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Economics 555
Over the following two years additional articles were written, and by the time that twenty existed, it was felt that enough had been said, to the extent that the author was of the opinion that “enough was enough.” Yet another three were subsequently added within a time span of twelve months, ending about a year ago. The driving force to “see these in print” was and still is an “analgesic;” ---- to get “it out of the system.” When troubled by a particular factor, to write and hopefully forget about it. So why “Economics 555.” Complex reasoning here, and not quite easy to define. It perhaps has as its basic principle or origins in the expression “Economics 101.” This particular expression either espouses the basic principles of economic concepts and /or is as well often used in a derisory manner to refute other concepts or data interpretation. “555” are equal numbers, ---- balanced as it were. Each one complementing the other. So perhaps it is being used as a “balance,” or even an expression, which says, “despite that --- this is the way we see things.” Another possibility is perhaps an answer to a question, “how many sides to a coin;” with the invariable answer --- “Two --- Head’s and Tail’s.” Forgotten perhaps, is that there are three sides to a coin --- THE EDGE! For it has always been our philosophy to look for the edge when seeking “ for another reason, another perspective, or another possible solution. And finally as well, it has been started in July of the year 2005. It will be wide ranging and in no particular order. Merely opinions expressed as thoughts come to mind, and DEFINITELY ---- this time, the final article to appear on this website. Perhaps a good place to start is with the subject of stock markets, for that was the first article written. Every day, around the world, newspapers and periodicals feature the latest local and international stock market news. Whether up or down; then inevitably dissecting, contemplating, ruminating the cause and / or effect etc. Coupled to this, millions of daily and weekly emails to invested clients with the news and defined reasons for why the “Markets” are up or down, and in consequence, advice as to whether to “buy, sell, or to hold.” What never ceases to amaze us, is the depth of analysis of daily changes that take place, as if it would ever be a frightening episode ---- “ if the market stood still; no change.” Quite forgotten, is the fact that “yesterday” one’s stockbroker, financial adviser or whatever, phoned, emailed or faxed everyone to sell this or buy that, thus creating the VERY ACTIVITY that so amazed or worried them “ the next day!” One is exhorted to “take profits off the table” in specific hot sectors, then their next worries and queries are why that sector’s shares slid markedly “yesterday.” Talking about the episode of taking profits, which generates a “cost transaction” in the selling process, when queried --- we were told that as a general rule in the industry, clients were advised to take profits after an 8% profit existed on the original purchase price. Our response was, to quote “ what happens if clients are charged a 2 ½ % fee to purchase and to sell and thus end up with a net 3% as against the financial institution handling the account having generated a return of 5% “ ---- there was an utter silence at the end of the telephone line. Some financial advisors set this profit margin at 10% in order to differentiate their “percentage take” on transaction charges. Even if the charges were to be 1 to 1 ½% it would surely leave meagre profits to the investor who is taking ALL THE RISK! At this point we must advise, that we DO invest on the stock market, and that we DO make profits on our investments, so the comments made are not “sour grapes” on our part. Then there is that silly expression that “the “Market knows best” --- or the market “foretells” as if it were a living entity or person. Millions of people are employed in running stock markets and investing therein. Millions more are in the industry of defining where the world’s savings, investments and pension funds are placed. IT is “THEY” who drive prices up or down. It is the sheer volume of billions of dollars, euro, yen pesos etc that daily drive prices up or down. PEOPLE do it --- not “MARKETS! Then again, another thought. One is exhorted to invest in the stock markets, either directly or through the purchase of shares, mutual funds, bonds, debentures, and a myriad of schemes such as hedge funds and derivatives. If there is a sudden drop in investment value, you are told to invest “for the long term.” Yet if you held the same shares, bonds, etc. for years, your broker or investment advisor would starve, and in the process inevitably lose their job. So evidently “long term” means -- “continue to send us money.” One of the greatest incentives offered to invest in shares, is the income to be derived from dividends. Yet “high” dividends are as scarce as “hens teeth.” Generally the more solid the investment, the lower the possibility