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Joe Barbieri has Bachelors' degrees in both Civil Engineering and Commerce from the University of Toronto. He has worked in the Financial Services field for over 13 years, with over 10 years on the institutional side of the business. He has covered positions from Fund Accounting to Investment... More
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What Is Your Money Telling You?
  • What Is The Value Of Trade Deals?

    Governments have been pursuing trade deals with different countries and economic trading blocs for at least the last 25 years or so. The benefits of increased GDP, more goods produced for less cost, higher corporate profits and greater consumer choice were promised. As with many things, the intentions are good and the concept works in the beginning but the results are not clear over time.

    The very beginning of trade featured barter between people or groups or people. The synergy afforded through co-operation versus doing everything by yourself was tremendous. As more goods were produced and economies become larger, a standardized system of exchange and accounting was developed, which is called money. As the economies grew to a national level, trade became linked to prosperity and survival of the groups who organized the economy. These groups were primarily governments, and taxes (or tariffs) were used to protect local economies from non-local market forces who were trading unfairly (dumping cheap goods to destroy local commerce, monopolies to drive out competitors, or businesses that harmed the society as a whole). The last 25 years or so theorized that since everyone is charging each other taxes, why not do away with all of them and save everyone some money? This sounded good in theory: it does have merit to an extent, but there are some assumptions which are coming to light in the last 20 years which show that trade deals may not provide the value that was promised.

    The first assumption is that cheaper goods are always a benefit to society. The buyer of these goods is equal to the worker who makes the goods is equal to the taxpayer who pays for the structure of the economic system. The evidence of the last 20 years shows that cheaper goods are abundant, but the capacity to earn money to buy these goods is much lower (high unemployment and wage stagnation), and the taxes are much higher. If either the worker, taxpayer or consumer is worse off, this means that the assumption does not hold.

    The second assumption is that higher GDP is always a good thing. Implied in this assumption is that a dollar worth of goods produced is the same value no matter what the product is. A dollar of toxic waste is just as good as a dollar of a beneficial product. The GDP does not take into account how the value was created. A war would increase GDP tremendously, but it does not serve society very well. The same holds true for environmental events, rebuilding after natural disasters, or society breakdowns like riots or civil unrest. The GDP does not examine the quality of the products produced or how long they last. A good quality product that lasts longer may have more value and a smaller GDP contribution than having more cheap products.

    The third assumption is that higher corporate profits are a good thing. Once again, the intention starts out well, but the results are questionable. This idea holds true if the corporation invests all of its profits within its own borders and caters to its workers, customers and government (which are all the same people). Once you have access to other jurisdictions, this assumption no longer holds. This means that money is siphoned out of a local economy and does not come back. The economics prior to trade deals allowed this money to come back into circulation, guaranteeing that it would be recycled by the local people, ensuring prosperity would continue. Is this necessarily true today?

    Trade deals are part of an experiment in how to conduct an economy. Like every experiment, modifications will have to be done to ensure that the outcome is beneficial. The economy and trade is supposed to benefit the users of the economy - the worker, taxpayer and consumer. Every experiment also needs feedback to indicate its success. Is this really what is happening?

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Apr 14 9:09 PM | Link | Comment!
  • What Is A Bail-In Bond?

    A bail-in bond is a source of money available for financial institutions should they be threatened with insolvency. If the institution is functioning profitably, funding will come from its profits. Should it get into trouble however, there are other options. The first one is bankruptcy, which states that the institution cannot survive any longer, and will be discontinued. Whoever is owed money from the institution will not get paid. Other options require getting outside help or financing from other parties. There can be mergers or takeover deals where a competitor would run the company that is in distress and use its resources to allow it to flourish. Since financial institutions are deemed to be very important, and their failure would cause economic damage, bankruptcy is not a good option. Mergers have already happened in the financial services industry, but that creates a higher concentration of assets which will lead to more damage should a larger institution go bankrupt.

