Asset price inflation, particularly in the rich countries of the world system, has become pronounced. Increases in asset prices benefit those who are already well endowed. On the other hand, the mechanisms by which asset prices are systemically forced to go up dispossess the large majority of non-asset owning classes, i.e., the general populace. The main reason asset prices are going through the roof is because of plenty of easy money sloshing around in the system. To be sure, it is the global banking cabal that creates this phony and unearned money. The states via their central banks, sit on top of this criminal scheme. This rigged system works against those who sell their labor, physical or mental!
When the going gets tough, the strategy of the global financial system is to keep on inflating. ‘Inflate or Die’ is the enduring slogan of the money creators. It seems, it is the only thing they have up their sleeve. When the 2007 global financial crisis hit the world economy, the response was to flood the world with more phony/unearned money. To start with, the financial crisis was caused, first and foremost, by the massive accumulation of unsustainable debt permeating the whole global order. The burst initially occurred within the financial sector (Bear Stern, et al). Later on, the crisis manifested in real estate, subprime housing, etc. Instead of accepting market correction of the bubble, which would have been painful, the managers of the global order continued to pump even more money to postpone the day of reckoning. A decade later, the world ended up having ridiculous amount of phony money in circulation, prompting asset price inflation as well as the implementation of useless projects (bridge to nowhere, ghost cities, etc.), which are not commensurate with the logic of capital, i.e., capitalism!
When negative interest rates prevail, the message is clear. It means there is a glut of capital that is not finding its way into productive engagements. Hence, this massive capital, restricted as it were, to the existing universe of activities, props up the value of anything and everything. Housing prices go up, not because there is real effective demand on the ground, but because there is plenty of cheap money around to buy all and sundry. In the highly financialized world of the OECD (rich countries) companies are actually borrowing money to buy back their own shares from the equity market. This is facilitated because the central banks, in their infinite wisdom, have decided to lend massive amount of money with no interest. Share prices in stock markets, pumped up by the massive phony money created out of thin air, are appreciating without bound. Price/Earning (P/E) ratio, which used to signal the values of corporations, is no more relevant to the ‘masters of the universe’, as these crooks are derogatorily called. Entities with no track record of making money are valued in the billions of dollars. Peter Schiff, a well-known financial analyst explained in his latest podcast, ‘the markets aren’t making highs because the economy is good. It’s making highs because of the Federal Reserve’s easy-money policies.’
In the real world where people actually try to make their living, money is hard to come buy. Robotics, Automation, Artificial Intelligence are increasingly encroaching the world of work. Consequently, demand for labor is gradually receding. For example, the Japanese car market crashed by about 25% this year, even though the Japanese state is the number one printer of phony money in the world. For thirty years, the Japanese pumped trillions of (US dollar equivalent) phony money to their system, mostly to save their old relics, the Keiretsu collectives. The old keiretsu (keiretsu is a set of companies with interlocking business relationships and shareholdings) that were trailblazers in global production (in the late 1960s and 70s) gradually became uncompetitive, as a result of many things. It is quite instructive to study the reasons as to why these once formidable industrial juggernauts ended up being mere laggards in the world economy. This lesson is very important to countries like ours that are trying to emulate the East Asian development models. Instead of allowing the market place to clear the deadwoods from the economy, the Japanese politicos decided to bail out the Keiretsu amalgam. In Japan, the Keiretsu still sway massive political power!
To reiterate: All the money that is being pumped into the real global economy (by the central banks/states) ultimately end up pushing asset prices higher. Those parasitic entities connected to the money spigot reap the benefit of free money, while the global masses suffer the consequences, amongst which, spiraling inflation features prominently. Something has to yield.
