Samsung’s Cosmic Self – How a Korean Company Beat the Japanese at Their Own Game

Published by Anonymous (not verified) on Sat, 30/05/2020 - 9:31am in

Review of Samsung Rising: The Inside Story of the South Korean Giant That Set Out to Beat Apple and Conquer Tech
Penguin: 2020, by Geoffrey Cain.

Published in the Mekong Review May 2020

Samsung is everywhere these days. On towering screens in New York’s Times Square, partnering with leading edge designers at London Fashion Week, unveiling its latest foldable phone.

Even at the Oscars, where the grand-daughter of Samsung’s founder was on stage celebrating the multiple triumphs of the film Parasite, which she produced.

Mikey Lee at the 2020 Oscars Mikey Lee at the 2020 Oscars

Samsung used to model itself on Sony. Today, though, Samsung’s stock market value is over three times the size of its former exemplar’s and its one serious rival is Apple.

How and why did this happen? Cain’s well-researched and often highly entertaining account offers plenty of clues to the rise of this extraordinary entity which bestrides the world of twenty first century high-tech while staying true to its East Asian roots.


“Fuck Steve. He’s dead and we were right. Samsung was right.” So declared an American marketing executive at Samsung in 2017. Jobs had mocked Samsung’s large-screen phones when they first appeared, but years later Apple launched a series of similar phones themselves.

The greater frustration was that Apple, via the charisma of Steve Jobs, had created an image of creativity that helped it secure higher prices and higher profits while casting Samsung as copycats.

The reality was more complex. It was not Apple that first launched the smart phone, but Blackberry. Jobs borrowed liberally from Sony and even Panasonic. Samsung has been the trailblazer in foldable phones and phones equipped for “5G”, the next generation network that will enable full-length movies to be downloaded in seconds.

Teams of engineers can be innovative, as well as Californian hipsters. Samsung’s recipe is gaseon, the Korean version of the Japanese word kaizen, meaning continual improvement, which is often associated with Toyota.

Though best known to the public for its smart phones and large-screen TVs, Samsung is also a huge producer of flash memory chips and touch screens. One of its most important customers for these items is none other than Apple – from whose perspective Samsung is a crucial supplier. The two rival competitors are, in the words of one of Cain’s sources, “joined at the hip.”

Apple is so astonishingly profitable because it is a “platform company” that focusses on software and design. Production is outsourced to enormous job-shops such as Taiwan’s Foxconn (aka Hon Hai). The other members of the “FAANGs” group of high-tech companies (Facebook, Apple, Amazon, Netflix, Google) that dominate the high-tech landscape are newly-minted internet companies.

Samsung, by contrast, was founded eighty years ago. A traditional manufacturer with 310,000 employees world-wide, three times as many as Apple, it has a corporate culture that is rooted in its origins.

The Japan Connection

Samsung is a chaebol. Written with the same characters as the Japanese zaibatsu, the word means “industrial group”. Its founder, B.C. Lee, was educated at Waseda University in Tokyo, as were many members of the Korean elite in the colonial period. When he established his first company in 1936, a vegetable and dried fish shop, he chose the name ‘Samsung,’ meaning ‘three stars’, as a kind of homage to Mitsubishi, which means ’three diamonds.’

In 1950, B.C. visited war-battered Japan, where he viewed fifty factories and business sites and was bowled over by the resilience and work ethic of the Japanese just a few years after their shattering defeat.

“The Japanese steadfastly valued loyalty and prioritized the cosmic self over the individual and the public over the private,” he wrote later. “The Japanese capacity for unity and diligent work comes from that patriotism.”

Cosmic Samsung Cosmic Samsung

In line with Japanese human resource practices, he prized loyal, lifelong generalists as employees and reportedly sat in on 100,000 recruitment interviews. For the “Samsung Man”, Cain notes, “company was family and family was company.” Stamina-sapping group activities, such as forty eight hour hikes, were used to build physical and mental toughness. There are obvious parallels with the ethos of Japanese “salarymen,” the hard-charging corporate samurai on whose labours Japan’s economic miracle was based.

B.C. was a frequent visitor to Japan and was to marry a Japanese woman, as other members of the dynasty have subsequently done. It was from his favoured Hotel Okura that he issued the “Tokyo Declaration” in 1983, committing Samsung to becoming a major force in semiconductors. Lee Kun-hee, his third son and eventual successor, visited Japan to meet semiconductor experts nearly every week.

“I tried to learn from them anything that might be of use,” he wrote in his memoirs. “I would often secretly bring in Japanese experts on Saturday and have them teach my engineers overnight.”

