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October 24, 2007
October 23, 2007
G7 parades its irrelevance
The meeting of the finance ministers of the Group of Seven (G7) nations is increasingly looking as irrelevant as the final of the US baseball World Series that began this week. Whoever wins the title of best baseball team, the rest of the world shrugs as, by and large, it does not play the sport or take part in the contest. Even the term “world series” is seen as hubris.
The latest communiqué from the G7, which called on China to allow an “accelerated appreciation” of the renminbi, led to predictable headlines. It was “the mostly strongly worded statement yet”, one said. The problem is that the G7 is a tournament that China does not participate in. Its members – Canada, France, Germany, Italy, Japan, the US and UK – met in Washington, DC, to debate the implications of the falling dollar.
The three eurozone countries, and France in particular, were angry that the euro has taken the brunt of the dollar’s depreciation. The single currency has soared by 7.8% so far this year, putting pressure on the euro zone’s exporters and threatening, politicians claim, to stifle the economic recovery. They want co-ordinated action to stem the fall in the dollar that they fear could turn into a full-scale rout that could destabilise the world economy.
That was never going to happen and the Europeans probably knew that. It is fruitless to intervene to prop up a currency when the markets are determined to sell it. Even as finance ministers started their meeting the key index of the dollar’s value slumped to a lifetime low against the euro of $1.4319 as poor US housing data raised the chance of another cut in interest rates on 31 October to 92%.
The next best for the French was public statement demanding that China let the renminbi against the dollar appreciate to take the pressure off the euro. To add salt to the wound, while the renminbi is firmly pegged to the dollar it has actually fallen 11.4% against the euro.
China, of course, will ignore the message from the communiqué, sticking to its long-held line that it needs to complete major reforms of its financial system before adjusting the exchange rate. It can also be forgiven for refusing to take advice from a group of which it is not a member. The G7 yet again spurned the opportunity to reform itself and open the way for countries such as China to join.
The last time the G7 attempted to play God in the currency markets was in 2000 when it stemmed the euro’s decline. Back then it represented two-thirds of world GDP. According to Alliance Trust, a financial services group, that could fall to a third by 2050. That might be more significant that World Series baseball but it is hardly a mandate to supervise world exchange rate policy.
The latest communiqué from the G7, which called on China to allow an “accelerated appreciation” of the renminbi, led to predictable headlines. It was “the mostly strongly worded statement yet”, one said. The problem is that the G7 is a tournament that China does not participate in. Its members – Canada, France, Germany, Italy, Japan, the US and UK – met in Washington, DC, to debate the implications of the falling dollar.
The three eurozone countries, and France in particular, were angry that the euro has taken the brunt of the dollar’s depreciation. The single currency has soared by 7.8% so far this year, putting pressure on the euro zone’s exporters and threatening, politicians claim, to stifle the economic recovery. They want co-ordinated action to stem the fall in the dollar that they fear could turn into a full-scale rout that could destabilise the world economy.
That was never going to happen and the Europeans probably knew that. It is fruitless to intervene to prop up a currency when the markets are determined to sell it. Even as finance ministers started their meeting the key index of the dollar’s value slumped to a lifetime low against the euro of $1.4319 as poor US housing data raised the chance of another cut in interest rates on 31 October to 92%.
The next best for the French was public statement demanding that China let the renminbi against the dollar appreciate to take the pressure off the euro. To add salt to the wound, while the renminbi is firmly pegged to the dollar it has actually fallen 11.4% against the euro.
China, of course, will ignore the message from the communiqué, sticking to its long-held line that it needs to complete major reforms of its financial system before adjusting the exchange rate. It can also be forgiven for refusing to take advice from a group of which it is not a member. The G7 yet again spurned the opportunity to reform itself and open the way for countries such as China to join.
The last time the G7 attempted to play God in the currency markets was in 2000 when it stemmed the euro’s decline. Back then it represented two-thirds of world GDP. According to Alliance Trust, a financial services group, that could fall to a third by 2050. That might be more significant that World Series baseball but it is hardly a mandate to supervise world exchange rate policy.
October 19, 2007
Falling dollar should force G7 to find a new role
Just as the clocks change twice a year, so finance ministers of the Group of Seven (G7) wealthy nations troop off to Washington for their biannual meetings. The latest one takes place this weekend (19/20 Oct). Yet again the issue at the top of the agenda will be the fall in the dollar.
