Tag: fiscal policy

Nurture State Treasures

There are many schools of thought on how to manage natural resources. The idea that a non-renewable resource “gifted” by nature to a country is something that should be considered a once-off benefit shows how forward-thinking that nation is.

If your country happens to have a wealth of a mineral resource, should the current generation use it for their benefit alone or should future generations of the country also benefit?

This also raises prognosis into an important distinction is between wealth and income.

Defining wealth

A non-renewable resource is a good that can only be consumed once such as oil and gas.
They are distinct from renewable resources such as forests and fisheries in such a way that, if managed properly can give you a sustainable stream of income for all time.

Some non-renewable resources can, of course, be recycled, and most metals and some fossil fuels fall into this category.

A goldmine, for example, should be viewed as a source of wealth (and not just income and profits for the company mining the yellow stuff).
And while this sounds normative, no single generation has the mandate to spend that wealth in their lifetime.

The wealth must instead be preserved for future generations and only the income from that wealth be used by the current generation.

A shining example

Norway* (if not now one of a few) is the only country in the world that consistently applies the principle of intergenerational fairness.
The revenue that Norway contracts from oil and gas has since 1990 been collected in a fund that currently stands at over $1 trillion. This number is growing every second!

The wealth is converted into money and the value preserved. This (sovereign) fund is maintained for future generations, and only the interest earned from this wealth is used for the current generation.

In this way, all future generations will benefit from the ‘lucky situation’ of the country.

The Government Pension Fund Global is saving for future generations in Norway. One day the oil will run out, but the return on the fund will continue to benefit the Norwegian population – Norges Bank (The managers of the public fund)

In intergenerational economic terms, this is the only correct way of using the non-renewable assets of the country. It is encouraging that other countries are looking to the Norwegian model.

Other ways of re-investing

A different school of thought is that some of the wealth can be invested to create future growth that will provide better sustainable income for the country.

Many Middle Eastern countries are prime examples. They invest the revenue in construction projects to create a platform for economic prosperity.

This is seen in the vast projects in the UAE cities of Dubai and Abu-Dhabi. They aim to produce sustainable income for the region when the oil runs out.

It is an interesting illustration of Say’s law – in which supply creates its own demand.

Will the investment in infrastructure enable these countries to sustain their level of wealth for all future generations or will they 200 years from now be vast cities in the desert. A legacy to a time where opulence and abundance purveyed?

Read more about sustainabilty and human irrational behaviour here.

In most developing countries, like most of Africa, there is no consideration for future generations. The wealth of non-renewable resources such as gold, platinum, and diamonds are used in today’s budgets. This is with little thought that this wealth could one day not be there and should not be spent now.

The wealth inherited from previous generations is used to finance an unsustainable level of consumption.

Conclusion

The main lesson to take from this is that a non-renewable resource can only be used once. It is a precious endowment that is bestowed upon the country by luck or good fortune and it is therefore selfish to use it on the current population.

It is not income, but wealth. This distinction is alien to most but is very important. Wealth is something that should be preserved.

The three basic options facing a country are: spending it, preserving it, or you can simply invest it in future sustainable growth.

The choice is ours.

*Revised and originally written by a Norwegian economist working for a Sovereign Fund company that has since moved to the Private Equity sector.

3 April 2018
How countries operate

At times, we can all become frustrated by political agendas, misfortunes, and perceived lack of planning by various governments around the world. As a result, not quite often see the bigger picture – or the economics of how countries work.

Naturally, the political fracases provide fuel for media companies who in turn bombard us with their 24-hour news cycles. But we need to understand that politicians are only temporary custodians of the country and its economy. Each economic model is built on the same premise that started many hundreds of years ago – that of bartering.

Two pillars of government

There are two main mandates or rather tasks that a ruling party is assigned by the electorate when it comes to governing. These are: controlling the country’s fiscal and monetary policy.

Fiscal policy is the internal running of the country and basically deals with tax and how it is allocated. The fiscal budget is then awarded to the various sectors of any economy.

These include education, transport, healthcare, finance, trade and industry, defense, agriculture, and many other building blocks of your country.
How the government prioritizes the spending on each of these sectors will determine its policy priorities.

It will also be a signal of its wider political intentions. And this not only to voters but also to its neighbouring countries in regard to international trade and security.

