; it's the most accumulation the city's seen in a decade, and further proof the Chinese may be becoming the world's best at managing weather. In a 2008 experiment, scientists seeded clouds in advance of the Beijing Olympics, successfully ensuring clear skies for the opening ceremony.

Saturday, December 25, 2010

Despite sanctions, American companies can do business with Iran….

US government is continuously pressurizing Iran to give up its nuclear program. This pressure is being exerted through various means one of which is isolating the target country through sanctions. Only a couple of days ago, the Obama administration imposed new sanctions on Iran, serving notice that it will not ease the pressure on Tehran just because it has begun talking again with the West about its nuclear program. According to a New York Times report, the measures announced by the Treasury Department — aimed at three companies linked to the Islamic Revolutionary Guards Corps and at Iran’s national shipping line — are less important than the timing. They come two weeks after Iran held chilly talks in Geneva with the United States and other countries, which accomplished little beyond an agreement to meet again in Istanbul in late January.

The tightening of the economic vise reflects the administration’s conviction that its pressure tactics are inflicting genuine pain on Iran. It said five Iranian ships had been seized in Singapore and other ports after the Islamic Republic of Iran Shipping Lines defaulted on more than $500 million in debt.

Notwithstanding these fresh sanctions and decades old embargoes, over the past decade the United States government has allowed American companies to do billions of dollars in business with Iran and other countries blacklisted as state sponsors of terrorism, an examination by The New York Times has found. In a separate report carried by New York Times, at the behest of a host of companies — from Kraft Food and Pepsi to some of the nation’s largest banks — a little-known office of the Treasury Department has granted nearly 10,000 licenses for deals involving countries that have been cast into economic purgatory, beyond the reach of American business.

Most of the licenses were approved under a decade-old law mandating that agricultural and medical humanitarian aid be exempted from sanctions. But the law, pushed by the farm lobby and other industry groups, was written so broadly that allowable humanitarian aid has included cigarettes, Wrigley’s gum, Louisiana hot sauce, weight-loss remedies, body-building supplements and sports rehabilitation equipment sold to the institute that trains Iran’s Olympic athletes.

Hundreds of other licenses were approved because they passed a litmus test: They were deemed to serve American foreign policy goals. And many clearly do, among them deals to provide famine relief in North Korea or to improve Internet connections — and nurture democracy — in Iran. But the examination also found cases in which the foreign-policy benefits were considerably less clear.
In one instance, an American company was permitted to bid on a pipeline job that would have helped Iran sell natural gas to Europe, even though the United States opposes such projects. Several other American businesses were permitted to deal with foreign companies believed to be involved in terrorism or weapons proliferation. In one such case, involving equipment bought by a medical waste disposal plant in Hawaii, the government was preparing to deny the license until an influential politician intervened.

In an interview, the Obama administration’s point man on sanctions, Stuart A. Levey, said that focusing on the exceptions “misses the forest for the trees.” Indeed, the exceptions represent only a small counterweight to the overall force of America’s trade sanctions, which are among the toughest in the world. Now they are particularly focused on Iran, where on top of a broad embargo that prohibits most trade, the United States and its allies this year adopted a new round of sanctions that have effectively shut Iran off from much of the international financial system.

Thursday, December 16, 2010

Trade relations are the only way to ease tension ....

India and China are worst of the enemies with border disputes and arms race intensifying the tensions. But both the countries have mutual trade worth $60 billion a year which they plan to boost to $100 billion. The Chinese PM Wen’s charm offensive during his current India visit aims at capturing, not the territory, but maximum slice of its market. Indian aims are no different.

Why is it important to have trade relations between the adversaries? It eases the tension, it raises the stake in each other’s stability and well-being and it is the first step for a tension-free relations. India and China have bitter memories of the past, their disputes are of the nature and scale that they should have fought many wars in the last twenty five years or so but they have put their disputes on the back-burner, only to be resolved with the passage of time. They have focused on boosting economic ties in which they seem to be making progress. Both are trying to become economic and military power, they have developed their military machines to advance their hegemonic agenda in the region but they have not lost sight of the importance of smooth economic ties.

According to media reports, Wen’s visit, the first by a Chinese premier to India in five years, has looked carefully choreographed to improve ties between two countries which, between them, are home to more than a third of the world’s population. Arriving with more than 300 business leaders on Wednesday, Wen said that India and China were not rivals and there was room in the world for both powers to develop. The two sides said they were aiming to raise bilateral trade to $100 billion by 2015 from $60 billion in 2010, partly driven by greater access for Indian firms to Chinese markets. “The two sides agreed to take measure to promote greater Indian exports to China with a view to reduce India’s trade deficit,” the joint statement said. 

