Tuesday, October 18, 2016

Samsung (and other Chaebols) has to Embrace the Future

Fairly or unfairly, South Korea, whose official name is the Republic of Korea, is often pejoratively called the Republic of Samsung. However, seeing how Samsung Group generates up to 20% of South Korea’s GDP, that name may not be entirely inaccurate.

As such, when Elliott Management, a US-based hedge fund management group, made its first serious attempt at shaking up Samsung Group last year, things were expected to get ugly. After all, South Korea
s economic fate is inextricably tied with Samsung’s fate. Essentially, Elliott Management opposed the US$8 billion merger of two of Samsung Group’s companies - Samsung C&T Corp and Cheil - because it believed that Cheil’s offer was too low and that there was not much evidence for Samsung Group’s “aggressive” claims that the merger would be profitable in a few short years.

For its part, Samsung stated that it needed the merger to streamline its corporate structure and to eliminate redundancies in order to cut unnecessary costs. Also, Samsung needed the merger to take place because it would have given Lee Jay-yong, the still current heir to Samsung’s chairmanship, more control over the company.

Things got uglier than anticipated. So much so that the language used in some Korean media outlets took on severely anti-Semitic tones. The decision whether to accept or reject the merger deal was pitted as one between a besieged group of noble Koreans (sound familiar?) fending off foreign vultures, specifically Jewish ones, whose sole purpose is to devour weak companies for all the money that they are worth and to leave them (and the countries that depend on those companies) to rot.

Samsung Group narrowly won that vote by 3%. For its part, Elliott Management demanded that Samsung C&T buyout its stake in the company. It was never publicly revealed how much Elliott Management was compensated.

It was assumed that that was that but more than a year later, Elliott Management seems to be ready to face off against Samsung a second time.

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After a series of explosions, recalls, continued explosions, and worldwide derision, Samsung Electronics finally decided to discontinue the Galaxy Note 7. The timing couldn’t have been worse. There are already signs that the international smartphone market is sputtering and increased competition from Chinese smartphone manufacturers are threatening the dominance once enjoyed by Samsung and Apple. The cost of recalling the troubled phones alone is estimated to exceed US$5 billion; not to mention the incalculable cost of tarnishing one’s reputation. Furthermore, considering how Samsung is still embroiled in a series of billion-dollar-lawsuits with Apple, the Galaxy Note 7 debacle couldn’t have come at a worse time.

Enter (or re-enter) Elliott Management.

Sensing an opportunity to strike while the iron is still hot, Elliott Management once again voiced its desire to see a shakeup in Samsung’s governance structure. Having learned from its previous bout with Samsung, Elliott Management appears to have put aside its brash demeanor and penned a relatively gentle proposal letter which would most likely be welcomed by both Korean and foreign shareholders and stakeholders for their own reasons.

Elliott Management
’s biggest four proposals are:

  • Split Samsung Electronics from Samsung’s wider corporate holdings.
  • List the newly-split Samsung Electronics on public stock markets such as the Nasdaq Stock Exchange.
  • Commit Samsung Electronics to a US$27 billion stock buyback program and, in line with international corporate standards, return 75% of its annual free cash flow to investors.
  • Improve transparency in Samsung Electronics’ corporate governance by adding three independent directors to its board.

The third proposal is likely to be met with approval by both Korean and foreign shareholders (and likely tacit approval by the Korean government for the stimulative effects it would have on the overall Korean economy) considering the fact that Samsung Electronics’ cash reserves is estimated to be around US$70 billion, a sum that Elliott Management and many others classify as being “significantly overcapitalized.”

For its own reasons, however, aside from splitting Samsung Electronics from Samsung’s wider corporate holdings, Samsung will most likely not at all consider Elliott Management’s other three proposals.

