Saturday, June 25, 2011

Let the Race Begin...

So yesterday we saw an incumbent President turn into a Presidential candidate. It was not the President but the Democratic Presidential candidate Barak Obama, who signed the release of 30 million barrels from the Strategic Petroleum Reserve (SPR). Although oil did fell 6% on the day of the announcement, based on the rate of US oil consumption, the release will be consumed in just one day. Even more important thing to notice is, according to American Automobile Association (AAA), gasoline prices were declining since last 20 days in US, so why the sudden need of releasing oil from the reserve?
White house is saying that the release is intended to be a preemptive move for the upcoming summer driving season, when demand for oil is expected to increase. But oil strategists and even the White House know that any price reduction in oil market because of the release will be temporary. I still have my doubts with the timing of the decision. I know it seems very obvious to be a smart political move but then sometimes in politics candidates have to be, plain blunt.
SPR was created in 1975 after the 1973-74 Arab oil embargo. It can hold up to 725 million barrels, which can fulfill little over a month’s US domestic demand. SPR was created primarily to counter severe supply interruption and its use should be limited to emergency situations. Releasing strategic reserve based on NYMEX & ICE spot crude oil prices doesn’t set a good precedence. Most of the so-called independent federal agencies (NBLR, SEC) lately, have been influenced politically; I suppose SPR is going in the same direction.  

Monday, June 20, 2011

Arab Spring: Is it?

Since the self immolation of an unemployed Tunisian in December 2010, to protest his ill-treatment by the police, people in the Arab world have started pro-democratic demonstrations. The world media, as usual, have cnnized the whole process and gave this movement a name- ‘The Arab Spring’. The term is adopted from ‘The Prague Spring’, the eight month liberalization rebellion in former Czechoslovakia in August of 1968.

We entered the seventh month of the so-called spring this past 17th. So far this rebellion has achieved its goal of overthrowing the dictatorial governments in Tunisia, Egypt & more recently, Yemen. Protests in Bahrain, Oman & Jordan were crushed and I think spring is over for the people of these nations. Demonstrators are on streets against there respective authoritarian rulers in Syria, Algeria & Morocco. There are protests in almost all of the Middle East and North African countries, but there activities are over shadowed by the high profile rebellion activities going on in Libya. Libya’s rebels have been recognized by Germany & Canada as the legitimate government of Libya, although Tripoli is still controlled by Colonel Muammar Gaddafi. Why NATO and particularly, US decided to get involved in Libya and no other country, is still a mystery.

The protests in Tunisia and Egypt, as far as bringing democracy is concerned, were a success (although I am still debating if success is the right word to use at this junction). But it is just the first step in the right direction. Democracy is not ‘The Answer’ to all the questions a nation faces. True, it helps to be a democratic society but remember, ‘with power comes responsibility’. Tunisians and Egyptians have the power and now, God forbid; if they fail they can’t blame anyone. The recent Christian & Muslim riots in Egypt were just the thing I am worried about. These nations have no experience in running a government on democratic values and one misstep will tarnish all the good that was done by removing the dictators.

Middle East and North Africa have for long been viewed from a prism of radical Islamism, but status quo is changing. It’s a brave new world in the Middle East. Although I sincerely hope that the young Arabs understand that overthrowing the current regime is just one step and the work of nation building will be there true test. The Prague Spring was crushed by Soviet tanks; I wish the ending is different this time around.

Thursday, June 16, 2011

The (Original) Sick Man of Euro


So, this morning the spreads (rate difference) between Greece and Germany’s debt increased to 1500+ bps (15%). Dow futures are down. European & Asian markets are all in red. Greece came to this point despite receiving $157 billion from IMF & EU last year.

Greece GDP (in nominal terms) is ranked 32nd in the world. Well below Iran and Argentina. So why is world so concerned about Greece? Unlike the other sick nations of EU, Ireland & Spain, Greece doesn’t have any large, troubled financial institution that forms the backbone of its economy. So, what is the story of Greece?

