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Our July 16, 2007 Newsletter
Edition
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SANTO
DOMINGO REAL ESTATE REVIEW:
.
Keeping
in line with various updates on NEW housing costs in the Dominican
Republic, here is a list of new Apartments or Homes for sale in Santo
Domingo (June 2007): Bella Vista section of the city, 2 and 3 bedroom,
2 bath - 1,000 and 1,600 square foot apartments starting at
US$96,000. In Arroyo Hondo, 1,300 square foot to 1,450 square
foot apartments starting at US$93,000. In La Julia, luxury
building with Swimming Pool, 19 story building with ocean view, 1, 2
and 3 bedroom apartments starting at US$106,000. New
building lots in an upscale sub-division 40 minutes outside of Santo
Domingo, mountain views, river, lake and community club house, US$15
per square meter or for a half-acre lot - about US$32,000.
.
.
IN
THE NEWS:
.
.
ANOTHER GREAT DEPRESSION? The
Fed's Role in the Bear Stearns Hedge Funds Meltdown
By Mike Whitney - Global Research, July 1, 2007
.
The
Bank for International Settlements issued a warning this week that the
Federal Reserves monetary policies have created an enormous equity
bubble which could lead to another Great Depression. The UK
Telegraph says that, The BIS--the ultimate bank of central
bankers--pointed to a confluence of worrying signs, citing mass
issuance of new-fangled credit instruments, soaring levels of household
debt, extreme appetite for risk shown by investors, and entrenched
imbalances in the world currency system. The IMF and the UN have
issued similar warnings, but they've all been shrugged off by the Bush
administration. Neither Bush nor the Federal Reserve is interested in
course correction. They plan to stick with the same harebrained
policies until the end.
.
The
easy credit which created the sub-prime crisis in mortgage lending has
now spread to the hedge fund industry. The troubles at Bear Stearns
prove that Secretary of the Treasury Henry Paulson's assurance that the
problem is contained is pure baloney. The contagion is swiftly moving
through the entire system taking down home owners, mortgage lenders,
banks, rating agencies, and hedge funds. We are just at the beginning
of a system-wide breakdown. The problem originated at the Federal
Reserve when Fed-chief Alan Greenspan lowered the Feds Fund Rate to 1%
in June 2003 and kept rates perilously low for more than 2 years.
Trillions of dollars flowed into the economy through low interest loans
creating a massive equity bubble in real estate which drove up housing
prices and triggered a speculative frenzy. The Feds easy money
policy has disrupted the debt-to-GDP balance which maintains the
integrity of the currency. By expanding circulation debt via low
interest rates; Greenspan put the country on the path to hyperinflation
and, very likely, the collapse of the monetary system.
.
The
problems at Bear Stearns are the logical upshot of Greenspan's
policies. The over-leveraged hedge funds are a good example of what
happens during a credit boom. Liquidity flows into the markets and
raises the nominal value of all asset classes but, at the same time,
GDP continues to shrink. That's because the wages of working class
people have stagnated and not kept pace with productivity. When workers
have less discretionary income, consumer spending, which accounts for
70% of GDP, begins to decline. That's why this quarters earnings
reports have fallen short of expectations. The American consumer is
tapped out.
.
The
current rise in stock prices does not indicate a healthy economy. It
simply proves that the market is awash in cheap credit resulting from
the Fed's increases in the money supply. Consumer spending is a better
indicator of the real state of the economy than stocks. When consumer
spending drops off; it is a sign of overcapacity, which is
deflationary. That means that growth will continue to shrivel because
maxed-out workers can no longer purchase the things they are
making. The underlying problem is not simply the Feds reckless
increases to the money supply, but the growing wealth gap, which is
undermining solid economic growth. If wages don't keep pace with
productivity; the middle class loses its ability to buy consumer items
and the economy slows. The reason that has not happened yet in
the US is because of the extraordinary opportunities to expand personal
debt. The Feds low interest rates have created a culture of borrowing
which has convinced many people that debt equals wealth. It's not; and
the collapse in the housing market will prove how lethal that theory
really is.
.
To
large extent, the housing bubble has concealed the systematic
destruction of America's industrial and manufacturing base. Low
interest rates have lulled the public to sleep while millions of
high-paying jobs have been outsourced. The rise in housing prices has
created the illusion of prosperity but, in truth, we are only selling
houses to each other and are not making anything that the rest of the
world wants. The $11 trillion dollars that was pumped into the real
estate market is probably the greatest waste of capital investment in
the nations history. It hasn't produced a single asset that will add to
our collective wealth or industrial competitiveness. It's been a total
bust. But today we face worrying signs of another economic
meltdown.
.
The
BIS said that they were starting to doubt the wisdom of letting asset
bubbles build up on the assumption that they could safely be cleaned up
afterwards (Greenspan's method) and that, while cutting interest rates
in such a crisis may help, it has the effect of transferring wealth
from creditors to debtors and sowing the seeds for more serious
problems further ahead. The bank said it was far from clear
whether the US would be able to ignore the consequences of its latest
imbalances, ($800 billion per year) citing a current account deficit
running at 6.5% of GDP, a rise in US external liabilities by over $4
trillion from 2001 to 2005, and an unprecedented drop in the savings
rate. The dollar clearly remains vulnerable to a sudden loss of
private sector confidence.
