Archives for posts with tag: Economy


by Merlin Hernandez

There are several trends which are certainly slowing down, if not reversing, the rapid pace of globalization. There is evidence of protectionism, nationalist sentiments and renewed economic regulations as a response to the recent economic crisis as well as other risks involved in operating in a globalised world. Acting globally has become the norm for most companies and there are benefits to be derived from a global reach. When faced with some of the risks associated with a globalised economy, however, government and companies are increasingly reverting to a more nationalistic and protectionist stance.

The recent economic crisis has certainly heightened the strength of some of anti-globalization trends as we see moves toward insourcing, more vigilant tax regimes, and tighter immigration oversight. While these types of reactions are unlikely to reverse globalization, they may well slow its development and can lead to more uneven development for the smaller, more vulnerable economies. Globalization has built deeply integrated connections between societies and economies that will not be broken easily and in many ways has become a defining and permanent feature of world economic relationships.

Attempts to temper economic and political fallout from global integration can roll back the gains of developing economies through job losses, reduced disposable incomes and spending power, lower GDP and economic stature – all of which will negatively impact the more vulnerable economic partners. As less developed economies shrink and people seek jobs and opportunities beyond their home ground, issues of immigration, national security, and strained social infrastructure become concerns of larger metropolitan economies.

Resurgence of Nationalism

As the global economy shrinks, economic nationalism is emerging as attractive to US and EU governments and business. But a globalized economy does not have to mean total integration with the world economy. The key will be strategic integration with the international economy as a factor of national planning in ways that seek to balance two critical factors – immigration and capital flows.

Recent nationalist policies have affected migration flows which can place additional strain on developing countries in the fight against unemployment. On the one hand there is the risk of a significant shift of much needed expertise away from developing countries to more established economies. Increasing unemployment, reduced entrepreneurship and expertise as well as lower spending power as a result of the new wave of protectionism by larger economies will exacerbate economic constriction in the developing world. Further unbalance in the world economy can have a negative effect on political stability and security interests. An increased demand for aid and crisis intervention can be expected.

Many developed countries are already restricting the supply of visas, except for the highest skills, and reducing immigration as a whole, which is a critical aspect of globalization. There is also the possibility that an overreaction in restricting migration (technical experts, migrant workers) may in fact lead to a further slowing of domestic growth in countries like the US, as well as a reversal of this element of the globalization process.

Monetary Rationalization

Following 9/11, nationalism also became the driver that threatened the flow of global capital. It is not new for global economic contraction to restrict capital mobility. But the historical effects of such policy on global savings and investment balances in the world economy would indicate a serious look at alternative strategies. The single currency idea which has been forwarded at different points in the debate might be revisited. Even with the dialing back of the globalization thrust, national currencies and global markets do make strange bedfellows. A multinational currency is worth consideration.

The US dollar is not only a national currency, it has become the primary international reserve and vehicle currency. With rising economic nationalism, capital management within the national interests of each economy would tend to lean toward more short term capital movements during periods of economic instability. But that does not factor depreciation that could drive capital out of individual currencies. Of course an appreciation of a particular currency will conversely attract capital into those assets. It is a scenario that may be characterized by wide swings in exchange rates which can only compound transnational financial instability. It does make the case for the need to operate under the umbrella of an internationally agreed financial framework to mitigate further global financial fallout.

Faced with these barriers and growing resistance to globalization trends at home, some multinational corporations are rethinking their outsourcing and offshoring strategies, giving more weight to nationalist reputation along with political and transport risks associated with widely dispersed supply chains. Furthermore, the current period of crisis and indebtedness in rich countries, along with rising reserves and assets in sovereign reserve funds from both developed and emerging economies have changed the nature of global investment supply and demand. Emerging financial players, such as China, now have the opportunity to buy global assets, more specifically assets in developed countries. These relationships will not be easily reversed. It all translates into globalization being here to stay but requires a strategy for global economic and monetary rationalization.

