The Sinking Ship
Since its launch in 2008, the G20 has organised three summit conferences. The first meeting created an enormous expectation by the mass media and bloggers that it would the same magnitude of 1944 Bretton Woods that determined the dollar supremacy, replacing the pound. But it was a false alarm. No official resolution was made on the settlement currency. The third meeting in 2009, therefore, had no such expectations.
Nonetheless, there are signals that G20 summit is indeed a conference to discuss the leading currencies. The UN Commission of Experts on International Financial Reform, quite abruptly, announced that the dollar standard ought to be replaced with a new currency basket scheme, much in the same manner of IMF’s SDR or EMS’s ECU.
UN panel urges replacing dollar with currency basket (Reuters)
The Russian authority leaked to the media that Moscow intended to propose a discussion to establish a new international standard currency at the preparatory meeting for the G20. The Russian proposal is based on the SDR, just like the UN panel.
Russia wants to start debate on new reserve currency at G20 (Ria Novosti)
The Russians insisted that major developing countries such as China supported their plan. China doesn’t officially express that it wants a new standard currency instead of the dollar, but unofficially it has made a preliminary proposal and disseminated the dossier to G20 delegates. On surface, China cannot afford to throw the dollar to the bin as it owns huge amount of US treasury bills.
U.S. dollar: Another Sign of Accelerating Loss of Confidence (Seeking Alpha)
Bank of America's Bernstein Says Sell Bank Stocks After Rally (Bloomberg)
If G20 wishes to transform the international currency regime to a multi-polar model, currencies of developing countries such as the yuan, the rouble, or the riyal to be stable. Yet, as long as insufficient regulation is placed upon hedge funds and tax haven jurisdictions, they are reluctant to lift the dollar peg for the fear of speculative attacks. The primary goal for Germany and France is to strengthen the hedge fund regulation – this is because they know the euro alone cannot take over the dollar’s role as the settlement currency. The EU needs the stabilisation and internationalisation of the other G20 currencies. Brussels pressured traditional tax havens such as Switzerland or Singapore to revise their financial tolerance. Britain, which used to oppose to more regulations, also declared ‘the beginning of the end of tax havens’.
'Beginning of the end of tax havens' (FT)
Similarly, American mass media enthusiastically report that US corporations evade taxation by transferring their profits to offshore facilities, so tax havens should be bulldozed.
Trillions that the world could use - $11.5 trillion hidden in offshore havens (International Herald Tribune)
The US is already bankrupt
FRB has decided to print more dollars to purchase the leftovers from the bond market. It will buy $300 billion worth of long-term bonds in 2009. Furthermore, the FRB will buy additional $850 billion mortgage equities from Freddy Mac and Fannie Mae that are not selling well.
Fed to buy $300bn in Treasury bonds (FT)
Beside local buyers, the US bonds have been traditionally supported by Japan and Germany. Since 2008, however, China became the world’s largest creditor of the bond. But the Lehman shock caused a huge drop in bond appetite by foreign buyers. Depression in US lowered the export volume of China, which is now in capital shortage to buy more US bonds. By analysing China’s natural resource diplomacy, it is clear that Beijing is trying to decouple from the dollar. China aggressively buys mines and petrol fields across the world. Seventy percent of China’s financial investment was composed of the dollar. They want to lower the percentage to 50, and the other 50% to be composed of more liquid non-dollar assets such as mines. This is clever, as it can offset the loss from the dollar depreciation with the price rise of commodities.
China inoculates itself against dollar collapse (Asia Times)
Falling greenback fuels BRIC dollar reserve rethink (Reuters)
More than Guantanamo, Obama’s biggest challenge is budgeting. He has to roll out financial policy, more public expenditure to sustain the economy, and re-strengthen social security policy that was neglected by his predecessor Bush. They all cost money. US fiscal deficit may become record high. Already, America’s fiscal balance is negative $11 trillion. Obama announced that the federal government expected $7 trillion increase of fiscal deficit over the next 10 years. Congress, however, thinks it was an underestimation, and instead figures the true estimate to be $9 trillion. Rescue plans to banks were originally $500 billion, but they are now $3 trillion.
Much Bigger Deficits Seen in Budget Office Forecast (New York Times)
Although an independent budgeting, Medicare assumes government bailout in the event its balance sheet fails. Estimation of the total cost borne by the government ranges from $30 to 50 trillion. Approximately 50 million Americans have no health care coverage at all. Inclusion of this group to the Medicare is ethically correct, but financially a risky venture.
Medicare Meltdown (Wall Street Journal)
Tea parties
A number of social movement organisers in US dubbed themselves Boston Tea Party in 2009. Historically, it is a symbolic incident in colonial America, that civilian groups in Boston dumped tea leaf barrels into the harbour as a protest to British decision to grant exclusive rights to the East India Company to export tea leaves to the 13 Colonies. Bostonians were upset not to be able to send representatives to the parliament in London, while taxation was freely decided by the British. British common law already established the principle ‘no representative, no taxation’, which was employed by the colonists. Three years later, the 13 Colonies declared independence. It became an American tradition to name any movement to oppose taxation with no popular representation Boston Tea Party.
The 2009 Tea Party participants are dissatisfied at the worsening economic condition despite huge bailout efforts on large banks by the government. People were angry to know that the government admitted to give excessive remuneration to AIG directors, while the company was supported by the public money.
Editorial: A.I.G. Bailout (New York Times)
Treasury told to make bail-out banks invest in US (FT)
A federation called New American Tea Party mobilised 150 demonstrations against corrupt bankers across America.
Fed-up Americans mobilize: More than 150 tea parties (World Net Daily)
Obama and his advisor Summers expressed their anger against AIG, but it will be difficult for them to take tough measures. AIG had accepted $50 trillion worth of CDS, which was instrumental to trigger the crisis. AIG failure is the CDS failure, which will cause chain reactions to other financial institutions whose success depend on.
"Getting Tough" with Predator Financial Institutions (Global Research)
Unemployment rate in US deteriorates. Including the semi-unemployed (U6), the rate is already 13.6 percent. In key states like Michigan, California, or Oregon, the U6 unemployment rate is 20. This is as bad as the Great Depression of the 1930s.
The federal government can have the FRB to print more money. But state governments don’t have this option. Illinois announced that it intended to increase the income tax by 50% for those whose annual income exceeded $56000. The middle class is also upset. Potential for tax rejection is big. If the tax revenue becomes insufficient, governments won’t be able to pay coupons to bond holders. Foreign investors will stay away from US bonds.
Boston Tea Party in 1774 achieved the independence and the birth of a new nation, but the Tea Party in 2009 may result in the dissolution of the Union. In the US, civil rights such as democracy and civil obligations such as tax payments form a clear social contract. The United States was not created as a nation state curved by natural boundaries. It is based on contracts. If the majority of the people become dissatisfied with the current state of the federation, the US can become politically very instable. In New England, the cradle of the American Revolution, there are heated discussions on whether they should declare independence from the US.
New Hampshire in uproar over US Administration (Russia Today)
Sunday 20 December 2009
Tuesday 15 December 2009
Britain, disturbed
Britain, disturbed
London’s real estate market has been nose-diving since the Lehman shock in 2008. The market was overheated by the excess capital from leverage finances, so the contraction was also quick. The market value of assets owned by Britain’s financial institutions diminished by a large margin. Approximately one-third of the money invested in Britain’s real estate came from abroad. For instance, Icelandic banks used to manage an asset that was 10 times larger than Iceland’s GDP during their heyday, and their main investment destination was Britain. As the crisis deepens, the capital from abroad started to fly, causing the pound to depreciate.
One of the biggest mistakes by the British government in 2008 was to purchase stocks issued by banks and grant them unlimited guarantees, believing the rescue packages would work. This was a wishful thinking. Endangered Royal Bank of Scotland alone, for instance, owns credits worth 2 trillion pounds which is far larger than Britain’s GDP ($2.6 trillion in 2008, by the IMF estimate). If 10% of these credits don’t perform, the entire expenditure for the NHS and education and research will be blown off. Compensation will have to be done by the public money. London has no such fiscal strength.
We're a nation on the brink of going bankrupt (Daily Mail)
The Wall Street Journal pointed out that the British government had failed to produce the intended effect on the financial market. It was rather becoming worse, and both the price of bank shares and the pound were falling. The general fear is so strong that the double collapse of banking system and the excess devaluation of the pound may be quite possible.
Restoring Confidence in the U.K. (WSJ)
Is the pound finished?
The US and Britain share the same financial system but not the currency. The US dollars are still the settlement currency of the world, such that dollar devaluation or inflation is unlikely even if the FRB prints more dollar than it should. International capitals that seek to withdraw from corporate shares and commercial papers will simply go to the treasury bills, so the US bond sells even if the fiscal deficit sustains. But the pound sterling is not such a world currency. In 2007, despite its petrol revenue and the effort to restore the external balance, the UK recorded the world’s third largest current account deficit. Britain’s accumulated fiscal deficit is already 400 billion pounds, which is roughly 250% of its GDP. Britain is more indebted than in 1976, when she asked for a rescue to the IMF last time. Britain cannot afford to spend more.
