Germany: Taxing less, Spending more

Germany; Stimulating spending; Courtesy Yah

Germany just announced a plan to cut taxes in order to stimulate their economy. The worlds third largest economy is in a small patch of quicksand right now. It has already hit recession and forcasts are that it will contract around 3% more this year.

Exports are not doing too well as demand for German products fall along with global spending power. Germany was the world's largest exporter of goods last year. Unemployment is set to increase as the current boom in German employment tops off. This will consequently increase government expenditure in terms of social benefits and welfare.

Reducing taxes at a time like this is a controversial decision. Angela Merkel, the German Chancellor has come under fire because the new policy will lose the government around 15 billion Euros and risk reducing GDP by a further 6% this year.

That is quite a significant amount for a massive economy like Germany. Also with the new tax breaks, the giovernment will be funding a budget deficit. Though Keynesian economic theory states that funding a deficit by reducing taxes can be good for an economy in trouble, as it stimulates inflation, the long term outlook is grim because the any additional cash people recieve will probably be saved instead of spent.

Still, it's a start. As money is saved this will increase the amount of cash in the economy and stimulate capital investment, which will in turn provide jobs and then create a less uncertain environment and aggregate demand will increase as a consequnece of this. But that takes a long time to happen. And Germany may go through some tough times before it gets to more solid ground.

Meanwhile, though markets are changing and demand for some German exports such as Automobiles, electronics, machinery, foodstuffs etc may be effected by changing market trends or if there is a major change in the geo-political landscape. This seems unlikely in the near future. Though competition like Chinese exports could have posed a threat, they would only do so if not for the tightly bound Eurozone regulations, which Germany is extremely particular about. So any threat to their main exports right now, seems minimal; ensuring a strong core economy into the near future at least.

no Humming in China

GM has been on the verge of selling their Hummer brand to the Chinese Sichuan Tengzhong Heavy Industrial Machinery company. Thats quite a mouthful. I wonder why Chinese companies have such weird names. But i digress.

But GM's plans of downsizing and rightsizing itself while it shelters itself under a Chapter 11 bankruptcy may suffer a setback because it seems like the Chinese government is about to block the deal.

China has about 100 car manufaturers and the government does not want yet another one entering the market at a time when they are trying to aim for stability and cut competition in order to try and build a global giant capable of taking on the big ones.

Also, it seems the strategy is to focus on building a robust market based on fuel efficient and environmentally friendly vehicles, something a Hummer definitely is not (Hummers on average do a bout 15 miles per gallon, thats around 5 or so km's per litre).

China has also got a lot of stick in recent years about its pollution. And mass producing a brand like Hummer won't exactly help them in cleaning up this aspect of their image.

Hummer is estimated to be worth around $500million. GM is eager to unload its lossmaking units and have cleared the sale of Hummer, being in debt of about $172 Billion. Thats roughly twice the GDP of Sri Lanka.

The Chinese however have not completely overruled the deal. So we might yet see an iconic former US military vehicle being owned and manufactured by one of its key global rivals.

read more here and here.

Sri Lankans are Encouraged to be Poor

Image courtesy Artismyhustle

Sri Lankans are Encouraged to be Poor - Dr. Sarath Amunugama.

Since the advent of independence, most governments have focused on concepts like 'nationalism', 'national pride' etc as a method of winning elections. Their policies have alienated segmentsof the population, created huge inefficiencies in the public sector, fostered corruption, and have let self defeating and 'rolling' economic policies (like printing of money to fund budget deficits) to prosper.

Many people wonder why we never turned out to be like Singapore, i think its because of our outlook. We as a nation have no long term plan for success. There is no long term vision. Governments have always seeked to tear down the achievements of previous governments in an effort to appear superior.

