By Stephan Zimmermann, on July 24th, 2009
The study of economics should be clearly divided into its factual, quantifiable aspects (more commonly referred to as “econometrics”) distinct from the more philosophical and abstract study (generally known as ‘normative economics’). This is becoming increasingly important as the world has become ever more interdependent. The global financial crisis attests to this.
The argument in the United States increasingly rages between “free market” advocates, such as Friedrich von Hayek and Milton Friedman, and advocates of governmental social planning from Horace Mann to Barack Obama.
Vocal anarcho-capitalists would ideally do away with all forms of governmental influence or control, preferring a reliance on the sovereignty and sanctity of an individual’s decision-making ability. Ardent social planners would prefer to regulate everything from “Joe Six-Pack’s” beer consumption to private sex.
Few “free market” adherents attach economic importance to the desired social, racial or sexist equality that a majority of Americans espoused over the past fifty decades. These issues are perceived more in the realm of sociology or political science rather than economics. When the issues are addressed, it is often felt that the “free market” theory would solve them, just as Adam Smith and his “invisible hand” led the way to theoretical capitalistic freedom.
Unfortunately, the “free market” theory in the United States certainly did not, by itself, do away with the social injustices of segregation or discrimination, poverty or the exploitation of labor that plagued the country. It ultimately took government planners to lead society in what a majority of the country’s citizens considered proper.
Was a conscious exception made for state intervention on these issues to promote increased control for economic purposes?
Even more perplexing is the apparent lack of discussion of oligopolies in “free market” discourses.
Significantly more measurable than the normative verbiage about the“free market,” economists have achieved a number of factual measures to determine when an oligopoly exists. The “four firm concentration ratio,” the Herfindahl Index or other closely allied measures can show with little dispute than an oligopoly structure exists. Most economists agree that four or five companies controlling more than forty percent of an industry’s market share indicates an oligopoly market.
While collusion, pricing fixing or cartels have been illegal in the United States for a century or more, economists agree that “price leadership” in an oligopolistic structure is inevitable, as are upwardly rising prices an downwardly “sticky prices” despite a free market.
Oligopolistic firms are not generally controlled in the United States, unless there is clear evidence regarding collusion or other gross legal violations, such as safety laws.
Through most of last century, oligopolies maintained roughly forty percent of GNP. Through government deregulation during the early part of the nineteen eighties, however, oligopolies dropped to a mere eighteen percent.
However, there are few consumer goods that are not directly controlled by oligopolies. From airlines to automobiles to soft drinks, movie studios to fossil fuel energy and distribution, government action for deregulation helped, rather than hindered, oligopoly in the country. Sheer financial size dictate the difficulty of market entry.
Individuals and private companies, not government, foster the never-ending race to maximize profit margins, to outsource and downsize employee labor in favor of more efficient technologies, or to move physical manufacturing to less expensive nations.
The most competitive industries, however, such as apparel, furniture and – yes, the mortgage business – are those that most failed in the market..
Norman Jewison’s 1975 science fiction film “Rollerball” (and the panned 2002 remake) envisioned a world not run by politicians, but corporations. Only a handful of companies control the industries responsible for communications, energy, food, medicine, sports and so forth. Despite its violence, the film tries to point to the power of the individual versus either a state or a corporation.
If we accept today’ realistic global trends, oligopoly is likely to win over both: the concept of state monopolies or a stateless “free market” of some nine billion people. Already American, European and Asian firms dominate their industries and compete within the structure of oligopolies irrespective of national political borders or mores. Their outlook on people’s wants is similar to Roman emphasis on bread and circuses.
Ideally, a fundamental change in the nature of mankind would solve the many pressing physical problems facing the globe. That, however, seems totally unrealistic.
Much of economics recognizes the facts of proven theories, instead of clinging to outdated, normative ones. It changes as the times change, albeit very slowly.
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By Stephan Zimmermann, on April 29th, 2009
In standard consumer lingo, a recession is never good. By economic definition, it means a slowdown in spending, which leads to a slowdown in production, which leads to unemployment and so forth.
The United States has seen its share of recessions since its inception over two hundred years ago. A quick review of Wikipedia’s “List of Recessions in the United States” provides a concise synopsis of the phenomena. While today’s perceived panic may be widespread, it is not uncommon.
More to the point, the current global recession is led by the United States. Few have the overall global impact that an American-led recession entails in this and the last century. The reason is simple. Until recently, the U.S. was simply the world’s largest producer and consumer.
Even China can feel the impact of the global recession.
