Category Archives: Economics

Risk – The More Things Change, The More They Stay the Same IV – Economic

In our last post, we discussed the top geopolitical risks facing your Supply Management organization that were chronicled in the World Economic Forum‘s 7th annual Global Risks report. Chronicling dozens of risk divided into five categories, this report did a tremendous job of covering the types of risk that an average Supply Management organization needs to prepare for. Today, SI is going to continue its coverage of the report by discussing the top risks from an economic perspective.

From an economic perspective, there are four major risks. These two major risks are exactly the same as last year:

Extreme Energy & Agricultural Price Volatility

Today’s organizations are ultimately dependent upon three things – people, raw materials, and the energy required to transform the raw materials into the product the organization will sell. If oil doubles in price, that could make the difference between being able to produce the goods in China and import them into the US for sale at a profit and having to import them into the US for sale at a loss (or risk losing the entire inventory). And food prices in certain categories have been approaching, and reaching, all-time highs ever since reserves hit all time lows since World War Two last year.

Fiscal Crisis

The fiscal crisis can lead to many things – currency volatility, a credit crunch, and overall infrastructure fragility. Weakening currencies can cause costs to skyrocket. A credit crunch can severely restrict cash flow and make it almost impossible for an organization to temporarily borrow the cash it needs to secure the inventory required to produce the goods it plans to sell to create revenue and, eventually, generate profit. And infrastructure fragility, which weakens every time there is insufficient cash to invest in necessary maintenance, can result in transportation lanes, power plants, and basic utilities becoming unavailable overnight. The ramifications of a fiscal crisis can reach far and wide.

These two risks have increased in severity since last year:

Chronic Fiscal Imbalances

Government debt obligations are rising out of control around the world. The recent government debt-crisis in Greece, which followed the bankruptcy of Iceland in 2008, could be just the beginning. With the US at its fiscal cliff, the UK increasing public sector and private sector debt at an alarming rate (while net assets are falling), and general government debt in Japan projected to reach 245% of GDP in 2013, this risk is getting extreme across the developed world.

Severe Income Disparity

The rich are getting richer and the poor are getting poorer, and this is true in the developed world and the emerging world. The recent occupy movements have brought to light how the top 1% receive almost 25% of the income in the U.S., reaching a high not seen since 1928 (just before the Great Depression). The gap between the rich and the poor is rising rapidly in China, where approximately 10% of the population live below the global poverty line (which is really, really low). And this trend is continuing around the world. This is scary as many revolutions throughout history have been based on the economic inequality between the rich and the poor.

CASSH starts with Canada!

Wall Street is about to go gonzo again and you can …

Blame Canada! Blame Canada!

With all our beady little eyes
And flapping heads so full of lies

Blame Canada! Blame Canada!

Time to form a full assault
It’s all Canada’s fault!

Yes, it’s all our fault. Because of our strong risk aversion and sound fiscal and financial management policies (with the exception of any policy Harper wants to implement), we are emerging from the global financial crisis in a comparatively healthy state. We don’t have a fiscal cliff, a systemic debt crisis, grossly unbalanced budgets or high levels of unemployment. We tend to make good policy decisions (with the aforementioned example) and, as per this recent article on CNN, we have hidden value.

And, like the other CASSH countries (Australia, Singapore, Switzerland, and Hong Kong), we’re looking at a 3% increase in GDP in 2013, compared to the 2% expected in the United States and Japan and the 1% in the EuroZone. We’re becoming the GDP leaders of the developed world! We’re stealing your thunder! (That’s right, you’ve been ThunderStruck.)

So what does this mean? For those of you South of the border, it’s time to take a closer look at your northern neighbour for investments of all kinds. Need a new R&D lab? Put it here! (And maybe even save some tax dollars while you’re at it. You can save Millions in taxes with SR&ED if you qualify, for example.) Need a new high tech manufacturing facility? Put it here! (And in addition to our productivity gains, take advantage of our highly educated workforce – our University completion rate is over 25%, meaning over 1/4th of the population between 25 and 64 has a degree.) Need a new corporate headquarters? Put it here! (Our banks won’t go bankrupt and take your cash with them!)

