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Economics

Scarcity in an abundant world: Poverty and the Economic divide in the US

The financial rescue or the stimulus package for low-income groups and businesses hit by Covid is criticised at almost all affluent dinner tables.

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If you live in the United States, an common weekend chore is a trip to Costco, the most beloved store in the country, to conveniently purchase a five litre bottle of ketchup, a five pound bag of your favourite candy or 10 toothbrushes in one packet. Abundant quantities mean more bang for your buck. The pushers of hundreds of carts rolling out of the store seek sense of security that ensuring that will never run out of ketchup and that by buying in bulk, they are getting a great deal. While big box stores have gradually morphed into consumer marketplaces, whether you are a household of two or ten you can buy all you want to the delight of your heart. A trip to Costco can make you forget all about the world, be it just for 30 minutes. 

Despite the world being full of commodities, scarcity is a living reality for millions in America. Economic wellbeing is not a certainty in a capitalistic society like the United States. Capitalism inherently is not a discriminatory economic model, as it is based on the core fundamentals of free enterprise and competitive marketplaces. There is no dearth of free enterprise in the US; however, the element of competitiveness is gradually depleting. One big corporation is swallowing another company to create a bigger giant than before, just to benefit from bigger breaks. America is the land of opportunity; There are countless anecdotal stories of those who have been able to make fortunes out of nothing. However those that are successfully able to accumulate wealth remain a few in number; while those who are economically vulnerable, remain vulnerable. While Elon Musk and Jeff Bezos are in efforts to launch rockets into  outer space, 1 in 7 American children goes hungry to bed. For thousands of families, school closures during the global Covid-19 pandemic did not mean just entail learning gaps, but meant one less meal for their child. Vulnerable economic populations deserving some share of the abundance are often described as “free riders”. ‘Each for its own self’ is the core principal of the American economy.

Unfortunately, one’s zip code and where he or she resides determines one’s economic and social standing in the system. A zip code with a higher percentage of low income and minority populations translates into poor infrastructure, inadequate healthcare services, poorly rated public schools, and housing scarcity, making poverty a multi-generational cyclical issue. In mainstream America, a bricks and mortar store has aisles and aisles of cereal types, yet a good number of the population cannot afford even cereal – there’s a plethora of variety, but it remains inaccessible to many. One in seven Americans are projected to have resources below the poverty line in 2021. The poverty rates for 2021 are projected at 13.7%, with 4.4 percent of people in deep poverty. Black people and Hispanic people are experiencing poverty at about twice the rate of white people. Poor neighbourhoods visually depict scarcity; there are usually more liquor stores than fresh produce stores, more cash checking shops than banks, and less affordable housing than mainstream America suburbs.

Public Housing projects have started to emerge in the 1960s promising  minority demographics economic security. Somehow, they became a major hindrance to economic freedom for the same communities. Suburban areas with a largely white demographic developed into small towns and cities of their own with ample access to supermarkets and fancier establishments, while those living in urban minority populations remained yearning for the basics. In addition, poor minority populations have to carry the heavy burden of strong, undermining stereotypes, illiteracy and less opportunistic attitudes. This cause and effect of economic disparity contributes to the systematic discrimination. The challenge of mental and physical escape from the zip code boundaries makes it not a fair game. As in a reversal of fate, today the same minority groups are experiencing gentrification in major cities and poorer communities are being further pushed out to areas with little to no economic resources. 

The financial rescue or the stimulus package for low-income groups and businesses hit by Covid is criticised at almost all affluent dinner tables. While Walmart and Best Buy have had to slightly adjust their business models, the blue collar workers or businesses do not have similar conveniences; the latter have been hit harder. Big companies are finding new savings by facilitating a remote work environment, and the shift to remote work seems inevitable. My no-commute work will be a convenient, flexible and often described as creative solution. But, this solution is not available by service workers such as bus drivers, gas station workers, or security guards whose physical presence is compulsory. What is profitable to one group will result in less for another. Access to education, public services, investment in infrastructure will further decline due to the widening digital and economic divide. 

Political leaders advocating for social support are ridiculed as being socialists who are working against the core American values. Historically, economic decisions have been more favourable for wealthier America. Social welfare is considered un-American.  Political leaders are shy to put forward any agenda for free education, health care or taxes for the wealthy; and those who do, often lose. The question of how to address scarcity for millions in an abundant land such as America requires a policy, economical, and societal shift. The future seems bright as younger America is promoting a new vision of equality, but it is too early to determine when scarcity will change into availability.

