by Paul B. Farrell
Seven reasons a 'good' depression beats a new Great Depression
Yes, a depression. Spelled: D-e-p-r-e-s-s-i-o-n. Wake up America, recessions don't work any more. Why?
Get serious folks. We had a 30-month recession not long ago. Eight years later the market's still barely at its 2000 peak, a loser. Worse, we're back in a new recession. But Washington politicians are keeping it a secret, feeding us doctored feel-good statistics as legendary political historian Kevin Phillips wrote in "Numbers Racket: Why the Economy is Worse Than We Know."
So we blindly refuse to bite the bullet and stop our out-of-control spiral into collapse. America needs a big wake-up call ... and it's coming soon, whether you like it or not!
Last November we posted "17 reasons America needs a recession." Today it's far worse, and getting worse still.
Most economists predict it'll take till 2010 to burn off our excess housing inventory. RGE Monitor say Fannie and Freddie bailouts aren't working; they'll soon be "profoundly insolvent" and need to be "nationalized." Treasury Secretary Henry Paulson has no long-term plans, he's a caretaker, plugging holes, anxious to get back to Wall Street's money machine, running out the clock till he turns over the catastrophe he enflamed to a new bunch of politicians and their armies of 42,000 greedy lobbyists.
Lessons learned? Zero. Why? Wall Street, Washington and Corporate America are a one-trick pony with one narrow-minded strategy: Economic g-r-o-w-t-h, bull markets, megabonuses. In good times they tout "free markets." But when greed bombs, these big babies throw free market "principles" under the "Reagan Revolution" bus as their lobbyists go whining to Congress for megabillion taxpayer bailouts and access at the Fed casino's discount window to siphon off more taxpayer money. What hypocritical wimps!
Wall Street and its co-conspirators are doing such a miserable job, America needs a new strategy: Stop all the short-term "hole-plugging." Let go and let an old-fashioned "Good Depression" do the job that our happy-talking leaders refuse to do. Let it clean house and reawaken America to basic values. Otherwise a "Good Depression" will turn into a new "Great Depression."
Here are seven strong reasons favoring this alternative strategy:
1. Yes, an Honest Diagnosis: Soul Sickness in American Capitalism
America's problems are not the economy, not markets, nor even politics. The endless bickering campaign is distracting us from facing our real long-term problems. Yes, our economic pains are real, but they're just symptoms. Since 2000, America has seen a relentless, sickening overdose of bad news: stupidity, deceit, corruption and even evil behavior. Americans are n-u-m-b, suffering post-traumatic shock syndrome.
The real problem is our thinking, our brains -- something deep in our cosmic soul, says Jack Bogle's "The Battle for the Soul of Capitalism." We lost our values, our moral compass.
2. Yes, Time to Admit This Really Is Like the 1930's Great Depression
Comparing today with the Great Depression has become common sport. In a Newsweek special "Seeing Shades of the 1930s," Daniel Gross writes: 75 years ago "Wall Street, after two terms of a business-friendly Republican president, self-immolated on a pyre of greed, incompetence and excessive optimism."
Like Dr. Scott Peck says in "The Road Less Traveled:" "Life is a series of problems. Do we want to moan about them or solve them?" We need to grow up, stop whining, roll our sleeves up and solve real problems.
3. Yes, a Good Depression Would Reveal Self-Destruct Bubble-Thinking
In a recent Atlantic article "Irrational Exuberance" author Robert Shiller warns: "Bubbles are primarily social phenomena. Until we understand and address the psychology that fuels them, they're going to keep forming."
Housing inflated 85% in a decade: "Historically unprecedented ... no rational basis for it." Today there's a huge excess housing inventory, higher-credit mortgages are now in jeopardy, the write-offs are now projected at $2 trillion -- on top of a $3 trillion war, $10 trillion federal budget, and more.
Bubble-thinking is contagious; it will trigger a pandemic. Shiller says "few people seem immune to boom thinking. The recent bubble grew so large partly because the very people responsible for the financial system's oversight came to share the general public's rosy expectations."
Unfortunately our leaders are still ignoring the underlying problem: Nothing is being done about "our psychological vulnerability to bubble-thinking."
Shiller then warns of a new megameltdown: "We recently lived through two epidemics of excessive financial optimism. I believe we are close to a third episode, only this one will spread irrational pessimism and distrust -- not exuberance ... our economic problems will become much worse than they need to be, and our social problems will multiply."
4. Yes, a Good Depression Will Stir Outrage, Force Real Reforms
In a recent Wall Street Journal article, Jim Grant, Forbes columnist and respected editor of the Interest Rate Observer, framed his title as a question: "Why No Outrage?" Why? He notes: "Through history, outrageous financial behavior has been met with outrage. But today Wall Street's damaging recklessness has been met with near-silence, from a too tolerant populace."
Tolerant? No, n-u-m-b! "Human progress seems to be the likeliest culprit." Fear-driven, we prefer the devil we know to a new one. Yet while "Wall Street may be sweating to fill out this year's bonus pool," Grant worries that Wall Street will run "itself and the rest of the American financial system right over a cliff." A Good Depression brings outrage.
5. Yes, Good Depression Forces Wall Street to Think Outside the Box
In a great Bloomberg Markets feature, "No Easy Fix," we're told Wall Street's "profit formula has hit a wall ... Wall Street's money-making machine is broken and efforts to repair it after the biggest losses in history are likely to undermine profits for years to come."
Merrill Lynch is a good example: It is selling 615 million new shares, a 38% dilution, while hanging on to "$30.6 billion in crummy derivatives," says Dennis Berman in the Wall Street Journal. Merrill's stock is about half the 2004 price of $55. Merrill "needs to come up with $2.8 billion in new profit, not sales, to get back to its 2004 per share earnings levels. That's $43,000 in new profit for each of Merrill's 65,000 employees."
Unfortunately, Merrill's cash cows (off-balance sheet gimmicks, derivatives, repackaged asset-backed securitization) that made megabucks the past decade "have largely disappeared. That puts the burden on Merrill's old-line businesses -- brokerage, asset management and investment banking."
Solutions? Cut costs, steal market share or "gradually start to take on more risk on Merrill's trading desks, which produced the bulk of the $30 billion in losses the past 12 months."