Perhaps as a result of Elliott Management’s toned down proposal, the Korean media’s defense of Samsung has not taken on the ugly anti-Semitic tone that some took up last year. However, that is not to say that the Korean media has abandoned its nativist strategy to defend Samsung; and the unintended (or perhaps intended) side effect of such a defense strategy may be to prevent Korean investors from seriously considering the possible benefits of Elliott Management’s proposals.

Case in point, a few days ago, Hankyung (aka The Korea Economic Daily), one of the most respected business/economics news outlets in Korea, penned an editorial about Elliott Management’s proposal. After stating what the four main proposals were, the editorial went on to excoriate 
foreign corporate raiders that seek to maximize short-term returns for shareholders (namely themselves) at the expense of sustainable growth for the businesses they descend upon. The editorial then goes on to say that the Korean government needs to help Korean corporations to defend themselves from “the wolves” and one of the best ways of doing so would be to allow Korean corporations to issue Differential Voting Right (DVR) shares.

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Typically, DVR shares are traded in the same way as ordinary equity shares except these provide fewer voting rights to the holder. Investors who purchase these types of DVR shares tend to be passive investors who are not much interested in the decision making process but are merely interested in financial gains i.e. the exact opposite of activist shareholders. Consequently these types of DVR shares are usually traded at a discount and may offer higher dividends to shareholders who choose to purchase them in exchange for accepting highly weakened voting rights.

DVR shares with higher voting rights can also be simultaneously issued by a company’s promoters to themselves or their own family members. This is done to increase their control in the company’s decision making process, which would of course be in excess of their financial holding of the company. Therefore, the sale of DVR shares to 
“outsiders would not weaken the promoters’ voting rights and would also make hostile takeovers difficult to achieve, if not outright impossible.

Currently, Korea’s Commerce Law prohibits the issuance of DVR shares.

The problem with such editorials is that they keep Korean investors and shareholders in the dark about the benefits that are being proposed by these “foreign vultures.” To explain, they don’t explain why Elliott Management wants to see Samsung Electronics split from the parent company or the events that led to such a proposal to be made. It also doesn’t bother to do anything more than simply mention in passing that one of Elliott Management’s proposals is to have Samsung Electronics publicly listed on the Nasdaq Stock Exchange, which would subsequently help to significantly raise Samsung Electronics’ market value - not unlike what happened for Alibaba.

It goes without saying that being publicly listed and traded in international stock markets would certainly pose a challenge for the existing management teams and the systems that they have in place. After all, publicly traded businesses face extra scrutiny from investors, regulators, and the media from all over the world. That is to be expected once they begin to play on a much larger stage. Once publicly listed, Samsung Electronics would no longer be able to rely on a fawning local media or local regulators who may (or may not) have conflicts of interests with Samsung Electronics. In other words, international exchange markets, whether those in New York or Hong Kong would further be able to help to steer Samsung Electronics’ governance and corporate structure into a more internationally respectable one.

Especially important for international investors is that such a public listing would significantly streamline the investment and share-buying process. Currently, due to Samsung’s refusal to be publicly listed and traded, international investors need to jump through a series of hoops just to be able to buy a basket of Korean companies’ shares - only some of which is actually Samsung’s shares. In fact, Samsung has dedicated an entire page on its website - full of bullet points, tables, charts, and legal disclaimers - to help international investors purchase Samsung’s stocks.

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Of course, the problem is that the chaebols’ main priority is not having their stock indexes properly evaluated, but rather to maintain the control they have over their own business empires. The reasons are simple. The first and most obvious reason is that they have been able to retain control over their own businesses and they have no desire to lose that. The second (and related) reason is that not being publicly traded in international exchange markets has meant that chaebols have been able to exploit cross-shareholding for many years.

So what is cross-shareholding? Cross-shareholding is a practice that has often been used by chaebol chairmen and their family members with the sole purpose of securing their control over their business empires with just a handful of shares.

