Showing posts with label global capital. Show all posts
Showing posts with label global capital. Show all posts

Tuesday, September 21, 2010

Global Capital 6: Asian Capitalism Inching Up

A London-based financial think tank, Z/Yen Group, released its Global Financial Centers Index (GFCI) 8 recently. The top 10 financial centers and their ranking are below. Numbers in parenthesis represent their rating as of September 2010:
1. London (772)
2. New York (770)
3. Hong Kong (760)
4. Singapore (728)
5. Tokyo (697)
6. Shanghai (693)
7. Chicago (678)
8. Zurich (669)
9. Geneva (661)
10. Sydney (660)

In the GFCI7 released last March 2010 or just six months ago, Hong Kong's rating was only 739 while London and New York's ratings were tied at 775.

If current trend will continue, Hong Kong will overtake both London and New York by March 2011 in the GFCI 9.

Nonetheless, it's worth noting how 4 of the top 10 global financial centers are Asians. Shenzen and Seoul should not be far behind. Also New Delhi maybe.

The Philippines should learn from Hong Kong and Singapore capitalism. The important factor for these two dynamic economies is the low bureaucracies being imposed by their respective governments in businesses locating in their soil. Well, at least relative to the business bureaucracies imposed in other countries.

Filipino politicians and government bureaucrats should understand and appreciate that it is entrepreneurship and capitalism that creates jobs, that produce various goods and services in society -- from google and facebook to laptops and restaurants. It's not the state nor the bureaucracy.

Two related papers I wrote:

(1) World's Biggest Banks 2009

July 02, 2010

Despite the recent global financial turmoil, American banks are still the biggest in the world. Here's the chart from The Economist, July 1st 2010:

Some sectors may argue that this was made possible by US government bail-out of some of those biggest banks, implying that US capitalism was saved by the US government.

Not correct. Not all banks in this list wobbled recently and for those that wobbled, not all of them got huge bail-out money from the US government -- or from their respective governments.

Corporate and banking expansion and bankruptcies are 100 percent part of capitalism. Government bail-outs will only encourage some irresponsible behavior from some of those big banks. Their warranty is that they are "too big to fail." Government bail-outs, therefore, is wrong and must not be used again.

(2) Market Market, Free Market

September 02, 2010

A Filipino friend, Tos A., posted "Fun snaps around the world" and among the photos there was this one from Toronto, Canada, during the last G20 meeting about 2 months ago. Tos called it "Solutions to market failure?" And I replied, "Wrong title Tos, it should be "Solutions to government failure." And perhaps a more appropriate title will be "Beerhouse solution to government failure."

Here's another picture that Tos showed, from Quito. Right on! I like the name of that shop!! :-) In a free market, there is zero coercion. Sellers and buyers meet each other. If they do not agree to the price, the seller keeps his goods and services, the buyer keeps his money. One simply walks away until he/she finds the right seller or buyer and a transaction is made.

Here in Manila, we have a big mall with a similar name -- Market! Market! It's in Fort Bonifacio Global City, in Taguig City.

Market-market is just the English term for the Filipino variety shops called "Tiangge-tiangge". Deep bargain seekers flock to tiangge-tiangge shops as there are lots of choices, from clothes to jeans to shoes to electronic gadgets to food and drinks, and so on.

Sellers meet buyers. Producers meet consumers. Bargain hunters meet bargain traders. Zero coercion, zero forced collectivism, and there is order in society. There is a market for everyone, from the rich to the poor.

That's the beauty of free market capitalism.

See also:

Global Capital 1: Why Market Turbulence are Necessary, November 19, 2007
Global Capital 2: ICT, Capitalism and Government, December 18, 2008
Global Capital 3: Service Charges and Capitalism, October 25, 2009
Global Capital 4: Facebook, Capitalism and Liberty, February 09, 2010
Global Capital 5: Cars, Mobility and Capitalism, May 29, 2010

Saturday, May 29, 2010

Global Capital 5: Cars, Mobility and Capitalism

(Note: These are my last notes a few hours before I leave Houston last May 23, then fly to Atlanta, for my Atlanta-Narita-Manila trip. It's also posted in

HOUSTON, TEXAS – Cars and faster mobility of people are among the clear examples of the success of capitalism in improving the lives of the people. Various car manufacturers from around the world compete for customer satisfaction, pushing all of them to produce better quality (based on the specific needs of each motorist) cars at more competitive prices.