Warning: Expect more desperate, high-risk and stupid moves: A new BusinessWeek report says Wall Street's already lobbying Congress to raid America's $2.3 trillion "pension honey pot." Warning: These are the same greed-is-good Gordon Gekkos that brought us the last two rapid-fire meltdowns. Stop them before they turn the next into a Great Depression.
6. Yes, a Good Depression Can Prevent America's Decline and Fall
In "The Price of Liberty: Paying for America's Wars," Robert Hormats, Goldman Sachs international vice chairman, traces America's wartime financing from the Revolutionary War to present. Today we're "relying on faith over experience, hoping that sustained growth will erase deficits and that the ballooning costs of Social Security, Medicare and Medicaid will be manageable in the coming decades without difficult reforms."
Former U.S. Comptroller General David Walker put it in more ominous terms: "There are striking similarities between America's current situation and that of another great power from the past: Rome." They fell for three reasons "worth remembering: declining moral values and political civility at home, an overconfident and overextended military in foreign lands, and fiscal irresponsibility by the central government."
And Pulitzer Prize winning geographer Jared Diamond takes an even broader historical view in "Collapse: How Societies Choose to Succeed or Fail:" Many "civilizations share a sharp curve of decline. Indeed, a society's demise may begin only a decade or two after it reaches its peak population, wealth and power." He draws historical parallels with America in the past decade.
Warning: Wall Street's next meltdown won't be a mere statistical recession. Our monetary system, our financial system and our tax base are burning out. Like our overextended military, we are handicapped in our ability to face new threats, much as were Rome, the Mayans and other great civilizations.
7. Yes, a Good Depression Will Shock America's Warring Soul
President Bush said he's a "war president." The American economy is a war economy driven by our warring soul. We spend 54% of the tax dollar on war, 47% of the world's total military spending. A half century ago President Eisenhower warned of this "military industrial complex" that's running America into bankruptcy.
Today, our economy thrives on war and disasters, generating such "spectacular profits that many people around the world" are convinced America's "rich and powerful must be deliberately causing catastrophes so that they can exploit them" says Naomi Klein in "Shock Doctrine."
Klein's snapshot of Wall Street's soul is disturbing: "An economic system that requires constant growth, while bucking almost all serious attempts at environmental regulation, generates a steady stream of disasters all on its own, whether military, economical or financial. The appetite for easy, short profits offered by purely speculative investment has turned the stock, currency and real estate markets into crisis-creation machines"
Pray for a Good Depression ... before they trigger another Great Depression.
2008年8月13日 星期三
2008年7月3日 星期四
Solution to Stagflation
Stagflation is a term describing an economy with both stagnation, which is basically recession and inflation at the same time.
It's a tricky situation for governments because the monetary tools available cannot solve both problems at the same time, and more so, using one tool to relieve the effects of one condition exacerbates the other.
Raising interest rates is believed to exacerbate stagnation, and the primary stagnation-fighting tool of lowering interest rates will exacerbate inflation.
According to Mr. Rodger Malcolm Mitchell, there is one, and only one, solution to stagflation which is to raise interest rates to cure inflation and increase deficit spending to cure stagnation.
Will the solution stated here be the course of action governments partake?
It's a tricky situation for governments because the monetary tools available cannot solve both problems at the same time, and more so, using one tool to relieve the effects of one condition exacerbates the other.
Raising interest rates is believed to exacerbate stagnation, and the primary stagnation-fighting tool of lowering interest rates will exacerbate inflation.
According to Mr. Rodger Malcolm Mitchell, there is one, and only one, solution to stagflation which is to raise interest rates to cure inflation and increase deficit spending to cure stagnation.
Will the solution stated here be the course of action governments partake?
2008年3月18日 星期二
Siew's Ideas Contradict KMT Policy
By Yang Wei-chung 楊偉中, translated by Angela Hong
As the debate over the "cross-strait common market" heats up, how the average citizen understands the issue is becoming important. Faced with public doubt, Chinese Nationalist Party (KMT) presidential candidate Ma Ying-jeou (馬英九) and his running mate, Vincent Siew (蕭萬長), have provided several basic responses.
First, the "cross-strait common market" is not their campaign platform. Second, the "cross-strait common market" focuses on economics, whereas the "one China market" is a political label. Last, they do not wish to open Taiwan to Chinese labor or agricultural products that are now banned.
But these arguments are dishonest and contradictory. The foreword, policy outline and action plan of the KMT's policy guidelines, passed during the 17th KMT National Congress in August 2005, all promote the "cross-strait common market." Would the KMT presidential candidate not implement the party's plans? If the guidelines passed by the highest authority of the KMT are empty words, how can we trust other promises of the party?
In Siew's book One Plus One is Two ? the Road Toward a Cross-Strait Common Market, he mentions the great political significance of such a market on page 17, debunking the explanation that the common market is limited to economic importance. On page 31, Siew claims that the "cross-strait common market" will become the foundational structure for the integration of cross-strait politics. He believes that Taiwan should participate in the peaceful rise of China.
On page 121, Siew says that economic partnership is the best starting point for peaceful cross-strait integration. Economic integration has various degrees. Why is the high-level goal of a common market the main policy objective?
Siew says on page 142 that only the emergence of a "cross-strait common market" can bring about total economic, social and political integration. To use the common market as the main strategy for cross-strait political integration is Siew's core concern. By claiming that the common market is purely economic, the pan-blue camp is contradicting itself.
On pages 144 and 152, Siew further emphasizes that the so-called "1992 consensus" must be accepted as the basis of negotiation for cross-strait economic integration. From this perspective, how is the Democratic Progressive Party's labeling of Siew's policy a "one China market" an insult?
The pan-blue camp's list of things that will not be open to China in a common market is also self-contradictory. In his book, Siew says on page 158 that the creation of a free-trade area and the progression toward a common market relies most importantly upon a series of policy and regulation adjustments, based on the free and liberal flow of goods, labor, funds, services, information and other production resources.
To achieve a common market, there needs to be intermediate stages -- such as establishing a free trade agreement (FTA) or a closer economic partnership agreement, as in the case between China and Hong Kong -- both of which involve the free flow of products and labor.
Siew is clearly aware of this, but he ignores the implications of the common market without providing any solutions to its possible problems. Is this the attitude of a responsible politician?
In the negotiations of the WTO or other FTAs, non-democratic and black-box procedures often draw heavy criticism from social rights groups. Ma and Siew have promised that future cross-strait negotiations will be transparent. However, though they have not yet been elected, and the negotiations have not yet begun, there are already a number of lies and contradictions. How can people believe their promises?