I read that Sri Lankans are encouraged to be poor. A cuture of glorifying poverty is popularized by the political machine. And if you think about it, you realize that its true. Most of the teledramas you see on TV with a few exceptions, deal with the lives of poor people. The daily struggle to make ends meet, the problems associated with giving your daughter away in marriage etc being their central concern. Most protagonists in such cases are lower middle class, humble, hardworking individuals committed to a life of doing the same job day in and day out until they drop.

In Italy for e.g. people love wealth. They aspire to it. Even the current scandal surrounding Silvio Burlusconi doesn't prevent Italians from admiring him for his wealth and power, the Americans live and die by the Dream, the Japanese slave for lifelong success. We are what we aspire to; and a culture where being rich is glorified drives the masses to improve themselves and drive the country economically.

The government prints money to give subsidies to appease the people. They print money to cover budget deficits. They drive up inflation and make the public even poorer. Therefore a culture of glorifying poverty definitely helps keep us in check.


The Iranian Revolution - BBC

The supreme leader of Iran has accused the UK and US of meddling in its internal affairs. They just kicked out the BBC correspondent to Iran although they have allowed the BBC office to remain open. Is there credibility to their claims?

Economic Hitmen

Back in the fifties a similar incident happened in Iran. The US friendly Shah was overthrown by a Mohammed Mossadegh who then proceeded to kick out the oil companies and nationalize Iran's oil industry. Subsequently, Mossadegh was overthrown by a coup that saw the reinstatement of the Shah of Iran and the re-commencement of Big oil company operations, providing a cheaper and a more secure source of oil to the Western nations.

John Perkins, author of Confessions of an Economic Hitman, claims it was the CIA who instigated this coup at the request of the UK whose Oil firms suffered the most at the hands of Mossadegh's nationalization. A CIA operative by the name of Kermit Roosevelt (the grandson of President Teddy) used a few million dollars to bribe the right people and with the support of the international media pulled off the first of what was to become a regular US tactic to further their empire building strategies henceforth.

The Shah was in power until Iran went back into revolt in the late 70s with a religious upheaval brought upon by the rise of the Ayatollahs. And this has continued to the present day. There has been a lot of baseless effort at tarnishing Iran's reputation through the whole nuclear power scenario and there could have been build up on this for an attempt at the overthrowing of the existing power base of Iran to install a government more friendly to the West.


The government of Iran claims that it had detected the movement of several British secret agents during the weeks and months preceding the election. Media reports on the goings on inside Iran are full of speculation and drive uncertainty, mostly using unverified and non-credible reports to support their theories. Although, there has been evidence of tampering by the admission of the Guardian Council itself which admitted that more than 100% of the voter base has voted in about 50 cities of Iran.

But this is apparently a normal occurence because there is no legislation preventing people from voting twice in different constituencies. Its absurd, but hey, if it's true then its perfectly possible that more than 100% could have been voted in.

The Venzuelan Connection

Another similar incident which echoes to the current 'riots' in Iran happened in Venezuela not a decade ago. Hugo Chavez was overthrown by a elitist uprising that spurred protesters to eventually invade and claim the presidential palace. 

The rioters against the President were met by rioters for the President. There was a shooting  incident, and Chavez was accused of opening fire on the people protesting against him. This was then used to catalyze more opposition against him when several chiefs of the army denounced him on the media (which had taken the lead in painting him black for a long time by then), which subsequently led to the overthrowing of the presidential  palace guard and the taking over of the country with a rich businessman at the helm.

Ultimately as it turned out, the army itself had instigated the shooting and reports that the president had abdicated were falsified (his signature was forged and he was kidnapped). There was a major uproar and hundreds of thousands of people stormed the presidential palace, overwhelmed the army and succeeded in reinstating the president - War on Democracy


It's interesting to speculate on world affairs based on controversy and what are generally regarded as crackpot conspicay theories by the genral public who live and die by what is seen and heard in the mainstream media, but its more than just idle indulgence. There is more than meets the eye most of the time. The order of power and the lines of command are mere illusions. The world operates on a whole different spectrum from where it pretends to.