According to an October 30, 2008 report of the Economist Intelligence Unit, China’s GDP is expected to slow to 8% in 2009, and 7.5% in 2010. Moreover, the drop from recent Chinese GDP in excess of an annual eleven percent was hardly unexpected.
That, however, did not stop the world’s largest trade show, the China Import & Export Fair, in Guangzhou (Canton) from attracting some 200,000 international buyers in the three weeks of October 15 to November 8 this year. More than twenty-five percent of China’s 2008 exports, or $38 billion, resulted from the show.
While shipments to the United States and Europe slowed in tandem with the credit crisis, those to wealthier nations, such as Russia and the Middle Eastern countries increased substantially. Even less-developed nations of Latin America and Africa contributed to continued gains from Chinese export trade.
While the global recession may be especially bothersome to American consumers who are used to profligate ard irresponsible spending, there may be a silver lining.
The recession certainly provides the world with a slight respite from the selfish, myopic intent on growth without adequate regard for mankind and our common biosphere. It provides a rare opportunity to take a cue from the late German-born economist, E. F. Schumacher (1911-1977). In his renowned book, “Small Is Beautiful” he suggested “Perhaps we cannot raise the wind. But each of us can put up the sail, so that when the wind comes we can catch it.” The winds of change foretold more than a quarter of a century ago that the world would see rapid changes which to many were unthinkable. The quadrupling of oil prices by OPEC, the failure of communism, the economic growth and influence of China and India pale by comparison to the inherent dangers of what New York Times columnist Thomas L. Friedman calls “The World is Hot, Flat and Crowded” in his latest best-seller. Unfortunately, a negative response to the historic blip of the recession may engender revisionary, nationalistic political policies. A solution must, can and will be achieved, whether by Washington or Beijing, Paris or Riyadh. It will take the necessary combination of all the world’s economic and intellectual powers to move the world forward to its inevitable victory over the problems spawned by previous centuries. As Bob Dylan sang nearly a half century ago, “The Times They Are A-Changing.”
By Stephan Zimmermann, on March 24th, 2009
In a recent move, Switzerland’s second largst bank, Credit Suisse, has agreed to buy back more than half a billion dollars in securities and a hefty fine of fifteeen million dollars. The settlement arose due to an investigation by New York’s Attorney Genera;, Andrew Cuomo. The agreement stipulates that Credit Suisse will buy back securities from “individuals, charities and small businesses with accounts valued up to $10 million” according to
North American Securities Administrators Association (NASAA) – the oldest international organisation devoted to investor protection.
In consideration of the settlement, American states will agree to terminate their investigation of Credit Suisse’s marketing and sale of such securities to individual investors.
The ARS market involved investors buying and selling instruments that resembled corporate debt whose interest rates were reset at regular auctions, some as frequently as every seven days.
Market meltdown
They were sold as being as safe as cash but the market fell apart amid the downturn in credit markets.
Investigators have been trying to work out who was responsible and whether banks knowingly misrepresented the safety of the securities when selling them to investors.
In a statement from New York, the Zurich-based bank noted: “Credit Suisse neither admits nor denies allegations of wrongdoing.”
Eligible individual investors must have bought their ARS through Credit Suisse before February 14, it added.
The bank joins a growing list of major financial institutions – including Switzerland’s largest bank UBS – to reach settlements, with more than $51 billion targeted for repurchase, and state and federal penalties totalling an estimated $537 million.
“The industry is taking responsibility for correcting a problem they helped create, and that’s a good thing,” Cuomo commented in a statement.
« The industry is taking responsibility for correcting a problem they helped create… »
Andrew Cuomo, New York State Attorney General
“Return money”
“The fundamental goal has been to return money into the hands of investors, and that’s what these deals do.”
NASAA President Karen Tyler was also satisfied with the Credit Suisse settlement.
She described it as “another step on the road to recovery for thousands of Main Street investors who have been trapped in the auction rate securities meltdown”.
UBS last month announced a comprehensive settlement, in principle, for all clients holding auction rate securities at an estimated cost to the bank of $900 million.
It pledged to buy a total of $8.3 billion of ARS at face value from most private clients during two years from January 1, 2009. However, private clients and charities holding less than $1 million in household assets would be able to obtain this relief from October 31.
It said it would also provide solutions to institutional investors and agreed to buy all or any of the remaining $10.3 billion at face value from its institutional clients from June 30, 2010.
In July, UBS announced its intention to buy back up to $3.5 billion in auction-rate securities in the face of a lawsuit by Massachusetts’ authorities.
swissinfo with agencies
UBS, Switzerland’s largest bank, has similarly agreed to reimburse shareholders
Andrew Cuomo, New York state’s Attorney General, “The industry is taking responibility for correcting a problem they helped create
NASAA President Karen Tyler the Credit Suisse settlement.