The huge price differential of the same car model by the same manufacturer across countries can be explained mainly by the (a) cost of manufacturing and/or transportation of said cars in various countries, and (b) the level of taxes, fees and bribery, if any, imposed by governments in each country. Thus, while cars are generally cheap relative to the annual income of an average worker in the US and other industrialized countries, cars can be expensive and unaffordable to average workers in the Philippines and other developing economies.

I have been to the US several times the past three years to attend various conferences in various cities, then make short side trips to visit Filipino friends. What is noticeable here is the absence of public land transportation in the suburbs, except for a few trips by Greyhound buses and Amtrak (buses-trains). The city buses, trams and trains are found only in big cities. In the suburbs and small cities, they are nowhere to be found. Workers, visitors, students and household members drive their cars to their various destinations. A few ride big motorbikes but no one seems to be walking.

For some rich guys, they are buying huge cars like vans, SUVs and trucks. And much richer guys are buying those long and luxurious limousine cars.

The US government – federal and local – construct so many roads to almost anywhere. The wide roads, expressways and road interchanges seem to be full of cars everyday. Coming from the Philippines where there are millions of jeepneys, tricycles, taxis and buses, the sight of so many cars on the highways everyday – except on winter and during heavy snow, of course – do not fail to amaze me until now.

And not only in highways, the coastal cities in the west, east and southern coasts also have plenty of boats and yachts. Like the wharves in Kemah, Houston, full of so many boats. And not to mention the tens of thousands of commercial and private planes in so many airports around the US.

These sights could have prodded Mr. Al Gore, officials of the UN IPCC, environmentalist groups and NGOs, and some big banks and corporations, to push for more environmental regulations and taxation. There are just too much money to be collected when millions upon millions of motorists in the US alone are forced to pay higher gasoline and electricity prices and taxes. Thus, climate science has to be politicized whenever possible, similar to politicizing the setting of wages, fares, rentals and prices of other goods and services. The goal is to paint modernization and huge car use and ownership in many places around the world as “causing global warming and destroying the planet” and hence, as an evil thing. Thus, governments (the UN, various foreign aid bodies, national and local governments) and environmentalist groups should step in to restrict heavy cars and electricity use. And the mechanism to do that is through a carbon cap and tax measure.

Many people have glorified the “death or near-death of capitalism” in the US and many parts of the world as a result of the global financial turmoil of 2008-09. We may add that capitalism has “died” many times before – during WW1, during the Great Depression, during WW2, during the global oil crisis of the 70s, the global stockmarket collapse of 1987 and 2008-09. The problem, however, is that capitalism is “reborn” as soon as it is assumed to have already died and collapsed.

What the world needs now, the developing countries especially, is to have more economic growth, more modernization, more competitive capitalism, and to have faster mobility of people, goods and services across cities, countries and continents. This way, more jobs will be created, which reduces poverty and unemployment around the world.

People should not fall into the trap of believing that more government regulations and taxation, of having ever bigger and expanding governments, of reviving socialism, is the answer to the continuing scourge of high unemployment and poverty.

See also:

Global Capital 1: Why Market Turbulence are Necessary, November 19, 2007
Global Capital 2: ICT, Capitalism and Government, December 18, 2008
Global Capital 3: Service Charges and Capitalism, October 25, 2009
Global Capital 4: Facebook, Capitalism and Liberty, February 09, 2010

Tuesday, February 09, 2010

Global Capital 4: Facebook, Capitalism and Liberty

Last August 10, 2009, I wrote and posted this::

Facebook, Google, Yahoo and other free web and social networking services, are among the best examples of the free market system and individual liberty. Zero tax money, zero government borrowings, and no State bureaucracy to create and sustain them....

A Filipina friend now based in UK, Antonia Hopkinson, made these comments (she gave me permission to post her comments here):

"Facebook and liberty...I think you have forgotten the famous econ adage 'there is such thing as free lunch'...

"Actually joining FB and other social networking websites is actually not exchange for the free use we are actually giving them our personal details which they can sell to companies or use to create new products...have you noticed the applications available in FB such as farmville? information we give in the net and patterns of use is also being used to profile us in creating new commodities. 