All views expressed in this editorial are solely that of the author, and are not expressed on behalf of The Analyst, its affiliates, or staff.

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Economics

Lebanon’s crashing economy leaves many desperate for basic needs

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The ongoing struggles in Lebanon have resulted in a huge chunk of the population struggling to make ends meet. With about half of the population currently living below the poverty line, families are finding it difficult to cover the essentials to survive. Lack of access to food, medicine, shelter, and money from the banks is a serious problem across the country. 

The collapsing economy, alongside the nation’s failing political system, has left the Lebanese people feeling frustrated at how the government has been handling the back-to-back crises the country has faced over a number of years. 

Financially, the value of the Lebanese Pound (LBP) has been plummeting since March 2020, accelerated by the pandemic and political unrest. Then, one Great British Pound (GBP) was equal to around 1,700 LBP, whereas today it is north of 2,050 LBP. This has resulted in stagnant wages being unable to cover even the most basic of living costs for lots of people. 

In August of 2020, the Lebanese government was forced into resigning after numerous anti-government protests across the county, which were sparked by the explosion which centred at the port in Beirut. The incident killed at least 200 people, left about 5,000 people injured, millions were made homeless, and it pushed the entire country into even further economic turmoil.

Discontent with the Lebanese government was already running rampant by that point, due to concerns over deeply rooted corruption. For years, citizens have struggled to get the government to cater to the most basic of needs; they face daily power cuts, limited public healthcare and lack of safe drinking water. All the while, there is a huge economic disparity, with the rich truly shadowing the general population in terms of standard of living. 

These factors have all pushed a struggling nation even further into debt, financial ruin, and political uncertainty. 

Global leaders have spent decades staging various forms of intervention across the Middle East, with President Emmanuel Macron being the latest to announce an aid event to be hosted for Lebanon next year on 4th August, the first anniversary of the Beirut disaster. 

Even with international aid, Lebanon will still need both stable internal leadership, and time, to get through these troubles.

All views expressed in this editorial are solely that of the author, and are not expressed on behalf of The Analyst, its affiliates, or staff.

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Economics

The Australia-China trade spat

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For many years, Australia has been feeding China’s meteoric rise into becoming an economic strongman supplying commodities like iron ore and other exports such as  seafood, timber, alcohol, and coal. Yet, the geopolitics of the pandemic has forced Australia to square up to a “more assertive” China with the latter only recently revealing that its trade sanctions against Australia were in retaliation for Australia going against China’s narrative and its view of the world. To put it simply, China is using Australia as an example to the rest of the world – if a country crosses China’s path, then prepare to feel China’s wrath via economic sanctions and political desertion.

China’s approach to upending Australia’s export-heavy economy has largely proved to be somewhat of a blessing in disguise, with Australian exporters finding success in other markets beyond China. Some commentators have said these bans have diversified the markets of Australian exports, which is good given how the bans exposed Australian exporters’ addiction towards the Chinese market. Roland Rajah, an economist at the Lowy Institute noted that “Australian coal in India has been gaining market share” and that the coal trade was 9.5b AUD higher than before the ban (in annualized terms). However, sectors such as beef and alcohol seem to be struggling, and while the latter has found record sales in Britain, it still did not beat the amount the Chinese market was buying.

China achieves political desertion by instructing its allies to alienate the country in question by abandoning all diplomatic, economic and military channels. It has achieved great success in alienating Taiwan for instance, from many countries especially developing ones. In return for denouncing Taiwan and adhering to China’s view that it is a rebel territory yet to be unified with China, the country receives diplomatic, economic and military aid and partnerships. To date, only about 15 countries have diplomatic relations with Taiwan, showing how closed-door lobbying and dirt cheap Chinese credit is valued far more than Taiwan’s right to independence. Probably the most striking factor is that the United Nations does not recognise Taiwan either, leaving it abandoned on the world stage.

While concrete evidence of Australia being deserted by China is yet to exist, Australian allies have stepped up their rhetoric in their commitment to stand by Australia’s side. This is something the Trump administration was vocal about with former Secretary of State Mike Pompeo declaring that “we stand with Australia” and their decision to call for an independent inquiry into the pandemic’s origins. It should be noted this was a bipartisan response from Washington D.C with this letter signed by 27 members of Congress from both parties reaffirming its support for Australia and condemning China’s economic manipulation. 

