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With the calendar winding down, the hours get hardest when Andy Erickson and his wife, Andrea, are forced to take out their checkbook and do the math.

“We see the finish line in December before we have to dive into personal savings,” says the unemployed 39-year-old father of three. “It can turn into a tense talk between us for a couple of hours.”

For the last 15 years, Erickson had steady work as an IT consultant, most recently at Lucrum in Cincinnati, Ohio. But like a lot of people, he became yet another statistic when his company laid him off–on Halloween, no less–because of the slumping economy.

With belt-tightening now the order of the day, the IT industry so far has lost more than 140,000 jobs this year, according to Challenger Gray & Christmas. That’s more than the total for all of 2007–and does not even include the nearly 20,000 people who have received pink slips since the start of the fourth quarter.

Old IT hands who prefer to see the glass as half full can point out that the information technology business has generally fared better than other sectors of the economy. Unlike 2001 and 2002, when the economy was buffeted by the twin blows caused by the September 11 terrorist attacks and the dot-com bust, this time around high tech is not suffering drastic declines–at least not yet.

In fact, Forrester recently revised its 2008 technology spending growth prediction to 5.4 percent, up from 3.4 percent. The slowdown that Forrester expected would kill tech spending in the first half never came. Of course, this is just a snapshot in time. The effects of a mortgage crisis that turned into a financial crisis which, in turn, transmogrified into a global economic crisis are still playing out.

All of that has turned life upside down for families like the Ericksons.

“Most days we try not think about it,” he said, adding that “it can be stressful at times.”

That stress extends across the IT world spectrum, ranging from networking to the telecommunications sector to computer manufacturing. Recent layoffs announced by Sun Microsystems, Applied Materials, Adobe Systems, and National Semiconductor only add to the worry about what waits over the horizon.

Call it an exercise in groupthink or simply a survival mode reflex, but hunkering down certainly appears to be the common theme. While the causes of this recession may be different, IT professionals are no strangers to uncertainty and they remember the drill. In practice, this translates into budget cuts and freezes on travel, hiring, and general spending. It also involves delayed implementation of previously planned projects.

“We’re still in a state of overreaction. It probably will stay that way for another couple months,” said Chad Moore, founder and president of Xonicwave, an IT consultancy in San Diego. He does not expect a thaw until the January-to-March time frame at the earliest. Moore says that his clients are grappling with a big unknown and that everybody’s gotten too scared to make a move.

“Probably a good 25 percent (of our clients) are still not accepting of things,” he said. “Another 50 percent are simply shell-shocked, asking what the hell to do and how to deal with it. The other 25 percent is slowly migrating to the fact that not only do we have to weather the storm, but we have to come out of it with both guns blazing.”

There’s the rub. Until there’s a change in the prevailing psychology, IT unemployment rates will climb. As Moore describes it, the reaction to the recent financial meltdown still interferes with the ability of companies to craft a post-crash IT strategy.

“You have to make payroll, but at the end of the day you have to ask yourselves ‘how are you separating yourselves from the competition?’” he said.

It’s not an academic question either. Pressured by the recession, crisis management is the order of the day. Companies are being forced to re-evaluate how best to evolve into leaner enterprises that are better fit for survival.

“There’s a lot of trepidation about what the future might hold,” says Warren Arbogast, an IT consultant who specializes in working with higher education. “In conversations, the word ‘terrified’ comes up a lot on a personal level.”

“People are trying to avoid (cutting) things that are core to their business and that might directly affect customers or sales,” he said. “They’re also trying not to touch security. Other than that, it’s fair game.”

One bright spot amid the prevailing gloom is that organizations are more open to new ideas and new ways of doing things, according to Arbogast, who runs Boulder Management Group, in Boulder, Colo.

“When times are tight, I’m seeing business actually uptick…with people saying that now might be the right time to have someone come in and help them envision a different future,” he said.

Contract work: Take what you can get?

Until then, even IT professionals with extensive resumes are pressed to find replacement jobs that are commensurate with their old positions. Take Jim Martin, who was laid off by Woven Systems in September.