It's going to be interesting to see what happens in Iran now. It seems that most candidates are withdrawing their claims while reports from the media increasingly stress on the 'violent' crackdowns of the government. Perhaps an effort at dragging this as far as possible? Protests are still to spread outside of Tehran so we can't really say that the majority is behind the opposition. Until this whole issue clears up and some perspective can be gained, the story of what is really going on in Iran will not be known.

Sri Lanka: The state of play

The hot seat

On Saturday i was coming into Colombo from Wattala to attend a wedding with a few friends. There was a major traffic jam and we were consequently stuck on the road for quite some time. The reason being of course that His Excellency the President of Sri Lanka was on his way to receive some rare (read: probably obscure) honor for his efforts for providing us with freedom.

There are talks of new taxes being imposed. Apparently there is also a seatbelt fine. You get fined if you don't wear your seatbelt. From what i heard its somewhere like 2000 rupees per offense and repeat offenders get to go directly to the courts. Sri Lankans are notorious for not wearing seatbelts so this should net the government a handy sum if imposed and acted upon.

Im curious, is it cos i don't know of these things or is there really no mechanism that lets the public be aware of the rationale behind new legislation and policy stances? Ideally there should be reasearch studies out about frequencies and causes of road accidents to support the seatbelt tax. What i think happened was that some smart alec minister came up with a good 'suggestion' to find some fast cash without the public getting too pissed off. I mean hey, we can all keep our seatbelts on if we don't want to pay yeah. And most of the voter base doesn't really own cars anyway.

The Military

The army is expanding. I heard from the Armchair Warrior Grapevine that this is necessary to secure the area. More soldiers are apparently required to secure an area than to fight it. Maybe i can see the sense in that. Seeing as the LTTE seem to be regrouping now, but still it doesn't look like the taxes are going to subside becuse of this. Also, for the suparlative and the trivia fan, the Sri Lankan military apparently will be the 10th largest in the world if the expansion is carried out.

This also ties into the IDP issue; the government is insistent on holding them for at least 2 to 3 years while international pressure, for what its worth, keeps insisting they let them go. Reports of opressive paramilitary activities at IDP camps abounded and were pretty morbid. But living conditions have now improved according to the IDMC. The government insists it needs to 'weed out' possible tiger cadres hiding within around 300,000 IDPs in vaious camps in the North East and they have just released about 2000 people who have been camped for about two years now.

Our GDP may sink. As defense ependiture reduces the contribution of government expenditure. Although development may pick it up. I read in the Times that there is a 50 million dollar resort of a number of boutique hotels coming up. Hopefully more development will happen and help us with our forex problems which brings us to,

The Economy

Economy wise we seem to have reached a firmer footing. According to this LBO article our balance of payments crisis which was formed by the CBs soft peg is somewhat over. It happened when they sold what dollars they had to buy back rupees to keep up the rupee exchange rates, perhaps helping temper the cost of war imports. What they also did though, was to print more rupees at the same time, defeating the purpose of the peg. Thereby needing even more dollars to fund the thing and avoid a major currency collapse.

I guess they were gambling it all on the war being over, and it's paid off. There has been some foreign inflow and the government has even pulled of a US bond sale which was oversubscribed by about a 100%. Assertions that the need for that IMF loan have lessened seem a bit credible now. There is investment coming in and development projects in line for the liberated territories especially. Although i am not clear as to how much corruption and inefficiency will stunt it.

Industry seems to be suffering with a lot of jobs being lost in the recent spate of downsizing that hit the garment field and other industries. Foreign remittances are also on the decline and many workers are having to return home.

There are signs that fuel prices may be on the rise, with LIOC lobbying for a price increase, the government has insisted it is not planning on raising prices but that is a regular government tactic to calm the people before they go ahead and increase the prices overnight. As was seen in the past.