The British government is obliged to intervene and keep the financial system from collapsing so that the savings accounts of its citizens shall be safe. Yet the exchequer can no longer obtain capital from the bond market. The government thus instructs the BoE to print more pounds to support the non-performing loans owned by banks (= lend money for worthless collateral). This is the same policy by the FRB in the US. But the pound not being a hegemonic currency means that a currency crisis will become imminent if too much pound is supplied.
Treasury gives go-ahead to `print money' (FT)
US’ hot shot investor Jim Rogers declared the end of the pound and recommended all who own assets in pounds to sell them. The North Sea oil reserves and the City’s financial community, both of which have supported the strength of the pound, are now dry. Britain now has nothing to sell. City’s dominance is being taken over by rich Asian markets.
Jim Rogers: 'Sell any sterling you might have. It's finished' (The Independent)
Jim Rogers: `UK has nothing to sell' (FT)
Rogers, upon anticipating the continued growth of Asia, has moved his headquarter from the US to Singapore. Britain did not collapse as fast as he had wished, and Chinese stock prices have been falling. Nonetheless, Britain’s recovery doesn’t seem to occur any time soon, and business keeps on growing in Asia. Rogers is not a demagogue. Tory leader Cameron warned that Britain might soon need to ask the IMF for rescue. News agency Bloomberg anticipated IMF’s bailout for Britain before 2010.
We'll have to go begging to the IMF, says Cameron (The Independent)
Britain to Go Broke, Russia to Join OPEC in 2009 (Bloomberg)
One of the few not-so-bad banks, HSBC, has relatively fewer non-performing loans. But this is due to HSBC’s unique history that its Asian division used to be part of Britain Empire’s oriental wing, and after the 1997 Hong Kong handover, excess lending had been discouraged under the supervision of HK Monetary Agency. The Guardian observed sarcastically, that Britain’s savings account holders must praise Hong Kong.
Unless we are decisive Britain faces bankruptcy (The Guardian)
The curse of the euro
As the chancellor of exchequer, Brown concluded that Britain would not join the euro after his famed ‘five points test’. Looking back, it was a bad luck for Britain. If joined, the currency wouldn’t have been devaluated so much even if London enlarged the fiscal deficit. Indeed, the Maastricht Treaty obliges signatories to limit the deficit under a threshold, but Brussels doesn’t enforce it during the crisis times. In the eurozone, government deficit is rapidly expanding in Spain, Italy, Ireland, and Greece, to an extent that they may have to leave the euro. The Times says that Britain in non-eurozone will suffer less than in the continental countries, where the only fate is an economic meltdown after the expulsion from the eurozone.
It's a bitter chill but Britain is not Iceland (The Times)
In reality, however, such expulsions are unlikely. Eurozone states have given up their sovereign rights to print money and short-term monetary policies, and have agreed to be bound in their various economic policies. The EU aims to gradually take away the rights from its member states for harmonisation. Such strong political will probably render no intention kick out troubled fellow members. In fact, the EU has been extremely lenient in countries that failed in their obligations.
If the eurozone countries will never be expelled, under the same financial crisis and real estate market collapse, Spain and Ireland would appear in much better stead than Britain or Iceland. Icelandic kronas had to be suspended after its central bank printed too much, while Ireland had no such monetary trouble. Iceland recently filed an application to join the EU. The europhiles in Britain will similarly criticise the government for not joining the euro. The Guardian thinks the financial market will never recover unless London promises to join the euro after the crisis. But that would mean that the assets of the British people would be valued lower than before the pound devaluation. Then critics would undoubtedly say that Britain should’ve joined the euro while the pound was still strong. Chinese Xsing-Hua even analysed that Britain cannot join the euro in the future in any case.
News Analysis: Are Britain's hopes to join euro dashed? (Xin-hua)
President Obama chose Sarkozy as the first head of state to meet with during his European tour. Then Merkel. Brown was kept waiting in queue. Compare with 2002 when Bush swore into office, the first European visitor was Blair.
Barack Obama: Downing Street prepares for Obama snub (Telegraph)
During his last year in office, the same Bush refused Brown’s request for a meeting to prepare for the G20 summit, and instead chose Sarko. America is now looking for a new partner in Europe. Britain’s economy is heavily financialised, and its market system is a copy from the US.
Intelligence, you too
Britain’s traditional advantage is not only the City, but also its intelligence capability to manipulate international politics and markets. Commodity markets, Russia, democratisation movements in CIS and the Middle East, climate change, there are many fields at their discretion. If China’s growth is detrimental to Britain’s interest, for example, the MI6 can conspire to forge a military alliance between India and Japan to create political tension and instability in the Asia-Pacific. Yet, recently, the MI6 has made three big mistakes. First of such was the failure of the war on terror. Obama carefully seeks an exit strategy, and he will definitely close Guantanamo during his first term.
Obama 'declared end' to war on terror (Yahoo Canada)
Secondly, Israel is in danger. Israeli lobbyists in US have spoken for the benefits of Britain in many aspects of foreign affairs. 2009 invasion on Gaza was hugely unpopular by the UN, calling for a tribunal on war crimes committed by Israel. Thirdly, regulators in most major countries are interested in enact legislation to limit the activities of hedge funds and tax haven jurisdictions, which have been instrumental for Britain to wage economic wars against enemy markets. Cesspools of undisclosed capitals and speculators are now targeted for closure. These indicate that MI6 is not as powerful as it used to be. In Henry Kissinger’s recent essay, he insisted that the international political government needs to expand its scale to manage the global financial system. Effectively, he means that international organisations must acquire new functions to act like the world government. He otherwise articulated things such as the new Bretton Woods regime would be desired; US’ presence in the world was too strong; Sino-US relation would determine the world economic order; if the G2 is in conflict then China would attempt to create the Asian international order without US, and US would be tempted to protectionism.
Après le déluge. The chance for a new world order (NY Times)
With the weakened financial community and intelligence capability, Britain has much less to offer. America may not need the special relationship anymore, and perhaps seeks a new rival to partner with.
London’s real estate market has been nose-diving since the Lehman shock in 2008. The market was overheated by the excess capital from leverage finances, so the contraction was also quick. The market value of assets owned by Britain’s financial institutions diminished by a large margin. Approximately one-third of the money invested in Britain’s real estate came from abroad. For instance, Icelandic banks used to manage an asset that was 10 times larger than Iceland’s GDP during their heyday, and their main investment destination was Britain. As the crisis deepens, the capital from abroad started to fly, causing the pound to depreciate.
One of the biggest mistakes by the British government in 2008 was to purchase stocks issued by banks and grant them unlimited guarantees, believing the rescue packages would work. This was a wishful thinking. Endangered Royal Bank of Scotland alone, for instance, owns credits worth 2 trillion pounds which is far larger than Britain’s GDP ($2.6 trillion in 2008, by the IMF estimate). If 10% of these credits don’t perform, the entire expenditure for the NHS and education and research will be blown off. Compensation will have to be done by the public money. London has no such fiscal strength.
We're a nation on the brink of going bankrupt (Daily Mail)
The Wall Street Journal pointed out that the British government had failed to produce the intended effect on the financial market. It was rather becoming worse, and both the price of bank shares and the pound were falling. The general fear is so strong that the double collapse of banking system and the excess devaluation of the pound may be quite possible.
Restoring Confidence in the U.K. (WSJ)
Is the pound finished?
The US and Britain share the same financial system but not the currency. The US dollars are still the settlement currency of the world, such that dollar devaluation or inflation is unlikely even if the FRB prints more dollar than it should. International capitals that seek to withdraw from corporate shares and commercial papers will simply go to the treasury bills, so the US bond sells even if the fiscal deficit sustains. But the pound sterling is not such a world currency. In 2007, despite its petrol revenue and the effort to restore the external balance, the UK recorded the world’s third largest current account deficit. Britain’s accumulated fiscal deficit is already 400 billion pounds, which is roughly 250% of its GDP. Britain is more indebted than in 1976, when she asked for a rescue to the IMF last time. Britain cannot afford to spend more.
The British government is obliged to intervene and keep the financial system from collapsing so that the savings accounts of its citizens shall be safe. Yet the exchequer can no longer obtain capital from the bond market. The government thus instructs the BoE to print more pounds to support the non-performing loans owned by banks (= lend money for worthless collateral). This is the same policy by the FRB in the US. But the pound not being a hegemonic currency means that a currency crisis will become imminent if too much pound is supplied.
Treasury gives go-ahead to `print money' (FT)
US’ hot shot investor Jim Rogers declared the end of the pound and recommended all who own assets in pounds to sell them. The North Sea oil reserves and the City’s financial community, both of which have supported the strength of the pound, are now dry. Britain now has nothing to sell. City’s dominance is being taken over by rich Asian markets.