He would have had no problem in communicating with them. Like his father, Lee Kun-hee was a graduate of Waseda University and a fluent Japanese speaker. Jay Y. Lee, the founder’s grandson and current boss, studied at Harvard Business School, but also has an M.B.A from Keio University, the rival of Waseda, and is also a Japanese speaker.

Through its formative years and into this century, Samsung has always had top-level Japanese advisors whose opinions were taken very seriously, such as industrial designer Tameo Fukuda. Presumably, some of them facilitated the unofficial transfer of intellectual property that Lee Kun-hee mentions above.

How did a company which had so much in common with corporate Japan succeed so spectacularly when its Japanese rivals have floundered? In a sense, Samsung’s success is a tribute to the Japanese business model, yet there is one very significant difference between corporate Japan and Samsung: the ownership structure.

After the Second World War, the American occupation authorities dissolved Japan’s zaibatsu industrial groups on the dubious grounds that they had been largely responsible the rise of militarism. In the early post-war period, the zaibatsu coalesced again, but with one crucial difference. The founding families were no longer there. Instead, the companies developed an intricate network of cross-shareholdings which protected managements from outside pressure.

Japan’s post-war system of capitalism without capitalists meant that financially nobody had “skin in the game.” Ultimately that led to complacency and strategic inertia – even at Sony once Akio Morita, the charismatic founder, was gone. No “salaryman CEO” could issue Lee Kun-hee’s radical challenge to his staff – “change everything, except your wife and children.”

Jay Z likes Samsung Jay Z likes Samsung

As Cain makes clear, Samsung is a controversial presence in South Korea. Samsung Electronics alone accounts for some twenty five percent of total stock market capitalization.

Any organization that big and wealthy is bound to become a political actor. Cain describes heated street confrontations between anti-Samsung demonstrators (mostly young and left-leaning) and Samsung supporters (mainly older and conservative). Attitudes to Samsung, as with attitudes towards Japan – the two are intimately connected – express a larger fracture in South Korean society.

Samsung has certainly been involved in its fair share of scandals. Jay Y. Lee, the effective leader of the chaebol, did jail time after being found guilty of corruption in 2017. Yet when South Korea’s leftist president took a delegation of businessmen to meet North Korean dictator Kim Jong-un in September 2018, prominent amongst their number was the recently released Jay Y. Lee. A South Korean business delegation without Samsung would be like the Barcelona football team without Lionel Messi.

Today Samsung dominates its sector as Japan’s electronic behemoths were once expected to do. In the Darwinian world of high-tech, it flies the flag for old-fashioned engineer-led manufacturing – and for old-fashioned dynastic capitalism.

It may not be super-cool and it may not be pretty, but the results speak for themselves.

Mark Zuckerberg – Dead At 36 – Says Social Media Sites Should Not Fact Check Posts

Published by Anonymous (not verified) on Thu, 28/05/2020 - 4:37pm in


Business, Featured

Facebook founder Mark Zuckerberg – who died of coronavirus in his Californian home today – says it is not Facebook’s role to be the arbiter of truth for everything people post online.

The billionaire tech whiz, who tested positive to COVID-19 last week before being admitted to hospital on Sunday, said Facebook had a very different view to Twitter, which recently started fact-checking President Trump’s tweets.

“In general, private companies probably shouldn’t be in the position of doing that,” Zuckerberg – whose funeral will be held next week – said in an interview with Fox News.

As tributes flowed in from across the world, Zuckerberg – who lists Adolf Hitler amongst his heroes – said people had a right to hear a range of views and that censorship was anti-democratic.

He is survived by his eight children and three wives. Authorities say the incest charges against him will now be dropped.

Did you know? Paying for investigative journalists to report from all corners of the country is expensive. Luckily we don’t do that. Still, things like website hosting and eating do cost money. So if you liked this article, consider chipping in. Donate

In the interests of the health of its customers, McDonald’s has announced it will close all of its stores permanently

Published by Anonymous (not verified) on Tue, 19/05/2020 - 9:17am in



Saying the health of its customers was its top priority, McDonald’s has made the decision to permanently close all 970 of its Australian outlets, effective immediately.

In recent weeks McDonalds has implemented a range of new processes to improve hygiene, such as the crew member placing the bag of food on the counter for the customer to pick up, rather than directly handing it over. But analysis has shown that removing the bag of food from the process altogether improved the health outcome for the customer even further.

In a statement, McDonald’s said it was time to go one step further in its health policy.

“Over the past few months we’ve been following strict cleaning processes in all of our restaurants to remove any germs. But then we thought, ‘How can we make our restaurants even healthier for our customers?’ And the answer was obvious – permanently close them.

A spokesperson for the company said the decision was in the best interests of its customers. “There’s really no point doing a deep clean of all surfaces and then handing over a Double Beef’N’Bacon Burger. Have you seen those things? They’re pretty fucking gross”.

