Category Archives: economics

Foreign land ownership

Foreign person? Foreign company? Foreign trust? Local company owned by foreigners? Local company owned partly by foreigners? Foreign company owned by locals? Local company owned by locals with debt finance from foreigners?  Local bank with foreign shareholders and repossessed properties? Local insurance company issuing policies to foreigners? BRICS bank? Foreigner married in community of property to local? Local living permanently overseas?

You don’t even need to look at this proposal being counterproductive, populist silliness.

Book Review: Bitcon – The Naked Truth About Bitcoin

Jeffrey Robinson, the author of the well known book “Laundrymen” that I’m now reading, has written an engaging story about The Satoshi Faithful (as he calls them) supporters of Bitcoin and where their Faith is leading them stray.

The book is called BitCon: The Naked Truth About Bitcoin and it doesn’t pull punches in deriding the would-be currency. If you don’t know anything about Bitcoins, it may skip over some of the introductions necessary to hold your own in conversation. This isn’t a primer on Bitcoins or crypto-currencies, but it also doesn’t spend chapters on involved technical details so you won’t be completely lost.

I described the book as “engaging”. For me, already very sceptical of the long-term chances of success for Bitcoin and specifically  critical of its suitability as real “currency”, it had me nodding in agreement with many sections. Frankly, I don’t know how persuasive it would be to a fervent supporter (not that much anything would be).

I did enjoy the insights into some of the personalities behind Bitcoin and the histories of different supporters and how this has changed over the short time Bitcoins have been around. I learnt more about the Dark Web than I knew before, gaining a new appreciation for how dark the underbelly of the web and Bitcoins are.

Robinson ignored what I think is a key limitation on Bitcoin. Supporters claim its value derives in large part from the limited supply, but without any intrinsic value, other crypto-currencies are near-perfect substitutes. I’ve blogged about this before and was looking forward to seeing another take on it.

I enjoyed the book, reading through it fairly quickly and without wanting to switch to something else, suggesting Robinson hit the target with length and balance of information vs entertainment.

Go grab a copy from Amazon – BitCon: The Naked Truth About Bitcoin.

European deflation risks not deflating

The UK Telegraph (and other sources) are highlighting the rising panic about Euro area deflation. For those Austrian / hard money / gold standard / bitcoin / generally poorly informed amongst you, it’s not that deflation is itself a problem, but that it creates scenarios of debt spirals increasing the real value of debt obligations and decreases demand and economic growth through increasing the real cost of labour through downwards sticky prices (most especially wages).

European five year inflation expectations

European five year inflation expectations

It really does seem that UK / US policies are, more slowly than necessary, coming right and the economies are slowly shrugging off the GFC and are moving forwards.  The rest of Europe is not.

Argentina in default for second time in 13 years

S&P declares Argentina to be in default for the second time in 13 years and the third in 25. Inflation is likely to hit 40% this year and the Peso has already lost a quarter of its value this year, measured against the US Dollar.

Messages? This time isn’t different, sovereign debt crises happen all the time, ignore currency risk at your peril and there are many reasons governments can default on their debt.

Argentina teetering towards default

I’ve been working with a few insurers and reinsurers on credit risk recently. We’ve had plenty of reasons to think about it, what with new regulations (SAM, Basel III) and South African government downgrades. However, sometimes I get the impression that credit risk is viewed as an academic risk, as something that happens to others, micro lenders and maybe banks.

In South Africa, we’ve had incredibly few corporate bond defaults and most market participants don’t even know that the South African government “restructured” some of its debt in 1984 and so has, in fact, defaulted on contractual bond obligations.

In a recent credit risk and capital workshop, I raised the issue of Russia defaulting on Ruble-denominated debt in 1998, a big part of what led to the collapse of LTCM. Again, these events are often figured as “exceptionally unlikely” and not even worth holding capital.

Well, in the news, Argentina is about to default. Again. They have been one of the most regular defaulters on sovereign debt in the last couple of centuries. They’re also an example I often use of “currency pegs” doing precious little to mitigate currency risk except on a day to day basis.

More on that in another post (yes, I’m hoping to post a little more regularly in the coming months.)

Chinese debt a serious worry?