"its so unfortunate that we fell on the trap of voluntarily giving our personal details disguised as liberty. in the west not only companies benefit from our personal details but aso fraudsters and identity theives." 

Yes, no such thing as a free lunch. But I think people, me included, enter into this networking voluntarily, and can get out or unsubscribe anytime. As long as there is perceived net advantage (advantages are larger than disadvantages), people will stay. When an individual perceives there is net disadvantage, then it is time to get out. So there is fair game there.

Compare that in government, even if our Mayor or Governor or Cong. or President is/are the most corrupt guys around, we still have to sustain them against our will. Zero voluntary arrangement there, unless one will become too radical and call for another "people power" revolution, local or national.

Antonia made another comment. She wrote, 

"Free sites in the web have their own machination to entice people to join to achieve their motive. i remember ebay used to be free. once it got all the information of people buying and selling in its site it gradually introduce fees. now it is very expensive and people dont even realise it. they have been conditioned it's free and even introduced paypal as the only method people could use to pay in the guise that they are protecting the safety of their memebers. but sellers has to pay 10% to take the money buyer had paid out on top of the 10% commission ebay charges from the sale of the item. then there are fees for photos and other special features. 

"It is also very hard now for other businesses to compete with ebay as people have been hooked to ebay now."

On "being hooked", I think it's the same with SM malls here all over the country. Food and shops at SM are not cheap, except when there are bargains, but people still flock to their malls with or without bargains. There are other big malls by big corporations that offer competition to SM malls. There is market competition.

Between being hooked with something (ebay, facebook, SM, a cell phone brand, etc.) and not being hooked due to absence of stable or reliable competitors, many people choose the former.

I wrote this last September 22, 2009:

Facebook and Youtube Capitalism

A friend in facebook posted this trailer,

TRAILER: Michael Moore's 'Capitalism: A Love Story' - OPENS NATIONWIDE OCTOBER 2nd!

There’s a caption after the trailer, "It's a crime story. But it's also a war story about class warfare. And a vampire movie, with the upper 1 percent feeding off the rest of us. And, of course, it's also a love story. ...”

I commented on my friend’s wall, "Hi, facebook and youtube are a product of capitalism. Also google, yahoo, iphone, starbucks. We all have a love story with facebook here and facebook capitalism.” My friend commented, “hahaha, nonoy, so true.”

I think we should be thankful of capitalism. It depends on pure, voluntary exchange. Youtube, facebook, google, etc. go the extra mile to give excellent services at zero financial cost to us, and still they make big money somewhere. They get the money they wish for, we get the social networking we wish for. There are terms in joining the social networking, zero registration or joining fee, people accept it. Zero taxation and coercion, zero bureaucracies involved.

A guy satirically commented, “thank you capitalism”. I know him, he’s a leader of an anti-globalization, anti-capitalism movement. And Michael Moore’s movie is indeed critical of capitalism. I think Moore is critical of big government capitalism (like Mr. Bush and Mr. Obama administrations), like the recent bail-out capitalism, and not really of competitive capitalism.

Once competitive capitalism is severaly weakened, State capitalism aka socialism, will set in. But the break up of the former USSR, the fall of the Berlin Wall 2 decades ago, are proof that socialism is wrong.

We should be thankful also of airline capitalism. For both jet-setter pro-globalists and jet-setter anti-globalists. Also ipod and iphone capitalism, disneyland capitalism,... :-)

See also:
Global Capital 1: Why Market Turbulence are Necessary, November 19, 2007
Global Capital 2: ICT, Capitalism and Government, December 18, 2008
Global Capital 3: Service Charges and Capitalism, October 25, 2009

Sunday, October 25, 2009

Global Capital 3: Service Charges and Capitalism

Consumers are king. This is the most important motto for most or all enterprises operating in a competitive business environment. Consumers therefore, have the vested interest to keep the economy as competitive as possible. Once the economy falls into an oligopolistic, if not monopolistic structure, consumers fall from grace. They no longer are the king. They become slaves.

A friend asked, if the service charge of 10 percent of the bill in restaurants is legal. Since there is a mandatory 12 percent value added tax (VAT) imposed by the government, having a 10 percent additional service charge makes the cost of meals in good restaurants become 22 percent more expensive.