For example, when Company A makes an equity investment in Company B, which in turn buys a stake in Company C, which in turn secures a stake in Company A, a cross-ownership loop is created. This is what allows chaebol owners to have control over their business empires with just a handful of shares. It is also the very thing that has allowed chaebol families to facilitate father-to-son transfers of corporate control - something that would be anathema in Western markets.

An added benefit of cross-shareholding for Samsung’s owners and family members is that even if one of their subsidiaries loses money, Samsung Group can use the profits that have been generated by another subsidiary to cover the costs. Using this method, Samsung Group can undervalue their stocks, which is one of the key reasons for Korean corporations being so notorious for their relatively low dividend yields.

Yes, laws have been passed and the Korean government has put political pressure on the chaebols to ban new cross-shareholding investments (though not existing ones) but some practices take a long time to die out. As far as Samsung or the other chaebols are concerned, they have little incentive to take Elliott Management’s proposals seriously. They’re at the top of the world. Why would they give that up?

Decisions of this nature will always carry costs and benefits. The costs to the chaebols are obvious. They and their families would lose the iron grip they have over their businesses, jeopardize hereditary successions, and they would be at the mercy of extremely strict and demanding foreign investors and regulators. In short, they would their Shangri-La.

However, nothing lasts forever. Not even the joys of paradise. Economic uncertainty in Europe, modest job growth in the United States, and China’s economic slowdown and looming banking crisis have all significantly weakened external demand. Korean businesses have long complained that militant unions have long dissuaded foreign investors from investing in Korea and though that is true, that claim masks the role that low dividend yields have played in doing the same thing. Domestic consumption remains sluggish and further attempts to stimulate the economy via quantitative easing could inadvertently exacerbate household debts. Korea’s low rates of immigration combined with an aging population who will also have to someday face a real estate bust threaten economic contraction.

All indicators, from the short-term to long-term, are pointing to economic gloom and doom. And Korea is quickly running out of options and time to cushion the blow. The massive cash reserves that Samsung and other chaebols are holding on to may help them to weather economic recessions and survive where Hanjin failed to do so. However, a siege mentality is bound to fail over an extended period of time.

Samsung and other chaebol companies have a choice to make - adopt Elliott Management’s proposals (or at least some of them) while they are still gentle proposals and thus launch Korean corporations into the 21st century and compete with the rest of the world on an even footing and help to expand markets, both domestically and internationally, or someday be made to adopt them a la IMF diktats circa 1997~1998 when they were anything but gentle.

Choose wisely
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Thursday, October 13, 2016

Private Think Tanks Are NOT Ruining Policy-Making in South Korea

Yesterday, Emanuel Pastreich published a column/op-ed in Korea Exposé, which was titled “Tanks of Destruction: Private Think Tanks Are Ruining Policy-Making in South Korea.”

I don’t know if Pastreich came up with the title himself, or if it was created by the site’s editor and founder, Se-Woong Koo. Either way, it was a catchy title and it caught my attention. And not for the first time, I disagreed with yet another op-ed that was posted on that website.

Basically, Pastreich’s point was that a lot of think tanks in Korea, particularly the mainstream ones, are not worthy of the prestige they possess. The following are a summary of Pastreich’s main complaints regarding think tanks:
  • Much of the content produced by think tanks are banal, dishonest, superficial and ritualistic.
  • Think tanks are ranked according to the amount of funding received, but such funding means they are not independent as think tanks cannot risk upsetting their patrons.
  • Think tanks are not accessible to the public and they represent the interests of a small group who fund the think tanks.
  • Think tanks seek to privatize the work that should be carried out by a government official, a staff member of a government research institute or a professor at a university and set long-term national agenda. But think tanks’ purposes are short-terms gains.
Rubbish Thinking
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One could say that Pastreich may be throwing stones while living in a glass house. After all, he is the director of The Asia Institute, which is also a think tank. However, I must confess that I am not at all familiar with The Asia Institute or the work that it has produced. So that’s neither here nor there.

