What the…….!

No really, these are two funky new terms that we have come across this week whilst surfing the web and of course, we like keeping our readers up to trend with the latest fashions.

So – who fancies joining the new Frugalistas?

It’s the latest fashion of the thrifty chic. Living to excess is so last year. Expensive restaurants, SUVs, luxury holidays and overseas homes? – how passe! Definitely no longer cool. ‘Frugalista’ is the new black. Yes folks – you too can be poor and stylish !

Find some hot tips at sites such as Tips From The Frugalista Moms and The Frugalista Files

On the other hand, if you believe Barack Obama, we must all spend, spend, spend – if not at the consumer level then certainly at the governmental level. Its the only way to lift our economy out of the black pit of recession. Apparently! Nick Robinson of the BBC calls this philosophy Obamanomics, which reminds us of a website we quite approve of

In essence what we are alluding to here is something called The Paradox of Thrift – a term coined by the economist John Maynard Keynes in the 1930s, during the Great Depression. He stated that although being frugal and thrifty seems to be the best policy for individuals, as far as the overall economy goes it can be damaging. So the paradox is that the more we save, the more we reduce demand for goods and therefore the worse the economy gets. It can be quite a vicious circle. The slumping economy means businesses invest less, hire less and increase redundancies. Ultimately the effect cascades through the system and overall income for everybody declines, leading to less money for people to be able to put aside and save. Simply put, as a society overall, the more we save the less we earn. In this way the decline self perpetuates. Bear in mind this is all a theory.

In fact it is part of the Keynesian economic theory that is currently in fashion with Gordon Brown, Barack Obama and their global counterparts.

John Keynes’ suggested solution to the Paradox of Thrift conundrum was that to offset the thrift of consumers in times of recession, the government must step in and take their place. Keynes argued that the state should increase public spending – on hospitals, roads, infrastructure projects etc. in order to inject cash into the economy and try to keep businesses humming and people in jobs. This is even more vital when interest rates are also dropping and deflation (falling prices) is happening. Falling prices can reinforce the thrift instinct in individuals when it comes to big-ticket items because no-one wants to buy a new house or new car if they can see that in 6 months time these items will be even cheaper. Hence they stash the cash and kill the till.

Across the ocean, Obama has a Lightbulb moment………….

The Keynes effect is in full force over in the USofA. In fact it seems there is no end to the amount of money congress is willing to hand out to the ailing US economy. A fortnight ago another half trillion tax payer dollars were earmarked to ‘fight the crunch’. This time Bush (remember him?) wanted to address credit and housing, which experts say must recover to pull out of recession. That’s on top of the previous $470 billion bailout of the Wall St financial institutions (Fannie Mae, Freddie Mac and the rest).

Remember this is in the light of the steepest slump in US consumer spending for 30 years. Not only that but this weekend we heard that US employers axed 533,000 jobs in November, the biggest job cut since 1974. The unemployment rate is now 6.7% which is the highest in 15 years. Yet more record breaking statistics, the likes of which we are kind of getting fatigued of hearing now.

When Obama steps in in January he wants to hand out a further $500 billion +. This will be a ‘jobs rescue package’ with a definite ‘Green’ tint. He says that an “Immediate Infusion of money is needed to jumpstart the system” – looks like Obama has some surgeons and motor mechanics on the fiscal team! Amongst his many green-tinted Keynesian initiatives will be to make government buildings energy efficient by changing all the lightbulbs. Also new alternative energy projects will be an important theme. All these projects will create employment. Strangely though, his other initiatives such as increased road building and bridge construction as well as bailing out the big-3 car manufacturers, although meant to create jobs, are hardly going to help the environment. But right now the mantra is, that the price of doing nothing far outweighs that of the Obamanomics megaspend.

Rest-assured, like any theory, the Obamanomics-Keynesian theory also has its detractors. These critics feel that the infrastructure schemes will simply take too long to get off the ground and out of the planning stages to have any meaningful effect. By the time these projects get on line, the economy might already be past the rock-bottom stage anyway. Furthermore the effect known as ‘Rational Expectations’ may kick in. The general population may come to realise that all this hyper government spending will one day in the future have to be recouped through higher taxes. This expectation may make people spend even less than before and save even more, thus somewhat negating the effect of the increased public spending. Tricky isn’t it? But intriguing!