Interest rates need to be lowered. There is a reluctance by most banks to do this, the current environment still being favourable for high interest rates, but lending has frozen somewhat and domestic demand needs to be stimulated. There are already efforts to get this underway.

What next?

Overall, I feel the outlook is lukewarm. Im not by nature an optimist. But i'm not too pessimistic about our future either. The end of the war is widely speculated to stimulate interest in investments especially in the North East and this will have spillover effects on the rest of the country as well.

If i am a little skeptical, it is with regard to the country's leadership and direction, will they handle the redevelopment efficiently? And also the environment of suppression of free expression that is prevailing right now is a cause for concern. We need a more independent media capable of pulling up those in charge without fear of repercussions. Someone needs to monitor the monitors afterall.

Iran, Its Election and the International Media

A member of the Iranian soccer team protests in Seoul - NY Daily News.

This media hallabaloo about Iran seems to be based on nothing but cheap conjecture. No facts were uncovered about actual malpractice occuring with regard to the elections. Accusations were made that there was a shortage of ballot papers, 'pressurizing' of voters to vote for Ahmedinejad and candidate's representatives not being allowed to gain access to events at polling stations.

But none of this atually deals with the final count that emerged, the actual problem. Which showed president Ahmedinajad winning the election by a massive margin. Where are the errors pointed out in the actual counting mechanism? none of the protesters could actualy point out what sort of rigging had taken place. There was just a general consensus among them that some sort of rigging had to have taken place. On the surface, as any sane minded person would deduce, they just appear to be acting like sore losers.

Most of the protests were carried out in Tehran, which has a population of 14 million people. Iran itself has 70 million people in it. So how can the conviction of such a small fraction of a population be made to seem like the general consensus of the whole of its population? It just doesnt make sense.

And thats what these types of news stories are made for. To try and convey shallow messages in an attempt to shake up the basket a bit. They are aimed at the sort of people who just glance at the news and do not check their facts. This was simply a badly organized negative PR campaign against the Iranian leadership carried out by the Western media, if we want to get conspiratorial about it. Or rather, as i see it, it was just an opportunity to 'make some news' and all objectivity was lost as the media got blinded by a preconception that Iran's current leadership is essentially 'evil'.

Polls have shown that Ahmedinejad has secured major victories even in areas thought to be Mousavi strongholds and the margin by which he won (60%) is far too large to have been rigged.

Also, on a side note. Iran only has 35% internet penetration and 60% of its population is based in urban areas. Deduce of this what you will, but how can twitter updates from such a narrow margin of the population signify broad based protests sufficint enought to spark talk of the 'next Iranian revolution'?

the government of Iran does not appear to be completely innocent in this though. Apparently there has been some supression of protest activity and a cut down of media broadcasts from within. Though this may be standard government action to prevent things getting out of hand, as we have seen happen over here in SL, it is still enough to cause widespread speculation and concern about what is really happening inside.

Watch this Al-Jazeera take on it, its an interesting one.

Sri Lanka Economic Summit 2009

The Theme: “Dawning of a new Era … Opportunities and Challenges”

The When: 30th June to 2nd July

The Where: Oak Room, Cinnamon Grand Hotel

To quote the official release by the Ceylon Chamber of Commerce, which is organizing it;
"The war has hampered the country on many fronts for decades and much of the economic and human resources of the country have been wasted on the war. This has, over the years, pushed one of the most promising nations in the world to an abyss of despair and gloom. Although under- investment in education, infrastructure and health has held back progress of the country, the ending of such a dismal era would naturally invigorate the spirits of its people."
Factors arising from the recession in the global economy such as declines noted in global trade as more protectionist measureas are adopted by countries, the slowdown of developed economies and a credit sqeeze leading to reduced foreign borrowings and reserves are stated as posing challenges from the international arena.

I think that the end of the war, if taken advantage of, can create a mini economic boom in Sri Lanka that could allow us to ride out some of the bumpier repercussions of the global crisis such as reduction in export revenue, foreign inflows of currency and remittances. Also, the emergence of market confidence and animal spirits will help drive productivity and growth and attract investment, at least thats a viable hope.

