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Economy

Dear Central Banks, We Are in a Global Recession

Luis Durani

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2016 started off as one of the worst years on record for the stock market. As investors scrambled around dreading that the bull market might be over, the Federal Reserve and Central Banks from the around have continued to pacify fears that despite the jerky start, economic indicators were positive.

The Federal Reserve incessantly refers to the unemployment numbers, which fell to 4.9 percent (the lowest in a decade), as proof that the economy is continuing to strengthen. But how true are the soothing words of the Central Banks as compared to the economic data?

The Numbers

Gold the Indicator

In the ancient days, gold was considered the medium of exchange but in more recent times, especially since the elimination of the gold standard, the precious metal has been seen as a commodity. The prices of commodities fluctuate with the overall demand and supply of the global economy. As the global economy decelerates, commodities fall in price. As of 2016, almost all commodities have dropped in value and leading that dramatic decline is oil. Despite the precipitous drop in commodity prices, one commodity that has not depreciated but rather increased in value is gold. Unlike other commodities, gold can fluidly transition between being a commodity, medium of currency or hedge against financial uncertainty. In the current fickle financial environment, gold has reasserted itself as a form of insurance against the unstable fiat currencies.

Unlike other commodities, gold can be seen as a vote of confidence for Central Banks around the world including the Federal Reserve. Gold has been up about 14% against the Dollar but roaring against other currencies like the Ruble, Yen, etc. The rise in the price of gold indicates that investors are flocking to the precious metal as means of indemnification. Thus, all the assortments of financial tools that the Central Banks have employed such as quantitative easing, negative interest rates, etc. have failed with respect to propping up the economy. Despite all the “positive” indications by the Federal Reserve, the economic numbers from around the world are indicating the world is or will be in a global recession.

The US

The US, the world’s largest economy, has not been performing as well as the administration and Federal Reserve has claimed. Despite the stock market breaking records in the last several years, the fundamentals did not support it rather the Federal Reserve’s intervention via quantitative easing and interest rate reductions have helped create the artificial bull market. The largest misleading indicator is the unemployment rate, which is claimed to be at 4.9% but, in reality, is much higher. Some estimates put the unemployment numbers closer to recession/depression   levels. In addition, today more than half of Americans are on a form of government assistance. The following data indicates a worsening economic situation:

  • Exports were in decline in a year over year basis by 7%
  • Factory orders have dropped for 14 consecutive months
  • The Restaurant Performance Index, a monthly composite index that tracks the health and outlook of the restaurant industry, has dropped to the lowest level since 2008
  • The Baltic Dry Index, a measure of the price of moving major raw materials by sea, fell below 300 for the first time. This signals a dramatic drop in global demand for raw materials since the index is a direct measure of demand for shipping capacity
  • Orders for the Class 8 trucks have been almost cut in half on a year to year basis, which indicates demand for supplies has largely declined within the US
  • Despite approaches to reduce production of oil by global producers, the price of oil has more or less stayed below $30 USD per barrel. This indicates the global economy has slowed down
  • A large number of those employed in the US since the Great Recession was due to the boom in the Oil and Gas (O&G) industry. It is now reported that 67 O&G companies are filing for bankruptcy   in the US and that 35% of all O&G companies around the world are at risk of becoming insolvent. This is in addition to the tens of thousands that have been laid off since the decline in oil prices  
  • The number of job cuts skyrocketed by 220% in the month of January
  • Retail stores are shutting down at a stunning pace across the country

The Globe

While the US numbers are looking bleak at best, the global data is not any better:

  • Chinese exports have fallen by more than 11% on a year over year basis
  • Chinese imports are even worse in January on year over year basis indicating a decline of almost 20% –This dramatic decline is part of a larger trend of Chinese imports declining now for 15 months in a row
  • Indian exports plunged by almost 14% on a year over year basis
  • Japanese exports have declined by almost 10% on a year over year basis while their imports have declined by almost 20%
  • For the sixth time in six years, Japanese GDP growth has treaded negative territory
  • The overall global stock market currently exhibits a bear market with about 20% of all global stock wealth being wiped out in the last year alone