Narrow protectionist policies are of course not the final solution for average citizens. However, unlimited deregulation of trade and investment would also cause corresponding problems.
Faced with the "one China market" debate, we don't need lies or a war of words. We need honest politicians and active concern from the public to forge our own future with our own actions.
Yang Wei-chung is spokesman for the Third Society Party.
As the debate over the "cross-strait common market" heats up, how the average citizen understands the issue is becoming important. Faced with public doubt, Chinese Nationalist Party (KMT) presidential candidate Ma Ying-jeou (馬英九) and his running mate, Vincent Siew (蕭萬長), have provided several basic responses.
First, the "cross-strait common market" is not their campaign platform. Second, the "cross-strait common market" focuses on economics, whereas the "one China market" is a political label. Last, they do not wish to open Taiwan to Chinese labor or agricultural products that are now banned.
But these arguments are dishonest and contradictory. The foreword, policy outline and action plan of the KMT's policy guidelines, passed during the 17th KMT National Congress in August 2005, all promote the "cross-strait common market." Would the KMT presidential candidate not implement the party's plans? If the guidelines passed by the highest authority of the KMT are empty words, how can we trust other promises of the party?
In Siew's book One Plus One is Two ? the Road Toward a Cross-Strait Common Market, he mentions the great political significance of such a market on page 17, debunking the explanation that the common market is limited to economic importance. On page 31, Siew claims that the "cross-strait common market" will become the foundational structure for the integration of cross-strait politics. He believes that Taiwan should participate in the peaceful rise of China.
On page 121, Siew says that economic partnership is the best starting point for peaceful cross-strait integration. Economic integration has various degrees. Why is the high-level goal of a common market the main policy objective?
Siew says on page 142 that only the emergence of a "cross-strait common market" can bring about total economic, social and political integration. To use the common market as the main strategy for cross-strait political integration is Siew's core concern. By claiming that the common market is purely economic, the pan-blue camp is contradicting itself.
On pages 144 and 152, Siew further emphasizes that the so-called "1992 consensus" must be accepted as the basis of negotiation for cross-strait economic integration. From this perspective, how is the Democratic Progressive Party's labeling of Siew's policy a "one China market" an insult?
The pan-blue camp's list of things that will not be open to China in a common market is also self-contradictory. In his book, Siew says on page 158 that the creation of a free-trade area and the progression toward a common market relies most importantly upon a series of policy and regulation adjustments, based on the free and liberal flow of goods, labor, funds, services, information and other production resources.
To achieve a common market, there needs to be intermediate stages -- such as establishing a free trade agreement (FTA) or a closer economic partnership agreement, as in the case between China and Hong Kong -- both of which involve the free flow of products and labor.
Siew is clearly aware of this, but he ignores the implications of the common market without providing any solutions to its possible problems. Is this the attitude of a responsible politician?
In the negotiations of the WTO or other FTAs, non-democratic and black-box procedures often draw heavy criticism from social rights groups. Ma and Siew have promised that future cross-strait negotiations will be transparent. However, though they have not yet been elected, and the negotiations have not yet begun, there are already a number of lies and contradictions. How can people believe their promises?
Narrow protectionist policies are of course not the final solution for average citizens. However, unlimited deregulation of trade and investment would also cause corresponding problems.
Faced with the "one China market" debate, we don't need lies or a war of words. We need honest politicians and active concern from the public to forge our own future with our own actions.
Yang Wei-chung is spokesman for the Third Society Party.
2008年3月9日 星期日
KMT's Economic Ideas Lack Vision
By Lin Cho-shui 林濁水, translated by Eddy Chang
The Chinese Nationalist Party (KMT) looks over its decades of governing and the so-called "Taiwan miracle" -- the transformation into a strong economy and democracy -- and pats itself on the back.
It has an elitist attitude and deceives itself into believing Taiwan's success story was somehow all the result of its wisdom and foresight.
Based on that view, it has not changed its belief that such a regime is justified. It gives orders from the top and proposes projects with grandiose titles: the Asia-Pacific Regional Operations Center (APROC), an airline hub connecting Northeast and Southeast Asia; the dual purpose operations center for domestic and foreign enterprises; the "cross-strait common market," the global value-added services center; and the global innovation center.
The KMT has dominated the discussion of such issues. But ironically, in spite of a constant string of proposals and impressive project titles, its economic strategy boils down to one principle: complete reliance upon the US and China.
In the years before the KMT lost the presidential office, its economic policies focused on two areas: the development of the electronic information industry with a focus on manufacturing and the APROC.
The latter was a policy proposed by KMT vice presidential candidate Vincent Siew (蕭萬長) in 1995.
To bolster the electronics and information technology sectors, the KMT allowed the manufacturing industry to move operations abroad to gain cheaper access to land, capital and laborers. But the industry focused entirely on original equipment manufacturing of hardware, while the innovative integrated-circuit and software sectors, which focused on research and development, were grossly underestimated.
Companies working in these sectors had difficulty listing themselves on the stock market and gaining access to Hsinchu Science Park and were usually excluded from tax incentives.
The government's priorities back then resulted in an economic reliance on technology from upstream companies and orders from downstream companies. There was no effort to promote independent technologies or brands.
As for Siew's APROC, which was copied from Hong Kong, the KMT tried to used Taiwan's location to build a "greater China" economic zone.
KMT Vice Chairman Chiang Pin-kun (江丙坤) even suggested to the party's 2004 presidential candidate, former KMT chairman Lien Chan (連戰), that the government allow the entire manufacturing industry to move abroad.
The "greater China" approach was based on the erroneous judgment that the nation had gone from reliance on the US economy to reliance on the Chinese economy. To compete in the Chinese market, the argument went, Taiwan's manufacturing industry must have access to the same cheap Chinese laborers; the service industry must ape Hong Kong and focus on China; and Taiwan must serve as a door for China's imports and exports.
This is the approach that the KMT is promoting even today.
The Democratic Progressive Party (DPP) has a different vision for continued economic transformation. That vision is based on creating technology.
From building up brands to developing the service and cultural sectors, the nation's economy must seek its future in innovation. The key is research and development. Industries will gradually gain in independence by innovating and marketing their developments.
