Hamilton Institute » Economics http://www.hamiltoninstitute.com Smart Content for Smart People Fri, 13 Jun 2014 05:23:51 +0000 en-US hourly 1 http://wordpress.org/?v=3.5.1 Motorcycling America: A brief history of two-wheels and its heroes http://www.hamiltoninstitute.com/motorcycling-america-a-brief-history-of-two-wheels-and-its-heroes/ http://www.hamiltoninstitute.com/motorcycling-america-a-brief-history-of-two-wheels-and-its-heroes/#comments Mon, 06 May 2013 06:37:33 +0000 udey http://www.hamiltoninstitute.com/?p=13628 Motorcycling America
A brief history of two-wheels and its heroes
By Ujjwal Dey

We all love our rides. Whatever they may be. A cruiser, a sports model, a stock bike, a stripped down mud-all-terrain cycle, whatever. But what’s its history? How did a two-wheeler come to have such a passionate following across continents? An ancient rivalry between British and American motorcycles transformed the industry. Then came the Japanese rides challenging American pedigree. So what’s the story? We got it all here in a snapshot photo feature.

The Beginning: In the beginning, there was the word, and the word was “safety”. Yes, there is no known inventor of the motorcycle. Various people in Europe seemed to have had the same idea about the same time. The invention however culminated from the safety bicycle. This was a bicycle with front and rear tyres of the exact same size. That’s what was the seed to grow into a booming cycling industry in second half of the 19th century.

Pedaling along: So then these pioneers of a new industry thought of an automated bicycle. They already had pedals but what if the damn thing pedaled itself. So came a Steam Engine powered bicycle – the Michaux-Perreaux steam velocipede, can be traced to 1867, when French blacksmith Pierre’s son Ernest Michaux fitted a small steam engine to one of the ‘velocipedes’.

Pierre Lallement, a Michaux employee, filed for the first bicycle patent with the U.S. patent office in 1866. Then in 1868 an American, Sylvester H. Roper of Roxbury, Massachusetts developed a twin-cylinder steam velocipede, with a coal-fired boiler between the wheels. Roper died demonstrating one of his machines in Cambridge, Massachusetts on June 1, 1896.

Soon by 1881, Lucius Copeland of Phoenix, Arizona designed a much smaller steam boiler which could drive the large rear wheel of an American Star high-wheeler at 12 mph. In 1887 Copeland formed the Northrop Manufacturing Co. to produce the first successful ‘Moto-Cycle’ (actually a three-wheeler).

Germans: Yeah, they can never stay out of inventions. Heard the names Diamler-Maybach. Yes, the company that makes multi-million dollar sedans for the rich pigs of this economy. Back in 1885, Mr. Diamler and Mr. Maybach of Stuttgart invented the first petroleum-powered vehicle, running on a light gasoline. Named “Reitwagen”, it meant “riding car”. It was invented with Diamler’s ambition to prove that his grandfather clock would function just as well on a moving vehicle.

Sell it to the circus: So by 1880, every Tom, Dick and Frankenstein were inventing motorized bicycles. The trend spread from France, England and Germany to United States of America. There were new designs of something spectacular called “internal combustion engine”. The Hildebrand & Wolfmüller became the first motorcycle available to the public for purchase in 1894. Designs changed and more powerful engines were being made everyday. The very first known motorcycle in the USA is a machine brought to New York by a French circus performer, in 1895. It weighed about 200 lb (91 kg) and was capable of 40 mph (64 km/h) on a level surface. Same year, an inventor from the United States, E.J. Pennington, demonstrated a motorcycle of his own design in Milwaukee. Pennington claimed his machine was capable of a speed of 58 mph (93 km/h). Pennington is credited with inventing the term “motor cycle” to describe his brilliant machine.

So America can take heart at owning the word if not the invention.

War Horses: Eat crow all of you. I own a Royal Enfield Bullet. And Royal Enfield was the first brand name in motorcycle industry. They put up manufacturing at England and launched a commercial product in 1901, with a 239 cc engine mounted in the front and driving the rear wheel through a belt. Royal Enfield is now the oldest motorcycle brand in the world still in production with the Bullet model enjoying the longest motorcycle production run of all time.

In 1902, British bicycle maker Triumph also jumped in to make motorcycles. They had a Belgian-built engine. Also in 1901, the Indian Motocycle Manufacturing Company, founded by two former bicycle racers, designed the “diamond framed” Indian Single. Its engine was built by the Aurora Firm in Illinois as per Indian’s specifications. Indian’s production was up to over 500 bikes by 1902, and would rise to 32,000, its best ever, in 1913.

In 1903, as Triumph’s motorcycle sales topped 500, an American company emerged – our very own Harley-Davidson started producing motorcycles.

A time of experiments and innovation emerged. Everyone wanting to outdo each other to improve their product. This resulted in the new sport of motorcycle racing. This resulted in faster, tougher, more powerful and more reliable motorcycles. Chief August Vollmer of the Berkeley, California Police Department is credited with organizing the first official police motorcycle patrol in the United States in 1911.

By 1914, only basic bicycle elements such as seating and suspension could be recognized in a motorcycle. The motorcycle was now its own separate identity.

Right up to 1931, Harley-Davidson and Indian were the only American companies making commercial motorcycles for sale to general public. This rivalry is remembered proudly on the race tracks. After World War I, the Indian lost its “largest motorcycle manufacturer” title to Harley-Davidson.

Back in Britain, it was crazy. There were 80 different brands of motorcycles in Britain by 1930s. The familiar names like Norton, Triumph and AJS to the obscure, with names like New Gerrard, NUT, SOS, Chell and Whitwood.

Meanwhile records were broken with the new American hobby of cutomisation. In 1937, Joe Petrali set a new land speed record of 136.183 mph (219.165 km/h) on a modified Harley-Davidson 61 cubic inch (1,000 cc) with an overhead valve-driven motorcycle. This same day, Petrali also broke the speed record for 45 cubic inch (737 cc) engine motorcycles.

The industry was booming. Everyone knew the product. Then War broke out. With the build up to World War II, the production in Europe multiplied. Both BSA and Royal Enfield ramped up manufacturing to supply motorcycle to the Army. Royal Enfield’s 125cc light-weight could be dropped (in a parachute-fitted tube cage) from an aircraft to any field location or war-zone.

Freedom: Americans and the allies won. The World War II was over. Troops returned home. But these men had lived a thrill of a lifetime. They sought more adventure, more brotherhood, more speed in life and the edge that comes with living dangerously. These men started Motorcycle Clubs. A new lifestyle. Biker clubs thrived. It created a new persona. Hollywood art imitated the town-truths. Marlon Brando immortalized it in “The Wild One” (1954).

BSA purchased Triumph to be the largest manufacturer, claiming “one in every four”. Royal Enfield even had an alternative diesel engine motorcycle since 1965.

Social motorcycling was aimed at raising money for charities. Others took to rebel attitude long-surviving in American biker culture. These outlaw motorcycle gangs indulged in violence, retribution, protection racket of extortion, smuggling, gun-running, and other criminal activities. The FBI calls the current Pagans, Hells Angels, Outlaws MC, and Bandidos clubs as the “Big Four” OMGs (Outlaw Motorcycle Gangs).

By the 1970s, Motorcycles had become a symbol of disillusioned America breaking away from the social structure and conformations. They believed in a different America. They had their own outlaw codes. They loved and fought the same human challenges the common man faced in a bold new way.

The British also labeled its motorcycle enthusiasts as leather-jacketed hooligans.

Biker culture was a brave new way to deal with life’s bitter truths. Vietnam War Veterans came back home to their citizens calling them murderers. These war-men were a different lot than the ones who returned as heroes after World War II. While a few became distressed and depressed, others took up arms to protect their American Constitutional Rights. These biker clubs have been the most violent in its need to get back and reclaim their America.

Tourism and Bottomline: The motorcycle manufacturing industry along with the government entities tried to save the business by promoting a cleaner image of its buyers. They wanted to sell bikes. They didn’t want bikes to represent hoodlums. So the motorcycle was advertised with friendly people smiling. It was a quick getaway for a picnic by the beach or a weekend in the woods.

In the late 20th century, a cleaner image appeared with HOG and AMA. They even lobbied for political support for safer motorcycle-friendly legislation.

It was now all about keeping companies afloat, beating competitors in product quality, utilizing the fascination of the boy wanting to be his own man.

Asian Sun rising: This trend of safety and conformity was very well supported by the new competitors in the market. It was in the late 60s and then the 70s when Honda made it big with its fuel-efficient and maintenance-free motorcycles.

Honda was officially founded in Japan on September 24, 1948. They introduced their SOHC inline four-cylinder CB750 in 1969, which was inexpensive and immediately successful. This was followed by other Japanese legends, Kawasaki four-cylinder engine KZ900, Suzuki and Yamaha.

The British dominion in the motorcycle market quietly sank into a sunset. The Japanese were manufacturing the way Ford mass-manufactured efficient, reliable, strong machines. Americans bought into this new friendlier motorcycle. It didn’t look mean and big and bad. It was true as the Honda slogan said, “you meet the nicest people on a Honda” – a major change in the selling strategy in the industry.

The Japanese dominated the industry. The motorcycle was now a new symbol – a symbol of affordable transport for the common man. The statistics reveal it all. The 58% of world’s motorcycles are in the developing countries of Asia – Southern and Eastern Asia, and the Asia Pacific countries (excluding Japan) – while 33% of the cars (195 million) are concentrated in the United States and Japan. By 2002, India was home to the largest number of motorised two wheelers in the world that stands at an estimated 37 million motorcycles/mopeds. China came a close second with 34 million motorcycles/mopeds. In 2006, China had 54 million motorcycles in use and an annual production of 22 million units. Motorcycle taxis are the developing world’s limousines.

It was the poor man’s ambition now. The first motorized vehicle bought by any average Indian citizen happens to be a two-wheeler, either a motorcycle or a scooter. It was a machine to get you from Point A to Point B at your convenience at an affordable budget. I don’t wear leather or patches while I ride my Enfield Bullet. It’s the only vehicle I own. It’s an extension of me, a part of me. For me the Biker Lifestyle doesn’t mean breaking social norms, but to ride because I prefer the motorcycle to anything else. It’s practical and I must admit, quite stylish. Girls still like bikers, its true, ask your blonde, redhead or brunette.

Then and Now: Today the Japanese manufacturers, namely, Honda, Kawasaki, Suzuki, and Yamaha dominate the large motorcycle industry. Superbikes offering top speeds are the craze. Harley-Davidson still maintains a high degree of popularity, particularly in the United States. Indian motorcycle has been revived and shut down and revived again and again. It is as of 2012 available for purchase but I think its apparel sells more than its bikes ever will. Recent years have seen resurgence in the popularity of other motorcycle brands, including BMW, Triumph and Ducati, and the emergence of Victory as a second successful mass-builder of big-twin American cruisers.