Unfortunately for global investors, the continued intervention by Central Banks around the world, in the hopes of propping up the languishing economies, has caused the global economy to only worsen. Since the 2008 crash, the interest rates have been slashed by the Central Banks almost 640 times and more than 12 trillion dollars’ worth of assets have been purchased by them to no avail. Despite attempting to resolve the financial crash of 2008, governments did not eliminate the root cause of the problem but rather applied a bandage solution, which only worsened over time. Now it is all beginning to slowly unravel. All that is needed is a Black Swan event to bring the Central Banks to use the “R-word ” in describing the global economy.

Luis Durani is currently employed in the oil and gas industry. He previously worked in the nuclear energy industry. He has a M.A. in international affairs with a focus on Chinese foreign policy and the South China Sea, MBA, M.S. in nuclear engineering, B.S. in mechanical engineering and B.A. in political science. He is also author of "Afghanistan: It’s No Nebraska – How to do Deal with a Tribal State" and "China and the South China Sea: The Emergence of the Huaqing Doctrine." Follow him for other articles on Instagram: @Luis_Durani

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Economy

Business disorder between Europe and U.S.

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The European Union remains cautious in the economic battle with the White House. U.S. President Donald Trump continues to pursue his protectionist policies in international trade system. This has led to raising concerns and serious discontent among the United States’ European partners.

Disputes between the United States and other countries around the world are continuing on trade and economic issues. The fact is that U.S. President Donald Trump intends to exacerbate tensions until the presidential elections of 2020. Many international experts and analysts believe that a major part of the economic approach to the world of Trump has an electoral and political goal.

Many international analysts now talk about the conflicts between the United States and Europe over imposing sweeping steel and aluminum tariffs as a transatlantic “trade war”.

Conflicts that may extend in the near future and affect the widespread relations between Washington and Europe.

On the other hand, the authorities of Germany, Britain and France have not taken a proper approach to the policies of the President of the United States.Though politicians such as Emmanuel Macron, Angela Merkel and Theresa May seek to manage the situation and prevent the exacerbation of tensions with Washington, but people, business owners and European opposition parties are so angry at Trump and the U.S. government that the European troika’s authorities aren’t capable to control or even hide it.

One of the most important reasons for the continuation of Trump’s economic policies in the world is the passivity of European leaders against the White House. Under such circumstances, Europe has threatened to retaliate against the U.S. if Trump imposes steel and aluminum tariffs on European exports.

After Trump made his first announcement on the tariffs, European Commission President Jean-Claude Juncker threatened to put tariffs on American goods in response to Trump’s decision. That could decrease demand for those products inside EU borders and consequently lead to U.S. workers losing their jobs. But practically, European countries did not do anything about this.

Although some European citizens thought that the Chancellor of Germany would have a more determined approach than other European politicians, this was also a mistake!The German Chancellor stated that European Union member states must give the EU trade commissioner a clear mandate for negotiations with the United States over a long-term exemption from U.S. metal tariffs. Markel added: “Of course, we think it’s important that there are exemptions not only for a limited period of time … So far, we have had a very united stance, namely that we view these tariff demands as unjustified and that we want a long-term exemption.”

The fact is that Merkel’s implicit threat, which she didn’t address directly and explicitly because of her conservative policy towards the United States, is the same as the “European countermeasures” against the United States.

For months now, there have been months of anti-European measures taken by the White House and customs duties on European aluminum and steel. However, European countries have preferred to keep Silent instead of confronting Washington!
Indeed, the prolonged U.S.-EU talks on steel and aluminum tariffs is going to increase the dissatisfaction and anger among the European public opinion. It will also affect the performance of American companies in Europe.

