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I have been inundated with a lot of questions about the global economy this week; a lot of these questions are to do with the impact of the US economical woes on our global franchise, the Zambian Enterprise included.

 

So, I decided to put on my financial consultant hat and delve into as many econometrical variables as possible to try and explain what a layman may not be told are actually the causes of the economic impasse in the United States.

 

We at the Zambian Chronicle saw this coming as early as last year and in January we published David Frazier’s Global Economic Briefing in US Recession Could Affect Our Global Enterprise, The Zambian Enterprise Included …. This was followed by the Bush Administration’s rebuttal in Bush Sees No Recession Yet the very next month.

 

The argument from the administration has always been that economic fundamental have been sound and therefore much of the attention has been on monetary policy as the Federal Reserve Board has been trying to work on efficacy by reducing Fed Funds Rates. By the way, the Federal Reserve Act of 1913 gave the Fed more power than even the President of the United States when it comes to fiscal policy …

 

The problem with the reduction(s) of the funds rates though was that it created an illusion that by lowering the rates, the cost of borrowing would be lower thereby encouraging market participation by increased credit derivatives (lending and borrowing) in the market.

 

So new buyers were introduced into the system; mortgagee(s) rushed in and started refinancing already existing loans at the new lower interest rates at times cashing in on existing equity and business was booming as finance companies managed to make tones of money from loan origination fees, increased their asset holdings at much higher appraised values while turning around to sell mortgaged backed securities on the secondary market.

 

This illusion missed one point though; liquidity, liquidity, liquidity … the US unemployment rate has steadily been increasing from a “One State Recession” in Michigan at about 12% to the national average of about 6%. This meant that more and more people were getting out of work and despite their new lower mortgage rates and cashed out equity, they had no “ability to pay”.

 

Meanwhile the Federal Reserve kept on lowering the funds rates which eventually became a stimulus that would only encourage further mischief as lenders abrogated their fiduciary duties extending credit to unworthy borrowers and cut corners to close on deals.

 

The Fed regime was an accomplice to that reckless behavior. A fed funds rate of around 3.5% was a detriment particularly with commodities prices soaring and incipient inflation coming to US shores from demand-pull pressures and rising labor costs.

 

A real palliative came in as home owners started defaulting due to their lack of liquidity, leading to foreclosures and short sells. As homes foreclosed and or are short sold, their values declined thereby creating negative equity.

 

But that’s not all, what added salt to the injury is what is called “securitization”. This particularly in the US market comes in the form of Mortgage Backed Securities – MBS. These are asset backed securities sold on the secondary market whose cash flow is backed by collateralized mortgages.

 

Any one with an understanding of basic finance knows that if you borrowed $100,000.00 for 30 years you would probably pay back $300,000.00 on that same mortgage, $200,000.00 of which would be interest income for the lender.

 

These MBSs are backed by that interest income, sold as bonds and or other financial derivatives on the secondary market with a guaranteed yield. Insurance companies, retirement funds and other ultra-virus thrifts like to invest into these marketable securities because of their guaranteed revenues.

 

Well, the problem is if people have no work and thereby are defaulting, then the MBSs are not in actuality guaranteed for the loan term(s) because of foreclosures and or short sells in a downturn economy or prepaids in a vibrant one.

 

These marketable securities (MBSs) are a prerogative of the Securities and Exchange Commission (SEC) and they are regulated by them but they were asleep at the switch. The Federal Reserve Board is in charge of monetary policy and just kept on lowering funds rates and was asleep at the switch.

 

The Department of Treasury has a stake in checking on the yields from MBSs because they affect yields on Treasury Bills but was asleep at the switch; the Bush Administration was busy chasing Bin Laden and was asleep at the switch while the US Congress are supposed to be the watchdog for the tax payers but were busy fighting partisan politics, sleeping at the swath.

 

As of the first quarter of 2006, the total market value of all outstanding MBSs was approximately USD 6.1 trillion, according to The Bond Market Association. These are paper assets in which tax payers’ retirement security has been vested and is likely to be lost if no one takes the right steps going forward.

 

There two schools of thought going on this weekend in Congress, one that says a Government bailout means socializing the markets. Another school of thought wants to lend money to Fannie Mae and Freddie Mac so they can pay back with interest using market forces.

 

We at the Zambian Chronicle see an opportunity for the Federal Government so good to be passed on. The best route would be an outright bailout that places Fannie Mae and Freddie Mac under receivership.