Of course, if I could afford to buy a Harley-Davidson I would be owning one now. It’s still a rich man’s toy in India for now. It’s owners already having luxurious sedans from Audi, Mercedes and BMW in their fleet. Hey, maybe I will win the lottery. You never know!

Cheers to my favourites from the lot:







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How to End Economic Bailouts http://www.hamiltoninstitute.com/how-to-end-economic-bailouts/ http://www.hamiltoninstitute.com/how-to-end-economic-bailouts/#comments Sun, 01 May 2011 15:30:50 +0000 admin http://hamiltoninstitute.com/?p=35 Americans have seen the angusih of giving trillions of dollars to the private sector to keep the industry running. Many were outraged by the tax money that was given to companies like AIG, and was later enlightened the company spent the tax dollars on frivolous things such as CEO bounuses. Nevertheless, the bailouts were necessary for America’s economic fundamentals; without government intervention America would be facing a fiscal disaster that would soon transcend the global economy. Most economist agreed that the private sector bailouts were essential, but is there a way to end economic bailouts and secure a healthy private sector? Yes, there is a better way.

There is no debate that the bailouts that the American federal government fashioned kept the country afloat. So when American citizens cry in outrage, “Where is my bailout?” they are ignorant to the fact that this was a bailout to secure not only private business but the citizens as well. There is a strong connection between the people and the private sector in capitalism – they secure each realms fate economically. The bailout is a perfect example of when the fates of businesses and the consumers are cohesive; the people (or the government) aided the fatal private sector and in result were rewarded some more economic security. The economic fate of everyone is determined by the relationship of people and businesses.

That is how bailouts can end; by changing the business and people relationship to ensure economic security. The reason why the businesses needed a bailout was because they were too big to fail. When a company becomes massive in size and revenue, they become an asset to the economy and the people. The large businesses are care givers to the people – they supply employment, salaries, and benefits. Then when the large businesses begin to fail, the people become the care givers with government bailouts that exceed trillions of dollars. This type of a relationship makes the two realms bitter and unable to regain trust.

The bailouts given to large industries would not be necessary if the companies were not massive to begin with. Keeping businesses smaller would ensure that bailouts that take away the tax payer’s money would cease to exist. Why? Because now that businesses aren’t so large anymore they are not such an asset to the economy anymore. Large businesses have a vast amount of employees; when the large businesses begin to fall the people risk having more unemployment which would result in less money being ejected into the economy, so it’s only logical to keep those businesses floating with bailouts to secure their future. If the economy was only filled with small businesses there would be less detriment on the people because there is only an acute amount of employees. If one small business collapses, the amount of unemployment would not be as high like the large businesses that would go under.

The reason the economy went under was because so much capital was in the hands of a few industries and those industries began to collapse, but if there are more businesses that are smaller the capital is more divided up and would result in less of a chance of economic havoc. Keeping businesses small would be the responsibility of the people (or the government) to do. The relationship of the businesses and the people would change by having a more equal economic say. The government would have to get tough and keep businesses smaller. The government would call forth the breaking up of today’s large businesses such as NBC or Wal-Mart to secure our economic future. The government would have to end tax loopholes that large businesses take advantage of. Lastly, the government would have to get tough on taxing the businesses more to ensure less revenue that would keep the industry from growing. These government sanctions would end the large businesses, and therefore end the economic bailouts.

Conservatives would call this socialism, because it endangers the rights of the free market. They will claim that this is just more government intervention into the businesses that is unnecessary. Well let me ask you this: would you rather spend trillions keeping an economy stable and secure or would rather have growing businesses have to pay a little more taxes to keep the economy secure? I’m not stating that businesses should only be one store on one main street, but it is reasonable to secure the people’s fate by keeping massive businesses more diminutive then they are today. The free market has their rights, but to ensure a secure economy without bailouts some sacrifices would have to be made. The people have rights too, and they should have the right to cease the existence of trillions of dollars in bailouts.

There is a better way to construct our capitalist economy. They basic principle is to keep businesses small; make sure the industries in the private sector do no become an economic asset. Employment will stay the same, because the economy is the same size – the money is just divided up more between the industries. America has already seen the mayhem of the trusts in the gilded age, so now it’s time to continue the legacy of keeping an honest and secure relationship between the people and business to secure our economic future and our tax money as well.

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The Necessity of Offshore Outsourcing in Securing American’s Future http://www.hamiltoninstitute.com/the-necessity-of-offshore-outsourcing-in-securing-americans-future/ http://www.hamiltoninstitute.com/the-necessity-of-offshore-outsourcing-in-securing-americans-future/#comments Thu, 06 May 2010 18:05:37 +0000 admin http://hamiltoninstitute.com/?p=381 The story of mankind’s history is riddled with revolutions, reformations and transformations; ultimately culminating into a single theory, given the name evolution. Humanity is a constantly evolving creature, whose mainstay power of weathering the tests of time lay in the ability to adapt rapidly as the situation calls for. Man is not inept in his abilities to recognize and judge whether to act upon situations as they come or let them be, and the driving force behind these features is man’s primary concern of maintaining homeostasis. Political and socioeconomic revolutions of past such as the industrial revolution or the introduction of socialism have had both their proponents and opponents. Evolution ultimately provides a gamut of options in direction that may be chosen, however as Clarence Darrow once said “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change” (United States, Improving the Quality 17). It is this very ability to adapt to change that has been ever more in demand as the pace at which discoveries are made grows at what is seemingly an exponential rate.

(This article was written for an audience not versed in economic theory. My goal was to develop an acceptable explanation of the necessity for offshore outsourcing, that would consumable by the general public.)

The story of mankind’s history is riddled with revolutions, reformations and transformations; ultimately culminating into a single theory, given the name evolution. Humanity is a constantly evolving creature, whose mainstay power of weathering the tests of time lay in the ability to adapt rapidly as the situation calls for. Man is not inept in his abilities to recognize and judge whether to act upon situations as they come or let them be, and the driving force behind these features is man’s primary concern of maintaining homeostasis. Political and socioeconomic revolutions of past such as the industrial revolution or the introduction of socialism have had both their proponents and opponents. Evolution ultimately provides a gamut of options in direction that may be chosen, however as Clarence Darrow once said “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change” (United States, Improving the Quality 17). It is this very ability to adapt to change that has been ever more in demand as the pace at which discoveries are made grows at what is seemingly an exponential rate.

Over the past three decades there has been more innovation than in the entire history of mankind. Much of this innovation has come in the field of information technology, with the advent of modern-telecommunication systems, and of course, the Internet. These technologies have redefined how commerce is transacted, and have made a world of borders, boundaryless. Born out of these innovations is the fairly recent development of offshore outsourcing business practices. Offshore outsourcing, or offshoring for short, is a subtype of outsourcing, where jobs that are normally done in the home-country of the company, are sourced out to foreign countries that offer similar quality work at a fraction of the cost it would normally run back home. This sort of job movement has stirred up much uneasiness and resistance amongst Americans who are fearful of their employment prospects. Media outlets and politics have added fuel to the fire by feeding misleading economic statistics to the public, skewing unemployment numbers in ways that make offshore-outsourcing look like a major contributor to American job-loss. The truth couldn’t lay further away from this negative portrayal. Offshore outsourcing is a business practice that stands to benefit the American economy as whole, and affords long-term job security to American citizens.

Not Such a New Issue

The story of modern offshoring does not begin with the Internet revolution of the late nineties. Looking back over six decades, with the end of the Second World War and much of Europe left in shambles, there was a massive pool of unemployed low cost labour resources available. American textile and apparel companies, seeking cost savings, laid off workers and moved production to Europe, and years later to Asia and South America as well (Gupta 26). In the nineteen eighties, under the Reagan administration, major market deregulations and lowered barriers to trade led American autoworkers to face a similar mass exodus of their jobs. Foreign countries such as Mexico and various parts of Asia, including China, Korea and Japan began producing substantial amounts of the inputs required by the automotive industry (Hira xiv; Taylor 368). The companies that followed such outsourcing practices were simply living an economic maxim first lauded over two centuries ago by the famed father of modern economics, Adam Smith, in his book The Wealth of Nations. Smith wrote “It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy” (185).

Up until the mid nineteen nineties, offshoring had been mostly constrained to the manufacturing sector. This was in-part due to obstacles such as the lack of clear channels for communication and the high expense of long-distance calling that stopped service sector jobs from being performed abroad. With the advent of modern telecommunication systems and the Internet, companies are no longer bound by proximity and could now tap the knowledge and varying skill sets offered by the world community. The price of these technologies dropped by as much as 30% over the decade covering 1995-2005 (Mann 1). Centralized database systems allow for information to be accessed from virtually any location around the globe (Mann 1). E-mail and World Wide Web pages are leveraged as powerful tools for mass information dissemination. Voice Over Internet Protocol (VOIP), videoconferencing and high speed internet connections that carry this audio and video has all but eliminated the need for physical face-to-face meetings; further reducing the cost of doing business by cutting down on travel expenses.

Why do Companies Offshore Outsource?

The mainstream belief as to why a company would send jobs abroad is usually rooted in monetary savings or some derivative thereof. The wages in countries such as China and India for work quality that rivals that of American workers, could be as low as 10-20% of wage rates in modern developed nations (Hira and Hira 3). Lowered expenditure on human resources, although quite significant, is not the sole reason nor the primary reason most of the time for offshoring service sector jobs. Managers at firms that offshore mention a myriad of reasons for employing foreign labor (Mann 10). One factor, often stated as being more important than cost savings, is allowing the company to further concentrate on its core-competencies by freeing up human capital currently employed on non-core jobs. Management theory, and as previously mentioned in the quote from Adam Smith, state that companies should concentrate their efforts and most valuable resources on their core business. A computer manufacturer’s main job is to manufacture computers- back office work such as accounting, although required is not directly related to the company’s raison-d’être . Noncore work may be outsourced to professionals who specialize in those tasks, allowing for cost reductions, superior job quality and time savings to be achieved by leveraging their economies of scale (Taylor 369). This premise on outsourcing stands true as well for any input the company requires to produce its service or product. If a comparable resource may be acquired externally for a lower cost than it could be produced internally, then it makes economic sense to use the external product. The company essentially avoids the added drag of maintaining payroll for employees that are not central to the company’s offerings. Businesses can also avoid costs associated with insurance, health benefits, fringe benefits, labor laws and tax implications. In essence, it makes a company more agile, allowing them to scale-up or scale-down without much of the associated overheads (Di Gregorio 981). These prepositions may be construed as diminishing the value of American workers, however it must be understood that there is no face or nationality put on sound economic theories. These are simple realities, and as will soon be discussed, the alternative options lead America down a bleaker path.

