Economy
Credit Card Usage in India and China
Unlike in the Western countries, people in Asian countries still use cash for most transactions. However credit card usage is slowly increasing. With about 50% of the global population Asia holds plenty of potential for credit card growth. MasterCard(MA) and Visa (V) account for 90% of volume at the end of 2007.
Credit Card Usage by Country:
Japan ranks the highest in terms of card transactions followed by South Korea and Australia. India has the lowest card volume at just US $2.0 billion. Chinese spent nearly $24.0 billion using credit cards - 12 times that of India. With two of the world’s largest population, China and India offer substantial growth in the next few years.
Credit Card Growth in China:
Due to strong competition most banks waive annual fees for cardholders. Chinese banks have to deal with low rates of revolving credit on cards since most Chinese do not carry balances on their cards. This is a huge difference from other countries where credit card issuers earn most of their profits via interest on revolving balances. Hence Chinese banks cannot easily earn high profits on credit cards. Credit and Debit card growth rate has increased from 18% in 2004 to about 58% last year.
Source: Card payments in Asia Pacific The state of the nations, KPMG
China Remains the Largest Foreign Holder of US Treasuries
According to the latest data released by the US Department of Treasury, China remains the largest foreign investor in US treasury securities. As of September, 2009 China holds $798.90B of US treasuries. Japan is the second largest investor at $751.50B followed by UK at $249.3B.
The Top 10 Foreign Holders of US Treasury Securities with Year to Change are shown below:
(Amount in Billions of US $)
| S.No. | Country | Jan,2009 | Sept,2009 | YTD Change % |
|---|---|---|---|---|
| 1 | China | 739.6 | 798.9 | 8.02% |
| 2 | Japan | 634.8 | 751.5 | 14.61% |
| 3 | UK | 123.9 | 249.3 | 50.30% |
| 4 | Oil Exporters | 186.6 | 185.3 | -0.70% |
| 5 | Caribbean Banking Centers | 176.6 | 171.7 | -2.85% |
| 6 | Brazil | 133.5 | 144.9 | 7.87% |
| 7 | Hong Kong | 71.7 | 132.2 | 45.76% |
| 8 | Russia | 119.6 | 121.8 | 1.81% |
| 9 | Luxembourg | 87 | 98.7 | 11.85% |
| 10 | Taiwan | 73.3 | 78.1 | 6.15% |
Note:
Oil exporters include Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, the United Arab Emirates, Algeria, Gabon, Libya, and Nigeria.
Caribbean Banking Centers include Bahamas, Bermuda, Cayman Islands, Netherlands Antilles,British Virgin Islands and Panama.
Source: US Department of Treasury
China has increased its investment in US treasuries by about 8% since the beginning of the year. It is interesting to see that the UK and Hong Kong have increased their investments significantly this year. UK increased its holdings by 50.30% and Hong Kong raised it by nearly 46%. Russian investment in US treasuries is mostly flat this year.
Among the BRIC countries, India has the lowest US treasury holdings at $35.9B. The foreign exchange reserves for BRIC countries as of September this year are:
Brazil = $224 Billion
Russia=$413.45 Billion
China=$2,272 Billion
India = $280.34 Billion
So the Ratio of US Treasuries to Foreign Exchange Reserves for each country is as follows:
Brazil = 64.63%
Russia = 29.46%
China = 35.15%
India = 12.81%
From the above, we can infer that Brazil has the highest exposure to US treasuries and India has the lowest exposure at just 12.81%. The vulnerability ratio is high for China also since the ratio stands at 35.15%. With the US dollar on a downward spiral everyday Brazil, China and Russia will be adversely affected more than India. While in one way Russia, Brazil and China’s holdings show their confidence in the US, it may me wise for them to reduce their US treasury holdings now and diversify into other investments.
For the complete listing of Major Foreign Holders of US Treasury Securities as of September, go here.
Should the U.S. Drastically Cut its Bloated Defense Budget?
The outstanding US public debt is over $11 Trillion and the interest payments alone total over $22B per month. The unemployment rate reached 10.2% in October. The number of unemployed persons now stands at 15.7 million. The true unofficial unemployment rate U6 is over 17%. While the federal government and the states have taken various cost cutting initiatives in the past few months, one question that the mainstream media, think tanks and other outlets failed to ask the politicians is this: Should we drastically cut the bloated military budget to help solve some of the economic problems facing this country?. There should no sacred cows when it comes to finding ways to reduce the ballooning deficit.
US defense expenditures have been soaring since the 2001 9/11 terrorist attacks. In 2008, the US spent $711B accounting for 48% of the world’s defense expenditures as the chart shows below. Russia, the former superpower spent just $70B. Europe accounted for 20% of global defense spending. The US defense spending was more than the combined total of the next 45 countries.
