Monday, December 21, 2009

In Search of Risk Free Banking

As the linchpin of the global financial system, can banks be ever run in a risk free manner?

By: Ringo Bones

Maybe it was the sage advice of Robert “Bob” Diamond, chief executive of Barclays Capital, on a BBC September 15, 2009 interview that there is no such thing as banking without risk. It readily cast a worm of doubt over governments’ frantic but somewhat futile attempts to formulate ways to prevent another global credit crunch from ever happening again. And the world’s leading economist still has a consensus that risks are an inherent part of a typical banking institution’s business structure. Given the somewhat inevitable status quo, can we even at least minimize banking risk down to as close to zero as humanly possible?

Our current version of the Basel Accord, in which a thoroughly studied financial research allows banking regulators to establish the right amount of minimum capital requirements to minimize inherent banking risks. Was set up to achieve a goal of globally interconnected banks whose inherent risk is as close to zero given our current financial systems know-how. Unfortunately, the accord’s current incarnation was set-up a few years before the US credit crunch went global and we’ll before we knew the root causes of. Thus making it likely that the current Basel Accord could be overhauled before the end of 2010 to make way for quantitative easing schemes and monetary policy guidelines that will prevent our current global recession from ever happening again. In other words, a better way to minimize overall financial risks of banks deemed to big to fail. But are there other ways to further minimize banking risks?

After consulting with the world’s leading economists, financial regulators had recently proposed the establishing of a “living will” for banks so that in case of a bank failure / bankruptcy, banks can be easily broken up – liquidated if you will – so that their assets can be more efficiently used elsewhere. Especially during the event of a major financial crisis like that event that brought down Lehman Brothers back in September 2008. A bank’s “living will” could be set up in advance to facilitate the fiscally expedient liquidation process of failed banks, so that there assets could be effectively used for keeping a major financial crisis from going out of control. A well-structured breaking up process of a failed bank when it files for bankruptcy could be a big help to governments during times of a widespread economic crisis. Where the speedy formulation of fiscally sensible quantitative easing and monetary policy schemes are needed to keep a major economic crisis at bay.

Sunday, November 29, 2009

The Dubai Debt Crisis: Undermining Investor Confidence?

As a more upscale version of the American subprime mortgage crisis that started in 2007, will the Dubai debt crisis not only undermine investor confidence but of the ongoing global economic recovery as well?

By: Ringo Bones

To all of us who still care about the overall health of our global economy, the Dubai debt crisis – like the US subprime mortgage crisis before it – unsurprisingly managed to go global by undermining overall investor confidence. Like the subprime mortgage crisis, the Dubai debt crisis can also trace its beginnings in the intervening years. Unfortunately, both had been already proven to readily spread to the world’s shares markets as fear and panic are the primary motivators of market speculators. Dubai’s decision to delay paying debts – i.e. refinancing – for 6 months not only made Moody’s downgrade Dubai’s credit rating but it also started to spook the global shares markets as soon as the press got word of it. Given the supposed financial risk involved, does the Dubai debt crisis create shares markets chaos largely disproportionate to the actual scale of the actual problem involved?

The Dubai debt crisis largely stems – according to financial experts – from its inflated portfolio of luxury properties plagued by cost overruns in their development that resulted in Dubai’s leading property developers to defer their debt obligations for 6 months. Thus making Moody’s – one of the world’s top credit rating agencies – to recently downgrade Dubai’s credit rating.

One of the surest investment options in Dubai is the property developer Nakheel. Famous for making the world’s largest man-made island – the Palm Jumeirah – a reality, Nakheel also boasts as the only property developer with its own in-house environmental assessment team. Nakheel’s apparent fiscal sensibility was shaken to its core after miscalculating the final cost by a significant margin of the development of the Palm Jumeirah island and its scores of 6-Star hotels. Delays in the return of investments / profits due to the still recovering global economy is the main reason why Dubai is currently experiencing their own version of the US subprime mortgage crisis.

Just over a year ago – back in November 20, 2008 – the lavish opening festivities / inauguration of Atlantis Hotel Dubai where the venerable global song and dance sensation Kylie Minogue got top billing would make it seem that Dubai’s current debt crisis seems like a fiscal and economic impossibility. State-owned Dubai World – the firm that made Hotel Atlantis Dubai and the lavish Palm Dubai inauguration party a reality was rumored to have spent 35 billion US dollars to make it possible. Ironically, a year or so later, the property development firm is asking for a government sponsored financial bailout.

The actual development cost oversight that led to the raising of additional capital which Nakheel has never commented publicly is probably one of the reasons why most of Dubai’s top businesses to elect debt payment deferment. Even at the cost of credit rating downgrade. Unfortunately, Dubai’s credit rating downgrade due to its debt obligation problems had resulted in a shares markets slowdown in the US and in Asia. Even Dubai's brother Emirate Abu Dhabi had even offered debt payment assistance to Dubai in order to minimize the chaos to the world’s shares markets Dubai’s debt crisis could create. With total debts at around 60 billion US dollars, Dubai’s current debt crisis is bound to create a significant chaos in the world’s shares markets. Let’s just hope that this is just a minor slump so that the world economy can fully recover soon, hopefully maybe in 2010.

Friday, November 20, 2009

Mutual Distrust: Very Good for the Global Economy?

From marital infidelity being the bread and butter of the private investigation industry to the Eurofighter selling like hotcakes at the recent 2009 Dubai Air Show, is mutual distrust very good for the global economy?

By: Ringo Bones

Pioneering game theorist John Von Neumann was smart enough to foresee that an all-out nuclear exchange between the US and the then Soviet Union would certainly wipe out the global economy as we know it. But did he also foresee that low-level mutual distrust – i.e. the so-called “Cold War” – eventually paid very good financial dividends? Maybe the movie Wall Street only got it half right, greed may be good, but mutual distrust is better - especially when it comes to money making.

Overall, the commercial civilian aviation side of the aerospace industry may be down thanks to the global credit crisis and might take another 6 months to fully recover. Not so with the defense side of the aerospace industry when the Eurofighter Typhoon is currently selling like hotcakes at the 2009 Dubai Air Show’s first two days. By the way, the 2009 Dubai Air Show was scheduled for November 15 to 19. With Saudi Arabia as the main customer of this “value-for-money” air defense weapons system, it does seem like the world’s crude oil industry is here to stay for yet another century.

On a more “grassroots level”, the private investigation industry is one of the few businesses that managed to buck the trend of the past few months’ worldwide recession. Corporate espionage may constitute the few “prestige cases” of a fortunate few private investigation agencies, but their main bread-and-butter is still the marital infidelity investigation and verification biz. To most of us working folks, paying our hard-earned money to hire a private investigator to make sure of our significant other’s marital fidelity is probably the closest thing we’ll ever manage of buying our very own squadrons of high-performance fighter jets. As part of the Reagan Doctrine, “trust but verify” is still the cornerstone of our post Cold War capitalist society.

The Nobel Prize for Economics: A Nobel Prize for Mathematics in Disguise?

Certainly it was not a part of Alfred Nobel’s original will, but is the Nobel Prize for Economic Sciences really just a thinly veiled attempt at a Nobel Prize for Mathematics?