There is a pre-conceived stigma that only large corporations participate in offshore outsourcing, however, small and medium sized enterprises (SMEs) stand to benefit just as well. Many SMEs do not have the capital required to hire the best local talent for every job position. Offshoring allows companies to spend less while tapping a wider talent pool. The beauty in this, is that it gives the opportunity for smaller companies, with agility inherent in their size, to stay competitive against larger corporations (Di Gregorio 973). This leads to another major reason companies decide to offshore. Thanks again to technology, it is easier than ever for companies to transact business in markets abroad. The most efficient manner to expand into foreign markets is to hire personnel directly in that market’s geographic region. This allows companies to fine tune their products to local needs and foster better relations with the local population (Di Gregorio 973). Whereas once the prevailing reason for offshoring was cost savings, more and more today the reason is becoming that of capitalizing global markets. Gupta says that “[o]ne needs to treat offshore vendors as strategic partners rather than as mere low cost service providers” (7). Thus SMEs looking to expand globally benefit from creating strategic partnerships with organizations abroad.

Behind the Numbers – Public Sentiment and the Truth

Since the dot-com bubble burst in early 2000, there has been an outcry in America to halt the outflow of jobs to foreign countries. The belief was, and still is, that offshore outsourcing is a major contributor to American job loss. In an effort to stem what was perceived as a bad business practice, the media began to publish negative stories about American companies that offshored jobs. Lou Dobbs, a well known former CNN business news anchor, took frequent pot shots at American enterprises who hired foreign contractors to do the job of an American. Dobbs alleged that these companies were behaving too near sighted and overly focused on making shareholders happy in the present. Dobbs also claimed that American enterprise turned a cheek and valued a quick dollar over their employees’ well being, and ultimately the US economy.

During the years following the dot-com bubble, the media would often publish articles that skewed jobs numbers and overstated the effects of offshoring on the overall jobs market. The fray over the loss of IT and related white-collar jobs in the first half of the decade was fuelled by these misleading reports. The basis for comparison that much of the media used when talking about offshoring was flawed. Whenever there was talk on television, radio, in magazines or newspapers about job numbers, media outlets would focus their comparisons of the present day to that of the peak of the technology boom in the late 1990’s up until the dot-com bubble burst on March 10th 2000 (Mann 2). During the late nineties, the rate at which jobs grew in the IT sector was spurred by artificial expectations that had caused unsustainable liquidity levels in start-ups. Dot-coms had failed to translate theory into practice and the bubble burst. The media’s interpretation of job losses failed to take this bubble effect into consideration. This curtailed proper consideration and examination of normal business cycles, a long-standing decline in the U.S. manufacturing sector, and rapid inflation of the US dollar (Mann 2).

The reincarnation of public angst over outsourcing is primarily due to layoffs in the IT sector of white-collar jobs ensuing the dot-come bubble burst in-between 2000-2003. Prior to this, Americans believed that these higher-paying technical jobs were immune to being offshored, and that it was only basic low-level tasks that would be affected. Although some IT jobs were shed during those years due to offshoring, over 90,000 new American jobs were created in 2003 to support and compliment those that were sent abroad (Global 1). This leads to a key premise on offshoring. As Taylor mentions in his article “In Defence of Outsourcing”, workers who lose their jobs to offshoring eventually will be re-deployed into other work sectors (371). Hira however argues the opposite on this theory, stating “The track record for adjustment is terrible, and there are no resources to facilitate the adjustment process” (5). As we will visit shortly, it is this author’s opinion that the truth lay somewhere in the middle of these two statements.

Attention now shifts to the un-escapable fact that the latest wave of modern technologies has defined these times as the ‘digital era’, and has redefined how commerce can be transacted. The digital era is part of the evolution of globalization. As communication technologies have proven, businesses are no longer bound by physical proximity. Furthermore, advancements in foreign trade policies of both developed and developing nations have lowered the barriers to transact business across borders. Member countries of the World Trade Organization (WTO) have forged the generalized agreement on trade and tariffs (GATT), which aims to ease trade between nations by reducing duties and tariffs on imports and exports (Gupta 27). This freer flow of goods and services across nations is a key economic growth factor as the world becomes more interconnected and dependant on foreign business. GATT allows companies to stay competitive by seeking out the most cost effective inputs for their products, as well as being able to sell them internationally at price points that stay competitive with foreign businesses in their home countries.

Maintaining a competitive advantage is crucial for the American economy. Foreign businesses today have unprecedented access to the American market and are now in direct competition for the same clients as local businesses. Other countries also have access to the same offshoring options America does. Foreign companies make use of this in order to try and steal U.S. market share away from competing American firms. The two primary methods that companies use to compete in the global marketplace are price competition and product differentiation. In price competition, firms attempt to produce an end product in the most cost efficient manner in order to sell the consumer a product at a lower price than their competitor can (McConnell, Bruce, and Flynn 230). As previously mentioned, this means having access to lower cost inputs and methods of production. Product differentiation means creating a unique set of features for a product that competing companies do not have and consumers would want (McConnell, Bruce, and Flynn 223). In order to differentiate best, organizations want to have a sizeable talent pool from which they can tap the best possible resources to stir up fresh, alternative ways of thinking.

When offshoring of technology services began to spike in the late nineties, there was a lack of trained employable resources in the U.S. to fulfill demand (Gupta xxi). One direct cause for this could be the insufficient number of engineers American Universities graduated relative to demand during this rapid growth phase. Countries such as India and China however, had large pools of unemployed, university educated individuals ready to take on work (Hira 68). According to the National Academy of Engineers, in 2004 the U.S. awarded 137,437 undergraduate degrees in engineering, computer science and information technology; by contrast, China awarded 351,537 in the same year (210). Now that offshoring has begun to touch on many careers outside of information technology, such as finance, medical, and back-office business work- it is worth looking at total output of advanced university degrees. Here is where numbers become staggering- in 2009, the U.S. conferred approximately 659,000 graduate degrees, India conferred 3.5 million (United States, “Degrees conferred”. Table 268; India “Annual Report” 104). These numbers however do not speak as to the quality of those graduates, as Mercer Consulting says that “only 25% of graduates in India are employable” (qtd. in “Mere 25% graduates”). Similarly, research by the National Academy of Engineers finds that corporations only deem about 5% of Chinese universities as producing employable engineers, read: up to American standards (211). Keep in mind however, that this is still a sizable number of graduates that are up to snuff, and yet once more, cost a fraction of what an equivalent American employee would run.

How much less are employees in other countries being paid? According to Hira, an engineer earning $70,000 in the U.S. would earn $15,120 USD in China, $14,420 USD in Russia and $13,580 USD in India (69). At first glance this discrepancy in wages might seem significant, and allude to the fact that perhaps engineers in these foreign countries do not have as good a standard of living as does the American engineer. It needs to be understood though that these wages should be filtered through what is known as the ‘purchasing power parity’; this equates the purchasing power of each country’s respective currency to that of the United States dollar. In essence, the engineers from these foreign countries experience an equivalent standard of living to that of the American engineer (Hira and Hira 68). Their costs of living are simply much lower than those in America.

What happens if America does not take advantage of global resources? Foreign firms will. American corporations will lose their ability to compete on price, and perhaps even innovation. Consumers will end up purchasing more and more imports since they will be priced significantly lower, funnelling money completely away from the U.S. economy and destroying American jobs. The automotive industry was faced with this very problem in the eighties when foreign automobile manufacturers began selling their cars in the U.S. American autoworkers were fearful for their jobs and tried to lobby congress to reduce the amount of imports. In his book, Gupta quote’s an interview with economist Lester Thurow, former dean of MIT’s Sloan School of Management, “There were only two long-term viable alternatives: either half the car is produced in Detroit and the other half in Mexico, or the whole car is produced in Japan. By attempting to use legislative measures to tilt the balance in favor of Detroit over Mexico, one would in fact be tilting the balance in favor of Japan” (2). This was reiterated over a decade later, when Robert Miller CEO of Delphi, a major American automotive parts manufacturer, said during his company’s bankruptcy proceedings- that Delphi would need to cut wages down from an average of $65 an hour to about $20 in order to stay afloat due to increased global competition (Knowledge@Wharton).

Allowing for the transparent bi-directional free flow of both goods and services between America and other countries ensures that the American economy will be able to continue to grow into the future unbounded by the limits of its native resources. At one extreme of confinement, Lester Thurow in his forward to Gupta’s book describes the situation in Africa:

Central Africa has almost no contact with the outside world. Other than commodities, it gets almost no foreign direct investment. It has few exports except raw materials. Not surprisingly, it is one of the few places in the world that has a falling per capita GDP. Central Africa has gone from being an area that had a per capita income above that of Asia to an area that has a per capita income below that of Asia. As Central Africa demonstrates, to stop globalization in one’s own country is to stop economic development in one’s own country. (xviii)

This is not to say that America should be considered in the same light as Central Africa, as it has been very fortunate in the path history has provided for its growth. However, it should not consider itself insusceptible to the slowdown that limiting or making foreign interaction costlier would cause.

The recent slowdown of the global economy and high unemployment rate in the U.S. has caused many to once again become cynical of the roll that offshore outsourcing plays on employment numbers. Getting a fix on the exact amount of jobs sent abroad is difficult as the statistics currently gathered by the government on this are limited. The Bureau of Labor Statistics only collects information regarding jobs being offshored in what is known as their ‘Mass Layoff Statistics’, in which only companies that have laid-off 50 plus workers during a five week period would be recorded. These laid-off workers would also have to had applied for unemployment insurance in order to be counted in the numbers (United States, “Extended Mass Layoffs” 2). In 2007, approximately 11,526 workers were laid off during these mass-layoff events due to their jobs being offshored; this account for only 2% of all mass layoffs in said year (United States, “Extended Mass Layoffs” 1, 10). This is a small number when compared to the near one million individuals that were part of mass layoffs due to a host of other reasons, including: waning business demand, financial issues, labor disputes, product discontinuations, seasonal jobs, and the list goes on (United States, “Extended Mass Layoffs” Table 2). Of course these numbers do not paint the whole picture on offshoring since they neglect all layoffs that have to do with a smaller amount of employees losing their jobs. What can be alluded to though upon careful examination of these BLS trends over the years, is that there are a host of other reasons that play much more significant rolls on job loss than offshore outsourcing.

Another public misperception most probably drawn out because of over exaggerated media reports, is that the IT industry in the U.S. is suffering at the hands of offshoring. This is simply not true; in fact the BLS reports job growth in the IT sector. In 2004 there were 460,000 computer software and application engineers, which grew to 515,000 in 2008. In the same years there were 231,000 network systems and data communication analysts that grew to 292,000. In fact, recent BLS projections mention these fields as two of the top thirty occupations which will experience the largest employment growth through 2018; growth of an estimated 70% (United States, “Employment Projections 2008-18” Table 6; United States “BLS Releases” Table 3c). The surge of jobs into the information technology industry in the 90’s was due to the Internet revolution and a massive drop in computer equipment costs that made technology more readily available. It would be unrealistic to expect jobs to keep growing at the exponential rates experienced during the Internet’s infancy. The boom years of the Internet brought a surge of early adopters, all trying to be the first to market in a new industry. Employment growth has since calmed down, and although higher than in other industries, has begun to take on more sustainable levels.