India and China are the world’s fastest-growing major economies. But India fears China wants to curtail its rise as a global power, and is concerned about Beijing’s close security ties with Pakistan where Wen arrives on Friday on the second part of his trip. The joint statement outlined Beijing’s support for United Nations Security Council Resolution 1267, which calls for sanctions against the Lakshar-e-Taiba militant group that New Delhi blames for the attack and accuses Pakistan of harbouring. India also fears China wants to restrict its global reach by possibly opposing its bid for a permanent U.N. Security Council seat or encircling the Indian Ocean region with massive projects from Pakistan to Myanmar. 

China reiterated its support for India’s aspirations to play a greater role in the Security Council, but it stopped short of expressing full backing for India. Long wary of Washington’s influence in South Asia, Beijing’s overtures toward New Delhi come just a little over a month after U.S. President Barack Obama’s trip to India, during which he endorsed India’s long-held demand for a permanent seat. Wen’s avuncular style contrasts sharply with that of Singh, who is seen as shy and lacking charisma. Singh is also engulfed in what may be India’s biggest corruption scandal, threatening the stability of the Congress party-led coalition government. Wen announced on Wednesday that Chinese companies would sign deals with Indian firms worth more than $16 billion ranging from power equipment to telecoms gear, underscoring business was driving the relationship, for now. 

Chinese banks will provide the bulk of lending for these deals. Although both India and China have said they are exploring a possible free-trade agreement, no real progress is expected on that front as there is some skepticism in New Delhi that Beijing may only want to dump cheap manufactured goods on India’s booming $1.3 trillion economy. China is now India’s largest trade partner and two-way trade is expected to reach $60 billion in 2010/11 compared with a target of $40 billion. Trade was $13.6 billion in 2004/05 and $3 billion in 2001/02, illustrating the phenomenal growth rate. Still, total investment by China in India is small, amounting to only $221 million in 2009, representing about 0.1 percent of China’s total outward foreign direct investment in that year. That figure is seven times less than what China has invested in Pakistan, according to official data.

While the two are often lumped together as emerging world powers, China’s GDP is four times bigger than India’s and its infrastructure outshines India’s dilapidated roads and ports, a factor that makes New Delhi wary of Beijing’s growing might.

Can India and Pakistan, in spite of tensions, boost their trade ties. They have to fight a common enemy killing them day in and day out; and that is poverty?

Saturday, December 11, 2010

BRIC all set to have a second eye….

The world is changing so swiftly that sometimes something very obvious gets blurred and something out of blue catches your sight. Today, we are sitting with our fingers crossed deeply thinking who is going to be the economic power of tomorrow. People are betting their nickels on either China or India. The quick and smart calculations conclude no different outcome.

Does the next decade of economic development really belong to Asia? Absolutely. Is it China or India? Well, neither, and some people are ready to bet on this. They think it is neither China nor India, not even Malaysia and South Korea. Some people, in 2004-07 had this misplaced illusion that future belongs to Pakistan's fast growing economy. Perhaps they got carried away by short-term economic growth during Musharraf era. No more, Pakistan is not only out of the race, it is struggling for its economic survival. 

People are now talking about a country which was relatively unscathed by the global financial crisis, its economy was projected to grow at a healthy 6.1 percent clip in 2010 and 6.3 percent next year, one of the fastest rates in Asia (and the world). What's more, its per capita GDP is projected to increase almost 20 percent in the next two years. Since 2009, this country has had Asia's second-best-performing stock market. A number of analysts are now suggesting that the BRIC (Brazil Russia, China, India) grouping might soon need to add another I. 

Yes, this is Indonesia. According to The Stories You Missed in 2010, part of Indonesia’s growth is driven by the country's abundant natural resources. The country is a major exporter of timber, coal, and silver and its manufacturing sector is growing as well. Chinese clothing and furniture companies, which prospered by making goods for the American market, are now increasingly moving production to Indonesia, taking advantage of a free trade agreement between the two countries, which is just now coming into effect. 

A peaceful and orderly presidential election last year reassured international markets of the country's political stability, and Indonesia's foreign direct investment increased 34 percent this year to $3.7 billion in the second quarter. Some obstacles remain, of course. The country's banking sector is still fairly undeveloped. This helped Indonesia avoid the worst of the market crash. Poor infrastructure and official corruption also continue to hamper development in many parts of the country, though arguably this is the case in China and India as well. Indonesia also has one of the world's highest deforestation rates, though it pledged a two-year moratorium on logging in May. 

The country still has a poverty rate of around 14 percent, which increased slightly this year due to the financial crisis, but Deutsche Bank projects that 52 million Indonesians will enter the middle class in the next five years, a development with potentially monumental consequences. And it's not just an economic story: Indonesia stands a good chance of becoming the world's first Muslim and democratic superpower.