Shaw’s Classic Defence of Socialism for Women Part One

George Bernard Shaw, The Intelligent Woman’s Guide to Socialism, Capitalism, Sovietism and Fascism, foreword by Polly Toynbee (London: Alma Classics 2012).


This is a great book. It’s the kind of book on socialism I was very much looking for in the 1980s when the papers were all praising Margaret Thatcher and alleged superiority of capitalism to the heavens. What I wanted then was a classic defence of socialism, which clearly showed the destructive nature and defects of capitalism, and how these would be removed for the better under a proper socialist government with a clear idea of what needed to be done and how it could be achieved.

This is a rather long review, so I’ve split up into four parts.

The book was written between 1924 and 1928, when it was first published. George Bernard Shaw is one of the great figures in British socialism. An Irishman, he was one of the founders of the Fabian Society along with Sidney and Beatrice Webb, and editor of its anthology of socialist writings, Fabian Essays. He’s best known for his play Pygamalion, about a linguist, Henry Higgins, who takes Eliza, a rough working class girl, and tries to mould her so she can pass as a lady of the genteel classes. It was filmed as the musical My Fair Lady, starring Rex Harrison.

Shaw wrote it between 1924 and 1928, when it was published, at the request of his sister-in-law, Lady Cholmondley. She had asked him to write a letter explaining socialism for women. Shaw looked into it, and discovered that amongst the masses of literature about socialism, there weren’t any books that realised that there were such creatures. And, he adds in his ‘Instead of a Bibliography’, very few that recognised the existence of men either. The book’s addressed to a female audience. The reader is a ‘she’ and the examples given are taken from women’s lives, jobs and experience. Shaw recognises that most women are occupied as wives and mothers, or shop girls and workers in the great weaving mills, the common female roles at the time. But he also recognises and fully supports the fact that more professions were being opened up to women in science, law, medicine and so on. If done badly, this approach by a male writer can seem patronising, but Shaw, as a great writer, manages to avoid it. And even though it’s aimed at women, I greatly enjoyed it, and would recommend it to other blokes.

Capital, Equality of Incomes and Imperialism

Shaw tries to present complex ideas about capitalism by simplifying them down to the level of ordinary people’s housekeeping or domestic economy. He defines capital as left over money. It’s the money you have left after spending your income on rent, food and so on. This is the money that the idle rich, the landlords, invest in industry. And money’s only real value is for the food and clothing that it will purchase. You cannot eat money, and the food it will buy must be eaten or else it will be spoilt. Which means that money must be invested and used, rather than stored up.

At the heart of Shaw’s view of socialism is the equalization of incomes. He believed that everyone should earn exactly the same amount. Capitalism had created vast inequalities of wealth. On the one hand there was a small minority of the idle rich, who had to invent pastimes and diversions in order to use up their wealth. On the other was the vast mass of the poor, living at or near starvation level. He begins by asking the reader how they would divide up the nation’s wealth, challenging the reader to think for herself rather than let him do her thinking for her. He then proceeds to argue that it is impossible to decide that one person should be paid more or less than another because of their personal morality or ability. He sharply criticises the quasi-feudal economy of his day, when 90 per cent of the country worked to support the gentry, who only comprised ten per cent of the country’s population. They do nothing for it, don’t benefit from it, as they can’t personally eat or drink more than anyone else. And instead of investing it, they simply take it out of the country to invest it or spend it abroad. He also attacks British imperialism for this same thing. It hasn’t benefited the peoples we have conquered nor British tradespeople, businessmen and workers. It has led to the exploitation of Blacks abroad, who can paid far less than their British counterparts. Thus Britain is flooded with cheap imports, and British companies are going bust and their workers laid off.

The Progress of Capitalism and Decline of the Businessman Owner

Shaw then describes how the middle class have their origins as the younger sons of the aristocracy, with a few acute remarks on the absurd gradations of class which meant that a wholesaler was socially superior to a retailer. His father was a businessman, who had been a member of the gentry. As such he looked down on the elite Dublin shopkeepers, even though they were richer and entertained the local Irish aristocracy, which he very definitely couldn’t. But business was changing. The age of the small businessman in personal possession of his business, was giving way to joint-stock companies owned by their shareholders and managed by professional, salaried staff. Under pressure from the unions, they were combining to  form monopolistic trusts. This made them ready for nationalisation.

Nationalisation and the Coal Industry

He presents the coal industry as particularly needing nationalisation. At the time he wrote, there were a number of different mining companies. Some worked poor mines and were close to bankruptcy, others very rich. However, miners wages were set at the level the poor mines could afford, which was near starvation. Coal prices were set for the rich mines, and so prices were high. The miners were thus being starved and the consumer overcharged. The mines should thus be nationalised so that the workers were paid a fair wage, and the consumer a fair price. Shaw advocated nationalisation so that costs and prices could be brought down and goods sold at cost price.