It is true that there are many jobs that can be offshored, but common sense also spells out that there is much that simply cannot. Anything that requires a physical presence cannot be done away with: registered nurses, retail salespersons, construction workers, school teachers, security guards, lawyers, physicians and surgeons, truck drivers and fitness trainers would not be very useful coming over a phone wire (Gregory 1; United States, “Employment Projections 2008-18” Table 6). These are all positions expected to experience job growth over the coming years, and there are many, many more. In fact, over 75% of the top 30 occupations estimated to grow the most over the next ten years are expected to create millions of jobs (United States, “Employment Projections 2008-18” Table 6).

My First Hand Experience with Offshoring

Up until recently, I ran one of Canada’s larger marketing agencies. In 2009, my company began to undertake a major Web development project. When I originally began scouting for North American based development firms, the estimates I was receiving for the project ranged from $150 thousand to $400 thousand dollars, with time horizons of five to eight months to complete the job. The budget I had envisioned was much more modest than this, and so I began to look at alternative markets for development. I read articles on outsourcing in various publications such as The Economist, the usual Google searches on the subject, and consulted with others in industry that had found low cost IT prospects. The general consensus was that India has an enormous pool of talented web developers that charge on average 20-40% of what comparable developers would charge in North America; and due to the sheer size of their resources, they could start and finish the job on a much shorter and rigid schedule.

My first contact with India was a one week barrage of phone calls and emails to setup meetings with six of the country’s top Web development firms. As soon as I had finished explaining the project requirements, and had non-disclosure agreements in place, I began to receive estimates ranging between $40 thousand to $75 thousand. I reviewed each company’s portfolio, and was quite impressed. The company I choose to contract had done work that was developmentally sound and artistically expressive. Their client list includes Fortune 100 companies and top Web portals such as Yahoo!, Microsoft, Dowjones and Sony.

Prior to starting the large project, I decided it would be best to test the waters and have the Indian firm work on a pilot. This was a way for me to gauge the efficacy and efficiency of our communications, as well as a great method to determine if we would be able to build a lasting partnership before investing a great deal of time and money. It was a simple low-budget project that was to last one month and I was to personally direct. However, the project did not end up unfolding as I had expected. The time difference of ten and a half hours between Eastern Standard Time and Indian Standard Time created a communication scenario where I needed to be up between midgnight and one in the morning to direct the next day’s work. When I would wake up in the morning, the developers in India would be heading home for the night. Through an online portal I was able to see the work that was done and if needed, request changes. The time difference meant that there would be a lag of 24 hours before I would be able to see any new modifications; this caused delays and set my company behind schedule.

The costs of the pilot began to rise as more time and work was needed to get things just right. In the end the savings did not amount to the expected 60-80%. Rather, the project cost was roughly 30% less than that of a comparable North American job. I decided not to continue with the Indian firm due to these time lags and costs, although I know many other organizations that would be content with reaping these sorts of savings. What I learned from my offshoring experience is that in order to justify the added complexity of contracting foreign workers, the monetary savings would need to be significant, and probably best suited for projects of a significant size.

My original reason for offshoring this work was economic. What I had envisioned, was that the larger offshored project could save my company enough money to hire an additional two permanent full-time employees for local positions. The actual Web development work would not have required full-time employment for more than a few months. Economically speaking, the cost savings from offshoring would ultimately have contributed more to Canadian GDP in the long-run than had my company expended the estimated $150-400 thousand on local web development. This theory is still sound, however as previously mentioned, would probably best be applied when the volume and costs are large.

What Needs to be Done

There will indeed be millions of jobs shed over the coming years; however most of them could not even be offshored. The top ten industries estimated by the BLS to see the most significant declines in employment and wages all require a physical presence, such as motor vehicle parts manufacturing, postal services, printing, newspaper publishers, gasoline stations and wired telecommunications carriers (United States, “Employment Projections 2008-18” Table 4). This brings up a key point, none of these fields are losing jobs because of offshoring, they are losing their jobs to technology advancements and automation. Looking back to the industrial revolution over the 18th and 19th century, the vast majority of the world worked in either farming, manufacturing or mining. It took sheer man-power in mass numbers to have done what can be done today by the simple push of a button and a couple of individuals guiding a machine. As Lester Thurow describes the 1700s “Most people, 98% or more, were farmers and everyone did their farming in the same way: human or animal power…” (Gupta xvii). The number of farmers declined because of the increased productivity provided by machines such as tractors and cultivators, as well as advances in the sciences of agricultural biotechnology that lead to greater harvests per square acreage. The automotive worker experienced a similar fate in the second half of the 20th century, as automotive assembly line robots pushed man out of his career.

Although the postal worker could fault the creation of email for the major decline of employment in his profession, and the newspaper printer along with his delivery boy could fault the World Wide Web- should they? Email and the Web have become some of the most powerful tools ever created. They have revolutionized not only business, but how many people manage their lives. These technology advancements alone have created countless jobs, and their importance today is so great that their operations are protected by dedicated government agencies and even military. Offshore outsourcing is one piece in the larger context of globalization, which is a paradigm shifting evolution of humanity similar in moniker to that of the industrial revolution. It would not mean a decline in overall employment. Offshoring would simply lead to a shift of a small part in workforce composition as workers retrain into new careers- just as humanity has done throughout any other period of advancement.

Where the true problem lays is not in unsound business practices or unfair trade policies. The problem rests not within the framework or concepts of offshore outsourcing, nor those who use it in their business practices, at least at first. It is a problem with the public’s perception of how offshoring actually affects the economy, and also how both companies and government react after workers have been let go. There are proactive steps that can be taken to offset the pain that adversely affected individuals experience when their jobs have essentially become no longer sustainable in their current form.

It is costly for a company to hire new employees and acquaint them with the business’s culture and operations. One method that can prove beneficial to both employer and employee is to re-deploy workers that have been laid-off into another position within the same organization. If there are positions available whose required skill set does not drastically deviate from that of the employee who’s lost his job, and retraining costs would be less than hiring a completely new worker from outside, then the company should retrain and redeploy the worker. Alternatively, businesses who offshore could use some of the savings they have amassed through offshoring to aid displaced workers by paying compensation equal to salary for a reasonable amount of time until a new job is secured. The displaced worker would have to prove that he/she is actively searching for a job, and the company should also aid in the search.

The government could create a program separate from unemployment insurance, specifically for individuals who have lost their jobs to a worker in a foreign country. In this program, companies who lay-off workers because of offshoring would need to contribute to the program which would pool nationally and be available to all workers displaced due to offshoring. Of course there could be many enforcement problems with such a program, since the burden of proof that the job was sent oversees would probably fall on the worker whose been laid-off. Catherine Mann suggests that the government should give tax-credits to displaced workers, however again this creates a difficult situation in identifying and proving that an individual lost their job because of offshoring. (Lookup proposed measures in McConnell, Bruce, and Flynn. Mention of such programs that are already in action.)

Ultimately, it falls on the government to secure the future of America. To do this it must first educate the public of the true effects of offshore outsourcing. It can bring offshoring back into the spotlight by employing respected public figures to form an open discussion on the mechanics of offshoring and economic theory in lay-mans terms. Also, funding must be expanded for the BLS, Census Bureau and other government agencies- with spending to be focused on gathering and studying a more detailed body of statistics on offshoring in order to better understand its movement and the progression of jobs amongst industries. Most importantly, the government needs to spend more on education. The true power of a country lays not in the strength of its currency, its wall street or its army, but the strength of its people and the knowledge they possess. Countries such as India and China are pouring more money into their education systems because they realize this. The U.S. public education system in the meanwhile is in a period of contraction, with schools closing down and too many students in classrooms for teachers to properly give needed attention. Education is the key to unlocking innovation, what has defined America as a world leader.

Times have changed. The face of business has changed. For the first time in humanity’s existence, there is a true global economy. One of the best examples is the European Union, in which a singular currency, the Euro, is the economic lifeblood of 16 countries. Many people are afraid of change, as change signals walking out of the known and shifting into what can only be described at best as prediction. Favorable to this generation is the fact that the study of economics has come a long way since the last revolution. The body of time tested theories has many who understand them at ease with the developments of offshoring. Harvard Economist and former Bush presidential economic advisory committee member Gregory Mankiw stated:

I think outsourcing is a growing phenomenon, but it’s something that we should realize is probably a plus for the economy in the long run. We’re very used to goods being produced abroad and being shipped here on ships or planes. What we are not used to is services being produced abroad and being sent here over the Internet or telephone wires. But does it matter from an economic standpoint whether values of items produced abroad come on planes and ships or over fiber-optic cables? Well, no, the economics is basically the same. (qtd. in Taylor 369)

In the long-run, offshoring allows America to compete with the rest of the world on an equal playing field. It aids in economic expansion by shifting workers into fields in which the U.S. would be able to best compete in, and outsources those in which other countries can provide greater efficiencies. It is a process that affects a relatively small part of the population, but is still a subject that should be understood by the public at large. Beneath all the theory, the fact remains that when somebody looses their job, the outcome overshadows the reason. It is their world that has just been chipped away at, and no talk of sacrifice for the greater good will serve as solace.

Works Cited

Di Gregorio, Dante, Martina Musteen, and Douglas E. Thomas. “Offshore Outsourcing as a Source of International Competitiveness for Smes.” J Int Bus Stud 40 6 (2008): 969-88. Print.

Global Insight. Executive Summary: The Comprehensive Impact of Offshore IT Software and Services Outsourcing on the U.S. Economy and the IT Industry. Virginia: Information Technology Association of America., 2004. Print

Gregory, Sean. “Five Jobs for Our Shores: Afraid of Outsourcing? Here Are Some Growing Fields That Won’t Be Farmed out to Overseas Workers.(Time Bonus Section November 2005: Inside Business/Careers).” Time 166 15 (2005): A11. Print.

Gupta, Amar. Outsourcing and Offshoring of Professional Services : Business Optimization in a Global Economy. Hershey, PA: Information Science Reference, 2008. Print.

Hira, Ron, and Anil Hira. Outsourcing America : What’s Behind Our National Crisis and How We Can Reclaim American Jobs. New York: AMACOM, 2008. Print.

India. Ministry of Human Resource Development. Dept. of Higher Education. Annual Report 2008-2009. Web. 11 Mar. 2010

Knowledge@Wharton. “A Bumpy Road for Delphi, GM and U.S. Auto Workers.” Knowledge@Wharton. Strategic Management., 25 Nov. 2005. Web. 8 Mar. 2010. < http://knowledge.wharton.upenn.edu/article.cfm?articleid=1301>

“Mere 25% graduates in India are employable: Mercer Consulting.” livemint.com. The Wall Street Journal, Feb. 2008. Web. 3 Mar. 2010.

