Sunday, October 31, 2010

Much Ado About America’s Jobless Recovery

With the DOW Industrial Average now hovering around the 11,000-point mark with the unemployment rate approaching 10%, is the American economy currently experiencing a jobless recovery?

By: Ringo Bones

The DOW Industrial Average is now “safely” entrenched in the 11,000-point mark and yet the current jobless rate in the U.S. has now crept closer to 10% - comparable to the record unemployment rate spikes of the past 30 years. And yet, there are obvious signs that America’s economic health had already recovered since the 2008 global credit crunch – like the slowly creeping price rise of crude oil and other indicators. Given the current economic data, is the U.S. now currently experiencing a jobless economic recovery?

In an October 22, 2010 interview on the Bloomberg channel, Professor Alan Blinder of Princeton University says that basing on current economic data America won’t be experiencing a long-term jobless economic recovery because America’s current jobless rate is a cyclical jobless rate as opposed to a structural jobless rate. That is, America’s current jobless rate – being cyclical in nature – could easily go down once the economy improves, as opposed in a structural jobless rate where the unemployment rate stays at a fixed rate – and at a rather high percentage rate – even if the economy improves.

Most U.S. economists – including Professor Blinder – safely concludes that the current U.S. unemployment data is overwhelmingly cyclical, as opposed to structural, and could return to the previous natural unemployment rate of slightly below 5% once the U.S. economy further improves. Which could spells further good news for the U.S. economy since 70% of the U.S. GDP is due to retail purchases.

But what if the unemployment problem in the U.S. turns out to be a markedly structural jobless rate rather than a cyclical jobless rate? Well, given that the economic nerve centers in the U.S. are now computerized and largely robotic, America could well experience a true jobless recovery with a structural unemployment rate framing the backdrop of an economic prosperity with a 10% or more jobless rate.

Worse still, in an economic climate marked by structural jobless rates, the U.S. economy might become too dependent on the markedly dubious wealth manipulation industry in the murky world of investment banking. Like superfast high-frequency trading which – from time to time – is still prone to market meltdown and market crashes like the recent one that happened back in May 6, 2010.

Thursday, October 7, 2010

Is Currency Intervention Legal?

Even though countries fortunate enough not to resort to one often look down at countries that do in order to get out of a bind, is the act of currency intervention even legal?

By: Ringo Bones

So far there’s still no legal precedent of any country subjected to punitive UN Security Council sanctions whenever they resort to high-level currency intervention in order to get out of a current economic bind. The world’s leading economists recently criticized the wisdom and sustainability of the Bank of Japan’s latest attempt at currency intervention, primarily done in order to lower the value of their super-strong yen in order to make Japanese exports globally competitive again. To those still unfamiliar with currency intervention, it goes as follows.

Currency intervention is the action taken by of one or more governments, central banks, or currency speculators for the purpose of increasing or reducing the value of a particular currency against another currency. Most economists have a consensus view that currency intervention – more often than not – fizzle out quite quickly since the funds used to make a particular currency artificially low or high in value is ultimately limited in comparison to the level of international trade that floats it as its true arbiter of value.

The value of the yen recently became too strong for its own good because many speculators and some governments – like the Peoples Republic of China – has used it as a safe haven investment. The Bank of Japan’s funds being used to reduce the value of the yen back to just make Japanese export products competitive is ultimately limited in comparison to the war-chest of the various global currency speculators and the Beijing government; Making the Bank of Japan’s first currency intervention since March 2004 ultimately an exercise in economic futility.

The Mainland Chinese currency – the yuan – has a value ultimately determined by the country’s volume of trade with the international market, as do most floating currencies these days. While the US government - especially US Treasury Secretary Timothy Geithner - is still irked by the Beijing government’s “suspected” subsidizing of the yuan in order to keep its value artificially low in order to make China’s exports unfairly competitive.

As the US government is already in the process of legislating laws to charge punitive tariffs against Chinese goods imported into the US if Beijing doesn’t intervene to strengthen the value of the yuan. Even though this move reeks of protectionism, the legal gray area that currency intervention has carved itself a niche into is by no means free of moral hazards.

George Soros, the most famous billionaire who single-handedly performed his own successfully executed currency intervention back Black Wednesday of 1992 never spent a time in jail despite of famously known for “breaking the Bank of England”. With an estimated current net worth of around 11-billion US dollars, Soros is ranked by Forbes as the 29th richest person in the world - and probably the most notorious single-proprietorship currency speculator.

With such wealth and influence, Soros can for all intents and purposes practically make up his own “moral sensibilities” as he goes. In 1997, he managed to bring the economy of South-East Asia to its knees by performing his “one-man” currency speculation that triggered the Asian financial crisis of 1997 just because Soros is pissed when the Association of South-East Asian Nations or ASEAN welcomed Myanmar – and the country’s despotic regime - as a member.

So is currency intervention legal? I’m afraid so, but within the legal gray area of a niche that it has managed to carve itself into I just hope that central banks, currency speculators and eccentric billionaires that use it consider the moral hazards that inevitably and inextricably come with it. After all, an overwhelming majority of us still resort to crummy jobs just to earn money.

Monday, October 4, 2010

Is Basel III A Financially Sensible Bankruptcy Protection For Banks?

As the latest incarnation of the Basel Accord, does Basel III really provide the most financially sensible way to provide protection against a repeat of the 2008 global credit crisis?

By: Ringo Bones

Born out of the governments in the industrialized West experiencing first-hand the shock of the global credit crunch, the latest incarnation of the Basel Accord – the Base III Agreement – was seen as a saviour of governments now weary of using taxpayers’ money to prop-up ailing banks. This “New Deal” for central bankers aims to reduce risks of future financial crisis through proposed Core Tier I Capital requirement reforms – in other words increasing the banks capital reserve. But is this a sensible solution against a future financial crisis?

As it was the Bank of International Settlements being one of the first to warn against the looming 2008 global credit crunch months before it actually happened, the Basel III Agreement was readily agreed with open arms (or was it via political clout?) by central bankers and senior regulators. With required aims to triple the size of banks’ capital reserve in comparison to previous Basel Accords in order to protect against another banking crisis, plus the proviso of cutting bonuses of bank executives if they can’t maintain the newly agreed capital ratio. With such stringent capital requirements, one could wonder if Basel III will ever have universal appeal.

As of late, bankers have warned a regional regulation race that could result once Basel III is finally implemented. Not only that, the stringent capital requirements also means less money available for banks to be made available to be borrowed, thus lowering their “potential” earnings - which could eventually hurt fledgling small to medium business firms seeking to borrow funds for capital expansion. Although the new rules are yet to be submitted to the upcoming G-20 meeting in South Korea, it is very doubtful if there is another bankruptcy protection scheme that can provide a better compromise between a bank’s profit earning potential and the risk of a worst-case scenario where a large number of borrowers default on their debts. Like what happened during the subprime mortgage crisis of 2008.