A nation concerned with information and its human capital will prioritize education in its budget. There are however other approaches to budgetary allocation such as funding trade and industrial activities.
This leads to job creation that will, in turn, drive a need for tradesmen and women to diversify and obtain the new skills required.

This also provides an incentive for state-run schools, privately funded schools, and institutions to develop new skill sets. Doing both is ideal – as governments must foster innovation by promoting and funding higher learning institutions where top talent can be nurtured and developed.

Fiscal policy forms the larger mandate as this budget is derived from the collective taxation of income, capital gains, trading and customs, sin taxes, corporate, and simple public services.
That way allocation of the fiscal budget to finance will pave the way for monetary policy to function.

International trade is the key to generating further income as a government cannot rely on an internally driven economy to sustain wealth. The same applies to business so an agreed trade policy would need to accommodate all aspects of the country’s economy.

National specialization

Every thriving nation has been built on either skilfully utilizing internal resources or have created global demand for a service or industry.
The UK has strong financial and corporate offerings plus its geo-positioning (GMT) allows it to be a central commercial trading point for the world.
Germany has always had a rich source of steel enabling the production of cars, rail brands, and manufacturing.

In addition, it continues to be a market leader in developing technologies to complement those industries thus allowing the country to thrive as a major European power.

The Nordic countries are rich in mineral resources of which they have converted the revenues into national trust funds. These are used to aid its citizens; many of whom develop skills in trade, innovation, and finance (and now Fintech).

Though Japan is geographically smaller and is made up of two islands it continues to prosper by becoming a global leader. This comes from its exports of tech innovation, artificial intelligence (robotics), and fishing stocks.
It even ‘exports’ financial aid (loans) to other countries due to its strong and disciplined monetary policy.

The US has invested heavily in services, human capital, and innovation – to large extent immigration has played a major role in these areas of growth.

The emerging economies

Russia is mineral-rich and has outsourced its intelligence gathering skills, military technology, and training for years.

China continues to grow and subsidizes its agriculture and manufacturing industries fully utilizing the abundance of manual labour at its disposal.

China even exports this labour thus gaining influence and soft power enabling Chinese goods and services to be exported more freely to other economies.

The ability to offer the global economy a form of expertise or goods/service can attribute hugely to each country’s economic wealth. Israel – military and intelligence; Brazil agriculture and tourism not to mention countries in the Far East – oil and fossil fuels.

Most African countries obtain their sources of income (though not as much as they should) from natural minerals, agriculture, and tourism.

Ghana has gold and cocoa; Nigeria – oil; South Africa – gold and many mineral resources; Kenya and Tanzania – tourism. Even a poor country like Zambia has survived because of its coal and coffee reserves.

Any country without resources or the ability to offer goods and services would have to be more subsistence-like. This usually means having to rely on aid or import goods and services.

That, however, comes at a price and leads to the country functioning with an unsustainable debt burden.

Application of policies

Interesting food for thought by Dr. Jagdish Bhagwati, a famous Indian-born economist in the US:

Americans spend, save little. Also US imports more than it exports.

Has an annual trade deficit of over $400 billion. Yet, the American economy is considered strong and trusted to get stronger.

The Japanese on a contrary, save a lot. They do not spend much. Also, Japan exports far more than it imports, has an annual trade surplus of over 100 billion. Yet Japanese economy is considered weak, even collapsing.

Modern economists complain that Japanese do not spend, so they do not grow. To force the Japanese to spend, the Japanese government exerted itself, reduced the savings rates, even charged the savers. Even then the Japanese did not spend (habits don’t change, even with taxes, do they?). Their traditional postal savings alone is over $1.2 trillion.

Thus, savings, far from being the strength of Japan, has become its pain.

International trade

This then gives way to various trading blocs, which over time have been built, broken, or renegotiated when it was not suiting either of the participants.

The strength of a country’s currency is primarily determined by supply and demand for its sovereign currency. This demand can only be fostered by trade.

The more the demand for a countries commodity the greater the demand for its currency. This is the medium we use to compensate for transactions. In terms of a country’s monetary policy, it is more of a singular relationship between a government and its banks.

The banking system

Banking is the system to which you can place your disposable income (gross income after-tax) in a digital repository. The central (reserve) bank regulates the money supply into the economy ensuring that locally, inflation does not corrode the value of its currency. The central bank controls how much it lends to local banks and at which payable interest rate.