In economic terms, the first material impact occurred when Beijing threatened – and followed through – to ban Australian barley from being imported should Australia pursue a motion for an independent inquiry into the pandemic’s origins. In 2018 alone, that market was worth AUD 1.5b. In return, Australia got the support of more than 120 member countries at the 2020 World Health Assembly and that became the catalyst for where the trade relationship rests today. 

The scope of the import bans from barley alone was extended to beef, wine, coal, cotton, timber and lobsters while China warned its local population against studying or touring in Australia. To illustrate the stakes this trade relationship holds, the Australian Department of Foreign Affairs and Trade (DFAT) estimates that in the 2018-19 year, the two-way trade between the two countries was worth AUD 235b, or 27% of all Australian trade making it the most valuable trading relationship. So, it does not help if diplomatic relations sour, as the economic repercussions follow suit. 

China’s furore did not stop there. In what was widely perceived to be a deliberate public relations stunt, the Chinese embassy in Australia released a list of 14 grievances against Australia. Items in the list included blocking Huawei from the 5G rollout, calling for an investigation into Covid-19’s origins, speaking out about the South China Sea, accusing China of human rights abuses in Xinjiang, among others. The embassy said that should Australia apologise for its anti-Chinese rhetoric, then the relationship will get back on even ground. A Chinese foreign ministry spokesperson said Australia “slandered and accused China of engaging in intervention and infiltration activities in Australia” revealing how seriously the Chinese embassy took these grievances.

Officially that list has been labelled a “massive own goal by China” by the then Secretary of DFAT, Frances Adamson. As of the time of writing, China continues to be an economic headache for Australian exporters and whether Australia can weather the storm depends on its success in pivoting to other markets. China also has a stake here as it cements its image like a dragon whose wrath better not be incurred, lest the economic tirade directed at Australia be directed at a country less stable in governance and vulnerable and reliant on foreign aid and investment. 

Only time will tell whether Australia sticking to its values is worth the money.

All views expressed in this editorial are solely that of the author, and are not expressed on behalf of The Analyst, its affiliates, or staff.

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Economics

Has the UK government borrowed too much money?

During the pandemic, the UK government has spent billions of pounds to help the public. Where has the government found this money, and how will we pay back our large debt?

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The state of the current UK economy

The UK was issued its first debt in 1694, during the reign of William III. Since then, the UK has borrowed a lot of money due to wars and other national events. Borrowing money is easy, but paying it back is often more of a challenge. The UK government was planning to borrow £160bn even before the Covid-19 outbreak, of which nearly £100bn would have been just to pay back previous debt. 

Looking at the current debt, statistics from the ONS indicate that where the debt has increased over the last decade, the debt as a percentage of the GDP has not increased as much. This suggests that either the UK is paying back the debt, or the GDP (‘Gross Domestic Produce’) i.e. the total value of goods and services produced by a country) is growing at a faster rate. This is arguably a positive thing because, despite large debt, our economy remains strong enough to handle our debt levels. 

Government borrowing this April was at £31.7bn – the second-highest borrowing in April since records began in 1993. This is £15.6bn less than in April 2020.

Why is the UK government borrowing money?

Many countries need to borrow money, as they are spending more than their income (government income is mainly from the taxes which we pay). Though government can increase taxes to match spending, this will politically damage a government as the public do not like high taxes. We can see this in Columbia, where mass protests were triggered by proposed tax reforms that were subsequently very quickly withdrawn. Higher taxes would also mean less consumer spending, and so the economic growth of the country would decrease. Thus, borrowing money instead is a better option. 

When the Conservatives won the 2019 General Election, they promised not to increase income tax, corporate tax, and Value Added Tax. To maintain this promise, Sunak is freezing the tax threshold. This is the amount of income someone needs to have to pay tax. So as the amount of wages rises a little each year, if the threshold stays the same, the government can receive more tax, without raising the tax. 

How does the UK government borrow money?

The UK government mainly uses bonds to borrow money. A government bond is a promise between the public and the government, where the public buys government bonds at a fixed rate of interest. These bonds are also bought by different financial institutions, as well as by the Bank of England, to stimulate the economy (quantitative easing), but they can also be bought by private savers. This method of investment is very reliable, as there is a very small chance of not being paid back by the government.