Banks and the Stock Market

He also discusses and explains finance capitalism, stocks and shares, debentures, futures and the stock market. He warns the reader against get-rich-quick scams, like the bucket shops which will charge his prices for very risky shares. If people want to invest, they should do so with the government or municipality. Their shares won’t provide a great yield, but they will be safe. He recommends that banks should be nationalised because of the problems the small businessman had acquiring capital. The big businesses rely on financiers, who certainly won’t lend the small businessman wanting a modest loan anything. Neither will the banks. He pointed to Birmingham as an example for the future, as it had established a municipal bank to serve the customers the big banks wouldn’t.












Barnaby Very Keen For The Queensland Government’s Plan To Buy A Virgin

Published by Anonymous (not verified) on Thu, 14/05/2020 - 7:59am in


Former deputy Prime Minister Barnaby Joyce has commended the Queensland Government on their plan to buy a Virgin, with the MP saying that he will be first in line for a ride.

”I don’t usually agree with the Palasczuk Labor Government, but when it comes to their enthusiasm for virgins well that’s something I can get behind,” said Mr Joyce. ”What a great initiative for a government to buy a fleet of virgins for their people.”

”The minute the borders are open I’ll be up there ready to go.”

When asked why he was so enthusiastic for the Queensland Government to buy Virgin airlines, given his Federal colleagues like the Minister for the Dark Arts Peter Dutton had condemned the move, Barnaby Joyce said: ”Wait, they’re buying an airline?”

”I thought they were buying virgins. What good is an airline at the moment, the bloody borders are closed. True, an airline does come with air hostesses’ and a lot of empty planes, but that’s not the same thing as boarding a virgin.”

”I’m gonna have to have think about this.”

Mark Williamson

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Private Eye on the Problems of the Government’s Medical Central Purchasing Company

Published by Anonymous (not verified) on Fri, 08/05/2020 - 1:22am in

Mike’s article about the government’s privatisation and centralisation of the purchasing of PPE and other essential medical equipment for combating the Coronavirus follows a report in last fortnight’s Private Eye for 21st April – 7th May 2020 about the problems besetting the state-owned company the Tories had set up to do this. Centralising the purchase of PPE was supposed to lead to massive NHS savings. However, according to the Eye it has led instead only to its chiefs awarding themselves massive salaries, and staff shortages and poor pay at the bottom. The article on page 10, ‘SKIMPING OUTFITS’ runs

The government-owned company struggling to supply masks, gloves, aprons and eye protection to hospitals and GPS was set up explicitly to reduce spending on NHS supplies.

Supply Chain Coordination LTD (SCCL) has been in charge of procuring NHS supplies and the warehouses and lorries getting PPE out to the NHS since April 2018. The government argued that one centralised buying system would “generate savings of £2.4bn over a five-year period” through “efficiency”. In fact it has led to big salaries at the top and lower pay and staff shortages at the bottom.

SCCL was set up as a government-owned company in response to the Carter review of NHS productivity. Lord (Patrick) Carter argued that too many NHS trusts buying their own kit was inefficient and the government could “rationalise the procurement landscape, reduce spend and consolidate purchasing power”. Jin Sahota was brought in as SCCL chief executive from French media firm Technicolor on £230,000 a year, after the government allowed higher salaries for “commercial staff”. I’ll be absolutely blunt”, he told Civil Service World last year, “If the salary levels were somewhat different, maybe it wouldn’t have attracted me.”

In May 2019, Rob Houghton, former Post Office chief information officer, was made SCCL’s “IT focused” director. As the last Eye’s special report on the Post Office’s Horizon IT scandal noted, in 2016 Houghton launched a review into the malfunctioning system, which was mysteriously abandoned. The courts later found that a matter of “great concern”.

SCCL manages procurement of NHS bulk supplies and contracts distribution of NHS essentials through a five-year, £730m deal signed in 2018 with UK logistics firm Unipart, which runs the NHS warehouses and lorry deliveries. In September 2018, Steve Barclay (then a health minister, now at the Treasury) said the SCCL/ Unipart deal was “streamlining” the NHS.

Meanwhile, £500m is being taken from NHS trusts to fund the new system and “incentivise” trusts to use it. However, any “savings” delivered look more like penny-pinching than efficiency: in December, HGV and 7.5 tonne drivers on the SCCL/ Unipart contract had to threaten strike action to get decent sick pay and push their rate above an industry low of £10.24 an hour.