The biggest worry is that these strategies will not prevent a recession or depression, and worse still we may end up with Stagflation – the thankfully rare malady of a stagnating economy coinciding with a spike in inflation, such as that experienced in the 1960s and 70s, which took until the 80s to recover from (I promise to touch upon the how and why of what stagflation is in the next Ultraletter – so stay tuned – I don’t want to fry your brain cells and mine all at once! )

In the UK Gordon Brown and Alistair Darling are going hell-for-leather down the same route as Bush and Obama. The Germans are meanwhile hissing with scorn. Their finance minister, Peer Steinbrück, tore into Gordon Brown’s £12.5bn cut in VAT, describing the move as “crass Keynesianism” that would raise Britain’s national debt to levels that would take a generation to pay off

Whether we are about to see a new era of Stagflation, possibly on a global scale remains to be seen. Even we are intrigued to see if Keynesianism will do the trick this time around. In case it doesn’t just remember we were dubious all along.

continues below…..

There’s a reason why Dinosaurs became extinct………..

Sorry to harp on, but those car makers from Detroit – General Motors, Chrysler and Ford – are getting really irksome. They don’t have any money left to fund their inefficient production lines, boring car designs and private executive jets, so now they’re loitering around Capitol Hill, Washington trying to beg some off the taxpayers. This is why the word ‘Shooo’ was invented.

I remember learning in biology class about Darwinism and survival of the fittest. We were taught that the dinosaurs became extinct 65 million years ago due to some cataclysmic event, most likely a comet impact, from which they were unable to recover. Does this sound familiar at all, Detroit folk? No doubt that dinosaurs walked the earth for over 165 million years, but when their time was up, it was up! There was no bailout – period!

But it had to be that way – they were no longer viable in the changing climate. Their large size meant they were resource-hungry and inefficient. They’d had it easy for too long. They could not adapt, so nature allowed their era to come to a close. Were it not for that event however, it’s unlikely that the meteoric rise of the mammals could have occurred. The wondrous creation known as Homo Sapiens may never have had its time. We have been around perhaps only a couple of hundred thousand years – yet look at the astonishing things we have done.

The point is that entities, whether species or companies, should not be given life-support beyond their natural end. If we do that, we will never find out what ingenious ideas or objects may have come in their place. In any case, even if we do try, the end is usually just postponed, not averted.

T Rex was late again to the Extinction Convention

We can understand the quandary facing the politicians. The US car industry reckons it accounts for 1-in-10 US jobs, of which 250,000 are direct employees. In addition, a bankruptcy or failure of the Detroit Three would threaten billions of dollars of financial instruments, according to credit market analysts. On an international level there are also many hundreds of thousands of jobs in related industries that are likely to suffer. So there are a lot of people’s livelihoods at stake here, and we are not callous enough to not care about all of that, so we say go ahead lawmakers, give it a shot. Where you have spent billions on the bank bailouts, why not give some to the car makers too? If you like you can send a couple of cheques our way too. We are sure you wouldn’t even notice a few K’s amongst all those billions.

Ultimately though, it appears that these corporates have already squandered their advantages. Their cars are inefficient and the quality is simply not there. They had decades to get it right. They didn’t have to export since their target market, i.e. the biggest consumers of cars in the world, was at their doorstep. They could understand their customers needs since they were from amongst them. They had the ear of politicians and finance was easy. It was all downhill driving. Yet now the world has decided that they do not want Detroit cars. They want German and Japanese cars. Maybe they don’t want cars at all and they just want LCD TVs instead. So by bailing them out, congress is saying to the world “NO, you must have our cars!” – The world will answer, “Hello? We don’t want them!!”

2009 ain’t lookin’ too good for the Detroitosaurus Rex.


more divine inspiration follows….

Ultranomics and Obamanomics? Now try Godnomics – the pilgrimage to zero interest rates…

The latest round of interest rate cuts around the world have taken rates to amongst their lowest points in half a century. In the UK, USA and Japan they are approaching 0% and according to some analysts are likely to get there soon.

It hardly seems fair.

Yet there is another school of thought, which predates our modern day economists by a fairly wide margin and that could shed an alternative light on the debate. We all know (or should do) that the three major monotheistic faiths, Judaism, Christianity and Islam all have in their literature a prohibition on interest. The Torah, The Bible and The Quran all advise against dealing in interest, whether charging it or even paying it. References on these can easily be googled so I won’t elaborate here.

