Month: October 2017

President Donald Trump says he is “very close” to picking a person for the most important economic post in the United States, the head of the Federal Reserve. Current Chair Janet Yellen’s term expires early next year and she is one of at least five candidates for the job.

Besides Yellen, the candidates include Fed board member Jerome Powell, former Fed governor Kevin Warsh, Stanford University economist John Taylor and Trump economic adviser Gary Cohn.

Moody’s Analytics economist Ryan Sweet says a new Fed chief is likely to continue current policy at least for a while because “rocking the boat” could rattle financial markets.

The Fed’s job is to manage the world’s largest economy in ways that maximize employment and maintain stable prices. During recessions, the bank cuts interest rates in a bid to boost economic growth and create more jobs.To cope with the most recent recession, the U.S. central bank slashed interest rates nearly to zero.

The jobless rate fell from 10 percent to the current 4.2 percent, and the economy stopped shrinking and began growing slowly.

Critics of the record-low interest rates said keeping rates too low for too long could spark strong inflation and damage the economy. However, the inflation rate has been below the two percent level that many experts say is best for the economy.

As a member of the Fed’s board and later as Chair, Yellen supported low interest rates and a slow, cautious return to “normal” rates. Experts also say she improved communication between the Fed and financial markets, which reduced uncertainty and reassured investors.

Trump criticized Yellen during the campaign, but then as president, praised her work. Analysts Tom Buerkle of “Reuters Breaking Views” gives the Fed credit for taking effective action during a crisis when Congress was reluctant to act.

Another candidate is former investment banker Gary Cohn, who now heads the National Economic Council at the White House. He has reportedly been working on efforts to reform taxes and boost spending on U.S. infrastructure.

Fed Board member Jerome Powell is also a candidate. He is a Republican with a background in private equity who served in a top Treasury Department post. Powell supported Yellen’s approach of slashing interest rates during the crisis, and returning them to historic levels as the economy recovers.

When rates were cut to nearly zero, Fed officials took the further step of buying huge quantities of bonds in an effort to push down long-term interest rates to give additional economic stimulus. The complex procedure is called “quantitative easing.”

“Ryan Sweet of Moody’s Analytics says when the next recession appears, Powell will be more willing to use tools like quantitative easing than more conservative candidates like Kevin Warsh and John Taylor.

Warsh is a former member of the Fed’s board, a lawyer, and a former executive of a major financial firm with experience at the president’s National Economic Council.

John Taylor of Stanford University and the Hoover Institution is an eminent economist who has served on advisory councils for presidents and congress and written books on economic topics. Taylor came up with an equation, called the “Taylor Rule,” that considers inflation as well as slack in the economy as a way to set interest rates. Some conservatives say the Taylor Rule would improve policymaking.

Critics say the economy is too complex to be managed by a computer, and the Taylor Rule would make the Fed less independent and effective.

Tara Sinclair of Indeed.com says independence is a “key part” of having an effective monetary policy. She says the interest rate-setting process and other decisions need to be separate from Congress and the administration so interest rates and other policies are based on long-run economic needs.

The president is expected to announce his choice in early November.
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More than four decades after selling 1,000 Volvos to North Korea, Sweden is still trying to get paid for the cars.

The vehicles were part of a $131 million trade package delivered to North Korea in 1974, during a period of openness. But Pyongyang never paid anything on the deal, leaving a debt that has now accumulated with interest to $328 million, according to the Swedish Foreign Ministry.

North Korea owes millions elsewhere in Europe from purchases made during the early 1970s, when Pyongyang was expanding economic relations with the West.

“Volvo Car Corporation sold approximately 1,000 of our 144 sedan(s) to North Korea in 1974,” said Per-Åke Fröberg of Volvo Heritage in the company’s press office in Sweden, who added that he did not know what else was included in the deal. The Swedish government was also unable to say what else was included.

Fröberg said the sale of the Volvos was insured through the Swedish Export Credit Agency, or EKN. “When North Korea failed to pay for the cars, EKN stepped in, meaning that Volvo Cars did not suffer financially,” he said. “The deal was closed from our point of view.”

But not for EKN, which twice a year reminds North Korea of its outstanding balance.

“For the most part, we get no response,” Carina Kemp, the EKN press manager, told VOA’s Korean service. However, “EKN’s position is that claims will be recovered.”