The 39-year-old network architect and systems engineer had been working on the design of 10-Gigabit Ethernet switching technology for server consolidation and storage networking. The company’s B round of financing started to run low just as the venture capital market dried up. Then Intel and AMD decided not to include 10-Gigabit Ethernet on their next generation of server motherboards. It was a perfect storm and it forced Woven to hand out pink slips.

Martin’s family wants him to return to the East Coast, but he prefers to remain in the San Francisco Bay Area, where he has lived for the last 15 years. He’s giving it a shot, but even a long and accomplished resume is no longer a guarantee of finding a job–not at this point in the business cycle.

“I’ve had a lot of people interested,” he said. “But what I’ve found is that they’re taking me to their companies and it’s, ‘Hey, this is a great person. He should come join us.’ But then their job openings freeze while everybody sort of panics at this stage of the game.”

On the flip side, many companies have budgeted projects that need to get completed. And if full-timers are losing their jobs, that opens the door for part-timers like Martin, who has made do by signing on for contract work.

“It’s not very stimulating work, but money is money when times are tough,” he says. “What worries me is that, while I’m lucky enough to have a pretty strong background, the people who are younger and not quite as experienced won’t have the same opportunity.”

Needless to say, the economic crisis is testing businesses and individuals like no time since the 1930s. Fear feeds on fear because nobody has any idea when the miasma will lift. The pressure cooker atmosphere was punctuated by a Silicon Valley tragedy last month, when an engineer fired by the semiconductor firm Siport returned to the company’s Santa Clara, Calif., offices with a weapon and shot three colleagues to death.

That was the exception. If the can-do history of the IT industry teaches one lesson to people currently getting the short end of the stick, it’s that the bad times never last forever.

“It’s cyclical,” says Andy Erickson. “It’s just a matter of waiting it out. I just don’t have whole lot of faith in our government, but maybe we’ll come out of this stronger as a country.”

In the meantime, Erickson says, he and his family continue to hope for the best as they prepare for the worst.

“The kids know we just can’t go out and buy gum or whatever,” he says, “They’ll just have to suck it up and be part of the team.”

Joel Guinto
INQUIRER.net

MANILA, Philippines — President Gloria Macapagal-Arroyo has unveiled a “payback package” for overseas Filipino workers (OFW) who have been retrenched as a result of the global financial crisis, even as she belittled the layoffs as a “trickle” of the entire OFW population.

On Friday, Arroyo distributed PhilHealth insurance, certificates for skills training, and referral letters for alternative employment to 102 of more than 1,000 recently laid off OFWs from Taiwan, at the Rizal Hall in Malacañang.

“We will implement programs to show our gratitude for our expatriate Filipino workers, who are forced to return home because the country where they are working in is hit by the economic crisis. The DoLE [Department of Labor and Employment] and the OWWA [Overseas Workers Welfare Administration] will lead the government’s payback programs for expatriate Filipinos,” she said.

“Even if it is only a trickle of our workforce that is coming back, the government will not sit idly and do nothing for our modern day heroes in this time of great economic uncertainty. We assure you of full and unequivocal support,” she said.

The “payback package” includes:

• Setting up a P250-million livelihood support fund, which Arroyo had announced in October;
• Cutting red tape so that OFWs could access the P250-million fund easily;
• Identifying business opportunities;
• Identifying employment opportunities here and abroad;
• Skills training to avail of in-demand jobs in other parts of the world;
• Setting up of DoLE and OWWA desks in every province to match OFWs’ skills with available jobs;
• Setting up of an online resource for job vacancies, and;
• Holding a “marketing blitz,” through the OWWA, for OFWs.

Christine Avendaño
Philippine Daily Inquirer

MANILA, Philippines—Saying 2009 could be a “perilous” year, Senator Edgardo Angara said on Wednesday that close to 60,000 Filipinos could lose their jobs abroad, mostly from the United States, due to the global recession.

“If not handled correctly, the financial crisis we see today will become tomorrow’s human crisis,” Angara said in his sponsorship speech for the proposed 2009 appropriations of several government agencies at the resumption of the Senate marathon hearings for the P1.4 trillion national budget for 2009.

Angara said that 590,000 of the 5.1 million overseas Filipino workers were “at risk of losing their jobs.”