By: Ringo Bones

To anyone who still cares about the annual Nobel Prize festivities, it is probably common knowledge to them that there is not – and probably will never will be – a Nobel Prize for Mathematics. But given that the Nobel Prize for Economics – also officially known as the Nobel Memorial Prize in Economic Sciences – is not part of Alfred Nobel's original will bequeathing his fortune for an annual prize for those deemed worthy enough by his estate. And given that economics is something of a mathematics intensive scientific endeavor, does this mean that the Nobel Prize for Economics is nothing more that a thinly veiled Nobel Prize for Mathematics established to appease those generations of “angry” mathematicians left out by Alfred Nobel’s prestigious will?

The Nobel Memorial Prize in Economic Sciences – commonly referred to as the Nobel Prize in Economics – is an award reserved for outstanding contributions to the science of economics and is generally considered as one of the most prestigious awards for that science. But as everyone knows by now, it is not part of the original set of awards in Alfred Nobel’s will – i.e. 1) Medicine and Physiology, 2) Literature, 3) Physics, 4) Chemistry and 5) Peace.

The Prize in Economics, as it is referred to by the Nobel Foundation, was established and endowed by Sveriges Riksbank – Sweden’s main bank – during 1968 on the bank’s 300th Anniversary in memory of Alfred Nobel’s 1895 will. Like the Nobel Laureates in Chemistry and Physics, the Royal Swedish Academy of Sciences does the selecting of the Laureates in Economics. It was first awarded during 1969 to Dutch and Norwegian economists Jan Tinbergen and Ragnar Frisch for having developed and applied dynamic models for the analysis of economic processes. Given how math intensive the science of economics is, rumors start to spread that the Nobel Committee finally caved in to the demands of mathematicians around the world to have their very own Nobel prize. But why is it that Alfred Nobel has such a miserly of praise to mathematicians everywhere?

If you check out the official sanctioned Alfred Nobel’s estate site or the Nobel Prize Committee sites on the Internet. The Nobel estate’s “official” explanation on why Alfred Nobel didn’t include mathematics as being worthy enough to receive any of his famed prizes is that “officially” Alfred Nobel thought that mathematicians hasn’t contributed enough progress to humanity to warrant being honored with one of his prizes. In other words, Alfred Nobel thinks that mathematics doesn’t contribute one iota to the betterment of humanity as a whole.

Unofficially – according to the “supposed rumors” being spread by Ivy League mathematics professors in America. The reason Alfred Nobel haven’t establish a Nobel Prize for mathematics is that during the brief period in his life when he managed to socialized the woman of his dreams – i.e. those rare times when Alfred Nobel wasn’t too engrossed with his work. He unfortunately lost the woman of his dreams to a more “romantically skilled” mathematician. Given that those were still “Victorian Times”, it wasn’t as tawdry as a contemporary Hollywood love story.

Given that most higher concepts of economics also use higher mathematics that were formerly the reserve of the “thorny task” of seamlessly unifying Albert Einstein’s General Relativity with quantum mechanics. It is somewhat easy to forgive anyone who thinks that the Nobel Prize for Economics is a thinly veiled version of a Nobel Prize for Mathematics. Unfortunately, Alfred Nobel passed away before the full impact of mathematics became self-evident. Alfred Nobel would have thought differently of mathematics if he only knew that this day and age, science and even national security has mathematics as its bulwark. Given what we knew of his resolve for mathematics, I even wonder if Alfred Nobel would give the green light in giving one of his prizes to the science of economics if he was still alive in 1968.

Friday, November 13, 2009

Gold: Still a Good Investment?

Spurred on by the recent purchase of India of 200 tons of IMF gold, does the current sky-high price still make gold a reliable long-term investment?

By: Ringo Bones

As the price of gold now teeters ever closer to the 1,200 US dollars per troy ounce mark, many investors are now probably wondering whether is it still feasible to join the bandwagon of investing in gold or whether this is an investment bubble that’s long overdue to burst? Fortunately for some, we are probably still a long way for such a bubble to reach critical mass for a number of reasons.

From most novice investors’ perspective, the recent purchase by India of 200 tons of gold worth about 6.7 billion US dollars from the International Monetary Fund may just seem as just a way for India to satisfy its somewhat large demand for gold jewelry. After all, it is a custom in India – even by the very poor – to purchase gold jewelry at least once a year - especially during auspicious occasions. But India is not just satisfying the needs of citizenry at the retail level given that it has been one of the world’s top ten leading gold jewelry retailers in her own domestic market for a long time now. The Indian government’s decision to bolster their gold reserves by buying the precious commodity from the IMF - even at these elevated price levels still makes sense to invest in gold for a number of reasons.

Even though the US economy is supposedly already “safely” out of the subprime credit crisis of its own creation, the “relatively high” jobless figures in America still make some seasoned investors cautious when it comes to using the US dollar as a long-term investment tool. And given its good track record as an investment asset to hedge against inflation, gold and related precious metals, still deserves its claim to fame as a prime safe haven investment tool. Not to mention every nation's monetary policy decisions in the immediate future.

At currently near the 1,200 US dollars per troy ounce mark, gold may have reached a record high in the 21st Century, but it still needs to be at least twice its current price taking account of inflation – to equal its all-time high back in January to February 1980. And given that it takes around 500 US dollars worth of energy to process a troy ounce of gold to 99.99% purity – i.e. bullion-grade purity – it is very unlikely for gold to return to its all-time low price of 200 US dollars per troy ounce back in 1999.

And a gold bubble is somewhat unlikely because due to the yearly rise in the demand of electronic goods, gold purchases for use in corrosion-resistant connectors will create a stable demand - unlike that of the seasonal demand of gold jewelry. Given that we will be more likely to be sending robotic spacecraft – as opposed to living and breathing astronauts – for space exploration in our immediate future, a steady and constant demand for gold in the aerospace sector will make the prospects of a gold bubble less likely to occur now compared back in 1980.

Saturday, October 31, 2009

Death of the US Dollar: Greatly Exaggerated?

Given that it is as strong as the government that backed it, will the US dollar slowly fade away given that the 21st Century will be less likely ruled by American geopolitics?

By: Ringo Bones

Despite of the rumors about it’s death, it is still safe to assume that for the foreseeable future that the US dollar will still be a “financially fashionable” item and investment tool. The reason why the US dollar has hung on for far to long than rationally justifiable is that there has never been a credible and viable replacement and / or alternative. Whether you base your financial decisions via political jingoism or cold hard facts, the dollar is still a good way to hedge your capital gains given that it is still a good source of value. But what started the rumors surrounding the death of the US dollar?

Primarily due to the collapse of the Lehman Brothers back in September 2008. Where somewhat panicky investors who are more driven by fashion trends than by long-term profits had been moving away from the US dollar – probably after sniffing the signs of an impending subprime mortgage crisis near the end of July 2007 – and into more flavor-of-the-month safe haven investments like gold. And even to the Japanese yen. Also a Republican-run America can only convince Wall Street to be greedy and indifferent only up to a certain point to prop-up their version of economic prosperity as in the Reagan days. Add to that the Bush-Cheney Consortium that borrowed trillions from China to buy Arab crude oil while prosecuting their “War on Terror” in a malfeasant manner could make everyone wonder just what it would take to destroy the US dollar?