She described it as “another step on the road to recovery for thousands of Main Street investors who have been trapped in the auction rate securities meltdown”.
UBS last month announced a comprehensive settlement, in principle, for all clients holding auction rate securities at an estimated cost to the bank of $900 million.
It pledged to buy a total of $8.3 billion of ARS at face value from most private clients during two years from January 1, 2009. However, private clients and charities holding less than $1 million in household assets would be able to obtain this relief from October 31.
It said it would also provide solutions to institutional investors and agreed to buy all or any of the remaining $10.3 billion at face value from its institutional clients from June 30, 2010.
In July, UBS announced its intention to buy back up to $3.5 billion in auction-rate securities in the face of a lawsuit by Massachusetts’ authorities.
By Stephan Zimmermann, on March 2nd, 2009
At OPEC’s most recent meeting held in December, the thirteen-member cartel agreed to reduce crude oil outputs by 2.46 million barrels per day, a record production cut for the group. As world crude prices dropped below $38/barrel, the cut is designed to stabilize prices to meet OPEC’s forecast of $75/barrel as “fair.”
Market analysts believe that the OPEC production cut is likely to fall short of the intended spur to $75/barrel. Among others, Morgan Stanley joined those whose world forecasts predict significantly lower prices in the $25 – $30 per barrel range.
Producers such as Saudi Arabia and the United Arab Emirates could maintain budget equilibrium or surpluses at the $25 price level. Less stable political bodies, such as Iran, however, could easily foresee increased borrowing requirements in light of continuous dropping world demand and a shortfall of oil revenues.
Russia, a non-OPEC member, hinted that it might support cuts of its significant domestic production if the worldwide economy does not recover to increase oil demand.
China cut prices on refined product, such as gasoline by 13.8% and diesel 18%, to stimulate its domestic economic demand.
India, with its large subsidized oil sector, nearly 70% import-dependent, cut its retail fuel prices. It continues with its political objectives of conservation, alternative energy, and strategic domestic reserves.
The recent economic roller-coast activity in the gyrating world-wide demand for oil points out one of the fundamental “truths” of economics.
When finite supplies of a product in world-wide high demand and only limited substitutability exist, cartels are a natural phenomenon. That is as true for sugar, coffee and many others as it is for oil … or drugs..
If cartel members agree on pricing policies and various political issues, cartels can remain effective for decades and longer.
That is certainly true on the supply side of the equation.
Less effective is potential manipulation of demand.
There is little OPEC can effectively do to stimulate economic demand that the market itself cannot.
Further, as actual substitutability for oil is demonstrated through the application of alternative energy sources, demand for oil is likely to decrease further.
The leadership of OPEC is economically savvy and understands the economics. It also understands the ills of short-term gratification at the expense of long-term satisfaction.
Whether the current financial worldwide crisis equally enlightens the American consumer remains to be seen.
The potential collapse of the automotive industry (as we know it) should give rise to a new, fossil-fuel-free base of employment.
It automatically generates expanded opportunities for research and development of existing and new technologies in every conceivable field of scientific and commercial application.
Will the average American consider the high levels of crude oil earlier this year and its subsequent fall as a xenophobic and conspiratorial plot?
Perhaps the public will finally understand the machinations of supply, demand and the effect of cartels?
Supply shocks and price increases occasioned by cartels are likely to recur in the near future if the world’s dependence on oil is not carefully checked. Most of that stems from the demand side of the formula!
OPEC’s next regular meeting is scheduled for March 15, 2009, in Vienna, Austria. It will precede the OPEC International Seminar on March 18-19.
By Stephan Zimmermann, on February 16th, 2009
As early as May, 2008, Libyan leader Colonel Muammar Ghaddafi suggested that his country planned to dismantle his nation’s political bureaucracy and would “hand out oil money directly to the country’s five million people.” (www.javno.com) Nearly three-fourths of Libya’s petroleum revenue is suspected of being illegally diverted.
In September of last year, the Arab Times reported that “Libyan leader Muammar Al-Ghaddafi has announced he will distribute all oil revenues directly to his people and will purge most state departments except the Defence, Interior, Foreign Affairs and Justice,” columnist Saleh Al-Ghannam wrote for Arrouiah daily. Ghaddafi attributes this decision to corruption in government departments which put the burden on the budget to the tune of $27 billion each year.” (www.arabtimesonline.com)
London’s Financial Times reported November 14, 2008 on an appearance by Ghaddafi on Libyan television. Among those discussing the issue were Farhat Omar Bin Guidara, central bank governor, and Al-Baghdadi Ali al-Mahmoudi, prime minister of Libya.
