Category: Economics

Categories
Economics

[1114] Of KKR at the gate

After the euphoria, the important question comes up: how the hell KKR manages to convince other people to pay for their fun ride?

At the NYT today:

In an unusual twist that may soon become common, the banks are going one step further than simply providing the debt financing involved in the deal, in this case a daunting $24 billion of debt.

The banks are also lending $1 billion to TXU’s buyers, Kohlberg Kravis Roberts & Company and the Texas Pacific Group — not as secured debt, but in the form of equity using the bank’s own cash.

[…]

The risk to the banks is that the value of TXU could fall sharply below the $69.25 being offered. Yesterday, TXU shareholders welcomed the deal, driving up the shares 13 percent, to $67.93. [Private Equity Buyout of TXU Is Enormous in Size and in Its Complexity, Feb 27 2007]

Also, humor:

The deal still must undergo months of scrutiny from state and federal regulators. And while the deal has won support through pledges to cut electric rates and scale back a plan to build coal-fired power plants, the private equity firms must still overcome a perception that buyout buyers are temporary owners who are not beholden to shareholders or customers.

Talk about building bridges. [Private Equity Buyout of TXU Is Enormous in Size and in Its Complexity, Feb 27 2007]

If KKR sounds familiar to you and you are unfamiliar with modern economics or finance history, you might be thinking of Barbarians At The Gate, based on the book that goes by the same title. Heh. I bet somebody is going to write a book on this, just like what happened the last time KKR had fun at RJR.

Categories
Economics Environment Politics & government

[1112] Of all hail to Environmental Defense

When KKR, a coal power plants operator and the Environmental Defense are mentioned in one article in the same paragraph, one would expect a report on vicious political skirmish. Quite to the contrary and to my surprise, the three groups are working together!

The buzz first came up a couple hours ago but it is only just now that I accepted it. I was like running into a think see-through glass door — it takes a moment to realize what is going on after a pang in the face. This might signal the greatest cooperation between the greens and the grays yet:

Early Monday, after several weeks of marathon negotiations that brought together both environmentalists and Wall Street bankers, TXU announced that its board of directors had approved the bid from Kohlberg Kravis and Texas Pacific for about $45 billion, which would be the largest buyout in history.

[…]

The deal was noteworthy not just for its size, but for the confluence of business decisions and environmental concerns that drove the ultimate transaction. Because private equity firms are unregulated and historically have valued their privacy, neither Kohlberg Kravis nor Texas Pacific were eager to become an “enemy combatant” of the environmental groups, people involved in the talks said. Reducing the coal plant initiative will also free up billions of dollars in planned spending that the firms will be able to use for other projects or to help finance the transaction. [NYT, Feb 26 2007]

I have a newly found respect for the Environmental Defense! That whole lot spams I received through email, tons of snail mail I received in my mailbox and that couple of bucks I donated to them while I was at Michigan worth every single bit!

This is the crux of the deal, as far as the environment is concerned, as stated in an email I received from Environmental Defense:

As part of the sale agreement, Environmental Defense helped negotiate an aggressive environmental platform that will, among other things:

  • Terminate plans for the construction of 8 of 11 coal-fired power plants TXU had hoped to build;
  • Stop TXU’s plans to expand coal operations in other states;
  • Endorse the U.S. Climate Action Partnership (USCAP) platform, including the call for a mandatory federal cap on carbon emissions; and
  • Reduce the company’s carbon dioxide emissions to 1990 levels by 2020.

Way to go!

w00t! w00t!

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

p/s — and Al Gore won the Oscar for An Inconvenient Truth!

Categories
Economics Pop culture Society

[1108] Of the poor listen to local music

At the Marginal Revolution, based on a paper by Omar Lizardo:

…the data supplied by Professor Lizardo show that the poorer a country, the more likely it will buy and listen to its own domestic music. This makes sense given that music is a form of social networking and the relevant networks are primarily local.

There is an article discussing the same subject on the NYT written by the author of Marginal Revolution.

I skimmed through the paper for regression analysis and I found this on page 15:

Omar Lizardo. Fair use.

Malaysia is somewhere in the middle, above the regression line. You may take a closer look at the graph by clicking on it.

I wonder how the inclusion of population size would affect the analysis.

Categories
Economics History & heritage

[1106] Of fighting inflation by shooting down the zeros

What would one do to fight runaway inflation?

In Venezuela, chop the zeros off:

CARACAS (Reuters) – President Hugo Chavez said he will chop three zeros off new bolivar currency bills to bolster Venezuelans’ perception of a strong currency in a bid to curb inflation, which is now highest in Latin America. [Reuters, Feb 16 2007]

If I remember my history correctly, the German Empire took similar route to combat inflation right after the First World War. Though similar, there is one major difference.