is the return on the investment. Banks deal in Billions --- makes billions of profit ---- yet pay out “PEANUTS!” Generally dividends are rated as 1.25 to 2.25% of the price paid for the share. Thus a large capital outlay for meagre pickings, and the hope of a capital gain as overpriced value shares offer lower and lower relevant returns to their rising market prices. Then one has those companies who continue making profits, paying low dividends and when disgruntled investors complain, the board retaliates by using "THE INVESTORS MONEY” to propose “a buy-back scheme” to return the shares to the company! One is left to imagine what the intention of those boards is to be. Perhaps increased salaries and bonus’s to members of the board and to the top officials would be in order, as well as enhanced share options to selected personnel. Retained earnings are not a crime --- if used wisely to enhance added profits and resultant higher dividends. But this is not often seen in that sequence. Interest rates are an interesting factor ----- despite the pun or play on the word “interesting” as being derived from “interest.” Bonds are debt instruments upon which an interest rate charge is made, thus generating income to the investor. At the same time the possibility exists that a capital gain or loss can as well be incurred. What is of interest, is that if Central Banks never played with interest rates, bond capital values would probably never change other than any change to the exchange rate of the currency of issue. In other words a $1000 bond investment at 7% would generate $70 annual income, and if held to maturity would be repaid as “$1000.” If interest rates are lowered to say 3.5%, investors will pay a premium for that bond; perhaps $1200, in which case the seller has made a capital gain of $200. What now become interesting factors is the relationship “circumstance” between the original and secondary owners of the bond. The original owner, although having made a capital gain, now finds that any new bond issues are only available at say 5% and that even if the $1200 is invested, the return has diminished to $60 per year. And if lower rates are available, the problem of income derived has increased. The secondary purchaser is also placed in a quandary. The $1200 investment, while paying out $70 per year, generates a “return” on the capital invested of only 5.83% ---- although paid out at 7%. There is an additional problem to the secondary investor. If the bond is held to maturity, there is the capital loss of the $200 overpayment of the face value of the bond, as well as a lower income return while held. The only chance of recouping the capital outlay is in the hope that interest rates keep dropping and that someone will pay a higher premium for the bond. On the other hand, if interest rates start to rise, bonds can be purchased at a discount, and the capital loss will be even greater. This long dissertation on bond rates is an answer to the rather stupid remarks forthcoming from investment advisers and economists when discussing “ what is happening to the “Federal “ or “TREASURY”10 year bond yield.” They “talk in hushed tones” --- ruminating --- contemplating the meaning of --- the consequence of ---- any changes to “THE TEN YEAR BOND YIELD!” Why the surprise and consternation, when they well know that folks are buying these bonds as a “safe haven” when interest rates and/or currency values are changing or are expected to change. As Central Banks increase rates, all other rates rise, and the differential between the 10 year bond and the short term bonds will narrow ---- so why the mystery and the concern. Similar concern is expressed when economists and investment advisors depict the above “graphically” --- as an inverse curve alteration. In reality, whether you hear it in words or as a “picture” should cause no surprise or consternation. The major concern of Central Banks are said to be “inflation” --- yet their very manipulation of rates is one of the primary factors that drive inflation. The lower rates are dropped, the greater the activity to purchase stocks and bonds, thus driving up prices in both as investors look for better yields. This applies as well to the increasing investment in real estate. Inevitably there will be capital losses at some stage, and the grounds are set for the next recession. “Cheaper” money is a far greater and broader inflationary factor than any other commodity price rise. As interest rates start to rise, the greater created debt burden will inevitably result in capital losses of both savings and investment. While the “BANKS” do this exercise, currency values fall --- so an extra burden is placed on the populace at the same time. Manipulation of interest rates has another devastating influence on the savings and income of retirees. Those living on fixed income investments. As a general rule Central Bankers should understand that what is required, is that there be a gap of at least 4% between the estimated rate of inflation, and the lowest required interest rate return on investments In other