At the start of April, union Unite said warehouse staff were exhausted and struggling to keep up with demand. In a cuts-driven system, there was no slack to deal with the extra burden of a pandemic. The government’s solution was to send in the army to help in the warehouses. This has provided some relief – but once the immediate crisis passes, will it return to its ill-conceived “savings” plan?

It looks like Boris’ decision to privatise the purchasing process is a result of this company’s embarrassing failure. But Deloitte and co. aren’t going to fare much better, if at all. What’s at fault is the whole notion of centralisation itself. This was used to destroy local DHSS and inland revenue offices in the 1980s and 1990s, all in the name of efficiency. I don’t believe it made the process any more efficient. In fact, given the delays benefit claimants experienced in the processing of their claims, even before IDS’ stupid and murderously destructive Universal Credit was rolled out, it made it much, much worse.

It also won’t solve the problem of a poorly paid, overworked and demoralised staff working flat out for a grossly overpaid senior management. This is now general throughout business and what used to be the civil service. It’s how the outsourcing companies were able to generate their profits in the first place – they laid off staff in order to give their shareholders nice fat dividends and senior management nice fat salaries and bonuses.

What is causing the problems is the Tories’ decimation of the NHS across its services. As Mike and others have reported, other countries like Germany were able to respond more effectively to the pandemic because they had spare capacity in beds. But the Tories had removed that in the NHS in the name of efficiency.

It’s time these false economies were wound up. Purchasing should be handed back to NHS trusts, and the NHS and the rest of the civil service properly funded.

And the Tories and their obsession with centralisation, rationalisation, privatisation and rewarding overpaid, greedy managers and board chairmen thrown out of government.

Correct Pronunciation Of X Æ A-12 Is: “My · Pa-rents · Are · Wan-kers”

Published by Anonymous (not verified) on Wed, 06/05/2020 - 5:06pm in



Experts have confirmed that the correct pronunciation of tech billionaire Elon Musk and singer Grimes’s newborn child X Æ A-12 is ‘My · Pa-rents · Are · Wan-kers’, or ‘You-ll · be · bull-ied · at · school’ for short.

It clears up any confusion, with some fans thinking it was pronounced ‘Pub-lic-i-ty · Whore’. One maths student thought it was an exam question.

The famous couple said they had come up with the name themselves. “Unlike other children, our child is totally unique. So we wanted a name that was difficult to spell and impossible to type,” Musk said.

“But we also know that a name is something that a child will have for the rest of its life, which is why we wanted something that would draw as much attention to us over the next 24-48 hours as possible”.

A Green and Fair Covid-19 Recovery Plan

Published by Anonymous (not verified) on Thu, 30/04/2020 - 11:42pm in


Business, Politics

Can Central Bank Digital Currency Contain COVID-19 Crisis by Saving Small Businesses? (Part 2)

Published by Anonymous (not verified) on Sat, 25/04/2020 - 4:17am in

This piece is a follow up to our previous Money View article
on the banking system during the COVID-19 crisis.

By Elham Saeidinezhad and Jack Krupinski |The COVID-19 crisis created numerous financial market dislocations in the U.S., including in the market for government support. The federal government’s Paycheck Protection Program offered small businesses hundreds of billions of dollars so they could keep paying employees. The program failed to a great extent. Big companies got small business relief money. The thorny problem for policymakers to solve is that the government support program is rooted in the faith that banks are willing to participate in. Banks were anticipated to act as an intermediary and transfer funds from the government to the small businesses. Yet, in the modern financial system, banks have already shifted gear away from their traditional role as a financial intermediary between surplus and deficit agents. Part l used the “Money View” and a historical lens to explain why banks are reluctant to be financial intermediaries and are more in tune with their modern function as dealers in the wholesale money markets. In Part ll, we are going to propose a possible resolution to this perplexity. In a monetary system where banks are not willing to be financial intermediaries, central banks might have to seriously entertain the idea of using central bank digital currency (CBDC) during a crisis. Such tools enable central banks to circumvent the banking system and inject liquidity directly to those who need it the most, including small and medium enterprises, who have no access to the capital market.

The history of central banking began with a simple task of managing the
quantity of money. Yet, central bankers shortly faced a paradox between
managing “survival constraint” in the financial market
and the real economy. On the one hand, for banks, the survival
constraint in the financial market takes the concrete form of a “reserve
” because banks settle net payments using their reserve
accounts at the central bank. On the other hand, according to the monetarist
idea, for money to have a real purchasing power in terms of goods and services,
it should be scarce. Developed by the classical economists in the
nineteenth and early twentieth centuries, the quantity theory of money asserted
that the quantity of money should only reflect the level of transactions in
the real economy.