.
The
BIS referred to the toxic effect of the $470 billion in collateralized
debt obligations (CDO), and a further $524 billion in synthetic CDOs
which have spread through hedge funds industry. These CDOs are the
loans (many sub primes) which were bundled off to Wall Street and
turned into securities which are highly leveraged in hedge funds for
maximum profitability. As Bear Stearns is discovering, these CDOs are
like roadside bombs; exploding without notice whenever the stock market
suddenly dips. The BIS also cautioned about the excess of
leveraged buy-outs (mergers) which touched $753bn, with an average
debt/cash flow ratio hitting a record 5.4 Sooner or later the
credit cycle will turn and default rates will begin to rise.
.
The
central banks around the world are increasingly worried that the Bush
administrations profligate spending and irrational monetary policies
will trigger a global depression. The recent volatility in the stock
market suggests that the credit boom is just about over. Once the
liquidity dries up---stocks will fall sharply. As the defaults
continue to pile up; the hedge funds will take a bigger and bigger
pounding. It can't be avoided. That's what happens when bankers abandon
traditional lending standards and lend trillions of thousands of
dollars to people who have bad credit and lie on their loan
applications. Thousands of these same shaky sub primes loans have
been wrapped up like the Crown Jewels and sold off to Wall Street as
CDOs. Now they are ripping through the hedge fund industry like a
tornado in a trailer park. The media has tried to downplay the damage,
but its not hard to see what is really going on.
.
According
to Reuters: Banks doubled the amount of CDOs outstanding in the
past two years to $2.6 trillion, including a record $769 billion sold
last year, according to J.P. Morgan. These figures include funded and
un-funded issuance. Pimcos Bill Gross said there are hundreds of
billions of dollars of sub-prime residential mortgage-backed securities
(RMBS), derivatives on sub-prime RMBS and collateralized debt
obligations (CDOs) that buy sub-prime RMBS and/or the derivatives on
the RMBS -- all of which he considers toxic waste. $2.6 trillion!
That's enough to bring down the whole economy. And, as Bear Stearns
proves, the whole mess is beginning to unwind pretty quickly.
.
Foreign
investors have been the dominant buyers of these exotic debt
instruments in recent years, owing to their insatiable demand for
yield. If investors start dumping them, oh boy, watch out for
some massive credit widening, said Dan Fuss, Vice Chairman at Loomis
Sayles. (Reuters). If the hedge fund industry follows the
downward slide of the housing bubble, foreign investors will run for
the exits. In fact, this may already being happening. China sold
$5.8 billion in US Treasuries in May; the first time they have dumped
USTs on the market. This may be the first sign of capital flight
--foreign investment fleeing the US for more promising markets in Asia
and Europe. The greenbacks survival now depends on the generosity of
foreign bankers. If they refuse to recycle our $800 billion current
account deficit by purchasing US bonds and securities, then the dollar
will sink like a stone and lose its place as the worlds reserve
currency.
.
http://globalresearch.ca/index.php?context=va&aid=6209
.
.
BANK OF INTERNATIONAL SETTLEMENTS: CREDIT
BOOM MAY SPARK DEPRESSION - Monday, June 25, 2007
.
The
Bank of International Settlements (BIS) is warning that the global
economy could be on the brink of a major depression similar to the one
that passed in the 1930s. The BIS said that years of loose
monetary policy have fueled a dangerous credit bubble leaving the
global economy more vulnerable to an economic catastrophe than is
generally understood. In its 77th Annual Report for the financial
year April 1, 2006-March 31, 2007 that was submitted to the BIS annual
general meeting held in Basel on June 24, the BIS - which one source
described as the ultimate bank of central bankers - noted that the
Great Depression that began in 1929 caught many off guard and
unprepared. Virtually nobody foresaw the Great Depression of the
1930s, or the crises which affected Japan and southeast Asia in the
early and late 1990s. In fact, each downturn was preceded by a period
of non-inflationary growth exuberant enough to lead many commentators
to suggest that a new era had arrived, said the bank.
.
http://www.newsmax.com/money/archives/st/2007/6/25/
.
.
HAVE
THE GOOD TIMES PASSED?
Sunday
Star Times - Sunday, July 1, 2007
.
If
you want to get gloomy, you don't have to troll websites for books with
titles like The Second Great Depression: Starting 2007 and Ending
2010. Just try last week's missive from the Bank for
International Settlements, or a speech from the governor of the Bank of
England. Or indeed, the pages of the prestigious Wall Street
Journal. The headline in the Journal read: Why some forecasters
warn of recession. The story reported a small but vocal group of
forecasters who believe that the relatively upbeat view of mainstream
pundits have got it wrong. That the US economy was getting so weak it
could actually be in recession now. From Switzerland, the
prestigious central bankers' bank said in its annual report the risk of
a 1930s-style economic slump has been heightened by euphoric markets
tapping cheap global money. It pointed to soaring levels of
household debt, investors extreme appetite for risk, and new-fangled
credit instruments as a confluence of worrying signs. Debt was
also the concern of Bank of England governor Mervyn King in a speech in
Britain last week. He recounted a banker telling him he couldn't recall
a time when credit was more easily available. King asked:
Excessive leverage is the common theme of many financial crises in the
past. Are we really so much cleverer than the financiers of the past?