Last month, President Obama approved a $636B defense budget for 2010. This includes $128B for the wars in Afghanistan and Iraq. By one estimate the 2010 budget is a 0.20% increase from the 2009 budget.
The chart below shows select U.S. defense-related expenditures since 1960 from the Balance of Payments data published by the BEA.
Click to Enlarge
Source: U.S. Bureau of Economic Analysis (BEA)
Note: The 1991 figure includes $42.5B received from coalition partners for the Persian Gulf war.
The three defense-related items shown in the chart are: Transfers under U.S. military agency sales contracts, Direct defense expenditure and U.S. government grants. These three expenses appear in the current account section of Balance of Payments data and represent the amount the US spends to police the world. From under $20B prior to 1980 this amount increased to $95B in 2008.
For spending this amount of money, the overall U.S. economy benefits much less. A recent study by Global Insight, the respected economics research firm, shows that increased defense spending leads to job losses.
From the article titled “Massive Defense Spending Leads to Job Loss” by Dean Baker of the Center for Economic and Policy Research:
“For example, defense spending means that the government is pulling away resources from the uses determined by the market and instead using them to buy weapons and supplies and to pay for soldiers and other military personnel. In standard economic models, defense spending is a direct drain on the economy, reducing efficiency, slowing growth and costing jobs.
A few years ago, the Center for Economic and Policy Research commissioned Global Insight, one of the leading economic modeling firms, to project the impact of a sustained increase in defense spending equal to 1.0 percentage point of GDP. This was roughly equal to the cost of the Iraq War.
Global Insight’s model projected that after 20 years the economy would be about 0.6 percentage points smaller as a result of the additional defense spending. Slower growth would imply a loss of almost 700,000 jobs compared to a situation in which defense spending had not been increased. Construction and manufacturing were especially big job losers in the projections, losing 210,000 and 90,000 jobs, respectively.
The scenario we asked Global Insight to model turned out to have vastly underestimated the increase in defense spending associated with current policy. In the most recent quarter, defense spending was equal to 5.6 percent of GDP. By comparison, before the September 11th attacks, the Congressional Budget Office projected that defense spending in 2009 would be equal to just 2.4 percent of GDP. Our post-September 11th build-up was equal to 3.2 percentage points of GDP compared to the pre-attack baseline. This means that the Global Insight projections of job loss are far too low.
The impact of higher spending will not be directly proportionate in these economic models. In fact, it should be somewhat more than proportionate, but if we just multiple the Global Insight projections by 3, we would see that the long-term impact of our increased defense spending will be a reduction in GDP of 1.8 percentage points. This would correspond to roughly $250 billion in the current economy, or about $800 in lost output for every person in the country.
The projected job loss from this increase in defense spending would be close to 2 million. In other words, the standard economic models that project job loss from efforts to stem global warming also project that the increase in defense spending since 2000 will cost the economy close to 2 million jobs in the long run.”
For a given amount of spending, the number of jobs created by the defense sector is actually less than the number of jobs created by other sectors of the economy. An article in Naked Capitalism references a study titled “The U.S. Employment Effects of Military and Domestic Spending Priorities” by the economist Robert Pollin at The Political Economy Research Institute at the University of Massachusetts, Amherst. The following chart and table are from the updated version of this study:
Employment Effects of Spending $1B on various sectors:
Spending $1 billion on the military creates just 7,100 jobs whereas spending the same on educational services creates 16,900 jobs and on health care creates 10,400 jobs.
Clearly military spending does not help the economy like other sectors do. Sure some might argue that many cool technological advancements have come out of military research such as the Internet, GPS, etc. But those are just by-products of military research that benefited the growth of civilian economy. Civilian sectors can produce much more inventions and help provide jobs stimulating the economy if the same amount of funds are invested in civilian projects. Even Nobel Laureate Paul Krugman recently agreed that defense spending creates a short-term boost to the economy. In the long-run military spending is wasteful. Most of the defense funding is allocated to pork belly projects of politicians to keep their constituents employed and the defense industry reap huge profits. Another example of wasteful spending by the Pentagon came to light today with this news item: $400 per gallon gas to drive debate over cost of war in Afghanistan.
“The Pentagon pays an average of $400 to put a gallon of fuel into a combat vehicle or aircraft in Afghanistan.
Pentagon officials have told the House Appropriations Defense Subcommittee a gallon of fuel costs the military about $400 by the time it arrives in the remote locations in Afghanistan where U.S. troops operate.”
Last month there was another case of wasteful spending when the Senate was set to fund $2.5 B for C-17 cargo plane production which were unwanted by the Pentagon.
This $400 a gallon, $2.5B for unwanted planes are just the tip of the iceberg. Billions of tax-payer dollars are skimmed off from the military by others such as the private military contractors, consultants that have enjoyed tremendous growth in recent years.