And, again, you can:

Blame Canada! Blame Canada!
It seems that everything’s gone wrong
Since Canada came along

Blame Canada!
Blame Canada!
We’re not even a real country anyway

:-;

Federalist No. 30

In Federalist No. 30, Hamilton addresses the issue of taxation.

In this essay, Hamilton makes it clear that there must be interwoven, in the frame of the government, a general power of taxation, in one shape or another. After all, money is, with propriety, considered as the vital principle of the body politic; as that which sustains its life and motion, and enables it to perform its most essential functions.

Hamilton also argues that the ends of public happiness will be promoted by supplying the wants of government, and all beyond this is unworthy of our care or anxiety. To support this position, he asks how is it possible that a government half supplied and always necessitous,
can fulfill the purposes of its institution, can provide for the security, advance the prosperity, or support the reputation of the commonwealth? How can it ever possess either energy or stability, dignity or credit, confidence at home or respectability abroad? How can its administration be any thing else than a succession of expedients temporizing, impotent, disgraceful? How will it be able to avoid a frequent sacrifice of its engagements to immediate necessity? How can it undertake or execute any liberal or enlarged plans of public good? In other words, a government must be adequately funded to do its job.

The power of creating new funds upon new objects of taxation, by its own authority, would enable the national government to borrow as far as its necessities might require and take the actions necessary to maintain, and defend, the Union.

Federalist No. 13

In Federalist No. 13, after addressing the utility of the union in respect to commercial relations and a navy in Federalist No. 11 and the utility of the union in respect to revenue, Hamilton then approaches the broader subject of the advantage of the union in respect to economy in government. Since we all want a more economical government, this is definitely one of the series’ must reads.

Hamilton starts off by noting that, if we have an efficient government, the money saved from one object may be usefully applied to another, and there will be so much the less to be drawn from the pockets of the people. Is it just me, or have governments around the world forgotten this? Let’s look at North America. Every state and province has their own Department of Motor Vehicles, and every state and province issues their own licenses. And while this is probably as it should be, they all use their own, custom, systems instead of using one, common, system (or at least one system that uses the same APIs and same protocols) so they need to do extra work to get driver history data from drivers who move into the state or province. In addition, many are not able to automatically suck the basic information of the individual in from a Federal database, and we have a duplication of data that leads to propagation of errors. One system, individually administered by each state, would be much more efficient. As prove, look at multi-tenant SaaS, which is gaining traction in enterprise software. Every improvement is able to be immediately leveraged by all for one development cost. But I digress, back to one of Hamilton’s key points:

If the States are united under one government, there will be but one national civil list to support; if they are divided into several
confederacies, there will be as many different national civil lists to be provided for. The whole point of a union is strength and efficiency. Since it is true that when the dimensions of a State attain to a certain magnitude, it requires the same energy of government and the same forms of administration which are requisite in one of much greater extent, efficiency can only increase with size and scale (provided such size and scale is properly administered). The advantage of civil power is that properly organized and exerted, [it] is capable of diffusing its force to a very great extent; and can, in a manner, reproduce itself
in every part of a great empire by a judicious arrangement of subordinate institutions.

Hamilton’s final words deserve to be etched in stone:

If, in addition to the consideration of a plurality of civil lists, we take into view the number of persons who must necessarily be employed to guard the inland communication between the different confederacies against illicit trade, and who in time will infallibly spring up out of the necessities of revenue; and if we also take into view the military establishments which it has been shown would unavoidably result from the jealousies and conflicts of the several nations into which the States would be divided, we shall clearly discover that a separation would be not less injurious to the economy, than to the tranquillity, commerce, revenue, and liberty of every part.

Why The Republican “Trickle Down” Platform Won’t Fix the U.S. Economy

While a recent video uploaded to Youtube on Why Obama Now didn’t do the greatest job of explaining why you should vote for Obama, it did do a great job of why you shouldn’t vote for any republican who still believes that if you lower tax cuts for the rich, the “trickle down” effect will save the economy. This is one video worth checking out for that reason alone!