The central bank is independent of the government. They have their policies shaped by fiscal influences and are under obligation to impact the strength of the economy through its interest rates and exchange rates.
So, the central bank sets the mandate by which banks offer security interest, loans, and building deposits to help you benefit from their hard-earned cash.

Banks, however, have a wide range of consumer charges so transacting doesn’t offer much protection against inflation. In some cases, banks offer you zero interest on savings deposited!

You can therefore understand the frustration of citizens who would like to see increased corporate taxes, especially for banks. This especially as they reward executives with excessive remuneration packages even in a failing economy.

Financial governance and regulations

The new wave of Cryptocurrency aims to shake-up these long-standing benefits banks have enjoyed. Benefits such as the bailouts from taxpayers’ money from risk-taking behaviour that nearly brought the global economy to its knees.

Banks behave like a petulant child knowing well that their ‘parents’ will only mildly reprimand them. This ultimately enables the continuation of behaviour with as they get away with only a slap on the wrist.

Governments tolerate bank’s excessive salary packages and risk-taking because they play a strategic role in the stability and growth of an economy.

This is just the tip of the iceberg and paints a big picture of how a country is managed – or indeed can be mismanaged.

24 February 2018
Conjecture buying

Before throwing our coins out of the pot or making second guesses about a big crash one must understand how the price of altcoins works.

The price of some altcoins on the trading market has a lot less to do with its intrinsic value. It is actually what individuals, and most traders (who seek only profit), believe it to be worth.

So, what is the reason behind the recent downward price spiral? Not much conspiracy to “ruin the cryptocurrency” other than an expected price correction coupled with some external factors.

Punters including ‘corner shop’ setups inflated the price with rampant price speculation. Speculation based on nothing more than historic (and a short history) rise of the price of the coin from only a few cents to almost $65 000 each (adjusted to 2021 all-time-high price).

The idea of creating an invention that performs a certain function quite soundly and then limiting its supply displays the financial clout of its creator/s.

That way, the natural laws of supply and demand would drive up the price of Bitcoin, as it became rarer though needed. It is already becoming harder to attain (through mining) and as it encroaches its supposed 21-million-unit limit.

“The fact that people keep talking today that bitcoin is below 10,000, it’s a disaster, or bitcoin is above 10,000 and that’s crazy. I think the fact that bitcoin is still alive, and attracting so much attention, is the fact that we’re talking about bitcoin in Davos with a Nobel Prize winner, a central bank governor, and a seasoned investor. I think that’s a powerful tool.” – Jennifer Zhu Scott (Radian Partners principal) – 2018.

External influencers of price

But there are external factors that come into play that affected its speculative price. Factors such as the rise of other altcoins after the split in its technology.

Bear in mind that the blockchain code is open to anyone smart enough to develop and run a product on it.
So, there is also some kind of a substitution effect as newer altcoins become more specific in purpose and faster in executing transactions.

This results in people switching from Bitcoin to the likes of Ethereum-run newcomers like DigixDAO.
These new coins are doing well (if the rising price is an indicator) and climbing while others lose both intrinsic a speculative value.

External factors including market sentiments do in fact play a huge role in determining the demand for the product or service. In the case of Bitcoin, the closing down of some Exchanges in Asia as well as talks of heavier regulation. Such was mentioned at the World Economic Forum in Davos 2018.

Global leaders pledging to take tougher measures to regulate cryptocurrencies raises cause for concern for people with significant amounts invested.

So, the usage by criminals, for instance, has created a much-expected reluctance by governments and financial institutions to accept its legitimacy.
There is also a constant and sometimes subliminal shift in thinking, as trading involves a lot of psychological and emotional play on buying behavior.

Buyer behaviour

One such example is the impulse people have when purchasing items that are supposedly on ‘special’ or at a low price.
A 75% discount on a pair of shoes only tells you that the seller has marked it up so high that they could still make a profit when they knock it down by that much!

You only notices the price (before and after) the discount. This is without realising that it cost the buyer a fraction of both to produce, package it and get it shipped to the store.

The true value of ‘the shoe’ lies in the materials (quality) used to produce it for it to last long or give it its level of comfort (its true purpose). That and its appearance of course.