Greece as you may all know is the ‘proud’ member of the European Monetary Union. It was one of the founding members. But since it didn’t meet any of the monetary & fiscal benchmarks (Convergence criteria’s) to make it to the Euro-zone, it had to wait for two years before it was finally inducted as the 12th member of the exclusive club. It’s an open secret that Greece did a lot of window dressing with its accounting books to get qualified.
Robert Mondale, ‘Father of the Euro’, was against admitting Greece in Euro area because of its weak economy. But as always politics had the upper hand in European Union matters and his advice was disregarded. Fast forward 10 years and you see the reason why he didn’t wanted Greece to be in EMU. After all, Father knows that Best!!

Now, since Greece is one of there own, EMU policy makers, sitting in European Central Bank’s office in Frankfurt, are worried about the contagion effect. They are concerned that if Greece goes under, it will have a domino effect on economies of Ireland, Portugal, Spain and Italy, as there financials are very shaky and there banks have a good amount of exposure to Greece. Although, more importantly they are worried that it will weaken the ‘concept of Euro’, both financially & politically. Kicking out Greece from EMU won’t help either Greece or EU members. Because if Greece adopts Drachma again, it will be much more devalued and since Greece is not a big exporter it won’t have any impact on its revenue. Instead, it will increase its financial burden since its debt is denominated in Euro & USD. The devalued Drachma in turn, will directly impact the above mentioned struggling EU nations, since investors will loose faith in Euro and will ask for more interest on there debt.

As I write this Greek’s, American born Prime Minister, George Papandreou is in the process of proving his majority, so that he can bring in some harsh, much needed austerity measures. Greece’s road ahead is not very smooth, but that is the only way out. The nation that gave the world the lesson of Democracy needs a lesson or two in Economics.

Monday, June 13, 2011

Mittelstand: A German Lesson for US

             Lately a lot has been said about the barren US manufacturing landscape. During the past decade, US manufacturing employment has fallen by one-third while manufacturing output has remained roughly constant. Media Pundits and Politicians have attributed the manufacturing job losses to low wage emerging countries, lower trade barriers because of globalization and also to ‘unfair’ US trade policies. But then we can also say that Technological improvements and not globalization is reducing the US manufacturing employment.

I understand that US manufacturing sector (the ‘rust belt’) is going through a rough patch, but it’s no reason to blame, globalization or China, to be precise. During the cold war, fear mongers magnified the threat of USSR, in 1980’s it was Japan and now it’s China. China is the world’s largest exporter? True; but until last year China was number two. That’s right, and you know who was number one…a colleague of US in G-8, Germany. Germany with its high wages and generous social benefits was able to outdo both, China and the U.S in exports until recently.

Germany had its own economic issue; first, integrating East Germany and then creating a Euro zone with ‘not-so-stable’ economic neighbors. It went through some weak economic growth in early 2000, but it didn’t blame external threats, instead it concentrated on its own economic and trade policies, especially focusing on Mittelstand- family-owned companies with fewer than 500 employees and annual sales of less than 50 million euros. We might think that Germany is all about global champions like Siemens and Mercedes Benz, but it's the Mittelstand that employs more than 70 percent of German workers and contributes roughly half of the country's GDP. Since late 60’s Germany’s average un-employment rate has been around 10%, but the recent data by IMF shows that Germany’s unemployment is down to 8% and is the fastest growing economy in the G-8. Germany did it by exporting high quality, high tech and well-branded goods.

China was so impressed with Germany that when IMF statistics showed that China will be number one exporter, its leaders proclaimed that they were number one only in ‘quantity’. They said China’s goal was to follow in Germany’s path to become an exporter of ‘high tech, high quality, well-branded goods.’ And all these time we thought that China was gunning after US by imitating its trade policies.

There is no doubt that US is still the world’s largest economy and will remain so for a while. But it has to start putting its house in order. I am not saying that Mittelstand is ‘The Answer’ to US’s manufacturing questions; absolutely not. But its high time US policy makers get serious about the labor situation and at least take a lesson or two from the other ‘successful’ economies and instead of blaming China for its unemployment problem, focus on its own micro-economic policies. Just as President Obama followed Germany in “Cash for Clunkers” (That’s right, Germany had put to use this idea first) the American economy might take some manufacturing pointers from Germany as well.