Jim Rogers: 'Sell any sterling you might have. It's finished' (The Independent)
Jim Rogers: `UK has nothing to sell' (FT)
Rogers, upon anticipating the continued growth of Asia, has moved his headquarter from the US to Singapore. Britain did not collapse as fast as he had wished, and Chinese stock prices have been falling. Nonetheless, Britain’s recovery doesn’t seem to occur any time soon, and business keeps on growing in Asia. Rogers is not a demagogue. Tory leader Cameron warned that Britain might soon need to ask the IMF for rescue. News agency Bloomberg anticipated IMF’s bailout for Britain before 2010.
We'll have to go begging to the IMF, says Cameron (The Independent)
Britain to Go Broke, Russia to Join OPEC in 2009 (Bloomberg)
One of the few not-so-bad banks, HSBC, has relatively fewer non-performing loans. But this is due to HSBC’s unique history that its Asian division used to be part of Britain Empire’s oriental wing, and after the 1997 Hong Kong handover, excess lending had been discouraged under the supervision of HK Monetary Agency. The Guardian observed sarcastically, that Britain’s savings account holders must praise Hong Kong.
Unless we are decisive Britain faces bankruptcy (The Guardian)
The curse of the euro
As the chancellor of exchequer, Brown concluded that Britain would not join the euro after his famed ‘five points test’. Looking back, it was a bad luck for Britain. If joined, the currency wouldn’t have been devaluated so much even if London enlarged the fiscal deficit. Indeed, the Maastricht Treaty obliges signatories to limit the deficit under a threshold, but Brussels doesn’t enforce it during the crisis times. In the eurozone, government deficit is rapidly expanding in Spain, Italy, Ireland, and Greece, to an extent that they may have to leave the euro. The Times says that Britain in non-eurozone will suffer less than in the continental countries, where the only fate is an economic meltdown after the expulsion from the eurozone.
It's a bitter chill but Britain is not Iceland (The Times)
In reality, however, such expulsions are unlikely. Eurozone states have given up their sovereign rights to print money and short-term monetary policies, and have agreed to be bound in their various economic policies. The EU aims to gradually take away the rights from its member states for harmonisation. Such strong political will probably render no intention kick out troubled fellow members. In fact, the EU has been extremely lenient in countries that failed in their obligations.
If the eurozone countries will never be expelled, under the same financial crisis and real estate market collapse, Spain and Ireland would appear in much better stead than Britain or Iceland. Icelandic kronas had to be suspended after its central bank printed too much, while Ireland had no such monetary trouble. Iceland recently filed an application to join the EU. The europhiles in Britain will similarly criticise the government for not joining the euro. The Guardian thinks the financial market will never recover unless London promises to join the euro after the crisis. But that would mean that the assets of the British people would be valued lower than before the pound devaluation. Then critics would undoubtedly say that Britain should’ve joined the euro while the pound was still strong. Chinese Xsing-Hua even analysed that Britain cannot join the euro in the future in any case.
News Analysis: Are Britain's hopes to join euro dashed? (Xin-hua)
President Obama chose Sarkozy as the first head of state to meet with during his European tour. Then Merkel. Brown was kept waiting in queue. Compare with 2002 when Bush swore into office, the first European visitor was Blair.
Barack Obama: Downing Street prepares for Obama snub (Telegraph)
During his last year in office, the same Bush refused Brown’s request for a meeting to prepare for the G20 summit, and instead chose Sarko. America is now looking for a new partner in Europe. Britain’s economy is heavily financialised, and its market system is a copy from the US.
Intelligence, you too
Britain’s traditional advantage is not only the City, but also its intelligence capability to manipulate international politics and markets. Commodity markets, Russia, democratisation movements in CIS and the Middle East, climate change, there are many fields at their discretion. If China’s growth is detrimental to Britain’s interest, for example, the MI6 can conspire to forge a military alliance between India and Japan to create political tension and instability in the Asia-Pacific. Yet, recently, the MI6 has made three big mistakes. First of such was the failure of the war on terror. Obama carefully seeks an exit strategy, and he will definitely close Guantanamo during his first term.
Obama 'declared end' to war on terror (Yahoo Canada)
Secondly, Israel is in danger. Israeli lobbyists in US have spoken for the benefits of Britain in many aspects of foreign affairs. 2009 invasion on Gaza was hugely unpopular by the UN, calling for a tribunal on war crimes committed by Israel. Thirdly, regulators in most major countries are interested in enact legislation to limit the activities of hedge funds and tax haven jurisdictions, which have been instrumental for Britain to wage economic wars against enemy markets. Cesspools of undisclosed capitals and speculators are now targeted for closure. These indicate that MI6 is not as powerful as it used to be. In Henry Kissinger’s recent essay, he insisted that the international political government needs to expand its scale to manage the global financial system. Effectively, he means that international organisations must acquire new functions to act like the world government. He otherwise articulated things such as the new Bretton Woods regime would be desired; US’ presence in the world was too strong; Sino-US relation would determine the world economic order; if the G2 is in conflict then China would attempt to create the Asian international order without US, and US would be tempted to protectionism.
Après le déluge. The chance for a new world order (NY Times)
With the weakened financial community and intelligence capability, Britain has much less to offer. America may not need the special relationship anymore, and perhaps seeks a new rival to partner with.
Monday 14 December 2009
Ig-Nobel and National Competitiveness
Factory superstar
There is an event called the World Skills Competition (WSC). Starting in Spain in the 1950s, it is now a large-scale biannual competition, often dubbed as the Olympic Games for manufacturers and other skilled professions. The competition genre is broad, from robotics, metal plating, facial massage, confectionary, electronics circuits, to aroma therapy.
In the context of manufacturing and service output, occupation masters often speak of finesse and intuitive heuristics that they acquired after decades-long experience. But ‘outputs’ are not just that. They are the results of the nexus consisted of research, planning, design, development, production, and sales.
Scientists engage in the basic research, engineers in design and development, creators in innovative product planning, operators in production sites – the quality of an output is determined by the collaborative effort of these players in the same value chain.
Six dimensions of production
Can we quantitatively analyse such an output quality and potential of a nation? Much has been done by economists on this subject. But how does it look like from a natural science perspective? If we use the World Skills Competition as an index for production skills, I would choose the following indices for statistical comparison.
1. Production - Number of gold medals at the World Skills Competition
2. Design - Number of applications under the Patent Cooperation Treaty
3. Development - Number of publication in natural science and engineering
4. Research - Number of Nobel Prizes in physics, chemistry, and physiology/medicine, economics
5. Theory - Awards in mathematics and computational sciences (Fields Medal, Nevanlinna, Abel, Schock, Wolf, Gauss, Turing, Gödel)
6. Planning - Number of awards at Ig-Nobel Prize
Part of the upper work flow at the WSC involves creative thinking as a designer. Great ideas may mature to be recognised as patents. Patent Cooperation Treaty (PCT) provides for the common recognition of patents that are applied and acknowledged in all the important patent jurisdictions like the US, Japan, and Britain. I use the number of PCT applications as the proxy for the design ability. Alongside the design department, there is another specialism that is responsible for development and sampling. Achievements in natural science and engineering such as new mechanisms and regulatory mechatronics will be submitted as theses to the academia. The development potential can be understood as the number of academic theses. This area is not only a monopoly of private enterprises – research institutes and universities also strive in their endeavour. One process upstream from development lies the foundation or ‘pure’ research. The most authoritative brand thereof is obviously the Nobel Prize. To value ‘research’, I count the prizes in physics, chemistry, physiology / medicine, economics, and exclude literature and peace prizes. The Nobel Prizes, however, doesn’t include mathematics – the mother of all sciences. This is due to Alfred Nobel’s philosophy that the prize shall be awarded to direct contribution to the society. Therefore I chose additional 8 prizes that are internationally admired (6 from mathematics: Fields Medal, Nevanlinna prize, Abel prize, Schock prize, Wolf prize, Gauss medal; 2 from computation sciences: Turing prize, Gödel prize). This will be the index for pure theoretical science.
The order from the WSC to mathematics is sorted according to the general production tasks. From another perspective, the later categories may seem more luxurious. When a country becomes richer and accumulates social capital, there will be more engineers who are highly trained to be able to produce scientific theses. Companies can afford to have their own foundation research institutes. Governments can spare their budget for mathematics, whose direct contribution to industries is often difficult to see. Societies are more mature and they allow research in things that don’t general immediate returns. On the same line of argument, I thought there should be another category for “useless research that are too strange to be reckoned”.
Ig-Nobel Prize, an award for aesthetic and witty planning
Ig-Nobel Prize is an unofficial award by volunteer academics, awarded at Harvard. Ig-Nobel committee chooses researches or phenomena that cannot be highly regarded by the authentic natural sciences but are uniquely indicative to the hard science. Here are some of the examples from the past recipients.