Back in 1944 during the Bretton Woods Conference where every nation allied to the US reached a consensus of pegging world currencies against the US dollar and America being a victor nation of World War II gained enough clout to make it so. Then August 1971 came when then US President Richard Nixon removed the US dollar from the gold standard, which engendered the multi-billion dollar global foreign exchange industry. It did made the value of the US dollar fluctuate periodically but it made the US dollar stronger nonetheless - but only (and it’s a big one) when the global economy retains a semblance of stability. With the status of the American economy still somewhat uncertain despite of the DOW recently returning to the over 10,000-point mark, could this be the beginning of the US dollar losing its global dominance?

Even if China looks unfavorably at America’s debt, it won’t be the death knell of the US dollar because a lot of Chinese bond holders will be left high and dry if they’ll do something that undermines the value of the US dollar. You would never do something to undermine someone who borrows money from you his or her ability to pay you back, right? Despite some economists calling for a viable replacement for the US dollar to improve global crude oil price stability, a truly viable alternative is yet to be found. Even the basket of various currencies used by the IMF and World Bank, as Special Drawing Rights are still too dependent to the US dollar. The euro seems promising, but at a little over a decade old, it still yet has a lot to prove. Looks like the US dollar will be hanging around longer and much louder - like a drunken fraternity brother.

Tuesday, September 22, 2009

Can Islamic Finance Improve the Western Financial System?

With the proposed Tobin Tax and looming draconian clampdowns on risky financial practices, will the Western financial system model itself after the Islamic financial system to avert future crises?

By: Ringo Bones

As of late it looks like French president Nicolas Sarkozy is trying his best to push through his Tobin Tax proposal – a tax to penalize unnecessarily risky behavior in the financial trading world – to the Western financial centers. Quite odd, given the French President’s disdain against Islamic headscarves that he finally allowed legislation of a law against the wearing of such “overt religious symbols” in French government institutions now that he is now planning a financial reform that would transform the Western financial system into something that is closely modeled to the Islamic financial system. The question now is how closely – if ever – will the Western financial system be modeled after a financial system that was developed and established in the financial world?

Given that the Islamic world have always viewed gambling or “Maisir” as “Haram” or forbidden under religious grounds, established modern Islamic finance that resembles that of the established modern Western system has always been characterized by a somewhat low-risk trading schemes. Quite a contrast to it’s high-rolling Western counterpart that during the time when Ronald Reagan ruled the free world, Wall Street and other major Western financial trading centers could almost be mistaken as a gambling casino due to the risk and speculation that the traders routinely practiced. Not surprisingly, it seems that sizable financial crises are always around the corner waiting to strike at the expense of the “financially unwary”.

Western insurance companies – especially those dealing in subprime mortgage securitization and credit derivatives – are viewed as the worst offenders. Especially in the light of the subprime credit crisis of 2008 that eventually broke the back of Lehman Brothers on the 15th of September of that year. Even Persian Gulf region financial institutions were exposed to this subprime mortgage debacle to some extent - Which is quite a contrast to the Islamic finance’s Takaful scheme which is based on social solidarity, cooperation, and mutual indemnification of the losses of members. This is “probably” the history’s first multi-billion dollar cultural misunderstanding.

With the upcoming reforms and revisions of the Basel Accord – i.e. the minimum reserve capital requirements of major banks and other financial institutions. Not to mention the proposed clampdown on the “bonus culture” that rewards high-risk behavior and adventurism in the Western financial world (as long as they make tons of money?), will Western financial institutions be modeling themselves to that of the Islamic financial system? And does the West’s future prosperity dependent on it doing so?

Back in August 16, 2009, the credit rating agency Moody’s Investor Service became concerned about unused surplus liquidity being a risk factor for Islamic finance. Does this mean that Islamic finance is Basel Accord compliant if proposed revisions require an increase in minimum capital requirements? Maybe, but I don’t see it as a “risk factor”. Maybe it is the never-ending quest to avoid “Gharar” or uncertainty that makes Islamic finance to have it’s very own distinct “flavor” that is radically different in comparison to the Western financial system. The Islamic world had saved the Western finance back in the past via the zero to nine digits of the Hindu-Arabic numeral system, maybe it is time for another “bailout” this time around.

Monday, September 7, 2009

Will Joblessness Stifle Global Economic Recovery?

With the unemployment rates of the under 25s steadily on the up-rise, will the “green shoots” of global economic recovery going to just wither and die?

By: Ringo Bones

When the term “green shoots” became a buzzword in the American economic community back in April 2009, everybody and their dog thought that the much-anticipated global economic recovery is just around the corner. Even though whether or not the data of the economic fundamentals indicate the supposed glimmers of an economic spring is an another thing entirely. But after a series of quantitative easing and bank stress tests, why is it that the endemic problem that points to the fact that the global economy is still not well and good – namely unemployment – still remains unsolved?

Many tenured economic analysts point out that unemployment rate reports – more often than not – tend to lag behind the economic data that indicates the soundness of the fundamentals that point to economic recovery. Though this explanation is quite encouraging, it still not restored investor confidence to pre-subprime mortgage crisis levels. Add to that it seldom – if ever – addresses the on-going problem of rising unemployment and laid-off workers.

Economist held in retainer by big corporations should start to realize that a well-paid workforce is a valuable asset – rather than a liability – when it comes to keeping the wheels of the economic system rolling. I mean to whom does the production sector sell their products? - Certainly not to a vacuum. Governments around the world should start bailing out their workforces, as opposed to just the major banks and other big financial institutions because without a well-paid workforce, a country’s economic system could easily grind to a halt. Destroying any chance for a global economic recovery.

Tuesday, July 21, 2009

Is American Capitalism a Religious Construct?

As a country that preaches the political doctrine of the separation of church and state, is American-style capitalism for all intents and purposes nothing more than a religious construct?

By: Ringo Bones

Maybe this debate started back when then President Nixon took America off the Gold Standard, and the line “In God We Trust” on the greenback means that the value of America’s money is backed by the nation’s ability to wage war at a moments notice. Or did the debate started with the extensive news coverage of American über-Tele-Evangelists. Especially their material excesses during the latter days of the Reagan Administration that gave non-Americans – especially adherents of Liberation Theology – that American-style capitalism and it’s unbridled pursuit of material wealth is for all intents and purposes a religious construct that took the Protestant Work Ethic to it’s logical greedy end. Which is the mother of all ironies indeed, given that America’s Founding Fathers insisted in a strict separation of church and state as stipulated by the nation’s constitution.

How American capitalism got to this point could be blamed on the scores of Republican presidents that came long after Abraham Lincoln. By this time, the Republican Party doctrine was used by their elected presidents – either by accident or intent – to subtly shape established canonical Christian doctrine to fulfill their ideological aims. The most recent case in point is the Bush Administration’s unlawful – under International Law – invasion of the sovereign country of Iraq in search of non-existent weapons of mass destruction. But can the Republican Party’s obsession of a God-construct they already manipulated for decades to suit their ideological and material goals be blamed for America’s current economic crisis? Maybe, but first, let’s examine the faith-based origins of the Protestant Work Ethic - which seems for all intents and purposes the “Rock” in which American-style capitalism is based.

