Tuesday, 13 September 2011

The ‘money’ is broken

Business Mirror

THE financial disaster that is affecting the world is complex and complicated. However, it is important to realize that the “disaster” is only the symptom of the disease that has been growing for nearly 40 years. The disease is that globally, money is broken.

Perhaps I can put it all together in a sensible way to help you understand why the idea that soon we will return to “normal” is a lie.

We think of money as a storage of wealth and a medium of exchange. Many things through the ages from golden Cowry shells in Fiji to wild boar tusks in Papua New Guinea were accepted as both. However, precious metals and copper were the items that met all the standards as money through virtually all civilizations.

Gold, like silver and copper, is intrinsically useful. It is in limited supply and difficult to obtain.

However, do not think that the average person ever used gold for trade transactions. Even as early as 700 BC during the Mahajanapadas period in ancient India, gold coins were for large purchases, silver coins for taxes and contracts, while copper coins were used by the people. These practices continued through medieval times in Europe.

Currency as we know it started even earlier as a form of deposit or receipt for grain stored in government granaries recorded as far back as 2000 BC in Egypt and Sumer. A farmer would deposit his grain and then could barter the receipt.

By the 1600s, paper currency was almost universally accepted because it theoretically represented a form of deposit against a nation’s metal supply. Granted, often governments cheated by printing more money than they had gold to back it with.

However, gold or silver was the reserve currency of global money because the paper could be converted to metal.

Most international trade was a form of barter. Country “A” sells bananas to country “B” in exchange for the cloth “B” produces. But if “B” wanted bananas and “A” did not want cloth, the trade would be settled in gold by “B” physically sending gold to country “A”.

With an internationally accepted reserve currency, eventually everything balanced out. If country “B” spent all its gold for the bananas, they could not buy anymore. So “B” would reduce the price of its cloth in gold terms to attract buyers and, therefore, gold.

If previously one gold bought one cloth, now one gold would buy three cloths. However, that creates domestic inflation. Why? Assume previously the exchange rate was one gold equals one cloth equals one “B” dollar and equals one “A” banana. But now the ratio is one gold equals three cloths. Therefore, one gold equals three cloths means that one banana equals three “B” dollars since “A” would not reduce the price of bananas to three bananas equals one gold.

In order to have gold flow back into country “B,” its citizens would have to face inflation until there was a better balance and they could raise the price of their exported cloth.

Governments have always played games with their currency. In ancient Rome, one emperor gave the military a 50-percent pay raise. In order to pay for it, the silver in the coins was reduced by 50 percent. That caused inflation because merchants raised prices by, you guessed it, 50 percent to receive the original amount of silver.

If you did that with your international trading partners, either they stop trading or go to war.

In 1974 the world decided to remove precious metal as the world’s reserve currency and replace it with the US dollar.

The same imbalances occur now as in the silly example of cloth and bananas above. But they cannot be worked out because there is a virtual unlimited supply of dollars and those dollars are created out of thin air, not because of the US simply shipping dollars out to buy goods. The US borrowed the money to pay for Chinese imports and printed the dollars to pay the debt.

The US dollar does not meet any of the standards of a reserve currency and causes broken money. Look at the enormous rise in the Philippine international reserves. But a very large portion of that dollar inflow is not working in this economy. You can borrow dollars for almost nothing in the US and use them to open a peso account here and make five times the amount of interest as you would in the US. That is why Brazil taxes inflowing dollars that are put in bank deposits.

The dollar has fallen 37 percent in the past decade. Gold has increased 500 percent.

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Peza Revises 2011 Growth Targets

On back of strong investments
Manila Bulletin

MANILA, Philippines — The Philippine Economic Zone Authority (PEZA) has revised its growth targets this year to 11-11-11 percent for investments, exports and employment on back of strong growth in the past months.

PEZA Director-General Lilia B. De Lima told reporters they have decided to adjust the target after hitting P113.603 billion in investment approvals in the January-August period this year or 60 percent higher than the P70.958 billion a year ago.

The investment generation represented the project cost of a total of 426 export-oriented projects. The number of projects, De Lima said, was 28 percent higher than 332 projects registered in the same January-August period last year.

These projects are expected to generate $23.941 billion in annual exports once they go into full commercial operation. The exports projection was 2 percent higher than the $23.394 billion estimated exports from the 332 projects approved last year.

Employment in PEZA also increased 14 percent to 808,735 in the first eight months of the year from 711,839 a year ago.

Originally, PEZA had set a conservative 10-10-10 percent growth targets for 2011 for investments, jobs and exports over 2010.

In setting the original growth targets, De Lima said they have to tame their projections because they were coming from a very high growth base in 2010 of P204.394 billion or 16.55 percent higher than 2009.

PEZA’s total direct employment in 2010 was also over 20 percent to 728,318 from 606,350 jobs in 2009.

In terms of exports, the agency reported a 24.05 percent increase in export sales to $36.996 billion for the January-November period of 2010 year compared to the full year 2009 exports of $29.824 billion.

According to De Lima, investments growth driver would still be electronics and IT. The country’s booming tourism sector is also expected to give a boost to the tourism ecozones while investments in agrizones are also expected to contribute in 2011.

PEZA which grants tax and fiscal incentives to export-oriented enterprises have a high realization rate of 98 percent, meaning most of the projects it registered have gone into full commercial operations and fulfilled their export and employment generation commitments.

It has a realization rate of 98 percent of all its approved projects.

PEZA grants a maximum of eight years of income tax holiday to qualified investors, zero duty on capital equipment importation and five percent tax on gross sales in lieu of all other national taxes, among others.

Most of its locators are engaged in electronics product manufacturing operations for the export market. Japanese companies account for the bulk of its registered enterprises. (BCM)