Arguments by leading members of the government against Ghaddafi’s revolutionary and unorthodox plan included anticipated major inflation and foreign currency problem in the country. Another suggested distributing shares in Libya’s manufacturing and telecommunications industries. Ghaddafi failed to be persuaded. According to The Financial Times, he charged officials with “clinging to the status quo to protect their privileges…so you can keep your positions.“ (www.ft.com)
The story was hardly reported in major American news media at the time. It was not until February 14, 2009 that the New York Times and Yahoo.com first reported the story from a Reuters dispatch.
The Socialist Islamic republic, which derives roughly a quarter of its annual GNP from the OPEC member’s petroleum revenues, was unlikely to be seen one of the first nations to try to adopt a direct libertarian political posture.
In his forty years since his successful and bloodless coup in 1969, Ghaddafi has at various times been both hailed and denounced as a visionary and a revolutionary.
In a 1986 raid on Tripoli by U.S. warplanes, he lost his infant daughter.
Proof of his complicity in the 1988 Pan Am flight bombing over Lockerby, Scotland was never legally established, although Ghaddafi and the Libyan nation accepted full responsibility and made financial restitution in 2006.
Previous U.N. sanctions, imposed in 1992, were lifted in 2003 and 2006.
Today, the Sunni Moslem country is a one-year member of the U.N. Security Council
It is estimated that there are roughly five million people in Libya. The nation produced a GDP of $57 billion. Some $32 billion annually would be distributed to the population.
Ghadaffi’s remarks should be favorably received by those advocating similar utopian ideals in the United States.
Libya is essentially a centrally ruled socialist autocracy with popularly elected local leaders. In 1977 Ghaddafi proclaimed Jamahiriyah (people’s republic). The unique governmental form combines religious aspects of Islam, economic mixture of socialism and capitalism, and populism.
While Ghadaffi holds ultimate power over major macro-economic decisions, he suggested that “You would fail to stop corruption as long as the state owns the oil wealth, makes contracts with companies to carry out projects, manages health care, education and other services and economic projects”
Particularly unusual for an autocratic ruler, Ghaddafi emphasized that “We are not afraid that people enjoy freedom on every street and every place, to appoint the officials of their liking, create associations, set up business and companies as they like. … This is their right and there is no debate about such an issue.”
Roughly twenty percent of Libyan’s are government employees.
Awaiting the outcome of the social experiment, American analysts ranging from the intelligence community to armchair pundits ascribe various motives to the sixty-seven year old leader. Ghaddafi is one of the longest-serving heads of state in the world, ruling since 1969. The king of Thailand, Bhumibol Aduljadej (1945), Sheik Saqr of Ras al-Khaima (1949), Queen Elizabeth II (1952) and Gabon’s Omar Bongo (1967) are the other leaders currently serving.
The convergence between capitalism and socialism and populism with strong central leadership should be closely monitored, whether in Libya or the United States.
By Stephan Zimmermann, on January 30th, 2009
It is usual to provide an incoming President with a hundred days following the inauguration. This common courtesy permits the electorate to see and feel first-hand the substance of the chief executive’s leadership potential. Unfortunately, the country does not appear to have that luxury of time.
President Barack Obama is obviously cognizant of his role as chief executive and the power contained in Executive Orders. His first orders dealt with morality and ethics in the halls of the government, including the White House. He also emphasized the role of law in his order to the Guatanamo military establishment.
He could, however, take a major – perhaps unprecedented – step forward to assure the nation of his boldness of leadership and incisiveness of economic options. Despite the Democratic Party’s majority in both the House and Senate, partisan bickering already continues the rift concerning the proposed “stimulus package.” Pork-barrel bills under the guise of “make-work” programs may eventually help an incumbent in his or her constituency in two years. It is doubtful whether they can institute rapid employment or renewed investment to help solve the current crisis. From many sections of the document it is obvious that it is pet projects, rather than meaningful emergency legislation, that are intended.
Obama could handily issue an executive order labeling the current economic crisis as a “national emergency,” operate with a minimum of federal bureaucracy, and continue his effectiveness and popularity with the electorate.
The executive order would be based on existing precedents.
It would immediately suspend the Federal Income Tax in its entirety.
It would simultaneously institute a flat, national sales tax to offset the loss of federal revenues to continue smooth operation of existing governmental infrastructure and mandated programs.
It would allow the President a minimum of six months without Congressional interference and partisan bickering to establish the priority of needs and wants of the country in the national, not merely partisan, interest.