First published in our partner Tehran Times

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Economy

Citizen Capitalism: How a Universal Fund can provide Influence and Income to all

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In the face of growing wealth inequality worldwide, more and more people are discussing alternatives to the current laissez-faire capitalism status quo.  Tamara Belinfanti, Sergio Gramitto and the late Lynn Stout offer up their own solution in Citizen Capitalism: How a universal fund can provide influence and income to all.

Our authors have devised up a concept they call the Universal Fund.  It’s like a sovereign wealth fund, but is privately created and funded via private ordering. That means that the Universal Fund is to be created from donations of stocks by companies and philanthropists.  The government would hence be uninvolved; the Universal Fund is not a socialist venture.  Rather, it is in part modeled on the structure of NGOs like the Sierra Club and the Red Cross. The Fund would provide an annual dividend to every citizen, with no maximum income cap.  Though it may seem absurd to send welfare payments to the wealthy, it’s politically savvy framing.  A free public college bill was passed in ultraconservative Tennessee thanks to having no maximum income cap; conservative detractors weren’t able to use the “class warfare” and “welfare queen” arguments. It should be noted that charitable tax deductions, estate tax reductions and lowered tax brackets would act as a de facto government incentive for the wealthy to donate to the Universal Fund.

The goals of the Universal Fund would be to decrease wealth inequality, encourage long-term investment and increase civic engagement in corporate culture.  On the last point, the authors remind us that, “The top 10% [of wealthiest Americans] hold more than 90% of all shares.”  Even in regards to the other 10% of shares owned, most of them are passively owned.  Most small-time investors don’t have time to vote in the annual general meetings of every company in which they are invested in.  Thus, boardroom votes are dominated by two shareholder proxy advisory firms and individual investors who own a substantial percentage of shares, as well as fund portfolio & hedge fund managers.

These Wall Street elites naturally tend to vote based upon their elitist interests.  Thus, they usually make decisions that are insane in terms of employee welfare, long-term corporate growth, executive pay and the environment. For example, `the authors remind us of the recent case of Martin Shkreli, the hedge fund manager who acquired Turing Pharmaceuticals and then raised AIDS medication prices from $13.50 to $750. This is the embodiment of the Reagan-era Golden Rule of maximizing shareholder value.  Not only is this Gordon Gekko truism objectively crazy, it’s actually legally unfounded.  Contrary to what you hear on CNBC or Fox Business, there’s no legal requirement that companies only focus on maximizing shareholder value.  The book relates the following quote from Supreme Court Justice Samuel Alito comments in the recent case Burwell v. Hobby Lobby:“Modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not do so.”

CITIZEN CAPITALISM points to the ongoing successes of the sovereign wealth funds of Norway and Alaska, an ultraliberal and an ultraconservative society, respectively.  The Alaskan fund generally provides each citizen with a dividend payment of a few thousand dollars each year, via the state’s oil revenues.  The Government Pension Fund Norway is a more pertinent example, since it’s funded through a $1T stock portfolio.  Norway is not only able to fund its citizens’ pensions through the Fund, but also exert a moral influence on the market.  The Fund boycotts various egregious companies, like cigarette manufacturers, and will sell its shares in a company that gets exposed for abusive practices, like say employing child labor.  Our authors likewise want the Universal Fund to use a carrot-and-stick approach in regards to corporate ethics.

The thesis of CITIZEN CAPITALISM is, as the title suggests, rooted in optimism for capitalism.  Though they write about the success of socialist program in Alaska specifically, a conservative state in the US, the authors are convinced that a sovereign wealth fund bill could never be passed in Congress.  Recent polls and election results, however, show that Americans are starting to overwhelmingly favor ambitious government-program proposals like Medicare for All and a Green New Deal.  As I wrote before, the Universal Fund would mostly be feasible due to tax incentives; these government incentives would likely need to be greatly expanded in order to encourage enough stock donations to build the Fund to a substantial size.  Even America’s greatest philanthropists still stockpile billions of dollars in their offshore bank accounts.  Thus, one shouldn’t expect the Universal Fund or other private UBI schemes to become a replacement for state management of wealth inequality through programs like public school funding and marginal taxation.  Nonetheless, CITIZEN CAPITALISM is a stimulating little primer for rethinking the relationship between Wall St and Main St, managing the looming crises of a rapidly aging workforce and automation, plus the balancing of private and public sectors in regards to solving societal problems.