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Outsourcing Twist: Jobs come home

The other side of Outsourcing


By Merlin Hernandez

In a bid to jumpstart the tepid recovery, and to boost investment and the employment rate, the Federal Reserve has increased its stimulus with monthly treasury purchases of $45 billion. This is in conjunction with the $40 billion in mortgage-backed securities per month which started  last September. While the new purchases can only come by creating new money, the prime rate is held near zero to further encourage borrowing, and with current inflation below 2%, new movement in the economy is expected to cushion any rise in inflation.

But market response has been unsurprisingly lukewarm reflecting nervousness about the looming fiscal cliff which has been cited by the IMF as the biggest threat to the US economy, and raising some fears of a liquidity trap if the economy is allowed to go over the cliff even for a short period. Businesses have halted new expenditures, including new hiring in fear of a stringent fiscal policy come January if agreement is not reached in Washington on the extraction of some $600 billion from the economy.

Strong seasonal retail showing and a further reduction in jobless claims did not shift investor caution either, with the Dow Jones and S&P index down slightly at the end of the business day on Dec. 13 (Thursday). The uncertainty over fiscal cliff negotiations between Democrats and Republicans also has international implications. Even with news of the ratification of the long-awaited Greek bailout that could tame the European debt crisis, the European Central Bank cut its growth forecasts. This is in anticipation of US economic setbacks which would summarily reduce US demand for European goods if the government fails to reach agreement on tax and spending cuts.

China’s emerging recovery, after a two year slowdown, had been gaining momentum with growth in the manufacturing sector. But the prospect of a stalled US recovery leading to much reduced US demand and export revenues has caused contraction in investor enthusiasm. There is concern that GDP growth will be significantly below targets if the US does not resolve its fiscal issues, with talk of an expansion of the China deficit as a result.

The US Federal Reserve is already revising future growth prospects downward based on the current economic standstill. Q4 of 2012 was expected to be the cranking up period for slow but steady growth in 2013 but as it stands, the world may just have to brace itself for a new recession if Congress is unable to reach a bipartisan compromise by December 31.

Related Articles on this Blog
• Current Monetary Policy
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Merlin Hernandez is an entrepreneurial development and management consultant who operates mainly in the small and medium enterprise sector. She has extensive experience in International Trade. For more information on this topic, please send enquiries to

by Merlin Hernandez

The reality of economies is that they are subject to the roller coaster that is the business cycle. The role of a central bank in a recession is really to nudge the economy back on a path to growth and maintain stability of output and prices. In recent times there appears to be a disproportionate expectation that the Federal Reserve will make an economic turnaround happen. But this is beyond the scope of the central bank alone. Moving the expansion curve towards a growth trend is the point at which the effectiveness of combined monetary, fiscal and other necessary measures might be determined.

When the economy is in a slump, the Federal Reserve has several tools at its disposal to influence a turnaround by increasing money supply and controlling inflation. A decrease in the reserve ratio that reduces the percentage of reserves a bank is required to hold against deposits is one way to make more money available for loans to businesses. Another avenue is open money operations (Quantitative Easing) which allows the Fed to purchase financial assets like treasury bills, bonds, and foreign currencies from government, corporations, banks, and other financial institutions allowing them to build cash reserves, loosen lending policies and lower borrowing costs to stimulate business and employment.

Offering low discount rates to commercial banks can also stimulate the economy by signaling to financial markets that they can lend more. Perhaps the least viable option would be printing more money against the same reserves which engenders fear of spiraling inflation. But any large injection of money into the system runs the risk of sustained inflation if the economy does not grow at a rate commensurate with the money supply. It is important that government’s fiscal policy maintains purchasing power through increased government spending to kickstart the stalled economy and sustain fledgling growth. A further fiscal stimulus like tax reduction for the large middle class increases disposable incomes to induce increased demand for goods and services.

