Tuesday, June 30, 2009

BC's Structual Trade Deficit

Latest BC statistic report about BC economy shows:

  • There was a 9.0% drop in the value of BC origin exports in the first quarter of 2009 compared to the same period a year ago. Reduced exports of forest products, metallic mineral products and machinery and equipment were mainly responsible for the drop.
  • The forest sector continues to struggle as exports of both solid wood (-23.4%) and pulp and paper (-26.0%) plunged in the first quarter. Exports of softwood lumber, which has traditionally been BC’s top export, have fallen 24.2% over the first three months of 2009, compared to the first quarter of 2008, and trail shipments of both coal and natural gas.
  • The value of coal exports soared 81.1% in the first quarter, solely due to higher prices, as volumes shipped have actually dropped 39.3%. The global financial crisis has resulted in a significant reduction in the demand for coal and it is expected that new contract prices will drop substantially. As a result, this strong growth in the value of coal exports will likely be short-lived. Elsewhere in the energy sector, falling prices have driven the value of natural gas exports down 18.1%, despite a 5.5% increase in the quantity of gas shipped. Exports of electricity have also declined, slumping 21.9%.
  • The value of metallic mineral exports fell 26.0% in the first quarter, despite a 1.8% rise in shipments of copper ores and concentrates, BC’s most significant metallic mineral export. Exports of molybdenum ores and concentrates (-48.7%) and unwrought zinc exports (-51.3%) are both well down from last year.
  • Among the few bright spots in BC’s export picture were increases in shipments of agriculture and food products (+10.1%) and fish (+14.4%).
  • Exports to most of BC’s major trading partners in Asia bucked the overall trend. Shipments to Mainland China (+26.5%), Hong Kong (+21.6%), Taiwan (+3.8%), Japan (+10.4%) and South Korea (+37.0%) all climbed.
  • The last time BC had a trade surplus was 20 years ago, in 1988. Over the next 15 years, the deficit was fairly stable at between about $4 billion and $8 billion; however, over the last five years, the deficit has ballooned, tripling from 2003 to 2008. International trade in goods is the component driving most of this rise in the trade deficit. By 2008, the province had a trade deficit with other countries of $25 billion.
The export to China, HongKong and other Asia countries mainly due to the buildup of inventory strategy by these countries or regions in taking advantage of low commodity price. China's buildup of commoditiy inventory is mainly used to diversify its more than $2 trillion US dollar reserves. Despite of the boost from China, BC still won't be able to make up the shortfall demand from other countries, mainly the United States.

BC's export is shrinking faster than the import which is why the structual deficit had a spike recently. BC has run trade surplus with countries include the United States, the United Kingdom and most advanced economies. It has run trade deficit with China, Mexico and less developed countries. This structure means that BC's trade position will continue to deteoriate in the near future.

BC has been living a life beyond its means for a long time. The economy needs to be significantly diversified to cousion the global economic crisis.

Sunday, June 28, 2009

Pension Fund Capitalism - Globalization

The Anglo-American pension fund model has hardly been questioned in the current financial and economic crisis. Most critics has been focused on financial intermediaries, rating agencies and government as the main corpus of the financial and economic crisis. On a global level, developing countries blamed US dollar reserve system and monopoly of international financial system by a few developed countries as the main causes of the current crisis according to United Nations' recent meeting on economic issue.

Pension fund is one of major players in capital market besides private equity funds. The size of it won't be able to excuse itself from the responsibility of allocating resources efficiently to promote economic growth and other social goals.

Source: OECD Global Pension Statistics

The United States had the largest pension fund market in the OECD with assets worth USD 9.7 trillion – approximately two thirds of the total OECD aggregate market. The US’ share of OECD pension fund assets was 60% in 2006. Canada has US0.7 trillion of pension funds. The more important figure is the ratio between pension assets and country's GDP. As we see from the picture, the highest asset-to-GDP ratio was Iceland's, at 132.7%. Nether land, Switz eland, Australia, the United Kingdom and the United States are next. It's not surprising to see that Ireland ran into serious pension crisis during the current financial market sharp correction.

However, the relationship between Pension fund and economic growth is far from virtuous from economic, environmental and social perspectives.

The investment process of pension fund is based on Market Efficiency Hypothesis. The sole objective of funds has been focused on achieving returns to meet its pension liabilities. However, this decision making process is irrelevant in the face of structural and market imperative. Fund investment in most cases has been used to assist the accelerating speed of globalization through investment in multinational firms. That means that local economy has been deprived of funding sources for industry growth and development. Real productive economy has been shrinking steadily while more and more cheap imports produced from multinational firms in China occupied developed world including Canada. Canada has been relying on resource industry to feed the needs of its people while local industry has been starved for money.

The downside of current pension investment is that when the boat of globalization sink, our pension sinks too. The only hope for Canada is that BRIC countries (China, Russia, Brizal and India) will pick up the demand slack left by the United States.

There are a few players for the pension fund:

Beneficiaries: employees
Pension Trustees: elected government officials
Intermediaries: Investment firms. Semi-government investment corporations.
Custodians: financial firms
Investment Products: High credit quality equities and corporate bonds, government bonds, Small portion of Alternative Investments.

Friday, June 26, 2009

Unite Nation Delegates Call for a New International Financial Order

Developing countries called for a new international financial system at the United Nations on the World Financial and Economic Crisis and Its Impact on Development yesterday. The whole press release is here. Here are some paragraphs:

Decrying a world economic order that had rewarded the powerful, marginalized the poor and promoted an unbridled capitalism that ignited unprecedented financial contagion, General Assembly delegates today urged swift and concerted measures to restructure international finance bodies and forge people-centred policies that addressed human security.