Sunday, June 12, 2011

An Affair to Remember…

I have been thinking about this for a while now and I feel that the time has arrived.
This seems to be the season of making public your extra marital affairs. Take Arnold Schwarzenegger, John Edwards, Jesse James, Dominic Strauss Kahn and the most recent addition to the list, Anthony Weiner. I will like to add one more name to the list of ‘shame’…Viki Shah.
That’s right. I can’t take the burden of guilt any more. I have been living a dual life for a long time, but not anymore. I think that my wife of seven years (might be eight!!) has every right to know the truth. She should know that the person whom she has trusted the most, is not been 100% honest with her. Since my blogs have some responsible, loyal readers most of whom are my family and friends, I will take this platform and confess that I have been having an extramarital affair. I am in love with someone out of my wedlock. There I have said it!
I admire her, look upon her; think about her, dream about her.       I LOVE her.
It’s been a while since I got romantically involved with her. In fact she was my elementary school sweetheart. All these years my love has stood the test of time. I was born in late 70’s, when India was still a quasi- socialist ‘closed’ economy. But my dreams were always ‘global’. And the fact that she is German proves that I did conquer my dreams!! We met at a social gathering. It was her first visit to India. It was a love at first sight. Her charisma, her persona was irresistable. It’s been almost over 20 years now and like me, she has also changed…physically, but my love for her is strong as ever. I must say she maintains her body quite well.
So here’s the moment of truth. I want the world and particularly my wife, to know her name. Before that I just want to say that I love my wife very much. Lord, forgive me for I have sinned.  
Ladies and gentlemen, her name is…AUDI A-4, The epitome of German Engineering.

Wednesday, June 8, 2011

The Story so far…

The crisis that started with the Housing bubble was first called the ‘Real estate crisis’, then a new named emerged, ‘Sub-prime crisis’. As the economic troubled deepened and the financial institutions started getting affected, it became ‘The Credit crisis’, after a few weeks it was ‘Liquidity crisis’, after a month it became, ‘The Moral crisis on the Wall Street’ and lastly, my favorite, 'The Great Depression-II’, but in the history books it will go down as ‘The Great Recession’.

It’s been four years since the crisis started but US economy is still under the weather. To recap the current ‘not-so-exciting’ news, Un-employment is at 9.1% (Shadow unemployment is close to 17%), housing prices fell to their lowest since 2002 ; factory output and car sales dipped in the current quarter and the Dow industrial fell for the fifth consecutive week. All these vital signs indicate a double dip recession. And there is a very very bleak chance that economy will grow at Fed’s predicted growth rate of 3.3% for the year. Not to mention the most politicized economic issue of our time, the Federal Debt ceiling, which is still debated in congress with no conclusion in sight.
             
Although I am a Keynesian, I also believe that when Demand creation doesn’t work, focus has to move towards the Supply side and I think that’s why government’s role is so important at this junction of the US economy. It’s a simple math:

GDP= C (Consumer) + G (Government) + I (Investment/Businesses) + X (Export) - M (Import).

When C & I (directly related to X & M) are not functioning, G has to come into the picture to maintain the GDP. On the Monetary front, Mr. Bernanke has kept our short term interest rate to almost 0% and thanks to the demand by foreigners our long term interest rates are also at a historic low. But consumer and businesses are still uncertain about the future and hence are hoarding cash (US businesses has $2T cash on there balance sheet). So when monetary policy can’t function Fiscal policy has to come into the picture and I think this is where the current white house administration is missing the point.

I have said this before and will say it again...It’s the corporate tax stupid!!

At 35%, the U.S. corporate tax rate is one of the highest in the world. Agreed, loopholes enable savvy companies to pay a lot less but the effective tax rate is still among the highest, (2011 Business Roundtable). Only Japan, Brazil, Uzbekistan, Chad and Argentina have higher corporate tax rates than the U.S. The effective U.S. corporate tax on new investment was 34.6% in 2010. This was higher than the average OECD rate of 18.6%. (2010 Cato Institute)

The urgency and zeal that President Obama showed during the Health Care bill, (The Bill that was wanted but not needed at this point of time) he needs to show that same enthusiasm for bringing the reforms to the US corporate tax. If not for the average Americans, do it for the corporate donations, Mr. President!!