- Training a pigeon to distinguish paintings of Picasso and Monet (cognitive science)
- Tamagotchi (economics, for wasting of hundreds of work hours)
- Dog-to-human translation device (peace)
- Special steel on which pigeons wouldn’t shat (chemistry/material science)
- Karaoke (peace, for a unique way to learn tolerance)
- 34 years of dietary record for the study of brain and bodily conditions (physiology, for an attempt that nobody dared)
- Beer froth and the law of exponential decay (physics)
- Hippocampi of London cab drivers (medicine)
- Verbal indignation in organisations (literature)
Certainly, inventions of tamagotchi or doggy translator wouldn’t be in good regard by the academia, but may be pioneer products for man-machine-interface in its design philosophy. Pigeon training is a good indicator for something that is easy for humans but extremely difficult for computers, a research that may be applied to vision recognition and robot engineering. These are, in other words, children’s play that can entertain the best scientists.
This is an excellent proxy to assume the degree of creative and curious thinking in a culture. Sensitivity in this area has a strong applicability to the most upstream of the production chain – the product planning. If we define the path from the Skills Olympics to mathematics as a course of technology, Ig-Nobel is perhaps a diversion of manufacturing to an artistic pursuit.
The results
The counts were done according to the nationality of the recipients. All the mentioned awards have official websites, which show the past recipients.
The below ranking table showed the result of this exercise. Quite easily, interesting tendencies can be observed.
There is an event called the World Skills Competition (WSC). Starting in Spain in the 1950s, it is now a large-scale biannual competition, often dubbed as the Olympic Games for manufacturers and other skilled professions. The competition genre is broad, from robotics, metal plating, facial massage, confectionary, electronics circuits, to aroma therapy.
In the context of manufacturing and service output, occupation masters often speak of finesse and intuitive heuristics that they acquired after decades-long experience. But ‘outputs’ are not just that. They are the results of the nexus consisted of research, planning, design, development, production, and sales.
Scientists engage in the basic research, engineers in design and development, creators in innovative product planning, operators in production sites – the quality of an output is determined by the collaborative effort of these players in the same value chain.
Six dimensions of production
Can we quantitatively analyse such an output quality and potential of a nation? Much has been done by economists on this subject. But how does it look like from a natural science perspective? If we use the World Skills Competition as an index for production skills, I would choose the following indices for statistical comparison.
1. Production - Number of gold medals at the World Skills Competition
2. Design - Number of applications under the Patent Cooperation Treaty
3. Development - Number of publication in natural science and engineering
4. Research - Number of Nobel Prizes in physics, chemistry, and physiology/medicine, economics
5. Theory - Awards in mathematics and computational sciences (Fields Medal, Nevanlinna, Abel, Schock, Wolf, Gauss, Turing, Gödel)
6. Planning - Number of awards at Ig-Nobel Prize
Part of the upper work flow at the WSC involves creative thinking as a designer. Great ideas may mature to be recognised as patents. Patent Cooperation Treaty (PCT) provides for the common recognition of patents that are applied and acknowledged in all the important patent jurisdictions like the US, Japan, and Britain. I use the number of PCT applications as the proxy for the design ability. Alongside the design department, there is another specialism that is responsible for development and sampling. Achievements in natural science and engineering such as new mechanisms and regulatory mechatronics will be submitted as theses to the academia. The development potential can be understood as the number of academic theses. This area is not only a monopoly of private enterprises – research institutes and universities also strive in their endeavour. One process upstream from development lies the foundation or ‘pure’ research. The most authoritative brand thereof is obviously the Nobel Prize. To value ‘research’, I count the prizes in physics, chemistry, physiology / medicine, economics, and exclude literature and peace prizes. The Nobel Prizes, however, doesn’t include mathematics – the mother of all sciences. This is due to Alfred Nobel’s philosophy that the prize shall be awarded to direct contribution to the society. Therefore I chose additional 8 prizes that are internationally admired (6 from mathematics: Fields Medal, Nevanlinna prize, Abel prize, Schock prize, Wolf prize, Gauss medal; 2 from computation sciences: Turing prize, Gödel prize). This will be the index for pure theoretical science.
The order from the WSC to mathematics is sorted according to the general production tasks. From another perspective, the later categories may seem more luxurious. When a country becomes richer and accumulates social capital, there will be more engineers who are highly trained to be able to produce scientific theses. Companies can afford to have their own foundation research institutes. Governments can spare their budget for mathematics, whose direct contribution to industries is often difficult to see. Societies are more mature and they allow research in things that don’t general immediate returns. On the same line of argument, I thought there should be another category for “useless research that are too strange to be reckoned”.
Ig-Nobel Prize, an award for aesthetic and witty planning
Ig-Nobel Prize is an unofficial award by volunteer academics, awarded at Harvard. Ig-Nobel committee chooses researches or phenomena that cannot be highly regarded by the authentic natural sciences but are uniquely indicative to the hard science. Here are some of the examples from the past recipients.
- Training a pigeon to distinguish paintings of Picasso and Monet (cognitive science)
- Tamagotchi (economics, for wasting of hundreds of work hours)
- Dog-to-human translation device (peace)
- Special steel on which pigeons wouldn’t shat (chemistry/material science)
- Karaoke (peace, for a unique way to learn tolerance)
- 34 years of dietary record for the study of brain and bodily conditions (physiology, for an attempt that nobody dared)
- Beer froth and the law of exponential decay (physics)
- Hippocampi of London cab drivers (medicine)
- Verbal indignation in organisations (literature)
Certainly, inventions of tamagotchi or doggy translator wouldn’t be in good regard by the academia, but may be pioneer products for man-machine-interface in its design philosophy. Pigeon training is a good indicator for something that is easy for humans but extremely difficult for computers, a research that may be applied to vision recognition and robot engineering. These are, in other words, children’s play that can entertain the best scientists.
This is an excellent proxy to assume the degree of creative and curious thinking in a culture. Sensitivity in this area has a strong applicability to the most upstream of the production chain – the product planning. If we define the path from the Skills Olympics to mathematics as a course of technology, Ig-Nobel is perhaps a diversion of manufacturing to an artistic pursuit.
The results
The counts were done according to the nationality of the recipients. All the mentioned awards have official websites, which show the past recipients.
The below ranking table showed the result of this exercise. Quite easily, interesting tendencies can be observed.
Wednesday 9 December 2009
The World According to the 5 Currencies
Leaders of the FRB, the ECB, and the Bank of England jointly expressed their dissatisfaction to the dollar peg that many Asian countries pursued. In the wake of global inflation, the peg is detrimental, the bankers say. Donald Kohn of the FRB described that overheated Asian economies increased the commodity demand, inviting the price hike. Flexible monetary policy would be beneficial to counter the inflation. Kohn only said ‘Asian economies’, but it is widely understood that he meant China and Saudi Arabia.
Federal Reserve exports inflation (Seeking Alpha)
Kohn speech hints at call to drop dollar peg (Financial Times)
Governor King of the BOE spoke at the Parliament, saying “a very important region to the world economy pegs to just one currency called the dollar. [because of the peg] This region has to increase the monetary supply [because US does so to counter the crisis], causing worldwide inflation”. A very important region, of course, means Asia.
Interest rates in dollar-pegged Asia not appropriate (FX Street)
France’s governor Noyer, who was also the vice-president of the ECB, criticised the overstretched monetary policies of the pegged Asian countries. Flexible exchange rate would help balance the global trade flow, by which the depreciated dollar would increase US exports and discourage Asian exports to the US.
To keep the peg, China and the Middle East has invested in the financial industry of the US, as well as supported US bonds. The series of public statements made by the Western central banks represent that the US now thinks the negative impact of the inflation outweighs the benefits of capital inflow from Asia. At the same time, by these statements, the US authorities have admitted that US’ increase of dollar supply was the cause of the worldwide inflation.
Trans-Atlantic cooperation at stake
This is not the first time when the Western governments put the pressure on China and the Gulf to stop their dollar peg. In 2006, the IMF and the G7 called for the appreciation of those currencies against the dollar, to balance the terms of trade. The IMF created ‘Five Poles Council’ (=US, EU, Japan, China, Saudi Arabia). Yet the abandoning of the peg was not materialised by the opposition by China and Saudi Arabia, supported by Japan. The second call for the peg stop was due to America’s crisis that requires lowering of the interest rate and inflation due to shaky dollar credibility which disables to raise the interest rate. While the Fed’s FOMC keeps the interest rate, the ECB tends to raise the rate to counter the inflation.
Eurozone inflation soars to new high (FT)
In comparison to US economy, the eurozone counterpart is not performing so badly. The ECB wants to raise the interest rate to fight inflation. The inflation rate of the eurozone in 2007-08 was 4%, twice larger than its inflation target. Unlike America’s FRB, the ECB abhors inflation more than anything, by the tradition it inherited from the Bundesbank.
