Gold: Not All That Glitters

August 14, 2013 § Leave a comment

Warren Buffet once said, “Gold is the only thing we dig out of a hole in the ground, put back in a hole in the ground, and hire someone to guard it”. True..Gold has little end use unlike other commodities like Copper, iron or Oil. It isn’t a bond or a stock with earnings. But there has always been a creepy fascination with gold yet not many people need gold. gold_2

Most Gold advocates state that they do not know what the price of Gold will be but they usually have a portion of their savings in gold because gold has always maintained value which isn’t actually true(1980’s to 2000’s). Most personal investors of gold just own gold in case there is a serious monetary collapse, which periodically has happened throughout history(Germany, Argentina, Greece, Cyprus) typically after very loose monetary policy such as excessive debt and money printing. The thinking has been that when everything all else collapses, Gold becomes the currency people use to trade.

 Gold curveThe price of Gold is driven by its scarcity and growing demand in emerging economies such as India and China but the supply of gold is low thus making it expensive. Everything that scarce is expensive. Gold has always had a relationship with stocks.The reason gold prices rises so high is partly because of falling stock prices. When stocks are falling, Investors take money out of stocks and put it into gold and vice-versa. The Gold standard was abolished in the 1970’s but governments and banks all over the world still hold tonnes of Gold.

When the economy of Cyprus collapsed  earlier in the year, Germany one of the bailout partners insisted it to sells its gold reserves to finance its because there is no better collateral than gold.

Will there a Gold Bubble? I don’t think so. The bubble is not in Gold but in Debt. In my opinion, Gold does not combat inflation but the status of rare metal increases its demand and makes it worth the investment but it’s worth noting that all this is an investing game and that there will be losers and winners

Kenya Power: Monopoly Gone to Far

March 4, 2013 § Leave a comment

Two years ago when Kenya Power re-branded, I honestly think they grew horns. This week they were at it again pushing for a review of the already high electricity tariffs by ERC which will push tariffs up by between 24-40% and this with the full backing of Ministry of Energy.

wpid-264998_214809241895563_6462071_n.jpgKenya is quickly turning into one of the most expensive places to set up and run a business majorly due to prohibitive energy costs. Kenya Association of Manufactures and Kenya Private Sector Alliance are already warning of job losses should the tariffs be implemented. That is something our fragile economy cannot afford. Not long ago a few Multi-National companies closed shopped and shipped some of their Manufacturing to Egypt and South Africa due to increased cost of doing business in Kenya majorly high electricity costs. Compared to other African Countries, we fare miserably. Here are some comparative prices: Egypt $0.04/kwh, South Africa $0.07/kwh, Uganda $0.08/kwh, Tanzania $0.09/kwh and Kenya $0.23. Kenya Power intends to use the money raised from the Tariff increase to finance the setting up of new power generation plants. But wait a minute, i thought thats the work of Kengen? Sounds suspicious as it comes at a time when Kengen is issuing asset-backed bonds worth 30billion!! Kengen supplies 74% of all Kenya Powers Electricity with the rest coming from independent Power producers. Why was Kengen and Kenya Power even split? For both of them to profit, the Kenyan consumer pays a higher price. Kenya Power pays $0.025/kwh for electricity from Kengen. If the cost of production is this low, why is Kenya Power charging kenyans almost ten times what it pays for? It is tragic that no Presidential Candidate has brought up the issue of high energy costs? How do they expect to create jobs in such a hostile environment? It is laughable that the Permanent Secretary says that tariffs will come down in 2020. Power profits are supposed to come from new connections and sales but not price hikes. Higher tariffs would bring about a domino effect; job losses, inflation, destabilize the economy, increase poverty levels etc. The consumers can only pay much. This time, Kenya Power has pushed its luck too far. Its time we did away with Kenya Power’s management as they have run out of ideas. Even better, we do away with Kenya Power’s Monopoly. Kenya Power is one parastal leaching on Kenyans.

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“I don’t think we can go back to the old days. But I think that what the government needs to do is it needs to make sure that the pricing is fair, that you don’t have monopolies out there, so that people don’t have a chance to compete” Dan Glickman

Living Large: Kenya’s Growing Public Debt

February 7, 2013 § Leave a comment

wpid-debt-2.gifWe learn from History that we don’t learn from History. Those are not my words but words of Desmond Tutu.  Kenya is fast living beyond its means. It seems we haven’t learnt any lessons from other countries whose spending spun out of control. Argentina, Greece, Cyprus and several EU countries come to mind. While Kibaki’s era has been hailed for fast economic growth, it has come at a cost. Kenya’s Public debt has ballooned over the past five years by 87% from Ksh.871 Billion to Ksh. 1.6Trillion. This is nearly half of the Country’s GDP.  While this may appear to be relatively low compared to developed Countries such as Japan and the USA, the situation is likely to worsen now that the Country is moving to a more devolved system of Governance which may require more spending. Already, in the current Financial year, Kenya has already borrowed Ksh.95 Billion + which is way more than had been budgeted for. The upcoming general elections bring back real risks of economic disruption as it happened in 2007-08 Elections. It is imperative to cut unnecessary spending so as to lower debt-to-GDP ratio. While the ideal situation is to spend only what we are able to raise in taxes that won’t be realistic. Lowering debt-to-GDP ratio can only be attained through an economic growth rate of more than 6% and an annual expenditure growth rate of not more than 10%. High level of Public Debt can only end in one way..,the Greek way, higher taxes and cuts in expenditure which will definitely harm the economy. Kenya needs to wake up and act decisively or else we are on our way to being another Morality tale to the world. Refusal to live within your means only ends up in one way…