Mann, Catherine L. Globalization of IT Services and White Collar Jobs: The Next Wave of Productivity Growth. [United States]: Institute for International Economics, 2003. Print.

McConnell, Campbell R., Stanley L. Brue, and Sean Masaki Flynn. Economics : Principles, Problems, and Policies. The Mcgraw-Hill Series in Economics. 18th ed. Boston: McGraw-Hill Irwin, 2009. Print.

Smith, Adam, and Germain Garnier. An Inquiry into the Nature and Causes of the Wealth of Nations. London etc. New York,: T. Nelson and sons, 1865. Print.

Taylor, Timothy. “In Defense of Outsourcing.” CATO Journal 25 2 (2005): 367-77. Print.

United States. Dept. of Labor. Bureau of Labor Statistics. BLS Releases 2004-14 Employment Projections. Washington, D.C.: 2005. Print.

—. Dept. of Education. National Center for Education Statistics. Degrees conferred by degree-granting institutions. Web. 11 Mar. 2010.

—. Dept. of Labor. Bureau of Labor Statistics. Employment Projections – 2008-18. Washington, D.C.: 2009. Print.

—. Dept. of Labor. Bureau of Labor Statistics. Extended Mass Layoffs in the Fourth Quarter of 2007 and Annual Totals for 2007. Washington, D.C.: 2008. Print.

—. Congress. House. Select Committee on Aging. Improving the quality of life for the black elderly : challenges and opportunities : hearing before the Select Committee on Aging, House of Representatives, One Hundredth Congress, first session, September 25, 1987. U.S. G.P.O. : Washington, D.C. : 1988. Print.

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Reaction paper on SONA 2009 http://www.hamiltoninstitute.com/reaction-paper-on-sona-2009/ http://www.hamiltoninstitute.com/reaction-paper-on-sona-2009/#comments Sun, 02 Aug 2009 03:16:03 +0000 admin http://hamiltoninstitute.com/?p=204 SONA: A Dream or a Reality

A Reaction Paper

The twenty-seventh day of July of the present year is the most awaited day of our President Gloria Macapagal Arroyo to face the Senate, House of Representatives and especially the Filipino people to deliver her 9th State of the Nation Address (SONA), which serves as her last annual report on her accomplishments and as well as to her soon to be projects in her term of administration.

The State of the Nation Address of PGMA this year was the longest SONA so far on her term which lasted 57 minutes and 33 Seconds, based on the Philippine Daily Inquirer. It was interrupted by 126 applauses made by supporters of President Arroyo; applauses were almost every glance she made after every sentence she states. While the president receives applauses made inside the Batasang Pambansa by her allies, angry protesters are on the gathered on the roads and outside the Batasang Pambansa doing rallies against the administration of President Arroyo.

Beginning the SONA the president started it by requesting the people to join her in a movement of prayer for the fast healing of former President Corazon Aquino. Then she stated that the nation’s economy was strong, even though people know that the economy is somewhat weak. In her speech our president shows optimism to our country’s state, stating “I want our Republic to be ready for the first world in 20 years.” In attaining that vision she made key reforms like placing the new tax revenues to help pay for better healthcare, more roads, lifting the poor citizens to live and raise a family with dignity, give the farmers a capital to establish a modern equipments in farming to feed the entire nation and to feed also their families and a strong education system.

Also she boastfully stated her accomplishments like the building of the Subic-Clark-Tarlac Expressway, building airports of international standards, upgrading domestic airports, building seaports and the roll on-roll off transport system, increasing the revenue on BPO industry, $5 billion tourism industry, raise government salaries through Joint Resolution 4, benefited 1,000 people on the emergency employment of the economic resiliency plan, 700,000 poor families benefit from the Pantawid Pamilya program, 700,000 indigenous people and farmers benefited on the CARP, 7 million entrepreneurs benefited by the ?165 billion microfinance loans, selling of NFA rice to ?18.25 per kilo, selling half the price of medicines in the Botika ng Bayan and Barangays, electricity to almost all barangays, building 95,000 classrooms, additional 60,00 teachers and allocate ?1.5 billion for trainings of English teachers, provided college and post-graduate education for over 600,000 scholars, end sentences of 700 OFW who is in jail through her State Visits, net foreign direct investments 15 times multiplied, the GDP growth more than doubled from $76 billion to $186 billion, continuous investment on the 3 E’s, economy, environment and education, and many more. The president obviously boasted that during her administration the lowest inflation rate recorded since 1996, dropped to 1.5%. And for the next nine months of her term she will add another cabinet of the government due to high revenue and productivity on the BPO, which will she call Department of Information Communication Technology.

In her speech she gives thanks to the people behind the success of each of her projects, the Congress, for passing the Cheaper Medicine Law, Rent Control Law and for the automation of election. Also she ask the Congress to passed some laws like the Philippine Transport Security Authority Law, to amend the Commonwealth-era Public Service Law, which will do a great help in the implementation of her projects.

Also the president deal with the things that must be given taxes. She states that books should not be given taxes instead the tobaccos and alcoholic liquors. “Tax hazards to lungs and livers and do not tax minds…,” said by the president. She greatly shows concern on education and the teaching profession stating that “Pardon my partiality on the teaching profession, I was a teacher….” I observe that the president is very concerned in education so she must focus on education this last nine months of her term for her not to gain boos again from students and in education sectors.

To make her administration praised by the public she commenced some ordinary people who benefited on some of her projects like Gigi Gabiola, a former household service worker in Dubai which is now an employee of DOLE, Tarnati Dannawi, a Badjao who was taught of modern mariculture who raise ?180,000 last year, Mylene Amerol-Macubal, a scholar of the government who finished accounting at MSU-IIT and went to law school and placed second on the last bar exam, the first ever Muslim woman bar topnotcher, and lastly Leah de la Cruz, a former NPA who was caught last 2006 and who is now involved in LGU-supported handicraft livelihood training of former rebels. And she also acknowledged some public figures like Congressmen Chua, Alvarez, Biron and Locsin, also to Governor Amadeo Tetangco of Bangko Sentral ng Pilipinas, and to the Manny Pacquiao.

To summarize her accomplishments in the past year of her administration she point-out five:

1. We have a strong economy and a strong fiscal position to withstand global shocks.

2. We built new modern infrastructure and completed unfinished ones.

3. The economy is fairer to the poor than ever before.

4. We are building a sound base for the next generation.

5. International authorities have taken notice that we are safer from environmental degradation and man-made disasters.

She also blows her own trumpet by stating publicly that the US President Barack Obama invited her to be the first Southeast Asian leader to meet him in White House, where their agenda will be peace and security issues. Also she claims that during her administration, it was recorded the highest average rate of growth, recording multiple increases in investments, the largest job creation in history, and which gets a credit upgrade at the height of a world recession. Also by saying that she didn’t declare martial law even the country faced attempted coups, rather she only proclaimed state emergency.

In fairness to the president even during her SONA she allotted lines to make tirades on her critics like Sen. Mar Roxas saying “To those who want to be President, this advice: If you really want something done, just do it, do it hard, do it well. Don’t pussyfoot. Don’t pander. And don’t say bad words in public….” To the former House Speaker Jose De Venecia saying, “The noisiest critics of constitutional reform tirelessly and shamelessly attempted Cha-Cha when they thought they could take advantage of a shift in the form of government. Now that they feel they cannot benefit from it, they oppose it….” And up to the last minute of her speech she shamelessly makes tirades on the former president Joseph Estrada stating, “I am accused of misgovernance…. I am falsely accused, without proof…. Many who accuse me have lifestyles and spending habits that make them walking proofs of that crime. We can read their frustrations. They had the chance to serve this good country and they blew it by serving themselves. Those who live in glass houses should cast no stones. Those who should be in jail should not threaten it, especially if they have been there….” During those tirades made by the president, her allies in the administration who are present in the venue make a great round of applauses and yells that leads to negative feedback to the president after her SONA.

But despite the negative weather and rallies opposing the administration for the president to vacate her position or she should not run for another term of presidency in May 2010 election, the president still holds her dignity being the president of our Republic. Even without answering the big question whether she will run or not, she just stated “At the end of this speech I shall step down from this stage, but not from the Presidency. My term does not end until next year. Until then, I will fight for the ordinary Filipino. The nation comes first. There is much to do as head of state—to the very last day.” Even there are many reactions on the statement she made, she still hold calmness and shows the professionalism being the country’s president by saying “And to the people of our good country, for allowing me to serve as your President, maraming salamat. Mabuhay ang Pilipinas….” Even if it is seems to me that it is an open-ended speech I still hope that the promises that President Gloria Macapagal-Arroyo made would then be a realistic one.

The next SONA will be delivered by the president to be, either a new one or still President Arroyo. I wish whoever will be the next president of our country he or she must focus on education and county’s sake and not to be corrupt president but instead serve as a determined president bearing in mind that the Filipino people put their trust on him/her to serve this nation. It is a great dare to the want-to-be presidents to make this country a nice place to live, to be a competitive country not only in Asia but internationally and an efficient country that will make every Filipino people proud of. Maybe this wish is possible, but perhaps this wish will come to reality. Soon we will know.

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The Dawn of Socialized Banking in America http://www.hamiltoninstitute.com/the-dawn-of-socialized-banking-in-america/ http://www.hamiltoninstitute.com/the-dawn-of-socialized-banking-in-america/#comments Sun, 09 Nov 2008 19:54:34 +0000 sjeffers1 http://hamiltoninstitute.com/?p=482 smjLet us first open with the obvious, there is an exponential difference between a bail-out and a buy-in, bail-outs have been a tenant of government intercession on behalf of the capital good of major U.S. industries since nineteen hundred and seventy under Tricky Dickey, republican president Richard Nixon to the tune of 3.2 billion (cost in 2008 U.S. dollars). But our latest government foray into corporate, “here let me help you up off of  that floor your face just smacked off of”, is the hum dinger of all; the 700 billion dollar mother of all bailouts, really a veiled temporary buy-in, in an effort to prevent a recession.

Well, news flash, ooops, too late, we’ve been in a recession, there I used it, the “R” word, since November of 2007. Yup, the “R” word, the “R” that comes after the big “O”; Overspending. We’ve been engaged in gross overspending, present author included, and our chickens are coming home to roost and peck and peck again on our 401Ks and frankly they are ticked off with roid rage, hopped-up  on growth hormones and steroids that have caused them to appear on the world market more like their ancient cousins the raptors rather than our beloved cartoon icon Foghorn Leghorn. Oh, but we’ve had company during out spending orgy, yes I just used the word Orgy in an economics article; Japan, The European Union, The former Soviet Union, sheepishly raise your hands with eyes gazing downward, you know you were drunk with overspending for decades too, your stock markets betray your bloodshot eyes beneath dark sunglasses. Japanese salarymen have been legendary for dropping enough money to buy a halfway decent used car (or brand new Yugo) in one night of business client entertainment, and they are mere armatures when placed in the ring with some of our heavyweights over at AIG and Enron.