Many scholars and historians cite John Calvin as the father of Western – make that American-style – capitalism using the doctrine of the Protestant Work Ethic as its cornerstone. Calvinism – the ideology founded by John Calvin as it is later known – also made possible the establishment of an independent Dutch state in the late 16th Century. Even though the Dutch nation – then and now – never fully embraced John Calvin’s somewhat stoic religious ideology. As some Dutch settlers decided to move to America, most of them probably embraced capitalism hook line and sinker when they established their business interests in Manhattan, thus laying the foundation of a Protestant work Ethic that would later drive Wall Street as it is famously known today. With the doctrine that preaches that idle hands are the devil’s own playground; an individual’s productive employment became part of the established Christian canonical definition of morality and of God’s Grace.

In this day and age, the University of Geneva purportedly became the current heir of Calvinism – albeit only in an academic capacity – according to the more recent subsequent scores of dean emeritus. Given the way Calvinism blended itself seamlessly with canonical concepts of Christian piety, how come it haven’t “exactly” gained undisputed global universal appeal?

Probably due to the European “Empire Builders” who trailed Christopher Columbus and Ferdinand Magellan failing to established a pan-global Papist / Anglo-Saxon Protestant monoculture during the crucial periods of the Golden Age of Exploration. Add to that the increasing acceptance of moral constructs that developed independently from the Christian West, thus relegating Calvinism as a quaint antiquated moralist ideology in an increasingly egalitarian global community.

Calvinism’s current holdout in corporate America could be seen as a fluke, given that a lot has happened since the Civil Rights movement of the 1960s. People of non-White ethnicity need not “necessary” – albeit in more enlightened workplaces – emulate their White Anglo-Saxon Protestant overlords to gain upward mobility in corporate America. Unfortunately, some still backward thinking parts of America still think that successful capitalism should be ruled by precepts established by John Calvin and the Anglo-Saxon Protestant construct of Jesus Christ.

Sunday, June 28, 2009

The Michael Jackson Incorporated

Though many of his adoring fans were shocked and saddened by his untimely passing, but how will this “ultimate career move” affect our still struggling global economy?

By: Ringo Bones

One of the few benefits of being older is being fortunate enough to appreciate Michael Jackson’s music and showmanship without the burden of that unfortunate child molestation issue haunting your conscience. But there is no denying the fact that Michael Jackson is the number one money making machine in the global music business. Even as far back as 1984, Time magazine dubbed Michael Jackson as the savior of the music industry. Which is kind of strange, given that the 1980s were the Golden Years of the global music industry in terms of profit earnings. Though a few others had registered on Fortune 500’s RADAR – like Guns N Roses or Bon Jovi – but taken as a whole, they’re on average only one-tenth the average money-making potential of Michael Jackson in terms of record / CD sales, concert tour earnings, merchandising, etc.

As a businessman, Michael Jackson’s shrewdest move was the purchase of The Beatles back catalogue of ATV Music publishing back in 1985 which allowed him to live a lavish lifestyle most of us can only dream of. Although this was overshadowed by his purchases of curio that are more a liability than an asset. Add to that his reckless behavior and lifestyle choice that cost him millions to “get out of jail”. It is estimated that Michael Jackson owes about half a billion dollars from various creditors, despite of selling three quarters of a billion dollars worth of records and CDs.

His announcement to embark on a tour – dubbed as the “This Is It” tour – and was planned to kick-off in the O2 Arena in London was supposed to have reduced Jackson’s outstanding debts significantly. The tour’s promoter, Randy Phillips CEO of AEG Live was confident of Michael Jackson being able to meet the commitments of this “grueling” tour after witnessing Jackson passing his physical exam with flying colors. Sadly, the King of Pop passed away unexpectedly last June 25, 2009.

Even though concert promoter AEG Live managed to purchase insurance from Lloyds for Michael Jackson’s This Is It Tour, doubts have emerged whether the insurance money is enough to cover the cost of refunds to ticket holders. Not to mention the canceled contracts to FOH sound engineers, stage lighting, pyrotechnic personnel, and even the legions of catering crews. Had the tour went underway, it would have earned at least 115 million US dollars in the slated 50 dates in London alone. While a 3-year world tour would have at least earned 500 million US dollars. Enough to put Michael Jackson’s financial problems on hold and could have been enough to stimulate our ailing global economy. Not to mention the employment opportunities a massive concert tour like this would have provided. The world indeed mourns Michael Jackson’s passing in more ways than one. Well, at least my curiously shaped Michael Jackson vinyl – i.e. picture discs – collection will probably be as valuable as my Billie Holiday 78 RPM shellac of Strange Fruit.

Microfinance: The World Economy’s MRE?

Given that the world economy is still in survival mode, will the various micro finance schemes alleviate the world’s burgeoning poverty and unemployment problem?

By: Ringo Bones

Even though the criticisms against the Dr. Muhammad Yunus-inspired micro finance schemes is centered around the easily obtained money for drug and alcohol abuse by signing up for a microcredit loan under false pretenses - i.e. the microcredit / microfinance liar-loan, it is hard to argue against the overwhelming number of success stories. Though it is proven that there are those who are unscrupulously taking advantage of the program for easy money to fuel their various vices and addictions. The scheme is at least transparent enough – particularly in my neck of the woods – to see first-hand how the money that you’ve invested in your local microfinance scheme is being used. Especially when it comes to the small businesses that are more often than not are not more than 300 meters away from the local micro finance financier's headquarters.

As of late, U.S. President Barack Obama has been busy laying the groundwork for an improved regulation of the U.S. financial system so that the corporate excesses that lead into the near-catastrophic collapse of the global economy will never happen again. But in the meantime, those people being laid-off – and are definitely now unemployed - due to the post-credit crisis austerity could need a vital safety net to get them through the tough times. Especially here in the Far East where the recent economic slowdown in Hong Kong, Singapore, and even Japan had sent thousands of overseas workers back to their homelands without any prospect of financial security before they can find new jobs again. Plus, unlike in the United States, almost all of the countries in this region don’t have a comparable unemployment compensation scheme.

Most laid-off workers in the South-East Asian region – especially those former employees of the construction boom-gone-bust of mainland China, Hong Kong, Macau, and Singapore of the past few years. Are now applying for a microcredit / micro finance loan in order to become self-employed using the skills they learned when they were growing up. Like fishing and organic farming of exotic vegetables for the fast-growing slow food sector and herbal medicine market, which for all intents and purposes allows this laid-off workers to make their ancestral wisdom a part of their daily bread-winning scheme. Although the new trade – more often than not – earns only a fraction of the money they used to when working overseas, but without the availability and easy access to microcredit, these people for all intents and purposes will be in dire straits. And it also keeps the money moving around a bit – as opposed to a complete standstill – in a full-blown global depression like the one that started in Wall Street back in 1929.

Tuesday, April 21, 2009

Is War Good For the Economy?

Given that different stock exchange markets around the world were originally established to fund wars, is war therefore a vital part of the economy?