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Economy

Working for a brighter future

Cyril Ramaphosa

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Authors: Cyril Ramaphosa and Stefan Löfven*

We stand at a crossroads as seismic shifts take place in the world of work.

Technological advances are changing the nature of many jobs, and leading to the need for new skills. The urgently required greening of economies to meet the challenge of climate change should bring further employment possibilities. Expanding youth populations in some parts of the world, ageing populations in others, may affect labour markets and social security systems.

On one path, countless opportunities lie ahead, not only to create jobs but also to improve the quality of our working lives. This requires that we reinvigorate the social contract that gives all partners a fair stake in the global economy.

On the other path, if we fail to prepare adequately for the coming challenges, we could be heading into a world that widens inequalities and leads to greater uncertainty.

The issues are complex. As co-chairs of the Global Commission on the Future of Work  we, and our fellow members of the Commission – leading figures from business and labour, think tanks, government and non-governmental organizations – have been examining the choices we need to make if we are to meet the challenges resulting from these transformations in the world of work and achieve social justice.

We call for a new, human-centred approach that allows everyone to thrive in a carbon neutral, digital age and affords them dignity, security, and equal opportunity. It must also meet the changing needs and challenges facing businesses and secure sustainable economic growth.

The opportunities are there to improve working lives, expand choice, close the gender gap and reverse the damage that has been wreaked by global inequality.

But it will need committed action on the part of governments and social partners to turn those opportunities into reality.

So how do we achieve this? Three areas of increased investment are needed:

First, we have to invest more in people’s capabilities: This means establishing an effective lifelong learning system that enables people to skill, reskill and upskill – a system that spans early childhood and basic education through to adult learning. It also means investing in the institutions that will support people as they go through transitions in their working lives – from school leavers to older workers. Making gender equality a reality and providing social protection from birth to old age are also critical. These social investments will not only increase productivity. They will also allow for a more inclusive growth, where informal workers and business can both benefit from and contribute to a sound formal economy.

Second, we must invest more in the institutions of work – including the establishment and implementation of a Universal Labour Guarantee. This will ensure that all workers enjoy fundamental rights, an “adequate living wage”, limits on their hours of work and safe and healthy workplaces. Linked to this, people need to have more control over their working time – while meeting the needs of enterprises – so that they can fulfill the full range of their responsibilities and develop their capabilities.

Collective representation through social dialogue between workers and employers needs to be actively promoted. Workers in the informal economy have often improved their working conditions by organizing. Unions need to expand membership to informal workers, whether they work in the rural economy, on the city streets of an emerging economy or on a digital platform. This is a critical step towards formalization and a tool for inclusion.

We’re also calling for governance systems for digital labour platforms that will require these platforms and their clients to respect certain minimum standards.

Finally, we need to invest more in decent and sustainable work. This includes incentives to promote investments in key areas, such as the care economy, the green economy, and the rural economy, as well as high-quality physical and digital infrastructure. We must also reshape private sector incentive structures to encourage a long-term, human-centred approach to business. That includes fair tax policies and improved corporate accounting standards. We need to explore new measures of country progress to track important aspects of economic and social advancement.

Beyond these critical investments, there is a further opportunity: to place discussions about the future of work at the heart of the economic and social debates taking place at the high table of international policy-making. This could revitalize the multilateral system at a time when many are questioning its legitimacy and effectiveness.

Yet none of this will happen by itself. If change is the opportunity, we must seize the moment to renew the social contract and create a brighter future by delivering economic security, equal opportunity and social justice – and ultimately reinforce the fabric of our societies.

Stefan Löfven, Prime Minister of Sweden, co-chairs of the ILO Global Commission on the Future of Work

ILO

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