These include 129,000 in the US under temporary working visas, particularly those in hotels, casinos as well as agricultural workers; 48,000 seafarers in cruise ships; 268,000 factory workers in South Korea, Taiwan and Macau; 130,000 household service workers in Singapore, Macau and Hong Kong, according to the senator, chair of the Senate finance committee.

“Of this number, 50,000 to 100,00 are losing their jobs now,” he said.

Angara said the shifting of the government’s spending priorities in the proposed 2009 budget “sends a clear signal that we are girding for a coming storm.”

The government is targeting its 2009 spending at basic infrastructure, education and health, housing and environment.

The best way to create jobs and stimulate consumption, especially in rural areas, would be through infrastructure spending, Angara said.

He said P177 billion has been allocated for infrastructure projects for 2009, and P54 billion would be spent for direct labor.

Angara said 54,000 Filipinos would get jobs in 2009 for every P100,000-expenditure.

For these projects to start on time, Angara said the Department of Budget and Management gave its commitment to a timely bidding.

“If we fail to do this now, the outcome is stark and simple: we will fall just like Iceland, just like our neighbors in the Asian region,” Angara said. Iceland declared bankruptcy due to the global financial crisis.

Erica Ogg
cnet News

Analysts are readjusting their expectations for the PC industry next year, and it’s not looking good.

On Wednesday, IDC released an updated forecast for the number of PCs expected to be shipped next year. In 2009, PC shipments will rise just 3.8 percent worldwide, according to the report.

That’s a drastic cut from the 13.7 percent growth IDC had predicted for 2009 earlier this year. The hardest hit areas will be the emerging PC markets of Latin America, Central Europe, the Middle East, and Africa due to falling commodity prices and the worldwide credit crunch.

But the U.S. PC market is expected to fare even worse. Next year will bring a decline in shipments of PCs by 3 percent compared to this year. However, IDC says that there will be “low single-digit” increases in the years following.

The key factors affecting PC shipments are the rate of portable PC adoption, falling prices, and the PC upgrade cycle.

“Low-cost mini notebooks will help volume, but pressure margins and revenues,” said Lore Loverde, director of IDC’s Worldwide Quarterly PC Tracker. “Consumer and commercial segments will be much more conservative in their purchases over the coming year or two, and while low prices will remain essential, they will not drive volumes as they did in the past few years.”

Alexander Villafania
INQUIRER.net

MANDALUYONG CITY, Philippines – Philippine-based outsourcing giants are now feeling effects of the US recession with some companies seeing a slowdown in demand for services, particularly on medical transcription and animation, industry executives said.

But some are reporting a surge in demand in contact center services, back office operations, software development and gaming.

Nevertheless, the local outsourcing firms are approaching 2009 with “cautious optimism,” according to Philippine Software Industry Association (PSIA) President Beng Coronel.

Animation Council of the Philippines (ACPI) President Grace Dimaranan said some of their projects, which are mostly animation series, were postponed or on hold amid the US recession.

Similarly, Medical Transcription Industry Association of the Philippines (MTIAPI) President Myla Reyes said some of their services, mostly serving the US market, have slowed down.

The Philippine outsourcing industry is composed of contact center operators, business process outsourcing, animation, game development and transcription.

The Philippine outsourcing industry is expecting a 35 percent overall growth that is worth $12 billion to $13 billion by 2010.

But given the US recession, Business Process Association of the Philippines (BPAP) CEO Oscar Sañez said they might adjust these targets but assured that growth would remain in the double digits.

“We are not distracted by the US recession. Indeed there will be some effects but the recession situation is also an opportunity. With companies trying to streamline their operations outsourcing is a viable and cost effective solution,” Sañez said.

There are, however, concerns on US President-elect Barack Obama’s pronouncement to provide tax cuts for companies who will keep operations in the US.

Still, Philippine outsourcers are not threatened by Obama’s statements, saying there are no details yet as to how these tax cuts will be implemented.

Philippine contact centers, who are servicing mostly US clients, are still optimistic.