By: Ringo Bones

For better or for worse it was primarily the constant search by various governments throughout history of various means to conduct wars – especially when it comes to raising funds – that engendered our contemporary economic systems. Though the financially disastrous “Moral Adventurism” of the Bush Administration’s invasion of Iraq back in March 2003 – which former World Bank president Paul Wolfowitz was the primary architect – would certainly serve as a bad example. No one can deny that throughout history, wars are the primarily effective economic stimulus packages.

Our various stock exchange markets can easily trace their origins in medieval times in many European countries. As governments became increasingly reliant on public loans for the capital need for conducting wars and other operations – though mostly in conducting wars – issues of stocks and bonds multiplied, thus making more and more elaborate financial machinery in the form of financial instruments necessary for the maintenance of a ready market in the various type of paper certificate issue. Out of this need, the stock exchange – as we know them today – was born.

The establishment of stock markets in London and New York during the second half of the 18th Century was primarily driven by war. Probably one of the oldest continuously run stock exchanges in the world was the one established in London. It started when several dealers in bills of exchange – that is, short-term credits – also dealt occasionally in government funds, started to look for buyers for those wishing to sell and vice versa.

As time went on, these dealers took to meeting regularly at a particular coffee house in London. Which at the time financial business of most kinds were often transacted in such establishments, by 1773, this place became known as the Stock Exchange Coffee House. By 1802 the amount of business conducted there, stimulated by the continuous raising of funds required to fight the Napoleonic Wars, had reached to such proportions that a new building – to be used exclusively for these business transactions was constructed. This building occupied part of the site of the present London Stock Exchange.

While the New York Stock Exchange - which now handles more business than any other stock exchange in the world - can trace its origins to the same point in time. Especially to the particular stimulus of the American Revolution in raising funds to defend the then fledgling country from continued British attacks, which the New York Stock Exchange has been in continuous operation since 1792. The American Revolution – like the Napoleonic Wars – made necessary the mobilization of considerable sums of money. Furthermore, the myriad securities issued by the separate states soon produced the need for market facilities.

The then fledgling New York market began with just 24 dealers who formed the habit of meeting for a short while each day under a large buttonwood tree quite close to the present site of Wall Street. These men dealt in securities issued by government banks, insurance companies, and canal builders. It wasn’t too long before business expanded to the point where a special building was required – together with a set of rules – by which the market was organized and controlled.

Even the first incident of short selling can be defined as a war time incident. It happened back in 1609 when Dutch trader Isaac Le Maire, a big shareholder of the Vereenige Oostindische Compagne or VOC. In 1602, Le Maire invested about 85,000 guilders in VOC. By 1609 the VOC still was not paying dividends and Le Maire’s ships on their Baltic routes were under constant threat of attack by the British Royal Navy. Primarily due to trading conflicts between the British and the VOC. Le Maire decided to sell his shares and sold even more than he had. The stock market notables at the time became outraged over this act and this particular incident led to the first real stock exchange regulations: a ban on short selling. The ban was eventually revoked a couple of years later.

Maybe it was the Keynesian dictum of crisis measures having a habit of lasting much longer than the crisis itself or the World War II-era Bretton Woods Conference that largely shaped our present financial system that most of us will note the inexplicable link between war and economic activity. Or is it that we in the Western Civilization had gotten war down to a science that we can easily profit from it provided that the rules that are in place that keep or dear Western Civilization from being destroyed are enforced. If this is the case, then maybe Wall Street insiders should brush up on their game theory knowledge to find out what they did wrong during the Bush Administration that created our present global economic crisis. Maybe there is something about that Sun Tsu’s Art of War being recommended by many as a required reading for aspiring business titans.

Tuesday, April 7, 2009

The London G20: A New Start or Business as Usual?

Touted as the most important economic summit since World War II, but does the proposed reforms of the London G20 really save our ailing global economy?

By: Ringo Bones

Even though US President Barack Obama is probably the most influential policymaker of the London G20 economic summit because the US together with the UK and Japan managed to put forth their proposals of spending more money in order to save our ailing global economy. Never mind President Obama’s powers of “Diplomatic Persuasion” during the London G20 summit. Although France and Germany’s call for tighter regulation of the global economy was eventually approved, it seems like every sensible proposal – make that “conventional proposals” - to save our current global economic crisis was eventually embraced by everyone. The question now is will all these measures that we’ve taken really save our ailing global economy?

Throwing money at the problem was readily approved, given that it had saved Japan’s economy during her “Lost Decade” even though the policymakers haven’t dealt with the bad banks / zombie banks fast enough. Thus the plan to spend 1 trillion dollars to rehabilitate the global economy was given the green light. 750 billion dollars of which will serve as an extra resource for the IMF to help countries on the verge of financial collapse, most of which are Eastern European states. While 250 billion is promised as trade credit overdraft for cash strapped countries, in other words, a kind of export insurance for the global trade to make protectionism less profitable.

The call for tighter regulations on financial institutions was also given a green light. Especially those pertaining to key players like hedge funds, credit derivatives, and credit rating agencies. Plus stricter compliance of capital requirements; especially when it comes to capital risk requirements; like Basel Accord / Basel II implementation compliance; a crackdown on tax havens and a call to end arcane bank secrecy laws as an institution. And finally the creation of an early warning system to prevent the repeat of the July 2007 subprime mortgage crisis from spreading out of control. Even though every key players of the London G20 eventually reached a somewhat concise consensus, but does all of these proposals really work in practice?

Brazil’s president Luis Inàcio “Lula” da Silva said that the financial sector should be congruent with the production sector in order to avoid a repeat of our current economic crisis, or to avoid our current one from becoming worse. Has he got it all figured out? Given that investment banking had been making money out of thin air in an unsustainable manner, Brazil’s president could be on to something. Though his suggestion will never ever be taken seriously or do most of the ones proposed during the London G20.

For the very reason that the global capital markets had already grown into a powerful economic entity since Ronald Reagan ruled the free world and it is very unlikely to be influenced by the various heads of state’s consensus made during the London G20. This is where the “business as usual” part of the global economy trumps the altruism of the London G20 consensus. It looks like “leave it alone” capitalism is a dead end because it tends to go into excesses. In short, it can’t reform itself.

But there are very good reasons for everyone to be optimistic of the consensus reached during the London G20 summit. The proposals put forth by the various NGO’s to aid the world’s poor during times of crisis were eventually given the green light. Even the rock star and anti-poverty activist Bob Geldof was very optimistic about the consensus reached during London G20 summit. The London G20 could be capitalism’s make-or-break moment to reform itself.

Monday, March 30, 2009

The Geithner Plan: A 21st Century New Deal?

Is US Treasury Secretary Timothy Geithner’s plan to heal the ailing US economy by rescuing US banks this century’s New Deal or, as his critics attests, a road to hell?

By: Ringo Bones

It is now official, US Treasury Secretary Timothy Geithner’s plan to heal the ailing US economy by detoxifying American banks of their toxic assets is already underway. The plan primarily involves a public and private sector team-up investment program to buy toxic assets / financial products, the primary cause of the subprime mortgage crisis. The scheme will initially funded by the US Government with 500 billion dollars worth of funds to buy the toxic assets with the potential to expand to 1 trillion dollars - if needed - over time. While the US Federal Reserve and the FDIC will assist investors in buying assets, the private sector will share the risk with the US taxpayers. Though the creation of the “equitable” market price of these assets needs really diligent oversight, which could be a problem.