.
Here
in credit-crazed, debt-laden New Zealand, the Reserve Bank tries to
cool a hot economy to a slightly warm soft landing, and with consumer
confidence showing signs of being reined in as the impact of higher
interest rates begin to bite, it looks like it might succeed. But
as has happened in the past, will the bank - and all of us - be hit for
a six by events overseas? Should we be worried?
.
http://www.stuff.co.nz/4114507a13.html
.
.
WALL
STREET FIRECRACKERS AND PICNICS
July
5, 2007 - By: Andy Sutton
.
When
the Fourth of July rolls around, thoughts generally turn to picnics,
pools, and fireworks. Ok, you know I didn't check in this week to write
about picnics and pools. However, I am going to talk a bit about
fireworks, but probably not the same ones you'll see in the skies above
many American cities tonight. I am talking about a cache of fireworks
that Wall Street et al are trying desperately to keep under
wraps. I have just read with a growing soberness an article from
the Telegraph, an English newspaper about the nearly $2 TRILLION
dollars worth of sub-prime and alt-a mortgage debt that is going sour
faster than a truckload of Spanish melons sitting at Port Authority on
a 90-degree day. The problem lies in the fact that most of this
debt was bought with borrowed money, and to be honest, the collateral
just ain't worth what it used to be. This causes a huge problem for the
folks that hold this toxic waste. It works like this:
.
Let's
say for instance that you want to buy a car that costs $1000, but you
only have $100. So you go to a bank and borrow the remaining $900 at
some rate of interest. You take possession of the car. The car,
however, is leveraged, meaning that you had to borrow to buy it. The
loan is secured, in this case by the car. As long as you make the
payments, no one ever gives two hoots about how much the car is worth.
Let's say now that you make 3 payments of $50 on the car and then stop.
You default on the loan. The bank in this case will want to repossess
the car in order to sell it and make good on the loan. However, when
they go to sell it, lets say the car is now only worth $200. So the
bank, for its trouble collected $150 from you plus the $200 for the
car. For all intent and purposes they eat $550. Don't feel too sorry
for the bank; these risks are priced into the interest rate and on the
whole they usually do very well.
.
The
Collateralized Debt Obligation (CDO) in simple terms really isn't that
much different from our prior example. In this case, you have a bunch
of mortgages that are packaged and sold off. The payments that the
homeowners make become the return on the CDO, paid to the holder. The
CDO's were valued using fancy computer models that assumed a certain
default rate. So what happens if the default rate is higher? Certainly
we can't say that the CDO is still worth what the model thought it was.
As it is turning out, the default rate is MUCH higher than anticipated
and in some cases the CDO's are only pulling 50 cents on the dollar
when a sale is forced. This is horrible given the fact that the owners
of the CDO borrowed in many cases 90% of the money to buy it in the
first place. Does everyone see the problem here? Start revaluing these
things and we'll have the carcasses of hedge funds, banks and financial
intermediaries littering the landscape on all 7 continents. Think this
isn't a recipe for a credit crunch?
.
The
banks involved, realizing what was happening quickly halted the sales
of such instruments and calls for an orderly unwinding became common.
The term orderly unwinding translated means that - We got caught with
our hands in the cookie jar and we need help to get our hand out nice
and slow before the lid slams shut. This can no longer be
dismissed as another annoying conspiracy theory. Mainstream financial
figures (mostly notably ones outside the US) are calling attention to
this growing problem: Who now holds these risks, and can they
manage them adequately? The honest answer is that we do not know. (so
says the Bank of International Settlements). It was a cover-up,
Charles Dumas, global strategist at Lombard Street Research. This
is the big one: All investment portfolios will be shredded to ribbons
(so says Albert Edwards from Dresdner Kleinwort). In a nutshell -
too much funny money. Too much greed. Someone wanted too much, too soon
and pushed the envelope too far, relying only on the fact that they had
gotten away with it last time. Ex ante it looked like another slam
dunk. Ex post it may well turn out to be their worst nightmare.
The one thing I will say about this Fourth of July is that there are
going to be some big time fireworks. And it isn't going to be much of a
picnic for anyone that relies on the dollar bill for their way of life.
.
http://www.marketoracle.co.uk/Article1455.html
.
AFTER UBS HEDGE FUND TROUBLE, EXECUTIVES
SHUFFLE: The investment bank announces a management
shakeup following a costly hedge fund blow-up. July 5, 2007
.
NEW
YORK (CNNMoney.com) -- UBS late Thursday announced it's replacing Chief
Executive Peter Wuffli with deputy CEO Marcel Rohner, among other
executive management changes, following a hedge fund blow-up that
proved costly for the investment bank. In May, UBS, the world's
largest asset manager, shut down its in-house Dillon Read Capital
Management after the hedge fund reported a $124 million loss due to bad
bets in the sub-prime mortgage market.
.
http://money.cnn.com/2007/07/05/news/international/ubs_ceo/
.
EDITORS NOTES:
I am sort of reminded of the television character of Fred Sanford,
constantly grabbing at his chest, feigning aloud to his dead wife
Elizabeth that the big one in coming (as a way to manipulate his adult
son Lionel, who usually had more common sense most of the time).