Debt interest

Government spending on debt interest was lower in 2020/21 than in 2019/20. This can be attributed to two factors: lower inflation (the interest paid on around 20% of government debt is linked to inflation) and the Bank of England holding around 30% of government debt. The effective interest rate paid by the government on the debt held by the Bank of England is the UK’s official interest rate (known as the bank rate), which has been at a record low during the pandemic.

Why has the UK government borrowed so much?

The UK government has provided a lot of financial support to individuals, as well as businesses e.g., through the furlough scheme. During the pandemic, as there were less people in work, not only did the UK government receive less tax (corporate and income tax), but it also had to provide more unemployment benefits. The deficit grew. 

The government supported the public in two main ways:

Subsidies

In 2020, the UK government spent over £140 billion in subsidies. Out of this, £64bn was spent on the Coronavirus Job Retention Scheme (the furlough scheme), and £20bn was spent on the self-employed.

Goods and services

The UK government’s day-to-day spending (current spending) on goods and services increased to a total of £506bn. This includes the costs of Test and Trace, as well as the vaccines. 
Reuters Graphic

The graph on the above shows the debt of the UK compared to other nations. The UK is fourth in the list, below France, Spain and Greece, respectively. This shows that we have accumulated a lot of debt. However, as analysis by Bloomberg Economics shows, debt from G-7 countries rose from 85% of GDP in 2005 to 140% in January 2021. The cost of servicing that debt, on the other hand, has fallen, from close to 2% of GDP to 1.5%. Projections out to 2030 show that for many countries, costs are expected to stay manageable. Thus, though it will take us a long time to pay back our debt, we will be able to pay it back. We must also recognise that extra spending because of the pandemic has been necessary to push the economy through this difficult period; one which has affected economies globally. 

What is the impact of this debt?

The UK economy, though heavily in debt and with high levels of unemployment, should see a “bounce-back” in the economy, though it will not be a boom, as seen in post-war nations. It is not clear yet whether the 7.25% prediction for the increase of GDP will prove accurate. Post-Brexit Britain has seen an increase in Europeans leaving the UK. Therefore, there are greater employment opportunities for the younger generations but, even so, they may not fill up all the gaps that Brexit may have caused in the jobs market. Large government investment is already needed to mitigate the climate crisis and this may compromise the strength of this “bounce-back”. 

All views expressed in this editorial are solely that of the author, and are not expressed on behalf of The Analyst, its affiliates, or staff.

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Economics

Is Cryptocurrency a Viable Replacement? – In Focus

How does Cryptocurrency differ from standard or Fiat Currency and what’s next for these distributed networks?

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All views expressed in this editorial are solely that of the author, and are not expressed on behalf of The Analyst, its affiliates, or staff.

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Economics

What is Cryptocurrency and Who Controls It? – On the Radar

What are you actually getting when investing in Cryptocurrencies? We discuss this question and more in this episode of On the Radar, with Azeem Khan, CEO of the Medici Consulting Group and Maaz Bajwa, Engineer and Macro Economist, looking at the differences between standard or fiat currencies and these new, blockchain-based cryptocurrencies.

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What are you actually getting when investing in Cryptocurrencies? We discuss this question and more in this episode of On the Radar, with Azeem Khan, CEO of the Medici Consulting Group and Maaz Bajwa, Engineer and Macro Economist, looking at the differences between standard or fiat currencies and these new, blockchain-based cryptocurrencies.

THIS IS NOT FINANCIAL ADVICE. You should do your own research before investing any money.

All views expressed in this editorial are solely that of the author, and are not expressed on behalf of The Analyst, its affiliates, or staff.

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Economics

Canada’s red-hot housing market is a recipe for disaster

Canada has seen dramatic inflation of house prices in the past decade, one of the highest in G20 nations

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Canada has seen dramatic inflation of house prices in the past decade, one of the highest in G20 nations (Figure 1). Amongst other factors such as foreign investment and economic growth, experts accredit this rise to increased mortgage accessibility. During the 2008 financial crisis, Canada remained largely immune to the global crash of the housing market due to government-mediated reduction in interest rates and easing criteria for mortgages. This encouraged house buying that not only stabilized the market but also inflated prices. 