Now the downside, the overall risk exposure of the American taxpayer is still not well established by the “Geithner Plan”. Which is not exactly easy because most American banks are still vilified for their risky behavior that instigated the subprime mortgage crisis. Plus, there is that issue whether capital restrictions govern the pricing of the assets. In short, the “equitable” value of the toxic assets still needs evaluation. Worse still, the scheme can easily privatize the corporate gains while the losses are socialized – i.e. the American-taxpayer-as-investor can easily be left holding the bag if the scheme turns sour.

In spite of the plan’s caveats, world markets reacted positively to the Geithner Plan. The day after the plan’s inception, stock markets rallied. Not just in Wall Street but also in other parts of the world as well, especially in Asia. Although the Czech Prime Minister Mirek Topolanek – who is also currently the EU president under it’s rotating 6-month term - criticized the “Geithner Plan” as the “road to hell” for the global financial system. Maybe quantitative easing is too complex to be policed properly from PM Topolanek’s point of view?

The good thing about the “Geithner Plan” is that it renewed the sense of urgency to regulate financial companies who provide complex and exotic financial services and instruments. Like hedge funds and credit default swaps just to name a few. Plus, the renewed assessment of financial companies’ practice of keeping adequate credit reserves to back up their inherent operational risks (a localized Basel Accord?). The question now is whether governments around the world will become too obsessed with quantitative easing that they’ll forget there are other things to take care of during times of economic crisis like maintaining employment opportunities, the environment and other social concerns.

Monday, March 23, 2009

AIG: A Billion-Dollar Financial Black Hole?

Taking note of the TARP fund misappropriation via exorbitant executive bonuses, is the insurance and financial corporation AIG really too big to fail?

By: Ringo Bones

Many considered it as the battle that needs to be lost in order for the greater war against the on-going global economic downturn to be won. While others considered the company as too big to fail, but has the US Government made the right decision in spending their not-so-limitless billions of the Troubled Assets Relief Program or TARP funds on AIG? Or is AIG nothing more than an obsolete financial institution trapped in the REAGANOMICS euphoria of the 1980’s?

American Insurance Group Incorporated or AIG managed to get the ultimate PR free-ride during the Clinton Administration when the company’s frequent and highly visible adverts about their environmental coverage and their underwriting ability for environmental risks. During this period of “think locally, act globally” environmentalism of the 1990’s, AIG practically invented corporate social responsibility years before the term became popular in American Ivy league business-oriented colleges. Whether the company practiced corporate social responsibility at the time is another thing entirely, but it did bring them an aura of a corporate entity that’s accountable for the planet.

That was then, but in the era of Bush Administration-era tax cuts in with the promise of prosperity, AIG got too greedy for their own good. After being swept up in the subprime mortgage frenzy, the financial arm of AIG lost it’s better judgement after succumbing to the promise of fat profits of loaning money to persons who can’t afford to pat them back. Many financial pundits had now blamed the company as the ground zero of the global subprime mortgage crisis. When the toxic assets of the subprime mortgage debacle came in contact with their arcane credit derivatives of their credit insurance arm, this created a “perfect storm” that instigated our on-going global financial crisis.

Given that the proverbial Road to Hell is always paved with good intentions, the US Government got hoodwinked into giving AIG a few billion – 170 billion dollars more or less – of the somewhat limited TARP money. All in the hopes of propping up the company that’s supposedly too big to fail. A few months later, AIG misappropriated those billions by giving each of their top executives 165 million dollars in bonuses, which AIG CEO Edward Liddy says to the press fundamental mistakes were made in handling of the TARP funds – an excuse by any other name?

The corporate excesses of AIG drove Treasury Secretary Timothy Geithner to explain himself to the press claiming that he is at fault. While President Barack Obama created another first as the first incumbent president to appear on the Tonight Show With Jay Leno in order to explain to the American people the on-going debacle at AIG. But whatever shenanigans AIG is doing, the US Government already had the upper hand. Since as majority shareholder of AIG, Uncle Sam can simply “claw back” those ill gotten millions of dollars misappropriated as executive bonuses by legislating tax laws aimed at AIG executives, which they are currently doing right now. If Uncle Sam can’t or won’t control AIG, it could become the financial black hole that will swallow Wall Street.

Is Our Financial and Economic System a Joke?

After the high-profile feud between Jim Cramer and Jon Stewart made the problems faced by our global economy “interesting” to primetime TV viewers, is our financial system nothing but a joke?

By: Ringo Bones

This probably all started when Jon Stewart of The Daily Show with Jon Stewart made a joke about Rick Santelli. A Wall Street pundit and staunchest critic of President Obama’s plan to bailout ailing American companies, calling the president’s action as socialism. The joke was even enhanced to us in the know by Rick Santelli’s inability to delineate a proper line across the sand between socialism and capitalism (or unbridled greed?). From this perspective, Jon Stewart’s indictment of CNBC’s Mad Money with Jim Cramer seems incidental. Until when the TV ratings between the two got affected.

Even though an overwhelming majority of people around the world would consider Jon Stewart in criticizing CNBC’s financial-themed programs like Jim Cramer’s Mad Money because they didn’t do their part of disclaiming the true extent of the risks involved in investing in the stock market. The feud between the two even ballooned to cartoonish proportions when Jon Stewart’s ratings shoot up while the ratings of CNBC’s financial-themed shows slightly slipped down. Even Jim Cramer resorted to appearing to the TV show of securities fraud ex-convict Martha Stewart – i.e. Better Living with Martha Stewart to plead his case - Irony of ironies indeed.

Even though the feud between Jim Cramer and Jon Stewart were now diffused after Jim Cramer appeared in Jon Stewart’s show. Looking beyond the debacle in terms of TV ratings cost and benefit, looks like the feud between the two finally brought into the spotlight the eternal struggle faced in maintaining the overly complex organism that we call the global economy.

When compared to other investment companies that provide service for the novice investor, the CNBC focus groups deciscion to chose to use “In Cramer We Trust” as the de facto legal and risk disclaimer for Mad Money with Jim Cramer. The show for all intents and purposes undoubtedly opens itself to all manner of ridicule. As a marketing and promotional ploy to make Mad Money with Jim Cramer appeal to middle-school aged demographic, the idea seems dubious to me.

When Jim Cramer first promoted Mad Money on The Tonight Show with Jay Leno a few years ago, the idea of persuading novice investors to invest in high-yield but riskier funds as a component to diversify their own portfolio is somewhat suspect. Given that majority of older viewers who have enough money to indulge in Jim Cramer’s financial adventurism are somewhat squeamish to invest in something riskier than bond funds and equity income funds, the showmanship behind Mad Money should concentrate more on investment risk disclaimers. Rather than the novelty bells and whistles that are de rigeur of the show. Remember when Jim Cramer told everyone to invest in Bear Stearns back in 2008, and a few months later the company had major financial troubles?

