Pedestrian Observer GB: Economy

"In societies where Robbing Hoods are treated like a celebrity it is but natural to expect political parties to act like a Mafia syndicate" Political Jaywalker "In a nation where corruption is endemic people tend to confuse due process with aiding and abetting criminals" Political Jaywalker "War doesn't determine who is right, war determines who is left" Bertrand Russell "You have just one flash flood of money, you keep your people poor. It's like a time bomb and it's scary" Philippine Lawmaker

Showing posts with label Economy. Show all posts

A sample scenario, OFNs proposal on shifting external hard currency debt into peso bonds

Let us assume that today (July 2010) we have targeted to shift 1 billion dollars of maturing external debt in three months time say October 2010 into OFN held peso bonds. The bureau of the treasury would need to have about 47 billion pesos (in dollars) to pay off the debt by October.

Assuming the decision is to issue 1000 peso denominated zeros with a required rate of return at 8 percent per annum redeemable in 10 years.

Such an instrument would have a value of 463 pesos on a straight annual discount of 8 percent. Factoring in equivalent coupon rated bonds bearing the same 8 percent rate at a semi-annual payment, the instrument would only have a value of 456 pesos (a difference of 7 pesos per bond). The lower amount is what the BT will receive from the ODF (456) while the higher amount (463) is the price of the bond that will be passed on to the subscribers in OFN organizations. The ODF in this example makes a margin of 7 pesos per bond.

To raise 47 billion pesos BT will issue 105,264,000 bonds (1000 peso par). By printing different denomination values (100 bonds, 500 bonds, and 1000 bonds in one sheet) the number of physical bearer instruments can be reduced to about 222, 000 pieces. These bearer instruments get consigned to the ODF as needed. For the whole period of July and August the ODF get commitments and escrow of funds from OFO's (overseas Filipino organizations). By September when the whole issuance had been physically printed, physical transfers are made to the individuals in the OFO's and their escrowed dollars or hard currencies are transferred to the account of BT. Upon accumulation of the 1 billion dollars BT settles the debt with the external creditor. If the buy down process of negotiations during this period yields a payment of 70 cents on the dollar then BT saves 300 million dollars and proceeds to apply this to the next maturing debt or try to use the amount to buy externally held Philippine debt papers in the secondary market.

For this issuance the ODF and the OFO's will have earned 736,848,000 PH Pesos or roughly $16 million. i.e. $ 8 million for the ODF and $8 million to the OFO's. It is up to the OFO's on how to compensate those individuals in their organizations that are active in promoting these bonds but the bottom line is that the subscriber to the bonds will not pay more than 463 pesos for each bond. 736 million pesos represents 157 basis points of the bond proceeds and only 79 basis points of the bonds redemption value in 2020.

If the bonds included a sticky feature like a 100,000 peso monthly winning for the ten year duration then the ODF will have to deposit in escrow (with the PCSO which will handle the lottery) the equivalent of 12 million pesos plus projected lottery cost (hopefully to be covered by interest earnings of the escrowed amount) from which fund the monthly 100,000 peso will be paid out to the bond lottery winner. The minimum odds of winning here every month would be 100/105,264,000.

The denomination breakdowns of the 222,000 pieces of bearer instruments are as follows:

100,000 with 100 bonds
52,000 with 500 bonds
70,000 with 1000 bonds

This means that the minimum buy in amount for a subscriber would be approximately 1,000 dollars; the next denomination about 5,000 dollars; and the largest would be 10,000 dollars. Given an approximate cost of printing at 10 pesos per unit, cost of printing on currency grade security paper would be approximately 2 million pesos. It is expected that worldwide road shows will be conducted as well as other advertising and promotional expenses. A net margin of about 4.7 million pesos is expected for this issuance after staff salaries and other compensation for the period are accounted for.

Since the bonds are bearer instruments and can be sold in the secondary bonds market the sticky features are designed so that the Bonds would tend to stick with the first buyer up to maturity. However these sticky features would be carried over to the current bond holder when such bonds are indeed released into the secondary market. However an OFO or individual must have 100,000 dollars worth of bonds in par value at the current exchange rate when executing a nomination vote of a particular prospective director in the ODF.

So for this first hypothetical issuance we need a maximum of 222,000 individuals to participate. About a hundred thousand with a thousand dollars; 52 thousand with five thousand dollars; and about 70,000 with ten thousand dollars. 222 thousand is about 2 percent of 11 million overseas Filipinos.