But is it true that all this is nothing more than mere drama, OR is
this something to be seriously concerned about? Well, long-term
readers of our newsletter have known that many of the worlds central
banks have been dumping US Dollars for some time now, so this is
nothing new. Recently of course, it is reported that China sold
$5.8 billion in US Treasuries in May of 2007 - the first time they have
dumped US Treasuries on the market, and that is something to take note
of. Indeed something is afoot, and all of a sudden you are now
hearing from the Bank of International Settlements, a banking
organization that I would bet many of you have never heard of before,
albeit an important body in the global scheme of banking and finance -
now declaring some ominous news.
.
According
to a recent article from the International Herald Tribune:
.
Six
decades ago, the U.S. Treasury wanted to shut down the Bank for
International Settlements, saying it had helped to finance the Nazis.
Today, Jean-Claude Trichet and Ben Bernanke are transforming the
organization into one of the world's most powerful networking
clubs. With hedge funds and private equity firms pumping record
sums of money into the world economy, central bankers worry that
investors are taking on too much risk. As a result, the bankers are
increasingly turning to the bank, based in Basel, Switzerland, the
oldest international financial institution, for research and advice,
and to coordinate plans for damage control. If the BIS didn't
exist, we'd have to invent it, said Laurence Meyer, vice chairman of
Macroeconomic Advisers in St. Louis, a former U.S. Federal Reserve
governor.
.
http://www.iht.com/articles/2007/06/19/bloomberg/bxbis.php
.
According
to an article from Weekly Forex Research:
.
The
Bank of International Settlements, BIS, (the central bank of central
banks) has warned against imbalances in the FX markets and compared the
current situation with the market situation before The Great Depression
in the 1930s and the FX crisis in Asia in the late 1990s. The periods
leading up to these crises were like the current situation
characterized by solid economic growth and low inflation.
.
http://www.fxstreet.com/fundamental/market-view/weekly-forex-research/2007-07-03.html
.
According
to an article by Brian Fallow in the New Zealand Herald (July 5, 2007):
.
The
BIS (Bank of International Settlements)
observes that economists collective track record in predicting big
shocks is not good. Virtually no one, it says, foresaw the Great
Depression of the 1930s, the Great Inflation of the 1970s, or the
crises that struck Japan in the early 1990s and Southeast Asia in the
late 1990s. The BIS sees a world of too-low interest rates. It
sees a growing willingness on the part of virtually all investors,
including pension and mutual funds, to take on more risk as a means of
raising returns. And it sees a failure of exchange rates to
adjust to correct the big external imbalances which have developed.
.
http://www.nzherald.co.nz/
.
Of
course not everyone is espousing gloom and doom, as the recent July 6 article by Australasian Investment
Review indicates:
.
But
It's Not The End Of The World - The past few weeks have seen lots of
gloom surrounding the investment outlook. The return of the
sub-prime mortgage crisis in the US has led to renewed talk of a credit
crunch. There has been talk of a looming Great Depression after the
Bank for International Settlements annual report referred to parallels
between the current situation and the 1920s. Even the headline
best financial year for Australian shares since 1987 has a somewhat
negative undertone because we all know how 1987 ended. The AMP's
chief strategist, Dr Shane Oliver, believes we are now entering a more
risky phase in the cyclical bull market in shares, but it has further
to go. Recent developments do nothing to change this. The
crisis in US sub-prime loans has further to run and is worth keeping an
eye on. Ultimately though, while it will keep US growth subdued, we
don't believe that it will lead to a recession or credit crunch.
More broadly the sub-prime mortgage crisis is consistent with the
cyclical bull market in shares generally having entered a more volatile
and risky period. On this front a 10 to 15% correction some time
over the next six months would not be at all surprising, but still
within the context of a rising trend.
.
http://www.acnnewswire.net/press/en/37747/Australasian-Investment-Review.html
.
(Editor) I
have three words of advice for you: Diversify, Diversify and
Diversify. And most importantly, diversify outside of the US,
should you happen to live there and have all your investments tied up
domestically. For your liquid assets, meaning cash, considering
putting some of your assets into other currencies, which could include
bonds based in other currencies (but keep an eye out as interest rates
are destined to go up due to inflation and declining currency values,
so do not jump in just yet but rather watch the market - you will
continue to see interest rate rises as governments step in and raise
interest rates to defend their own currencies), and maybe even gold, or
other commodities. And with that said, do not have it lying
around for easy access (the last time there was a economic depression,
the US government confiscated everyone's private gold holdings, not to
say it would happen again - but then again, you never know). In
other words, buy bonds, buy gold or other investments, but safe keep
them elsewhere (safe from predatory confiscation).
.
Also
consider buying real estate - for cash, inside a country and economy
that does NOT have a credit problem, whereby the housing market is NOT
built upon a house of cards either (meaning cheap credit or no money
down mortgages). Many people have recently touted the
bargain basement real estate in US locations such as Michigan and Ohio,
but what about carrying costs? Which is to say, all well and good
to pick up a US$400,000 house at auction for US$135,000 but if you
calculate the fact that local real estate taxes might be US$5,000 per
annum (or some such figure, probably higher) then you have another kind
of problem (namely the local government chasing you because you happen
to be the one guy on the block, literally, who is still solvent).