Contact Center Association of the Philippines (CCAP) Benedict Hernandez said tax cuts will not deter US companies from outsourcing if the need arises. Some companies would have to look into the viability of keeping operations in the US or having it outsourced to other countries.

“We’re at the forefront of providing the best solutions and we’re not afraid that US policies would affect services here,” Hernandez said.

Another concern of Philippine outsourcers is human resource or the lack of skilled workers ready for hiring. The rate of hiring is still low due to the specific requirements of the outsourcing industries.

The software industry reported that it is in need for 75,000 workers by 2010 but has only 21,000 so far. The transcription industry is in need of 32,000 but it only has 10,000 people hired. Animation, on the other end, is in need of 25,000 people but has 10,000 hired.

The contact center business, the biggest outsourcing industry, has 220,000 employees but is still in need of 350,000 people. The relatively new industry, game development, has about 300 to 500 people but also hopes to grow to 1,000 employees.

MTIAPI’s Reyes said English speaking skills remain a problem among applicants in the outsourcing business. Thus she said that fundamental education should be further developed if human resource demand is to be met.

The PSIA, CCAP and the MTIAPI are now working with the Technical Education and Skills Development Administration (TESDA) and the Commission on Higher Education (CHED) to integrate specific curriculums in colleges and universities.

Meanwhile, the Game Development Association of the Philippines (GDAP) and ACPI has been conducting school tours to promote creative and artistic development among students.

Sañez said that while the US is still the main target of the local outsourcing industry, the potential of providing services in Europe and some Asian countries is enticing some companies to build new clienteles outside the US.

The PSIA is already looking at Japan. GDAP has clients from Australia, Germany and France. MTIAPI is expanding to Canada and New Zealand.

Meanwhile, ACPI has clients in Italy France, the United Kingdom and New Zealand.

Sañez said that the outsourcing industry has to expand its product portfolio and its clientele beyond the US to partly augment the possible effects of the US recession.

“There will be challenges and requirements could be slightly different. This is an industry that is working very hard to achieve its goals,” Sañez said.

William French
Agence France-Presse

GENEVA, Switzerland — Illegal immigration is likely to rise as the economic crisis continues and governments must do more to effectively manage the flow of labor, the International Organization for Migration (IOM) said Tuesday.

“In times of financial crisis, a growth in irregular migration is obviously a significant possibility,” said Ryszard Cholewinski, co-editor of the IOM’s World Migration Report 2008.

By its very nature, illegal immigration is almost impossible to measure but the best estimates are that between 10-15 percent of the world’s roughly 200 million migrants are “irregular,” he told journalists.

Tens of thousands of people are already fleeing poverty in the developing world in the hope of a better life in the West, often risking violence, extortion and even death at the hands of smugglers and traffickers.

For example, the UN refugee agency estimates that more than 38,000 people, often Somalis and Ethiopians, crossed the Gulf of Aden from Somalia to Yemen in the first ten months of 2008, while over 600 people have been reported dead or missing.

The onus is on developed countries to develop an effective immigration policy that matches labor supply and demand while not stoking resentment or xenophobia in the domestic population, said Gervais Appave, a fellow co-editor of the IOM report.

Europe is home to the highest number of migrants of all global regions at 70.6 million people, the IOM report said.

Migrants come to Europe for a variety of reasons including its relative wealth vis-a-vis its southern and eastern neighbors, large numbers of humanitarian refugees who arrived in the 1980s and 1990s, and the emergence of organized trafficking and smuggling networks, the report said.

“The role of growing demand for migrant workers to fill gaps in local labor markets is also widely acknowledged” as demographic trends push the average age of Europe’s population ever higher, the report said.

Some EU member states have recently taken a tough line on immigration and right-wing populist parties focusing on the issue have scored well in recent elections in countries such as Italy and Austria.

Italian Interior Minister Roberto Maroni called last month for a two-year moratorium on accepting foreign workers from outside the EU, saying it would protect current immigrants amid the world economic crisis.

“With the economic crisis, we are concerned about protecting the most fragile people, and therefore people from outside the union who could lose their jobs,” he said.

But Appave warned against such a policy, saying immigration should not be reduced to a matter of states “opening and closing doors.”