The economic policies offered by the DPP and KMT reflect the difference between independence and dependence. They represent two completely different economic maps for the growth of the nation's industries. They are the difference between looking over the horizon to create a global center for logistics and innovation or limiting Taiwan to a "greater China" economic zone.
Hong Kong is an excellent example. It is a door to the Chinese market and some have called it the hub of East Asia. But Hong Kong's success remains limited to taking advantage of its location. It has capitalized on its position to become what it is today, but failed to innovate and grow in other directions. Siew's vision is exactly this: Taiwan, another Asia-Pacific center.
There is no doubt that Siew is right in one aspect. The nation would be foolish not to take advantage of geography to grow. But Taiwan is more than the "city economy" that is Hong Kong. Taiwan has long had global ambitions. Instead of vying to compete within the region, the nation's economy needs to aim for competing globally. Our ambitions should be much higher than simply hoping China and other countries continue to transit their goods through here.
Taiwan and Hong Kong have taken different paths for centuries and should not start mirroring each other now. The pan-blue camp keeps warning against policies it labels as "isolationism," but its strategy would undermine the nation's strides as a global player and turn it into a regional player.
Lin Cho-shui is a former Democratic Progressive Party legislator.
The Chinese Nationalist Party (KMT) looks over its decades of governing and the so-called "Taiwan miracle" -- the transformation into a strong economy and democracy -- and pats itself on the back.
It has an elitist attitude and deceives itself into believing Taiwan's success story was somehow all the result of its wisdom and foresight.
Based on that view, it has not changed its belief that such a regime is justified. It gives orders from the top and proposes projects with grandiose titles: the Asia-Pacific Regional Operations Center (APROC), an airline hub connecting Northeast and Southeast Asia; the dual purpose operations center for domestic and foreign enterprises; the "cross-strait common market," the global value-added services center; and the global innovation center.
The KMT has dominated the discussion of such issues. But ironically, in spite of a constant string of proposals and impressive project titles, its economic strategy boils down to one principle: complete reliance upon the US and China.
In the years before the KMT lost the presidential office, its economic policies focused on two areas: the development of the electronic information industry with a focus on manufacturing and the APROC.
The latter was a policy proposed by KMT vice presidential candidate Vincent Siew (蕭萬長) in 1995.
To bolster the electronics and information technology sectors, the KMT allowed the manufacturing industry to move operations abroad to gain cheaper access to land, capital and laborers. But the industry focused entirely on original equipment manufacturing of hardware, while the innovative integrated-circuit and software sectors, which focused on research and development, were grossly underestimated.
Companies working in these sectors had difficulty listing themselves on the stock market and gaining access to Hsinchu Science Park and were usually excluded from tax incentives.
The government's priorities back then resulted in an economic reliance on technology from upstream companies and orders from downstream companies. There was no effort to promote independent technologies or brands.
As for Siew's APROC, which was copied from Hong Kong, the KMT tried to used Taiwan's location to build a "greater China" economic zone.
KMT Vice Chairman Chiang Pin-kun (江丙坤) even suggested to the party's 2004 presidential candidate, former KMT chairman Lien Chan (連戰), that the government allow the entire manufacturing industry to move abroad.
The "greater China" approach was based on the erroneous judgment that the nation had gone from reliance on the US economy to reliance on the Chinese economy. To compete in the Chinese market, the argument went, Taiwan's manufacturing industry must have access to the same cheap Chinese laborers; the service industry must ape Hong Kong and focus on China; and Taiwan must serve as a door for China's imports and exports.
This is the approach that the KMT is promoting even today.
The Democratic Progressive Party (DPP) has a different vision for continued economic transformation. That vision is based on creating technology.
From building up brands to developing the service and cultural sectors, the nation's economy must seek its future in innovation. The key is research and development. Industries will gradually gain in independence by innovating and marketing their developments.
The economic policies offered by the DPP and KMT reflect the difference between independence and dependence. They represent two completely different economic maps for the growth of the nation's industries. They are the difference between looking over the horizon to create a global center for logistics and innovation or limiting Taiwan to a "greater China" economic zone.
Hong Kong is an excellent example. It is a door to the Chinese market and some have called it the hub of East Asia. But Hong Kong's success remains limited to taking advantage of its location. It has capitalized on its position to become what it is today, but failed to innovate and grow in other directions. Siew's vision is exactly this: Taiwan, another Asia-Pacific center.
There is no doubt that Siew is right in one aspect. The nation would be foolish not to take advantage of geography to grow. But Taiwan is more than the "city economy" that is Hong Kong. Taiwan has long had global ambitions. Instead of vying to compete within the region, the nation's economy needs to aim for competing globally. Our ambitions should be much higher than simply hoping China and other countries continue to transit their goods through here.
Taiwan and Hong Kong have taken different paths for centuries and should not start mirroring each other now. The pan-blue camp keeps warning against policies it labels as "isolationism," but its strategy would undermine the nation's strides as a global player and turn it into a regional player.
Lin Cho-shui is a former Democratic Progressive Party legislator.
2008年3月4日 星期二
Bringing the Business Back Home
By Shen Chung-hua 沈中華, translated by Ted Yang
Attracting businesses based in China back to Taiwan to register on the domestic stock exchange has been a recurring issue for those concerned about the country's economic development.
Businesspeople's reluctance to return can be attributed not only to the fact that if they returned they would have to meet the 40 percent investment cap on China-bound investment, but also to several other factors.
The world's stock exchanges can be divided into two kinds based on their design. The first mainly works as a trading platform. Examples are Hong Kong, Singapore and the US. The main characteristic of this kind of exchange is that a company does not need to make a physical investment, such as opening a factory, or register with the stock exchange before it can raise capital.
This means that a company can operate in a place other than where it is listed. This includes financial holding companies that differentiate between the place of operations of daughter companies and the location where they are listed. This kind of exchange also allows companies to register at locations other than where they are listed.
Suppose that a financial holding company registered in the Cayman Islands has two subsidiaries, one in China and one in Vietnam. It can invest in Hong Kong, but not in Taiwan, because Hong Kong regulations allow for stock exchange listings, company registration and operations to take place at different locations.
The second kind of exchange requires a company to both invest and register in the country before it can be listed where it is domiciled.
This kind of exchange is investment-oriented. Regulations require that a company must have made physical investments two to three years prior to a stock exchange listing and also that it is registered in the same country -- paying taxes -- and makes a certain annual return on its investments every year before it can be listed on the exchange.
