Scottish Currency Issues and the Referendum

More questions than answers

  The article I read is about the economic considerations behind a Scottish exit from the U.K. and how it will affect the economies of Britain, Scotland and the European Union. The article opens with discussing how the value of the pound has reached a 10 month low compared to the U.S. dollar and a 3 month low with the Euro and how shares in Scottish companies were falling which leads to even more questions on Scotland's capabilities to deal with the impending fiscal situation if the referendum were to pass. 

  A major issue brought by Scotland's possible independence is what type of currency they would use; sterling, euro or the pound. The issue with using the pound is that currency unions should not be made in the European Union without total political and fiscal union, according to U.S. economist Paul Krugman. This leads into the major obstacle that is the resulting U.K. debt situation with a separate Scotland and U.K. The possibility that Scotland forgoes all liabilities from leaving is very slim, which then prompts the conversation as to how much debt they assume and how they will pay it off. The banking sector of Scotland is relatively large compared to other countries going through similar situations, but the projected financial situation for Scotland by Blackrock (world's largest fund manager) is “likely high debt, fiscal deficit, weak economic growth, lack of institutional frameworks and low foreign exchange reserves”. This suggests Scotland would pay a higher interest rate than the British government; brokers estimate an extra 1-1.5 percentage points a year. This all comes back to the currency issue, Scotland's liabilities and assets would be in different currencies if it were to utilize sterling and Britain used pounds. The increasing interest rates would make investors more likely to remove British assets thus making Britain's financial situation more confusing. One long term situation proposed is that a Scottish exit would make a British exit from the European Union likely, thus furthering the ripple effect. However I feel this to be a bit of a stretch. One question that I came across while reading this article is how informed the average Scottish voter on these issues/conversations.

Link:http://www.economist.com/news/britain/21617032-investors-hate-uncertainty-scotland-supplying-plenty-it-more-questions-answers

John Wainwright

America's Economy - How long will the expansion last?

http://www.economist.com/news/united-states/21612168-weighing-evidence-how-long-will-expansion-last

Some economists are worried that another recession may be right around the corner. This article states that our current expansion is 5 years old which is "longer than the post-war average of 58 months".

Later in the article, it is noted that recessions have become rarer in recent memory. The three previous expansions prior to the 2008 economic collapse lasted for an average of 95 months. Rudi Dornbusch, an economist, said "post-war expansions didn't die in their beds; they were murdered by the Federal Reserve." By saying this, Dornbusch is stating that through inflation, profits in the economy as a whole deteriorated, prices and wage rose as well, which was followed by the Fed raising interest rates. This process leads to recessions.

Although interest rates have been drastically low since the beginning of the recovery because of low inflation as well as slow growth in the economy. Because of this, the Fed has "little firepower to respond to another shock."

One of the main points of the article was to highlight the fact that the Fed can only do so much to protect against recessions. Processes that have worked in the past sometimes fail to work in the present and the economy is unpredictable - Our guesses can be based off the past, but every now and then something changes course which unpredictably causes a recession.

How Immigrant Entrepreneurs are Making It

http://money.cnn.com/2014/09/18/smallbusiness/immigrant-entrepreneurs-exports/index.html?iid=H_E_News

In this article presented by CNN Money, it offers an in depth perspective on how immigrant entrepreneurs have a significant leg up on North American entrepreneurs when it comes to international business. Some of the advantages that they have are due to family ties, culture familiarity, knowing the market as well as the environment.

The article touches on how these immigrant entrepreneurs have a much higher propensity for participating in transnational activities given their roots in foreign territories. International clients have more confidence in their partners overseas if they have ties to a different country. The ability to export internationally has a great deal of influence on ones knowledge of that given area, and given that many of these new entrepreneurs have a great ability to speak many languages, it gives them a leg up on North American businesses because of the barrier presented by language and familiarity. The network of international business is far more substantial for those from foreign countries, and because of this, it allows for a greater ability for international distribution partners, which is a huge business asset. 