words, if inflation is said to be 2%, then bond investment rates should be a minimum 6%. This applies equally to both the expectation of dividends, as it does to bond yields. Said another way, Central Bank rates should never be set lower than a 2% margin above the expected inflation rate. Low-income pensioners whose income is estimated to be at the “poverty line level ruling at the time, should be exempt from ALL FORMS of taxation, no matter what the source of their income. Thus the vital importance of rates at which pension funds can derive meaningful growth to cope with the increasing growth in longevity of the population. The “Balance of Trade” deficits and their relationship to the perception of the changing value of the currency. Debt is debt, no matter how formed. Two factors exist with debt; the payment of interest and the ultimate repayment of the debt --- or it’s so-called “repurchase.” When it comes to “government” or “federal” (Treasury) debt repayment, it more often than not is “ever repaid.” New debt instruments are offered to raise the capital required to meet the maturing debt obligation. Creating a permanent debt cycle, the only changes being that in all probability it is being repaid with a currency that has weakened in value (perceived or in reality) and at as well at a more disadvantaged interest rate. These facts apply equally as well to budget deficit debt created by government. Interest rate changes are a normal occurrence when related to two factors, these being the “supply and demand” factor, and the other being the perceived “integrity” of the borrower. Their reliability to repay the debt. And finally, coupled to all of this, is the perceived value of the currency by which repayment is made. So when Central Banks dabble with interest rates, they set in motion many other factors and imponderables, all of which have a multiple affect both domestically and internationally. We mentioned that one of the primary concerns of Central Banks were to contain inflation. Presently an anomaly exists where a large number of economies are experiencing relatively low inflation, despite the extremely high cost of oil and gas and that of commodities as well. When one considers this phenomenon, a lot of factors seem to have either been “missed” or ignored by economists. Central Banks will tell you that it is their interest rate strategy that is responsible for this. There may be an element of truth to this, but in reality it is presently a very minor factor influencing the containment of inflation. Aside from services, all goods whether manufactured or agricultural, require the use of energy and commodity use. Everything made and sold generates a transport cost factor as well, whose costs are driven by the cost of energy. What seems to have been forgotten or ignored is the volume of cheap goods pouring into countries from low cost Eastern origin. To this one has to add so-called locally manufactured goods, whose percentage of content is derived from low cost economy source as well. To all this there is the additional savings in cost by “out-sourcing” labour and services. All of these have a marked influence on keeping prices down and thus containing inflation. Balance of payment differentials are surely a sign of this impact. Finally one has to add “competition” within the economy, which has a marked effect on price containment. Low prices emanating from the above factors, are masked by the observation that local companies are today showing signs of profitability. They are making profits. Forgotten is the fact that there has been a very high saving in the existence of low company taxation. If a company were to be paying tax at the old rate, profitability would presently be markedly lower. Additionally, were consumer taxation also not have been lowered, the effect on business profitability would be quite obvious. All of this stems from the manipulation of “government” and not that of Central Banks. Thus Central Bank manipulation of interest rates do not have the “marked effect” that Central Bankers would want us to believe. Another thought that comes to mind, being that expression called “productivity.” It is always expressed as defining hourly output in relation to the hourly cost of labour. While it is said to be “DEFINATIVE, we can think of nothing that is “MORE AMBIGUOUS!” Gross Domestic Product is defined as being the value of all the output of all “goods and services.” How do we equate the service value of a lawyer who charged his clients $300 per hour one year, then the next year decided to charge $600 per hour. His “labour costs” doubled, yet his output per hour never changed! In many economies, especially the Western economies, the service industry has become a major proportion of the total GDP value. So how do we equate this when comparing “productivity.” Additionally, labour negotiates lesser working hours for possibly as well higher wage payments. How are these to be equated with “productivity”. Or the increased “benefits” that are squeezed from management. It would be different or easier to compare