Ecuadorian President Rafael Correra said that the creation of a coordinating entity that could issue Special Drawing Rights would help break a monopoly in the provision of liquidity that guaranteed the dominance of the United States dollar and asymmetric decisions of the International Monetary Fund (IMF). Channelling those rights through such bodies as the Food and Agriculture Organization (FAO) would prevent the Fund from re-editing its asymmetry.

Ralph E. Gonsalves, Prime Minister of Saint Vincent and the Grenadines, also questioned why countries should be forced to borrow from those whose bad advice and reckless regulatory neglect had precipitated the crisis. The responsibility lay in the world’s unregulated financial centres, and in those who considered it their right to prescribe other peoples’ policy space. A good solution required a framework for a modern, competitive and many-sided “post-colonial” economy that was at once local, national, regional and global. To deal with the fallout, his country sought to strengthen bonds with other nations through various regional groupings.

At the same time, Heidemarie Wieczorek-Zeul, Federal Minister for Economic Cooperation and Development of Germany, pointed out that it would take an organization with the United Nations legitimacy to fully tackle the crisis. With today’s Conference, countries were strengthening the United Nations role in global economic governance and she welcomed the proposed creation of a panel of experts that included expertise from all regions.

She stressed the need for a global stimulus package that would benefit the poorest and embrace an ecological dimension. More financing was needed for development, which could be mobilized by fighting tax evasion, making greater use of instruments -- like emissions trading and “debt2health” swaps -- and having banks accept financial responsibility for the crisis. The allocation of Special Drawing Rights would provide an important foreign reserve cushion for developing countries in need.

Building on that, Reneet Kaur, Minister of State for External Affairs of India, underscored that today’s conference was the first United Nations gathering on the global financial and economic system since 1944. It was vital that the Organization’s convening power be used to hear the voice of the entire global community. At the Bretton Woods institutions, voice and quota reform needed to be accelerated. Lending by international financial institutions and multilateral development banks must also increase, and associated loan conditionalities must soften.

International financial system is falling part and financial firms are under the life support of developed nations. I am wondering how these voices will go into the ears of US politicians. Of course US won't care about the voices of these little countries accept a few big emerging countries such as China, Russia and India etc.

Climate Protection Bill

Carbon trade will give financial firms a huge potential to earn super normal rate of return in the near future while allowing the polluters continue to pollute in the western world.

According to Bloomberg, Democrats in the U.S. Congress are working on a climate- protection bill that would allow American emitters to use emerging-market and domestic offsets for potentially all of the carbon cuts required through 2025, according to New Carbon Finance. The bill, sponsored by Representatives Henry Waxman of California and Edward Markey of Massachusetts, reflects input from Richard L. Sandor, chairman and chief executive officer of Climate Exchange Plc, which owns the world’s biggest CO2 exchange in London.

The lobby -- which includes Goldman Sachs Group Inc., Morgan Stanley, Barclays Plc, JPMorgan Chase & Co. and 168 other firms -- argues that climate change can’t be solved without a profit-driven market. The organization and its members haven’t disclosed how much they earned from trading carbon permits.

China, Mexico and Greenpeace filed complaints against the carbon trade and argues that direct government tax will be more effective in protecting the environment.

It probably should be called Climate Pollution Bill.

Over the Counter Derivative

There is an article from Chris Whalen: Over-the-Counter Derivatives: Modernizing Oversight . In the article, Chris states that OTC Banking model provides super-normal return for a few dealers in the market which acts as a heavy tax burdern for other sectors of the real economy. In the economic downturn, the risks of these huge positions undertaken by the few banks and dealers are shared by all taxpayers. The compexity and oqupue of these contracts put all others players in the market an unequal level playing field. OTC Contracts has also been used by corporate executives to make up its short term profit which is essentially fraudulent.

Chris also crtisized Obama and Geinther's recent OTC reform plan, he states:

  • Congress should subject all OTC contracts to The Commodity Exchange Act (CEA) and instruct the CFTC to begin the systematic review and rule making process to either conform OTC markets to minimum standards of disclosure, collateral and transparency, or require that the contracts be migrated onto organized, bilateral exchanges. It is time for the Congress to right the wrong done over a decade ago to Commissioner Brooksley Born and her colleagues at the CFTC. This wrong was committed in part by the Congress and in part by then-Treasury Secretary Larry Summers, then-Fed Chairman Alan Greenspan, and former Treasury Secretary Robert Rubin, among others, who all worked together to effectively block action that would have subjected OTC contracts to the full supervision of the CFTC.[6] [8]
  • The Congress should admit that it made a mistake in 2000 by blocking CFTC regulation of OTC derivatives. The Congress should take the time to document how and why Greenspan, Rubin and Summers, and others, viciously attacked the reputation and integrity of Chairman Born and other members of the CFTC, and thereby blocked CFTC regulation of OTC derivatives. The actions of Summers, Greenspan and Rubin over a decade ago to block CFTC regulation of OTC derivatives arguably created the circumstances for the collapse of AIG as well as hundreds and hundreds of billions of dollars in losses incurred by financial institutions around the world. The Congress and the people of the United States deserve to hear the explanation of Summers, Greenspan and Rubin for the actions they took and did not take in their capacity as public officials subject to congressional oversight. [7] [9]
  • I agree with the statement by Secretary Geithner last week that how and whether to combine the operations of the CFTC and the SEC is a question that needs more time and consideration than the Obama Administration has allocated for the consideration of reform for the OTC markets in 2009. I urge the Congress to move first on subjecting the OTC markets to CEA, then to take further time for hearings and fact finding to consider what other changes should occur in terms of the law and the operational structure of the SEC and CFTC.

The shadow banking system won't be gone until OTC comes under the sunshine.