Category: Economics

Yesterday – actually it was the day before yesterday – the European Commission on behalf of the European Union slammed a $603 million penalty on Microsoft for unfair competition. Not so long ago, the same ruling was given out to Microsoft in the United States though with a heavier penalty – the company was supposed to be split into two different entities. Somehow, Microsoft appealed against the ruling and managed to keep itself in one piece. If my memory does not fail me, the last company that actually was split into several different entities was Standard Oil – now known as Exxon Mobil.

Apart from the half a billion Euro fine, Microsoft also has been ordered by the European Union to disclose relevant information to the public in order to promote a fair competition within a few months.

Currently, Microsoft has announced to appeal against the European ruling.

But is Microsoft really dangerous? Is it okay for the EU to punish Microsoft for being too successful? [Insert some funky music here]

It is no doubt that a monopoly would bring inefficiency into the market. In economic terms, Microsoft is charging the users a price higher than the firm’s marginal cost, gaining too much profit while producing too little. At the same time, deadweight loss to the society is unavoidable. Maybe,

Still, I believe in free market. My belief in laissez faire leads me to believe that it is wrong to punish Microsoft from being too successful.

The clash of the two concepts make me feel uncomfortable. Being both a green and a free-marketeer wannabe is hard.

However, in Microsoft case, one event made it easier for me to decide.
Weeks earlier, it was reported that Microsoft encouraged SCO to launch assault on Linux. SCO has of course denied this allegation but still, the tree doesn’t sway if the wind doesn’t blow.

Ladies and gentlemen, Micro$oft is as evil as Standard Oil and Exxon Mobil. And I support, cautiously, EU’s decision.

I’m tired of politics. Let’s shift some gears.

In my financial class today, again, the professor told an interesting story. This time, it was about the Hunt brothers, oil tycoons from Texas.

Back in the 70s, according to Freedom Investment, the Hunt was possibly the richest family in America. The professor in his usual confident tone said that two of the Hunt brothers decided to corner the silver market. Further search on the net revealed that they were trying to protect their asset from the rising inflation. At the time, inflation in the US was high; sometimes it was almost as high as 10%.

The Hunt tried to corner the market by buying a lot of future options, call options to be precise. For those who lack general financial knowledge, the future market is roughly a market where assets could be bought and sold at an agreed price at some future date.

Together with some help from their Arab friends, they created a silver pool and continuously gathered silver through future contracts. As time progressed, the silver pool got bigger and its supply in the public market steadily decreased. Then naturally, rumor about somebody was cornering the silver market came up but nobody did anything.

From about USD 2 per ounce, the poor’s gold price soared to more than USD 50 per ounce. Record price was USD 54. As the price was setting record, day by day, people thought that these, as the professor put it, Texas folks, would in the end sell off the silver and make a huge profit. However, that was not the case. People didn’t know that the reason the Hunt brothers’ created the pool to protect their wealth, not making profit. And thus, the silver market was continued to be pressed by, as what some would call, the rouge traders.

Industries related to silver started to feel the pain and that was enough to convince the Federal Reserve to jump in and act. The Fed with the New York Metals Market halt silver future trading and declared that no silver could be bought nor traded anymore for the time being. Just as a note, this might be an example on how free market might fail.

Immediately after the announcement, silver price crumbled from its peak price to about half in one day. Later, the price fell to about USD10. The bubble burst.

Unfortunately for the Hunt brothers, because they had accumulated almost all of the deliverable silver, they fell from grace and in the end, in the early 1980s, filed from bankruptcy. Jokingly, one of the brothers – roughly, quoting the professor – said “who cares about three billions anyway?”

Of course, that was said in a sarcastic manner.

According to an article in the New York Times today, Shell’s top executive has resigned due to Shell’s overestimation of its oil and gas reserve worldwide. The result of Shell’s reassessment of its reserve was announced several weeks ago and it sent shockwave throughout relevant industries. According to New York Times further, considering the Shell’s conservative management style, it would be hard to accept the gross overestimation, 3.9 billion barrel lower than previously thought. That’s a 20% reduction.

At the same time, due to malpractice suspicion, the Securities and Exchange Commission has launched a probe against Shell on February 19.

The problem was further intensified in the days after the restatement when Shell announced that its net income has decreased by 19% in the fourth quarter earning. The company has also reduced its oil and gas production forecast.
Despite Shell’s restatement, no other major oil and gas firm has issued a restatement apart from El Paso. El Paso reduced its reserve estimate by a staggering 41%.

The current development is interesting since any move made by Shell, one of the once seven sisters will affect the world economy. This is true since the world market to a large degree depends on carbon-based fuel mined by giant transnational companies such as Exxon Mobil, BP and Shell. More importantly, if the current phenomenon in Shell is not exclusively a Shell’s problem, I would expect other firms with similar core business to re-estimate their reserve.

There has been a study that suggests oil and gas reserve will fall rapidly in the near future. In fact, according to another report by New York Times more than a week earlier, Saudi Arabian production is unsustainable and would fall soon. Even right now, Saudi Arabia is barely meeting its own production quota. In Malaysia, PricewaterhouseCoopers has reported that oil and gas reserve is dwindling and further exploration needs to be done if Malaysia wants to combat its rapidly falling reserve.

Also, it has been predicted that by 2050, oil and gas roles in the economy will be limited due to supply shortage. Once oil and gas reserve finally depleted, alternative energy will gain importance.

I’m convinced that the migration from fossil fuel to alternative fuel will happen no matter what; it’s more a matter of when than why or how. Being a green, I’m hoping that it will happen sooner than later because this will force companies such as Shell and the stubborn Exxon Mobil to shift from its traditional core business to alternative energy business.

Due to the imminent migration from fossil fuel to alternative energy business, research on various alternative fuels should be accelerated in order to compensate the spaces left behind by the coming departure of fossil fuel.

With the departure of fossil fuel, perhaps we could combat global warming more effectively since with the absence of fossil fuel, greenhouse gasses emission will be significantly reduced. And even if global warming is not true – of which I believe is impossible to say so – we could have a cleaner air to breath in.

Today in my financial economics class, conducted by a hilarious visiting professor from Vanderbilt University, for the first time there was a hint of politic in it.

It all started with the discussion of investment companies and from there, the topic gradually moved on to pension fund and all the way to social security system. Currently, the social security system is the largest pension fund in the whole world and it is sort similar to the Employees’ Pension Fund back in Malaysia. More precisely, the social security is a defined benefit plan, where the employer is responsibled to set aside part of its employees’ income into a pension fund and then hand out a stream of income for its employees after their retirement. In reality, a small part of the company assets is aside for the purpose, not part of the employees’ income. Therefore, the money that is supposed to be there to pay future retirees is not actually there but rather, will be paid through future wealth that will be put aside when the time to pay up comes.

Currently, the baby boom generation that came into being in the 70s is still in the workforce and the generation is slowly pushing themselves towards retirement. Right now, the social security works because there are more people in the workforce versus people that is out of them workforce due to retirement. And presently, in practice, the baby boomers are paying the income stream for current retirees.

The problem arises when the baby boomers retire. As Professor Rousseau put it in a serious but yet entertaining tone, “And guess who is going to pay for it?”

Well, guess who?

Hint, USD 500 000 000 000 budget deficit; for the mathematically deficient, that’s half a trillion dollar.

Answer, us. Well, actually us excluding me unless I continue to stay here after 2005.

There are a few solutions to this problem. One is to scrap the social security system. Interestingly, the professor said this may not be the solution due to moral hazard – we won’t allow our parents to live in the street. Well, would us?