productivity within the identical industry with all the identical factors applying, but this is not done. What really makes a mockery of “productivity is the foreign content of labour and services whose end product is then sold as “domestically produced.” Another factor, which continually “nags” and often troubles the mind is ---- THE VALUE OF MONEY. So much is written about the subject matter, yet so little is done to stabilize what is “perceived” to be its value --- worth --- or wealth. In articles we wrote about currencies and wealth, we equated these to “toilet paper.” This description, if one gave it more thought could prove to have been very apt. So one thinks that a little more time spent on this aspect could prove to be either instructive or informative. For – IN REALITY --- all currencies are backed by little WEALTH as one would determine “intrinsic value.” If one lived within a closed society where one is “self-sufficient", there possibly would be no necessity to place “a value” or intrinsic worth to the domestic currency used. It would require not to be “backed” by something of value or worth such as gold, diamonds or any other rare or “precious” thing. Whatever was in circulation, provided it was recognized or accepted as “payment”, would suffice, --- even -- “toilet paper.” The only duty required for or by it’s citizenry, would be to see that it’s purchasing power be as stable as possible, for as long as possible. But we do not live in isolation! In reality, what has happened, is that we all are being paid with toilet paper. The only difference being perhaps the colour and texture of the paper may be different. One country is using white, while another yellow, and others pink, green etcetera. There is no standard applied. Neither to texture, colour, weight or width. From the moment we went “off the “Gold Standard” --- the rot set in. We fool ourselves, we fool each other. And we are all living “IN A FOOLS PARADISE!” To confound the issue, the Central Banks bolster their own “Reserves” by keeping various numbers of rolls of other country’s toilet paper. And, of course Treasury debt is dealt with in the same manner, as is trade debt. Is this Mass Hypnosis or Mass Psychosis on a grand scale? Is it that difficult, or that impossible to go back to some form of regulated and defined Gold Standard. A common denominator of WORTH and VALUE! We have the scientific genius to fly probes to distant planets, explore their composition and relay this information back to Earth. WE have the mathematics to invent the most complex of machines and solve the most complex of problems To find and/or manufacture the drugs and medications to cure or alleviate most of the diseases that afflict mankind; yet we somehow cannot --- or will not find the answer to defining the worth of currencies and their true “worth” relationship to each other. As an “aside” it may be the opportune moment to comment on the so-called revaluation of the Chinese Renminbi two days ago. It was revalued 2% to the US Dollar, and stated to have been “unpegged “ from the Dollar, and it’s new value determined against a “basket” of currencies. At this stage the basket of currencies used have not been divulged; nor the stated percentages used to those within the basket that somehow now defines its new value. The news media of the world stated that Central Banks were “ecstatic”; governments “highly gratified.” The more cautious comment was that “at least it is a start, a sign that China is willing TO COMPROMISE! The emphasis on the final two words of the last sentence --- are ours. HAIL THE NEW ECSTASY PILL! Who needs the old one now that China has revalued the currency by 2%. The required 30% strength pill is due to be released in the next MILLENNIUM! Fiddling WHILE ROME BURNS. The Italian economy is presently teetering on the brink of going into recession or at best deflation or stagflation. The German economy “in the doldrums.” The French living in a fool’s paradise while they go to sleep “hugging” their “agricultural subsidy holy grail” to their bosom while they slumber. The rest of the European Union wondering how long their “edifice” will last before it starts to fall apart at the seams. Japan nowhere out of it’s 14-year battle with their domestic economy. The lessons of Japan presently forgotten. And finally --- The United States, holding on to its slender gains as the economy starts to show “a glimmer of light at the end of the tunnel” Nothing will be determined until THE CHINESE EQUATION IS SOLVED! Which brings us to “Globalization” – “Free Trade –“International Trade.” Currencies are the “grease” that keeps the wheels of trade moving. And of course the means and the need to pay for the things sold or traded. So here again a dire need to define the wealth or value of the currencies in which we are all being paid. None of those defined figures of trade will ever succeed or satisfy all trading partners until such time as we realistically define the worth of all currencies to each other and formulate a system to control that function. While on the subject