The “brand name and image” in this case can thus be compared to the speculative aspect of a commodity.
So, a pair of pumps would sell (at a higher than normal price) if the likes of Beyoncé or Gal Gadot are seen wearing them.
The same goes for sportspeople and the whole multi-million dollar/euro endorsement deals they carry. Their endorsement of a product thus ‘legitimizes’ it.

When global leaders, banks, and financial institutions raise concerns about cryptocurrency – it does the very opposite. This sets off-market panic and the selling-off we are currently observing.

The future of Crypto

So, what will happen from here on? Provided it is not outright outlawed. This is, however, proving to be difficult as even the South Korean government have now softened their tough stance on the Crypto Exchanges.
This is after they discovered what a tax ‘gold mine’ Crypto exchanges can be. This is then when the speculative buying will begin again.

Investors who couldn’t purchase Bitcoins at levels above $20 000 will now be seeking an opportunity to enter the market.

Especially if it dips below the $30000 mark (it is currently $34 000). This with the hope to make some decent profit even if it just pushes back to $50 000.
Some will hold on and speculate on a return to previous highs – and so the bullish and bearish cycle continues.

Authorities including the delegates at the Davos talks were in agreement, however, that they will want it at affordable prices. At a level that stays relatively stable, they may even start to consider it as ‘global legal tender’.

But that will be a long time, especially if traders continue to buy it speculatively to make profits.
Those awaiting a total crash of Bitcoin, altcoins, or the blockchain, however, would have to hold their breaths.

The technology is indeed a game-changer and has already been widely adopted. It will only change form to be partially or fully regulated.

The core functions of blockchain-based currency will remain its main contribution to the evolution of banking and ‘money’ transfers.

3 February 2018
Peer-to-peer service

History has taught us that a fully centrally controlled government system fails completely – well, in the long run.

The idea of a communistic system has its merits and could still work in some sectors of our economies. It, however, omits the very thing that was provided to us as human beings – choice.

Knowledge is empowering – but the power to do the things you would like to do effortlessly without fear of error.

This shared knowledge emanates from scientific, biological, or financially proven theories and tests.

They can help you make the right investments. Such as saving money on the best deals, obtaining rights to social benefits, travel to great destinations. Or simply just helping other people achieve their personal and spiritual goals.

Monopolistic behaviour

Those that cling onto knowledge though, serve their interests alone and should not be revered but rather shunned for power-hogging.

Sadly, some governments monopolize access to information, basic services, resources, and even education to create an artificial demand for ´their services’.

This forms the basis of a centrally controlled or outright communistic state.
In business, this is a common practice of a monopoly to control the price of their good or service as they are the only ones providing it.

The quality of that good or service, however, can and will be determined by them and them alone!

Can you imagine then, based on the previous sentence, a situation that only governments have this power to dictate a basic service such as healthcare or education for you?

Scary thought and if you look at most developing countries, the evidence of this is overwhelmingly sad.

But we are not here to talk about the governments as there would be several cases to point out and this is not a political platform.
Case in point, the concept of a centrally controlled system nevertheless is less efficient and prone to failure to disseminate the very items it sets out to provide.

Deploying software by a global firm like IBM, via a centrally stored-located server would be absurd because the infrastructure of the recipient regions or end-users might not be well equipped to handle it.
So one begs to question, why would you do it for social services for instance?

Decentralized systems

Decentralizing a system can improve efficiency because it gives options to get the best quality possible. It also removes power from one or a few providers and shares it equally amongst other stakeholders.

This way all will stand to mutually benefit from a working system indirectly rather than just the state collecting monetary compensation or tax and deciding what to do with it alone.

Centralized systems can learn from the blockchain to efficiently provide services.

Let’s take the now “illegal” peer-to-peer file-sharing and downloading software such as eDonkey/eMule (developed by Microsoft).
Or take BitTorrent for example you could with them, build together any file by downloading “bits” of the file by many connected servers or PCs (peers).

This system leads to faster downloads and allows one to source from the best quality of the available digital bits to get the data to form the e-book, music track, or movie that you were after.

Leaving your download running would enable others to get the files you have already amassed (you reciprocally upload the files). The cycle continues until everyone acquires the same great quality file from the best ‘seeds’.

Downloading from a sole server for the same product, on the contrary, could crash the server.

Let’s not forget the delays due to operational differences in time-zones, or complete failure to download if the file source is corrupted or the file quality is bad.