Incredibly enough, if you purchase a residence in the Dominican
Republic for US$150,000 or less (and believe me, there are many nice
properties in this price range) - in such a case, you have NO annual
real estate taxes - none, nada, zilch. Why? Because this is
an incentive the Dominican government has put in place to assist middle
class home owners. So, the point is, reviewing real estate
options can go beyond simple bargains, and local taxes on the property
may be a concern to be considered also. Case in point, see the
following news items below.
.
.
FOR
JUNE, HOME SALES GO THROUGH THE CELLAR
Higher
rates, overbuilding cause market to plunge 22%
By
Jeff Swiatek - July 13, 2007
.
Home
sales plunged in the Indianapolis area in June, falling 22 percent from
their year-ago level, and real estate professionals fear a wave of
property-tax increases will keep the market from recovering its vigor
anytime soon. Widespread jumps this summer in property tax rates,
prompted by state-mandated reassessments of property values, now
threaten to thwart any effort by the market to bounce back.
Property tax rates in Marion County have jumped an average of 34
percent. Surrounding counties have seen less drastic jumps.
.
http://www.indystar.com/
.
.
ELKHART COUNTY HOMEONWNERS HIT HARD BY
PROPERTY TAX INCREASE - July 11, 2007
.
Many
homeowners are opening their tax bills and are finding an unwelcome
surprise. On average, property
taxes have gone up about 34 percent. And people living in Elkhart
County have been hit particularly hard. State and local leaders
are looking to the legislature for an answer to the problem. And
while they may not all agree on how to fix it, they all do agree that a
solution is urgent. Jeannine Alick has lived in Elkhart County
for the past 39 years. And although she says she knew her
property taxes would increase, she never expected it to be this
much. Jeannine Alick says, It's the same house since 1992 and
nothing else has been done. And the taxes have doubled, more than
doubled. And that's not right. And Jeannine says the problem
isn't only the amount of her property taxes, it's also the appraisal of
her home. Jeannine Alick says, I don't think my house would in
this area for what they appraised it for. And others who also
live in Elkhart County feel the same way. Bill Rohman worries
that the taxes could get too high for him to even pay. Bill
Rohman says, I've thought very seriously, as I've watched taxes
go up and services in the state stagnate, I've thought very seriously
of moving. Across the street, Kathy Weaver is also
concerned. Kathy Weaver says, It worries me because each year
it's increased and when does it end?
.
http://www.fox28.com/News/index.php?ID=21528
.
EDITORS NOTES:
The Camden Chronicle (Tennessee) reports on July 11, 2007: County
residents can expect to spend a little extra money on property taxes
this year. The Benton County Budget Committee approved the 2007-2008
budget Monday night, which includes a 38-cent hike in local property
taxes, from $2.75 to $3.13. The budget and property tax increase will
have to go before the full commission in August for final
approval. (Editor):
That represents about a 14 percent increase in real estate property
taxes for residents of Benton County, Tennessee. From Indiana to
Georgia to a whole list of other municipalities - taxes are going up,
and in some cases by well over 30 Percent. And of course to add
insult to injury, as we reported in past newsletter issues, school
districts across the country are laying off teachers, not to mention in
some cases, other government employees (such as police) as well.
Of course, not to sound like a broken record, but in countries such as
the Dominican Republic, middle class homeowners pay ZERO annual real
estate taxes (for homes valued at less than US$150K or its
equivalent in the local currency) and to the best of my knowledge, no
one in the municipal government is being laid off. So, you tell
me - which of these two sounds like an insolvent Third World Nation,
and which one does not? I have commented many times before,
politicians may lie but statistics or the facts do not.
.
.
UNBELIEVABLE
GROWTH IS JUST BEGINNING
By
Chuck Saletta - July 12, 2007
.
In
the past, the United States was a worldwide engine of prosperity and
economic stability. Many of the global benefits from its economic power
came from off-shoring activities. Chinese manufacturing, Taiwanese
electronics, Indian software development, and Costa Rican business
services provided the initial fuel and capital for the current global
boom. All those first-generation activities had one thing in
common: They were all based on goods and services destined for use in
the United States. The old joke about the global economy was, When the
United States sneezes, the rest of the world catches cold. Sure
enough, if the U.S. faced a recession, it knocked much of the rest of
the world for a complete loop. So who gets the credit for
off-shoring's success? Much of it boils down to simple economics. The
companies who have moved production abroad have been able to attract
high-quality employees for a fraction of the price of hiring Americans.
While these wages seem low by American standards, they tend to be good
for that specific country. THE NEXT BOOM: The act of paying
relatively decent wages for the cost of living has spurred a new
phenomenon in many formerly impoverished countries: a middle class.
While that may not sound like a big deal to the average American, it is
a huge deal for the rest of the world. Taken as a whole, a solid
middle class absolutely dwarfs the spending power of anyone else. While
the ultra-rich may have a whole bunch of money, there are only so many
of them around. To have a strong local economy, instead of simply an
export-driven one, a country needs a solid middle class.
.
http://www.fool.com/investing/international/2007/07/12/
.
EDITORS NOTES:
So, we hear that the middle-class is growing in the rest of the world
and specifically in supposedly Third Word under-developed countries
(such as China, India, Indonesia, Costa Rica, The Dominican Republic,
Brazil, and so on) - while at the same time, the middle-class in the
United States is getting wiped out. An interesting trend - no?