US sees a shadow of the Bundesbank (FT)
If the interest rate variance widens between the US and the Eurozone, the dollar will be sold for the purchase of the euro. The credibility of the dollar will be thus weakened further. Amidst the crash of the housing market, the US authorities are thought to continue its oversupply of the dollar. This is exactly the reverse of the dollar-euro interest rate variance in the 1990s, that threatened the nascent euro. Now investors perceive the euro as a more solid currency.
Morgan Stanley warns of catastrophic event as ECB fights Federal Reserve (Telegraph)
This is not advantageous to Europe. In Asia, many countries peg their currencies to the dollar – such that euro appreciation against the dollar automatically means expensive euro against the Asian monies. Europe wants Asia to stop the dollar peg.
Germany and Japan for the 1970s, China and GCC for the 2000s
China left its official dollar peg in 2005, and yuan has shifted to the peg to a currency basket of the dollar, euro, yen, and pound sterling. Yet the Chinese authorities still keep their flexible peg, by which they control the exchange fluctuation range against the dollar. The Gulf States (GCC6) plans to launch a common currency in 2010 while keeping the dollar peg. The US pressures both China and GCC6 to leave the peg, but they are reluctant. For them, currency management is easier while they free-ride on the US hegemony. Nonetheless, times are against the peggers. Depression in the US, financial crises, dollar credibility, worldwide inflation; they are all negative incentives to keep the peg. If they indeed leave the peg, they will no longer have to have a large amount of foreign reserves made of dollars cash and treasury bills. In the long run, such will devalue the dollar and US bonds. The US somehow needs to make sure that they won’t sell the dollar.
In the 1970s when Nixon left the gold standard, many thought West Germany and Japan would take over the economic hegemony. High level ‘Three Poles Committee’ was created to discuss this inevitable. However, the Germans and the Japanese didn’t wish sudden power shift to their camp. The old axis states of the WWII were well aware of the consequence of such an adventurism. The US took advantage of their unwillingness, and instead created the G5, in which Germany and Japan would collectively intervene to support the dollar.
In the 2000s, similarly, neither China nor the GCC wish to acquire sudden economic hegemony. But unlike Germany or Japan, they are not US allies, nor have they general pacifist tendencies in their societies. They also maintain good relations with anti-US states ie Iran and Venezuela. Will they take a big step to claim the position of world financial centre at some point?
Can they manage international currencies?
Saudi Arabia in the 1970s used to simply waste out the petrol revenue for … nothing. Petrol exporters these days invest in infrastructures and the sovereign wealth funds (SWFs). Iran’s Ahmadinejad also advocates the GCC common currency, albeit that it shifts from the dollar peg to the currency basket. He wants the crude oil to be denominated in the GCC currency, instead of the dollar.
The GCC has never managed its own currency. In the 1970s, before the dollar peg, they used the Indian rupee which was pegged to the pound. Some see that the GCC lacks an ability to form and manage its own currency. Yet it has a huge revenue base from the petrol. If it can somehow obtain techniques to manage the currency, it will be able to launch a strong common currency and leave the dollar peg. The Chinese, likewise, did not have an expertise on foreign exchange. But thanks to knowledge transfer from Goldman Sachs and the FRB, they improved their macroeconomic management ability. Like the Chinese, the Arabs have the traditional excellence in trade and commerce. They can do it too.
The monetary map of the world will shift from the current dollar dominance to a multipolar one, involving the five major currencies.
Sunday 6 December 2009
The FRB bubble
The Midwest state of Montana submitted a proposal to circulate a new currency backed by bullion for transactions by the state government and the private sector, alongside the US banknotes issued by the FRB. The Montana State congress was concerned that the FRB was printing too much dollar and the anticipated inflation when its value goes down. Rare metal commodities such as gold and silver are known to fluctuate less than cash currencies. Identical proposals have been discussed in other states of Indiana, Colorado, Missouri, Georgia, and Maryland.
State considers return to gold, silver dollars (World Net Daily)
Old rivalries
Since the creation of the Union, the debate between the federalists and the democratic-republicans (and later Jacksonians, Monroevians) has never ceased in the US. The FRB system, though its power is concentrated in New York, is officially a collaborative conference of 12 geographically-spread reserve banks. Democratic-republicans tended to distrust the FRB and tended to perceive the federal government as having been hijacked by the Wall Street capital owners. Use of bullion-backed money instead of the federal dollar has been discussed for a long time. The stimulus package has contributed to FEB’s 17% increase of money supply, whose seigneurage is to be used to support the unsold treasury bills. State governments are worried.
Beyond the dollar (Asia Times)
Recently, the FRB has published a thesis that advocated the strong interest rate policy whose desirable rate would be minus 5 percent. A negative rate is practically impossible for interest rates so the only option must be the quantitative easing by overprinting of the dollar.
Fed study puts ideal US interest rate at -5% (Financial Times)
Then, will the US at the state level be able to avoid the negative impacts from the dollar fall? Most likely not. US economy is fully integrated as a nation, such that no state has a stand-alone economy. Gold coins are just proposals, or expressions of dissatisfaction to the federal policy. The most radical Democratic-republicans go beyond just another currency but call for the demolition of the FRB system itself. A number of libertarians insist that scrutiny on the FRB would be necessary. If the true amount of non-performing loans owned by the FRB is publicised, the credibility of the Federal Reserve will plummet to the ground. One of the most important functions of the FRB is to print the dollar and supply the money to buy the treasury bills or commercial papers, or reduce the money circulation by selling them. This is called an open market operation. During the normal times, it provides stability to the real estate markets and ease inflation pressures, and allocate the right amount of capital for the economic activities. Money balance will have its equilibrium.
However, since 2007, the FRB has kept on increasing its dollar output, by ignoring inflationary pressure as well as instability of real estate collateral equities. If the government bond market falls, the interest rate of the bond will go up, taking the housing loan rate with it, such that the real estate market will even worsen. The FRB bought equities from private banks, but booked for its paper company and not on its own balance sheet. Congress audit will not be able to detect the kinds of equities that the FRB had received from banks. Before the crisis, major US banks had created out-of-book special investment vehicles (SIV), and operated high risk equities there. The FRB has many ‘super SIVs’.
Why Obama’s new Tarp will fail to rescue the banks (FT)
Volcker says Fed’s authority probably to be reviewed (Bloomberg)
Everybody’s the Fed
If the FRB survives on its credibility creation function, the private sector did the same by securitisation. Just like the FRB can transfer the nation’s credibility to the value of the dollar, corporations could transfer their credibility to the value of their corporate bonds and commercial papers. Credit rating agencies determined the value of those bonds, and safety net such as credit default swap (CDS) strengthened the new system. Non-creditworthy enterprises or individuals could easily obtain monies by securitisations and real estate collaterals. American and British economies benefitted much from this. The 2007 crisis is the end of the ‘everybody is the Fed’ system. Ten trillion dollar worth of value created by securitisations is at stake.
State considers return to gold, silver dollars (World Net Daily)
Old rivalries
Since the creation of the Union, the debate between the federalists and the democratic-republicans (and later Jacksonians, Monroevians) has never ceased in the US. The FRB system, though its power is concentrated in New York, is officially a collaborative conference of 12 geographically-spread reserve banks. Democratic-republicans tended to distrust the FRB and tended to perceive the federal government as having been hijacked by the Wall Street capital owners. Use of bullion-backed money instead of the federal dollar has been discussed for a long time. The stimulus package has contributed to FEB’s 17% increase of money supply, whose seigneurage is to be used to support the unsold treasury bills. State governments are worried.
Beyond the dollar (Asia Times)
Recently, the FRB has published a thesis that advocated the strong interest rate policy whose desirable rate would be minus 5 percent. A negative rate is practically impossible for interest rates so the only option must be the quantitative easing by overprinting of the dollar.
Fed study puts ideal US interest rate at -5% (Financial Times)
Then, will the US at the state level be able to avoid the negative impacts from the dollar fall? Most likely not. US economy is fully integrated as a nation, such that no state has a stand-alone economy. Gold coins are just proposals, or expressions of dissatisfaction to the federal policy. The most radical Democratic-republicans go beyond just another currency but call for the demolition of the FRB system itself. A number of libertarians insist that scrutiny on the FRB would be necessary. If the true amount of non-performing loans owned by the FRB is publicised, the credibility of the Federal Reserve will plummet to the ground. One of the most important functions of the FRB is to print the dollar and supply the money to buy the treasury bills or commercial papers, or reduce the money circulation by selling them. This is called an open market operation. During the normal times, it provides stability to the real estate markets and ease inflation pressures, and allocate the right amount of capital for the economic activities. Money balance will have its equilibrium.
However, since 2007, the FRB has kept on increasing its dollar output, by ignoring inflationary pressure as well as instability of real estate collateral equities. If the government bond market falls, the interest rate of the bond will go up, taking the housing loan rate with it, such that the real estate market will even worsen. The FRB bought equities from private banks, but booked for its paper company and not on its own balance sheet. Congress audit will not be able to detect the kinds of equities that the FRB had received from banks. Before the crisis, major US banks had created out-of-book special investment vehicles (SIV), and operated high risk equities there. The FRB has many ‘super SIVs’.