“We need to manage mobility effectively… we spend too much time opening doors and closing them. What we should do is to have an open door that is sometimes kept ajar and sometimes open more widely,” he told journalists.

“This should not be a situation where migrants are scapegoated… it should be an opportunity to educate the public about the contribution migrants make to the societies in which they live,” he added.

Rob Lever
Agence France-Presse

WASHINGTON, United States — The United States officially joined the ranks of the recession-hit economies, but debate is still raging on how long and how deep the downturn will be.

The Business Cycle Dating Committee of the National Bureau of Economic Research (NBER), the panel recognized as the official arbiter of business cycles, said it made the determination the recession began in December 2007.

Although a recession is generally defined as two consecutive quarters of declining activity, the panel has its own criteria for determining a downturn, including data on employment, income and industrial output.

Because of the lag time in officially declaring a recession, some analysts say the worst is generally over by the time the news becomes public.

But John Ogg, analyst at 24/7 Wall Street, said it may not be the case this time: “We still think more pain is on the way.”

That message was hammered home with a survey showing the US manufacturing sector sank to its lowest level of activity in November since 1982.

The Institute of Supply Management (ISM) said its manufacturing index slumped 2.7 points to 36.2 percent, far below the 50-percent level that separates expansion and contraction.

Analysts pointed out the overall economy will have trouble escaping deep recession with manufacturing so weak.

“The worsening credit crisis and deepening global slump have pushed the ISM index below the 41 figure that is consistent with past recessions,” said Sal Guatieri, economist at BMO Capital Markets.

“The fact that the index continues to decline points to more than your garden-variety downturn.”

Many analysts have been saying the recession has been raging for months.

“So far in 2008, employers have slashed 1.2 million jobs, and the bad news is expected to continue when we get employment data for November this Friday,” said Michael Fowlkes, analyst at Investor’s Observer.

“Recession fears have now become a reality, and the questions that remain are just how bad and for how long this recession will linger over us.”

Augustine Faucher at Moody’s Economy.com said his firm expects the downturn to last through the first half of 2009 and to be “the worst of the post-World War II era.”

“Even with a substantial stimulus package, unemployment is likely to peak close to 9.0 percent in early 2010,” he said.

According to official government data, the US economy contracted at a 0.2 percent pace in the fourth quarter of 2007 but grew 0.8 percent in the first quarter and 2.8 percent in the second quarter of 2008. It then contracted 0.5 percent in the third quarter, based on a provisional estimate.

But the gross domestic product (GDP) data may have been skewed by tax rebates that stimulated consumer spending, according to analysts.

A major factor in determining recession is employment, which has been declining since last December, the panel said. Other factors include monthly data on income, manufacturing and retail sales.

The NBER makes no forecast on how long a recession will last, but said that in the past they have run from six to 18 months. The panel said it has no definition of the term “depression.”

Federal Reserve chairman Ben Bernanke said meanwhile the current economic situation bears “no comparison” to the much deeper crisis of the 1930s Great Depression.

“I’ve written books about the Depression and been very interested in this since I was in graduate school, there’s no comparison,” Bernanke told an audience in Austin, Texas.

Bernanke said the situation in the 1930s represented “very difficult circumstances,” because “we didn’t have the social safety net that we have today.”

Brian Wesbury at First Trust Portfolios said there are signs the recession may end soon because of how it developed.

“This time around, the recession is not due to tight monetary policy, higher tax rates, or protectionism,” he said.

“It’s due to a sudden and sharp plunge in the velocity of money — what we have been calling ‘risk aversion hysteria’ — where the speed with which money moves its way through the economy slows down as both consumers and businesses decide they want to increase their cash holdings.”

Wesbury said indications that holiday shopping is better than expected “may be an early sign that the bearishness went way too far.”

Aurelio O. Angeles
Philippine Daily Inquirer

(Conclusion)

WHAT DOES it mean to the people of the United States when their economy’s current account has been on deficit not just for a year, but for 31 years?

Here are thoughts that will blow your mind.

Deficits and the American people
First, remember my statement earlier, “people make up the economy, and economics is all about people.”