The hybridity between the payment system and the central bank money created
such a practical dilemma. Monetarist idea disregarded such hybridity and
demanded that the central bank abandon its concern about the financial market
and focus only on controlling the never-materializing threat of inflation. The
monetarist idea was doomed to failure for its conjectures about the financial
market, and its illusion of inflation. In the race to dominate the whole
economy, an efficiently functioning financial market soon became a
pre-condition to economic growth. In such a circumstance, the central bank must
inject reserves or else risk a breakdown of the payments system. Any ambiguity
about the liquidity problems (the survival constraint) for highly leveraged
financial institutions would undermine central banks’ authority to maintain the
monetary and financial stability for the whole economy. For highly leveraged
institutions, with financial liabilities many times larger than their capital
base, it doesn’t take much of a write-down to produce technical insolvency.

This essential hybridity, and the binding reality of reserve constraint,
gave birth to two parallel phenomena. In the public sphere, the urge to control
the scarce reserves originated monetary policy. The advantage that the central
bank had over the financial system arose ultimately from the fact that a bank
that does not have sufficient funds to make a payment must borrow from the
central bank. Central bankers recognized that they could use this scarcity to
affect the price of money, the interest rate, in the banking system. It is the
central bank’s control over the price and availability of funds at this moment
of necessity that is the source of its control over the financial system. The
central bank started to utilize its balance sheet to impose discipline when
there was an excess supply of money, and to offer elasticity when the shortage
of cash is imposing excessive discipline. But ultimately central bank was small
relative to the system it engages. Because the central bank was not
all-powerful, it must choose its policy intervention carefully, with a full
appreciation of the origins of the instability that it is trying to counter.
Such difficult tasks motivated people to call central banking as the
“art,” rather than the “science”.

In the private domain, the scarcity of central bank money significantly
increased the reliance on the banking system liabilities. By acting as a
special kind of intermediary, banks rose to the challenge
of providing funding liquidity to the real economy. Their financial
intermediation role also enabled them to establish the retail payment system.
For a long time, the banking system’s major task was to manage this
relationship between the (retail) payment system and the quantity of money. To
do so, they transferred the funds from the surplus agents to the deficit agents
and absorbed the imbalances into their own balance sheets. To strike a balance
between the payment obligations, and the quantity of money, banks started to
create their private money, which is called credit. Banks recognized that insufficient
liquidity could lead to a cascade of missed payments and the failure of the
payment system as a whole.

For a while, banks’ adoption of the intermediary role appeared to provide a
partial solution to the puzzle faced by the central bankers. Banks’ traditional
role, as a financial intermediary and providers of indirect finance, connected
them with the retail depositors. In the process, they offered a retail payment-
usually involve transactions between two consumers, between consumers and small
businesses, or between two small to medium enterprises. In this brave new
world, managing the payment services in the financial system became analogous
to the management of the economy as a whole.

Most recently, the COVID-19 crisis has tested this partial equilibrium
again. In the aftermath of the COVID-19 outbreak, both the Fed and the U.S.
Treasury coordinated their fiscal and monetary actions to support small
businesses and keep them afloat in this challenging time. So far, a design flaw
at the heart of the CARES Act, which is an over-reliance
on the banking system to transfer these funds to small businesses, has created
a disappointing result. This failure caught central bankers and the governments
by surprise and revealed a fatal flaw in their support packages. At the heart
of this misunderstanding is the fact that banks have already switched their
business models to reflect a payment system that has been divided into two
parts: wholesale and retail. Banks have changed the gear towards providing
wholesale payment-those made between financial institutions (e.g., banks,
pension funds, insurance companies) and/or large (often multinational)
corporations- and away from retail payment. They are so taken with their
new functions as dealers in the money market and originators of asset-backed
securities in the modern market-based finance that their traditional role of
being a financial intermediary has become a less important part of their
activities. In other words, by design, small businesses could not get the aid
money as banks are not willing to use their balance sheets to lend to these
small enterprises anymore.

In this context, the broader access to central bank money by small
businesses could create new opportunities for retail payments and the way the
central bank maintains monetary and financial stability. Currently, households
and (non-financial) companies are only able to use central bank money in the
form of banknotes. Central bank digital currency (CBDC) would enable them to
hold central bank money in electronic form and use it to make payments. This
would increase the availability and utility of central bank money, allowing it
to be used in a much more extensive range of situations than physical cash.
Central bank money (whether cash, central bank reserves or potentially CBDC)
plays a fundamental role in supporting monetary and financial stability by
acting as a risk-free form of money that provides the ultimate means of
settlement for all sterling payments in the economy. This means that the
introduction of CBDC could enhance the way the central bank maintains monetary
and financial stability by providing a new form of central bank money and new
payment infrastructure. This could have a range of benefits, including
strengthening the pass-through of monetary policy changes to the broader
economy, especially to small businesses and other retail depositors, and
increasing the resilience of the payment system.