Why does it take $600+ billion to run the military?
According to the latest figures available, as of 2007 “Pentagon is today one of the biggest land owners in the world. The 737 military bases it possesses worldwide (in addition to the bases located in US territory) occupy a total area of 2.2 million hectares. They include 32,327 buildings and employ nearly 500,000 people, including 400,000 American military and civilian personnel. In Germany only, there are 25 American bases, employing 75,600 military people. In Italy, the most important American bases
(Aviano, Camp Ederle in Vicenza, Ghedi, Camp Darby at Pisa, Napoli, Verona, Sigonella in Sicily, La Maddalena in Sardinia) occupy an area of more than one million square kms and employ 15,500 military people and 4,500 civilians.
The historian Chalmer Johnson (*The Last Days of the American Republic*, 2007), who was a CIA consultant between 1967 and 1973, has recently stressed that these figures do not include the 106 American garrisons installed since May 2005 in Iraq and Afghanistan, nor the ones built in Israel, in Qatar, in Central Asia, in Kyrgyzstan and in
Uzbekistan, nor the enormous base of Camp Bondsteel, built in 1999 in Kosovo by a subsidiary of Halliburton company, nor of course the multiple NSA installations (like the Echelon net) devoted to the illegal espionage and ‘hearing’ of personal communications throughout the world (including yours and mine).”
In addition to the two unpopular wars, the Pentagon needs billions of dollars each year just to maintain the facilities mentioned above. Some 1.4 million military personnel serving the country also cost a significant amount of funds in terms of benefits, payroll, etc. In the current economy, military is one industry that is actively recruiting people and in some ways is helping to keep the unemployment numbers low.
In summary, though defense spending is beneficial to the economy in the short-term, in the long-term it is not. In most countries military spending is much lower than US defense expenditures and those countries are able to allocate those funds for other productive investments. Since the Cold War is long over and the Berlin Wall no longer exists, isn’t it time for the US to wind down its global empire and concentrate on domestic issues?
Which is Higher: U.S. Direct Investments Abroad or Foreign Direct Investments in the U.S.?
It is common knowledge that foreigners own many of the assets in the U.S.. This is true especially with financial assets where China and Japan hold some of the largest chunks of U.S. treasuries. But what about direct investments?. Do foreign companies invest more in the U.S than U.S. Multi National Companies (MNCs) invest abroad? This article presents some analysis on this subject.
According to the “Direct Investment Positions for 2008″ report from the Bureau of Economic Analysis (BEA):
“IN 2008, both the U.S. direct investment abroad and foreign direct investment in the United States positions, valued at historical-cost, grew 8 percent. This marked a slowdown in growth for both positions compared with 2007, when the U.S. direct investment abroad—or “outward”—position rose 18 percent and the foreign direct investment in the United States—or “inward”—position rose 15 percent.”
Hence last year as the global financial crisis worsened, not only U.S. companies reduced their overseas investments foreigners also decreased their direct investments in the US.
Some of the highlights from U.S. direct investment abroad include:
- The outward investment position in 2008 was not only less than the figure in 2007, but also the smallest since 2005.
- Reinvested earnings by US companies was the largest contributor to the 8% increase in 2008. This clearly shows that profit made by US companies are not fully repatriated back to the US and also shows that US firms help foreign countries’ economic growth by reinvesting their earnings there which produces more jobs, tax revenues, etc. in those countries. This could also be another reason why jobs are so scarce in the U.S. at this time.
- Though net equity investments increased in 2008 they were less than the previous year mainly due to the lack of available credit that reduced acquisitions.
Some of the highlights from Foreign Direct Investment(FDI) in the US include:
- The turbulent financial markets in 2008 kept foreign investments away. The 8% growth in 2008 lagged the 12% average during 1996-2006.
- Net equity investment was the largest contributor accounting for 61% to all the inward investment increase in 2008. This shows that foreigners took advantage of cheap equity prices and scooped up many of them.
- Despite the decline in earnings in 2008, reinvested earnings by foreign companies in the U.S. grew substantially
#1) US Direct Investment Abroad:
At the end of 2008, the U.S. direct investment position abroad was valued at $3,162.0 billion. This includes the book value of U.S. direct investors’ equity in, and net outstanding loans to, their foreign affiliates.
Which country received the most U.S. investment in 2008?
Canada, The Netherlands and the UK accounted for one-third of US investment positions in 2008. Canada is one of the major US investment destinations since it is a neighbor and is also the largest trade partner. However it is surprising to see The UK and The Netherlands as major recipients of US investment capital.
Historical inward and outward direct investment positions
Historically outward investment positions have been higher than inward investment. The gap between the two widened in the late 90s as more and more manufacturing and other operations were moved offshore to cut costs.