Why Obama’s new Tarp will fail to rescue the banks (FT)
Volcker says Fed’s authority probably to be reviewed (Bloomberg)
Everybody’s the Fed
If the FRB survives on its credibility creation function, the private sector did the same by securitisation. Just like the FRB can transfer the nation’s credibility to the value of the dollar, corporations could transfer their credibility to the value of their corporate bonds and commercial papers. Credit rating agencies determined the value of those bonds, and safety net such as credit default swap (CDS) strengthened the new system. Non-creditworthy enterprises or individuals could easily obtain monies by securitisations and real estate collaterals. American and British economies benefitted much from this. The 2007 crisis is the end of the ‘everybody is the Fed’ system. Ten trillion dollar worth of value created by securitisations is at stake.
HFT: Who’s the prankster in Rock-Paper-Scissors?
Who’s the prankster in Rock-Paper-Scissors?
The financial community has embraced the term ‘high-frequency trading’ (HFT) as its buzz word in 2009. In early July, a programmer at Goldman Sachs was caught for stealing confidential algorithms that were used for financial transactions. The stolen programmes were designed for high-frequency trading. The fuss became much bigger when the FBI implied that the programmes could have been used for market manipulations.
Stock Traders Find Speed Pays, in Milliseconds (New York Times)
Transactions at major financial markets such as NYSE or Nasdaq are done on computerised marketplace. Participants order sales or purchases, the exchange establishes the instructions, and the confirmation will be sent back to the participants. All of these are conducted with a delay of a fraction of a second.
The brink of delayed moment, however, is not equal to all participants. Some participants have the advantage of receiving the information more quickly than other participants by a nick of second, if they pay 500,000 dollars per month so that they can use part of the exchange’s computer server as a rental collocation server. The exchange first sends information to participants within its servers, and then disseminates to the rest.
Automated transaction programmes enable businesses by hundredth of a second. If a participant can obtain information quicker than others by hundredth of a second, he or she can anticipate the future movement of equity prices. Financial institutions further develop special algorithms that were developed to anticipate general tendency of market participants, and pay extra fees to the exchange to embed them within the collocation server. There are several other automated trading using the subtle variances between errors and enclosing the market, while the HFT is focused on time differences.
Legality and source of profit
Another reason of scrutiny is that the high-frequency trading was seen as the main source of earning for major US financial institutions such as Goldman Sachs. Financial research firm Tabb Group revealed that the aggregate profit of the largest 300 financial institutions made by the HFT amounted to 21 billion dollars in 2008 in the US.
High Frequency Trading Technology: an anthology (Tabb Group)
Other analysts estimate approximately 20% of such profits was made by Goldman Sachs, which aggressively pursues this method. Reuters argues against it, denying the accuracy of the Tabb Group research. Goldman itself insists that less than 1% of its profits was made by the HFT. At present, nobody knows with a certainty how Goldman Sachs had made record profits only half a year after the financial crisis of 2008.
Before the computerisation of stock markets, the matching of sales and purchases was done on the exchange floor. Traders congregated around the staff to know the new prices of the equities as quickly as possible. The exchange industry refutes that such competitions are now done electronically by placing special algorithms within the computer servers, which is permitted by the exchange.
What’s behind high-frequency trading (Wall Street Journal)
High frequency trading is a rent-seeking activity, and has been practiced for quite a while. Only when this type of transaction become excessive, exchanges warned the participating financial institutions to lower the order volume. Meanwhile, US Congress ponders to enact new regulations, blaming that HFT is a type of insider trading.
The Impact of High-frequency Trading: Manipulation, Distortion or a Better-functioning Market? (Wharton School, UPenn)
While the argument submitted by the financial industry seems reasonable, it potentially has negative consequences when the HFT occupies 70% of daily equity trading in the US. With this magnitude, depending on how the programmes are constructed, they may move the average stock prices upward without paying considerations to the real economy. HFT increases profits by placing a large number of transactions with very small margins. This is also advantageous to stock exchanges, which long for increasing trade volumes. The exchanges have an innate interest in keep near-illicit HFT afloat. That said, if Congress bans HFT as an illegal trading practice, the trade volume of US equities will suddenly crumble, leading to another stock catastrophe.
Most major US financial institutions utilise identical programmes to run high-frequency trading. If the computer infrastructure is similar across the market participants, they tend to behave in a similar fashion. When the falling stock prices cause panics, the spread of the fear will be quick. It has an unfortunate resemblance to LTCMs that profited from high-frequency trades in the bond markets and collapsed during the 1998 global monetary crisis. The HFT is a lucrative short-term transaction, but is not a sustainable idea for the long-term stability of the financial system.
The financial community has embraced the term ‘high-frequency trading’ (HFT) as its buzz word in 2009. In early July, a programmer at Goldman Sachs was caught for stealing confidential algorithms that were used for financial transactions. The stolen programmes were designed for high-frequency trading. The fuss became much bigger when the FBI implied that the programmes could have been used for market manipulations.
Stock Traders Find Speed Pays, in Milliseconds (New York Times)
Transactions at major financial markets such as NYSE or Nasdaq are done on computerised marketplace. Participants order sales or purchases, the exchange establishes the instructions, and the confirmation will be sent back to the participants. All of these are conducted with a delay of a fraction of a second.
The brink of delayed moment, however, is not equal to all participants. Some participants have the advantage of receiving the information more quickly than other participants by a nick of second, if they pay 500,000 dollars per month so that they can use part of the exchange’s computer server as a rental collocation server. The exchange first sends information to participants within its servers, and then disseminates to the rest.
Automated transaction programmes enable businesses by hundredth of a second. If a participant can obtain information quicker than others by hundredth of a second, he or she can anticipate the future movement of equity prices. Financial institutions further develop special algorithms that were developed to anticipate general tendency of market participants, and pay extra fees to the exchange to embed them within the collocation server. There are several other automated trading using the subtle variances between errors and enclosing the market, while the HFT is focused on time differences.
Legality and source of profit
Another reason of scrutiny is that the high-frequency trading was seen as the main source of earning for major US financial institutions such as Goldman Sachs. Financial research firm Tabb Group revealed that the aggregate profit of the largest 300 financial institutions made by the HFT amounted to 21 billion dollars in 2008 in the US.
High Frequency Trading Technology: an anthology (Tabb Group)
Other analysts estimate approximately 20% of such profits was made by Goldman Sachs, which aggressively pursues this method. Reuters argues against it, denying the accuracy of the Tabb Group research. Goldman itself insists that less than 1% of its profits was made by the HFT. At present, nobody knows with a certainty how Goldman Sachs had made record profits only half a year after the financial crisis of 2008.
Before the computerisation of stock markets, the matching of sales and purchases was done on the exchange floor. Traders congregated around the staff to know the new prices of the equities as quickly as possible. The exchange industry refutes that such competitions are now done electronically by placing special algorithms within the computer servers, which is permitted by the exchange.
What’s behind high-frequency trading (Wall Street Journal)
High frequency trading is a rent-seeking activity, and has been practiced for quite a while. Only when this type of transaction become excessive, exchanges warned the participating financial institutions to lower the order volume. Meanwhile, US Congress ponders to enact new regulations, blaming that HFT is a type of insider trading.
The Impact of High-frequency Trading: Manipulation, Distortion or a Better-functioning Market? (Wharton School, UPenn)
While the argument submitted by the financial industry seems reasonable, it potentially has negative consequences when the HFT occupies 70% of daily equity trading in the US. With this magnitude, depending on how the programmes are constructed, they may move the average stock prices upward without paying considerations to the real economy. HFT increases profits by placing a large number of transactions with very small margins. This is also advantageous to stock exchanges, which long for increasing trade volumes. The exchanges have an innate interest in keep near-illicit HFT afloat. That said, if Congress bans HFT as an illegal trading practice, the trade volume of US equities will suddenly crumble, leading to another stock catastrophe.
Most major US financial institutions utilise identical programmes to run high-frequency trading. If the computer infrastructure is similar across the market participants, they tend to behave in a similar fashion. When the falling stock prices cause panics, the spread of the fear will be quick. It has an unfortunate resemblance to LTCMs that profited from high-frequency trades in the bond markets and collapsed during the 1998 global monetary crisis. The HFT is a lucrative short-term transaction, but is not a sustainable idea for the long-term stability of the financial system.
Friday 4 December 2009
World economy, G20 in charge
On 25 September, the Pittsburgh G20 summit has declared that the international conference centre for the World economic cooperation had shifted from the G8 to the G20. This changeover was understood as the relocation of the location of power from the developed countries to the emerging markets. The White House made a similar announcement the night before. The global Anglo-American leadership (G7) has made way to the newly emerging collaboration of the US, EU, and the BRIC nations.