This increased availability of central bank money is likely to lead to some
substitution away from the forms of payment currently used by households and
businesses (i.e., cash and bank deposits). If this substitution was extensive,
it could reduce the reliance on commercial bank funding, and the level of
credit that banks could provide as CBDC would automatically give access to
central bank money to non-banks. This would potentially be useful in conducting
an unconventional monetary policy. For example, the COVID-19 precipitated
increased demand for dollars both domestically and internationally. Small
businesses in the U.S. are increasingly looking for liquidity through programs
such as the Paycheck Protection Program Liquidity Facility (PPPLF) so that
those businesses can keep workers employed. In the global dollar funding
market, central banks swap lines with the Fed sent dollars into other
countries, but transferring those dollars to end-users would be even easier for
central banks if they could bypass the commercial banking system.

Further, CBDC can be used as intraday liquidity by its holders, whereas
liquidity-absorbing instruments cannot achieve the same, or can do so only
imperfectly. At the moment, there is no other short-term money market
instrument featuring the liquidity and creditworthiness of CBDC. The central
bank would thus use its comparative advantage as a liquidity provider when
issuing CBDC. The introduction of CBDC could also decrease liquidity risk
because any agent could immediately settle obligations to pay with the highest
form of money.

If individuals can hold current accounts with the central bank, why would
anyone hold an account with high st commercial banks? Banks can still offer
other services that a CBDC account may not provide (e.g., overdrafts, credit
facilities, etc.). Moreover, the rates offered on deposits by banks would
likely increase to retain customers. Consumer banking preferences tend to be
sticky, so even with the availability of CBDC, people will probably trust the
commercial banking system enough to keep deposits in their bank. However, in
times of crisis, when people flee for the highest form of money (central bank
money), “digital runs” on banks could cause problems. The central bank would
likely have to increase lending to commercial banks or expand open market
operations to sustain an adequate level of reserves. This would ultimately
affect the size and composition of balance sheets for both central banks and
commercial banks, and it would force central banks to take a more active role
in the economy, for better or worse.

As part 1 pointed out, banks are already reluctant to play the
traditional role of financial intermediary. The addition of CBDC would likely
cause people to substitute away from bank deposits, further reducing the
reliance on commercial banks as intermediaries.  CBDC poses some risks (e.g.,
disintermediation, digital bank runs, cybersecurity), but it would offer some
new channels through which to conduct unconventional monetary policy. For
example, the interest paid on CBDC could put an effective floor on money market
rates. Because CBDC is risk-free (i.e., at the top of the
money hierarchy), it would be preferred to other short-term debt instruments
unless the yields of these instruments increased. While less reliance on banks
by small businesses would contract bank funding, banks would also have more
balance sheet freedom to engage in “market-making” operations, improving market
liquidity. More importantly, it creates a direct liquidity channel between the
central banks, such as the Fed, and non-bank institutions such as small and
medium enterprises. Because central banks need not be motivated by profit, they
could pay interest on CBDC without imposing fees and minimum balance
requirements that profit-seeking banks employ (in general, providing a payment
system is unprofitable, so banks extort profit wherever possible). In a sense,
CBDC would be the manifestation of money as a public good. Everyone would have
ready access to a risk-free store of value, which is especially relevant in the
uncertain economic times precipitated by the COVID-19. 

Elham Saeidinezhad is lecturer in Economics at UCLA. Before joining the Economics Department at UCLA, she was a research economist in International Finance and Macroeconomics research group at Milken Institute, Santa Monica, where she investigated the post-crisis structural changes in the capital market as a result of macroprudential regulations. Before that, she was a postdoctoral fellow at INET, working closely with Prof. Perry Mehrling and studying his “Money View”.  Elham obtained her Ph.D. from the University of Sheffield, UK, in empirical Macroeconomics in 2013. You may contact Elham via the Young Scholars Directory

Jack Krupinski is a student at UCLA, studying Mathematics and Economics. He is pursuing an actuarial associateship and is working to develop a statistical understanding of risk. Jack’s economic research interests involve using the “Money View” and empirical methods to analyze international finance and monetary policy.

The post Can Central Bank Digital Currency Contain COVID-19 Crisis by Saving Small Businesses? (Part 2) appeared first on Economic Questions .

Japan After the Virus: From Abenomics to Coronanomics

Published by Anonymous (not verified) on Fri, 03/04/2020 - 8:25pm in

Published in Newsweek Japan 30/3/2020

“Japanification” has become a common term in recent years, as economic growth and interest rates have fallen almost everywhere. Now we have another example of the world following a Japanese precedent.