#2) Foreign Direct Investment in the U.S.
At the end of 2008, the foreign direct investment position in the US was valued at $2,278.0 billion. The UK was the largest investor accounting for 20% of the total followed by the Netherlands and Japan. Canada and Germany also have large investment positions in the US.
The BEA report added:
“Capital inflows for foreign direct investment in the United States were $316.1 billion in 2008, up from $271.2 billion in 2007. Capital flows in 2008 consisted of $250.2 billion in net equity capital investment, $51.0 billion in reinvested earnings, and $15.0 billion in net intercompany debt investment.”
Europe accounted for 68% of all foreign direct investments in the US last year with the UK and Netherlands as the major investors. There were also an increase in Swiss, Hungarian and Spanish direct investments in the US. More than half of the foreign direct investments (54%) went into the manufacturing sector. This is ironic in the sense that foreigners are investing in US manufacturing now while US companies decimated the sector in the past couple of decades by moving them offshore. Obviously European companies are able to invest in manufacturing here and earn a profit while US companies say that they have to move manufacturing overseas in order to be profitable.
To answer my title question, U.S. direct investments abroad is much higher than FDI into the US for many years now.
Employment in U.S. Health Care Industry Projected to Increase
Healthcare is one of the few sectors in the U.S. that is creating jobs now and is projected to add more jobs in the future.
The Unemployment rate in the U.S. rose to 10.2% in October as per the latest data from U.S. Bureau of Labor Statistics. The sectors which had the largest job losses were construction, manufacturing, and retail trade. Another 558,000 persons joined the unemployed which now stands at 15.7 million in this country.
Source: U.S. Bureau of Labor Statistics
The Health Care industry added 29,000 new jobs in October. Health care is one of the bright spots in the economy for job growth since the recession that started about 23 months ago. The industry has added a total of 597,000 jobs since the start of recession. Healthcare sector employs nearly 13.7 million people in the U.S.
The BLS states:
“Before 1960, about 3 percent of private-sector workers were employed in heath care establishments. In recent years, the proportion of workers employed in private-sector health services has exceeded 11 percent.”
As America’s 78.2 million baby boomers retire in the next few years they will require more health care services. In addition to the baby boomers, the general increase in population, technological advances in the medical field, increased stress levels among the general population, new diseases, etc. are going to create the need for additional health care services as well. Though health care is a highly regulated field, there will be plenty of potential for anyone interested in making a career in this field.
U.S. Ranks 9th in Global Prosperity Rankings 2009
The London-based think tank Legatum Institute has published “The 2009 Legatum Prosperity Index“. The U.S. is ranked at number 9 in this list.
The Top 10 Countries in the Prosperity Index are listed below:
The Legatum Prosperity Index is unique because it “is the world’s only global assessment of wealth and wellbeing; unlike other studies that rank countries by actual levels of wealth, life satisfaction or development, the Prosperity Index produces rankings based upon the very foundations of prosperity – those factors that help drive economic growth and produce happy citizens over the long term.”
Finland took the top spot followed by Switzerland, Sweden, Denmark and Norway.Compared to the U.S., these top 5 countries rank higher in Health, Safety& Security, Governance and Social Capital.
The U.S. was ranked at overall ranking of 1 in 2007 in a three-way tie that included Sweden and Norway. In 2009, the US has fallen behind to ninth rank. Despite the current economic slowdown, USA is the best country in the world for Entrepreneurship and Innovation.
Health is one category that US performs poorly. In the top 10 listing, it has the worst number for health. Globally US ranks 27th. The report notes “Dissatisfaction
with their overall health is dragging down Americans’ sense of well-being, affecting their
determination to get ahead and their faith in their healthcare system.”
Despite the billions of dollars spent on security at the federal and state levels, US ranks 19th in the safety and security. This is not surprising since the current economic problems are leading more Americans to commit crimes. As the gap between the haves and have-nots widens and more gated-communities spring up across the country, security and safety in many communities may get worse. The report also cited the high per capita murder in this country relative to other developed countries. For example, Finland ranks number 1 in this category followed by Norway.
Commenting on the report, Will Inboden wrote in Foreign Policy wrote:
“The distinction between domestic and foreign policy is very thin — America’s education system, health-care system, domestic economy, and even family and community strength, are inseparably linked to its international posture and power. In other words, yes, the prevailing debate about health care is in part a foreign-policy issue.”
This argument completely misses the mark. One country’s education system and health-care system are not related to foreign-policy.The broken education system in this country and the convoluted healthcare system has nothing to do with America’s foreign policy or power.Some might argue that the main problem with our government policies is that we do not have our priorities right. We ignore many of our domestic issues and instead focus our resources, time, money and energy on foreign issues that most Americans could not care. Would you agree?