The persistent current account deficit of the United States means that, on the average, Americans spend more than they earn, and they have been borrowing money from the rest of the world faster than they can earn and repay it.

The Americans–their families, government, institutions, businesses–have to work harder, earn more, be more competitive in their dealings with the rest of the world if they are to maintain their standard of living.

Or, they can live within their means.

Otherwise, their debts will catch up with them, bubbles will burst, people will default on their loans, and banks will run out of money to meet their own financial obligations.

Second, these persistent CAB can also mean the people of the United States are spending money on counterproductive projects.

Here is a good example: waging wars funded by borrowings.

If people do not provide the money for the country to go to war and its government fails to collect taxes to fund the war, there is only one way to go–the government has to borrow from the financial markets to fund these wars.

Believe it or not, with the persistent failure of the US economy to turn around its current account deficit, and of the US government to collect enough taxes to balance its budget, the wars in the last 18 years have been funded, and continue to be funded, by borrowings from the savings of the real economy within the United States and the rest of the world.

How can one repay a major financial obligation that does not pay for itself? How does one pay for a project that has become a bottomless pit of expenditures with no source of receipts?

In economics, nothing is free. In home economics, when you overcook, you burn the food.

The spectacular economic growth of the United States these past 31 years has been funded by borrowings.

Consider these figures from the IMF website, http://www.imf.org/external/pubs/ft/weo/ 2008/02/weodata/weoselgr.aspx.

The GDP of the USA has been rising from 1980 to the present: $2,789 B (in 1980), $5,803 B (1990), $9,817 B (2000) and $13,808 B (2007).

The per capita GDP of Americans is: $12,255 (in 1980), $23,208 (1990), $34,774 (2000) and $45,725 (2007).

The United States is reported to have the highest GDP and per capita GDP in the world. Right?

I tell you that expenditures for waging wars increase the nation’s GDP. People receiving income for waging wars necessarily raise the level of the nation’s per capita income.

But, because the economy is increasingly dependent on borrowing from international trade that it has no means of paying and because the government continues on its financial escapades without regard to being able to pay for them, the figures on GDP and Per Capita GDP may be truly growing as seen above, but such growth is now increasingly funded by domestic and foreign borrowings.

In such a case, the day of reckoning will come, as it does to a family which bought a grand mansion on credit without regard to the income to pay for the amortization.

Role of financial markets

Financial markets exist to do business.

It is the objective of business to look for customers, to earn money and to outdo the competition in terms of products, services, prices, distribution and frills.

So long as there are customers that buy, there will be markets that will sell. So long as business is good, there will be a growing chain of suppliers of capital that will support the industry from within and outside the economy.

If the market is free from government intervention, then the sky is the limit in offering products, services, pricing, distribution and frills.

Thus were born fixed income investments, stock markets and the “brilliant” idea of exotic derivatives, futures and options.

So, we demand: Let the government provide direction and guidelines and mandate it to intervene in the markets when necessary.

Now, why would we allow the government to interfere and provide directions in these markets when it cannot even balance its own budget for years!

People talk about recession now coming to the United States. Well, in truth, our debts have caught up with us at last.

It is the day of reckoning. It is collection time. It’s the hour for looking deep into ourselves.

Realities are simple. But our complex minds do not accept simplicity and look for reasons elsewhere.

Is there an end in sight?

Why do the financial markets continue to promote the growth of debt–or CAB deficits–in the US economy in spite of the obviousness of its inability to repay such debts from any future surplus?

First, the profit motive behind every debt paper provides the incentive. That’s free market for you. As President Bush is reported to have said: “Don’t disturb capitalism.”

Second, there is a lack of understanding among people on the impact of the chronic US CURRENT ACCOUNT DEFICIT on the world economies in general and on the financial markets in particular.

Till now, they are unable to connect these deficits with the failure of financial markets to recover in spite of massive aid.

Third, people in high places tend to equate economic prosperity with the performance of stock markets, commodities markets, futures and options markets.

If these markets are going through boom times, then there is economic growth and prosperity. If there is a bust, then the world must be in recession.

But the financial markets are just a mirror of what happens in the real economy.

Take care of the real economy, heed what the CAB has been saying for 31 years, and the financial markets will take care of themselves.

