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Quo Vadis World Economy – I: White Darkness at Davos

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A gloomy mood marked this year’s meeting at the rich club Davos. Women were told to take care owing to the explosion of “sex tourism” in Davos, and many millionaires who advocated for vegetarianism and gender equality flew private planes to Switzerland.

Nevertheless, the atmosphere there was dark. Annually released around the time of the Davos Summit, the World Economic Forum (WEF) Global Risk Report presented shocking findings. We are expected to witness social and environmental crises; the cost of living is ranked as the most severe crisis, and “biodiversity loss and ecosystem collapse” is viewed as one of the fastest deteriorating global risks.

Inflation could lead to stagflation, the socioeconomic consequences of which could be severe, given an unprecedented interaction with historically high public debt levels. Global economic fragmentation and geopolitical tensions could also contribute to widespread debt distress.

As if that wasn’t bad enough, the report went on to predict that technology would worsen inequality, food and fuel crises exacerbate societal vulnerabilities, and declining investments in human development erode future resilience.

Is there any cause for optimism in this dark scenario? For the WEF, there is.

‘Stakeholder capitalism’

“What kind of capitalism do we want?” was asked by Klaus Schwab, a WEF founder, in his 2019 Davos keynote.

Schwab thinks there are three models/answers to address the crisis.

The first is ‘shareholder capitalism,’ embraced by Western corporations. In this model, a corporation’s primary goal is to maximize its profits.

The second model is “state capitalism,” which entrusts the government with setting the economy’s direction and has risen to prominence in many emerging markets, not least China.

Third, of course, is the way Schwab also proposes, ‘stakeholder capitalism.’ In Schwab’s own words, it is a model he proposed half a century ago, positioning private companies as ‘trustees of society.’

The WEF founder argues that the single-minded focus on profits caused capitalism to become increasingly disconnected from the ‘real economy.’ This form of capitalism is no longer sustainable. Instead, large corporations must cultivate ‘stakeholder capitalism’ along with governments and multilateral organizations.

When discussing the transition from shareholder capitalism to stakeholder capitalism, Schwab emphasized the significance of the ‘Greta Thunberg effect.’ For him, the Swedish climate activist has reminded us that adherence to the current economic system represents a betrayal of future generations. Moreover, Generation Z no longer wants to work for, buy from, or invest in companies that lack values beyond ‘shareholder values.’

Now some facts

The WEF-painted bleak picture and its calls for ‘sustainable’ capitalism are close to the truth.

The 2022 Global Wealth Report by Credit Suisse estimates that global wealth will have increased to $463.6 trillion by the end of 2021. This is almost 4.5 times the total worldwide output.

Furthermore, international wealth climbed by 9.8 percent in 2021, much higher than the average growth rate of 6.8 percent witnessed since the turn of the century.

Behind this enormous jump are rising real estate prices and stock market growth fueled by credit expansion. That is to say, a significant portion of the rise in wealth can be explained by the enrichment of the richer in the world.

Indeed, the report estimates that by 2020, a mere one percent of the global population (56 million individuals) possessed 45.8% of all wealth, while the other 2.9 billion owned just 1.3%. This ratio changed as follows in 2021: What one percent of the population now owns rose to 47.8 percent of all the wealth. The richest 13% has 86 percent of the total wealth.

According to the inequality report by Oxfam, just four cents in every dollar of tax revenue collected globally came from taxes on wealth.

Income tax collection from the wealthiest in OECD countries has decreased from 58 percent (in 1980) to 42 percent now.

This rate drops to 31 percent when the number of countries in the sample is expanded to 100. In the same sampling set, tax on capital income, one of the significant sources of wealth for the top 1%, has an average rate of just 18 percent. Only three countries have a higher tax rate on capital income than on wages.

International institutions are also pessimistic

The warnings of IMF Director Kristalina Georgieva before Davos are worth remembering. According to Georgieva, a third of the world will face a recession in 2023.

The OECD revised down the IMF’s forecast for global GDP growth from 2.7% to 2.2%. Arguing that the growth ‘has lost its momentum,’ the OECD noted that risks are skewed to the downside.

The World Bank went even further, projecting the global growth rate to be at 1.7 percent and growth in per capita income in all regions of the world to be lower than in the pre-COVID decade.

According to the World Bank, by the end of 2024, GDP levels in emerging and developing economies will be roughly 6% below the levels expected before the pandemic.

In the WEF’s Chief Economists Outlook survey, economists are even more pessimistic. 18% of polled chief economists in public and private sectors said that experiencing a global recession this year is ‘extremely likely.’

One-third of economists expect a global recession and anticipate that the United States and Europe will maintain their tight monetary policies.

All surveyed chief economists predict Europe to grow ‘weakly or very weakly’ in 2023. For the US, 91% forecasted ‘weak or very weak growth.’

In last year’s survey, these rates were 86 percent (for Europe) and 64 percent (for the United States).

Nine out of ten respondents agreed that corporations would feel the effects of low demand and high financing costs. At the same time, six out of ten underscored the rising input prices. For these reasons, many chief economists expect multinational corporations to reduce operational costs to cut expenses.