Figure 1
Percentage change in house prices of G20 countries between 2010 and 2020, adjusted for inflation. Data obtained from OECD.Percent change calculated as (new real price – old real price) / old real price. G20 members Argentina and Saudi Arabia omitted due to insufficient data. BRA: Brazil; RUS: Russia; ITA: Italy; ZAF: South Africa; KOR: South Korea; IDN: Indonesia; EU: European Union; FRA: France; TUR: Turkey; JPN: Japan; UK: United Kingdom; AUS: Australia; MEX: Mexico; CHN: China; USA: United States of America; DEU: Germany; CAN: Canada; IND: India.

Since then, efforts have been made by the Canadian government to prevent housing bubbles, including after the 2016-17 market overheating event, with some success. Subsequently, rising interest rates and stiffening mortgage criteria resulted in a partial cooldown of the market. However, the Covid-19 pandemic sparked anxieties regarding Canada’s economic future. Anxieties further heightened following a slight decline in house prices at the onset of the pandemic in early 2020. As a result, Bank of Canada once again slashed the interest prices driving eager investors and buyers into the market, thereby reversing the short-lived downwards trend.

The housing market continued to overheat beyond expectations throughout 2020 and early 2021. Today the average house price in Canada has soared to $678,091, a 25% increase from last year. A recent analysis of housing affordability by RBC Economics showed that housing is more unaffordable than ever in major metropolitan areas in Ontario, British Columbia, and Quebec. Such overheating has not been observed since the early 1980s, and has led many experts to believe that the housing bubble is on the verge of collapse. But the ever-growing demand for real estate shows that many still have unshaken faith in the housing markets of major Canadian cities.

Thus far, the Canadian government and Bank of Canada have expressed little interest in tackling the housing crisis, at least until the economy can recover from the effects of the pandemic. In a recent press conference Bank of Canada governor Tiff Macklem stated, “right now the economy is weak…I think we need the support – we need the growth we can get.” While investors rejoice, this trend is troubling for low-to-middle income Canadians and new buyers, who wonder if home ownership is now out of their reach.

In the fourth quarter of 2020, 50.3% of an average Canadian household income was required to cover costs of home ownership. These statistics were even higher in major cities like Vancouver and Toronto, where households spent 78.8% and 67.6% of their income, respectively, just to own a house. Such effects are no longer isolated to major cities as housing unaffordability drives buyers further from city centers, spilling the housing crisis into neighboring areas and smaller towns. 

Even more worrying is the immense mounting household debt as a result of increased housing prices and lowered interest rates. Between third and fourth quarter of 2020 alone, mortgage debt increased by $6.6 billion, bringing it to a total of $34.9 billion. Currently, the average household debt exceeds average income. While experienced and inexperienced investors alike, rush to cash in on the hot market, growing debt and subsequent imbalances in the housing market make it vulnerable to economic stress.

The threat of this imbalance worries even the Bank of Canada, as Macklem recently expressed concern; “what gets us worried is when you start to see extrapolative expectations, or people starting to speculate on this, and houses become assets as opposed to something we live in”. Unsurprisingly, at most risk are lower income households, for whom mortgage debt can be crushing. A recent study published by the International Journal for Equity in Health revealed that in Canada, high mortgage debt is strongly associated with high prevalence of food insecurity. Furthermore, this effect was found to be even more pronounced in lower-income homeowners.

Some experts believe strong federal intervention can make the housing market more affordable. The Liberal government has discussed plans for constructing affordable housing, as well as further taxing foreign investors, though little action has been taken so far. Some believe more needs to be done if Canada’s unruly housing market is to be controlled. Suggestions include additional aid to first-time home buyers, taxing investors, especially those hoarding vacant homes, and diversifying the economy. Nevertheless, the focus of the federal government at the moment seems to be limited to the pandemic.

The housing market in Canada has historically been treated as a buffer to mediate periods of economic stress. This method has seen some success in the past and currently seems to be holding together a fragile economy destabilized by Covid-19. However, this approach is ultimately short-sighted. Rising house prices and household debt make Canadians and their economy increasingly sensitive to economic shock. Relying on the housing market to soften the blow of economic uncertainty is not a solution, rather it is delaying the inevitable. Moreover, this tactic benefits the wealthy, while furthering the plight of vulnerable groups. Canada must work towards building a robust economy more adept at handling unforeseen stresses without targeting affordable housing.

All views expressed in this editorial are solely that of the author, and are not expressed on behalf of The Analyst, its affiliates, or staff.

Graduate student interested in world politics, social issues, science and the environment.

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