A Partnership for Progress

A powerpoint presentation by Gil R. Ramos, Ph. D. in our journey towards a new beginning through the virtual Overseas Filipino Nation. A Partnership for Progress

To the left, to the left

Bottom Line
By Marvin Bionat

After wreaking havoc as it swung a little too far to the right, the political pendulum is now swinging back to the left. Most Americans have had enough of a government that's too busy doing business as usual as the economy runs amok and then stumbles and crumbles into a heap of despair and anxiety. The question now becomes: How far should the pendulum swing back to the left without leaving a new wreck in its wake?

As the country wallows in the throes of a deep recession, America not surprisingly is more open to a government playing an activist role. Majority (56 percent) approve of the way Obama is handling the economy; compare that to only 31 percent who trust the Republicans to do a better job. For many, there isn't much choice. Extraordinary circumstances require extraordinary measures. It helps that the president is a gifted communicator and is actively selling what his team believes are the right interventions.

Those who have passionately bought into political ideologies (that is, the hard core or the hopeless ideologues) are unlikely to remove their philosophical blinders. In fact, the extreme political right will seize every opportunity to fault the new government for the continuing economic malaise and/or new setbacks. Those on the far left, on the other hand, will be disillusioned as the Obama administration proves itself to be less partisan and more pragmatic in its approach to governance.

Those of us who are more curious students than adamant advocates of political ideologies should pay close attention not so much to the sizzle (and froth) of heated debates (you'll get more than enough of those from listening to talk radio or watching Fox or MSNBC) but to actual evidence.

If the ideological issue is framed in the context of the welfare state (that is, the extent to which the government provides a social safety net to help people), the evidence is readily available. It's just a matter of comparing key indicators in a representative sampling of three kinds of capitalist societies: free market (U.S., Australia, Canada, Ireland, New Zealand, and the U.K.), mixed (Austria, Belgium, France, Germany, Italy, and the Netherlands), and social welfare (Denmark, Finland, Norway, and Sweden). Data is culled from available OECD statistics as cited in Common Wealth: Economics for a Crowded Planet (Jeffrey Sachs, 2008). Overall government spending: At roughly 38 percent of GNP, the free-market governments spend the least. In the middle of the spectrum are mixed economies that spend approximately 49 percent of their national income. Social-welfare states spend the most at 52 percent.

Public-sector outlays: If we break down the data to actual social outlays (cash transfers, direct government provision of services, active labor-market policies), the total public-sector outlays in free-market states are significantly lower at 17.4 percent of GNP (with the U.S. spending even less at 14.8 percent) compared to 25.8 percent and 26.8 percent for mixed and social-welfare economies, respectively.

Key indicators: How does social spending affect the bottom-line indicators (that is, poverty level, inequality, and prosperity)? It turns out that poverty rate in free-market states is much higher at 12.6 percent (and worse in the U.S. at 17.1 percent). Mixed economies do better at 9 percent, and social-welfare states have the lowest poverty rate at only 5.6 percent. In terms of the Gini coefficient (where 0 means wealth is equally distributed, and 100 means distribution is completely unequal), free-market states lag with a coefficient of 32 (35.7 for the U.S.), while mixed economies and social-welfare states do better at 28 and 24.7, respectively.

In terms of technological innovation and R&D spending (key metrics that underlie long-term prosperity), social-welfare states resoundingly trump free-market and mixed economies. Based on the World Economic Forum Technology Index, the average rank among social-welfare states is 6, compared to 16 and 24 for free-market and mixed economies, respectively. Likewise, R&D spending as a share of GNP is much higher at 3 percent in social-welfare states, compared to 1.8 and 2 percent in free-market and mixed economies, respectively.

It should be noted that in this year's list of "Top 10 Happiest Countries" (based on an annual survey conducted by the OECD), Denmark, the quintessential social-welfare state, again tops the list. All the other social-welfare states cited above are also in the top 10, with Finland, Sweden, and Norway taking the second, fourth, and ninth spot, respectively. The U.S. did not make the list.

If the social-welfare states and mixed economies have proven to be much more successful in making their people happy, why doesn't the U.S. learn from them? The political right's mantra of "small government" is certainly a compelling one, but decades of deregulation and tax breaks for the wealthy have brought the economy to the deepest hole since the Great Depression. What then is in the way of a more activist U.S. government?