For those of us who had benefited from our money funds during the 1990’s and had now diversified our investment portfolios into something higher-yielding – but a little riskier – bond funds and equity income funds, Mad Money with Jim Cramer will always be viewed somewhat of a joke from our perspective. Prudence will always be a guiding force every time we invest our hard-earned money. It will surely take more than a TV showman armed with oversized novelty bells and whistles and other props that belong in Pee Wee’s Playhouse to convince us that investing in aggressive growth but high-risk derivative funds and specialist funds is the best thing for us since free money. Our investment portfolios probably can’t afford such jokes during these times of a worldwide economic downturn.

Friday, March 13, 2009

Managing Credit Card Debt

If the convenience of credit cards has got the better of your spending avarice necessitating the services of a debt counselor, is it still possible to manage one’s credit card debt?

By: Ringo Bones

Admit it, most of us has come to the point of availing ourselves the services provided by credit card companies after an acquaintance of ours started touting the life saving convenience of credit cards. Not to mention that obligatory first-hand testimonial of a harrowing life-saving payment usually involving a stay in the emergency room. Nonetheless, every one of us should remember that once and for all credit cards are not the best thing since free money they are touted to be.

Ask every financial consultant worth his or her own salt and they will more often than not tell you that high-interest credit cards can be the most expensive form of money you can have in your budget. Time and time again they will recommend that the most cost-effective way to use your own credit card is to pay off the balance each month. At the very least, protect your credit standing or your very own credit rating of the card-issuing bank that you signed-up with - which can “easily” done by making sure you don’t let the level of your outstanding balance run away with you by your monthly payments. Even though these are just your unseemly basic debt management procedures, they can be a beneficial guide for the frequent credit card user.

Another method of keeping high-interest credit card debt at bay – as recommended by most financial advisers – which is also works in avoiding lingering credit card debt is by converting the balance into a personal loan. Personal loans usually have a lower interest rate, but it will only work if you have the fiscal discipline to avoid running your credit card debt again. This can be relatively easy if you take the necessary steps in reviewing your pattern of expenses to get to the root of why you had incurred such high credit card debt in the first place. At least it is way less costly than asking for debt advice from a debt counselor paid by your very own money.

Credit Cards: Our Best Friends?

Given their convenience and pro-consumer advantages, are credit cards really the “Devil Incarnate” they are touted to be?

By: Ringo Bones

Despite of the latest high-level exposé of the predatory lending practices of some credit card companies, from a legal standpoint, majority of credit card company’s by-laws are actually pro-consumer. Even though – through varying degrees of factuality – all credit card use (spending?) problems can be “conveniently” blamed on cardholder’s inability to curb spending avarice. While the truth lies somewhere between your credit card being the closest thing of your money acting as your very own consumer advocate and credit rating agency, or just the best thing since free money.

If you are strong enough to resist the temptation of using cash on items that can be purchased by a credit card – in spite of the shopkeeper’s promise of an attractive discount via cash purchase – then be prepared to enjoy the penultimate benefit of using credit cards to buy stuff. The main – if not the overriding – advantage of paying with your credit card is that if you don’t receive what you were promised – very useful in mail order and on-line transactions – you, the customer, can always dispute the charge with the credit card company. All credit card companies have the legal right to temporarily withhold payment while it conducts its own investigation.

Although credit card companies usually protect you – their valued client – if you don’t get what you pay for, but not if you merely change your mind about a purchase. Credit card companies has the advantage of having the legal authority of doing this type of caveat emptor for you. Just be sure to pay your monthly obligations on time to keep interest rates of your charges low and please never forget to curb your spending avarice. Other than that, your credit card – as promised by your credit card company – could really open new doors of purchasing opportunity for you.

Tuesday, March 3, 2009

Microcredit Versus the Global Recession

As various financial institutions fall by the wayside, will Dr. Muhammad Yunus’ microcredit program hold its own against the onslaught of the on-going global economic turmoil?

By: Ringo Bones

Even though Dr. Muhammad Yunus’ Grameen Bank and the microcredit / microfinance program that it fostered could trace its beginnings back in 1982, it is only after Dr. Yunus won the 2006 Nobel Peace Prize that his poverty elimination scheme gained worldwide fame. He even gained fame as the “Banker to the Poor”. The underlying success of Grameen Bank’s microcredit / microfinance program has been – according to Dr. Yunus’ own words is that: “poor people can, and do, repay loans”. As a poverty elimination scheme that is congruent with the long established global financial system, Dr. Yunus is largely credited with making microfinance / microcredit a socially responsible and viable business model.

When the global credit crunch went full steam during the last quarter of 2008, many have wondered whether Dr. Muhammad Yunus’ novel poverty elimination “financial company” could become insolvent. After all, he conscientiously made his microfinance / microcredit program’s business model congruent with the established global financial system. But the program’s 98% payment / payback rate has been it’s saving grace during increasingly tough economic times. Even the fledgling Grameen Bank America that started serving the “financially depressed” parts of New York City back in January 2008 seems to be holding its own, despite of scores of banks teetering on the brink just a stone’s throw away from Grameen Bank America’s offices.

As the global credit market seems to be currently grinding to a halt, an overwhelming majority of microfinance / microcredit schemes modeled after the ones established by Dr. Yunus seem to be holding their own, which is very fortunate for the rest of us because financial companies that provide microfinance / microcredit loans are very vital in developing countries as they are – more often than not – the only source of small business loans and start-up capital loans. Surprisingly, it works even better than the dysfunctional foreign aid system whose own rigmarole is powerless against white-collar corruption. In the long-term, microfinance / microcredit schemes could be a more economically viable way out of poverty - even foreign aid dependency – in developing nations.

Dr. Muhammad Yunus’ Grameen Bank has even been wholeheartedly welcomed in the Islamic World due to its adherence of Sharia Banking Laws – i.e. the use of tangible / concrete assets as collateral. Plus, the money provided by these microfinance / microcredit schemes are used in bricks and mortar business establishments like fish and vegetable markets – even if the bricks and mortar more often than not are just twigs and thatched straws. Nonetheless, these are far more tangible than those overly complex credit derivatives designed by financial engineers in leading American Ivy League institutions.

Monday, February 2, 2009

Recession v. Super Bowl XLIII

For many years, the NFL Super Bowl Sunday has been an American institution in more ways than one. Will the current economic recession be its downfall?

By: Ringo Bones

More than just an end-of-season finale for the NFL, the American Super Bowl Sunday has for years been a magnet for multi-million dollar 30-second advertising slots. But the slow inexorable creep of the on-going global recession began to manifest itself in America in a dramatic way during the second half of 2008 via layoffs and stock market free-fall. Will this inevitably ruin the 2009 Super Bowl XLIII?

Big-time sports advertising in America has always been about profits and ease of moneymaking. When the crude oil tycoon J. Paul Getty started the cable-based sports channel ESPN, you can be sure that he’s not doing it for humanitarian reasons. Given that the “R” word – that is recession – has already behaving like Frankenstein’s monster set loose on an unsuspecting public, will it eventually take down one of the most hallowed American of institutions – that is the Super Bowl Sunday?