This was first published on Capital in 2019
ASSET PRICE INFLATION
What is truly important
The vision and goals that most business owners have for their business is to make profit. We must realise though that making money is not a goal at all, it is a result. A goal is to make a difference, to make things better than they were yesterday, to make a contribution to society, to provide better services. Setting the right goals and working hard towards achieving them will eventually result in a successful business and making a profit. And so it is important for any business owner to have a clear vision and to have realistic goals. All activities being carried out in the business should contribute to these goals. Organizing, planning, managing, production and budgeting are all done to achieve the goals of the company. If you have no clear vision and goal for your business, chances are that you will not be successful. Developing a vision and goals is not easy though and often they are derived from the values we have. Values represent what we find really important in life and surprisingly enough very few people will find it easy to define exactly what their values are. But most people act according to their values even if they are not very conscious about it. After all, where your treasure is, there your heart will be. If someone finds it very important to have a car (s)he will try and get one. The reader who has built a house, will know how difficult it was to complete the project but it was worth it because it was very important. Other people find it important to be around their family and because of it hesitate to take on a job that will separate them from their family. Other examples of values are to have respect for each other, to be honest, integrity, etc. We can also know what people do not find important as we observe their behaviour. Somebody who finds it important to get rich quick but does not value honesty or hard work for example will find other innovative ways to get the money. In other words, our values guide our behaviour for a great deal. Do you know what your values are? Try to list and write them down and you will discover that it is not so easy to have a deeper look into your inner self. But if you can, it will help you in getting more clarity about your do’s and don’ts. Now, what has all this to do with doing business? Personal goals and values will transpire in the way somebody goes about running a business as well. Somebody who values honesty is likely to run the business in an honest way, avoiding short cuts and kick backs. Personal values can thus become corporate values and it is actually very important and helpful to make corporate values explicit like so many organizations do these days. Examples of corporate values are: “We esteem our customers.”, “We produce high quality.”, “We deliver in time.”, “We keep our promises.”
In trying to achieve the goals it is therefore important that the corporate values are adhered to. Here it becomes now tricky though. Because the corporate values may be clear to the business owner or the board of directors, that does not at all mean that they are understood, let alone internalised by the employees. And where this is not so, performance of workers may be disappointing, not contributing to achieving results and sometimes even be counterproductive. This in its turn will lead to much frustration for the business owner, who just cannot understand the behaviour of the workers and has run out of ideas to motivate them. As a result the company is not effective in achieving its result. For a company to be effective it is important that the goals and values are shared and internalised by all staff and time and energy needs to be invested in this by management. But this is not all that needs to be done. Subscribing to the corporate values helps but is not enough to become effective. To be effective requires being proactive and that is what most people are not, also not in Ethiopia. Most people here are reactive. They react to what is coming their way. They don’t plan ahead and blame others for things gone wrong. They say: “I don’t have time.” They are busy repairing the damage that has been done and they are constantly in the crisis management mode.
Proactive people on the other hand plan ahead and take responsibility. They say: “How can I help?” They prevent problems from happening and set the right priorities. Reactive people allow circumstances to dictate their agenda while proactive people set the agenda. And they do that using their personal values as a point of departure. To take it a step further, for employees to be effective in their work it is important that there is a match between their personal and the corporate values. Where there is no such match, workers will not make significant contributions to corporate effectiveness.
Yes, somebody with an accounting diploma or degree can work in any company or organization. But whether or not (s)he will make significant effective contributions depends on how excited that accountant is about the products that the company makes and in how far (s)he subscribes to the corporate values. If “high quality” is one of the corporate values then delivering high quality and timely financial reports to management will be expected. If a company says that it esteems its customers, then the sales persons are expected to be polite and give competent advice to the clients.
During this festive season, I suggest the reader to take some time to reflect on values and the potential to be proactive. Do the following exercise:
- Define your personal values.
- Do they match the corporate values?
- What can you do to increase the match between your personal and the corporate values?
- In which areas of your work can you become more proactive and thus more effective?
- Write this down and share with management.
- Agree on a time frame to evaluate progress.
Ton Haverkort
Ethiopian Capital Market – The ecosystem approach is an imperative
I have been following the formation of the Ethiopian capital market for the last 2 years from afar. No doubt, it would bring a significant change on how the financial market, and in particular how finance is accessed in Ethiopia. As a finance professional who has spent the better part of the last two decades working in the world of finance, I thought it would be prudent to consider ‘the ecosystem approach’ to ensure the capital market has all the elements to thrive from the outset. This is a pre-emptive opinion of the writer not written with apprehension but with dispositional optimism.