To my understanding of the idea behind this prohibition, it seems that just like the Paradox of Thrift mentioned above, there is another paradox when it comes to interest. Although at an individual level it may seem totally reasonable and even desirable for banks to extend loans in return for interest so that we can buy a house or start a business, on the macro-economic level it may eventually play a large part in causing the booms and busts that we experience. The theists will argue that taken as a whole, the harm caused by interest is far greater than the good that might come of it, hence it is not allowed. It is a complex subject and not one that can be covered in detail in this Ultraletter, but one worthy of a separate article which we promise to write up soon in the name of research and understanding. In the meantime here is an excellent guide from one of the UK’s leading ethical financial advisers, 1stethical.com, on the subject of Interest based lending in the modern banking system

At the crux of it though, the ‘good savers’ that put their cash away into savings accounts were after interest income without risk, or making money directly on their money without doing any economic activity, e.g. trading or renting out an asset. They were not actually contributing to the economy by spending or investing, but rather trying to earn money whilst taking no risk, i.e. capital was secure. Accordingly since no risk is being taken, to be honest they deserve no reward. It could be argued that its the people buying houses, paying stamp duty and VAT in the process, then spending thousands doing up their houses in the pursuit of happiness and profit who are the real stars of the economy. They are the ones who put their butts on the line! Those amongst them who took too great a risk, i.e. self-certified loans beyond their means or where they had a shaky cashflow, have been punished automatically by losing the asset they acquired.

The Board of 'The Bank of God' do some blue-sky thinking

Suffice to say that with falling rates across the globe, whether willingly or not, the world’s bankers are getting closer to a more divine banking system month-by-month! We wonder though if they will ever see the light. Our breaths are not being held !

See you again next time. In the meantime why not sign up to automatically get the next Ultraletter by email?

Alternatively you can subscribe to our RSS Feed

17th November 2008, TK (co-editor)


One thing is for sure, always expect the unexpected. For the past decade the buoyant global economy has been lulling us into a false sense of security. We started to actually believe that this time it was different. Forget the dotcom crash, real estate really could always go up in value. Heck you know what they say, “buy land, they’re not making any more of it” (personally we don’t consider Dubai’s new islands to be an exception! – see jq’s reference to Atlantis below) so with increasing populations, increasing economic migration, low unemployment etc etc how could the property market possibly crash. No, no, no – this time it really is different. That’s what most of the experts were saying.

But you know what we say, don’t you readers? Nature in the end gives you what you deserve – the Indians call it karma. Here’s the rub though – for all our technology, all our analytics, all our models, most of us never see that sucker punch coming! Or if we do see it its usually far too late. The American Subprime meltdown is of course the elephant that caught our great world leaders completely by surprise.

Now those same great leaders were found to be having a jolly back-patting get-together at our expense this weekend in Washington, where they convened the G20 summit. Did you see the pics? Mr Bush looked the most jolly of all – like the kid who made a mess in the nursery but was about to leave without having to tidy the toys back into the box.

George W. Bush at the G20 summit

Bush and the others, from both developed and developing nations promised to take “whatever further actions are necessary to stabilise the financial system” and vowed to “use fiscal measures to stimulate domestic demand to rapid effect, as appropriate to each particular country”. Whenever we hear the words, “Whatever necessary” and “use measures as appropriate” we get that feeling of being in a boat without a map. These are the guys who never noticed that elephant going berserk, who allowed our crops to be devoured and our shacks trampled in plain view of incompetent herders (the banks), who put all their trust in the zoo’s gatekeepers (the central banks) and who never bothered to understand what dangerous tricks the elephant trainers (the hedge funds and derivative dealers) were teaching to the elephant. Now these same world leaders expect us to believe that they know what they are doing and can handle the crisis that they let occur.

We will wait and see what their efforts will achieve. Yet we fear that for all the promises of co-operation and anti-protectionism policy objectives, for all the cash injections and new regulatory “colleges of supervisors”, the way this new Great Depression will play out will have precious little to do with what governments decide to implement. It will simply take its own course. The greedy will be cut down. The non competitive enterprises will be decimated. Jobs will be lost. The weak will perish. Those who didn’t save for the future will find that the future won’t save them. Those who thought that something for nothing was possible, will find their somethings have become nothing. Sure, a lot of innocents will be hurt along the way. The Great Depression will not care. Finally though, our economies and the world in general will emerge a healthier, more grounded place. New enterprises will take the place of the obsolete, and bring with them new jobs and new prosperity. Of course, our politicians will take credit for it all. Until the next Depression which probably won’t be in our lifetimes. That unfortunately means that as individuals our lessons learned may not be needed by us again, although those lessons may make us into boring penny pinching old folk. Perhaps our kids will listen to our advice – somehow though I don’t think so.