Ref: http://www.propublica.org/special/government-bailouts

To put this brutally for all of you meat and potatoes carnivores out there, the question is not why 19 U.S. banks have failed as of November 2008, but why anyone would want to be a banker in the U.S. in the coming decade, for God’s sake people, offshore banking will be the wave of the future at this rate. Run. Forrest. Run! Why would you want the U.S. government telling you who you can and can’t loan money to and how much risk you can incur in said transactions, when you can set up shop in oh, say the Cayman Islands and bank, oversight free, in your Bermuda shorts and flip flops. George Orwell stand up and take a bow, go ahead, toot your own horn from beyond the grave you warned us this was coming some thirty years before I was in footy pajamas and thought Battlestar Galactica and Buck Rodgers were the coming future.

If I’m sounding to you a bit unpatriotic, backhand yourself about the cheek and don’t even go there. It is every American citizen’s right to encourage and embellish upon the work of our founding fathers, the first patriots of the American system of government, a system predicated solidly upon checks and balances. Those old white guys in powdered wigs and white calf stockings really knew their stuff, they knew their history, no Caesars or Kings for us, they created a political cage match for us called the House, Senate and Executive Branch, so that we would be guaranteed freedom from tyranny. Much like socialized medicine, socialized banking frightens off those worth their salt, who frankly appreciate compensation based on merit and risk, not government oversight.

What we need is a social change in spending among the American people and their government, not socialism. A gross alteration of spending behavior. We’re going to have to do without some luxuries for a time during the “Great Recession of Twenty ‘O Nine”. Once again I ask you to backhand yourself about the cheek, this is not a depression, 24.9% unemployment, now that’s a depression. Checks and balances people, checks and balances. Have faith, the guys in wigs knew what they were doing, it’s only when we get away from their original blueprint of government that we get ourselves in trouble.

Ref: http://www.huppi.com/kangaroo/Timeline.htm

“Those who cannot remember the past, are condemned to repeat it.” George Santayana (December 16, 1863, Madrid – September 26, 1952, Rome), a philosopher, essayist, poet, and novelist.

Post depression era, our grandparents were thrilled to have a car and a decent house and maybe a little nest egg saved up so that their kids could, dare to dream, go to a good college and attain a better life. Now you’re nobody, or so we’re told, if you can’t vacation at club med and sit on a lounge chair next to Martha frekin’ Stewart while checking your stock portfolio on your Blackberry while sipping a low-cal margarita. Sorry Martha, just using you to illustrate a point.

Now for the good news, socialized banking won’t work, we’re Americans; no offence Canada, with your 1993 International Award for Excellence winning socialized medicine program; but we invented the ‘Rebel Without a Cause”, the leather jacket, the Harley Davidson, we resist anyone and anything that smacks of King George III. I’m neither left-wing, nor right-wing, like my hero General George Washington, this Dodo bird don’t fly, we get nervous when things go to extremes. We’re Americans, we will unlearn our poor spending habits and by God we will listen to our elders who lived through the great depression and this time we will listen well and this time we will learn. Our failure has been in forgetting that savings and fiscal responsibility are not luxuries like a Lexus or a Platinum Visa, they’re a necessity. Socialism in America? In the home of the Big Whopper? What are you kidding me? Here’s a new buzz word for the 21st century…Frugality. Look it up on Wikipedia, it’s the exact, I’m talking verbatim here, economic formula for how we get out of this economic mess.

Don’t give up on your America, George, I’m reading my American history and reading your original words of wisdom to a new nation that you wrote and delivered at Federal Hall on Wall Street (hmmm Wall Street) as our first sitting president in 1789. I’m listening George, I’m listening well, and thank you President Washington for helping to form a nation where I can write such words as I have written here, free from the fear and tyranny Mr. Orwell warned us of, it is in your honor that such words are written in a sometimes humorous, yet respectfully thoughtful manner, as a patriotic citizen of The United States of America.

Ref: http://www.bartleby.com/124/pres13.html

Frugality is the practice of

1. acquiring goods and services in a restrained manner, and
2. resourcefully using already owned economic goods and services, to
3. achieve a longer term goal.[1]

Ref: http://en.wikipedia.org/wiki/Frugality


Find me here at sjeffers1@netzero.net

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A Review of Untapped: The Scramble for Africa’s Oil http://www.hamiltoninstitute.com/a-review-of-untapped-the-scramble-for-africas-oil/ http://www.hamiltoninstitute.com/a-review-of-untapped-the-scramble-for-africas-oil/#comments Sat, 08 Nov 2008 16:50:16 +0000 admin http://hamiltoninstitute.com/?p=343 John Ghazvinian’s Untapped: The Scramble for Africa’s Oil looks at one aspect of the economic and social impacts of this resource abundance, namely oil.  To explain the economic forces at work in Africa this paper is divided into four parts.  The first section provides an overview of the book itself.  The goal was not to rehash Ghazvinian’s trek but to provide one who had not read the book with an understanding Ghazvinian’s main points.  The second and third sections provide opposing views by accomplished economists on “resource curse” veracity.  The final section looks at another possible economic factor: globalization.  It will consider the rise of the African Union as a result of globalization and the potential for U.S. Africa Command (AFRICOM) to leverage it.


Basil Enwegbara provides critical insight into the vast economic potential of Africa when considering, relative to world supply, it has the bulk of diamonds, over 90% of the cobalt, 70% of the cocoa, 64% of the manganese, 60% of the coffee, 50% of the phosphates, 50% of gold production, 40% of the platinum, 30% of the uranium, and 20% of the petroleum.1

John Ghazvinian’s Untapped: The Scramble for Africa’s Oil looks at one aspect of the economic and social impacts of this resource abundance, namely oil. To explain the economic forces at work in Africa this paper is divided into four parts. The first section provides an overview of the book itself. The goal was not to rehash Ghazvinian’s trek but to provide one who had not read the book with an understanding Ghazvinian’s main points. The second and third sections provide opposing views by accomplished economists on “resource curse” veracity. The final section looks at another possible economic factor: globalization. It will consider the rise of the African Union as a result of globalization and the potential for Africa Command (AFRICOM) to leverage it.

Untapped Overview

John Ghazvinian’s Untapped: The Scramble for Africa’s Oil provides an engaging account of his travels through twelve African nations. His work reads like a combined journal,  James Bond adventure, and commentary on Africa’s economic and social condition resulting from the unintended consequences of oil abundance.

Given the world’s increasing energy demands and undeniable oil dependency, oil discovery and extraction in Africa is big business. Instability in the Middle East only increases Africa’s strategic importance. Ghazvinian describes the “oil curse” from the bottom up, sometimes through imprudent adventures such as a trip deep inside the dangerous Niger Delta.

Two key examples of his bottom up look include illegal bunkering and local bunkering. Bunkering, controlled by expansive criminal networks, is the systematic theft of oil by tapping into oil pipelines and selling stolen crude on the black market.2 Millions are spent bribing local officials, police, and even ship’s captains. Bunkering syndicates invest heavily in weaponry to protect their networks, adding to the areas dangerous instability. Local bunkering, by contrast, is the poor man’s version of bunkering.3 In Nigeria, for example, laid off Shell workers were paid to tap natural gas lines in riverbeds. Local criminals steel the gas to create highly volatile kerosene, which they sell to other locals. The kerosene is significantly cheaper than its commercial counterpart – a veritable win-win if you are not one of those burned or killed when it explodes.

Continue reading the complete: A Review of Untapped: The Scramble for Africa’s Oil in PDF format here.

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Arbitrage the unfair advantage http://www.hamiltoninstitute.com/arbitrage-the-unfair-advantage/ http://www.hamiltoninstitute.com/arbitrage-the-unfair-advantage/#comments Mon, 07 Jul 2008 17:01:23 +0000 admin http://hamiltoninstitute.com/?p=346 If you had enough money to pay off your mortgage right now, would you? Many people would. In fact, the ‘American Dream’ is to own your own home, and to own it outright, with no mortgage. If the American Dream is so wonderful, how can we explain the fact that thousands of financially successful people, who have more than enough money to pay off their mortgage, refuse to do so.

The answer most of what we believe about mortgages and home equity which we learned from our parents and grandparents, is wrong. They taught us to make a big down payment, get a fixed rate mortgage, and make extra principle payments in order to pay off your loan as early as you can. Mortgages, they said, are a necessary evil at best. The problem with this rationale is it has become outdated. The rules of money have changed. Unlike our grandparents, we will no longer have the same job for 30 years. In many cases people will switch careers five or six times. Also, unlike our grandparents, we can no longer depend on our company’s pension plan for a secure retirement. A recent Gallup survey showed that 75% of workers want to retire before the age of 60, yet only 25% think they can.

Unlike our grandparents, we will no longer live in the same home for 30 years. Statistics show that the average homeowner lives in their home for only seven years. And unlike our grandparents, we will no longer keep the same mortgage for 30 years. According to the Federal National Mortgage Association, or Fannie Mae, the average American mortgage lasts 4.2 years. People are refinancing their homes every 4.2 years to improve their interest rate, restructure their debt, remodel their home, or to pull out money for investing, education or other expenses. Given these statistics, it’s difficult to understand why so many Americans continue to pay a high interest rate premium for a 30-year fixed rate mortgage, when they are likely to only use the first 4.2 years of the mortgage. We can only conclude they are operating on outdated knowledge from previous generations when there were few options other than the 30 year fixed mortgage. Wealthy Americans, those with the ability to pay off their mortgage but refuse to do so, understand how to make their mortgage work for them.

They go against many of the beliefs of traditional thinking. They put very little money down, they keep their mortgage balance as high as possible, they choose adjustable rate interest-only mortgages, and most importantly they integrate their mortgage into their overall financial plan to continually increase their wealth. This is how the rich get richer. The game board is the same, but while most Americans are playing checkers, the affluent are playing chess.

Many people hate their mortgage because they know over the life of a 30 year loan; they will spend more in interest than the house cost them in the first place. To save money it becomes very tempting to make a bigger down payment, or make extra principal payments. Unfortunately, saving money is not the same as making money. Or, put another way, paying off debt is not the same as accumulating assets. By tackling the mortgage pay-off first, and the savings goal second, many fail to consider the important role a mortgage plays in our savings effort. Every dollar we give the bank is a dollar we did not invest. While paying off the mortgage saves us interest, it denies us the opportunity to earn interest with that money.