The role of capital markets is to serve as a bridge between investors and businesses by allowing them to raise the necessary funds. Capital markets complement traditional bank financing by providing an alternative source of funding; they reduce reliance on banks and enhance financial stability. A well-regulated financial market provides essential finance for governments, financial institutions, and small businesses. This is critical to fund infrastructure development, access to technology, housing, agribusiness, and promote entrepreneurship in support of small and medium enterprises that will promote job creation and meaningful economic participation in the years ahead.
They also provide investment opportunities for individuals and institutional investors. These opportunities include the buying and selling of shares, bonds, and other financial instruments.
Capital markets are essential for effective working, and this requires a robust legal and regulatory framework. Such a framework ensures investor protection, transparency, and fair market practices. Strong corporate governance practices are particularly crucial as they enhance investor trust and ensure that companies adhere to transparency, accountability, and ethical standards. Additionally, efficient trading platforms, stock exchanges, and clearing and settlement systems play a critical role in facilitating smooth transactions and enhancing market liquidity.
Capital markets involve various participants, including issuers (companies raising capital), investors (individuals and institutions), brokers, and market intermediaries. While there are encouraging signs of various banks and Ethio telecom selling shares and buying stakes in the Ethiopian Stock Exchange, there needs to be a concerted effort to encourage participation from diverse stakeholders, particularly retail investors who have reasonable cost and access to the market. It is important to have a variety of financial instruments available, including equities, bonds, and derivatives. Developing local debt markets is particularly important in Ethiopia, given the dire need for finance and chronic shortage of Forex, as well as the tainted image in attracting FDI due to recent security issues (Sovereign risk) for long-term financing.
Educating investors about capital markets, risk management, and investment opportunities fosters confidence and participation. Financial literacy programs can play a significant role in this regard.
The ecosystem approach in efficient capital markets refers to a holistic strategy that considers various interconnected elements and stakeholders to create a thriving and sustainable financial environment.
With the formation of the Ethiopian Capital Market Authority and the Ethiopian Stock Exchange (ESX), there is a need for a robust enabling environment with strong policy setting and a whole-of-government approach. One critical element for broad participation is investor education and capacity development. Investor education, building financial literacy, and resilience across the country breed investor confidence and the desire to participate in the market and invest. Strengthening investor protections and promoting transparency are essential for this to happen. In terms of capacity building, developing human capital is vital. Training programs, workshops, and educational initiatives help market participants understand capital market dynamics and best practices. The ecosystem approach emphasizes collaboration among different stakeholders, including governments, regulators, financial institutions, investors, and businesses. By working together, they can address challenges and create synergies. It is always the case that there remains tension between accountability and efficiency in an ecosystem where businesses focus on value creation through competition and regulators err on the side of caution to ensure the capital market is robust and remains viable.
A well-functioning ecosystem requires robust market infrastructure, including stock exchanges, trading platforms, and settlement systems. Efficient infrastructure facilitates smooth transactions and enhances liquidity. In addition, the capital market ecosystem ought to encourage financial innovation without stifling regulatory burden, particularly at this nascent stage. Encouraging innovation in financial products and services contributes to a dynamic ecosystem. New instruments, such as green bonds or social impact bonds, can attract diverse investors.
The ecosystem approach recognizes that efficient capital markets involve more than just financial transactions. They thrive when all elements work harmoniously, fostering economic growth and stability.
A word of caution – the capital market, with all its potentials and aspects to drive economic growth, has its own pitfalls. Without dimming the optimism, I will return to highlight some of them and how they could be minimized and the risk mitigated, at least at a macro level.
Mengistu Weldemariam is a senior consultant in business and finance. Previously a lecturer in corporate finance and accounting and currently works in consumer and investor protection. You can contact him via weldemariammengistu@gmail.com
The History of Cheap Labor
The Industrial Revolution began in Britain at the end of the 18th century, and for much of the 19th century it was the dominant industrial power in the world. By the 1880s, however, it was bypassed by the United States and then by Germany at the turn of the century. In both cases, the newcomers benefited greatly from absorbing and deploying British technology such as the steam engine and the Bessemer process for steel making.
