The results of the President's economic policies are becoming plain to see. The economy is mired in stagnation; inflation is picking up; and new unemployment claims are surging. The national debt is reaching catastrophic levels. The Fed is printing money to finance purchases of new debt (they bought 80 percent of the newly financed deficits for the past eight months). The most absurd economic policies in American history are bearing fruit. The economy is a total mess.
Obama often speaks of "the race to the bottom." Now we know what he means. The American economic engine, once the envy of the world, is now a joke, and a bad one at that. Obama's policies have strangled the private sector and broken the finances of the federal government.
So what is Obama doing now? He's beginning his re-election campaign. Wonder what part of this record he plans to defend?
Thursday, 28 April 2011
Wednesday, 20 April 2011
Greek Restructuring -- Sooner or Later?
It is interesting to see folks saying that if the Greeks restructure their debt (meaning a partial default on their debt) that a financial Armageddon will soon follow. Since restructuring or some type of default is inevitable for Greece, I guess there must be a financial Armageddon in our future. Last week the IMF suggested that the Greeks must restructure within 12 months and now more voices have been added saying essentially the same.
What those who worry about the coming Armageddon don't seem to get is that "restructuring" or a "partial default" is inevitable for Greece, Ireland, Portugal, Italy, and Spain. Indeed, one should add Germany and France to that list since their governments and banks have backstopped the former countries with bailouts in the past 24 months.
What is wrong with a default or partial default by Greece? Nothing. Those who have made bad loans to Greece should lose money. Is there any reason that they should be insulated from their bad decisions and the losses should be spread to those who did not make bad decisions? That's the problem with bailouts. They transfer wealth from those who made good decisions to those who made bad decisions. Why is that a good (or fair) idea? The answer is: it isn't.
Lending money to people who can't possibly pay it back is stupid and will eventually result in loss. Call it financial Armageddon or whatever you will. It is inevitable. The Western European plains are soon to be littered with defaults, partial defaults and restructurings. There is no way to avoid it. You may as well plan for it.
What those who worry about the coming Armageddon don't seem to get is that "restructuring" or a "partial default" is inevitable for Greece, Ireland, Portugal, Italy, and Spain. Indeed, one should add Germany and France to that list since their governments and banks have backstopped the former countries with bailouts in the past 24 months.
What is wrong with a default or partial default by Greece? Nothing. Those who have made bad loans to Greece should lose money. Is there any reason that they should be insulated from their bad decisions and the losses should be spread to those who did not make bad decisions? That's the problem with bailouts. They transfer wealth from those who made good decisions to those who made bad decisions. Why is that a good (or fair) idea? The answer is: it isn't.
Lending money to people who can't possibly pay it back is stupid and will eventually result in loss. Call it financial Armageddon or whatever you will. It is inevitable. The Western European plains are soon to be littered with defaults, partial defaults and restructurings. There is no way to avoid it. You may as well plan for it.
Saturday, 16 April 2011
Why Bail Out Bondholders?
Debts continue to rise in the US and in Western Europe. The so-called bailouts of Greece and Ireland simply enable those countries to get deeper in debt and continue the fiction that some day those debts can be paid off. They can't.
Over the next sixteen months, more European countries will be added to the bailout list: Portugal first, then Spain, and then attention will focus on Italy. The purpose of a bailout is to enable a country to continue to expand its debt. Is that a good idea?
Isn't it time the lenders took a loss. Why are we protecting the lenders? The lenders are sophisticated, highly paid folks, who took a risk that is not working out. They should get burned for their mistake. Why bring the taxpayers into the picture and continue to increase debt levels that everyone knows will never get paid.
It is time for a "workout," as they say in the finance world. Lenders and borrowers need to sit down at a a table and "work out" a new repayment schedule -- a schedule that will inevitably lower debt levels and force the lenders to restructure their way into losses. This is going to happen anyway. Why not start now, instead of pushing policies that simply increase debt to even higher levels and perpetuate the myth of eventual repayment.
Capitalism can't work unless you let it work. Let it work.
Over the next sixteen months, more European countries will be added to the bailout list: Portugal first, then Spain, and then attention will focus on Italy. The purpose of a bailout is to enable a country to continue to expand its debt. Is that a good idea?
Isn't it time the lenders took a loss. Why are we protecting the lenders? The lenders are sophisticated, highly paid folks, who took a risk that is not working out. They should get burned for their mistake. Why bring the taxpayers into the picture and continue to increase debt levels that everyone knows will never get paid.
It is time for a "workout," as they say in the finance world. Lenders and borrowers need to sit down at a a table and "work out" a new repayment schedule -- a schedule that will inevitably lower debt levels and force the lenders to restructure their way into losses. This is going to happen anyway. Why not start now, instead of pushing policies that simply increase debt to even higher levels and perpetuate the myth of eventual repayment.
Capitalism can't work unless you let it work. Let it work.
Tuesday, 12 April 2011
Yellen and Dudley
Academic economist Janet Yellen, now President of the San Francisco Federal Reserve Bank and Bill Dudley, long time Wall Street (Goldman Sachs) economist, now president of the New York Federal Reserve, have both chimed in on inflation in the last 24 hours. They don't see it coming. The Fed, in their view, should continue to expand its balance sheet to historic levels, effectively printing massive quantities of new dollars. Why?