Regardless of that fact, however, the fact that he is the director of a different think tank and the other think tanks that he excoriated are basically his competitors is, I think, the weakest rebuttal that can be summoned against Pastreich’s points.

My first point of contention after reading Pastreich’s op-ed was that think tanks are supposed to be exclusive. They are supposed to represent the opinions, thoughts, and research by the elites who have spent a long time studying those subjects they pontificate on.

Back in early 2014, right about the time when Ahn Cheol-soo had just started to seriously begin his foray into politics, one of the first things he did was to establish his own think tank - the oddly-named Policy Network Tomorrow (정책네트워크 내일). I looked at his think tank’s mission statement and it sounded a lot like the kind of think tank that Pastreich is looking for (at least in think tanks that he is not a part of) - a think tank that is accessible to the public and one that doesn’t put too much focus on the “banal and dishonest” experts, but rather, in the words of Policy Network Tomorrow, on “the problems that the people face in their lives.”

I wrote about Ahn Cheol-soo’s think tank before and the unfortunate reality seems to be that if Pastreich’s suggestions regarding accessibility is given serious consideration, it would lead to think tanks that don’t do a lot of thinking.

Pastreich is not wrong when he argued that the opinions and research data that think tanks advocate can be (and often are) hijacked by people with vested interests. That is not in dispute. But the notion that think tanks are supposed to be open to the public or somehow responsive to what the public thinks is wrong. For one thing, all you need to do is speak to one of the unwashed masses who has never thought much about a given topic to know that you shouldn't pay attention to everyone. After all, the direct result of paying too much attention to the opinions of the masses is the rise of Donald Trump!

Besides, if we are looking for people who will better reflect the wishes of the public, those people already exist. They
re called elected officials. I wont hold my breath waiting for people to shower them with glory and praise.

Obligatory mention of the fact that he also said “Democracy is the worst form of government, except for all the others.
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Another point that I strongly disagreed with Pastreich was his opinion that massive corporate funding makes a think tank less trustworthy and reliable.

There was a think tank that I really liked. It was Freedom Factory, a libertarian think tank that advocated limited government and free market solutions to many of society’s ills.

(Disclaimer: I was never formally employed by Freedom Factory, but I did a number of freelance work for them - mostly Korean-to-English translation services. I also edited their English-language biweekly online news magazine, Freedom Voice.)

Did you notice the use of past tense? That
s because Freedom Factory went out of business a couple of months ago. I recognize that “capitalism” is often used as an epithet and there are even fewer fans of libertarianism. So I understand that some of you may disagree with what Freedom Factory stood for and argue til youre blue in the face that it was evil or throw whatever epithets you can think of. I won’t argue; this post is not meant to serve as a defense of libertarianism.

(And in case any of you are wondering, no, I have never thought of myself as a libertarian. I think of myself as an ally to libertarians, but never one of them.)

However, no matter what kinds of clever curses you can throw at it, it doesn
t change the fact that Freedom Factory produced a good number of studies, surveys, op-ed pieces, translations, media appearances, and helped to spread awareness of the problems of over-regulating businesses and the history of the South Korean economy to the masses. It was a great think tank that saw a great vision for itself. But it went out of business because it couldnt turn a profit.

Pastreich can argue that corporate funding makes think tanks less independent, but not having enough money means that you go out of business. I wish Freedom Factory had the luxury of worrying about a lack of independence. It never even got that chance.

Though I don’t know for certain, I imagine there are many think tanks of various political affiliations that have met and will continue to meet a similar fate.

Regardless of how much people think of the corrupting nature of money, it doesn’t change the fact that corporate funding helps think tanks to do their work. It may not be a perfect solution, but its the best there is. Why is it the best? It’s the best because, going back to my earlier point, the vast majority of the unwashed masses have never even heard of many of the subjects a lot of think tanks and their employees have dedicated themselves to studying; and they dont care for them.