The main benefit of such an executive order would be to renew the confidence of the electorate in the stability and predictability of government leadership. Markets thrive and prosper on predictability, rather than chaos.
It would free individuals from the time and money involved in complying with the complex and unpredictable legislation affecting the annual tax codes.
It would permit the individual to decide where and how to spend his or her own money, instead of working for roughly four months each year for income tax withholdings. The various states could emulate the federal program within their own jurisdictions if they so desired. California’s Governor Arnold Schwarzenegger took the way of a state executive order on December 19, 2008 to stave off immediate bankruptcy. While taking various steps to stop that state’s hemorrhaging spending, Schwarzenegger stopped just short of mandating a change from the state’s income tax to a consumption tax.
Strict constitutionalists, no doubt, will immediately howl and point to the potential danger inherent in the chief executive’s application of such an executive order. They have done so from George Washington to George W. Bush and every President in between. The existence of Executive Orders now applies to physical dangers to the country, as well as less defined “national emergencies.” Few, if any, have been effectively challenged.
Previous Executive Orders set ample precedent. Qualified attorneys can point out the obvious benefits and drawbacks for President Obama.
From his campaign to his inauguration, Barack Obama has often invoked the image of Abraham Lincoln. Perhaps he can take the step further by emulating Lincoln’s courageous use of executive orders to solve today’s crisis in the United States.
By Stephan Zimmermann, on January 27th, 2009
In a settlement with New York State Attorney General Andrew Cuomo and the North American Securities Administrators Association (NASAA), Credit Suisse agreed to buy back nearly half a billion dollars of individual investors’ securities purchases and a $15 million fine. Credit Suisse is Switzerland’s second largest bank. (www.swissinfo.ch)
The settlement concerned sales of auction rate securities (ARMs,). It provides for Credit Suisse to “buy back the securities from individuals, charities and small businesses with accounts valued up to $10 million” according to Swissinfo. Securities brokers often understated the potential risk of ARMs, especially to unsophisticated smaller investors. (www.cfo.com 16 Sep 08)
Cuomo suggested that “The industry is taking responsibility for correcting a problem they helped create, and that’s a good thing,” .
Karen Tyler, president of NASAA, described the Credit Suisse settlement as “another step on the road to recovery for thousands of Main Street investors who have been trapped in the auction rate securities meltdown”.
UBS, Switzerland’s largest bank, similarly settled earlier this year with various American authorities. It announced in August a settlement for customers owning ARMs. UBS, which has seen a dramatic drop of more than forty-three percent in its share value, reserved an additional US$900 million to the US$8.3 billion. Buybacks are planned to start as early as October.
Citgroup, Merrill Lynch, JPMorgan, Chase and others reached similar settlements, all on or before August 15 this year, before the big “meltdown” in the financial markets.
The buybacks of ARMS for smaller investors intensify a closer scrutiny of the necessity or desirability of a federal bailout of illiquid American financial companies.
While the candidates for the presidency stress the potential necessity of such a bailout for the effects on “the small guy” it becomes critical to understand exactly how small investors might be impacted by the potential failures of financial firms.
By Stephan Zimmermann, on December 17th, 2008
The Organization of Petroleum Exporting Countries (OPEC) announced Saturday, November 29, that the organization would wait until its next scheduled meeting in Oran, Algeria, to agree on its output reductions, according to Reuters. The Algerian meeting is scheduled for December 17. (www.reuters.com)
OPEC, the cartel producing nearly forty percent of the world’s oil supply, is experiencing significant declines in oil revenues. From the high of nearly US$150/barrel in July, prices have dropped to approximately
US$54/barrel last Friday. A decline in world oil consumption resulting from the general global economic slowdown has fueled the decrease in prices.
Both Saudi Arabian Oil Minister Ali Ibrahim al-Naimi and his sovereign, King Abdullah, cited the figure of $75/barrel as the “fair price” of crude oil “to protect the marginal producer.” OPEC refused to agree to further
production cuts until the Algerian meeting. (www.arabianbusiness.com)
Venezuela and Iran, both OPEC members, called for immediate production cuts after October’s
decrease of 1.5 million barrel/day, The division is a sources for disagreement among cartel members. (www.english.daralhayat.com).
According to various sources, Venezuela is overstating its current production and would benefit by
further mandated OPEC cuts. Anticipating resulting price increases from further production cuts would bring expected economic benefits to the country.