What do you think the rate of return on home equity was in Seattle for the last 3 years? What about Portland? Careful, this is a trick question. The truth is, it doesn’t matter where you live or how fast the homes are appreciating, the return on home equity is always the same, ZERO. We have a misconception that because our home appreciates, or our mortgage balance is going down, that the equity has a rate of return. That’s not true. Home equity has NO rate of return. Home values fluctuate due to market conditions, not due to the mortgage balance. Since the equity in the home has no relation to the home’s value, it is in no way responsible for the home’s appreciation. Therefore, home equity simply sits idle in the home. It does not earn any rate of return.

Assume you have a home worth $100,000 which you own free and clear. If the home appreciates 5%, you own an asset worth $105,000 at the end of the year. Now, assume you had separated the $100,000 of home equity and placed it in a safe, conservative side account earning 8%. Your side account would be worth $108,000 at the end of the year. You still own the home, which appreciated 5% and is worth $105,000. By separating the equity you created a new asset which was also able to earn a rate of return. Therefore, you earned $8,000 more than you would have if the money were left to sit idle in the home.

Homeowners would actually be better off burying money in their backyards than paying down their mortgages, since money buried in the backyard is liquid (assuming you can find it), and its safe (assuming no one else finds it). However, neither is earning a rate of return. It’s actually losing value due to inflation. Few people today bury money in the back yard or under their mattresses, because they have confidence in the banking system. They also understand idle money loses value while invested money grows and compounds. As Albert Einstein said, “The most powerful force in the universe is compound interest.” After all, homes were built to house families, not store cash. Investments were made to store cash. Taken from another angle suppose you were offered an investment that could never go up in value, but might go down how much of it would you want? Hopefully none. Yet, this is home equity. It has no rate of return, so it can never go up in value, but it could go down in value if the real estate market declines or the homeowner experiences an uninsured loss (e.g. earthquake), or a foreclosure. After all it’s better to have the money and not need it than to need the money and not be able to get at it.

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Understanding The Job Market http://www.hamiltoninstitute.com/understanding-the-job-market/ http://www.hamiltoninstitute.com/understanding-the-job-market/#comments Thu, 29 Nov 2007 17:25:51 +0000 admin http://hamiltoninstitute.com/?p=354 What could be the unemployment rate tomorrow? Today’s figures concerning the job market have become extremely difficult to analyse and the common relation between inflation and labour factor tends to disappear, probably relegated to the historical economic theory. Why? Because new elements that composed the labour function have completely changed the fundamentals of the macroeconomic theory, notably the notion of natural unemployment, also called NAIRU. We have now entered into a modern structure of the job market, essentially based on destruction and creation with a relatively low replacement rate.

Before all, we must define assumption that will be used to stabilized the model. Usually economic models consider that information asymmetry reduce the efficient of the job market. We believe that right now the information flow is extremely good, an assumption that should obviously lower the value of the NAIRU. However, we can add a new factor, which has an impact negative on the job market.

The idea is relatively simple. If we assume that the renewal movement observed in the job market intensifies with the degree of innovation, it also implies quality changes that obviously would be affect negatively by static education program. As fast as the innovation integration goes, as fast must the workforce modify its structure. This modification depends on public expenses, since most of the program and improvement of education program are financed by taxes. Therefore, opened fiscal policy used to stimulate classical industry forces also public authorities to proceed to a difficult choice.

We obtain then:

U is the unemployment rate, B is the public budget and alpha’ is the IT innovation growth factor. We now have to define an additional data that would ensure us to capture the idea of education model in the labour market function. To do so, let simply assume that the public budget is composed by two different variables, one related to the education budget, and another correlated to the unemployment benefits. Those two characteristics have an opposite evolution, but cannot be neutralized in term of budget function. We Obtain then:

Gamma is a coefficient that measures the impact of the education expenses on the public budget. We supposed that the more intense is the education program during the previous period, the minimum will be the asset allocated to the public budget used to reduce the negative effect of the innovation absorption on the job market function.

Theta is the coefficient corresponding to the unemployment benefit, or public expenses allocated to the weakness of the job market. Of course, this variable cannot be dissociated from the previous one, since the education program set during the previous period has an impact on the amount required to maintain healthy consumption by redistributing income to non-workers.

At the end, we clearly observe that fundamentally, if innovation in term of technology asset reduces the initial assumptions used to determine the NAIRU, we can also remark that an absorption crisis can lead to a sharp improvement of the optimum unemployment rate added to sliding public expenses. Those two equations explain for instance why the US job market remains flat despite a significant rebounds of the GDP. This situation is also the case for most of the European countries, excluding the ones that import high quality human capital to offset the lack of quality employees. The major problem is that there is no stabilization of this factor, since quality allocation regarding public expenses is extremely difficult to improve.

Two solutions arise. One is to proceed to an impressive increase of the education program, but the impact will only be measured at the next period, which is difficult to determine, because actually we have opted for a period characterized by a new innovation cycle. Let’s assume that according to the recent researches, the new innovation cycle will be the emergence of wireless communicators used for the entire computing related environment. The other solution is maybe easier to put in place. The idea is to simply limit the penetration of the innovation in the economy in order to reduce its impact on the job market. Usually, the simple existence of the price model unaffordable creates this effect, and therefore leads to a slow penetration. Today it’s not the case because the financial system put a lot of pressure on creativity, forcing innovators to ensure quick return on investment and by the way lowering the average selling price in order to maintain strong volume. The current product line transition concept used by industrial analyst is almost obsolete since we observe only one entry line and one low end line without any middle product range. This is due to the absence of product maturity, extremely typical in IT. Based on those remarks, it appears that in order to limit the penetration, we can simply ease the financial system by increasing the direct financing technique for innovation program. In other words, encouraging expensive and long term innovation program allow policy makers to reduce the risk of absorption crisis coming from undesired low volume of cheap IT products.

In the lights of those comments, we can now define an optimum for the labour function in non-cyclical environment. Starting from the initial definition.

We have only three variables, which are theta, gamma and alpha. It’s very important to remark that in our model, the classical growth factor of the industrial economy (excluding the impact of IT innovation on the global growth) doesn’t interact because from one period to another, its impact is not significant when its value is comprised between minus 1 and 1. Let’s remind you that the equation used to define our growth factor for the economy is:

A is the global growth factor, Beta is the budget function, the first alpha represents the industrial growth factor although the second element depictures the IT innovation growth factor.

For the last ten years, any OECD countries have reported a value of industrial growth factor that doesn’t exceed that range. We can point out also that two periods are necessary to measure the impact of new public policy on the interest rate.

So, what all this means. First it’s crucial to understand that education programs used today are supposed to become growth factor tomorrow and element of the labour market function within the next two periods. As results, if a country economy is not strong enough to produce educated employees, it has to ensure salary level that would attract sufficient labour force to offset this effect. The second point would be more related to the forecast of the unemployment rate. Measuring the job market quantitatively is a difficult task, especially when we try to define it based on innovation factors. But we can use this model to adjust long-term economic policy (above two innovation periods) to influence precisely the economic path. Our last remark will be to encourage people to keep improving their knowledge. Most of the efficiency obtained by using this model is based on the idea that citizens have the willingness to learn by themselves in order to offset the weakness of common educations program.

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Volatilité implicite et volatilité d’une option : Principe de rétroaction http://www.hamiltoninstitute.com/volatilite-implicite-et-volatilite-dune-option-principe-de-retroaction/ http://www.hamiltoninstitute.com/volatilite-implicite-et-volatilite-dune-option-principe-de-retroaction/#comments Wed, 24 Oct 2007 17:06:02 +0000 admin http://hamiltoninstitute.com/?p=349 La célèbre formule de Black–Scholes a permis au monde boursier de découvrir l’importance du monde optionnel, celui dans lequel on vit tous les jours. En effet, l’existence d’options, de produits dérivés, ne reflète que des relations sociales, des choix pris de telle manière à affecté son sous jacent, autrement dit les actions que l’on génère dans la vie. Par exemple, vous devez conclure une importante affaire avec un client, vous allez faire un choix optionnel quant au lieu de rendez vous, donc vous émettez un Call sur vous même, le sous jacent afin d’augmenter vos chances de réaliser votre opération, considérant que cette option peut avoir une conséquence favorable.

C’est la première lecture du monde optionnel, identique à celle du joueur d’échecs. L’ouverture correspond à un choix d’option, un call pour les blancs et la recherche d’une option de vente, un put pour les noirs qui souhaitent impacter négativement le sous jacent des blancs, c’est à dire ses actions dans ce que l’on appelle le ” middle game “, la phase stratégique du jeu, sachant que ce dernier se termine le plus souvent par une troisième phase conceptuelle, de type ingénierie en géométrie ou plus précisément vous exprimez votre intelligence artificielle faible (caractérise un niveau de refoulement faible dans une science) propre aux êtres humains dans le domaine des mathématiques. La compréhension de ces trois étapes distinctes dans le jeu d’échecs, à savoir optionnel, stratégique, puis conceptuelle, permet de mieux comprendre l’importance de la volatilité qui émane de l’existence d’une option sur son sous jacent, mais également sur le sous jacent des autres. Il est possible dès lors d’améliorer la qualité de ses propres actions si les options d’achat émises par nous même avec des choix tels que le bon lieu de rendez vous pour conclure son business deal aboutissent au strike voulu. En d’autre terme, si l’on considère que le prix d’équilibre d’une option sur le marché représente le scénario moyen des détenteurs d’options à propos du sous jacent dans une période de temps défini, alors il serait juste de percevoir une volatilité inverse, venant de l’option vers l’action en raison d’une confiance créée ou détruite pour le sous jacent par l’échange d’options. Revenant à notre exemple, cela signifie que vous risquez d’avoir un gain de confiance en vous dans l’ensemble de vos actions journalières à cause de la matérialisation de vos options d’achats concernant la meilleure manière d’obtenir vos deals.

Si vous jouez avec les noirs, vous devez impérativement définir une option de vente concernant les actions des autres. Sur le marché, cela revient à émettre un Put sur un titre, de telle manière à définir l’ensemble des scénarios négatifs portant sur cette action, le prix d’équilibre de cette option pouvant être interprété comme le scénario moyen des détenteurs de put dans un horizon de temps défini. Il s’en suit une volatilité pour le sous jacent issu de la réalisation ou pas de ce scénario négatif. Une société peut très bien émettre des Put sur elle-même afin de bénéficier d’une hausse de son cours de bourse dans le cas ou l’ensemble des scénarios moyens attribué d’un strike ne se réaliserait pas. Ainsi, le groupe coté en bourse bénéficiera d’un regain de confiance pouvant améliorer sa situation future. C’est une idée très importante à comprendre en bourse. Dans la vie, cela revient à annoncer un retard léger à un rendez vous alors qu’en fait vous serez là parfaitement à l’heure. Un put, c’est tout simplement appeler pour dire que vous aurez peut être dix minutes de délais avec l’heure initialement fixé, mais vous souhaitez éviter le scénario négatif de l’autre personne en raison de votre retard, alors vous émettez une option de vente sur vous même. Répéter plusieurs fois, vous pouvez obtenir une remarque du type ” mais je sais bien que tu es toujours à l’heure “, une phrase qui peut très bien vous amenez à améliorer votre ponctualité.