I’m not really that close to developments in the Chinese economy. It is a large, complicated beast that is quite different from our own. Over the last year or so I’ve heard more and more from people who generally speak sense that the debt levels in China and the awful investment projects used to show the appearance of a strongly growing economy form a worrying pair of forces.

House of Debt (a newish blog, seems interesting) has a post covering some of these risks to the Chinese and therefore global economy, with charts! I may post on these issues from time to time as it’s beginning to feel more and more relevant.

Education, CAs and how long is long to study

A recent Moneyweb article poses the question of whether Chartered Accountants in South Africa should study longer.

The problem is that high schools are failing learners and many accounting students start out with significant literacy and numerical weaknesses in their learning.

Now, as it turns out, I’m not a supporter of increasing the required length of study because some students (even, perhaps, a majority) need more time to complete the work.  I see no reason to enforce an arbitrarily longer study period on students who are perfectly capable of making it in the current and long-standing term of the programme just because some students are entering with inadequate preparation.

I’m not oblivious to the challenges of education in South Africa. I’ve blogged regularly on how education shortcomings are the number one cause of economic challenges and unemployment in South Africa. I’m also not saying that we should simply raise entry requirements as that would exclude many students with the potential to be successful CAs because of imperfect high school level preparation.

What I suggest is an optional (at the choice of students or the university) post matrix, pre-CA year to cement the basics.

The nature of this course would be that the majority of candidates electing or being required to attend this extra year would be previously disadvantaged. I also see it as a perfect opportunity to make tuition cost for this pre-CA year count fully towards cost in the first year of the BComm or BBusSci course should the student meet the requirements. Thus, there is no free year of university grade education for all and sundry, but rather for those who benefit from the programme and successfully enter the mainstream CA stream studies their will be limited financial penalties.

In some ways, this subsidy could potentially save the universities and National Treasury some money – better pass rates in later years should shorten the amount of time to graduate, reducing other university and government subsidy costs.  I haven’t worked the numbers, but it is an offsetting impact to consider.

I understand that UCT, certainly for actuarial students, has a very successful programme of tweaking the education route for this with poorer preparation. I don’t have the numbers at hand, but the results apparently have been quite staggering.

Of course, SAICA has a somewhat silly response:

Saica’s senior executive for professional development, transformation and growth Chantyl Mulder said the duration to qualify as a chartered accountant (CA) is already seven years and thus lengthening university studies is not viable.

Stating that it isn’t viable doesn’t actually say anything. The same could be said against a seven year study period of the current were six years. The same could be said against the seven to twenty (and beyond for an unlucky few) years of study for actuarial students and medical specialists. As it is, my understanding is that UCT students pursuing their CA career via B.Bus.Sci have a four year undergrad degree (and what a magnificent degree it is too) and then a final year of GDA study before starting a three year articles period.

The recognition that some CAs take longer than seven years could be taken as evidence that some students need longer. Surely it’s better to prepare a robust eight year programme for those very likely to take longer than seven years rather than leave them to the wolves and an eight or nine year struggle with inadequate preparation? Or even if a parallel rather than serial solution to improving the basic skills is the answer, this has nothing to do with seven years being the magical “right” number.

The final worry itching at the back of my head is that we have all accepted the pernicious degradation of matric quality and have therefore already become used to lower entrance requirements at universities, adding pressure to admissions and possible decreasing the average level of learning. This route as only one destination – lower skilled employees, less international competitiveness, lower economic growth and higher unemployment.

When is revenue lost?

In respect for Nelson Mandela’s death and funeral, many retailers closed yesterday for the day. This Business Day article claims a R300m loss for the retail industry as a result.

Except, no. Some fraction of those sales might be permanently lost, but the income hasn’t been spent and the cash still sits in shoppers’ pockets. The R300m is mostly just delayed.

There will be some impact where closed shops sacrifice sales to open shops.

There might even be some small amount of decreased consumption and therefore increased saving. The article headline wasn’t, “Retailers sacrifice means an increase of R300m in personal savings.”

This is part of an ongoing trend (probably for hundreds of years) for journalists, even respected financial journalists working at a respect newspaper, to seek the most impressive headline. It also reflects our very human tendency to ignore second order effects. Which is a pity because that’s where the really interesting analysis lies.