Iran which possesses the world’s fourth largest oil reserves is subject to continuing technological and infrastructure problems. It benefited substantially from last year’s record oil prices. It is, however, also subject to the Iran Sanctions Act, first passed by President Clinton by Executive Order in 1995. It was subsequently renewed until 2011. Among other items, the Act precludes foreign investment in Iran of more
than $20 million per year. Attesting to the overall ineffectiveness of the sanctions, Iran and China signed a multi-year oil and gas supply accord in 2004 potentially worth nearly $200 billion. The country is also eying improved trade relations with India, Russia, and Indonesia.
In a show of bilateral support, Indonesian President Yudhoyono met with Iranian President Ahmadinejad earlier this year. Indonesia, which leaves OPEC at the end of December, is also a non-permanent member of the United Nations Security Council. It was the only member not to condemn Iran’s alleged nuclear research program. Stated in its charter, “OPEC’s objective is to co-ordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry.” (www.opec.org)
The political troubles within OPEC may presage further short-term cuts in production to reach the target levels suggested by Saudi Arabia to stabilize world prices for consumers and producers alike.
However, it is potentially dangerous to short and long term options to new exploration, drilling or alternative energy development. As global demand shrinks in the short run and oil prices decline, so do potential profits from energy investment.
Last year approximately $77 billion were committed globally by major producers in alternative energy projects, including nuclear, hydroelectric, wind and solar power. British Petroleum (BP) alone is responsible for roughly ten per cent of alternative energy investment. It agreed to provide $8 billion over ten years. The company has already funded $1.5 billion in 2008. Chevron-Texaco invested $2 billion since 2002, and expects additional investments of $2.5 billion through 2009.
Exxon-Mobil, the world’s most profitable company, reportedly spends roughly one percent, or $3 billion, of its annual profits on alternative energy each year. While not investing directly in wind, solar or other different sources of power, the company concentrates mainly on hybrid car development and battery and fuel cell technology.
The recent global financial problems specifically point to the interconnectivity of international economics: continually rising populations (especially in the less developed world) and increasing expectations to achieve
increasing material standards by the world’s populations, face greater knowledge of finite material supplies. This knowledge invariably leads to heightened tensions such as exemplified by OPEC members.
If one is inclined to look at the negative potential of each human crisis, this could be as dismal as Malthus’ incorrect prediction regarding population growth nearly two centuries ago. The short-term impact on the global economy could easily be seen as the decline of civilization.
Yet, allowing for the flourishing of mankind’s intellect and ingenuity and motivation, the current crisis can easily point the way to an even more fruitful, productive and innovative period throughout the coming centuries.
By Stephan Zimmermann, on November 21st, 2008
The financial liquidity crisis is in full swing around the world. It is no wonder that experts and novices alike seek ways and means to prevent a future recurrence. Many different solutions are enacted and proposed. All of them center on wealth and money or votes.
Questions regarding the reemerging push for a return to a gold standard and our discussions of earlier Austrian school of economic theories abound.
Such discussions especially flourish during major financial crises.
Certainly, gold has been viewed by civilizations for some five thousand years as stable and desirable. Why? Simple – man cannot easily destroy it, nor create it. It has been considered both wealth and money.
It certainly meets both ancient and modern economics’ criteria for wealth. To a lesser degree, it meets the definitions for money.
First, it is a medium of exchange. Almost everyone agrees to trade if gold is involved.
It serves as a store of value. In other words, gold cannot only serve as money, but it is actually a tangible representation of wealth.
It is a standard of value. People can agree that one ounce of gold is equal to a fixed amount of some other good or service.
Since it is rare instead of plentiful, that standard remains in tact as long as people agree. Richard Nixon unilaterally arranged for the United States to leave the gold standard in 1971 for political and economic interests. Gold prices “floated” against other currencies, and no country since then has remained on a gold standard.. Nonetheless, gold has been and can remain a basis for contracts, debts and other private or national obligations.
Finally, it is a unit of account. That simply permits us to set prices, costs, or profits. In short, any money, whether gold or silver or fiat (paper) money issued by a government, gold can fulfill that function.
Without too much difficulty, gold can also simply exist to guarantee the use of fiat money. That places a currency on the gold standard, and simply means that a government certifies that it has enough physical gold (as in Fort Knox or the IMF vaults in New York) for every dollar of fiat money it issues.
Your, or a country’s credit, is limited by the amount of gold owned.
Enter the problem.
It may be simplistic, but bears repeating. It is, after all, the reason why economics came into being in the first place. Supply and demand.
The fundamental law of economics assumes that mankind wants an almost limitless amount of goods or services. That includes everything from basic foods to intangible things like religion.
Those “wants” may have both positive and negative effects.