I think the 10 percent service charge is legal. It is the restaurant's way of saying, "We are keeping the cost of our meals cheaper by cutting some salaries of our staff. But our staff are efficient, hardworking, polite and friendly, they need to be rewarded with some tip to augment their income. So we are passing the cost of such additional cost to you. Thank you."

Now this might seem an imposition without consultation, on the consumers and restaurant clients. Not exactly. If customers do not like this policy , then they can opt not to go to those restaurants, and look for other good food outlets which do not have mandatory service charge, a customer may or may not give a tip. And there are plenty of restaurants that practice this policy too. So it is additional competition among food outlets to attract more customers.

This makes competitive and free market capitalism beautiful, no matter what the anti-capitalists and the statists would say. Competitive capitalism allows one important factor that socialism or heavy regulation economies don't have: choice. Consumer choices. Lots of it.

The 10-percent higher cost of one’s food bill in a restaurant due to the service charge, the customers get value for that -- good service right there and then by efficient, smiling, and friendly waiters/waitresses. The latter perfectly know that if they do not smile and be polite to their customers, they may not see said customers again next time, they may even tell their friends not to patronize their restaurant because waiters and waitresses just collect service charges and they do not even know how to smile, how to be polite to their customers. So the restaurant will lose money, and later, waiters/waitresses will lose their job. So the mandatory or voluntary tip of 10 percent you give, you get clear, explicit additional service.

It's the 12 percent VAT that has no clear, explicit service to you. Some of the taxes you pay on VAT may go back to you in the form of street lighting or road maintenance, and some of it will simply be stolen, or be used for wasteful spending by the politicians and government officials.

For competitive capitalism to flourish, there should be few and low taxes. Not zero taxes. But few and low taxes. Not having 47 different taxes (and fees) that medium size companies are required, obliged, coerced, to pay to the government (local, national) every single year (WB-IFC "Doing Business" and WB-PWC "Paying Taxes" annual reports).

The hotel industry is another example of an industry under intense capitalist competition. Travelers and tourists can choose a variety of hotels and inns, depending on their budget and other personal or professional considerations. From backpacker type of small rooms, no frills but very cheap, to the most gallant, most elaborate architectural design, and very expensive rooms and other service charges.

I stay in hotels only when I attend international conferences and/or meetings abroad. So far this year, I have traveled four times, twice to Singapore and twice to the US (NY and LA), and consequently, stayed in 4 different hotels. My sponsors, all fellow free market think tanks and institutes that receive zero government funding (local or national government or foreign aid), pay for my plane fare and hotel accommodations.

What amaze me in those hotels is their uniqueness, the variety of their exterior and interior designs, their lobbies and swimming pools, and so on. But despite such variety of physical designs and amenities, there is one single common trait among them: the politeness of their staff, the quick and efficient services. These are hotels under certain global chains and hence, they compete for global visitors in a stiff global competition. Any dissatisfied hotel guest can always move to another hotel the next time they visit the same city. Or write something negative about their hotel which will then be posted in the internet and be made available to anyone who happens to stumble on such posting.

It is this fear of any negative publicity (and the desire for optimum customer satisfaction), whether in traditional media or in the blogosphere, that keeps those hotels – and restaurants, airlines, banks, spas, etc. – on their toes always. There is very little room for complacency and lousiness.

And we go back to the earlier observation on restaurant service charges. It is the rawness of capitalist competition that results in better services to the consumers, and competitive and rational prices. Price differentiation for different services for different people with different needs is one characteristic of competitive capitalism.

Next month, I will go back to the US for the third time this year, to participate in an international conference by a free market institute, to celebrate the fall of the Berlin Wall 20 years ago, one of the symbols of the failed socialist economic central planning and political prosecution, and to discuss the new walls erected by big governments around the world, including the Philippine government, in perpetuating old coercive regulations and taxations and in creating new ones.

The not-yet-over-the-brink economic difficulties due to the recent global financial turmoil, is often used by the anti-capitalist groups and people, to criticize the “evils and irrationality” of free market capitalism. But they do not realize that it is precisely free market capitalism that penalized personal and corporate irresponsibility. Capitalism without failure is like religion without sin. Corporate expansion and corporate bankruptcy are 100 percent part of capitalism and the competition that is inherent in it.