On a donc deux volatilités dans un sens opposé. La première telle que décrite ci dessus, et la volatilité implicite d’après la formule de Black–Scholes. Le sous jacent doit faire face à une volatilité implicite. Logique puisque nos comportements humains sont différent en fonction de la composition lipide protide glucide de notre alimentation et ce à valeur calorifique identique. Si notre énergie n’est pas la même avec 300 calories de chocolat, l’équivalent en frites et la même dose énergétique en légumes verts, alors on doit admettre que nos réactions cérébrales et physiologiques ne sont pas identiques par rapport à cette composition. Il existe une composition énergétique idéale, avec un poids idéal reflétant la probabilité la plus élevé de se nourrir à cette même structure protide lipide glucide idéale pour nos actions. Voici l’une des causes de la volatilité implicite du sous jacent. Les chocs brownien seraient dans ce cas les fois ou l’on ingurgite de la nourriture, sous forme liquide ou solide dans notre estomac (le fameux récipient du mouvement brownien). En ce qui concerne la bourse, il s’agit simplement du marché et des ordres d’achats ou de ventes passés par les traders (les petites particules) sur les titres d’une société cotée (la grosse particule) qui verra sa vitesse changer , donc son cours de bourse varier chaque fois qu’il y a un choc, soit un équilibre entre l’ordre d’achat et de vente.

L’autre raison de la volatilité implicite d’une action est stochastique. De manière similaire à la composition alimentaire, l’être humain est soumis a un cycle de déstockage des graisses, qui est malheureusement différent des félins qui eux sont en cycle infini. Le signe infini vient d’ailleurs des félins quand ils baillent, reflétant le fait qu’ils peuvent déstocker des graisses identiquement après une nuit de sommeil qu’après une bonne sieste. Ce que nous ne pouvons pas faire. Même si certains salaires minimaux ont été révisés à la hausse, comme c’est le cas en France récemment en raison d’une amélioration de la productivité liée à un accroissement du temps de déstockage de graisses pendant le sommeil (d’habitude les heures de sommeil au delà de 6 heures du matin apportent peu d’énergie en plus dans la journée, un passage à 6h15 change le salaire minimum), tout le monde doit faire face à un comportement stochastique, la quantité d’énergie disponible dans le corps au cours de la journée n’étant pas identique, en tout cas c’est évident entre le matin et l’après midi. Certaines personnes travaillent habituellement sans déjeuner le matin et fournissent une productivité importante simplement sur la base du déstockage de la nuit. Puisque les entreprises sont composées d’être humains, donc elles subissent également cette volatilité implicite, les personnes qui échangent leurs titres aussi. Cette dernière, aléatoire puisque déterminée par des variables que l’on ne connaît pas à l’avance comme ce que vous voudrez manger à midi ou ce soir, va définir le choix de votre option comportementale dans le future consécutivement à une action qui n’est pas encore arrivée pour laquelle vous êtes en train d’établir un script dans votre tête quant aux conditions de sa réalisation. Ainsi, nous serions enfermés dans une sorte de boucle rétroactive de la volatilité, de l’action vers l’option, puis de l’option sur la suite de nos actions.

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Application du théorème de Bayes à la structure des marchés http://www.hamiltoninstitute.com/application-du-theoreme-de-bayes-a-la-structure-des-marches/ http://www.hamiltoninstitute.com/application-du-theoreme-de-bayes-a-la-structure-des-marches/#comments Fri, 05 Oct 2007 17:19:31 +0000 admin http://hamiltoninstitute.com/?p=352 Toujours aussi inquiétante, l’évolution des marchés boursiers nécessite une lecture plus précise des mouvements de fusion acquisition, d’introduction en bourse, d’offre publique de retrait. Le théorème de bayes fournit une réponse assez simple de ces mécanismes, permettant de justifier un ensemble d’opérations observées dans l’histoire du système de cotation.

Redéfinissons le théorème tel qu’il est enseigné en mathématiques : on part de la probabilité conditionnelle p(A\B)p(B)= p(A∩B)= p(B\A)p(A)

En divisant par p(B) les deux éléments et en considérant p(A∩B) comme la probabilité que les évènements A et B aient tous les deux lieu, alors on obtient :

P(A\B)= (p(B\A)p(A))\p(B), soit le théorème de bayes.

Il s’agit en fait d’un théorème de probabilités d’affectation positive entre deux évènements. Positive car le sens de l’affectation est défini par un anti slash, ce symbole mathématique utilisé également en informatique signifie une action du conscient de A qui impacte le conscient de B sachant qu’il diminue le refoulement de B vers son subconscient avec une certaine probabilité. Plus simplement, la lecture sociologique de ce théorème peut s’expliquer de la manière suivante. Supposer que vous révisiez pour vos examens avec un très bon élève, dont le niveau de compréhension est très important alors que vous avez des difficultés. Sans échanges majeurs au niveau des explications des théorèmes à apprendre, vous allez travailler à ses cotés. Il en résulte un impact positif sur vous, moins bon élève, puisqu’en percevant son niveau de compréhension qui équivaut à une probabilité définie du niveau de compréhension maximum des enseignements à étudier, vous allez vous même diminuer votre refoulement (terme psychologique lié au passage entre conscient et subconscient, on refoule ce que l’on n’aime pas) consécutif à votre incompréhension, et par conséquent améliorer votre intégration du savoir à son contact avec une probabilité relative qui s’ajoute à votre probabilité initiale de comprendre seul vos cours à apprendre. Bien entendu, la matérialisation que tous les deux évènements aient lieu selon le théorème de Bayes correspond dans ce cas présent au fait que vous étudiez ensemble pour préparer vos examens. On a donc défini une nouvelle probabilité associée à la réalisation de vos révisions tous les deux. D’ou l’intérêt de connaître des bons élèves.

Suite à cette exemple, passons à une lecture économique et financière de ce théorème, afin de comprendre les mécanismes de rapprochement et autres. Nous allons définir deux courants ou vecteurs d’association probabiliste, à savoir celui reliant les actionnaires aux sociétés, et celui qui réunit uniquement les activités des sociétés entre elles.

Le premier environnement d’affectation bayésienne peut se définir ainsi : il s’agit d’une relation verticale de financement, cette affectation entre les sociétés et leurs actionnaires justifie à elle seule les introductions en bourse. Supposons que vous n’êtes pas introduit en bourse, donc vos titres de propriétés ne sont pas échangeables sur le marché, donc vous êtes possédé par un nombre limité d’actionnaires. Ces derniers ne sont pas forcément les meilleurs détenteurs possibles sur les marchés, il vous serait alors possible de percevoir d’autres détenteurs de titre, séduits par les qualités de votre société. Considérant un événement probabiliste de référence tel qu’il existe une probabilité non nul que la détention de vos titres par les meilleurs gérants, les meilleurs fonds ou autres détenteurs de titre vous permettent d’améliorer vos conditions de financement, votre accès au crédit et par conséquent vos financements de développement. Il s’agit d’une relation verticale entre vos créanciers et vous, identique à celle que vous obtenez en introduisant vos cartes de visite sur un marché de businessmen. Les cartes doivent être détenues par les meilleurs businessmen de telles manières que vous puissiez avoir des retombés positives sur votre réseau relationnel, votre activité professionnelle.

De la même manière, l’introduction en bourse signifie un ensemble de détenteurs qui s’échangent vos titres, comme des cartes de visites, ce qui va vous permettre d’obtenir des conditions de financement supérieures à celle que vous pourriez obtenir avec un actionnariat non listé, à condition bien sûr que les détenteurs de titre soient toujours meilleurs que vos actionnaires initiaux. Dans ce cas, l’introduction en bourse a du sens, sinon il est préférable de rester en dehors, puisque vos caractéristiques, autrement dit les performances de votre société ne sont pas assez attrayante, ou ne semblent pas assez solide sur le long terme (une introduction en bourse coûte chère). Voici la règle qui définit les introductions en bourse d’une société à partir du théorème de bayes.

Le second courant d’association probabiliste de type bayésien correspond à l’activité des entreprises entre elles. Supposons que vous soyez un acteur moyen d’un secteur quelconque. Votre secteur ou industrie dispose de caractéristiques moyennes utilisées pour vous référencer par rapport aux performances de vos concurrents. Ces caractéristiques comme le taux de croissance, le niveau d’endettement, le taux d’utilisation, etc. définissent un environnement probabiliste, de même que vous définissez un environnement probabiliste à partir de vos propres caractéristiques. Si les vôtres sont inférieures à celles de votre secteur, alors vous pouvez bénéficier d’une affectation positive qui doit vous permettre d’enregistrer une amélioration de vos performances. On obtient la relation suivante : le leader du secteur tire vers le haut l’indice sectoriel qui lui même crée une amélioration des entreprises concurrentes du même secteur. Simple application du théorème de bayes, et ce indépendamment des détenteurs de titre. Mais il ne faut pas négliger l’impact de l’autre type d’association probabiliste, car il est normal de considérer que l’entreprise la plus faible du secteur, celle qui à les caractéristiques les moins prometteuses sera détenue par les actionnaires les moins attractifs donc la perspective de rebondir en ayant des solutions de financement pour devenir un leader du secteur reste très limité.

Parfois, le porte feuille de détenteurs est si mauvais, et l’entreprise n’a pas réussi à se positionner en tant que leader de son secteur malgré son affectation positive interentreprises, elle sera obligé de procéder à une OPR, une offre publique de retrait pour revenir à un portefeuille d’actionnaires moins mauvais. Même une offre publique d’achat suppose une affectation bayésienne positive une fois l’opération d’achat réalisée, puisque la nouvelle entreprise une fois intégrée doit générer des performances supérieures pour l’entité globale. La condition de déclenchement d’une offre publique d’achat ou d’échange n’est donc rien d’autre qu’une affection bayésienne positive créée par les détenteurs de titre, qui doit couvrir le montant des coûts d’assimilation de la nouvelle société, les synergies étant relatives à l’affectation positive interentreprises. En gros, on ne rachète que si le portefeuille d’actionnaires s’améliore qualitativement après l’opération pour au moins le montant du rachat.

Les cas de spin-off répondent également à une application du théorème de bayes, proches des conditions d’introduction, puisqu’une entreprise doit observer des caractéristiques supérieures d’une de ces branches d’activité par rapport à son ensemble de performances pour déclencher un spin off afin de récupérer des fonds sachant que les détenteurs de titres voudront opter pour la possession de titres uniquement associés à cette branche. Il y aura alors un spin-off de cette division générée par une lecture bayésienne. C’est peut être le plus important théorème de la finance !

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