In a world where all physical goods are limited, if supplies are finite while wants are unlimited, we instantly see the basis for having to make choices. The choices can be resolved in civil manner by trade or, in the extreme, by war.
Therein lies the fundamental problem of gold as a backing for fiat money, or as a direct global currency.
There simply is not enough gold on the planet, existing above ground or yet to be mined, to back all the fiat currencies that have been created to accommodate the continually rising population in this world.
Better yet, if we applied simple supply and demand laws, the price of gold would reach enormous proportions compared to the universally accepted world standard of the equivalent US$700 per ounce at today’s values. Careful, please, the price may rapidly move or down from that level!
We know reasonably well how much gold there exists on the planet. We also know approximately who owns how much, both in physical gold and in reserves still to be mined. With the expected gold craze to continue, major exploration and mining companies are hoping to bring those underground reserves to daylight to join in the speculative fever of potentially recovering gold.
For example, Northgate Minerals Corporation (TSX: NGX, AMEX: NXG) announced September 8, 2008 that it found new mineral reserves at its Australian site, including some 140,000 ounces of gold. In their press release, the company stated that the find “will extend the current mine-life by an additional 18 months until the fourth quarter of 2011.” (biz.yahoo.com). (www.northgateminerals.com)
If you do simple math and use today’s value at $700/oz., that results in some $98 million. At a cost of some $20/oz, that results in a nice profit for the company and its shareholders.
However, that amount pales on a macroeconomic level.
It would make little difference on a world-wide basis for the United States, the International Monetary Fund, South Africa, Russia or Canada as countries. Russia, for example, recently announced continued progress in its Kamchatka gold discoveries.
Trans-Siberian Gold’s Asacha mine is estimated to process some 608,000 ounces of gold over the expected six and a half year life. It has not yet commenced drilling. The company is traded on the London stock exchange. (TSG-L)
In short, the supply of gold is reasonably fixed with only relatively small increases foreseen in the near future.
We can also reasonably predict general industrial and commercial uses for gold, such as electronics, medicine and personal jewelry.
With normal supply and demand predictable, the excess demand for speculation drives the price on the international gold market. It is a speculator’s and gambler’s heaven!
There are good and bad aspects to a national or world-wide gold standard.
Making gold convertible into a certain amount of dollars, yen, Euros or whatever would certainly restrict the amount of money each nation could spend. As such, it would artificially impose a certain financial prudence on the part of government issuance of fiat money. It would be likely to sharply curtail spending and investment.
It should certainly cause policymakers to think twice before wasting assets in such futile endeavors as wars not designed merely to defend a nation’s borders against intruders.
However, a return to the gold standard would impose a limit on growth, and thus on employment. History shows that unemployment was far more extensive under the gold standard than without it. Despite the speculation, irresponible credit use and eveb criminal activity, no one can challenge the tremendous growth in entrepreneurship worldwide sice the Reagan and Clinton administrations.
Whether it is the Federal Reserve or another central bank, interest rates would still have to be adjusted – even in a 100% gold-backed currency – to maintain that currency’s value relative to the arbitrary value agreed to and set upon an ounce of gold.
It all ultimately depends whether you want to put your trust in your fellow man (or woman) based on a shiny metal to back your country’s currency or on a piece of paper backed by the “full fait and credit” of the United States or any other country.
If you truly believe more in gold than in the ultimate productivity of the dollar, the yen or the countless others, by all means buy some gold directly through any one of dozens of legitimate gold currency dealers. Not issued by any bank, but backed directly by the gold you purchase, some of that gold is denominated in Dinars or Dirhams or Rials. Islam does not believe in interest or usury, but fixed fees. Remember, though: the value of your gold could rise or fall, depending on what the market dictates.
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By Stephan Zimmermann, on October 27th, 2008
Will companies that issued derivatives based on bundled student loans be the next financial dominoes that will require a government “bailout”? The country’s long dedication to education makes it a virtual certainty.
The emphasis of the role of government in education predates the establishment of the United States as a country. As early as 1642, a year before the founding of Harvard, laws of the Massachusetts Bay Colony broke with English tradition of purely private education and introduced a role for the state. The law essentially suggested that the colony’s government would assume the duty of teaching children if parents failed to do so.
A century later, the new Congress of the United States enacted the Northwest Ordinance of 1787. It set forth the role and obligation of the state in education. Article 3 of the Ordinance stated that
Religion, morality, and knowledge, being necessary to good government and the happiness of mankind, schools and the means of education shall forever be encouraged.