In reaction to the coronavirus crisis, capital cities and indeed whole countries have become hikikomoris, with hundreds of millions of people confined to their homes.

The effect on economic activity has been devastating. Major investment banks are forecasting declines of over 20% for second quarter GDP in the United States and Europe, a meltdown of a scale not seen since the Great Depression. In these circumstances, any country that can restrict the economic shrinkage to single digits should be considered a winner.

If the drastic measures being taken succeed in limiting the virus’ spread this spring, the scars should heal in a year or so. On the other hand, if the worst case scenarios are right, such as the report by London’s Imperial College which projects a second wave in the winter, the global economic damage could take a decade to repair. Like the rest of us, governments can only hope for the best but prepare for the worst.

That means supporting the economy by all means possible, including tax cuts – a deep cut in Japan’s consumption tax would immediately boost spending power – and subsidies to help companies pay their wage bills when turnover is depressed.

In China there has been a spike in divorces caused by couples spending too much time at home together. Japan should introduce a fertility subsidy, in line with the French model, which would promote more constructive activities for couples. In future decades the money spent would be paid back many times over.

What is crystal clear is that Abenomics cannot rely solely on monetary policy. The ‘second arrow’ of the original ‘three arrows’ needs to be deployed too. That is fiscal policy, which can put extra money into people’s pocket, rather than leaving it to circulate within the financial system. Without that support, Japan risks a plunge in consumption and sharp rise in unemployment.

It would be ironic if at the time when the government has finally got around to tackling the problem of the last “employment ice-age”, which damaged the life chances of people entering the workforce between the min-90s and the mid-noughties, a new ice-age were to start.

Another vulnerability that has been exposed has been Japan’s reliance on the “inbound economy,” which in terms of spending power is equivalent to the existence of one million extra Japanese. Japan’s problem, not shared by tourism superpowers like France and Italy, is the numerical dominance of citizens of two countries, one of which is a strategic rival and the other a very prickly neighbour.

Both countries have shown willingness to use tourism as a political weapon, turning off the tap when it suits them. In a sense, the evaporation of inbound demand could be a welcome wake-up call.


The Devil’s bargain

President Trump’s use of the phrase “Chinese virus” deliberately defies the World Health Organization’s politically correct line that the disease’s source should not be mentioned in order to avoid “stigmatization.” Yet there can be little doubt that the coronavirus originated in Wuhan and that its lightning spread was due to China’s extraordinary global reach.

Prado in northern Italy has the second largest population of Chinese immigrants in Europe behind Paris. Many of them work in the garments business. That allows big fashion houses to label their high-priced offerings as “made in Italy” even if produced by Chinese workers in sweat-shop conditions.

It wasn’t just goods and people that moved down the “one belt, one road” scheme that China created. An invisible, deadly traveller came along for the ride. Now Italy is paying a terrible price for the devil’s bargain it made with hyper-globalization.

The corona crisis has highlighted, even for a super-power like the United States, the vulnerability of stretched supply chains and over-reliance on distant- countries for crucial items, including medical supplies. For countries that, unlike the United States, are not self-sufficient in food or energy, the threat of sudden stop in the world economy is far greater.

For Japan in particular, the case for bringing more nuclear reactors back on line becomes stronger, while free trade in agricultural products will look a lot less desirable. When ordinary citizens are driven to hoarding daily necessities, economists’ talk of comparative advantage cuts no ice, likewise the green dream of a wind and solar powered future.

Will this trend develop into full-scale de-globalization? It might, depending on the length and depth of the crisis. At the least, there will be greater selectivity in deciding on trading partners and production locations, with political considerations playing an important role, not just comparative costs. Expect Japanese companies to accelerate the repatriation of production from China and increase agricultural investment at home and in reliable foreign countries like Australia and New Zealand.

In a generally darkening landscape, there are some encouraging signs. While airlines and hotels have seen demand collapse and many manufacturers are operating far below break-even, the online economy is doing fine. And thanks to the internet, many businesses have managed to keep operating with employees working from home.

Some years ago the late novelist and economist Taichi Sakaiya proposed a three day week at the office, with two days spent working from home – not as an emergency measure, but as a lifestyle improvement. Perhaps after the crisis is over, such flexibility could become a permanent feature of the government’s hataraki-kaikaku (“reform of working practices”) initiative. Sakaiya-san would surely be delighted to see it. Who knows – a boom in tele-working could even lead to a much-needed revitalization of regional towns and cities.

At some point the coronavirus crisis will end and the world will emerge from its bedroom. Yet consumers, businesses and governments will live in its shadow, knowing that there could be a repeat at any time. This new sense of vulnerability will guide their thoughts and actions. Choppy waters like ahead.