We may not grow as fast, but we will not have to kill ourselves growing.

The fourth reason for promoting debt and closing one’s eyes on the meaning of CURRENT ACCOUNT DEFICITS is hinged on the answer to this question: “Why does the US dollar appreciate in value even as the USA continues to be the center of the world’s financial crisis?”

You will read this answer from media–”The dollar remains the safest haven for the world’s currencies.” How foolish!

Why is there an increasing demand for the dollar in the various economies as the crisis engulfs the United States? Here is the first reason.

When in good times investors holding US dollars first invested funds in these economies, say the Philippines, they first converted their US dollar to peso. This brought the value of peso up in relation to the dollar. They then used the peso to engage in various forms of investments available in the Philippines.

Pinoys experienced this phenomenon when the value of the peso breached P40 to a dollar in the first quarter of 2008, after floating around P56 to a dollar in the third quarter of 2005.

Here lies the power of the volume of hot money flows.

Now with the crisis, these investors have been selling their Philippine investments in peso, converted the peso proceeds into dollars and have been repatriating their dollars to answer for their requirements in their home base.

These activities will result in a greater demand for the US dollar and the depreciation of the peso. It is the same everywhere, except in Japan where investors have to pay off their yen loans in yen.

What are some of these home-base requirements? They need to answer margin calls for their dollar investments; they need to pay their dollar loans and other obligations; they need to consolidate their dollar position.

Here is the second reason. Where is the financial center of the world? Where is the New York Stock Exchange, the New York Mercantile Exchange, the Chicago Mercantile Exchange, the Philadelphia SE, the Nasdaq? In the United States, of course!

To what currency must the peso, the dinar, the pound and ringgit be exchanged if people wish to transact business in these exchanges? The US dollar, of course!

Can we imagine the 2007 volume of equity shares traded in these exchanges? It is unbelievable but true–US$45.2 trillion! (Source: World Federation of Exchanges website, http://www.world-exchanges.org/WFE/home. asp?menu=436).

This is 3.3 times bigger than the GDP of the USA!

Here is the third reason.

What is the medium of exchange involving foreign trade transactions all over the world? What currency must a Taiwanese buy to trade with his relatives in China? The US dollar, of course. Which economy prints the US dollar? The US economy, of course.

People have no other choice in transacting international business. It is the way banks have been set up since after the Second World War, when the dollar was enthroned as king of foreign currencies.

So, it is foolish to say the value of the dollar is going up because “America, for all its problems, is still seen as the safest place to put one’s money.”

Current Account Deficit

and the US dollar

What has the universal use of the dollar as a means of exchange got to do with the growing debt of the US economy?

Take a look at the dollar bill and you will read that it is a legal tender for debts, public and private. Legally, they are liabilities of the Federal Reserve Banks and obligations of the US government.

Well, this explains why banks are tough on Argentina, Thailand and Iceland, but are patient and long suffering with the United States.

This also explains why the financial markets are adverse to the devaluation or depreciation of the US dollar.

And why is the dollar devaluation beneficial to the US economy?

It is a principal strategy for the USA to be competitive in the world market of real goods and services, to increase its net EXPORTS and turn around its CAB from negative to positive figures over time. Remember the Chinese yuan?

In short, the universal use of the dollar in finance, trade and exchange provides a massive challenge if the CURRENT ACCOUNT DEFICIT is to be turned around.

Truly a complex, interconnected world.

The leaders of the Group of 20 recently met in the United States. President Bush is reported to have offered the following list of solutions: bolstering accounting rules; setting up a central clearing house for credit default swaps; reinforcing rules for manipulation and fraud in trading of stocks and securities; enlarging the list of nations with voting power in the IMF and the World Bank.

And the Australian Prime Minister is said to have warned against rewarding executives of financial firms for high-risk investments and is said to have called this “dumb, wrong and bad.”

And more governments are providing billions of dollars to boost the liquidity of banks.

Good start. But the problem is larger than international finance, which is merely a reflection of the real economy.

The Group of 20 must address the roots of the 31-year-old international economics problem–the CURRENT ACCOUNT DEFICIT of the USA and its growing foreign debt.