of trade, we omitted the words “Fair Trade” --- for it is only THAT which in conjunction to fixed value currencies decide the fairness and honesty of International Trade. In the end, all countries have to have a valid currency, which can only be accumulated if they are given a meaningful share of trade in what they are able to grow or produce. While on the subject of trade, there seems to be either a simplistic or myopic view of what constitutes “free trade.” It is as if viewed as the spokes of a wheel, with the United States as its hub. America at the center --- desiring to sell its entire excess production to every nation on Earth; and viewed as well by those at the “ends of the spokes” who desire that the United States at the hub take a major percentage of their product or produce production. Surely it would be a better view as that of a “Spider’s Web,” where, --- if we do not take “your” specific export --- we are at least taking in exports from “OTHER COUNTRIES THAT ARE TAKING IN YOUR DESIRED EXPORTS.” In other words trade moving and spread as a “cobweb.” A perhaps better solution where each “Continent” deals with bi-lateral trade and final “inter-continental” agreements that deals with SPECIFIC PROBLEMS of trade absorption. Before we come to the final section of this article, which will be an overview of the World as we presently see it, a final word on Central Bankers. In 1996 an “un-named” Banker used the words “irrational exuberance” to define the frenetic activity taking place in “un-named” stock markets. Surely he would have become better well remembered had he set the example of DOING SOMETHING to CONTAIN THE EXUBERANCE! 1996 was four years away from the year 2000 “meltdown” --- ample time to siphon off all that excessive cash chasing stocks and bonds and thus maybe either saving the World from a recession, or at least lessening its seriousness. TIME WAITS FOR NO MAN. Five prophetic words – full of meaning for this moment in time. If one views the present state of the economies of the World, and at the same time attempts to relate these to the problems of the World, one cannot help but be mystified as to why we leave everything “to happenstance.” TO FATE. As if we had all the time in the world at our disposal to muddle through and let fate make all the decisions for us. As far as the value of currencies are concerned, we use the term “market” forces to make the decisions for us, forgetting the fact that it is the actions, manipulations of certain PEOPLE who are in fact making these decisions – without hindrance, order, or binding International law. We plunder and destroy the Environment with impunity, and are told that NATURE will take care of its survival and its recovery. We talk glibly of trade in its many fancy names; yet deny access to our countries of other peoples products, agriculture and services. We create international forums and treaties, yet allow certain countries to abstain or circumvent its rules. A World Court, whose idea originated in the United States --- yet who in the end refused to recognize its “sovereignty” over any transgressions practiced by Americans. A ban on the sowing of “minefields” – again refused to be recognized by America. The “Kyoto Accord’, the formula to save the “environment” --- also refused to be ratified by the UNITED STATES! The Concept of “Globalization” --- a “child” of the American Dream, yet they impose tariffs and quotas to stop the flow of goods INTO the USA! Yet with it all --- they are the first ones “to step up to the plate”. The first to offer aid whenever and wherever it is needed; and invariably the biggest donors of cash, food and transportation when required. The biggest donors to the International Monetary fund and the World Bank, and the biggest by far to the costs of keeping The United Nations “afloat.” The largest complement to NATO in “man and material” cost, and the biggest force in protecting the world from its own misdeeds. Viewed from afar, the World is a face pockmarked with festering sores, and the nicks and cuts of an over-sharp razor blade used indiscriminately; all of these covered in “band-aids.” Badly in need of a “Hollywood major MAKEOVER.” --- waiting for the people who have neither the will nor the skills to get the job done! The United Nations --- the most DISUNITED of all mankind’s assemblies. A world stalked by terrorists, and those breeding, harbouring and nurturing them offering but reasons, platitudes and excuses instead of action. Desert kingdoms whose Princes and Sheiks grow ever more wealthy on Crude Oil “dollars” --- deigning to spend a single “dollar on attempting to resurrect the desert soils to provide food for the teeming millions of its present and future citizens. What is to be their future when the oil is gone? Who do they turn to when the time of need arrives? Genocide unconquered and unpunished. THE ULTIMATE SIN. MANKIND’S INHUMANITY TO MANKIND. “Give a man a fish --- and you feed him for a day. Teach him how to fish --- and you feed him for a lifetime.” What is to become of Africa and its teeming poor and