G-20 to Assume Mantle as World's Main Economic Body
The G8 will continue to exist, albeit its agendas will be limited to economic development and security issues. Canadian PM Harper expressed the G8 summit in 2010 will be held in Canada, as planned. The G20 will take over some of the most important G8 topics such as the exchange rate and the framework for global economic growth.
The G20 is joined by the world’s most important nations. The aggregate GDP of its members represent 85% of the world’s GDP. The Pittsburgh declaration is not a normative expression but an officially agreed matter. The G8 was the most important decision-making body of the world. The UN Security Council is the supreme forum for security matters but the G8 had more significance in other areas including the economy. From now, the most important decision-making body will be the G20.
The Financial Times wrote that the emerging markets became equal partners [to the developed nations] as a consequence of the great depression. That said, the traditional G8 members (US, Europe, Japan, Canada, Russia) have acquired equal members of the BRIC and other large markets in the G20. Editorial - G20 takes charge
Since the 19th century when Europe became a great power after industrial revolution and political revolutions, the West has been the centre of the World for 150 years. The development occurred in Europe and regions where Europeans emigrated (eg. North America) and then Japan which adopted Western-style industrial and political revolutions at an early stage. After all, the West and its allies have dominated the world. The G8 was an institution for such nations. The changeover of the G20 signifies that the dominant power is now shifted from the West to ‘West + BRIC’; an event that destroys 150 years of world order.
The G7 as a dollar guard
The G7, the predecessor of the G8, was created in the 1970s. Its mission was to institute West Germany and Japan to support the dollar, whose credibility had been damaged by US fiscal deficit and the Nixon Shock of 1971. The dollar as the world settlement currency is the source of American hegemony, and a necessary condition to sustain the West to lead the world. During the last days of the Soviet Union, Gorbachev requested a membership of G7 as a condition to end the cold war, which was realised by admitting Russia (G8). However, during Putin’s term, the relationship between Russia and UK-US deteriorated, and important economic issues were discussed amongst the old members of the G7 without Russia.
The G8 started to invite leaders of the emerging market nations in the late 1990s. This is due to the slowing of economic development except the financial sector in the industrialised countries, and the continued growth of the emerging markets. Yet, the US began to acquire unilateral tendency at the same time, such that the presence of India and China at the G8 was largely limited to ceremonial occasions like photo shooting and dinner parties. The ‘expanded’ G8 did not have much utility. The unilateralism of the US effected to unite the BRIC nations, bringing together Russia and China to reconcile decades-long spats. The Shanghai Cooperation Organisation is a loose collective security unit to potentially rival the NATO. The cooperation between the BRICs enabled them to reject inferior treatments by the West.
Britain and US, which led the G8, were making enormous profits from their financial industry until 2007. However, with the Lehman bankruptcy in September 2008, the collapse of their financial system was quick. The loss of enhanced demand from the low-cost abundant capital resulted in economic depression. The US is no longer the consumption centre of imported goods. Importance vis-à-vis economic growth has shifted to those that were not fully integrated to the hitherto financial system, such as China.
Frequented warnings of the dollar collapse
The crisis of the 1970s was overcome by recognising West Germany and Japan as major powers for the exchange of their support for the dollar. The recognition of the G20 this time looks quite similar to such an arrangement. Yet, there is a critical difference. Germany and Japan were defeated nations of the WWII, and they were remade as client nations after the post-war occupation. US could grant certain authority to them in the international community, but they wouldn’t challenge the Anglo-American regime so that they would buy the dollar. In contrast, Russia and China are the victors of the war, and they possess the veto rights at the UN Security Council. The G7 was an institution to keep the dollar alive. The G20 speaks of post-dollar currency regime, such as the one based on IMF’s Special Drawing Rights. Not only the Russian or the Chinese or the Brazilian, but also the leaders of France and Germany openly indicate the end of the dollar as the key currency, and are in search of an alternative regime. The G7 prolonged the life of the dollar, but the G20 seems to put an end to the dollar institution.
Russian premier Putin says US dollar issuance 'uncontrolled', calls for diversified reserves
Top Chinese official signals move away from dollar
French President: dollar Can't Remain World's Only Reserve Currency
President Zoellich of the World Bank, also a member of G20, warned that the dollar’s place cannot be secure, as alternatives to the dollar standard were emerging.
World Bank says don't take dollar's place for granted
Zoellich criticises that the Fed had failed to regulate US finances and that Obama was wrong at attempting to strengthen the Fed to face off the financial crisis. So long as the Fed is in charge of the financial policy, the crisis will not cease to exist, and the credibility of the dollar (printed by the Fed) will be in jeopardy.
Zoellick Favors Power for Treasury, Not Fed
He also pointed out that the changing global economic forces would include many nations, not just the US. The world economy until the 1970s had the US and its allies as centres of production and consumption. From the 1980s till now had a pattern of production in emerging countries and consumption in the US. In the near future, it will be the emerging markets that take care of both production and consumption. Indeed it is only right to emphasise the G20 instead of the G8, and new members must be admitted for the decision making of the international economy.
From US to China, the consumption hub
Already, the United States partially renounced to be a locomotive of the international economy by importing goods. Lawrence Summers, an economy advisor to Obama, expressed that he wished to reorganise the US economy from consumption to production, by weaker dollar and thereby regaining export competitiveness. The new DPJ administration of Japan sent its treasury minister Fujii to US secretary Geithner to collectively announce that the yen would not be cheap.
Global rebalancing to weaken dollar, quietly
After the Lehman Shock, US consumers do not spend much, and instead increasing the savings. The consumer balance sheet used to be negative (savings < debts) but the savings are now speculated to be as high as 8 percent.
Pimco's Clarida Says U.S. Savings Rate May Exceed 8%
If the US consumers are not spending, US wouldn’t import as much either. Japanese manufacturers cannot depend much on their export to the US, thus cheap yen is meaningless. Since 2006, the top export destination of Japan, the second largest economy in the world, has China, the third largest economy. Chinese economy is still booming. Toyota’s production in China has been breaking records – the first half result in 2009 exceeded 53% of the preceding year. Japanese automakers get boost in China
China is expected to be one of the engines for the world economy. It is only a matter of time that the yuan will stop the peg and shift to the floating exchange regime. In the past, the foreign exchange only concerned world’s three currency – dollar, euro, yen – but it will soon joined by the yuan and possibly several others.
G-20 on Economic Regulation: Don't Get Your Hopes Up
Recently, there is a resurgent argument for Tobin’s Tax, by which all cross-border financial transactions shall be taxed by 0.005 percent. The revenue will be collected by UN organisations that will work for poverty alleviation. This is a plan to give financial independence to the UN from the West, that had the capital. At the same time, transactions will be monitored by the UN, such that speculative attacks to hostile states cannot take place anymore (thus media outlets such as The Economist disagree with Tobin’s Tax).
Op-Ed: Global Tax
Tobin taxes - wrong tool for the job
Could 'Tobin tax' reshape financial sector DNA
Venezuela’s Chavez proposed an independent development bank for South America which was not dependent on the capital from the West in 2006, and Brazil and Argentina signed at the G20 summit. If successful, South America can have a collective power within the IMF. Are these simply anti-America rubbish? These nations have considerable influence in the UN General Assembly, and began to function as the outer edges of the new G20 regime.
Discussing the dollar collapse before the dollar really collapses
The G20 contains an enigma. Though unofficially, it discusses the changeover of the dollar standard based on the alleged collapse of the dollar. The shift of world settlement currency is not one of the official discussion themes of the G20.
Stiglitz Sees Risk to dollar, Need for Reserve System
UN Says New Currency Is Needed to Fix Broken 'Confidence Game'
The G20 is metaphorically called the Second Bretton Woods. If the dollar is stable, no such discussion is needed. The very fact that world leaders are discussing about it damages the dollar credibility. Yet, the dollar has not collapsed. Indeed, the US during the Bush administration increased fiscal deficit, giving pressure to potential danger. But the foreign exchange has not reported waning dollar. Commodity market especially gold, which tends to heat up when currencies are not dependable, has only demonstrated a limited hike.
Raise the Bismarck!
Nonetheless, this is not a missable phenomenon. A number of major US banks are ghost banks that cannot survive without (un-)official credit lines from the Fed. Large scale capital injection by the Fed to the financial industry weakens the Fed itself, and the dollar that it prints. In the end, the dollar cannot be trusted.
Historically, financial crises in the US had been sorted by the Fed supporting the financial institutions for a year or two, and the asset markets such as real estate picked up the pace. But the crisis of 2008 is expected to continue for another 1-2 years, and the price drop expanded from household assets to commercial real estates. Twelve percent of Americans (35 million) receive food stamps. Consumption, which occupies 60% of all economic activities, does not seem to recover. Stock prices are no longer ‘preceding indicator of the economy’ but a manipulated figures by the government. Treasury Secretary Henry Paulson knew a bankruptcy of a major player of leverage finance such as Lehman Brothers would result in catastrophy.