If you think money is the root of all evil, try not having enough of it.
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The last thing about Pastreich’s op-ed I disagreed with was his argument that think tanks undermine the work that is better done by government officials, government research institutes, and professors at universities. He says that unlike government institutions, think tanks seek short-term gains and this is particularly dangerous when we think about long-term problems such as North Korea.

s a wonderful thought that government leaders and bureaucrats are more dedicated to long-term goals than think tanks. Unfortunately, however, reality says otherwise. Case in point, South Koreas policy toward North Korea has changed from administration to administration. Whereas Kim Dae-jung (and Roh Moo-hyun) sought engagement with the North via the Sunshine Policy, Lee Myung-bak immediately pursued a hawkish policy. Park Geun-hye wasn’t nearly as hawkish as Lee Myung-bak (at least initially) or as dovish as Kim Dae-jung as she was an advocate of trustpolitik” during the early days of her administration and she only became hawkish after North Korea’s fifth nuclear test.

If you read any of my columns at NK News, it won’t take you long to know what I think is the proper way of dealing with North Korea. Again, however, this post is not meant to defend or attack one idea or another. The point is that the notion that government officials are somehow more dedicated to pursuing long-term goals than people in the private sector is utter nonsense. It is a praise that government officials and their research institutes clearly do not deserve.

(Whether this is a virtue or a vice of the democratic process is another matter entirely.)

In fact, the only things that the government has insisted on taking the long-term view, regardless of who has been 
in charge, are looking out for their own interests. Even the country’s progressive leaders never abolished the National Security Law or hesitated from using defamation laws to silence their critics in the media.

Also, is there anyone who can say with a straight face that professors are any more virtuous than those who work at think tanks? At the end of the day, to one degree or another, everyone is a whore. The only thing that’s different is whom he sells his soul to and for how much and how happily he does so.

One thing that Pastreich does get right is his comparison of think tanks to hagwons, though certainly not for the reasons he stated. The comparison is valid because, like the hagwon industry, the ideas that are espoused by many think tanks do not seem that different from each other and there does appear to be a strong herd mentality that is defined by an unhealthy dose of 
“follow the leader mentality. There does need to be an infusion of new ideas (not that being new by itself is a virtue) and healthy debate among think tanks and universities and government research institutes. That is how we make sure that we do not fall victims to our own filth.

So, yes, there is a feeling of staleness when it comes to private think tanks in Korea. But are they ruining policy-making? That hardly seems to be the case. Although some of Pastreich’s criticisms may be valid, he does not seem to have really thought through on the subject of private think tanks as much as he seems to think he has.

Tuesday, September 27, 2016

First Clinton-Trump Debate: Dumb Economic Policy and Even Dumber North Korea Policy

The first presidential debate between Trump and Clinton ended a few hours ago and it was one for the history books for all the wrong reasons. For an hour and a half, hundreds of millions of people around the world got to witness sheer cynicism being masked around as political debate such as moments when Hillary Clinton talked about the importance of cyber security without a hint of irony or self-consciousness and when Trump went on an incoherent spiel about Rosie O’Donnell, Sean Hannity, and Howard Stern.

The Lincoln-Douglas Debate this was not! Not that anyone ever suspected it would be. Political debates are little more than pomp and pageantry where candidates get to flout their well-rehearsed lines and zingers hoping to spring their gotcha-traps for each other. But even when political candidates for the highest office of the land, and possibly the world, are held to such low expectations, it is amazing how they can still trip over those low bars.

I could honestly think of no other television show in history that was done a greater disservice from an absence of a built-in studio laugh track than that so-called debate.

There are many people who already have and will continue to break down the debates and go through them in excruciating detail until the next debate occurs. I wish them the best of luck. It would be akin to being told to look for gold in the Cheonggyecheon stream.

So instead, I will focus on two small portions of the debate that 
matter the most to me - economics and North Korea.