Many of the Volvos remain in service, as shown by an October 2016 tweet from the Swedish Embassy in Pyongyang describing “one of the Volvo’s from yr 1974 still unpaid for by DPRK.”

Sweden and North Korea have a long-standing relationship. It was the first Western European nation to establish diplomatic relations with Pyongyang; two years later, in 1975, it was the first to set up an embassy in Pyongyang.

Expanding relations

At the time, North Korea was expanding economic relations with the West. “In 1972-1973, before the global oil crisis, the prices of gold, silver, lead, zinc and other export items of North Korea were rising and Pyongyang must have been confident of its payment capabilities,” said Yang Moon-soo, professor of North Korean economy at the University of North Korea Studies, in the March 2012 issue of the KDI Review of the North Korea Economy, which is published by the Korea Development Institute, a think tank run by the South Korean government.

North Korea, after noting South Korea’s economic development through introduction of Western technologies, decided “to spur development with large-scale buildup of manufacturing plants with Western equipment and financing,” he said.

Of the 16 countries that owe a total of $729 billion to Sweden, North Korea’s share accounts for 45 percent, according to the EKN Annual Report 2016. Cuba, which is the next largest debtor, owes $225 billion as of December 2016 and began making payments that year, the EKN report shows.

Experts on sovereign debt told VOA there aren’t many ways for nations to recover what they are owed by cash-strapped North Korea.

“No payment has been made since 1989,” Katarina Byrenius Roslund, deputy director of the Swedish Foreign Ministry’s press office, told VOA in an email.

“This is the largest claim that Sweden has on a single country,” Roslund wrote. “Responsibility for the claim now lies with the Swedish Export Credits Guarantee Board, which sends a reminder to North Korea every six months.”

Roslund said the Volvos “are no longer a common sight on Pyongyang’s streets, but the odd Volvo 144 is still rolling down the country roads, often as a taxi.”

Paths to spare parts

Volvo’s Fröberg said he did not know whether the original deal included spare parts for the cars. But because the model purchased in bulk by North Korea, the 144, “was sold all over the world, they might have had their ways to get hold of parts through various channels.”

North Korea owes money elsewhere in Europe. The Swiss government reports it has claims for $241 million as of December 2016. North Korea owes Finland and private Finnish businesses more than $35 million, according to a YLE Uutiset report. Pyongyang “ordered paper machines and other assorted equipment” in the 1970s, according to YLE.

Isabel Herkommer, media spokeswoman at Switzerland’s State Secretariat for Economic Affairs (SECO), told VOA via email that “Swiss Export Risk Insurance (SERV) has an agreement with North Korea, which exempts the country from payment at the moment.”

According to the SERV Annual Report 2016, the agency signed a new restructuring agreement with North Korea in October 2011. Herkommer wrote that “there has not been a debt settlement with North Korea,” and when asked whether the Swiss government considered waiving all or part of the debt owed by North Korea as Russia recently did, she said, “No, this has not been considered.”

Outi Homanen of Finnvera, Finland’s export credit agency, said “that although the debts were not paid [on] original due dates, there are no defaulted receivables at the moment.”

However, experts on sovereign debt and the international monetary system say that there aren’t many ways for countries to recover their claims from North Korea. In 2014, Russia forgave 90 percent of the nearly $11 billion in debt that it and the Soviet Union before it was owed by North Korea.

“International debt is typically thought of as having two enforcing mechanisms. The first is that if a country wants to be able to borrow more, it has to be repaying or have repaid its previous debts,” said Dane Rowlands, a professor of international affairs at Carleton University’s Norman Paterson School of International Affairs in Ottawa, Ontario. “Since North Korea seems happy not to engage officially with the international community and capital market, cutting them off is not a useful enforcement tool.”

Asset seizure

He added that seizing exposed assets is another option for lenders but one that would not be effective against North Korea.

Hamid Zangeneh is an economics professor at Widener University in Chester, Pennsylvania. An expert in the debt of economically developing nations, he said that in North Korea’s case, “it really doesn’t matter because it is not part of the international monetary system.”

Rowlands speculated that Switzerland and North Korea might have made a deal when they signed the debt restructuring agreement in 2011.

“Given the relatively few channels of international finances that North Korea has access to, I could see them doing a deal with Switzerland saying we [North Korea] will pay back a portion of the debt. … What that would end up doing is Switzerland forgives the rest of the debt and they don’t have claim on seizing North Korean deposits for example,” he said.