G-20 to Assume Mantle as World's Main Economic Body
The G8 will continue to exist, albeit its agendas will be limited to economic development and security issues. Canadian PM Harper expressed the G8 summit in 2010 will be held in Canada, as planned. The G20 will take over some of the most important G8 topics such as the exchange rate and the framework for global economic growth.
The G20 is joined by the world’s most important nations. The aggregate GDP of its members represent 85% of the world’s GDP. The Pittsburgh declaration is not a normative expression but an officially agreed matter. The G8 was the most important decision-making body of the world. The UN Security Council is the supreme forum for security matters but the G8 had more significance in other areas including the economy. From now, the most important decision-making body will be the G20.
The Financial Times wrote that the emerging markets became equal partners [to the developed nations] as a consequence of the great depression. That said, the traditional G8 members (US, Europe, Japan, Canada, Russia) have acquired equal members of the BRIC and other large markets in the G20. Editorial - G20 takes charge
Since the 19th century when Europe became a great power after industrial revolution and political revolutions, the West has been the centre of the World for 150 years. The development occurred in Europe and regions where Europeans emigrated (eg. North America) and then Japan which adopted Western-style industrial and political revolutions at an early stage. After all, the West and its allies have dominated the world. The G8 was an institution for such nations. The changeover of the G20 signifies that the dominant power is now shifted from the West to ‘West + BRIC’; an event that destroys 150 years of world order.
The G7 as a dollar guard
The G7, the predecessor of the G8, was created in the 1970s. Its mission was to institute West Germany and Japan to support the dollar, whose credibility had been damaged by US fiscal deficit and the Nixon Shock of 1971. The dollar as the world settlement currency is the source of American hegemony, and a necessary condition to sustain the West to lead the world. During the last days of the Soviet Union, Gorbachev requested a membership of G7 as a condition to end the cold war, which was realised by admitting Russia (G8). However, during Putin’s term, the relationship between Russia and UK-US deteriorated, and important economic issues were discussed amongst the old members of the G7 without Russia.
The G8 started to invite leaders of the emerging market nations in the late 1990s. This is due to the slowing of economic development except the financial sector in the industrialised countries, and the continued growth of the emerging markets. Yet, the US began to acquire unilateral tendency at the same time, such that the presence of India and China at the G8 was largely limited to ceremonial occasions like photo shooting and dinner parties. The ‘expanded’ G8 did not have much utility. The unilateralism of the US effected to unite the BRIC nations, bringing together Russia and China to reconcile decades-long spats. The Shanghai Cooperation Organisation is a loose collective security unit to potentially rival the NATO. The cooperation between the BRICs enabled them to reject inferior treatments by the West.
Britain and US, which led the G8, were making enormous profits from their financial industry until 2007. However, with the Lehman bankruptcy in September 2008, the collapse of their financial system was quick. The loss of enhanced demand from the low-cost abundant capital resulted in economic depression. The US is no longer the consumption centre of imported goods. Importance vis-à-vis economic growth has shifted to those that were not fully integrated to the hitherto financial system, such as China.
Frequented warnings of the dollar collapse
The crisis of the 1970s was overcome by recognising West Germany and Japan as major powers for the exchange of their support for the dollar. The recognition of the G20 this time looks quite similar to such an arrangement. Yet, there is a critical difference. Germany and Japan were defeated nations of the WWII, and they were remade as client nations after the post-war occupation. US could grant certain authority to them in the international community, but they wouldn’t challenge the Anglo-American regime so that they would buy the dollar. In contrast, Russia and China are the victors of the war, and they possess the veto rights at the UN Security Council. The G7 was an institution to keep the dollar alive. The G20 speaks of post-dollar currency regime, such as the one based on IMF’s Special Drawing Rights. Not only the Russian or the Chinese or the Brazilian, but also the leaders of France and Germany openly indicate the end of the dollar as the key currency, and are in search of an alternative regime. The G7 prolonged the life of the dollar, but the G20 seems to put an end to the dollar institution.
Russian premier Putin says US dollar issuance 'uncontrolled', calls for diversified reserves
Top Chinese official signals move away from dollar
French President: dollar Can't Remain World's Only Reserve Currency
President Zoellich of the World Bank, also a member of G20, warned that the dollar’s place cannot be secure, as alternatives to the dollar standard were emerging.
World Bank says don't take dollar's place for granted
Zoellich criticises that the Fed had failed to regulate US finances and that Obama was wrong at attempting to strengthen the Fed to face off the financial crisis. So long as the Fed is in charge of the financial policy, the crisis will not cease to exist, and the credibility of the dollar (printed by the Fed) will be in jeopardy.
Zoellick Favors Power for Treasury, Not Fed
He also pointed out that the changing global economic forces would include many nations, not just the US. The world economy until the 1970s had the US and its allies as centres of production and consumption. From the 1980s till now had a pattern of production in emerging countries and consumption in the US. In the near future, it will be the emerging markets that take care of both production and consumption. Indeed it is only right to emphasise the G20 instead of the G8, and new members must be admitted for the decision making of the international economy.
From US to China, the consumption hub
Already, the United States partially renounced to be a locomotive of the international economy by importing goods. Lawrence Summers, an economy advisor to Obama, expressed that he wished to reorganise the US economy from consumption to production, by weaker dollar and thereby regaining export competitiveness. The new DPJ administration of Japan sent its treasury minister Fujii to US secretary Geithner to collectively announce that the yen would not be cheap.
Global rebalancing to weaken dollar, quietly
After the Lehman Shock, US consumers do not spend much, and instead increasing the savings. The consumer balance sheet used to be negative (savings < debts) but the savings are now speculated to be as high as 8 percent.
Pimco's Clarida Says U.S. Savings Rate May Exceed 8%
If the US consumers are not spending, US wouldn’t import as much either. Japanese manufacturers cannot depend much on their export to the US, thus cheap yen is meaningless. Since 2006, the top export destination of Japan, the second largest economy in the world, has China, the third largest economy. Chinese economy is still booming. Toyota’s production in China has been breaking records – the first half result in 2009 exceeded 53% of the preceding year. Japanese automakers get boost in China
China is expected to be one of the engines for the world economy. It is only a matter of time that the yuan will stop the peg and shift to the floating exchange regime. In the past, the foreign exchange only concerned world’s three currency – dollar, euro, yen – but it will soon joined by the yuan and possibly several others.
G-20 on Economic Regulation: Don't Get Your Hopes Up
Recently, there is a resurgent argument for Tobin’s Tax, by which all cross-border financial transactions shall be taxed by 0.005 percent. The revenue will be collected by UN organisations that will work for poverty alleviation. This is a plan to give financial independence to the UN from the West, that had the capital. At the same time, transactions will be monitored by the UN, such that speculative attacks to hostile states cannot take place anymore (thus media outlets such as The Economist disagree with Tobin’s Tax).
Op-Ed: Global Tax
Tobin taxes - wrong tool for the job
Could 'Tobin tax' reshape financial sector DNA
Venezuela’s Chavez proposed an independent development bank for South America which was not dependent on the capital from the West in 2006, and Brazil and Argentina signed at the G20 summit. If successful, South America can have a collective power within the IMF. Are these simply anti-America rubbish? These nations have considerable influence in the UN General Assembly, and began to function as the outer edges of the new G20 regime.
Discussing the dollar collapse before the dollar really collapses
The G20 contains an enigma. Though unofficially, it discusses the changeover of the dollar standard based on the alleged collapse of the dollar. The shift of world settlement currency is not one of the official discussion themes of the G20.
Stiglitz Sees Risk to dollar, Need for Reserve System
UN Says New Currency Is Needed to Fix Broken 'Confidence Game'
The G20 is metaphorically called the Second Bretton Woods. If the dollar is stable, no such discussion is needed. The very fact that world leaders are discussing about it damages the dollar credibility. Yet, the dollar has not collapsed. Indeed, the US during the Bush administration increased fiscal deficit, giving pressure to potential danger. But the foreign exchange has not reported waning dollar. Commodity market especially gold, which tends to heat up when currencies are not dependable, has only demonstrated a limited hike.
Raise the Bismarck!
Nonetheless, this is not a missable phenomenon. A number of major US banks are ghost banks that cannot survive without (un-)official credit lines from the Fed. Large scale capital injection by the Fed to the financial industry weakens the Fed itself, and the dollar that it prints. In the end, the dollar cannot be trusted.
Historically, financial crises in the US had been sorted by the Fed supporting the financial institutions for a year or two, and the asset markets such as real estate picked up the pace. But the crisis of 2008 is expected to continue for another 1-2 years, and the price drop expanded from household assets to commercial real estates. Twelve percent of Americans (35 million) receive food stamps. Consumption, which occupies 60% of all economic activities, does not seem to recover. Stock prices are no longer ‘preceding indicator of the economy’ but a manipulated figures by the government. Treasury Secretary Henry Paulson knew a bankruptcy of a major player of leverage finance such as Lehman Brothers would result in catastrophy.
Subscribe to:
Posts (Atom)