 

This route would not only make the American tax payers shareholders in the $700 billion bailout  enterprise but as these non-performing loans are turned around into performing assets all future interest income can be turned around to be invested into the Social Security and Medicaid/Medicare Trust Funds which are scheduled to go bankrupt by 2045.

 

… problem is I am not running for President of the United States of America; can’t run – not a US born citizen and so they probably would not listen …

 

In closing, this is a dire lesson for all emerging markets, the Zambian Enterprise included. What we have learnt is that greed is bad; using securitization, fund managers increased their income as they lowered their own risks.

 

By cutting corners, greedy loan officers and finance companies made a short term killing and by sleeping at the switch, the SEC, the Feds, the Bush Administration and the US Congress almost crushed the world’s beacon for capitalism.

 

Sometimes, it’s good to know that no one is actually looking out for you after all, you are on your own and you better watch your own back …

 

Live Long & Prosper; that’s this week’s memo from us at the Zambian Chronicle … thanks a trillion.

 

Brainwave R Mumba, Sr.

CEO  & President – Zambian Chronicle 

 

Copyrights © 2008 Zambian Chronicle. All rights reserved. Zambian Chronicle content may not be stored except for personal, non-commercial use. Republication and redissemination of Zambian Chronicle content is expressly prohibited without the prior written consent of Zambian Chronicle. Zambian Chronicle shall not be liable for any errors, omissions, interruptions or delays in connection with the Zambian Chronicle content or from any damages arising therefrom. 

Zambian Chronicle is a wholly owned subsidiary of Microplus Holdings International, Inc.

Copyrights © 2008 Microplus Holdings Int., Inc.

 

UN warns on food price inflation

Pakistani women at subsidised food store 03.03.08

Governments are urged to take action to help ease rising prices

The head of the UN World Food Programme has warned that the rise in basic food costs could continue until 2010.Josette Sheeran blamed soaring energy and grain prices, the effects of climate change and demand for biofuels.

Miss Sheeran has already warned that the WFP is considering plans to ration food aid due to a shortage of funds.

Some food prices rose 40% last year, and the WFP fears the world’s poorest will buy less food, less nutritious food or be forced to rely on aid.

Speaking after briefing the European Parliament, Miss Sheeran said the agency needed an extra $375m (244m euros; £187m) for food projects this year and $125m (81m euros; £93m) to transport it.

This is not a short-term bubble and will definitely continue
Josette Sheeran
WFP

She said she saw no quick solution to high food and fuel costs.

“The assessment is that we are facing high food prices at least for the next couple of years,” she said.

Miss Sheeran said global food reserves were at their lowest level in 30 years – with enough to cover the need for emergency deliveries for 53 days, compared with 169 days in 2007.

Biofuel prices

Among the contributing factors to high food prices is biofuel production.

Miss Sheeran says demand for crops to produce biofuels is increasing prices for food stuffs such as palm oil.

Miss Sheeran said governments needed “to look more carefully at the link between the acceleration in biofuels and food supply and give more thought to it”.

The WFP says countries where price rises are expected to have a most direct impact include Zimbabwe, Eritrea, Haiti, Djibouti, the Gambia, Tajikistan, Togo, Chad, Benin, Burma, Cameroon, Niger, Senegal, Yemen and Cuba.

Areas where the WFP is already seeing an impact include:

  • Afghanistan: 2.5 million people in Afghanistan cannot afford the price of wheat, which rose more than 60% in 2007
  • Bangladesh: The price of rice has risen 25% to 30% over the last three months. In 2007, the price rose about 70%.
  • El Salvador: Rural communities are buying 50% less food than they did 18 months ago with the same amount of money. This means their nutritional intake, on an already poor diet, is cut by half.
  • Anger over rising food prices have already led to riots in Burkina Faso, Cameroon, Senegal and Morocco.

    The BBC is planning a special day of coverage of this issue on Tuesday 11 March, online, on radio and on TV.
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    The Zambian Enterprise came out close to near bottom of the Global Competitive Index for the period 2007 – 2008. In this year’s report to be released on October 31, 2007, Zambia is ranked 117 out of the 128 countries evaluated for the period.  

    The World Economic Forum, which compiles the report, is an independent international organization committed to improving the state of the world by engaging leaders in partnerships to shape global, regional and industry agendas. 

    The Report will include The Global Competitiveness Index featuring the 12 pillars of competitiveness, The Business Competitiveness Index, detailed country profiles and data tables covering more than 100 social and economic indicators.  