Monday, June 6, 2011

(Indian) Man on a mission…

This past weekend my wife dragged me to our monthly Indian grocery ‘pilgrimage’. I am sure my fellow Non-resident Indian compatriots understand the emotional ordeal. It had been a while since I last visited the Indian them park on Newark ave. in Jersey City.

Indian male doing grocery shopping in an Indian store is nothing short of a NASA scientist looking for life in space. Man on a mission. They are so focused in what they do that they won’t even realize that there are other fellow co-shoppers and keep on bumping into others, literally. You enter the chaotic store and you notice most of the male shoppers has a ‘To-Do’ list, mostly prepared by the Chief Operating Officer (Dharam-Patni) of there household. The most priced possession in the bazaar is the empty shopping cart. Just as in India we have a cast system of our own in the Indian grocery stores. The great class divide is based on the ownership of the shopping carts. The ‘haves’ and the ‘have-not’s’!! Either you have it or you don’t, it’s as simple as that. Taking a note of the grave socio-cultural-economic situation, the store owners have tried to create a ‘middle class’ of sorts by brining in the ‘basket’. Once in the store and with cart or basket on hand the minds get into action. There eyes always wondering, looking for that ‘one item’. The cardinal sin of Indian grocery shopping is buying a ‘replacement’ for an item on the list.

One of the happiest moments of this mission is the time when all the items are crossed off. The narrow check-out lines serves dual purpose of your health check as well. For if you find it difficult to pass through the line, you know you need to hit the gym sooner rather then later. Once you are out of that bazaar you feel that you are back in civilization. It’s chaotic? Yes, crammed? Yes, crowded? Definitely yes, but that hour spent in the bazaar takes you back to the ‘good old’ days.

The mission is not over yet, for it has to pass through ‘the review’. If there is no ‘female’ voice coming from the kitchen it means that the mission is a success. If there is, then may God be with you!!

Wednesday, June 1, 2011

State Born from a Nation Torn...

It’s 2:30am. Bakeries are opening there doors and there is already a long line of customers. Petrol pump owners are witnessing the same scenes. Milkman is knocking the doors of his customers at around 4am. Soon follows the vegetable vendor. Household are not worried about there sleep, instead they are happy that they can buy this essential commodities. The reason: Traders, business owners and households want to beat the curfew hours. Over the past three months, pupils have attended school for less than 40 days while shops and other establishments have done business only for as many days. Teachers have started giving lessons to students via telephone. University students are getting there lessons via internet.

Politics has taken control of the day to day life of the people. Grenades, stone throwing and curfews have become part of the normal course of life here. This is how days and days of curfew and violence on the streets of this city and some other urban areas of this region has changed the life of its citizens. Night has become day.

This place is not a scene from any Middle East city nor is it a Sub-Saharan African town. This, my friends is Kashmir!!

Kashmir, IndiaKashmir, Pakistan

For Kashmiri’s life has come to a standstill since the day Maharaja Hari Singh acceded the Princely State of Kashmir to India. Of course being an Indian I will always feel that Pakistan should be kicked out of Kashmir and I am sure feeling of hatred is mutual on the other side of the border. I am not an expert on this issue, but it seems that no one from either side is, for this issue is been dragging on since last 60+ years. Three wars have been fought over this land. Thousands of lives have been lost both from war and terrorist/separatist activities. It’s a fact now that local Muslim leadership is been influenced by foreign elements. Calling “Bandhs” every other day and giving political statements during the Friday prayers is not a way to bring ‘peace’ in the region. India’s policy is also very porous. Military administration in form of a pseudo democratic government is not an answer for gaining local support. I don’t want to be political here, but if division is the ‘only’ solution than seat together and draw the lines. For how long will the childhood be stolen from Kashmiri kids, for how many times will kashmiris re-built there broken homes.

See the irony here, Kashmir is the “Heaven on Earth” but the political interests, separatist/terrorists activities and cross-border interference has made the lives of the people in the region...Hell.