Well, in their collective view, the economy is still weak and the incredibly surging commodity prices will soon be reversed. Maybe they should be trading, not running FRS banks. Their views and analysis show the poverty of economics as a science. Both Yellen and Dudley are staunch supporters of President Obama. He doesn't see any inflation coming, so neither do they. It's that simple.
Once again, the Yellen-Dudley theme is that government knows best. In this case, the government's agent is Ben Bernanke, whose famous utterance in 2007 that housing prices were justifiably high based on sound economic fundamentals, still echoes as a reminder of how little economists know about the economy.
There ought to be a rule that when you don't know anything about the future don't do anything that might make things worse. If that were the case, Ben Bernanke would be joining the ranks of the unemployed, instead of setting up future problems for the struggling American economy. His cheerleaders, Yellen and Dudley, should go back and do some research to justify their political leanings instead of sounding off about things they know nothing about. All we have learned from their pronouncements is that they both still worship at the shrine of Obama. We've learned nothing about the future of inflation from either of them.
Well, in their collective view, the economy is still weak and the incredibly surging commodity prices will soon be reversed. Maybe they should be trading, not running FRS banks. Their views and analysis show the poverty of economics as a science. Both Yellen and Dudley are staunch supporters of President Obama. He doesn't see any inflation coming, so neither do they. It's that simple.
Once again, the Yellen-Dudley theme is that government knows best. In this case, the government's agent is Ben Bernanke, whose famous utterance in 2007 that housing prices were justifiably high based on sound economic fundamentals, still echoes as a reminder of how little economists know about the economy.
There ought to be a rule that when you don't know anything about the future don't do anything that might make things worse. If that were the case, Ben Bernanke would be joining the ranks of the unemployed, instead of setting up future problems for the struggling American economy. His cheerleaders, Yellen and Dudley, should go back and do some research to justify their political leanings instead of sounding off about things they know nothing about. All we have learned from their pronouncements is that they both still worship at the shrine of Obama. We've learned nothing about the future of inflation from either of them.
Sunday, 10 April 2011
Accounting for Foreign Exchange Forward Contracts
FOREIGN EXCHANGE FORWARD CONTRACTS
An enterprise having exposure to multiple currencies by virtue receivable and payables (e.g. import and export) is likely to be worried about the exchange rate fluctuations that may result in gains and losses in the future. In order to hedge its position and to avoid the losses due to foreign exchange rate changes, the enterprise may enter into a forward exchange contract to manage the amount of the reporting currency required or available at the settlement date of transaction. Generally Accepted Accounting Principles (GAAP) and International Financial reporting Standards (IFRS) provides that the difference between the forward rate and the exchange rate at the date of the transaction should be recognised as income or expense over the life of the contract. Further the profit or loss arising on cancellation or renewal of a forward exchange contract should be recognised as income or as expense for the period.
Example:
Suppose MSD Ltd needs USD 500,000 on 1st May 2010 for repayment of a loan instalment and interest. As on 1st December 2009, it appears to the company that the USD may be dearer as compared to the exchange rate prevailing on that date, say USD 1 = INR 44.50. Accordingly, MSD Ltd may enter into a forward contract with a banker for USD 500,000. The forward rate may be higher or lower than the spot rate prevailing on the date of the forward contract. Let us assume forward rate as on 1st December 2009 was USD 1 = INR 45.00 as against the spot rate of INR 44.50. As on the future date, i.e., 1st May 2010, the banker will pay MSD Ltd USD 500,000 at Rs. 45 irrespective of the spot rate as on that date. Let us assume that the Spot rate as on that date be USD 1 = INR 45.80
Contract Summary:
Exchange Rate on the date of the Transaction (1-Dec-2009): USD 1 = INR 44.50
6 month Forward Rate on the date of the transaction (1-Dec-2009): USD 1 = INR 45.00
Spot Rate on maturity (1-May-2010) USD 1 = INR 45.80
Company’s expectation: USD may be more expensive in future
Company’s requirement: To hedge the payable of USD 500,000
Company’s Strategy: Enter into a Forward transaction with Bank. Bank will pay USD 500,000 to the company on 1-May-2010
In the given example MSD Ltd gained INR 2,40,000 by entering into the forward contract.
Payment to be made as per forward contract (USD 500,000 * Rs. 45) INR 22,500,000
Amount payable had the forward contract not been in place (USD 500,000 * Rs. 45.80) INR 22,900,000
Gain arising out of the forward exchange contract INR 400,000
Recognition of expense/income of forward contract at the inception
The difference between the forward rate and Exchange rate of the transaction should be recognised as income or expense over the life of the contract. In the above example, the difference between the spot rate and forward rate as on 1st December is INR 0.50 per USD. In other words the total loss was INR 250,000 as on the date of forward contract.