.
.
WHITE-COLLAR
ASIA FEELS OUTSOURCING PINCH
By
David L. Llorito, Asia Times - July 4, 2007
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SAN
JOSE, California, and MANILA, Philippines - The global outsourcing
trend, which first made political waves about job losses in the United
States, is now starting to cause similar ripples across
high-wage-earning Asian countries. Corporate America's drive to
cut costs by shipping service-related jobs to lower-cost developing
countries has raised hackles with labor groups, exacerbated structural
wage-price discrepancies and caused unprecedented economic and
financial insecurity in the US. Now, many white-collar Asian workers
are starting to feel a similar pinch. Largely because of
corporate outsourcing, the average American worker now has a one-in-six
chance of seeing his or her income drop by 50% or more from one year to
the next, according to some US economists estimates. In 2005, 90% of US
taxpayers saw a year-on-year real decline in their wages. Since 2000,
the US economy has lost about 1 million service-industry jobs overseas,
the same economists estimate. As globalization spreads, economic
theories about wage-price equalization - where through greater economic
integration rich countries' wages fall and poor countries' rise - are
fast becoming a reality. First witnessed in the relocation of
manufacturing jobs, now a growing range of white-collar service jobs
are being exported from rich to poor nations, often with the ease of a
computer keystroke.
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That
includes sectors that only recently seemed immune to what started as a
call-center trend, including accounting, software development, news
reporting and editing, legal services, architecture and engineering
design, insurance claims, radiology, financial analysis, and
Hollywood-style animation. To be sure, economic statistics show
that outsourcing pushes developed-market labor up the value-added
ladder and the greater efficiencies (and profits) outsourcing achieves
for corporations simultaneously helps create higher-paying jobs in new,
often unforeseen, business sectors. However, recent economic statistics
also show that not all white-collar workers who lose their jobs are so
easily reabsorbed into the national workforce. Ron Hira, an
engineer and assistant professor at the New York-based Rochester
Institute of Technology, contends that most US workers who lose their
jobs to outsourcing end up worse off. He says that as many as one in
three remains jobless indefinitely and that three in five are forced to
take substantial pay cuts to land another job.
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http://www.atimes.com/atimes/Asian_Economy/IG04Dk01.html
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EDITORS NOTES:
As many as one in three remains jobless indefinitely, so says an
engineer and assistant professor at the New York-based Rochester
Institute of Technology. Let's see, that's about 33 percent -
no? The unemployment rate during the Great Depression of the
1930s in the US was about 25 percent, so I guess it sounds about right.
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GETTING
TRADE RIGHT
By
Carl Pope - July 2, 2007
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There
are few issues on which mainstream U.S. media coverage is less adequate
than trade. The standard framing for reporting on trade is that U.S.
environmental and labor organizations are trying to impose U.S.
standards on third-world countries (which don't feel they can afford
them), and that the U.S. public faces a hard choice -- retreat into
protectionism, which denies these countries a chance to develop, or
lower our own standards. Occasionally, however, a different
underlying dynamic pops through the surface as it did this week. China
announced a major revision of its labor laws, a change that, if
enforced, would eliminate many of the worst workplace abuses in the
Chinese system. Among other changes, it would require employers to
provide written contracts for their workers, restrict the use of
temporary laborers, and make it harder to lay off employees.
There are some serious questions about enforcement here -- but passage
of this law leaves no doubt that the government of China favors better
conditions and wages for its workers. And one would think this would be
a cause for common celebration, especially among those who have sadly
told us that we simply cannot impose our standards on the world, and
that if we want to compete with China, we will need to lower our
expectations.
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But
what is surprising is that the advocates of free trade, far from
welcoming this Chinese effort to harmonize American and Chinese
standards, have been viciously lobbying China not to enact these laws
and saying that, if China raises its standards, they will move their
factories elsewhere. Companies like Wal-Mart, Microsoft, and AT&T,
acting through the American Chamber of Commerce in Shanghai and the
U.S.-China Business Council, have been working for months to block this
new law. So the very voices that in the U.S say, we can't have
high labor and environmental standards because we must compete with
China's lower rules are also working to prevent the Chinese from
raising their own standards. If there is any doubt that the real story
is that these companies want to use trade as tool to lower
environmental standards and worker protections, this incident should
put that doubt to rest. It is not the reality of globalization that is
forcing environmental and labor standards down -- globalization is
simply the pretext for the race to the bottom.