Peering Over the Fiscal Cliff

December 10, 2012 § Leave a comment

fiscal cliffIn August 2011, President Obama and Congress did something really unusual; They  built a fiscal cliff and they put the US economy on course to go over this cliff by the end of the year unless they come up with an alternative way to reduce the deficit by $1.2 trillion over the next decade. Its getting closer to the end of the year and there’s no apparent progress towards diverting from the cliff. Here’s what that would mean; taxes would go up, a lot for almost everybody. A broad swathe of domestic and defense spending would be cut. That would be a huge blow to an already fragile economy.

Here are a few things about the federal budget:

  • 63% of the federal budget went to pay for 5 things; Social Security benefits, farm subsidies, Medicare for the elderly, Medicaid for the poor and federal debt interest.63% was committed even before congress showed up and they spent the whole year arguing about the other 37%.
  • $1 of every $4 spent today goes towards healthcare which is 25% and its on the road to hit 33% over the next decade unless something big changes.
  • The US government employs over four million people but the fact is if you fired every single one of them from the secret service agents standing next to the president to the lady who collects toll at yellow stone, you would have saved the government $435 Billion in wages and benefits last year. That would not have reduced the deficit by even a third. Closing down government agencies can save some money but it is not enough to solve the problem.
  • The US spends a lot of money on defense, $700 Billion to be precise. That is $1 of every $5 the government spent. The US defense spending is bigger than the next 17 countries combined. The US spends more in defense than China, Russia, India, Great Britain, Japan, Germany, Italy, Israel, France, Saudi Arabia, Brazil, South Korea, Australia, Canada, Turkey, UAE and Spain put together.
  • The share of income most families have been paying as taxes has been falling for over 30years. According to congressional budget office in 1981, the middle class paid 19.2% of their income in federal taxes. In 2007, that percentage was 14.3%. The US therefore has had to borrow as they spent more than they were making. The US borrows 36cents for every $1 they spend much of it from abroad.

So, if you decide on how much to spend on benefits, how to slow the growth in healthcare spending, how many employees the government needs, what to do about defense and how much to tax people, you’ve pretty much have solved the deficit problem. Everything else is detail. Its easier said than done. How will all this play out? I don’t think anybody knows for sure. The impact of going down the fiscal cliff will stretch beyond the US thus striking a blow to the fragile world economy. Policymakers are rushing to stem a new slowdown in a global economy still recovering after the 2008-09 financial crisis. Japan, the worlds third largest economy is also facing it’s own version of the fiscal cliff, a potentially crippling funding shortfall just as it risks sliding into recession.The International Monetary Fund last month cut its forecast for global growth to 3.6% for 2013, citing “familiar” forces dragging on advanced economies: fiscal consolidation and a weak financial system. 

 Democrats don’t want spending cuts, Republicans don’t want tax rises and none of them is willing to compromise. Democrats and Republicans agreed last year to schedule the automatic cuts, though neither side wants them and both hope they won’t take place.

That roughly sums up the political problems throughout the world, greed and theft.  Refusal to live within their means usually ends up only in one place….

Who was it who said history repeats itself ?

The Greek Tragedy

October 28, 2012 § Leave a comment

Ever since Greece joined the Eurozone, it enjoyed spectacular boom and then it all went horribly wrong. Austerity has brought about numerous budget cuts leading to job losses, cut pensions, salaries and benefits. Families go without food, schools don’t have books and hospitals without drugs. A fifth of all public sector workers are set to be laid off. Pensions have been cut by an average of 30%. Vast private wealth remains evident yet Greece is broke.Young people feel they have been robbed off their future. It is estimated that 40% of Greeks could soon be living below the poverty line. The unchecked spending by the government when they joined the Eurozone as come back to haunt them. When the Greece joined the Eurozone, they got into an era of cheap borrowing and they embraced it until the bills started rolling in. In 2004, they hosted the Summer Olympics and this put a large hole in the Greek coffers.

All this isn’t exclusively a Greek Tragedy but more of a Eurozone tragedy. Larger economies such as Portugal, Italy and Spain are all facing austerity measures. Germany, the European Central Bank and the IMF which has come to their rescue with bailout money but austerity preconditions. Many Greeks loathe the Germans with even the German Chancellor being referred to as a Neo-Nazi by the Greek press and some politicians. This was even evident during the recently concluded European Cup Competition when Germany played Greece during the quarter final match. The Greek fans were singing ‘screw your debt’ and ‘we’ll never pay you back’. Nonetheless, Germany beat the Greeks. The Greek economy accounts for only 1.8% that of the Eurozone yet quiting the Eurozone means a collapse half of Europe’s Banks which hold Greek debt. Greece being in the Eurozone means they cannot devalue their currency to make their exports cheaper.

The story of Greece is a modern morality tale to individuals, corporations and nations. Have we learnt anything or shall we have a repeat of this in the future? Seems no one paid attention when Argentina went burst ten years ago.What is the way out for Greece? To quit the Eurozone all together? To default? What are the implications of this?How do we remedy this? That’s your food for thot…

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