Overall the main emphasis of this article was to elaborate on how current international business is fueled by immigrant entrepreneurs, and given that, they have a significant leg up on other entrepreneurs without ties to foreign countries.Those looking to start exporting or expand their international base can learn from immigrant entrepreneurs to get a leg up on their competitors.  

http://www.economist.com/news/business/21618815-death-chaos-destruction-theyre-not-bad-companies-you-might-think-profits-time


This article gives a rundown of how firms are generally influenced by geopolitical destabilization, generally the firms that have invested largely in rigid inflexible supply chains in areas of destabilization are hurt the most, while the larger firms can reallocate their resources and supply chains around the trouble while making a reasonable increase in business.

In addition the western market generally has the majority of technological investment based in the west itself and not in volatile regions, actually most investment is seperated from the unstable regions, which are of large political value but make a reasonably unsure market falter from investing near them, leading to the areas of instability being less economically important than other more profitable avenues of business.

Inequality and the Narrowing Tax Base: Too Reliant on the Few

http://www.economist.com/news/leaders/21618784-taxes-are-best-raised-broad-base-many-countries-it-worryingly-narrow-too-reliant

        As much as we all say we hate taxes, they are a necessary part of any civilized society. While we can all (mostly) agree on this statement, the resentment towards taxes comes from the extremely high rates many of Americans, and others around the world, are required to pay each year. This leads to an environment in which the richest of the rich do anything they can to avoid sending large chunks of their money to the government while lower socioeconomic individuals aren't even required to pay an income tax. Economists argue that we could change this hesitance and hostility towards taxes by taxing a broader base, allowing rates to fall which would increase tax revenue.
       This idea is directly opposite of what America, and other first world countries, are doing. Instead, the trend is a smaller proportion of the nation contributing the highest amount of income taxes. In 1979, the top 1% of Americans paid 18% of the income tax. Currently, they are responsible for 46%. There is a similar trend in the corporate world. While part of this is the fault of increasing economic inequality, bad tax policies are also to blame. There are two solutions to the issue at hand.
       The first fix is tightening up the tax code to reduce the amount of deductions and exemptions that are given each year. This would increase the tax base and add 7% to our GDP. The second solution is focused primarily at corporations and closing the loopholes that allow them to dodge the taxes they should be paying. By updating tax law, companies will have a harder time avoiding taxes thus leading to more revenue and a wider tax base. While implementing both of these policies would be ideal, any step taken towards widening the tax base would be extremely beneficial to both the individual/ corporations as well as the government.

China and Asia Winners and losers in the great Chinese rebalancing Slowing investment and resilient consumption in China are changing Asia’s economic order

The article goes into great detail regarding the effect china has in terms of being a regional economic power house. It gives an in depth comparison of how in five year China has gone from a nation growing at an annual rate of 10% on average for the past 30 years to 7.5% in the previous two years. Even though 7.5% annual growth is very good compared to other countries, but; still a downgrade for China. Its coal imports have gone down drastically. Low growth has had a negative effect on Asian Economies that have relied on China for higher exports. Major examples of these are Taiwanese machine tool makers who have seen a drop in exports to China by more than 20% since 2012. Australian iron has hit its lowest price in around 21 months. Jewelry sales have gone down in Hong Kong by 40% this year.

In terms of the Chinese economy, consumption is finally edging out investment as the main element. Household consumption has grown from 34.9% in 2010 to 36.2% of the GDP last year. Even after the mini-stimulus introduced by the government this year, consumption has accounted for more than half of the Chinese growth.