Huge dismissals at tech giants

What the economists polled by the WEF thought about multinational corporations has taken place for a while.

Having seen exorbitant stock rises and announced huge profits during the pandemic, technology giants began to ‘update’ their operational expenses due to the severe drops in their balance sheets last year.

Expanding their workforces in tandem with the growth of online activities during the pandemic period, American multinational monopolies, such as Alphabet (Google), Meta, Amazon, and Microsoft, started laying off employees as a primary measure against the shrinking industry.

The number of layoffs in the IT industry has reportedly reached 200,000 since the beginning of 2022, according to the website layoffs.fyi, which tracks releases in the technology sector.

In 2023, 67,268 people would have lost their jobs in this industry. About 51,000 people have been dismissed in the previous several weeks by Meta, Amazon, Microsoft, and Google alone. The only giant in the industry that has not announced a layoff so far is Apple.

The tech monopolies, on the other hand, are wallowing in money. Recently, Microsoft announced its profit for 2022 Q3 as $16 billion. If federal regulators had not stepped in to block the deal, Microsoft would have acquired the video game producer Activision Blizzard last year for $69 billion.

Meta reported a profit of $4.4 billion in the third quarter of 2022, although reporting a 52% decrease compared to last year.

Amazon also announced a decline in profits, but the company still made almost $3 billion in the latest quarter.

Layoffs spread across all industries

However, Silicon Valley giants are not an exception in dismissals.

Software giant SAP of Germany has announced it would lay off 3,500 staff, while chemical conglomerate Dow will fire 2,000 workers. Executives at Dow have said that they will cut costs by $1 billion this year.

3M, another American multinational giant, will reduce its staff by 2,500 on the pretext of falling customer demand.

The toys company Hasbro will lay off 1,000 workers, equal to 15% of its current workforce.

10% of employees will be dismissed at Salesforce, 6% at Spotify, 11% at Vimeo, 3% at BlackRock, and 7% at Goldman Sachs.

In the following articles, I will focus on the situation in the USA and Europe.

AMERICA

US tariffs on steel and aluminum set to impact $150 billion market

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The 25% tariff on steel and aluminum products imposed by US President Donald Trump’s administration on Wednesday is expected to create upward pressure on prices for approximately $150 billion worth of imports, negatively impacting the profits of American automakers and other companies.

The US imports about one-fifth of the steel it consumes. More than 20% of this import by weight comes from Canada, followed by Brazil at 16%, and the European Union at 7%, with Japan ranking seventh at 4%. Canada is also the largest supplier of aluminum to the US.

Because the direct cost of tariffs falls on importers, this will mean higher costs, especially for manufacturers in the US auto industry.

US-based Wolfe Research anticipates the 25% tariff will drive the price of steel products up by as much as 16% above the 2024 average. Aluminum prices, which are already trending upward, are expected to nearly double.

Nomura Securities research analyst Anindya Das estimates the impact on automakers’ fiscal 2025 operating profits from a 10% increase in steel and aluminum prices compared to the 2024 average. According to this analysis, American players Ford Motor and General Motors will face a hit of approximately 3% to 4% if they cannot pass on their costs through higher prices.

Toyota Motor will experience a smaller decline of 0.5%, while the impact on Subaru, which conducts a large portion of its production in North America, will be around 2%.

Some parts manufacturers affiliated with Toyota bring steel from Japan for use in their US production facilities, and there have been calls for the company to cover the higher costs resulting from the tariffs.

A Toyota executive stated, “Tariffs are a factor outside their control, so we will respond appropriately.”

Japan has pushed to be exempted from the tariffs. “Steel and aluminum products from Japan do not harm the national security of the US,” Cabinet Chief Secretary Yoshimasa Hayashi told reporters on Wednesday. “On the contrary, high-quality Japanese products are difficult to substitute and are necessary to make the US manufacturing sector more competitive, and greatly contribute to US industry and employment,” he added.

According to EU-based Global Trade Alert, the tariffs announced by the Trump administration last month cover a total of 289 categories, excluding overlaps between the steel and aluminum lists. These items, which also include kitchen and sporting goods, accounted for approximately 4.5% of the US total last year, with $151 billion in imports.

China was the largest importer at $35 billion, followed by Mexico at $30.6 billion, the EU at $20.3 billion, and Canada at $17.1 billion. Japan ranked seventh at $7 billion. When EU members were counted as separate countries instead of a single bloc, 27 economies had exposures exceeding $500 million.

To avoid tariffs, steel and aluminum exports previously destined for the US may be sold in other markets instead. Jakob Stausholm, CEO of Anglo-Australian iron ore miner Rio Tinto, said last month that selling aluminum in other markets such as Europe was an option.

Tadashi Imai, chairman of the Japan Iron and Steel Federation and president of Nippon Steel, recently stated that the biggest concern is that the tariffs “contribute to the market collapse caused by China’s excessive exports.”

With China’s economy declining, steelmakers are selling products at low prices elsewhere that cannot be absorbed by the domestic market. If they face higher barriers in the US, these goods could flow to other countries.