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http://www.huffingtonpost.com/carl-pope/getting-trade-right_b_54642.html
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EDITORS NOTES:
With regards to the push for a new and improved labor law in China, the
article says: Companies like Wal-Mart, Microsoft, and AT&T, acting
through the American Chamber of
Commerce in Shanghai and the U.S.-China Business Council, have
been working for months to BLOCK this
new law. Imagine that? Wal-Mart, and all the rest, do NOT
want to see improved working conditions or higher wages in China
(despite being companies born and bred in the land of the free, home of
transparency and human rights, etcetera and so on). In fact these
companies have threatened to leave China if these new labor laws are
passed. Where are they going to go? The Darfur region of
Sudan? I suppose Sudan remains to be one of the few places around
whereby employees will work for food. What a world we have
created - eh? Of course, getting back once again to the idea of
IMPORTING cheap labor into the OECD and the United States (rather than
moving the factory abroad): According to the latest edition of
the OECD's annual report on
migration movements and policies titled - International Migration Outlook 2007,
there are indications that the recent immigrant inflow has been more
oriented towards low-skilled occupations than in the past. Over half of the new
immigrants were in such occupations, compared to about one third
in the mid-1990s. No kidding? You mean to say that the high
tax, welfare countries are bringing in low or unskilled labor from
developing nations? In our last newsletter we highlighted
how a school district in UTAH is bringing in school teachers from
Mexico (supposedly, because the school district says that they cannot
find locally qualified teachers), which means many white-color jobs are
just as at risk. Regardless, we talked about this concept of TRADING PLACES
many times over the recent years. Which is to say, the influx of
new immigrants (both illegal and legal) primarily providing low skilled
or unskilled cheap labor, WHILE at the same time - the fairly solvent
and well educated are taking off (expatriating, or otherwise simply
getting the heck out of the high tax, welfare countries) to more
affordable countries. The result: Trading Places, although not an
even one for one exchange economically speaking (which only means
expect even higher taxes and lower social welfare benefits as the net
effect is lower government tax revenues).
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239,100
JOBS GONE FOR GOOD
July
2, 2007 - By Richard Brennan, Ottawa Bureau
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OTTAWA,
Canada - An average of 190 good-paying manufacturing jobs are
disappearing in Canada every day, most of them in Ontario. That's
been the case since 2004 when Canada hit its peak for employment in the
manufacturing sector. The high dollar, cheap imports, Canada-U.S.
border slowdowns and the fear of increased interest rates are proving
to be a deadly combination. In the manufacturing sector it is
very serious because we are finding a perfect storm, Perrin Beatty,
president and CEO of the Canadian Manufacturers and Exporters, said in
an interview. From the beginning of 2004 until the end of May,
Canada has lost 239,100 manufacturing jobs or almost 192 every day,
according to Statistics Canada. Of those job losses, 148,000 were in
Ontario.
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Last
week, Goodyear announced that its Collingwood hose manufacturing plant
is closing, throwing 165 people out of work. It is the second
devastating blow to the Georgian Bay community where Alcoa Wheel
Products recently announced it is shutting down its plant, which
employs 330 people. Automakers are among the hardest hit. CAW
president Buzz Hargrove said the thousands of jobs being lost in the
auto sector are gone for good and he holds out no hope that the
Conservative government will take any steps to reverse the trend of
offshore vehicles overwhelming the Canadian market. As of August, the
Canadian Blue Bird Coach facility on the outskirts of Brantford, Ont.,
is closing its doors after 49 years and moving to Fort Valley, Ga. All
130 employees, who make $20 an hour, plus benefits, will lose their
jobs. The plant has been making school buses since 1958. And in
Smith Falls, Ont., residents and town officials are still reeling from
the impending loss one of its major employers and tourist
attractions. The closing of Hershey's chocolate factory by 2009
will result in a loss of some 500 jobs. The Chocolate Shoppe attached
to the Hershey factory drew 425,000 visitors to the town in 2005.
Federal Finance Minister Jim Flaherty said while it may be a hard pill
to swallow, it is a trend across the industrialized world.
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http://www.thestar.com/News/article/231591
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EDITORS NOTES:
When the Hershey's chocolate factory has to shut down, I think that
tells you something.
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READERS
WRITE IN:
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Dear
John, I have been following your newsletter and info on the DR for a
few years now I am finally able to visit this summer. However I
am really confused about the cost-of-living. I know housing
costs, but everyday living, food, normal restaurants, utilities etc. is
harder for me to find out. I don't need a very detailed analysis,
if you could tell me for instance, the relationship of coastal DR
living costs, say around Puerto Plata would be to California living
costs, say in percentages for comparable lifestyles, that would
be enough. We live a simple, middle-class life, a family of
three, no servants, two car and a modest house. If you could get
us the same information for Panamá as well that would be very
helpful as we are planning a joint trip in a week or so. Thank
you very much.
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EDITORS REPLY:
A very interesting and very common question as well. First off,
let us examine a few different topics (and why indeed so many
middle-class and well off Americans and Europeans are
relocating). To begin with, we have made the comment that real
estate is probably about 30 percent LESS expensive in the Dominican
Republic than the other Caribbean nations in general. With that
said, I have given you above some examples of new construction on the
market at the moment that most Americans or Europeans would find to be
very acceptable. Of course the truth is, it all depends upon what
you want. Obviously if you wish to live in beach front or resort
area, expect to pay more, much more. Although, even so, we talked
about a gentleman in the Playa Bavaro -Punta Cana area that is offering
2 bedroom villas (not on the beach, but rather about two blocks away)
for about US$130,000. In metropolitan areas such as Santiago or
Santo Domingo, you can find very good housing options in the US$125,000
to US$150,000 range, and of course you can find higher end upscale
properties going up to perhaps US$300,000 or US$400,000 as well (and a
very wide variety between US$125,000 and US$300,000 also).