Application of decentralized systems

Naturally, the entertainment industry put a stop to this because it meant that people could attain their copyrighted material.

Many fines and warnings were dished out to individuals as well as companies hosting the sharing servers.

You can, however, still access them via carefully planned entry gateways to hide your IP address using VPNs. Those of you who are IT experts can use (old-school) backend protocols like FTP.

BitTorrent -> Bitcoin…Torrent -> Tor ..anyone seeing a pattern here?

There is now even a new digital currency designed to help artists curb piracy and reward the artists for their work.
Such protective software is already in the pipeline thanks to blockchain technology.

Decentralizing services such as money transfers in the advent of Cryptomania removes power from regulated financial institutions. They tend to charge high fees for sometimes slow and error-prone services because they can.

Conclusion

So, swiftness and security are a prime reason for the adoption the Blockchain technology. Everything else such as the price of digital alternative coins or ‘altcoins’ boils down to basic supply and demand for it.

Governments and other institutional service providers can take a leaf out of the blockchain technology tree and its true intention.

The aim is to decentralize the provision of a service to give everyone access to it. This will reduce associated costs of using it and improve efficiency!

28 January 2018
Elasticity and Sin Tax

We can change our dependence on certain goods and services so that we don’t take too high a knock when their prices fluctuate.

Life is about making choices. As rational beings, we tend to make choices that benefit our wealth and well-being.

But some choices have to be made on our behalf — especially when it comes to the provision of commonly used goods and services.

What is elsaticity?

The prices of government-regulated products such as fuel, alcohol, and cigarettes are examples. How we react to the price change (whether an increase or decrease) is referred to in economics as elasticity.

It is a general term for a ratio of change and scientifically attempts to capture your sensitivity to price movements. It is the percentage change in the quantity demanded (or supplied) of something brought about by a percentage change in its price.

A 10% increase in the price of bread, resulting in a decrease in the quantity demanded by 8%, means your price elasticity of demand for bread is 0,8.

The ratio is expressed as a number between negative infinity and infinity, with one being the midpoint. The number has no unit — it is not expressed in centimetres, litres or as a percentage.

But that number tells us a great deal. If it is higher than one, the product is said to be elastic. This means the quantity you demand responds strongly to price changes.

Anything under one is inelastic. This means a price change doesn’t affect your demand for it much.

When a product is said to be unit elastic, it means the change in quantity demanded is equal to the change in price.

Practical examples

On the commercial side, the concept becomes more useful when formulating and studying consumer trends. It is especially beneficial to brand managers who need to set prices for their products while paying attention to sales.

Income elasticity of demand measures the responsiveness of the quantity of a good to changes to your disposable income.

Generally, the more inelastic the product, the easier it is for firms to maximize profit by increasing their price.

Taking advantage of addictions

If you’ve ever wondered why the prices of your alcohol and cigarettes — commonly referred to as “sin taxes” — always rise, it is because they are inelastic.

If you were addicted to nicotine, for instance, you would rather cut down on movie tickets to still afford a box of smokes. This makes you inelastic to the increase in cigarette prices.

Likewise, we industrialize, we become heavily reliant on oil. Our dependence on oil was reiterated in the latest Organisation of Petroleum Exporting Countries (Opec) oil outlook, which paints a gloomy picture. The West’s demand for oil is predicted to surpass the available supply in the coming years.

Globally, over the decade of 1994-2004, about five times more passenger cars appeared on our roads than commercial vehicles. In South Africa, alone, commercial vehicle sales for July were up 13% in the same period.
Concurrently, increases in lorry volumes worldwide have been observed.

The more inelastic your product is, the easier it is for you to slap your consumers with high price increases.

At the time of writing in 2007, the oil price once hovered around $73/barrel and threatened to reach a record high of $80*

Concluding remarks

By using other means of energy (oil substitutes, wind, electricity, and solar) we could reduce our reliance on oil. this would make it less inelastic.

In South Africa, for example, using trains for cargo transport would ease our dependence on petrol and diesel-powered commercial vehicles.

Carmaker Tesla recently launched its future truck and alleged fastest production car in a big to reduce our reliance on fossil fuels. Tesla is gaining steady ground to introduce its electric cars to the world and has surpassed the net worth of Ford.

18 November 2017

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