Finance ministers – at least those outsider the dollar bloc – are worried for two reasons, one altruistic and one selfish.
The altruistic reason is a worry it could turn into a full-blown slump that triggers a spike in inflation, forcing the Federal Reserve to raise interest rates that in turn delivers a consumer recession.
The selfish reason is that they are concerned that the appreciation in their currencies, most notably the euro, is harming their export sectors. They say that villain in the piece is China which keeps its exchange rate artificially low against the dollar, forcing the euro to take the brunt of the pain. This is true enough. Since Beijing revalued the renminbi in July 2005, the dollar has fallen 9% against the Chinese currency but 18% against the euro.
Ministers will doubtless issue the same sort of statement they have for some years. Emerging economies with large current account surpluses “especially China” must let their effective exchange rates move, they will say. These statements rarely move currencies as the markets have decided the G7 has little relevance in a world where Italy and Canada are members but China is not. The first step towards using finance ministers as a conduit for discussing currencies would be to include the BRICs – Brazil, Russia, India and China.
The problem is that would imply a single European Union seat at the table, a move opposed by the four EU members – France, Germany, Italy and the UK. The real reason for the increasing irrelevance of the G7 is it assumes the dollar is the world’s reserve currency. Overseas investors do not see life that way. They are shunning US equities in favour of other markets and may do the same to US credit in the wake of the crisis on Wall Street.
In terms of currency transactions, the dollar has lost 2.4% of global share over the last three years while emerging market currencies have gained 4.6%. Several countries have reduced the importance of the dollar in their currency baskets while others mull pricing oil in euros not dollars.
The challenge for the US is to accept the solution to the imbalances in the financial system may involve a less pivotal role for the dollar. In a perfect world the G7 communiqué would acknowledge that the future will be less dollar-centric. Sadly just as millions of households prepare to turn their clocks back for winter, finance ministers will try to do the same for the financial markets.
This article first appeared in The Business (www.thebusiness.co.uk) on 18 October 2007
Finance ministers – at least those outsider the dollar bloc – are worried for two reasons, one altruistic and one selfish.
The altruistic reason is a worry it could turn into a full-blown slump that triggers a spike in inflation, forcing the Federal Reserve to raise interest rates that in turn delivers a consumer recession.
The selfish reason is that they are concerned that the appreciation in their currencies, most notably the euro, is harming their export sectors. They say that villain in the piece is China which keeps its exchange rate artificially low against the dollar, forcing the euro to take the brunt of the pain. This is true enough. Since Beijing revalued the renminbi in July 2005, the dollar has fallen 9% against the Chinese currency but 18% against the euro.
Ministers will doubtless issue the same sort of statement they have for some years. Emerging economies with large current account surpluses “especially China” must let their effective exchange rates move, they will say. These statements rarely move currencies as the markets have decided the G7 has little relevance in a world where Italy and Canada are members but China is not. The first step towards using finance ministers as a conduit for discussing currencies would be to include the BRICs – Brazil, Russia, India and China.
The problem is that would imply a single European Union seat at the table, a move opposed by the four EU members – France, Germany, Italy and the UK. The real reason for the increasing irrelevance of the G7 is it assumes the dollar is the world’s reserve currency. Overseas investors do not see life that way. They are shunning US equities in favour of other markets and may do the same to US credit in the wake of the crisis on Wall Street.
In terms of currency transactions, the dollar has lost 2.4% of global share over the last three years while emerging market currencies have gained 4.6%. Several countries have reduced the importance of the dollar in their currency baskets while others mull pricing oil in euros not dollars.
The challenge for the US is to accept the solution to the imbalances in the financial system may involve a less pivotal role for the dollar. In a perfect world the G7 communiqué would acknowledge that the future will be less dollar-centric. Sadly just as millions of households prepare to turn their clocks back for winter, finance ministers will try to do the same for the financial markets.
This article first appeared in The Business (www.thebusiness.co.uk) on 18 October 2007
October 17, 2007
Philanthropy - the ultimate paradox
The rich, as the late American satirist Peter de Vries noted, are not like everyone else; they pay less taxes. Perhaps a more telling difference is that they are more willing to give their wealth away.