The newcomers initially grew by leapfrogging technologies and ramping up production capacities on an unprecedented scale. Consider what happened to the railways. In 1830, the United States had barely 40 miles of railroads but the network had jumped to 28,920 miles by 1860 and further to a staggering 163,562 miles by 1890. This was more than the rest of the world put together, according to the United States Census Bureau. Technological invention was very important for turning Britain, Germany and the United States into industrial powers, but the key factor that allowed mass production was the deployment of cheap labor.
Desmond King, Professor at Nuffield College in UK stated that the share of the population that was urbanized in England and Wales jumped from 20% in 1800 to 62% in 1890 as people from the countryside migrated into the industrial cities. The United States saw wave upon wave of migrants who pushed up its population from a mere ten million in 1820 to 152 million in 1950, according to data compiled in 2001 by the OECD. In the popular imagination, these migrants headed west to settle in remote farms or participate in the Gold Rush. In reality, the migrants were usually absorbed by the booming industrial sector. At the turn of the century, around 80% of New York’s population of five million was either foreign-born or children of migrants.
Desmond King further noted that many of them were squeezed into the slums of the Lower East Side, with as many as 25 people sharing a single windowless room and sleeping in shifts. Most indicators suggest that living conditions were significantly worse than in the slums ofpresent-day Mumbai. Even as the West was industrializing , the experience was very different for China and India. These two giants had been home to large artisan-based manufacturing sectors in the pre-modern age and had been exporting manufactured products like textiles and porcelain for millennia. However, both of them found it difficult to adapt to the changing world.
Sanjeev Sanyal, Global Strategist at Deutsche Bank in Singapore explained that as the Mughal Empire in India crumbled in the early 18th century, it appeared for a while that the Marathas would replace it. When the Maratha bid for power stumbled, India dissolved into chaos, with many indigenous and foreign groups vying for power. According to Sanjeev Sanyal, the uncertain political conditions severely affected the investment climate and caused many parts of India to de-industrialize. The re-establishment of order under British colonial rule, however, did not help.
The Industrial Revolution had taken off, and cheap goods produced by British factories flooded India beginning in the early 19th century, further damaging the old artisan-based sector. Note that this happenedeven though Indian labor was much cheaper than that in England. Even in 1820, Indian per capita incomes were less than a third of British levels, but the largely illiterate workforce was not capable of absorbing new technology.
David Rueda, Professor at Oxford University stated that the building of new infrastructure like the railways also did not help. In fact, it worsened matters by allowing imported goods to penetrate further inland. Therefore, the de-industrialization of India is a good illustration that neither cheap labor nor improved infrastructure is useful unless the overall investment eco-system is in place. It is important to remember that the productive deployment of cheap labor depends on many factors, ranging from property rights and general governance to the prevalence of basic literacy.
According to David Rueda, Japan was the first Asian country to experience industrialization and, beginning in the 1890s, output rose very rapidly. Despite the devastation of World War II, Japan had built up a competitive industrial sector by the 1950s. Yet again, the deployment of cheap labor was a key component of this success. As recently as 1980, when Japan was already considered a developed country, the unit labor cost in nominal United States dollar terms was barely half of today’s levels. The sharp increase in Japan of the cost of labor input in the last three decades has been due mainly to the exchange rate.
Jason Moore, Professor of Economics at University of Leeds stated that the currency appreciated from 250-240 yen per United States dollar in 1985 to just over 120 per dollar by the end of 1987 and then further to 84 per dollar in 1995. The yen would drift weaker to the 100-150 per dollar range for the next decade and a half before appreciating back to the current range of 80-85 per dollar.
This currency movement undid the 0.5% per year decline in unit labor cost in local currency terms that Japanese manufacturing has sustained over the last three decades. According to Jason Moore, this goes to illustrate how the exchange rate is an important factor that needs to be considered when dealing with the international competitiveness of labor. It is possible, of course, to compete on design and quality, but a strong currency does make matters difficult.
As Sanjeev Sanyal explained, the exchange rate was an important factor in the re-emergence of both China and India on the world stage. There is a great deal of academic debate about the exact impact of this move, but it would be hard to deny that Chinese wages, already low by international standards, became even more competitive.