The result is that although the Taiwanese government's original goal was to convince Taiwanese businesspeople to list on the local market, in effect it is asking them to invest in Taiwan. The reasoning behind this is that if a company wants to come here to raise capital, it must first invest. The stock exchanges in Taiwan, China, Vietnam, Malaysia and Thailand all operate this way.
Taking a closer look, we can see that the design of financial centers in advanced countries lean toward the first kind -- providing a trading platform -- while those in developing countries tend to be investment-oriented, and there is a reason for that.
Platform-oriented stock exchanges simply provide a trading platform and make money from review fees to lawyers and accountants and high fees for listings and licenses.
Listing fees for the Hong Kong Stock Exchange can reach HK$20 million (US$2.6 million), but implicit costs are low since listed companies can have their operations at low-cost locations. Hong Kong thus welcomes foreign companies to raise capital there. After all, those who invest in the company are not necessarily from Hong Kong and it doesn't matter where the actual operations are located. The Hong Kong Stock Exchange focuses more on finance and less on manufacturing.
Although listing fees are lower on investment-oriented stock exchanges like Taiwan's, the implicit costs are high because a listed company cannot operate from a lower-cost location. The philosophy behind this is if a company wants to raise capital in a country, it should also invest in a factory, hire local people and decrease unemployment. This is a two-birds-with-one stone concept: listing on the exchange and promoting investment. The focus is on investment, though, and thus places more stress on manufacturing and less on the finance.
But this strategy only works when both the local tangible economy and the local financial economy attract investors, such as they did in Taiwan in 1989. This means that even if the cost for being listed on the Taipei Stock Exchange is low and the profit to earnings ratio and turnover are high, companies still have to invest in Taiwan for two years before they can be listed on the exchange. For many Taiwanese companies, this is very difficult.
Advocates of this system only consider the open cost of listing on the stock exchange while ignoring the implicit costs and thus fail to understand the reason why Taiwanese companies are not returning to be listed on the local stock exchange.
The root problem lies in whether we want Taiwanese companies to return to be listed on the stock exchange, or to both invest and be listed. If a company that does very well in Vietnam wishes to return to Taiwan to be listed on the stock exchange, it must have made a physical investments for two years before it can be listed. However, the reason why the company decided to invest in Vietnam in the first place was probably because Vietnamese labor costs were lower than those in Taiwan. With that incentive still in place, how can these companies be expected to return?
The answer is that the only way to succeed in killing two birds with one stone is to abandon that very strategy.
Taiwan's stock exchange wants to become a trading platform, but the Mainland Affairs Council, the Central Bank of China and the Ministry of Economic Affairs want it to be investment-oriented.
In order to attract China-based Taiwanese businesspeople to come back and be listed on the local stock exchange, or, even more ideally, to turn Taiwan into a financial hub, investment-oriented thinking should be abandoned for the trading platform concept. Hopefully this will happen soon.
Shen Chung-hua is a professor at National Taiwan University's Department of Finance.
Attracting businesses based in China back to Taiwan to register on the domestic stock exchange has been a recurring issue for those concerned about the country's economic development.
Businesspeople's reluctance to return can be attributed not only to the fact that if they returned they would have to meet the 40 percent investment cap on China-bound investment, but also to several other factors.
The world's stock exchanges can be divided into two kinds based on their design. The first mainly works as a trading platform. Examples are Hong Kong, Singapore and the US. The main characteristic of this kind of exchange is that a company does not need to make a physical investment, such as opening a factory, or register with the stock exchange before it can raise capital.
This means that a company can operate in a place other than where it is listed. This includes financial holding companies that differentiate between the place of operations of daughter companies and the location where they are listed. This kind of exchange also allows companies to register at locations other than where they are listed.
Suppose that a financial holding company registered in the Cayman Islands has two subsidiaries, one in China and one in Vietnam. It can invest in Hong Kong, but not in Taiwan, because Hong Kong regulations allow for stock exchange listings, company registration and operations to take place at different locations.
The second kind of exchange requires a company to both invest and register in the country before it can be listed where it is domiciled.
This kind of exchange is investment-oriented. Regulations require that a company must have made physical investments two to three years prior to a stock exchange listing and also that it is registered in the same country -- paying taxes -- and makes a certain annual return on its investments every year before it can be listed on the exchange.
The result is that although the Taiwanese government's original goal was to convince Taiwanese businesspeople to list on the local market, in effect it is asking them to invest in Taiwan. The reasoning behind this is that if a company wants to come here to raise capital, it must first invest. The stock exchanges in Taiwan, China, Vietnam, Malaysia and Thailand all operate this way.
Taking a closer look, we can see that the design of financial centers in advanced countries lean toward the first kind -- providing a trading platform -- while those in developing countries tend to be investment-oriented, and there is a reason for that.
Platform-oriented stock exchanges simply provide a trading platform and make money from review fees to lawyers and accountants and high fees for listings and licenses.
Listing fees for the Hong Kong Stock Exchange can reach HK$20 million (US$2.6 million), but implicit costs are low since listed companies can have their operations at low-cost locations. Hong Kong thus welcomes foreign companies to raise capital there. After all, those who invest in the company are not necessarily from Hong Kong and it doesn't matter where the actual operations are located. The Hong Kong Stock Exchange focuses more on finance and less on manufacturing.
Although listing fees are lower on investment-oriented stock exchanges like Taiwan's, the implicit costs are high because a listed company cannot operate from a lower-cost location. The philosophy behind this is if a company wants to raise capital in a country, it should also invest in a factory, hire local people and decrease unemployment. This is a two-birds-with-one stone concept: listing on the exchange and promoting investment. The focus is on investment, though, and thus places more stress on manufacturing and less on the finance.
But this strategy only works when both the local tangible economy and the local financial economy attract investors, such as they did in Taiwan in 1989. This means that even if the cost for being listed on the Taipei Stock Exchange is low and the profit to earnings ratio and turnover are high, companies still have to invest in Taiwan for two years before they can be listed on the exchange. For many Taiwanese companies, this is very difficult.
Advocates of this system only consider the open cost of listing on the stock exchange while ignoring the implicit costs and thus fail to understand the reason why Taiwanese companies are not returning to be listed on the local stock exchange.