This is a striking paradox. The super-rich, and the companies they control, spend vast amount of financial and human resources on minimising their tax liabilities. Yet at the same time entrepreneurs are increasingly deciding to give much of their money away voluntarily, particularly towards the end of their working life.
Before trying to answer this puzzle it is worth looking at the reasons for the growth in private philanthropy. Most obviously the amount of wealth in the world is rising rapidly. More importantly the share of that extra wealth that goes to the wealthiest in society is growing.
In very crude terms, globalisation has created more wealth and allocated it to a smaller band of people. This year’s Rich List 2007 published by the Sunday Times showed the fortunes of the richest 1,000 had risen by a fifth over the past year to almost £ 360bn. A decade ago that figure was £99bn, meaning that the volume of wealth held by this elite has risen almost four times.
A parallel Giving List showed the 30 leading philanthropists pledged or donated more than £1.2bn. Several donations ran into tens or hundreds of millions. While admirable in itself, this is dwarfed by philanthropy in the United States. There has been a strong American tradition of benevolence, particularly for large infrastructure projects such as art galleries or hospital wings that carry the donor’s name in perpetuity.
Some of the philanthropic efforts taking place are of mind-boggling proportions. Microsoft founder Bill Gates donated $22bn in 2000 to found the Bill and Melinda Gates Foundation, making it the US’s largest philanthropic trust.
Last year Warren Buffett, the investor, announced he would gradually give away 85% of his $44bn fortune, of which 85% would go to the Gates foundation.
Philanthropy has been a feature of the UK too, but perhaps less so until recently. There is some evidence that the more the state does to help its citizens, the less people are willing to give. In the Victorian era when capitalism in Britain was red in tooth and claw, business dynasties such as Guinness, Cadbury, Peabody and Lever, made charitable bequests whose legacies can be seen on Britain’s streets today.
However after the welfare state was born, a 1948 opinion poll found that more than 90 per cent of people felt there was no longer a role for charity in Britain. Whether the rebirth in UK philanthropy is a reaction to change in the welfare system under Conservative and Labour governments of the last three decades is open to debate.
One strong feature of recent large-scale donations may shed light on that issue. Philanthropy is increasingly focused on problems that globalisation has brought to the fore. Charity no longer begins at home. Thus the Gates’ foundation’s activities are focused on world health - fighting malaria, HIV/AIDS, and tuberculosis. Three years ago Sir Tom Hunter gave £100m to his charity, which invests in projects in Africa, and plans to disperse a further £1bn. These donations are often for purposes that overlap with government policy and agendas that politicians have campaigned on for many years.
What these donations symbolise is a willingness to donate money where the donor feels able to determine the fate of the finance – something currently impossible with general tax revenue. David Nickson, a partner at KPMG Europe, suggests in an article in Tax Journal magazine this month that it may indicate a cynicism about the way governments raise and disperse money or may be symptomatic of the rise of the individual.
There may be other factors at play. The huge public support for campaign by Bob Geldof and Bono to get rich nations, i.e. their taxpayers, to cough up more money to relieve poverty and disease in Africa received widespread support.
Individuals also seem more personally committed to issues such as African poverty and global warming. One civil servant I know took a career break to spend time working with an aid agency in Tanzania.
The $64m dollar question for governments is how to harness this philanthropy. They are certainly making it easier for people to give their money away – even if it isn’t destined for the Treasury’s coffers. Charitable giving in America has attracted tax relief since the 18th century while Britain joined the party in 1986. Income tax relief is now available on every cash donation made by a UK taxpayer.
Perhaps governments should go further. They are increasingly frustrated by the ability of the super-rich to avoid tax payments. Governments could exploit their voluntary generosity by more closely meshing their public policy interests with those of donors. For instance they could offer tax incentives to corporations making donations. One model might be the freedom companies have to reduce their tax bill by topping up their pension fund, because of the wider benefit of knowing the pension system is well-funded.
The same technique could be applied to donations towards a menu of spending options. Should a housebuilder gain tax relief in exchange for donating land or building affordable homes for free? Could a pharmaceutical giant lower its tax bill in exchange for major donations of basic medicines?
This is just one idea and there must be a myriad of other options. One thing is clear – the depth of poverty across the world calls for a resolution of this paradox of tax avoidance and generous donation.