Businesses would take advantage of the monetary stimulus to increase output while benefiting from the increased demand facilitated by the right fiscal policy to give traction to the economic recovery. In other words, government’s fiscal policy operates in tandem with the Federal Reserve monetary policy in order to avoid a liquidity trap where there is too much money available for business investment and too little takers because of low demand. While mitigating the potential liquidity trap, keeping interest rates close to the rate of inflation creates a disincentive to hold on to money because of low marginal yield and stumps any threat of deflation. The conditions are thus created for a climate of investment. It is not that the measures used by the Federal Reserve have been ineffective but that a reliance on the central bank to make a recovery happen is to place too great an emphasis on monetary policy alone to smooth business cycles.

Efforts by the Federal Reserve to increase the money supply in order to stimulate the economy in a time of recession have been seen by many economists, including Milton Freidman, as impractical as a principal strategy. Some of the factors that influence the inadequacy of a singular reliance on monetary policy include unstable relationships in the working money supply between monetary aggregates like currency in circulation, demand deposits, savings, and money market shares. The interrelationships among other macroeconomic variables like the velocity of money, exchange rates, credit quality, corporate debt, and international capital flows also make the case for the current integrated fiscal-monetary approach to stimulating growth.

Related Articles on this Blog
• Fiscal Cliff
• Deflation Threat
• October Insights 2012: A monthly eye
• Is the recession over?
• European Unrest

As the economy grinds its gears to recovery, it might by showing some elements of deflation as a result of the slow rise in employment levels. Deflation results from consumers not spending and/or conserving their cash which could lead to production surpluses and falling prices. Unemployment is a primary factor to consumer spending reduction but in a recession and early stages of recovery people who have jobs are not so quick to spend because they are not sure how long they will stay employed. When spending is down and there is surplus, prices are likely to fall. But even with low prices, there may not be enough takers, leading to further price reductions.

When the economy is tight, it does not matter if goods are cheap, consumers are scared and hold on to their money. The challenge would to eliminate the surplus and push prices up. In short, increase demand. To ensure that prices remain stable and stump creeping deflation, it is necessary to create the conditions that would encourage people to spend. Fiscal stimulus measures and tax cuts support continued consumer spending while the Feds monetary policy aims at supporting investment and job growth.

Regardless of what compromises are made to avoid the looming fiscal cliff and hold down deflation , there will be some degree of government spending cuts and tax rollbacks early in 2013. It would indeed be bad timing and the wobbly recovery would slow down again in spite of the access to investment capital through QE3. Job growth is likely sputter once more as investor caution postpones new business initiatives. The hope that QE3 will bankroll increased output and create an advantage for US exports in the short term will be delayed. The reduced trade deficit to strengthen the dollar may not be realized till much later.

The possible ensuing scenario begs some examination of US-EU interconnectedness as nervousness about Europe continues to impact the US economy and its growth outlook. The US is the largest trading partner for EU goods. A new US recession would mean a major drop in EU exports leading to further economic shrinkage in Europe. New austerity measures in an already battered Greek economy is giving new breath to political unrest that has several flashpoints across Europe. Reduced EU revenues threaten the bailouts for Greece and Spain and political/economic stability in the region.

The EU is also the largest outlet for US exports. Economic contraction in the Eurozone will affect the US ability to earn revenues from goods exported to Europe. The German economy, the strongest in the EU, is already showing signs of a slowdown which could be partially attributed to lower US demand. With supply and demand down on both sides of the Atlantic, the stage is set for deflation (zero growth) of global proportions. The issues relating to the US fiscal cliff need to be navigated free of partisan politics for strategizing so that the recovery will not be reversed and economic growth remains steady.

Very low economic growth leads to deflation and a stalled economy. Worst case scenario is that low demand and low supply will see prices fall so dangerously low that businesses will be forced to close their doors, triggering a new unemployment spiral and a recession deeper than before. The injection of money into the system as in the case of QE3 could increase inflation. But low levels of inflation are necessary to keep supply and demand at optimal points in order to sustain recovery and keep deflation at bay.