But there needs to be a concentrated effort from the business community together with the government to enable this to happen. Innovative policy instruments should be put in place and removals of bariers like red tape, corruption and non tariff barriers should be ensured. Also collective development of various sectors is needed to enable complementary growth.

As per the official release, the Summit

"..will discuss important matters on topics relating to the economy, banking & financial sector, agriculture, dairy, fisheries & tourism, employment, need for English and ICT as business languages and the importance of governance & accountability, both in the private and public sector". special emphasis to key challenges confronting the country, which includes post war reconstruction and resettlement, developing the northern and eastern regions, promoting balanced growth and macroeconomic management.

...will explore how challenges could be converted into opportunities and opportunities turned into time-bound action plans. The challenges and opportunities, both external and internal, would require cohesive effort from all stakeholders and the program for the summit has been designed to generate fresh ideas, a consensus view and a clear vision for the development of Sri Lanka."
It costs roughly Rs14,000 for individual participation and they do not provide free passes for students, i checked. So unless someone is willing to generously sponsor me, live updates and blog posts on the outcomes of the summit seems somewhat of a hazy reality. Also, if you're foreign, It costs you $200 which at today's rate comes to roughly 23k and i think that is without taxes.

Im not sure if there is any mechanism in place for the conclusions and ideas ensuing to be released to the public. Ideally they should have organized some sort of a live feed like a twitter/blogging platform and enabled recordings on YouTube etc. The Chamber of Commerce needs to get with the times.

The list of panelists include individuals from the government, international and regional financial/ research sector, local business leaders etc and looks promising. Hopefully, findings and conclusions made will have a concrete nature and would not be afraid to suggest radical change.

Also, the areas of concern seem to be largely related to the immediate future. But thats alright. Hopefully, this will help shape the government's future policy framework for the economy when they get down to it. What I'd really like to see is some serious governmental communications as to what their long term vision for the economy is. Flowery talk and metaphorical allusions to Singapore/Hong Kong etc notwithstanding.

US Economy on the Rise?

The US was officially classed as an economy in recession after its last peak in December 2007 (NBER) after which it had two consecutive quarters of negative growth. A recession as defined by the National Bureau of Economic Research is

 A significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough. Between trough and peak, the economy is in an expansion.

Anyway to cut a long story short, they identified the last peak of the US economy as December 2007 after a significant period of decline followed it which was sufficient enought to be identified as a time of recession.

Taking the generally accepted definition of a recession i.e. 'a recession is indicated by two consecutive quarters of negative/a decline in real GDP' we can deduce that for the recession to stop and for growth to start the GDP should pick up.

Recession = Contraction period

The GDP of an economy is measured as follows

GDP = Consumer spending + Investments + Government spending + (Exports - Imports)

or GDP = C + I + G + (X - M)

Now according to this BBC report the The American Bankers Association's Economic Advisory Committee thinks the US economy is set to grow in the third quarter of 2009. Im sure this is good news all around as a recovery in the US economy will probably mean eventual growth for other nations as well.

But is it really going to be a sustained growth?

Opinions of different schools of economic thought vary on the best option to handle a recession. The end of the Great Depression of the 1930s is credited to the policy ideas of John Maynard Keynes who suggested increasing government spending as a method of boosting production. In practice, this can even involve activities metaphorically akin to the famous paying-people-to-dig-holes-and-fill-them-up-again scenario.

But some are of the opinion that the massive government spending of the second World War is what ultimately brought the world out of the depression, leading to uncomfortable thoughts on the current global economy and political environment.

Monetary economists advocate the use of expansionary monetary policy by reducing interest rates to stimulate borrowing and thereby increasing spending power and eventually consumer spending. The Supply-side economists advocate tax cuts to promote business capital investment.