Economics is a complicated field. It has its own set of experts who have studied the topic their entire lives and those experts bitterly argue with one another with as much intensity as you’d find among those who argue about the Israeli-Palestinian conflict. It truly is a specialized field of its own that can also be divided into its own subgroups that are so disparate that an expert in one field could be completely clueless about the issues that deal with another.

But no layperson could ever be convinced of that when they hear politicians spout their bullshit views about economics when they try their best to dumb down the topic into easily consumable soundbites for the TV-watching audience.

Although many can convincingly argue that Clinton may be more knowledgeable about certain subjects than Trump and that Trump may be better versed in other things than Clinton, the first segment of the debate which dealt with economics clearly showed that neither person knew what the hell they were talking about.

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What Clinton said about the economy:
  1. I want us (the government) to invest in the people and their future by promoting infrastructure, advanced manufacturing, innovation and technology, clean, renewable energy, and small business, because most of the new jobs will come from small business.
  2. I also want to see more companies do profit-sharing. If you help create the profits, you should be able to share in them, not just the executives at the top.
  3. We have to make the economy fairer by raising the national minimum wage and also guarantee, finally, equal pay for women's work.
  4. We need paid family leave and earned sick days, affordable child care, and debt-free college.
  5. We're going to do it by having the wealthy pay their fair share and close the corporate loopholes.
  6. We also, though, need to have a tax system that rewards work and not just financial transactions. And the kind of plan that Donald has put forth would be trickle-down economics all over again. I call it trumped-up trickle-down. Trickle-down did not work. It got us into the mess we were in, in 2008 and 2009. Slashing taxes on the wealthy hasn't worked.
  7. We had the worst financial crisis, the Great Recession, the worst since the 1930s. That was in large part because of tax policies that slashed taxes on the wealthy, failed to invest in the middle class, took their eyes off of Wall Street, and created a perfect storm.
  8. We can deploy a half a billion more solar panels. We can have enough clean energy to power every home. We can build a new modern electric grid. That's a lot of jobs; that's a lot of new economic activity.
  9. When I was secretary of state, we actually increased American exports globally 30 percent.

My rebuttals to Clinton:
  1. Classic example of Broken Window Fallacy.
  2. The President of the United States does not have the authority to force companies to share their profits “more equitably.”
  3. Raising the minimum wage hurts the most vulnerable members of society - the marginal worker. It will exacerbate wealth inequality, not alleviate it. Also, when is this gender pay gap myth ever going to die?
  4. Ever heard of unintended consequences?
  5. Pray tell, what is fair?
  6. Here’s an old challenge. Please name any economist outside a mental institute who has ever defended or called for trickle down economics.
  7. Please cite evidence that the 2008 financial crisis was a result of low tax rates. Otherwise, please be prepared to be called a bullshit artist.
  8. See rebuttal number 1.
  9. Does the Secretary of State oversee trade?

Well, that was easy. So much for a smart and experienced Hillary Clinton.
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What Trump said about the economy:
  1. American jobs are fleeing the country.
  2. China is devaluing its currency, and there’s nobody in our government to fight them.
  3. I'll be reducing taxes tremendously, from 35 percent to 15 percent for companies, small and big businesses.
  4. We have to renegotiate our trade deals. Other countries are giving incentives, they're doing things that, frankly, we don't do.
  5. Impose a tax on American companies that manufacture their goods overseas and then sell them in the US.
  6. Bill Clinton approved NAFTA, which is the single worst trade deal ever approved in this country.
  7. I built an unbelievable company. But we’re opening the Old Post Office. Under budget, ahead of schedule, saved tremendous money. I’m a year ahead of schedule. And that's what this country should be doing.