According to the SERV 2016 report, the Swiss agency had claims of 179.1 million Swiss Francs ($210 million) with North Korea as of the end of 2016. However, the report says the claims have been reduced to 17.9 million Swiss Francs ($21 million), or about 10 percent of the original claim.

SECO’s Herkommer said, “There has not been any debt cancellation. We cannot make any further comment.”
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The U.S. House of Representatives Thursday approved a $4 trillion fiscal 2018 budget blueprint, a major step forward toward the introduction of a Republican tax cut bill.

The measure narrowly passed (216-212) despite last-minute resistance from the ranks of Republicans.

House passage makes enactment of an eventual tax bill more likely in the Senate, although decisions on numerous thorny issues lie ahead.

Approval of the budget resolution was a victory for President Donald Trump and Republican congressional leaders, who have vowed to rewrite the tax code, a feat that has not been accomplished in more than four decades.

“President Trump has always made cutting taxes for hard-working American families, creating more jobs for American workers, and simplifying the rigged and burdensome tax code a priority, and he looks forward to further cooperation with Congress to advance the Administration’s pro-growth and pro-jobs agenda,” the White House said in a statement.

Democrats oppose plan

The Republican plan is opposed by Democrats, who contend it would benefit primarily the wealthy and corporations.

“The struggle Republicans had in passing the budget shows how uncomfortable many of them are with eliminating the state and local deduction. In the weeks ahead, Democrats will do everything we can to preserve it and work to defeat any tax proposal that favors the wealthy few over the middle class many,” Senate Minority leader Chuck Schumer said in a statement.

 
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Elon Musk was fed up.

The seats on Tesla Inc’s new Model X SUV were a mess. An outside contractor was having trouble executing the complicated design, spurring frustration and finger-pointing between Tesla and its supplier.

How would Tesla ever pull off mass production of the upcoming Model 3, the car intended to catapult the niche automaker into the big leagues, if it could not deliver on something as fundamental as a seat?

Musk made a decision: Tesla would build the seats itself. 

But industry experts say Musk’s insistence on performing much of the work in-house is among the reasons Tesla is nowhere close to its stated goal of building 500,000 vehicles annually by next year, most of them Model 3s.

Missed target

The automaker this month revealed it built 260 of the vehicles between July and September, badly missing its target of 1,500 Model 3s in the third quarter. In a statement, Tesla blamed manufacturing “bottlenecks.” It declined to elaborate, but assured investors “there are no fundamental issues with the Model 3 production or supply chain.”

Tesla has demonstrated a commitment to vertical integration not seen in the auto industry for decades.

The company has so far sunk $2 billion into a sprawling Nevada factory to manufacture its vehicles’ batteries. In-house programmers design the bulk of the complex software that runs the Model 3, which Musk has described as a “computer on wheels.”

Tesla controls its own retail chain, selling its cars directly to customers and bypassing dealers.

But it is Tesla’s 2015 decision to build its own seats that has some industry veterans scratching their heads. Seat making is a low-margin, labor-intensive enterprise that big automakers generally farm out to specialists. Tesla is operating its own seat assembly line inside its factory, and it is hiring engineers and technicians to figure out a way to fully automate the process.

“Is that really the core competency of an auto company? It is not,” said analyst Maryann Keller, who has been tracking the car industry since the early 1970s. “Why would you want to do that?”

Tesla declined requests from Reuters to discuss its seat assembly efforts. The company is expected to reveal more about its production issues Nov. 1, when it announces third-quarter results. There is no indication that the “bottlenecks” mentioned previously by the company are associated with seat production.

Analyst Keller and others suspect Tesla eventually will be forced to farm out seat assembly to suppliers as the company transitions from a niche producer of pricey, hand-built luxury cars to a mass manufacturer. Seat makers including Germany’s ZF Friedrichshafen AG, France’s Faurecia SA and Detroit-based Lear Corp already are trying to win that business.

A lot is riding on Tesla’s ability to scale up operations quickly. Starting at $35,000, the Model 3 is Tesla’s attempt to bring its electric technology to a wider audience. 

More than a half-million customers have put down deposits.

Tesla has never turned an annual profit and it is burning through cash. Yet investors are betting big on its future. It is now the second most valuable U.S. automaker, behind General Motors Co. Tesla shares on Wednesday closed at $325.84, down 3.4 percent.