The article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines. The author is an entrepreneur who wrote the books “The Peso Exchange Rate: Why Are We So Poor?” and “The Philippine Economy: Do Our Leaders Have A Clue?” Feedback at map@globelines.com.ph. For previous articles, please visit map.org.ph.

Cielito Habito
Philippine Daily Inquirer

THE THIRD QUARTER GDP growth figures are out, and the numbers are as everyone expected. The economy has slowed down in the face of the shocks from abroad, and what kept it from slowing down as much as most of our neighbors did was the deliberate pumping up of government spending to prop up demand.

The government fiscal data say it all: October spending was up 20 percent even as revenue was up by only 11 percent from last year. Thus, rather than move closer to the originally targeted balanced budget this year, the year-to-date government deficit is 56 percent over what it was last year, now standing at P62 billion. What this means is that the government has had to borrow more again this year, and while this buys us better growth than otherwise for now, it will catch up with us as a heavier debt service burden down the line, with all its attendant adverse implications that we have all seen and felt before.

Triple shocks
The external shocks we face come in three forms. First is the financial turmoil which has led to tighter access to credit by governments and firms, depressed the equity markets and led to adverse exchange rate movements in terms of both levels and greater volatility. Second is the recession in major economies led by the United States, Japan and Germany, and the economic slowdown almost everywhere else. This translates directly into reduced exports, tourism, foreign direct investments and remittance flows, along with tighter government fiscal pressures, as already manifested in our own government’s finances seen above.

Third, and not directly the offshoot of the financial meltdown but coincident with it, is the adverse relative price movements, particularly in traded goods. Many countries are now facing higher prices for their imports (particularly oil and food) but lower prices for their commodity exports–what economists call worsening terms of trade, which directly translates to lower real income, and ultimately, lower general welfare.

Prior practice
As implied above, with governments going into fire-fighting mode to cope with the external shocks, it is well worth considering what longer-term implications this crisis and the responses to it will have for people in both the present and future. In particular, what are the human and environmental costs of the financial meltdown to countries like ours caught in the contagion?

We in East Asia are no strangers to this situation; we had “practice” in 1997-98 with our own financial crisis. And from that experience, one may expect at least six manifestations of the human and environmental costs of the current difficulties. These are increased poverty, reduced social investment, damaged social capital, relaxed environmental standards, reduced environmental investments, and adverse migration movements.

Impacts and responses
Poverty rose region-wide with the Asian financial crisis, and it will again with the current one. This is because the economic slowdown or even recession in some economies (as in Singapore) directly translates into more joblessness. This has, in turn, led before and will lead again to higher school drop-outs as parents keep children out of school, either because they can no longer afford the cost, or because they need them to help earn the family living. It has and will again lead to higher incidence of malnutrition and illness.

We are also likely to again see substantial public spending cuts on social services and human development, meaning education, health and social welfare. Private provision of the same will likewise suffer due to higher costs. And a decline in social capital will be manifested in rising incidence of crime, domestic violence, child abuse and street children, along with breakdown in community cohesion and cooperation. Experience tells us that in difficult times, individuals and families become more self-centered and less altruistic.

Grow now, clean up later
Experience likewise shows that when times are hard, governments, firms and people become more short-sighted. Governments tend to relax environmental policies and standards and become lax in enforcing them, as their concern shifts to keeping businesses alive. In the need to cut costs, firms shelve or abandon planned investments in environmentally sound technologies, and even stop operating environment control facilities already in place. There is also heightened pressure on environmentally sensitive exports (like logs and minerals) in the concern to sustain foreign exchange earnings. And for the most vulnerable members of society, for whom the environment is their only “social security system,” there is a rush to the uplands and coastal areas, where already fragile ecosystems face even greater population pressures.

The risk we face now is the same risk we faced in 1997-98: What we do now for the sake of short-term stabilization may be at the expense of our longer term welfare–including that of our children and grandchildren, here and yet to come. We would all do well to take a longer view of things as we deal with our current economic challenges. What worries me is that too many of our current political leaders have not exactly shown the capacity to see beyond the short term.

Comments welcome at chabito@ateneo.edu