    Since 2008, there have been other alternatives which are "bail outs" and "bail-ins". A bail out is using taxpayer money to help financial institutions in distress. While this may sound prudent, there needs to be accountability to the taxpayers as to how this money is being used. The bail-out has had a lot of criticism for this reason. The bail-in uses depositor money to help a financial institution in distress. The more general definition cites the bondholders or lenders to the institution as the parties providing the funding, but this is not always true as was evident in Cyprus (5).

    Looking at it logically - if an institution gets into trouble, who has the resources to help? Creditors are the same parties as the competitors and government unless the bondholders are made up of individuals. What this means is that the everyday people have to bail out the institutions. Whether they do it with their bonds or deposits is not of much consequence unless you argue that bondholders are richer stakeholders than depositors. This may be true but to what extent, and does it matter? If I own a $1000 bond, or have $10,000 in deposits, I may very well be the same person.

    A bail-in bond does not remedy the cause of the problem. How do these institutions get into trouble in the first place? Should they be bailed out or bailed in at all? Should depositors or bondholders be the ultimate guarantors of an institution? Are your deposits considered yours or are they property of the institution? These questions need to be clarified if help for institutions is to be done properly.

    Sources:

    1) http://internationalinvest.about.com/od/glossary/a/What-Is-A-Bail-in-and-How-Does-It-Work.htm

    2) http://business.financialpost.com/2014/02/07/bail-in-bonds-riskier-than-previously-thought-sp-warns/

    3) http://www.bloomberg.com/news/2011-05-09/bank-bail-in-bonds-could-help-avert-systemic-trauma-iif-says.html

    4) http://www.economist.com/blogs/economist-explains/2013/04/economist-explains-2

    5) http://www.politicolnews.com/cypress-taxing-peoples-bank-deposits-to-bail-out-banks/

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Apr 04 4:58 PM | Link | Comment!
  • Is Bitcoin The Sign Of A New Age In Currencies?

    What is a currency? A currency is a unit of measure, which is used to facilitate exchange. Does it matter who issues the currency or where it comes from? It does not as long as the parties doing the exchange agree on the terms. Bitcoin is an example of a currency. There are infinitely many currencies that have existed in the past and more will exist In the future.

    Does the fact that some governments ban the use of Bitcoin, others allow it and others want to regulate it seem inconsistent? This demonstrates that the fate of a currency will depend on what the consensus agrees to. That consensus is generally the users of the currency.

    Why did Bitcoin get as large as it did in the first place? Currencies are based on exchange - but the widespread use of a currency is based on trust and faith in the issuer of the currency. The trust is that the value of a currency is represented by actual resources that can be accounted for and used as collateral in an exchange should that become necessary.

    As an example, I agree to buy apples from someone and they give me a memo stating that they will pay me in oranges. These oranges are represented by 10 units of the U.S. dollar. I am banking on the fact that those 10 units of the U.S. dollar are backed by some entity that is accountable, and I can exchange those units for the oranges that I originally wanted to buy, in the case the U.S. Federal Reserve who is acting on behalf of the U.S. government. Ten units of a currency are useless unless they can be translated into something I want to have. This is true for every currency because the currency acts as a measuring stick, a translator and a unit of account for the resources and goods that seek to be traded. If you measure something in inches or centimetres, the thing being measure is still the same size.

    How is this related to Bitcoin? It shows that currencies like this can spring up anywhere and anytime as long as they adhere to the rules above. More currencies like Bitcoin have been used in the past and will be used in the future.

    Sources:

    1) http://asia.nikkei.com/Politics-Economy/Policy-Politics/Japan-to-regulate-Bitcoin-trades-impose-taxes

    2) https://bitcoin.org/en/

    3) http://news.cnet.com/8301-1023_3-57620092-93/mt-gox-ceos-blog-hacked-alleged-bitcoin-balances-posted/

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Mar 19 7:30 AM | Link | Comment!
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