From stop-gap to strategy

Musk has defended Tesla’s hands-on approach as the way to ensure reliability, as well as an opportunity to rethink industry norms. It is also a reflection of the entrepreneur’s obsession with detail.

“One of the hardest things to design is a good seat,” Musk said at the September 2015 launch of the Model X in Fremont.

Problems first surfaced with the flagship Model S sedan in 2012. Musk complained that the seats made by its contract manufacturer, Australia-based Futuris Group, were not comfortable nor of the quality expected for a car whose price tag started at around $57,400, according to a former Tesla executive who described Musk’s thinking to Reuters.

Troubles accelerated with the Model X, leading Tesla to wrest assembly from Futuris just after the vehicle’s release in late 2015. If seats could be entirely redesigned from the ground up, Musk reasoned, maybe their assembly could be automated in preparation for the high volumes anticipated for the Model 3.

“He saw the opportunity to do it differently and better,” the former Tesla executive said. “The short term was a stop gap, but the long-term idea was to rethink the design of how a seat works to include how a seat is built.”

Futuris did not respond to requests for comment. It continues to supply seat parts to Tesla. Detroit-based seating supplier Adient PLC acquired Futuris for $360 million last month.

Meanwhile, Tesla’s seat woes continue. In all, the automaker has issued four seating-related recalls since 2013. The latest came this month with the recall of 11,000 Model Xs manufactured between Oct. 28, 2016 and Aug. 16, 2017.

Suppliers circling

Making car seats is a complex business. Choosing materials, dying and cutting, shaping foam and metal frames, and adding heaters, recliners and other gadgets can involve nearly a dozen suppliers for top models. Final assembly requires lots of labor.

That’s why most automakers opted decades ago to outsource seats for their lower-cost models to specialty seatmakers whose market is expected to reach $79 billion by 2022, according to market researcher Lucintel.

Although Musk’s philosophy has always been “build it right and then figure out how to get the cost down” later, according to the ex-Tesla executive, observers say Tesla can ill afford more production headaches. 

Philippe Houchois, an auto analyst, wrote in a September note to clients that “scalability” was now the main challenge at Tesla, whose manufacturing prowess is still unproven when it comes to building large numbers of vehicles.

Despite Tesla’s previous battles with Futuris, seat suppliers smell opportunity. ZF Friedrichshafen and Faurecia have opened Silicon Valley labs, in part to woo Tesla.

Lear, which cuts and sews material for Tesla, is likewise pressing to get the automaker’s seat manufacturing business, according to Matthew Simoncini, the company’s chief executive. “In general Tesla has a philosophy: ‘We’ll do it ourselves. We’ll change the mold,’” Simoncini said. “(Outsourcing) is a much more efficient use of capital. That would allow them to focus on what they do best.”
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Ivanka Trump teamed up Wednesday with Republican legislators to try to ensure the tax overhaul package under construction on Capitol Hill includes an expansion of the child tax credit.

The White House adviser and presidential daughter, appearing at a Capitol Hill news conference with GOP lawmakers, framed the tax credit as crucial for working families.

“It is a priority of this administration and it is a legislative priority to ensure that American families can thrive,” she said.

Also attending were Republican Senators Marco Rubio of Florida, Mike Lee of Utah, Tim Scott of South Carolina, Shelly Moore Capito of West Virginia and Dean Heller of Nevada; and GOP Representatives Kristi Noem of South Dakota, Kevin Yoder of Kansas, Claudia Tenney of New York and Martha Roby of Alabama.

Rubio and Lee have worked closely with Ivanka Trump on the issue. Details are still being worked out, but Rubio and Lee would like to see the $1,000 credit doubled and made fully refundable.

The GOP tax plan would cut the corporate tax rate from 36 percent to 20 percent, reduce taxes for most individuals and repeal inheritance taxes on multimillion-dollar estates. The standard deduction would be nearly doubled, to $12,000 for individuals and $24,000 for families; the number of tax brackets would shrink from seven and the child tax credit would be increased.

Democrats and liberal family advocacy groups say the overall plan would provide limited benefits to low-income families while offering major cuts to the wealthy — and they say that any boost to the child tax credit must be viewed in that context.

Speaking to reporters earlier in the day, Rubio expressed optimism about the child tax proposal, saying the provision is needed because without it, people could “see a tax increase, which nobody around here is prepared to justify, because you can’t.”

Rubio praised Ivanka Trump, saying that “having the White House making it a priority of theirs has strengthened our chances.”
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