Early in the 19th century, Horace Mann took a leading role in the advancement of public education. Both as a Senator from Massachusetts and later as Secretary of the State Board of Education in 1837, Mann was instrumental in establishing textbooks and libraries, doubling the wages of teachers, and securing state aid for education. He argued that the country’s wealth would increase by educating the public and should be borne by the taxpayer. He was immensely successful in the task. Mann ultimately became president of Antioch College in 1853, six years prior to his death.
The fundamentals for universal public education were established and accepted on both a private and state level. However, it took nearly three quarters of a century, in 1935, for direct federal government loans to be debated. First, government student lending began on the state level when Indiana initiated the waiver of fees to students who successfully competed in statewide tests.
By 1944, the Serviceman’s Readjustment Act (commonly known as the G.I. Bill) was passed. It was the first legislation to provide direct aid for students on the federal level. The bill was amended and expanded following the Korean and Vietnam conflicts. Now called the Montgomery G.I. bill, it forms a crucial benefit to men and women voluntarily joining the military services.
The next half century saw a rapid rise in various federal, or federally-guaranteed, student loans and grants. Loans are to be repaid at subsidized low interest rates, while grants are outright gifts, requiring certain criteria and qualifications.
Some examples include:
- National Defense Education Act was launched after Russia orbited Sputnik I in 1958. It was centered on science, mathematics and language. The federal program is now called the Federal Perkins Loan program for low-income students with ten years to repay at five percent interest.
- The Health Professions Educational Assistance Act 1963 for medical and health program students was later broadened to add scholarships in addition to loans.
- The most significant and sizeable is the Federal Stafford Loan Program. It was initially passed by Congress in 1965 as the Guaranteed Student Loan Program. The program used private banks and other lenders, guaranteed by the federal government.
- Outright grants, such as the 1965 Educational Opportunity Grant Program and the 1972 Basic Educational Opportunity Grant, now known as the Pell Grant, consist of outright gifts to students in low income brackets. Eligibility is based strictly on need.
Later yet, government educational funding started to be offered to middle and upper income families such as the 1978 Middle Assistance Act and the 1981 PLUS loans.
Finally, loan consolidations and the William D. Ford Direct Student Loan Program of 1993 expanded loans available directly from participating schools.
As the population increased, and students availed themselves of the increasing variety of grants and loans, so did defaults on student loans.
A report published in October 2007 by Education Sector, an independent non-profit, non-partisan think tank, shows that student loan default rates were approximately five percent. Twenty percent, the largest percentage of those defaulting, owed $15,000 or more after attaining a four-year undergraduate degree.
According to the report,
Black students who graduated in 1992–93 school year had an overall default rate that was over five times higher than white students and over nine times higher than Asian students. … Hispanic students’ overall default rate was over twice that of white students and four times higher than Asian students. (www.educationsector.com)
The current financial crisis offers some serious food for thought.
Most significant is that, unlike mortgages, student loans have no underlying asset value. While defaults on mortgages have the backing of real estate – no matter if it has depreciated in market value – student loans are unsecured. Recourse to recover default payments may exist through attachment of wages and other measures, including tracking of an individual through IRS records, but has no tangible value except the student’s future earning power.
Despite the high-risk exposure, private firms in the student loan industry, such as SML Corporation, generally known as “Sallie Mae,” realized some $18.5 billion in derivatives sales in 2007. According to Bloomberg.com on October 22, Sallie Mae lost $185.5 million for the third quarter, compared to $344 million year-to-date. The company increased contingencies for bad student loans by some 31%. It also had extraordinary legal expenses in connection to a failed sale of the company to a third party. The stock declined from a high of $48.24 to close at $4.50 October 22, year-to-year.
According to Bloomberg, SLM “is partly insulated from the crisis because the company’s loan portfolio is 82 percent government guaranteed. The U.S. Department of Education is offering funding for those loans through July 2010.”
SLM Corporation owns or manages some 10 million student loans in addition to its ancillary businesses of college savings accounts and collection agencies. It was originally formed in 1972 as a “government-sponsored entity” similar to Fannie Mae and Freddie Mac. It became a totally independent company in 2004.
The question remains: if SLM Corporation’s management underestimates its potential student loan defaults and overestimates its cash and asset positions, will the federal government be in yet another “bailout” mode?
The history of government’s historic and stated position regarding education is clear. It remains for legislators to determine how best to reduce or eliminate student loan defaults. Don’t let the fear of college debt keep you from getting your degree. See the affordable degree options available at Belhaven College.
Stephan is a former department chair for economics and taught at various colleges and universities at both graduate and undergraduate levels. If you would like Stephan to answer your economics-related questions, read his post “Got an Economics Question?” and submit your questions in the comments area there.
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