    The rankings are drawn from a combination of publicly available hard data and the results of the Executive Opinion Survey, a comprehensive annual survey conducted by the World Economic Forum together with its network of Partner Institutes (leading research institutes and business organizations) in the countries covered by the Report. 

    This year, over 11,000 business leaders were polled in a record 131 economies worldwide. We wonder whether Zambia sent any of our business and or political leaders to this forum to represent our enterprise and make sure we were adequately represented.

    That aside, human inclination tends to dispel such a poor overall performance by stating that Zambia needed to be given a fair stake in the matter considering all the purported strides since made on the economic front. Well, for Africa alone for instance, Zambia does not even appear in the top 10 most competitive countries for crying out aloud.

      Rankings For Africa – 2007

    Growth Competitiveness Index

    *** Zambia Not Even In Top 10 ***

    Rank
    1
    2
    3
    4
    5
    6
    7
    8
    9
    10
    Country
    Tunisia
    South Africa
    Mauritius
    Egypt
    Morocco
    Libya
    Algeria
    Botswana
    Namibia
    Kenya
    Score
    4.72
    4.42
    4.22
    4.09
    4.02
    4.00
    3.98
    3.83
    3.76
    3.61

    It is worth mentioning here that our own analyses at the Zambian Chronicle have always been in line with the World Economic Forum’s assessments. We have been in the forefront on advising our Zambian Franchise that we have a great deal of competition around us. 

    In Zambia we tend to over-dramatize issues; beating ourselves on the chest if you like. We beat our own drums without taking into account other externalities that really matter. It is this kind of myopic prescience that usually leaves us hanging when actual results are brought to bear. 

    You cannot set your own standards as a country and want the world the judge you by those when the entire globe uses a different set of scenarios, such as ISO 9001.

    For instance, around the world, productivity is a real measure of competitiveness and competitiveness leads to prosperity. As Jennifer Blanke, Senior Economist at the World Economic Forum explains in the video below, there are institutions, factors and policies that are required to be in place for a nation to be competitive. For the period under review, twelve pillars were used and only nine could relate to the Zambian Enterprise. To make matters worse, those that could relate painted a very sad picture in terms of scores. 

    The first four pillars were classified under basic requirements and they included institutions required for normal business practices and we were ranked 56 out of 128 (perhaps one of our best in overall grading). 

    The next pillar was infrastructure and we were ranked 90; third pillar was macroeconomics and we came out 122 (imagine that) while the fourth pillar in this category was health and primary education in which we came out as 118 (remember our article about how spending on education was pathetic?). 

    In the efficiency enhancer, category three pillars were under consideration and they included the fifth pillar, which was higher education, and training and we came out 120; the sixth pillar of market efficiency earned us 86 and the seventh pillar of technological readiness we came out at 96. The last category we participated in was innovation enhancers, in which we actually came out to be at the bottom of the barrel. The eighth pillar was business sophistication and we had 128 out of 128 meaning we were the worst in the world. The ninth pillar is actually innovation; we came out 121 out of 128. 

    It is no wonder we are always asking others to come and develop Zambia on our behalf.  The fact of the matter is, Zambia shall be developed by the Zambians for the Zambian but our current crop of politicians seems to denigrate Zambian ingenuity always looking outside for others to come and take the lead. 

    classy-daddy-3.gifThe thumper mentality needs to end, the business of beating our own drums needs to end, the beating of ourselves on the chest needs to end and our state of mind needs to change if we have to play in the big league.

    Let us for a change focus on what our institutions, our factors of production and our policies are before we can look elsewhere. 

    Let us for a change use our debt-repayment savings and invest those into our children by providing quality education at all levels, providing exemplary health care for all our citizenry, and investing in our technological areas that encourage local innovation; that’s this week’s memo from us at the Zambian Chronicle … thanks a trillion. 

    Brainwave R Mumba, Sr.

    CEO & President – Zambian Chronicle

    Copyrights © 2007 Zambian Chronicle. All rights reserved. Zambian Chronicle content may not be stored except for personal, non-commercial use. Republication and redissemination of Zambian Chronicle content is expressly prohibited without the prior written consent of Zambian Chronicle. Zambian Chronicle shall not be liable for any errors, omissions, interruptions or delays in connection with the Zambian Chronicle content or from any damages arising therefrom.

    Zambian Chronicle is a wholly owned subsidiary of Microplus Holdings International, Inc.

    Copyrights © 2007 Microplus Holdings Int., Inc.