The race issue: The social-welfare states and mixed economies in Europe are largely racially homogenous, so social programs are met with minimal resistance (that is, it's okay to provide assistance to "their own kind"). In the U.S., because minorities are disproportionately poor, there is a strong resistance to providing assistance to people of different color, putting downward pressure on social spending. This is convincingly proven by the inverse correlation between the size of the African-American population and the level of social spending at the state level; that is, social spending tends to be low in states where there are more African-Americans. The idea of minorities abusing the system and losing the incentive to work fires up ardent right-wing advocates to resist the cyclical swing toward a more social-welfare society, and some are discreet enough to cloak the argument in non-racial terms; for example, as a grossly unfair socialist redistribution.

For political progressives to allow the widest swing to the left, the challenge is to prove or at least successfully argue that social spending is not about cuddling the poor and keeping them dependent on the government, but that government resources can be used to help people help themselves (through the provision of basic services, including affordable housing, health care, and education).

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Marvin Bionat is the creator of PhilippineUpdate.com, a news and views site that has served as a virtual platform that promotes various advocacies, including the political empowerment of overseas Filipinos and accountability in government. He wrote the National Bookstore bestseller How to Win (or Lose) in Philippine Elections (Anvil Publishing, 1998) and is now based in the

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The Great Depression: Deja vu all over again

No, it’s not quite the Great Depression in the America — not yet anyway. In the 1930s, unemployment was at 25% compared to only about 6% today. While more layoffs are expected next year, members of the National Association of Business Economists believe unemployment will rise to just around 7%. Even assuming that the US$700 billion bailout fails, economic forecasters estimate the unemployment rate to rise between 10% and 12%, still less than half of the 1930s scenario.

In terms of economic growth, the Great Depression saw the gross domestic product plummet by 13% in 1932. That’s a far cry from the expected 1.1% drop this last quarter of 2008, even assuming the bailout fails to jumpstart the flow of credit. Economists surveyed by CNNMoney.com surmised that in a worst-case scenario the GDP may drop by a maximum of 4%.

What made the 1930s crisis spin out of control was the lack of social safety net programs, including Social Security, unemployment benefits and insurance on people’s bank deposits. In addition, the fact that economic managers now have the benefit of hindsight (thus avoiding policies that directly aggravated the problem, such as the tightening of credit and the closing or protection of domestic markets) makes the specter of another Great Depression less likely.

Prudently allocating hundreds of billions of dollars (in addition to the US$700 bailout) in an active, diverse, and innovative New Deal-type approach to spur the economy will be the extraordinary medicine required to treat a massive heart attack that has now beset the US economy. President-elect Obama’s plan to fund major infrastructure projects and innovation in green technology is not only good in the short term; it will also help the US build its long-term capacity to compete. And creating a generation of new environmentally friendly technologies may be the new industry that will rejuvenate the US economy the way cars and personal computers drove economic prosperity in the past.

I suspect the worse problem America is now facing is not so much the lack of policy solutions to a major macroeconomic downturn but how to deal with one basic economic fundamental: a consumer-driven economy will work only when it’s sustainable — when people spend more than they can afford, then any “prosperity” is a sham and is bound to fall apart like a stack of cards.

Unfortunately, indicators are not exactly good. According to MarketWatch, 43% of Americans spend more than they earn. The average household now carries some US$8,000 to US$10,000 in credit-card debt. Savings is in the negative territory, from an 11% savings rate in 1984.

Only a few years ago Americans were using their homes as a cash cow — assuming that rising home prices would leave them ahead of the game. Now with the housing market tanking and huge chunks of retirement accounts falling off to the ground zero of the financial meltdown, the average American has nothing much to draw from. Those who are about to retire are hit the hardest: a couple who may have painstakingly amassed US$600,000 in retirement money are now left with only around US$360,000, assuming the typical drop of 40% in the equity market since the unraveling of Wall Street last year. Younger people whose time horizons are longer can afford (or like to believe they can afford) to sit it out and expect to recover their investment and then some.

Bottom line: While there are practical macroeconomic solutions to the current credit crisis, Americans need to start spending within their means or any recovery will be artificial and fleeting. How can Americans move from a negative savings to a positive savings territory? I suspect that is the question that should underlie any real solution to America’s biggest economic crisis since the Great Depression. Simply lowering unemployment is clearly not sufficient, as the decline in savings actually occurred in an era when unemployment was historically low. Arguably, the problem boils down to personal values and discipline, which the government can’t really legislate. Ultimately, compelling incentives will have to be provided at the microeconomic level if America is to start mitigating a rather steep economic decline.

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