In the aftermath of War to End All Wars that did not only fail to end all wars but instead made way for a larger war, the Allied was victorious and the Central Powers was devastated: the Ottoman Empire ceased to exist, Astro-Hungary disintegrated while the German Empire was humiliated through and through. As if such victory was not enough, the Allied at the Treaty of Versailles imposed heavy war reparation against the German state. Given heavy debt burden as well as the power to print money, the German government indulged in seigniorage.

The ability to print money might be cool but be careful, if you printed too much money, you might end up poorer, as the German learned in the 1920s. The German not only learned a lesson or two about inflation — they learned it the hard way.

In 1923, one US dollar was equivalent to 4.2 trillion mark. No. I am not kidding. That is 4,200,000,000,000 mark; 4.2 x 1012 mark. Imagine, if you lived in Berlin in 1923, you would have to use scientific notation to buy a sack of flour. And converse in German to boot!

And oh shit, imagine the (nominal) cost of roses on Valentine! Inflation on top of inflation cannot be good news.

Further, the nominal interest rate stood at around 900%. For comparison purpose, as of February 2007, the Malaysian nominal interest rate is 3.5%.

The funniest thing is, since prices across the board were raising so fast on daily basis if not on hourly basis, the central bank could not print out enough money to make life a little bit simpler for the Germans. In fact, there is one famous picture that depicts how bad inflation was back in 1923:

Public domain.

On Wikipedia: “A German woman feeding a stove with currency notes, which burn longer than the amount of firewood they can buy.”

Suffice to say, I do not think a person could buy dirt with the mark in 1923.

Some time in the same year, the German government which got tired of probably raising the interest rate almost daily — while the people got tired of running from the banks to the stores just to make sure 4.2 x 1012 mark would still be 4.2 x 1012 mark an hour later — replaced the heavily inflated mark with a new mark. Those outrageous zeros were slashed. While the Venezuela is cutting three zeros, the German cut 12. The new regime brought sanity back to an insane monetary roller coaster ride.

Apart from that, the new mark was anchored to real assets, which, I do not think is true for the Venezuelan bolivar. Because of this — this is the only policy tailored to fight inflation — and the reputation of Venezuelan central banking, I believe that the problem Venezuela is facing would not end anything soon. Reputation is important in the fight against inflation. Given how populist the Venezuelan government is right now, I doubt the central bank — which I assume has no independence on monetary policies — would have the stomach to fight inflation.

Apart from that slashing of zeros, there are other efforts aimed to fight inflation. For instance, Venezuela is cutting down taxes to fight inflation:

Chavez said VAT will first be reduced on March 1 by 3 percentage points and then by a further 2 points on July 1. [Reuters, Feb 15 2007]

And to promise to introduce new taxes to replace the old taxes:

To compensate for the income loss, Chavez, a proud socialist, said the government will create new taxes, including one that could involve the private property of the rich. [Reuters, Feb 15 2007]

With the removal of VAT, prices could fall but it remains unclear what the net effect would be as, as stated in the first Reuters’ article, price could increase with the slashing of zeros. The price increase is similar to the effect of abolishing the pennies.

Moreover, the abolition of VAT encourages consumption, which could lead to demand-push inflation. I am unsure what the net tax shift would be though.

Right or wrong nevertheless, Venezuela will be an exciting economy to watch from far.

Categories
Economics

[1099] Of food sovereignty and comparative advantage

As a graduate of economics, I unreasonably assume that everybody knows basic economic ideas like supply and demand and comparative advantage. Perhaps, it is time for me to throw away that assumption and assume the opposite. Explanation on comparative advantage is crucial in effort to discredit the idea of food sovereignty; food sovereignty is merely another name for protectionism.

The idea of food sovereignty is well-stated in the Ninth Malaysia Plan. See Chapter 3 of the Plan if you prefer not to take my words for it. Given that the current administration is stressing on agriculture, perhaps it is not too astounding to see food sovereignty being part of the administration’s economic game plan.

The idea of food sovereignty basically states that a nation should be able to produce enough food for its population and not dependent on others. It should be self-sufficient in food production.

In order to do that, resources would need to be allocated in a way that prioritizes the food production sector. Such prioritization if done as rigidly as possible would deprive other sectors of resources. And indeed, the idea of food sovereignty might contradict the concept of comparative advantage and ignore the possibility of trade.

Comparative advantage is a basic economic principle first proposed by David Ricardo approximately two centuries ago. It states that an entity, be it a whole economy or a person, should concentrate on what it does best. In order word, the entity should specialize in what it could produce most efficiently. From there on, trade away in order to obtain other goods that the entity does not produce. Whenever trade is impossible, the idea does not apply for the obvious reason. There is more to gain from trade than autarky, nonetheless.

When it comes down to the issue of food sovereignty, the question that needs to be answered is this: does Malaysia have a comparative advantage in food production?

Even if Malaysia has comparative advantage in food production — which I think it does to some extent due to favorable climate — the concept of food sovereignty is not as helpful as comparative advantage in creating a more prosperous society.