Meanwhile in TK’s living room………

I was just watching the U.K.’s PM Gordon Brown and his shadow counterpart David Cameron at each others throats on the BBC as they duelled over the current standoff about tax. After the G20 meeting at the weekend, Gordon is keen to spend his way out of recession next year by giving us in the UK lots of marvelous tax breaks.

Cameron though was having none of it, throwing back in Gordon’s face his old promises of prudence and pointing out that £15bn in cuts was tantamount to ‘fiscal incontinence’ (what a great turn of phrase). He points out that such out of control public spending risks plunging sterling even further down in the world markets. This would put off potential investors bringing their money into the UK. Also the massive increase in borrowing necessary to fund these tax cuts would inevitably lead to tax rises for future generations.

Gordon however is as keen as ever to pull the wool over our eyes. He’s been a silly boy pretending he was the maestro of finance all those years. Now its come back to bite him he won’t even answer a question straight. That’s the bit about politicians that is hardest to tolerate, we’re sure you will agree.

jq has dubai on his mind……

The Dubai Factor – Atlantis, the sequel

17th November 2008, JQ (co-editor)

I have worked for four years in the Emirates in various managerial roles from 1997 to 2001 and have had such a rich experience which in itself calls for writing a book. I was probably subconsciously impressed by a very famous 70’s comedy from Pakistan television [PTV] called Dubai Chalo; it reflected the Dubai fever throughout the Pakistani nation at the time, and in which most of them were literally taken for a ride in a boat and dropped at Karachi’s Hawks Bay after two days perilous sea voyage. [To set the record straight I flew and did reach Dubai first time].

Unfortunately Dubai is no laughing matter now, especially not for the property investors from all over the world who now stand to lose a great deal. A friend currently working in Dubai sent his woes in an email. This one line sums it up “sh*t has started to hit the fan over here in Dubai”. News is that one major Dubai property developer has begun laying off staff, and another is reviewing its recruiting needs as the available global finance becomes thin. The case in point is Emaar who is considering job cuts in the wake of the tumbling market. To keep you in perspective Emmar is the Gulf region’s largest property developer by market value, 32% owned by the Dubai government and is the developer behind the world’s tallest tower, the Burj Dubai.

Emaar shares are down nearly 80% this year to 3.19 AED a share. Realtors have now begun to identify worrying trends of rapidly declining house prices, a stagnant resale market, the inability of off-plan property investors to keep up with their payment schedules, a marked decline in hotel occupancy rates and wage and hiring freezes in property companies. To make matters worse, they have highlighted the government’s indebtedness [Yes Dubai is not as rich as you thought - it's Abu Dhabi which still has oil]. Dubai has borrowed heavily in recent years to finance all of the physical infrastructure needed to support its construction trend. So much is the fear of a Dubai Doom that the UAE President, His Highness Shaikh Khalifa Bin Zayed Al Nahyan had to reassure the people of the UAE that their economy is supported by a healthy and robust national banking system [do you believe in a healthy bank these days?! Lol and chuckle]. A royal effort indeed to save the Dubai Dream.

The Palm Jumeirah in Dubai

Still phenomenal projects are being announced in the Dubai heartland similar to existing ones such as Burj Al Arab and the Indoor Skiing Resort in the Emirates Shopping Mall, but I don’t see anyone buying these new projects. Local Urdu and Hindi channels in the UK are saturated with Dubai Exhibitions and to be honest they sound somewhat desperate. I know someone who bought property two years back in Dubailand and though on paper the value has gone up he has no buyers interested in taking it off his hands. There is virtually no resale market at all for these new apartments. Once you buy one, you are stuck with it.

There has to be a clear difference between bravery and sheer stupidity because if you jump from a skyscraper it better be a suicide attempt or you should be Lois Lane sure to be saved by Superman. The only hope for Dubai is in its cash rich Capital Abu Dhabi which can save the day (Abu Dhabi’s Sheikh Mansour recently played Clark Kent with the UK’s Barclays Bank taking the role of Lois Lane) – but the question is will they? If you ask me my money is not on Dubai, at least not for now. I don’t plan to go down with the new Atlantis.