Wednesday, June 10, 2009

EUROPE TURNS RIGHT WHILE AMERICA TURNS LEFT

The results are in, Europeans demonstrated a clear turn to the conservative side of the political spectrum in electing the new European Parliament. The Conservative bloc will have a 100 seat margin over the Socialists. This was a real boost to the current conservative governments in Germany, France and Italy and a real blow to the socialists governments in Spain and the UK.

The elections also saw real gains for the "Green" parties and their bloc in the Parliament as well as the "ultra-nationalists" who are often called the "far right." Hard to see where they will wind up in the Parliament with most assuming that the "Greens" will align with the Socialists and the "Ultras" with the Conservatives.

One of the major reactions was to contrast this win for the "right" with the Democractic victory in the last US election. One Spanish journalist lamented that while the "US moves forward on a progressive path, Europe chooses to stagnate." Of course the writer's political bent is clear. But the contrast did receive much commentary.

So what to make of the outcome? Hard to say that the swing to the right was the result of the "Global Recession" since Sarkozy, Berlusconi and Merkel have been at the helm long enough to be blamed for the economic downturn. Never-the-less the UK and Spanish governing parties quickly blamed the bad economy for their losses.

The gains for the "Ultras" were probably spurred by the anti-immigrant mood in Europe. The recession is a two edged sword here since immigrants taking jobs while locals are losing them in major numbers has generated much of the anger. On the other hand, the recession has already caused the number of new immigrants to fall off dramatically.

The Conservative gain fairly assures that European Commission President Manuel Barroso of Portugal will be installed for a second term. The only glitch here is that his re-election will be held off until the Lisbon Treaty, which reorganizes the European Union government, is adopted. The Irish, who stopped the Treaty by voting against it in a referendum last year, now want to approve it.

All of this indicates that a new, more powerful central European government will start life with a conservative flavor.

Now when and where did we start using the terms "left" and "right" to define our political parties?

Leo Cecchini
June 2009

Tuesday, June 9, 2009

AMERICAN WAKES UP TO THE "NEW ECONOMY"

GM stands for “Government Motors,” the US Government comes out with new guidelines for executive compensation for companies slopping at the public trough, Jon Stewart of the “Daily Show” rails against Uncle Sam buying up failed businesses. The public is finally waking up to the salient fact of the “Financial Meltdown of 2008″ and “The Great Recession of 2009,” the economic upheaval has led to Uncle Sam becoming the largest shareholder in US private business and thereby acquiring even more control over the economy.

But of course readers of my blogs already know about this seminal event since it has been the theme of my series on the “New Economy.” I started by reviewing other definitions of the “New Economy” which included a service dominated economy, a global economy and an information/communication dominated economy. To these definitions I added, the “New Economy” means one in which Uncle Sam, who was already the single largest consumer, owned the central bank, and set the rules, has become the largest owner of the economy.

Let’s review that ownership. Uncle Sam already owned, or held the major share of, the traditional government parts of the economy - the military, cutting edge technology (NASA, NIH, CDC, etc), the road network, national lands, and, with his siblings the state and local governments, education, ports, public safety, and the lion’s share of health care. I realize I may have overlooked other parts, but you get the drift. To these he has now added the largest auto maker, the largest insurance company, parts of the major banks, and the mortgage industry. With President Obama’s health plan he will soon own most of the rest of the health care industry.

Wow! This should make every Libertarian and Republican froth at the mouth. And they do. Wait a minute, is Jon Stewart a Libertarian, or worse, is he a Republican?

While my political leanings are well known, usually compared to Attila the Hun, which is a great injustice, since he was a real socialist, if you doubt me, just check his administration, I am not concerned. In fact I applaud Uncle Sam expanding his investment portfolio. If the sovereign funds of such oil powers as Saudi Arabia, Kuwait and the United Arab Emirates are buying up the private sector, why not Uncle Sam? And the beauty of this is that, while sovereign funds must pay money for their purchases, Uncle Sam does it by giving a chit.
I was once a stockbroker and thus am very impressed by Uncle Sam’s portfolio - manufacturing industry, transportation, energy, finance, health care, education, security, communications, and, of course, Treasury bills. While others lament the debt he has incurred in acquiring this stake in the economy, I point to the reality that income from these investments could replace taxes to a large extent, and thus lighten, not increase, the burden on my purse.