It is those attempts and various government regulations that claim to “prevent” future crisis that distort the natural system of reward and punishment in capitalist competition. The forthcoming elections in the country just 6 ½ months from now is a good opportunity for the various political parties competing for voters’ support, to distinguish themselves from others. Political competition based on clear ideology of supporting or discouraging personal responsibility, of abetting or dampening more government intrusion and taxation.

Voters need not listen to political pundits and other self-styling political analysts and commentators. Voters only need to look at their community if there is enough freedom and choices for them as consumers. Absence or insufficient level of choices and competition for their basic needs should be an indicator for them to support one or two particular political parties or candidates that advance a more competitive economy.

Last October 06, 2009, I wrote this.

Miscellaneous Economic Views

A friend in our economics alumni ygroups asked about our "economic crystal ball". I offered the following quickie comments.

On the Philippine peso appreciation, the US$ is suffering an endless beating, thanks to trillion dollars annual budget deficit of the federal government alone, and nearly 14 trillion public debt. The trend is there: the US government is spending like any irresponsible guy who spends more than what he earns, every single year for many years and decades, and just relies on endless borrowings to finance its irresponsible spending and lifestyle. So the days of huge debt payment are always with it.

Last year, migration of $ investments, many went to buy petroleum and related commodities. This year, the net "attractive" commodity is gold, reaching almost $1,100 a pound (or has it breached this level already?).

More people will be dumping the US$ in the coming days and years, causing it to depreciate and other currencies traded or exchanged with it (like the PhP) to appreciate, even if the economic fundamentals of the countries of those other currencies are not exactly good and improving. That is, even if the Gloria Arroyo government is corrupt and wallowing in various robbery scandals, and the next administration that will succeed her government will also corrupt and a theft, the peso can still appreciate.

The budget deficit will always remain high, with or without "Ondoy", "Pepeng" and other succeeding typhoons. The current administration will only worry about its spending and patronage, this year until early next year. Then it will leave the problem to the next administration. And the next admin will likely think too, "Heck, my government is paying for the debt, profligacy and robbery of the past administration. I might as well over-borrow also and let the next admin worry about my newly contracted debt and borrowings."

About effect on food production of the recent big typhoons, no doubt the effect is negative.
a) those to-be-harvested rice, many of those are gone and felled by heavy flooding, can no longer be harvested.
b) those already-harvested rice (before typhoons Ondoy and Pepeng came), the persistent cloudy skies disable rice farmers to sun-dry their harvest. A few days delay in removing the moisture content on newly harvested palay will result in blackening of the palay, affecting negatively it's color, taste and price

One quick solution is to abolish import tariff (currently around 50% I think, beyond quota level) and bring in cheaper rice from Thailand and Vietnam to come in quick. Government always asks the public to sacrifice, but government is always an arrogant and hypocrite institution that does not want to sacrifice by waiving any tax on essential commodities (rice, medicines, etc.), that contributes to their more expensive price. Time for the government to reduce its arrogance and hypocrisy.

So, will the economy "recover"? In the first place, the economy is never down. Some sectors are sputtering, but others are humming with activities and increased production.

But one shackle that will hound the country is the persistent call to "prepare for global warming and climate change". Global cooling is staring us in our faces and yet we prepare personal and government resources waiting for drought and warmer days and years. The government is evern creating new climate bureaucracies -- funded by tax money, where else -- like the Presidential adviser/consultant on climate change, and soon, a climate change commission to be created by Congress.

One result of this voodoo science thinking, is that energy policies are biased against cheap energy sources (like coal) in favor of "renewables" which may even get subsidies from our tax money even if they produce very little power. Also, it is possible that in the future, the government will increase the tax on oil -- like a WB Manila proposal to hike the current P4.50/liter excise tax on gasoline, to help plug the deficit and help "fight global warming".

One consequence will be another spate of brownouts. What production increase and economic growth can we expect if we depend on candles and expensive generator sets for our electricity?