Indeed, most of our clients buy homes for cash, and we would suggest
you get out of debt altogether if you can (own your own home, own your
own car, and just have basic monthly utility bills to worry
about). What we see now happening as a trend is, profit taking
from very overpriced real estate in the US and parts of Europe (Spain
and UK most notably) whereby people do have enough equity or profit to
pay cash for a property in the Dominican Republic (with no
mortgage). However, the initial cost is only part of the issue,
as I think annual real estate taxes are another important
concern. Obviously we know that property taxes are going through
the roof in many parts of the US, making middle class home ownership in
the US untenable for many people at the moment. Indeed, a formula
touted in Texas by real estate people is US$500 per month as a general
calculation for property taxes and insurance. So, there alone we
are talking about US$6,000 annually for a US$150,000 home in
Texas. That same home in the
Dominican Republic has ZERO annual property tax liabilities.
By simply moving, you are saving possibly US$6,000 per year alone, just
on your home.
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In
terms of education costs, another very important concern to our clients
that have children, again, the Dominican Republic is a bargain.
Private elementary and high schools will cost anywhere from (the
equivalent of in Pesos) about US$1,000 per year up to US$3,000 per year
for the more prestigious higher end schools. The average for a
private bi-lingual school (where students are taught in English with US
based curriculum) is probably about US$2,000 per year (maybe a bit less
as I am rounding up). University costs, for some the very best
private schools that often have exchange or affiliate programs with
some of the schools in Europe will run in the US$1,000 to US$1,500
range (per semester) at the moment. And just so you know, I am talking
about Medical School and Law School - not community college.
There are some excellent culinary schools and art and design schools as
well, just as some information, in the same lower end cost range.
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Now,
let us talk about what many people would consider to be basic cost of
living issues (food shopping, telephone bill, electricity, cable
television, internet and so on). While you will hear many
Dominicans complain about high costs for such things in the Dominican
Republic, the truth of the matter is, such costs are really reasonable
when compared to related costs in the US or Europe. However, the
problem of course is that salaries in the Dominican Republic are no
where near what they are in the US or Europe, making such costs often
difficult when average salaries are factored in. But, with that
said, you as a foreigner, with perhaps a stable and independent income
of about US$2,000 per month (or more) from investments, pensions, etc.
will find that you can do well living in the country. Which is to
say, if you have about US$2,000 or RD$65,000 Pesos coming in each
month, your average expenses will probably be the following (divide the
cost in Pesos by 33 to get the equivalent in USD): Telephone
Services - less than RD$2,500 per month with unlimited local calls, DSL
or Cable Modem Internet Service - US$2,500 per month, 100 Channel Cable
Television (about 15 stations in English, including HBO, CNN, Cinemax,
NBC, ABC, Fox Sports, etc.) - RD$1,400 per month, Electricity (expect
to pay about US 25 cents per Kilowatt or 8 Pesos per Kilowatt in higher
end areas, and half that in lower end neighborhoods) leaving you with
an average monthly bill of about US$8,000 Pesos or in USD probably
anywhere from US$200 to US$300 all depending if you run
air-conditioning quite a bit, etc. (I know of some clients that have a
monthly electricity bill less than US$150 per month, but they do not
use A/C nor have a large number of heavy duty appliances, such as an
electric clothes dryer either). Food shopping costs will vary all
depending if you buy a large amount of higher priced gourmet or
imported items, as opposed to sticking with local produce and
products. There is not much you cannot buy in the Dominican
Republic these days, from Hagen-Daz to imported Spaghetti or Acorn
Squash to Hellmann's Mayonnaise to Paul Newman's spaghetti sauce to
Butterball Turkey to French Butter to California or European wines ,
etc. and ad infinitum - but you will pay more for it because it is
imported. If you stick with local meat and produce, which is of
very good quality, then of course your food bill will be lower.
Moving onto to gasoline, I really think it is a mute point because I
expect gas to hit US$8 per gallon or more no matter where you live
(right now it is about US$5 per gallon in the DR, and is in the US$7
per gallon range in many parts of Europe, so Americans have been
spoiled in the past with cheaper gas, but those days are coming to a
close). What else? Obviously labor costs are lower, so if
you want a live in maid (that cooks and does do windows) or a nanny for
your young children, expect to pay about US$200 per month (or in that
general area).
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You
asked about Panama, and the only thing I will say in general about ALL
countries that use the US Dollar as their national currency is - hang
onto your hats. Prices have been going up in Panama and Ecuador
(two countries that use the USD) recently, and especially so in
Ecuador. Why? Because the US Dollar has been devaluing like
a sinking rock as the currency markets have awoken to the various
financial problems afflicting the US plus of course the US Federal
Reserve running the printing presses and overextending the money supply
by anywhere from 7 to 10 percent in recent years of course has not
helped. So, in general, while I very like and have confidence in
Panama (and of course we have an affiliated office in Panama assisting
clients with incorporations, residency and real estate there as well) I
also think that living in a USD based country or economy is not going
to be very pleasant going forward. Now with that said, American
and Europeans will find Ecuador to be very inexpensive and Panama
reasonable as well, in terms of cost of living. But, inflation or
devaluation of the US Dollar is starting to have an effect, so if you
want to live in one of these countries, consider carefully where your
assets are divested (in terms of other currencies, and of course
inflation hedged assets, such as real estate and so on). However,
this is not a completely negative ending, as you can live a less
expensive and better life outside of the US or EU when you factor many
of these issues into the calculation (taxes, real estate, cost of
education for your children, fees at the golf course, etc.).
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