The root problem lies in whether we want Taiwanese companies to return to be listed on the stock exchange, or to both invest and be listed. If a company that does very well in Vietnam wishes to return to Taiwan to be listed on the stock exchange, it must have made a physical investments for two years before it can be listed. However, the reason why the company decided to invest in Vietnam in the first place was probably because Vietnamese labor costs were lower than those in Taiwan. With that incentive still in place, how can these companies be expected to return?
The answer is that the only way to succeed in killing two birds with one stone is to abandon that very strategy.
Taiwan's stock exchange wants to become a trading platform, but the Mainland Affairs Council, the Central Bank of China and the Ministry of Economic Affairs want it to be investment-oriented.
In order to attract China-based Taiwanese businesspeople to come back and be listed on the local stock exchange, or, even more ideally, to turn Taiwan into a financial hub, investment-oriented thinking should be abandoned for the trading platform concept. Hopefully this will happen soon.
Shen Chung-hua is a professor at National Taiwan University's Department of Finance.
2008年2月12日 星期二
China Struggles to Avoid Past Mistakes in Controlling Food Prices
By Guy Newey
With food prices facing growing upward pressure, economists are using the term 'agflation' to refer to the country's soaring agricultural commodity prices
Rocketing food prices in China have sown deep concern among the communist leadership, ever wary of social unrest, as they fumble to control inflation without repeating past mistakes, analysts say.
Overall inflation in China is running at a 10-year high -- around 6.9 percent in November year-on-year, official statistics show.
Inflation is now being driven almost exclusively by increases in the price of food, in particular the staple meat, pork, which has spiked 60 percent year-on-year.
Prices have faced even greater upward pressure in recent weeks, as severe weather has crippled the country's transport system at the time demand is greatest, over Lunar New Year, the major annual holiday when millions of people return home.
A report by Credit Suisse said 10 percent of China's farming land has been affected by the extreme cold, and 1 percent could see a complete loss of crops and vegetables.
Price increases have been seen in food items ranging from cooking oil to apple juice, as China's growth and global demand creates what economists have dubbed "agflation" referring specifically to rises in prices of agricultural commodities.
Analysts say authorities in Beijing are becoming increasingly concerned about the prospect of food prices getting out of hand, but add that the problem is not yet approaching the levels that led to widespread popular dissatisfaction almost a decade ago.
"They [the central government] are increasingly nervous about it," said Andy Rothman, Shanghai-based China Macro-Strategist for CLSA. "But it is a long, long way from the inflation problems before 1989."
Last month, the National Development and Reform Commission announced tightened supervision of prices for grain, edible oils, meat, poultry, eggs, feed and other items in both wholesale and retail markets.
This followed the announcement in late December that from Jan. 1 the government would slap taxes ranging from 5 percent to 25 percent on exports of a range of products including wheat, corn, rice and soybeans to try and ensure stable food supplies at home.
The actions appeared to be stoked by memories of the widespread protests that resulted from the government's clumsy handling of food price controls that led to inflation of around 50 percent in the summer of 1988.
Public anger about inflation prompted the demonstrations that the following summer morphed into anti-government protests and the death at the hands of the army of hundreds, possibly thousands, of unarmed civilians in central Beijing.
"Most of the price rises were for staple foods, thereby causing the maximum economic pain to the maximum number of people," Joe Studwell wrote in his 2002 book The China Dream.
Vincent Chan, head of China research for Credit Suisse, cited another change in recent months, saying people were now expecting price rises, an often self-fulfilling situation that leads to even higher market prices.
"If you look at the statistics, then China's inflation problem is simply a food inflation problem," he said. "In the past, we have not really had a problem of inflation expectation, [but] this year we have already seen that. And that normally means that prices will rise."
Rothman said pork price inflation was only a short-term problem, and predicted prices will start to fall back later this year.
"This is a supply problem. In 2006, pork prices had a 10-year low. There was not any incentive for farmers to raise more pigs. This was made worse by blue-ear disease, which stopped supply when demand was rising," he said.
Rothman said although demand had risen by between 5 percent and 7 percent over the past few years, no sudden jump had provoked the current huge increases and that China's position as the world's biggest producer of pork meant it would be able to control supply.
The other major factor in Chinese inflation, cooking oil, was more complicated, he said, as 60 percent is imported.
"The major contributor to the rise is US ethanol policy and there is little the Chinese can do about that," he said.
Subsidies in the US have seen a major switch in land use to grow crops for fuel, rather than food, prompting worldwide increases in some staple foods.
The UN's Food and Agriculture Organization (FAO) said in its annual Food Outlook report that the US will increase its maize crop specifically for ethanol use by 50 percent this year, at the expense of acreage for other food crops, in particular wheat.
Wheat stocks are at their lowest level for 25 years, according to the FAO.
Maize, or corn, is the main crop used in grain-based ethanol. The Chinese government has said it will not grow crops for energy use.
Rothman said the price control announcements had been overplayed as CLSA had surveyed seven of the 12 companies the government had reportedly said would be subject to possible restrictions and found that none had received specific instructions.
"I think what they [Chinese authorities] are doing is what governments always do -- try and talk down inflation expectations," he said. "I think it is a clever move, whereas introducing price controls would be pretty stupid."
Nevertheless, the FAO said in October that China was expected to slash its exports of cereals from 7.7 million tonnes in 2006 and last year to 6.2 million tonnes last year and this year. At the same time it would probably increase imports to 10.1 million tonnes from 9.3 million tonnes.
Both imports and exports could be expected to rise in the wake of the recent weather disaster that could have an adverse medium-term impact on domestic output and supply.
China imported 32.2 million tonnes of oilcrops, including corn and soybeans, in 2006 and last year, which the FAO said was expected to rise to 37.3 million tonnes in 2007 to 2008, with exports expected to fall to 1.3 million tonnes from 1.5 million.
Rothman said there had been anecdotal evidence of subsidies to poor rural areas, which are the hardest hit by any price fluctuations, which if accurate could indicate the government's willingness to take action to keep a lid on food prices and prevent any hint of social unease.
With food prices facing growing upward pressure, economists are using the term 'agflation' to refer to the country's soaring agricultural commodity prices
Rocketing food prices in China have sown deep concern among the communist leadership, ever wary of social unrest, as they fumble to control inflation without repeating past mistakes, analysts say.
Overall inflation in China is running at a 10-year high -- around 6.9 percent in November year-on-year, official statistics show.
Inflation is now being driven almost exclusively by increases in the price of food, in particular the staple meat, pork, which has spiked 60 percent year-on-year.
