Friday, August 15, 2008

Financing War

Quote of the week:
'To be clever enough to get all that money, one must be stupid enough to want it.' - G. K. Chesterton.

Office for Rent Immediately:
As we have recently moved all our staff to the glass-enclosed cage that we call our head office, we have an entire fully furnished, gorgeous office for rent in a Medical Building at the corner of Sheppard Ave. and McCowan. The rent is minimal and the salient features of the space - such as the beautiful windows, the spacious Board-Room, the Corner offices, the nice faux mahogany furniture are enough to motivate your employees to work long hours while being paid whatever little you grudgingly give them. As a sweetener, there is even a nice, clean and neat private washroom that we will throw in for free. As this is a Professional Building (not just any building mind you, this one has achieved professional status through years of training on how to just sit there), it would be most suitable for a growing real estate, accountancy or legal practice. You can visit the space and see the endless possibilities that this new location presents for your business by clicking
here. Please do not email or call me directly - if you do, we will fiddle with the lock such that it does not open from the outside in emergencies.

Commentary of the week:

The Financing of War:

With the Russian advance into Georgia almost complete, our topic for the week suggests itself in a manner too difficult to ignore. Although we cannot determine from our plush offices here in Toronto what exactly went on in the Kremlin and why exactly our Russian friends decided to destroy half a country named after George W. and whether there is any symbolism involved here, we could either ignore the subject completely or find an opportunity here to discuss an area of finance that is usually swept under the rug. The choice is obvious, really and the question we have to explore is not really why this has happened, but how exactly these, and other hostilities, are sustained financially. In other words, how do Wars like this get financed, and what can we learn from this particular case.

By now everyone knows that the Russian army has pretty much settled down in some areas of their previous colony, and that it is unlikely that they will simply get up and go back as if all of this never happened or as if this was just a mistake. Money was spent planning this venture out and money will be spent keeping the army on a war-footing. How was this financed, and where will the money continue to come from? The case of Russia is a bit complex so let us tackle the simpler example first, which is that of the US and their adventure in Iraq.

For the US - it is quite simple. More or less the entire financial structure is built on Govt. bonds. Every time a foreign misadventure is planned, the govt. simply plans to sell more bonds at around 5% and the majority of the world, including your pension fund managers, simply line up and buy all they can afford. In this way, the government is able to borrow a practically unlimited amount for any expenditure they would like to make in order to get re-elected, and because the US actually does have a somewhat sophisticated knowledge based economy that keeps producing googles, Microsofts, Apples etc., the taxes are usually enough to at least pay off the interest on the bonds. Very simple.

For Russia, things are a bit more complex. There is no real tax base because the population has been through a decade plus of poverty resulting from the breakup of the USSR. Economic activity and production is limited and manufacturing exports are virtually nil (ever driven a Lada?). There is just one bright spot in the economy and that is energy production. Even though it is ironic that it is the US adventure in Iraq that has caused energy prices to rise to a level that has the Russian war planning department jumping with glee at the infinite possibilities available now that they can actually pay their troops, this is a heady moment for Russia. The barrel of Oil they were selling for $50 just a few years ago, is bringing in more than double that amount. Furthermore, since expenditures have been contained thanks to privatization and the retreat of the public sector, Russia's exports of gas and oil to Europe and China are profitable in the extreme. This already wonderful state of affairs is made even better for Kremlin by the fact that unlike the way it is in Canada, in Russia it is actually government entities and companies that control and own most of the oil and gas fields.

So for us now, what can we learn from this situation (other than the fact that war is a wasteful activity)? The first thing is that governments really shouldn't be borrowing. The borrowing of the US has created a mess in the US, Iraq, in Georgia and a mess in even my small bank account because of my frequent trips to the gas station. The second thing is that governments that do not depend on people's taxes or their consent for government, can do pretty much anything they want without the population's prior knowledge or approval. The third is that the gas we put in our cars for quick jaunts here and there and the omelettes that my German friend Hans (I kid you not - that is actually his name) makes every morning using the gas imported from Russia really pays for a lot more than just warm eggs. The fourth is that looking at the state of the world in this way means that it is not just the Russians or even the Americans that are to blame for all this. The simple fact of living in a gas-consuming, over-dependent-on-energy lifestyle makes us a party to much that is faulty around the world. Perhaps one solution is to disengage as much as possible from over-consumption so it is not so easy for Russia to sell its gas and for the US to sell Treasury Bonds; but that would require actual changes in the way we live and what we buy. Much better to pin the blame elsewhere - as you have probably noticed from what passes for 'news' these days - it is easy to blame others when we ourselves are a part of the problem.

Upcoming Events:

Barzakh Cemetery Services, a charitable, non-profit organization led by Muslim women, is hosting an event to discuss family financial matters from a Muslim perspective at 3:00 pm on the 23rd of August at the Northwood Community Centre, 15 Clubhouse Court, located here. The event is designed to address issues such as Wills, Taxes and the way to approach the complete financial planning process - so it may be worthwhile for you to attend. Sh. Yusuf Badat from the IFT will speak about the importance of Wills and the technicalities of Inheritance Laws, followed by Br. Ahmad Abdullah who will speak about the impact of Taxes during life and also at someone's passing. As for moi, usually one is invited to speak about Islamic Finance, but this presentation will IA be about Financial Planning in general and some of the challenges involved for us as Muslims. I have been told that one of the severest problems within the Muslim community is not really the lack of wealth, but the lack of financial sophistication - so this event should go some way towards addressing this critical issue. Lastly, as this is an educational presentation and we are just helping BCS, you will not need to write Ittihad a cheque at the end. You might still want to support BCS as a community organization however, so please don't leave your chequebook at home altogether. As seating is limited, please RSVP by replying to this email.


Finance News:

1. Even though we don't like debt, there is nevertheless a half-decent framework here to evaluate which kinds of debt are better for you financially (we won't get into the spiritual aspects this time around). If you are going to go into debt, at least be somewhat smart about it ... read more here

2. A good deconstruction of coat-tail investing ... read more here

3. House prices in Ontario now falling also ... read more here

4. A film about National Debt ... read more here

Economic News:

1. Inflation in the US at the highest level in 17 years (and these are just the official numbers) ... read more here

2. Trade protectionism is back, starting with agricultural exports from developing countries ... read more here

Islamic / Middle East / Emerging Markets:

1. China allows the listing of foreign companies on its stock exchange ... read more here

Interesting but not all Finance:

1. Farming practices better than organic? ... read more here

2. Definitely a 'why didn't I think of that?!' moment ... read more here

3. Loblaw's going into local produce (yes, but will grocery be cheaper?) ... read more here

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