The US is also the world’s largest exporter of scrap iron and steel, and rising scrap prices leaving the country are likely to reverberate in the global market.

A representative from Japanese aluminum manufacturer UACJ said, “The short-term impact will be small, but it could be larger in the long term.”

Although the company generally produces products for the US domestically, it imports some products with special requirements from Japan in small quantities. According to UACJ, starting alternative production in the US could take three to four years.

Other companies are turning to completely different materials. Coca-Cola stated last month that it would switch some packaging from aluminum to plastic if the tariffs came into effect.

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AMERICA

Trump signs order for ‘strategic crypto reserve’

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US President Donald Trump, in a move aimed at revitalizing the digital assets sector, has signed an executive order authorizing the federal government to stockpile cryptocurrency assets seized through law enforcement agencies.

According to a post on X by David Sacks, the White House’s crypto and artificial intelligence czar, under the executive order, the federal government will retain bitcoin assets seized by federal law enforcement, which will enter a “strategic bitcoin reserve.”

Sacks added that the reserve “will not cost taxpayers a single penny,” further authorizing the Treasury and Commerce departments to “develop budget-neutral strategies to acquire additional bitcoin, provided these strategies do not incur any additional costs on American taxpayers.”

Sacks wrote about bitcoin, “The reserve is like a digital Fort Knox. The early sale of Bitcoin has already cost US taxpayers over $17 billion in lost value. Now, the federal government will have a strategy to maximize the value of its holdings.”

The order also established a separate “US Digital Asset Stockpile” to include other cryptocurrencies seized by the government. Earlier this week, Trump hinted at the possibility of including tokens such as Ripple’s XRP, Solana, and Cardano, alongside bitcoin and ether, in what he termed the “Crypto Strategic Reserve,” causing the prices of these tokens to rise with investors’ hopes that the US government would enter the market as a major buyer of digital assets.

However, crypto prices fell immediately after Sacks’s post and recovered shortly thereafter. According to CoinGecko data, as of 4:45 PM (presumably local time, though unspecified), bitcoin was trading at approximately $88,000, down 2.8% from the previous 24 hours.

The creation of the reserve and stockpile is part of a broad shift in Washington towards policies aimed at benefiting the crypto industry. It comes ahead of a crypto summit to be held at the White House on Friday, which will be attended by leading figures in the digital assets world.

For supporters, the bitcoin reserve is a chance for the US to participate in the growth of the original cryptocurrency, and many in the market believe that the market is poised to climb higher as Trump pursues a crypto-friendly regulatory agenda.

Yet, there are still many questions about how the reserve and stockpile will operate. For example, some critics doubt that the federal government can cash in its bitcoin holdings without spooking other investors and triggering a sell-off.

Trump first promised to create a crypto reserve during a speech at a major bitcoin conference in July.

Sacks said, “I want to thank the President for his leadership and vision in supporting this cutting-edge technology and for his swift action in supporting the digital asset industry. His administration is truly moving at ‘technology speed’.”

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BlackRock to acquire Panama Canal ports in major deal

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New York-based asset management giant BlackRock announced on Tuesday that it will acquire two ports serving the Panama Canal from Hong Kong’s CK Hutchinson, as part of a larger $22.8 billion deal.

US President Donald Trump had threatened to regain control of the Panama Canal, believing that US ships were not being treated fairly due to Chinese influence. This deal could potentially alleviate those concerns.

The ports will be acquired by a consortium that includes BlackRock, as well as Global Infrastructure Partners and Terminal Investment Limited.

Hutchinson’s official statement said the deal was “completely unrelated to recent political news regarding the Panama Ports,” and that the deal was the result of a “fast” process.

BlackRock declined to comment further, but sources say the firm has informed both the White House and Congress about the deal.

According to the *Financial Times* (*FT*), CEO Larry Fink himself informed senior leaders in the Trump administration, including the president, to secure their support for the takeover, in order to overcome possible political obstacles.

A source added that the consortium would not have proceeded with its offer if it believed the US government would not support the deal.

The deal consists of two parts, one of which covers Hutchinson’s 90% stake in the ownership and operation of the Balboa and Cristobal ports in Panama.

This transaction will be conducted separately from the second part, which covers 43 ports in 23 countries, including Germany and the United Kingdom, and 80% of the shares will be sold. Hutchinson’s ports in China are not included.

The remaining 20% stake is held by PSA, a port operator owned by Singapore’s sovereign wealth fund Temasek.

BlackRock did not provide an estimated closing date, likely due to the number of different regulators whose opinions will need to be sought. The deal is expected to be formally signed by April 2.

CK Hutchison, controlled by Hong Kong’s richest man, Li Ka-shing, and his family, has a portfolio consisting of ports, retail, telecom, and other infrastructure. Port operations account for approximately 9% of CK Hutchison’s total revenue of HKD 461.6 billion (USD 593.97 billion) in 2023.

Hutchison Ports, one of the world’s largest container terminal operators, has been managing the ports at both ends of the canal since 1997 under concessions from the Panamanian government.

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