* See also 
Global Capital 1: Why Market Turbulence are Necessary, November 19, 2007
Global Capital 2: ICT, Capitalism and Government, December 18, 2008

Thursday, December 18, 2008

Global Capital 2: ICT, Capitalism and Government

A friend's yahoo email add was hacked, the hacker or virus was able to get into his address directory, and a message announcing or promoting a particular product and website was sent to everyone in his address directory. What's worse, he lost many of the contacts in his directory. Another friend commented that he's using Linux to protect himself from those undesirable hackers and/or viruses. He mentoned one Linux product or derivative, Kubuntu.

I only hear about Linux, but I haven't tried it yet, or too lazy to try my hand in learning those softwares and IT systems. Just a typical user of whatever is user-friendly, reliable, cheap or freely available.

Kubuntu sounds like an African term or village. Nonetheless, innovations like Kubuntu and its cousins or distant relatives, are all products of capitalism and its subversive nature of trying to knock down the complacent and irresponsible, anytime and anyday of the year.

Yahoo, google, yahoogroups, googlegroups, blogger, facebook, friendster, multiply, Linux, etc., are all products of capitalism too and the continuing innovations inherent to it. These are all free products and services, freely available to the people who wish to use them anytime and anywhere, so long as they have access to the internet. And somehow the capitalists, the inventors of those IT systems are making money somewhere. Zero coercion, zero taxation, zero bureaucracy, but there are free services and millions or billions of $ of income to the inventors. That's the "magic" of capitalism.

And capitalism is being ridiculed by many people who so love government regulations, if not socialism. They even herald the "demise" of capitalism with the current global financial turmoil as the single biggest proof for their claim. But it's not the "crisis" of capitalism. Capitalism is simply removing and culling the complacent and irresponsible among its players. The current turmoil is market self-correction to remove the excesses and abuses in the market. It's a healthy process over the long term, though there are pains in the short-term, the same way that there were unjustied gains in the past as a result of those excesses.

Oeople are rationale by nature. If they lose their jobs in this particular industry and company, there is nothing that can stop them from trying another job or another career in another industry, in another company, in another region or country and continent, using another technology and management style, etc. There are always options and alternatives, provided people and markets are allowed to make adjustments freely, and not curtailed by endless regulations and restrictions to mobility.

In the coming months and years, more versions of kubuntu and other derivative products of Linux or competitors by the latter, will be made available to the people around the world, freely or cheaply. Because capitalism never rests. It's a dangerous virus that can cripple the less innovative players by understanding the needs and whims of the people, the consumers around the world, and supplying such changing needs and whims.

Related Papers that I wrote,

(1) ICT and Government

December 03, 2008

Today, I was one of five speakers in the "Congress briefing on the Global IT industry" held at Edsa Shangrila Hotel. The event was sponsored by the Computing Technology Industry Association (CompTIA). All the 4 speakers were industry players, I was the only "outlier" coming from a think tank that dabbles on various topics and subjects. It is also my first paper on information and communication technology (ICT).

My paper is entitled "ICT growth amids mixed government intervention". Below are my concluding notes:

A mixture of less government intervention and regulation in the ICT sector, and a regime of bureaucratic business regulations plus burdensome multiple taxation in general, created some modest growth in internet use and penetration in the Philippines. The 15 percent of Philippine population linked to the global web in this period is small even among many neighboring countries in east and south-east Asia.

The government needs to step back, not come and intervene more, in business regulations and taxation in general, and ICT sector in particular. The proposed creation of a new and big department to harmonize government use of ICT in the short-term, and centralize regulation of private enterprises in the ICT sector later, may create more problems than solutions because the pursuit and propagation of information is one of the inherent values of people. But since the DICT bills are already in advanced stage of possible enactment in Philippine Congress, regulatory restraint should be emphasized in the said measure.

The government and ICT players should go for policies that stimulate competition-driven solutions, innovation and investment. And policies designed to address perceived market inequities should be avoided as such measures are easily used to advance protectionist trade policies and an anti-competitive business environment.

In the current debate in the EU regarding more regulation of broadband access providers (BAPs) for instance, two writers proposed that “the best approach to improving the provision of broadband access is to ensure that the environment in which BAPs operate is competitive. That means removing regulatory and other government-imposed barriers to competition, not creating new barriers in the form of restrictions on differentiation and mandatory quality of service (QoS).” (Morris, Gelder, 2008).

(2) The Ratings Agencies

February 11, 2008

The world has plenty of big banks, big car manufacturers, big IT companies, big airlines, big hotel chains, etc. But there are only 3 big ratings firms - S&P, Fitch and Moody’s. This looks like an oligopolistic industry. How come? I am curious.