Prices have faced even greater upward pressure in recent weeks, as severe weather has crippled the country's transport system at the time demand is greatest, over Lunar New Year, the major annual holiday when millions of people return home.
A report by Credit Suisse said 10 percent of China's farming land has been affected by the extreme cold, and 1 percent could see a complete loss of crops and vegetables.
Price increases have been seen in food items ranging from cooking oil to apple juice, as China's growth and global demand creates what economists have dubbed "agflation" referring specifically to rises in prices of agricultural commodities.
Analysts say authorities in Beijing are becoming increasingly concerned about the prospect of food prices getting out of hand, but add that the problem is not yet approaching the levels that led to widespread popular dissatisfaction almost a decade ago.
"They [the central government] are increasingly nervous about it," said Andy Rothman, Shanghai-based China Macro-Strategist for CLSA. "But it is a long, long way from the inflation problems before 1989."
Last month, the National Development and Reform Commission announced tightened supervision of prices for grain, edible oils, meat, poultry, eggs, feed and other items in both wholesale and retail markets.
This followed the announcement in late December that from Jan. 1 the government would slap taxes ranging from 5 percent to 25 percent on exports of a range of products including wheat, corn, rice and soybeans to try and ensure stable food supplies at home.
The actions appeared to be stoked by memories of the widespread protests that resulted from the government's clumsy handling of food price controls that led to inflation of around 50 percent in the summer of 1988.
Public anger about inflation prompted the demonstrations that the following summer morphed into anti-government protests and the death at the hands of the army of hundreds, possibly thousands, of unarmed civilians in central Beijing.
"Most of the price rises were for staple foods, thereby causing the maximum economic pain to the maximum number of people," Joe Studwell wrote in his 2002 book The China Dream.
Vincent Chan, head of China research for Credit Suisse, cited another change in recent months, saying people were now expecting price rises, an often self-fulfilling situation that leads to even higher market prices.
"If you look at the statistics, then China's inflation problem is simply a food inflation problem," he said. "In the past, we have not really had a problem of inflation expectation, [but] this year we have already seen that. And that normally means that prices will rise."
Rothman said pork price inflation was only a short-term problem, and predicted prices will start to fall back later this year.
"This is a supply problem. In 2006, pork prices had a 10-year low. There was not any incentive for farmers to raise more pigs. This was made worse by blue-ear disease, which stopped supply when demand was rising," he said.
Rothman said although demand had risen by between 5 percent and 7 percent over the past few years, no sudden jump had provoked the current huge increases and that China's position as the world's biggest producer of pork meant it would be able to control supply.
The other major factor in Chinese inflation, cooking oil, was more complicated, he said, as 60 percent is imported.
"The major contributor to the rise is US ethanol policy and there is little the Chinese can do about that," he said.
Subsidies in the US have seen a major switch in land use to grow crops for fuel, rather than food, prompting worldwide increases in some staple foods.
The UN's Food and Agriculture Organization (FAO) said in its annual Food Outlook report that the US will increase its maize crop specifically for ethanol use by 50 percent this year, at the expense of acreage for other food crops, in particular wheat.
Wheat stocks are at their lowest level for 25 years, according to the FAO.
Maize, or corn, is the main crop used in grain-based ethanol. The Chinese government has said it will not grow crops for energy use.
Rothman said the price control announcements had been overplayed as CLSA had surveyed seven of the 12 companies the government had reportedly said would be subject to possible restrictions and found that none had received specific instructions.
"I think what they [Chinese authorities] are doing is what governments always do -- try and talk down inflation expectations," he said. "I think it is a clever move, whereas introducing price controls would be pretty stupid."
Nevertheless, the FAO said in October that China was expected to slash its exports of cereals from 7.7 million tonnes in 2006 and last year to 6.2 million tonnes last year and this year. At the same time it would probably increase imports to 10.1 million tonnes from 9.3 million tonnes.
Both imports and exports could be expected to rise in the wake of the recent weather disaster that could have an adverse medium-term impact on domestic output and supply.
China imported 32.2 million tonnes of oilcrops, including corn and soybeans, in 2006 and last year, which the FAO said was expected to rise to 37.3 million tonnes in 2007 to 2008, with exports expected to fall to 1.3 million tonnes from 1.5 million.
Rothman said there had been anecdotal evidence of subsidies to poor rural areas, which are the hardest hit by any price fluctuations, which if accurate could indicate the government's willingness to take action to keep a lid on food prices and prevent any hint of social unease.
2008年1月7日 星期一
Economy, Geopolitics Guide Oil Price
Why are oil prices rising when the situation in Iraq seems to be improving, tensions with Iran appear to be easing and a mild late winter is expected in the US?
Now that the price of crude oil has crossed the psychologically important US$100-a-barrel threshold, and then retreated, what direction will it take next?
Many experts say it will go up, then down, and then maybe up again. That, anyway, has been the pattern of the last several years of volatile prices.
The arguments for even higher oil prices are well known. The economies of China and India are booming and hungry for energy. Oil fields in Mexico and the US are drying up, tightening world supplies. Venezuelan President Hugo Chavez is using oil as a political weapon. Rebels in Nigeria are creating havoc in some of Africa's most productive oil fields.
The war in Iraq rages on. The dollar is weakening, causing hedge funds and traders to flee to oil and other commodities as a safe haven.
But all those factors were in play last summer when the price fell to about US$60 a barrel, before it rallied at the end of the year. The price touched US$100 on Wednesday and surpassed that briefly on Thursday before retreating after the US government reported higher-than-expected heating oil and gasoline supplies. The price settled at US$99.18 a barrel, down 44 cents.
"Predicting oil prices continually demonstrates the perils of prophecy, because oil prices are the derivative of what happens in the global economy and global geopolitics," said Daniel Yergin, chairman of Cambridge Energy Research Associates. Yergin said he could foresee oil prices surging as high as US$150 in the next few years or falling as low as US$40.
John Richels, president of the Devon Energy Corp, an international oil and gas company based in Oklahoma City, said US$150 a barrel was possible, but so was US$55.
"We have to make investments based on our outlook over a long period of time," he said. "It is tough."
Central to the question of where oil prices will go is the effect of high prices on the consumption and development of alternative fuels.
Large amounts of public and private investment are going into solar, wind and biofuel development, but so far they are making only a slight contribution to energy supplies. Scientific and engineering leaps, like developing the atomic bomb or sending a man to the moon, can be made relatively quickly, but they are still measured in years.