The on-going global economic downturn has finally make itself felt on American soil when a week before Super Bowl Sunday – the 2009 Super Bowl XLIII in Tampa, Florida. According to NBC there are still four 30-second advertising slots that remained vacant. Whereas in the past, 30-second advertising slots – despite costing millions of dollars – are snapped up by interested parties as soon as they are made available. Does the vacant advertising slots point out – especially during the Super Bowl – that America is now indeed in a deep recession?

In spite of all the doom and gloom, the hallowed institution of the American Super Bowl Sunday still managed to provide a refuge for die hard fans to forget, just for a moment at least, the on-going global economic downturn. If Americans still manage to have a good time in spite of a “relatively austere” Super Bowl – in advertising terms at least. Then, the Super Bowl, together with the die-hard fans, can safely manage to hold on for things to get better – even though it means spending more money.

Monday, January 19, 2009

Minting Pennies and Nickels: Not Economically Viable?

Due to the rapid rise of commodity prices – especially metals - during the start of 2008, the cost of minting American pennies and nickels is now twice their actual face value. Weird economics at work?

By: Ringo Bones

When the global economic downturn instigated by the subprime mortgage crisis of the summer of 2007 started to be noticed on American soil during the first quarter of 2008. The US Mint or The Bureau of the Mint also started to notice that it’s now worth twice as much to “make” pennies and nickels than their face value – i.e. the coin’s buying power - due to the increasing prices of “coinage” metals like copper and zinc.

Noting that it now costs 2 US cents to make an American penny (a US 1 cent piece) and a nickel (a US 5 cent piece) now cost a dime or 10 US cents to make. It would only be a matter of time that the US Treasury Department will tell The Bureau of the Mint in Washington, D.C. to stop minting coins because they’ll be losing money - weird economics has finally arrived. Given that a typical American “Honest Abe” penny is 98% zinc while an American nickel is 25% nickel and 75% copper. The three metals – namely zinc, nickel and copper - whose trading values went through the roof during the first part of 2008 makes it easy to see why that minting coins using these traditional coinage metals is now more expensive compared to a generation ago.

Most countries around the world has since abandoned using gold and silver as coinage metals since making them costs way more than the coin’s intended face value, looks like copper, zinc and nickel will now be deemed too expensive for coinage use. Some countries have even resorted to using steel and aluminum to keep the cost of minting coins down. Especially during the early 1990’s when Sumitomo attempted to unlawfully manipulate copper prices in the London Metals Exchange by hoarding large stocks of copper for six years.

In the US, grassroots movements like Americans for Common Cents has been busy campaigning for the US Government to keep minting coins because if Uncle Sam ever decides to stop minting pennies and nickels, the penniless could literally become penniless. Like when merchants start rounding-off prices of goods to the nearest dime – given that if the US 10 cent piece or dime becomes the smallest American currency denomination – could cost American consumers 600 million dollars a year in retail expenses.

As we celebrate the 200th anniversary of Abraham Lincoln’s birth and the 100th anniversary of the “Honest Abe” penny in 2009, has the American penny and nickel become an archaic time-wasting transaction of our modern credit-based economy? In my opinion, coins of small denominations – like the American penny and nickel – are still relevant in today’s economic transaction, especially at the retail level. Plus, given that coins are more difficult to counterfeit when compared to paper currency and are less tempting to steal in comparison to credit card data, American pennies and nickels still serve an indispensable part of the American – if not of the global – economy.

Wednesday, January 7, 2009

US Treasury Bonds and Securities: A Bubble that’s About to Burst?

With a budget deficit that could reach 1 trillion dollars in order to save it’s own economy, are US Treasury bonds and securities still a sound investment choice in 2009?

By: Ringo Bones

With the critics of incoming US president Barack Obama’s supposedly socialist-leaning economic policies now segueing into the background like their empty rhetoric, the question still remains whether US treasury bonds and securities are still the safe-haven investments that they are touted to be. Or are they the latest speculative bubble just waiting to burst?

With the US government now printing money at an unprecedented scale and the government spending deficit that is predicted to reach over a trillion dollars just to save the American economy, financial analysts around the world are now casting their doubts over the long-term profitability of US treasury bonds and securities. Because if you choose to invest in US treasury bonds now, there’s no telling of it’s actual value when it matures. Looks like when one invests in US treasury bonds he or she will be primarily driven by patriotism rather than for profit. If he or she is willing to overlook the inherent disadvantages of financial and / or speculative bubbles.

Since US treasury bonds and securities was no longer the safe-haven investment vehicle that it once was, what are our options? In my opinion, investing in gold is a better bet right now because gold is not backed by credit – i.e. it has inherent value of it’s own. But if the patriotism issue is really nagging you, here’s my view on this: Does investing in a less desirable financial instrument in order to “help keep our fellow Americans employed and off welfare” both economic common sense and patriotic?

My answer to this is a really big fat no. Investing your hard-earned money in a less desirable financial instrument in order to “help keep our fellow Americans gainfully employed and off welfare” does not really make economic common sense or is really patriotic, it is just thinly veiled charity. A charity that most of us succumb into every time we use “liberal guilt” as a defense mechanism every time we are emotionally blackmailed into buying something we don’t really need. And by the way, when it comes to good business practices, emotional blackmail is still illegal.

But if you are like me – and many others - who still believes that America under the helm of President Obama, miracles – especially economic miracles – can still happen. Then by all means invest in US treasury bonds and securities as your patriotic duty to help keep the American economy strong. But beware and be very aware that the current state of the US economy still resembles some rickety contraption being held by bailing wire and the good intentions of a czarist-era mad Russian. Which is my latest assessment given the aftermath of the Bernard L. Madoff fraud that could put Charles Ponzi and his start-up pyramid scheme to shame.

Saturday, January 3, 2009

The Lowdown on Commodities

The current low price of commodities – especially that of crude oil - had lessened the impact of the global financial crisis to most sectors of the economy even though it will be very bad in the long run. A good time to cry wolf?

By: Ringo Bones

The world’s leading economist had already reached a consensus and had been warning us for sometime that the low prices of economies resulting in the lack of demand due to the global economic downturn. Will be bad in the long run – even if the global economy recovers sometime in the future – because producers are not making the necessary investments to expand current production to meet possible future demands. The proverbial “ticking time bombs” in the commodities market are copper and crude oil whose prices could skyrocket way pass their 2008 peak once the global economy recovers causing an increase in demand.

Violent price rises will be the norm – rather than the exception – when it comes to commodities prices when the global economy recovers around 2010 or so. Due to lack of current investment to expand production, demand for copper and crude oil in 2010 might not be met fast enough - which could be a headache to commodities trading. Especially when it comes to the demands of emerging economies in Asia like India and China whose economies are not as badly affected as those in the United States and Europe despite of the tragic job loss figures. Plus the increased affluence of consumers in Asia could also send prices of wheat, corn, and soybean skyrocketing past their 2008 levels due to these food crops being diverted into meat production as animal feed.

The world’s policymakers better start consulting their economic advisory team on how to plan ahead to avert disastrous and violent commodity price volatility in the near future. Even if the global economy eventually recovers, it could derive our poorer brethren of their daily bread if the recovery plan is ill conceived. Making that “dramatic” percentage-point rises in the global stock market a rather Pyrrhic victory for stock market traders.