This rebalancing has had an effect on various other economies. With 1.95$ trillion in imports in 2013 China became the second largest importing nation. For example Taiwan’s exports to china went up by 15% in June for a year earlier. However; more at risk are countries that export commodities and capital goods such as heavy machinery to China. Such as Australia will lose about 0.8% points if Chinese investment goes down any further. Which goes to show the impact of economic fluctuations in China as a regional power house.  

http://www.economist.com/news/finance-and-economics/21608749-slowing-investment-and-resilient-consumption-china-are-changing-asias-economic

Nation Experiencing Wider Gap in Retirement Savings

The gap in retirement savings between the rich and poor has been growing significantly.  Households in the lowest income bracket (those earning less than $39,000/yr) have a median savings balance of $13,000.  However, those in the highest income bracket (those earning $138,000/yr or more) have a median savings balance of $452,000.  Between 2004 and 2013 these numbers are a 24% increase for the high income bracket and almost a 20% decrease for the low income bracket. Even worse, only 9% of the lower income class households even have a retirement savings account, whereas 90% of the higher income class households have such an account.  Also, around 50% of middle class income households have a retirement savings account.

Some people will say that this is a problem the government needs to address quickly.  Others will argue that it’s the fault of the individuals, who need to maintain smarter saving behavior and manage their income more efficiently. 

http://money.cnn.com/2014/09/18/retirement/retirement-savings-income-inequality/index.html?iid=HP_River

South Dakota: Quietly Booming

http://www.economist.com/news/united-states/21614223-how-neglected-state-succeeding-quietly-booming

South Dakota has been quietly on the rise in the past few years.  Even though South Dakota doesn't have an oil industry, military base or an influential university, it still has a 3.7% jobless rate which is third lowest in the country and it has Sioux Falls which is the fourth fastest growing economy in the country.

The state's economy used to depend mainly on farming but now many financial companies and hospitals are the main forces for the state.  Citi-bank moved its credit card business there and many other banks have followed.  The state has $2.76 trillion in bank assets which is the more than any other state including New York.  What also makes South Dakota an attractive place to live or start a business, is the taxes.  South Dakota has no state income tax, personal property tax, inventory tax, or inheritance tax.

However not everyone in the state is prospering as South Dakota has some of the poorest spots in the nation, mostly Indian reservations.  For example there's Shannon County which has the lowest income per head in the country.  But for now South Dakota's economy looks like it's still on the rise.

Europe’s Big Airlines No Longer Want to Fly in Europe (Bloomberg Businessweek)

With numerous short-haul budget airlines around the world, the major airliners in Europe are starting to feel the effects of fare competition. The three biggest airlines in Europe, KLM, British Airways and Lufthansa are all changing their strategy to deal with this increased competition. This strategy change is seen in either acquisitions or use of already owned budget airlines.  United States’ airlines have already almost completely eliminated flight in Europe that does not involve one of their hubs. The costs are way to high for the low revenue associated with short-haul non-hub destination flights in Europe. 

            With the new move towards the use of budget airliners that the major European airlines have acquired, a number of issues have occurred. Many of the major airliner pilots have become irate over the decrease in wages for flying for the short-haul budget companies. The disparity in wages between the short-haul and long haul pilots is large. In fact three pilot strikes have occurred against Lufthansa in the last week.  Air France is preparing itself for a weeklong pilot strike that is likely to start this week. This is a major issue for travelers as there is going to be a lack of pilots in Europe causing delays and cancellations, which will disrupt business within the continent.  Air France has urged customers to reschedule their trips due to the instability in their labor forces.

Source: http://www.businessweek.com/printer/articles/225164-europe-s-big-airlines-no-longer-want-to-fly-in-europe

http://www.nytimes.com/2014/09/15/opinion/paul-krugman-how-to-get-economic-policy-wrong.html?_r=0

Paul Krugman writes this article to explain his opinion of the 2008 crisis. He blames economists for sugar-coating forecasting and he says that economists would only report on what they wanted to hear. He says that no one predicted the crisis because of our idealized view of capitalism. At the time we thought the market could never crash and that it would always be perfectly functional.

He does say that we had a good lesson from this 2008 crisis. We were able to accurately forecast the aftermath of the crisis predicting there would be low interest rates when it comes to budget deficits as well as low inflation with an increased money supply (suggesting that our GDP is growing because we are printing money with low inflation).

With all this said is is good to see that America is bouncing back. With a declining unemployment rate and our dollar strengthening, we are heading in the right direction.