Until now, most economists have been surprised that the steady rise in oil prices -- from as low as US$11 less than a decade ago -- has not had a greater effect on US consumers. But with oil prices rising at an increasingly rapid rate over the last few months in conjunction with the housing market slump and credit squeeze, many economists wonder whether oil prices could tip the economy into a recession.
A recession, of course, would curb oil demand. That would push oil prices right back down again, or so the theory goes, as fewer consumers drive to the mall, companies produce and ship less and world trade slows.
"If we are slowing down, we will not be buying as much goods from China and services from India," said Addison Armstrong, director for market research at Tradition Energy, an energy broker that deals with banks and hedge funds.
"My forecast for 2008 is that crude prices will average US$75 a barrel, and that is based on a scenario of a slowing economy in the United States," he said.
But Armstrong and other experts cautioned that a protracted insurgency in Nigeria, a punishing hurricane season or other unpredictable events could take oil prices up.
So why are oil prices going up now? The military situation in Iraq is arguably improving, and Iraqi oil exports are beginning to flow again. Tensions with Iran have eased a bit. There are forecasts for a mild late winter in the US, which should help bolster oil and gasoline inventories going into the spring and summer driving season.
Many experts say the answer lies in the investment decisions of traders and hedge funds. With the markets in equities, housing, credit and currency shaky in the US, traders are betting on oil and other commodities as a perceived safe haven.
Phil Flynn, a vice president and market analyst with the Alaron Trading Corp in Chicago, said the recent interest rate cuts by the Federal Reserve had underscored for traders the depths of the country's economic risks and led them to buy oil futures.
Flynn said he thought that oil prices were more likely to fall than rise, "because I think the factors that drove us to today are unlikely to repeat in 2008."
He added that he thinks the dollar will find a bottom this year and that the problems in housing are already priced into the markets.
But most experts say that if oil prices do go down, they will probably not go down very far or for very long.
Richels of Devon Energy said that consumers in Europe and Japan were not feeling the same pressure as Americans because their currencies have been strengthening and not weakening.
"There is still a lot of demand that is outside of the United States," Richels said. "There is increasing oil consumption, particularly in the developing nations, and oil is getting more difficult to find."
NY TIMES NEWS SERVICE, NEW YORK
Now that the price of crude oil has crossed the psychologically important US$100-a-barrel threshold, and then retreated, what direction will it take next?
Many experts say it will go up, then down, and then maybe up again. That, anyway, has been the pattern of the last several years of volatile prices.
The arguments for even higher oil prices are well known. The economies of China and India are booming and hungry for energy. Oil fields in Mexico and the US are drying up, tightening world supplies. Venezuelan President Hugo Chavez is using oil as a political weapon. Rebels in Nigeria are creating havoc in some of Africa's most productive oil fields.
The war in Iraq rages on. The dollar is weakening, causing hedge funds and traders to flee to oil and other commodities as a safe haven.
But all those factors were in play last summer when the price fell to about US$60 a barrel, before it rallied at the end of the year. The price touched US$100 on Wednesday and surpassed that briefly on Thursday before retreating after the US government reported higher-than-expected heating oil and gasoline supplies. The price settled at US$99.18 a barrel, down 44 cents.
"Predicting oil prices continually demonstrates the perils of prophecy, because oil prices are the derivative of what happens in the global economy and global geopolitics," said Daniel Yergin, chairman of Cambridge Energy Research Associates. Yergin said he could foresee oil prices surging as high as US$150 in the next few years or falling as low as US$40.
John Richels, president of the Devon Energy Corp, an international oil and gas company based in Oklahoma City, said US$150 a barrel was possible, but so was US$55.
"We have to make investments based on our outlook over a long period of time," he said. "It is tough."
Central to the question of where oil prices will go is the effect of high prices on the consumption and development of alternative fuels.
Large amounts of public and private investment are going into solar, wind and biofuel development, but so far they are making only a slight contribution to energy supplies. Scientific and engineering leaps, like developing the atomic bomb or sending a man to the moon, can be made relatively quickly, but they are still measured in years.
Until now, most economists have been surprised that the steady rise in oil prices -- from as low as US$11 less than a decade ago -- has not had a greater effect on US consumers. But with oil prices rising at an increasingly rapid rate over the last few months in conjunction with the housing market slump and credit squeeze, many economists wonder whether oil prices could tip the economy into a recession.
A recession, of course, would curb oil demand. That would push oil prices right back down again, or so the theory goes, as fewer consumers drive to the mall, companies produce and ship less and world trade slows.
"If we are slowing down, we will not be buying as much goods from China and services from India," said Addison Armstrong, director for market research at Tradition Energy, an energy broker that deals with banks and hedge funds.
"My forecast for 2008 is that crude prices will average US$75 a barrel, and that is based on a scenario of a slowing economy in the United States," he said.
But Armstrong and other experts cautioned that a protracted insurgency in Nigeria, a punishing hurricane season or other unpredictable events could take oil prices up.
So why are oil prices going up now? The military situation in Iraq is arguably improving, and Iraqi oil exports are beginning to flow again. Tensions with Iran have eased a bit. There are forecasts for a mild late winter in the US, which should help bolster oil and gasoline inventories going into the spring and summer driving season.
Many experts say the answer lies in the investment decisions of traders and hedge funds. With the markets in equities, housing, credit and currency shaky in the US, traders are betting on oil and other commodities as a perceived safe haven.
Phil Flynn, a vice president and market analyst with the Alaron Trading Corp in Chicago, said the recent interest rate cuts by the Federal Reserve had underscored for traders the depths of the country's economic risks and led them to buy oil futures.
Flynn said he thought that oil prices were more likely to fall than rise, "because I think the factors that drove us to today are unlikely to repeat in 2008."
He added that he thinks the dollar will find a bottom this year and that the problems in housing are already priced into the markets.
But most experts say that if oil prices do go down, they will probably not go down very far or for very long.
Richels of Devon Energy said that consumers in Europe and Japan were not feeling the same pressure as Americans because their currencies have been strengthening and not weakening.
"There is still a lot of demand that is outside of the United States," Richels said. "There is increasing oil consumption, particularly in the developing nations, and oil is getting more difficult to find."
NY TIMES NEWS SERVICE, NEW YORK
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