Since the financial year of the company ends on 31st March every year, the loss arising out of the forward contract should be apportioned on time basis. In the given example, the time ratio would be 4:1; so a loss of INR 200,000 should be apportioned to the accounting year 2009-2010 and the balance INR 50,000 should be apportioned to 2010-2011.
The exchange difference between forward rate and spot rate on the date of forward contract should be accounted for. As a result, the benefits or losses accruing due to the forward cover are not accounted.
Profit/loss on cancellation of forward contract
Profit/loss arising on cancellation of renewal of a forward exchange should be recognised as income/expense for the period.
In our example, if the forward contract were to be cancelled on 1st March 2010 @ USD 1 = INR 45.90, MSD Ltd would have sustained a loss @ INR 0.10 per USD. The total loss on cancellation of forward contract would be INR 50,000. This loss should be recognised in the financial year 2009-2010.
An enterprise having exposure to multiple currencies by virtue receivable and payables (e.g. import and export) is likely to be worried about the exchange rate fluctuations that may result in gains and losses in the future. In order to hedge its position and to avoid the losses due to foreign exchange rate changes, the enterprise may enter into a forward exchange contract to manage the amount of the reporting currency required or available at the settlement date of transaction. Generally Accepted Accounting Principles (GAAP) and International Financial reporting Standards (IFRS) provides that the difference between the forward rate and the exchange rate at the date of the transaction should be recognised as income or expense over the life of the contract. Further the profit or loss arising on cancellation or renewal of a forward exchange contract should be recognised as income or as expense for the period.
Example:
Suppose MSD Ltd needs USD 500,000 on 1st May 2010 for repayment of a loan instalment and interest. As on 1st December 2009, it appears to the company that the USD may be dearer as compared to the exchange rate prevailing on that date, say USD 1 = INR 44.50. Accordingly, MSD Ltd may enter into a forward contract with a banker for USD 500,000. The forward rate may be higher or lower than the spot rate prevailing on the date of the forward contract. Let us assume forward rate as on 1st December 2009 was USD 1 = INR 45.00 as against the spot rate of INR 44.50. As on the future date, i.e., 1st May 2010, the banker will pay MSD Ltd USD 500,000 at Rs. 45 irrespective of the spot rate as on that date. Let us assume that the Spot rate as on that date be USD 1 = INR 45.80
Contract Summary:
Exchange Rate on the date of the Transaction (1-Dec-2009): USD 1 = INR 44.50
6 month Forward Rate on the date of the transaction (1-Dec-2009): USD 1 = INR 45.00
Spot Rate on maturity (1-May-2010) USD 1 = INR 45.80
Company’s expectation: USD may be more expensive in future
Company’s requirement: To hedge the payable of USD 500,000
Company’s Strategy: Enter into a Forward transaction with Bank. Bank will pay USD 500,000 to the company on 1-May-2010
In the given example MSD Ltd gained INR 2,40,000 by entering into the forward contract.
Payment to be made as per forward contract (USD 500,000 * Rs. 45) INR 22,500,000
Amount payable had the forward contract not been in place (USD 500,000 * Rs. 45.80) INR 22,900,000
Gain arising out of the forward exchange contract INR 400,000
Recognition of expense/income of forward contract at the inception
The difference between the forward rate and Exchange rate of the transaction should be recognised as income or expense over the life of the contract. In the above example, the difference between the spot rate and forward rate as on 1st December is INR 0.50 per USD. In other words the total loss was INR 250,000 as on the date of forward contract.
Since the financial year of the company ends on 31st March every year, the loss arising out of the forward contract should be apportioned on time basis. In the given example, the time ratio would be 4:1; so a loss of INR 200,000 should be apportioned to the accounting year 2009-2010 and the balance INR 50,000 should be apportioned to 2010-2011.
The exchange difference between forward rate and spot rate on the date of forward contract should be accounted for. As a result, the benefits or losses accruing due to the forward cover are not accounted.
Profit/loss on cancellation of forward contract
Profit/loss arising on cancellation of renewal of a forward exchange should be recognised as income/expense for the period.
In our example, if the forward contract were to be cancelled on 1st March 2010 @ USD 1 = INR 45.90, MSD Ltd would have sustained a loss @ INR 0.10 per USD. The total loss on cancellation of forward contract would be INR 50,000. This loss should be recognised in the financial year 2009-2010.
Friday, 8 April 2011
Sound and Fury ...Signifying Nothing
The budget impasse is a lot of drama over very little. A $ 40 billion spending reduction shows that neither political party understands the depth of the US's national debt problems. It will likely take a failed treasury auction before the politicians on either side of the aisle understand how serious the US situation is. We are not that far from a Greece debacle or a Portugal debacle....and the European Central Bank is not available for our needs. Perhaps Obama should go ahead and take his Virginia vacation this weekend as planned. He doesn't really understand what's going on anyway.
By contrast, the victory in Wisconsin for Scott Walker is a true victory for fiscal sanity. Things look brighter in Wisconsin, but they remain pretty dim for the US taxpayer.
By contrast, the victory in Wisconsin for Scott Walker is a true victory for fiscal sanity. Things look brighter in Wisconsin, but they remain pretty dim for the US taxpayer.
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