In a number of indebted countries like the Philippines, these ratings agencies are often more powerful than the IMF in reviewing these countries' “credit-worthiness” or their ability to pay later. I have read some of the analysis by the staff of these ratings agencies, and funny that they often sound like the IMF bureaucrats that they are supposed to replace. For instance, it's not uncommon to read the former arguing for "more government spending and avoid early 'balance budget' and tax-cut goals for macroeconomic stability."

Turns out that it's the companies being reviewed, or the countries being reviewed, that often pay for these ratings agencies. Hence, the subprime crisis in the US was not "forewarned" by these agencies.

* See also Global Capital 1: Why Market Turbulence are Necessary, November 19, 2007

Monday, November 19, 2007

Global Capital 1: Why Market Turbulence are Necessary

Market turbulence shakes and shocks many people. It is those painful financial adjustments, sometimes approaching crisis situation, where stock markets swing wildly if not tumble, currencies significantly depreciate or appreciate, values of assets and properties often head downward while prices of major commodities head upwards, and big debt write-offs are reported along with announcements of resignation or sacking of CEOs of some very big banks and companies. Hence, fear of such turbulence is understandable because at the end of the day, incomes, savings and jobs are in danger.

But what people often refer to as "turbulence" are only those periods of economic downturn such as those described above. When new innovations and products come on stream, or new discoveries (petroleum and mineral deposits, attractive real estate development, etc.) are announced, they are also part of turbulence where old technologies and processes are discarded in favor of new ones. So that many people make money, and many new jobs are created. Thus, people are scared only of negative turbulence but applaud positive turbulence.

Increasing globalization should result in more turbulence across all countries and economies around the world. This is because in theory, mobility and migration of capital, technology, labor and commodities should result in equalization of their prices (other factors held in constant) across the world. And for many decades, the world has known only very expensive countries and dirt-cheap countries, so that "price equalization" over the long-term is a far-out possibility.

But markets can also follow natural laws. The law of gravity says that objects will fall down the earth or low-lying areas when the force that hold them up high is spent up. Capital can follow countries or territories where skilled (or trainable) labor, land and office rental, and other factors of production are lower, so that profits can be maximized. Thus, poorer countries that are capital-deficient suddenly becomes capital-surplus, and this creates positive turbulence there. Whereas countries that used to be capital-surplus suddenly find a growing portion of their capital migrating elsewhere, and this creates negative turbulence for them. In short, market turbulence is as natural as sunrise and sunset, as natural as the Newtonian laws of gravity, inertia and action-reaction. Market turbulence therefore, is necessary, so that countries will be forced to adjust, to liberalize their trade and investment rules, to encourage and respect innovation, and to abandon complacency, if not laziness.

The current market turbulence in the US subprime and house mortgage markets, the bigger than expected losses of big US banks, the continued depreciation of the US dollar relative to all major currencies and many currencies of developing economies, and the slowly-but-surely inching of world oil prices towards the symbolic 3-digits $100 a barrel or more, is causing headaches to many people, both economic policy makers and ordinary citizens alike. In the case of high world oil prices, it is unlike in the 70s, the 80s and the early 90s where the spike was driven by supply disruptions, both actual and anticipated. These days, the spike is due mainly to sustained high world demand as millions of people from emerging markets become richer and buy more cars or travel more often via public transportation (land, sea and air). Which is a case of positive turbulence creating some negative turbulence elsewhere.

Should governments step in to introduce new regulations, or upgrade existing regulations to stricter ones? There is no logic in doing this except to show that the state is "doing something". As argued earlier, turbulence like these allow markets and people to adjust to changing situations. Some people bought expensive houses though their current and future incomes cannot support the high amortization needed, so loan default should happen along the way. You multiply this a thousand times, or a million times, and you have an economy-wide, or world-wide financial turbulence. If we allow individual responsibility to take its course, to allow individuals learn lessons from their earlier decisions and actions made, then more government regulations will be unnecessary, if not counter-productive over the long-run. Because more state regulations often encourage complacency among individuals, not to mention financial costs in terms of taxes and fees, to sustain a new army of bureaucracies and regulators being created.