Like it or not, we are into the “New Economy” in which Uncle Sam will have more control and say about what happens. Doubt me, just look at the new government guidelines for executive pay in such corporations as GM, Citibank, AIG, and more.

Leo Cecchini
June 2009

Sunday, June 7, 2009

AFRICA IN THE RECESSION

I read an article the other day about how Africa is fairing during the worldwide recession. The author pointed out that Africa is doing better than one would expect, because of its new position as a main supplier of basic materials to the major emerging economies of the world, with Brazil and China leading the pack.

It was almost 20 years ago that I left my last foreign service job in Mexico. In my parting review of Mexico I noted that Mexico, as well as most of the rest of Latin America, was well positioned on the development train and that I had no real concerns about Mexico and the rest of Latin America for the future.

At the same time I noted in other writings that most of Asia was also well along the road to economic success. However, I said that Africa was still the problem child. I had also spent time in the 1980s working in Mozambique, South Africa and Namibia so had some idea of what was going on. I urged that whatever foreign assistance was available, that it be directed to Africa.

Well foreign aid was not redirected to Africa. But something more important happened. China found that Africa offered the raw materials it needed for its rapidly growing industry. The Chinese then set about establishing companies, joint ventures in the main, in several African countries aimed largely at producing raw materials.

China’s effort to obtain raw materials from Africa was clearly evident in its development of petroleum supplies from Sudan. And no matter where you go in Africa today you will find the Chinese busily building similar businesses.

Brazil is a different partner for Africa. It enjoys plenty of its own raw materials. But it is short of petroleum. Enter Petrobras and its explorations in Africa.

I am pleased to report that the fledgling cooperation between African countries and major emerging economies promises to be the engine of Africa’s economic future. I no longer fear for Africa’s future and believe it has joined its fellow developing states in Asia and Latin America on the train to a better economy.

Leo Cecchini
May 2009

Categorized in Uncategorized

KRUGMAN ON DEBT

I read an article by “Nobel Laureate” Paul Krugman in which he berates Americans for spending beyond their means by resorting to excessive borrowing and then chastizes the Chinese for not spending enough. I believe Mr. Krugman would have served us better if he had explored why this happens, rather than preach prudence to Americans and exuberant spending to the Chinese.

In my opinion the reason Americans have been happy to go into debt to buy is that they have confidence in their ability to earn more in the future and the underlying strength of the American economy. The Chinese spend less and save more because they do not have similar confidence. Of course the present state of the economy has gone a long way to undermining America’s confidence, but we are using record new debt to correct the situation in full confidence we will be able to meet future debt obligations.

More important it is important to understand the basic assumption of debt - you buy something on credit today that you will pay from future income, but you have the purchase today. The reverse would be to save today to buy tomorrow.

My parents used to say, “we don’t use credit, we pay cash for all we buy.” The net result is that our family missed out on some important items - no television, no automatic washing machine, no vacations. Of course my father conveniently forgot about having a mortgage on his home and a lien on his vehicle.

But let’s get real. The average new automobile costs $20,000. The median American household income is about $50,000. At a saving rate of 10% it would take four years to save enough to buy a new car, if the prices stay the same. The average home price is $200,000. Thus it would take 40 years to save to buy that house, and you can be sure the home price would be substantially more.

No, even the Chinese use debt to buy homes and cars. Buying on credit is a fact of life everywhere. The only question is the proper level of debt.

Krugman and most others blame the present recession on excessive debt. They keep crying that the credit house we built is collapsing around us. But hold the phone, we now know that 97% of bank loans are being paid on time. Hardly a cause for a major calamity. Moreover, the US Government is taking on unprecedented new debt to correct the slump.
No, the basic problem is that debt is part and parcel of our modern life but we are still uncomfortable with this fact.


Leo Cecchini
June 2009