starving? Sporadic aid in food and money are but band-aids. Useful, helpful, yet not a cure. The basic problems still exist, and unless tackled, there will be no solution. The writer is from Africa. Born there. And knows its problems. While still torn by the sight of a dying, starving multitude of mainly woman and children, and constantly driven to tears as these harrowing scenes are depicted on the World’s TV screens, cries out as well for the application of solutions to the basic problems that generate its continuity of suffering, starvation and death. These are the basic problems. Too many children born to people who have not the means to support them. Why is it that the poorest nations on Earth have the highest birth rate? On average perhaps 8 children or more to every woman born into this poverty during her lifetime. Born in or out of wedlock, it is the norm. This in reality is the “basic of the basic” – and needs to solved above all else. Once the birth rate growth is effectively slowed, so too will it diminish the volume of people who require their circumstance to be attended to. The earth is impoverished, failing to provide the food needed. So here too do we need to give urgent attention, for if we revive the land, less outside food assistance will be needed in the future. The basic requirement in this sector is to re-forest the land, for it has long been denuded of its forests for firewood. The populace to be taught that for every tree cut down, two are to be planted in its place. A minimum of 15% of all the land to be thus planted, especially hilly or mountainous sections that can start to attract moisture and eventually “bring the rains back.” Artificial lakes to be made and rivers to be dammed. Even to the extent that seawater be pumped in-land so that the evaporation thereof will be carried on the winds to fall as rain somewhere. Agricultural machinery and fertilizer provided and the educational facilities to teach them to farm scientifically. Not forgetting, that in the end, in the far distant future, that they be allowed to export their surplus produce to other countries. Domestic job creation by the teaching of the basic skills that comprise most domestic economies. Higher learning is indeed a gift, but certainly not what is the BASIC REQUIREMENT to be the building blocks of a basic society. And finally to rid them of DESPOTS, Warlords and corrupt officials and government, together with an excess of armaments constantly used to fight tribal wars. We end this with comments on what present circumstances exist, that will create problems to the future economic well being of the planet. The World is blind to the unresolved problem of currency values. It is no longer “a level playing field.” By the time we wake up to the problem of undervalued Eastern currencies, Western jobs will have been permanently lost, and thus economically weakened. North, South, East and West, all economies rely on that of the United States for their own economic well-being. Allowing it to suffer, then we all suffer. Somehow, for some unfathomable reason America slumbers, while there is an ongoing economic shift from domestic production and consequent job loss and slow down in new job creation, while they nurture those factors of job creation in undervalued Eastern economies. We are VERILY LIVING IN A FOOLS PARADISE. THE NIGHTMARE: The problem with recessions --- as it was as well with The Great Depression ( 1929 – 1933 ), is that the causes and the effect are only diagnosed and discussed AFTER THEY HAVE COME AND GONE. Perhaps that is why they occur. Surely, knowing what causes them should lead us into combating or eradicating the causes before the onslaught takes place. Rising prices and rising debt, coupled to decreasing savings usually ends in falling prices --- decreasing consumption --- and consequent loss of jobs. Yet we DAYDREAM! We end with these words extracted from John Milton’s poem Paradise Lost: Quote: “ Thou hast not miss’d one thought that would be fit, And all that was improper dost omit: So that no room is here for Writers left, But to detect their Ignorance or Theft.” ------------------- (Then a little later towards the end of the poem.) “ Where wouldst thou words of such a compass find? When furnish such a vast expanse of mind? Just Heav’n thee like Tiresias to requite Reward with prophesie thy loss of sight.”
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It
is perhaps seven years since our first article titled “Stock Markets”
appeared “in print” on the Internet. At that time the website was titled
“Finance and Economics” and was offered to various search engines for
inclusion within their data base .For perhaps the next four years the size and
scope grew as successive articles were written. By that stage the website had
grown to perhaps 15 articles, when the decision was made to register the site as
a “dot com.” As “Finance and Economics” was already registered, the site
name was registered as “economic-data.com” and the “hyphen between the two
words had to be inserted due to other similar registrations.