The general consensus among most economists is that a recession is a problem born of a drop in aggregate demand (meaning the total demand for goods and services within an economy). Therefore, as we can see, theoretical suggestions are mainly directed at stimulating at least one area of an economy that would contribute to a pick up in GDP.

The US's new forecast of a growth of 0.5% seems largely due to an increase in consumer spending which can possibly be attributed to the drastic reduction we have seen in the US's interest rates over the past few months. Also, government spending on dying corporates and banks caused still more money to be injected into the system and would have boosted produtivity somehow, somwhere.

However, unemployment is set to increase to 10% and the overall outlook of employement does not look too good for the next year and a half or so although the increase in consumer spending (which two thirds of the the US economy is driven by), is hoped to temper this.

But there are still deeper problems. According to the BBC the damage caused to the Public Finances and the Labor markets are still substantial and industrial production has fallen more than analysts expected.

There is also the problem of the US's growing trade deficit, which is not helping.

Therefore there are mixed signals on the status of this 'recovery'. It could be the beginning of a slow climb back to the top or it could just be a random spurt of growth brought on by arbitrary circumstances. We should hope for the former.

Great Links

Here are some really great stories that i thought i'd share.

Inflation, a double edged sword? - The Mises Economics Blog explores the inflationary implications of the US's trillion dollar bailout of the banks. It talks of how although pushing the inflation button and increasing the money supply is easy to do, the hard part is reigning it back in. Although its presumtion that contrationary monetary policy after a 'recovery' 'would also reduce bank reserves, reduce credit availability and loans, and increase interest rates' is true, this does not have quite the ominous ring to it as is hoped by the writer. Once the economy is 'recovered' such a reigning in may be necessary to curb inflation and may be the only option available and may not be all that destructive. Their call back to the Gold standard at the end of it though, seems hardly viable. But a great read nonetheless.

Googlenomics - Ever wondered how google manages to make so much of money while giving away most of their products for free? Ads right? Ever wonder how their system of advertising actually works? Its an economy unto itself thats what it is. Google initialy went the traditional way by having salesmen solicit advertising but then they discovered Adwords (toted by some as the greatest business discovery ever). Adwords uses auction theory to have a cost efficient way of selling advertising to bidders. But theres way more to it than this. Google employs a Chief Economist and also has Macro and Micro elements to its operation. This article is a brilliant read. Thanks to Brad De Long for the pointer.

A good time to die - The Adam Smith Institute Blog. The Us has what they call an estate tax where they have this massiv tax imposed on estates over a certain value when the ownder dies. The estate tax has been largely reduced through Bush pressure and is set to come to zero by 2010. But will return in full force (fifty percent) by 2011. This read explores the possibility of more rich people dying in 2010. Its even a bit morbidly funny. If you'll forgive my insensitivity.

China, The US State Department - This account of China is not exactly some obscure study of sensational interest but gives you everything you need to know about the more recent (special emphasis on the last century) Socio-political and economic activity of what will probably become the the worlds biggest economy in ten years. Interesting learning point for me was the Taiwanese political connection and its origins.

General Collapse

US and world car giant General Motors finally files a chapter 11. They already owe a lot of money to the government. They have already lost a good few amount of workers, but this will only increase now.

A chapter 11 bankruptcy is where companies take the option of temporary protection from takeovers (hostile or otherwise) and dissolution. the general idea is that the Bankruptcy filing gives them protection until they can clean up their act and come back into business in their own right. So GM now has a few months to 'rightsize' itself and get back into fighting shape if it still wants to be GM into the future.

Only about 10% of companies who file for Chapter 11 have known to come through at the other end of it. Most others get gobbled up in bits and pieces by other players. In GMs case, their global spread makes them more vulnerable to being eventually scattered among a large group of buyers.

For a full analysis of the bankruptcy and its contributing history, see this Economist report.

Rumours are that a Chinese firm is set to buy the Hummer brand