This article first appeared in 'the city magazine' in October 2007
This is a striking paradox. The super-rich, and the companies they control, spend vast amount of financial and human resources on minimising their tax liabilities. Yet at the same time entrepreneurs are increasingly deciding to give much of their money away voluntarily, particularly towards the end of their working life.
Before trying to answer this puzzle it is worth looking at the reasons for the growth in private philanthropy. Most obviously the amount of wealth in the world is rising rapidly. More importantly the share of that extra wealth that goes to the wealthiest in society is growing.
In very crude terms, globalisation has created more wealth and allocated it to a smaller band of people. This year’s Rich List 2007 published by the Sunday Times showed the fortunes of the richest 1,000 had risen by a fifth over the past year to almost £ 360bn. A decade ago that figure was £99bn, meaning that the volume of wealth held by this elite has risen almost four times.
A parallel Giving List showed the 30 leading philanthropists pledged or donated more than £1.2bn. Several donations ran into tens or hundreds of millions. While admirable in itself, this is dwarfed by philanthropy in the United States. There has been a strong American tradition of benevolence, particularly for large infrastructure projects such as art galleries or hospital wings that carry the donor’s name in perpetuity.
Some of the philanthropic efforts taking place are of mind-boggling proportions. Microsoft founder Bill Gates donated $22bn in 2000 to found the Bill and Melinda Gates Foundation, making it the US’s largest philanthropic trust.
Last year Warren Buffett, the investor, announced he would gradually give away 85% of his $44bn fortune, of which 85% would go to the Gates foundation.
Philanthropy has been a feature of the UK too, but perhaps less so until recently. There is some evidence that the more the state does to help its citizens, the less people are willing to give. In the Victorian era when capitalism in Britain was red in tooth and claw, business dynasties such as Guinness, Cadbury, Peabody and Lever, made charitable bequests whose legacies can be seen on Britain’s streets today.
However after the welfare state was born, a 1948 opinion poll found that more than 90 per cent of people felt there was no longer a role for charity in Britain. Whether the rebirth in UK philanthropy is a reaction to change in the welfare system under Conservative and Labour governments of the last three decades is open to debate.
One strong feature of recent large-scale donations may shed light on that issue. Philanthropy is increasingly focused on problems that globalisation has brought to the fore. Charity no longer begins at home. Thus the Gates’ foundation’s activities are focused on world health - fighting malaria, HIV/AIDS, and tuberculosis. Three years ago Sir Tom Hunter gave £100m to his charity, which invests in projects in Africa, and plans to disperse a further £1bn. These donations are often for purposes that overlap with government policy and agendas that politicians have campaigned on for many years.
What these donations symbolise is a willingness to donate money where the donor feels able to determine the fate of the finance – something currently impossible with general tax revenue. David Nickson, a partner at KPMG Europe, suggests in an article in Tax Journal magazine this month that it may indicate a cynicism about the way governments raise and disperse money or may be symptomatic of the rise of the individual.
There may be other factors at play. The huge public support for campaign by Bob Geldof and Bono to get rich nations, i.e. their taxpayers, to cough up more money to relieve poverty and disease in Africa received widespread support.
Individuals also seem more personally committed to issues such as African poverty and global warming. One civil servant I know took a career break to spend time working with an aid agency in Tanzania.
The $64m dollar question for governments is how to harness this philanthropy. They are certainly making it easier for people to give their money away – even if it isn’t destined for the Treasury’s coffers. Charitable giving in America has attracted tax relief since the 18th century while Britain joined the party in 1986. Income tax relief is now available on every cash donation made by a UK taxpayer.
Perhaps governments should go further. They are increasingly frustrated by the ability of the super-rich to avoid tax payments. Governments could exploit their voluntary generosity by more closely meshing their public policy interests with those of donors. For instance they could offer tax incentives to corporations making donations. One model might be the freedom companies have to reduce their tax bill by topping up their pension fund, because of the wider benefit of knowing the pension system is well-funded.
The same technique could be applied to donations towards a menu of spending options. Should a housebuilder gain tax relief in exchange for donating land or building affordable homes for free? Could a pharmaceutical giant lower its tax bill in exchange for major donations of basic medicines?
This is just one idea and there must be a myriad of other options. One thing is clear – the depth of poverty across the world calls for a resolution of this paradox of tax avoidance and generous donation.
This article first appeared in 'the city magazine' in October 2007
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