By Merlin Hernandez

The election is finally over and there is now the urgency to address what has been described as a looming fiscal cliff which can hurl the economy back into recession. On December 31, government spending cuts are due to kick in, while tax cuts and exemptions that boosted disposable incomes are set to expire. There is the expectation that the fallout would be a large contraction in spending that would strike a major blow to the fledgling recovery. The economy has been kept on life support through increased government spending, tax cuts, and maintaining an acceptable level of consumer spending through entitlements. Monetary policy nursed the ailing economy by carefully and creatively massaging growth with cash inflows and low interest rates over the last few years.

The election has essentially given the government the mandate to continue the policies that have painstakingly put the economy on the road to recovery. But this has come at no small price with ballooning debt and a huge budget deficit. And then there is the fact that the expenditure multiplier did not trickle down to create jobs due to outdated GDP measures, a tax structure that failed to treat effectively with outsourcing, and unwillingness in some quarters on to commit to the necessary tax reforms.

It is clear that government needs to continue to prop up the economy by maintaining spending levels, at least until the effects of QE3 is widely diffused and new investment stimulates required levels of job growth. But the deficit needs to be addressed as a matter of priority to avoid a catastrophic credit rating downgrade. A radical shift in the path to recovery is not an option as drastic spending cuts and a full roll back of tax breaks could reverse the current growth trend. The Obama government finds itself between a rock and a hard place. Compromise is indeed indicated but it will take bipartisan effort in a Republican controlled House.

On election night, President Obama tackled the issue head on by reaching out to the leaders of both parties to immediately begin a process to reduce the deficit, maintain tax cuts for the middle class, and provide tax incentives to small business in order to create jobs. The President remains in favor of tax increases on the wealthiest Americans. Republican House Speaker, John Boehner, has signaled an interest in some kind of interim fiscal arrangement that links reforms to both entitlements and the tax code and is known for his rigid position on no tax increases. The differences in perspectives take us right back to the 2010 impasse where tax reform became the victim of gridlock.

The urgency to create policies that will address the fiscal cliff means any interim arrangement needs to be very careful about reducing entitlements and increasing taxes on the middle class. This would cut the recovery off at the knees. The issue of entitlements should only be addressed when the business cycle is in expansion mode, beyond just the current trend – when employment is stabilized and spending approximates pre-recession levels

Avoidance of the fiscal cliff must be done in a way that sustains the recovery and may need to span both ends of the debate. This would involve maintaining entitlements, and making selective spending cuts in the short term. Tax code reforms will serve to bring jobs home, and provide incentives for job creation that will eventually relieve the burden of entitlements. But there is really no escaping some kind of tax increase and the need to enhance job creation may lead to limits to corporate taxation, leaving the wealthy as the most viable option. Once the recovery takes hold, massive spending cuts would need to be undertaken.

by Merlin Hernandez

Outsourcing has essentially been characterized as the transferring of US jobs to emerging economies like India, China, and The Philippines to take advantage of lower wages and taxes as well as environments that are less regulated. Outsourcing industries have spanned manufacturing, technology call centers, human resource administration, medical billing/coding, and health insurance benefit management to name a few.

But many of the tech jobs did not go overseas but were outsourced to overseas companies operating in the US. For example, some call centers remained in the US but the work was contracted to Indian companies and workers were brought in from India to do the work. With the level of unemployment in the US, it would seem bizarre for H1B visas to be granted to foreign workers. The argument in favor of the practice is that these “guest” workers are contract professionals brought in to fill shortages in the tech industry, and fast-tracked for US residency ostensibly to maintain the level of proficiency in the workforce.

Many analysts question whether there is a shortage of US technology workers. They suggest that firms operating in the industry prefer to hire younger foreign workers at lower wages while more experienced professionals are sidelined as being too expensive. Supporters maintain that H1B visas secure the best talent to keep US innovation alive and American business competitive in the global market. But it has been found that may visa workers were doing non-technical jobs that could have gone to the average US college graduate.

The obvious question is why this is allowed when there are USCIS stipulations that jobs under H1B can only be offered to a foreign worker if no US worker can be found to perform the job. The answer apparently lies in the fact that H1B workers are paid less than industry norms and come at a much lower overall cost. H1B legally mandated prevailing wages have not caught up with the realities of the tech industry and fall way below the market wage – sometimes more than 50% lower. Moreover, workers may not receive benefits like health insurance and pension plans, and employers do not have to pay into unemployment insurance. Foreign workers not only cost less but under the terms of their visas, they are not free to leave the contracting employer till the end of the contract, and longer if they are awaiting US residency status – a veritable modern day indentureship system to provide a stable body of cheap expertise.

With increasing numbers of foreign workers seeking H1B visas and sustained public outcry against outsourcing in general, the USCIS intensified its scrutiny of applications by US businesses to import workers, and imposed more stringent visa policies. The cost of visas almost doubled to $4,500 per application and the rate of H1B admissions dropped significantly. The vigilance is part of the government’s move to limit work visas to foreign nationals as a way of addressing domestic unemployment. At the same time there is a Senate proposal for tax incentives to businesses for repatriating outsourced services. Not to be left out in the cold, Indian outsourcing firms began to hire US workers for their US operations where their most lucrative customers are based. These firms have gone even one step further to network with universities to better prepare students for tech jobs.

As the US economic recovery gains momentum in 2013, it can be expected that the insourcing of previously outsourced American jobs will escalate. US investors, looking for opportunities in growth industries are likely to compete aggressively for a greater share of the outsourcing pie.

by Merlin Hernandez

The global financial environment remains uncertain and Eurozone problems will continue to be a major risk factor. Both the Fed and the ECB will take pressure off credit markets by increasing capital flows for some while. Business gains are increasingly less driven by market share considerations but more on cost control for margin improvement, and improved quality and service for added customer value.

But employment levels and consumer spending have not yet recovered sufficiently to sustain pre-recession production volumes. Lowering inventory and carrying costs as well as reduced production could see further shut downs and layoffs in the fourth quarter and going into 2013. The incentives created by QE3 and low interest rates seem a little slow to sink in and business remains cautious and in no great rush to embark on new projects in the general pre-election malaise.

Monetary policy in a lingering recession will of necessity be concerned with stimulating growth. QE3 increases liquidity to re-ignite investment but effectively devalues the US dollar. We can, however, expect an increase in demand for US exports as a result which provides another engine for growth. The other advantage, of course is a reduction in the trade deficit which will ultimately strengthen the dollar.

Some analysts are predicting increased inflation and a rise in the price of commodities and natural resources necessary for production. and the risk of general price increases. But commodities were down October 31 as a response to the much anticipated Chicago PM Index falling just short (49.9) of the 50 point mark for economic expansion. Supply and demand will clearly be the final arbiters and it is fair to project that with increased international trade, demand would be the lever to keep prices down.
Precious metals, however, are negative betas and we can expect gold and silver prices to fall as investors re-direct money back into the economy.

For October, the market has hopscotched through the rumor mill of a debt downgrade (denied by Fitch), and sputtering growth in a housing sector weighted down by less than expected growth in previously owned homes in spite of some increase in new home sales. But the Department of Commerce reported that spending on both consumer products and durable goods showed a little above the 2% annual growth rate in the third quarter. The Department of Labor reported a decrease in jobless claims for the same period. Both DOC and DOL reports are important economic markers.

Perhaps the most important indicator of growth moving toward 2013 is the Dow Jones. Even though the Dow is not really representative of the overall market, it does reflect the movement of stock prices to provide an indication of the tide of investor interest. There has been significant growth in energy (Chevron, Exxon), basic materials (Alcoa, Tech Resources, CFI Holdings), and industrial goods (Caterpillar, Emerson) which is an indication of the economy readying itself for increased production. Combined with the availability of investment capital, Fed support for housing/construction through QE3, some early movement in the sector, and low interest rates, the economy does appear to be poised for sustained growth. It would depend on how fast entrepreneurs and investors get off the starting block post election.