My rebuttals to Trump:
  1. Trump spoke a few times about the employment situation in Ohio and Michigan. So in other words, he is talking about manufacturing jobs. But the reality is that the American manufacturing sector is still robust.
  2. If China is devaluing its currency, then what do people call what the Federal Reserve is doing?
  3. That’s actually a pretty nifty idea. Inversions are one of the most visible signs that the U.S. corporate-tax code is broken. One of the reasons Ireland is a popular destination for corporations looking to move their headquarters out of the United States is the fact its corporate tax rate of 12.5 percent - about one-third of America’s rate. Cutting corporate tax rates could potentially help to create hundreds of thousands of new jobs and it could also lead to a significant increase in real wage. The question is how Trump intends to do that. As per usual, he doesn’t offer any concrete plans.
  4. (i) This will come as a surprise to the TPP’s 12 signatory countries that agreed they would not renegotiate the trade deals that have already been made. Seeing how the US is the major partner in the TPP, reneging on that promise would destroy the TPP and would destroy the Asia Pivot.

    (ii) Trade means increased jobs, but trade also means increased security. Reneging on its trade deals would be comparable to the Ming Dynasty suddenly choosing to become an isolationist hermit kingdom in the mid-15th century, after pursuing oceangoing exploration in the early part of the century. China could have been a superpower hundreds of years before the rise of the West. Is the US willing to become the new Ming China of the 21st century?

    (iii) In regards to complaints about “unfair” subsidies foreign governments grant their corporations, once again, Milton Friedman already provided the best rebuttal to that decades ago.
  5. Is Trump talking about companies with captive offshore operations (the practice of completing work at a non-domestic location, whether by workers at a company’s own offshore subsidiary - often called a “captive” center - or by a third-party or companies that outsource to third-parties based overseas) or is he talking about companies that outsource (the practice of contracting out of goods or services to a third party)? Does he even know the difference?

    This is an important distinction because targeting companies that operate subsidiaries overseas would include, for example, IBM and a good number of non-vendor Fortune 500 companies who maintain a presence abroad, such as GE and Proctor & Gamble, some of which provide their parent companies with IT services.

    On the other hand, if it does not affect US companies that “ship jobs overseas” by hiring an offshore company, then the only offshore outsourcing customers this plan could have any bearing on are those who work with US-based IT services companies like IBM, which then deliver those services offshore. If that is the case, it's unlikely the the average American would have much to benefit.

    Also, how would increasing taxes on those companies persuade businesses to relocate to the US? Taxes are not the only reason companies outsource. There are also lower wages in overseas markets. The likely outcome of increasing taxes on such businesses could be more offshoring, not less, as those corporations use labor arbitrage to offset the bigger tax bill.
  6. NAFTA is NOT the worst trade deal the US has ever had.
  7. The idea that it would be better for the government to be run like a finely operated corporation has always been fancied by those on the political right. For good or for ill, however, a government cannot be run like the way a business is run. See here, here, here, here, here, and here.

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North Korea

Very little was said about North Korea. So my response will be short, too. Trump said, “China should go into North Korea. You look at North Korea; we are doing nothing there. China should solve that problem for us. China should go into North Korea. China is totally powerful as it relates to North Korea.”

My rebuttal:

Assuming that the US even has the leverage to “let” China do anything, allowing China to install a pro-Chinese regime in Pyongyang would infuriate not only Seoul, but also Tokyo, Moscow, and Hanoi. It would most likely be the best way for the US to actually become what Chinese nationalists have called it for decades - a paper tiger.

It is obvious except to the most deluded that the only place where Trump is a brilliant strategist or a deep thinker of any type whatsoever is in the deep recesses of his own twisted fantasies where he ought to crawl back into.

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I know that I've said this about politicians many times but I will say it again. A plague o' both their houses!

Wednesday, August 3, 2016

Movie Review: Suicide Squad

WARNING: The following review contains a lot of spoilers. If you have not yet seen Suicide Squad and wish to do so without having the plot given away, then do not read this.

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It is often said that the definition of insanity is doing the same thing over and over again and expecting different results. Technically, that is NOT the definition of insanity, but whatever. Let's go with that definition of insanity and just plainly say that I am clearly insane. I am insane for constantly going to every single comic book movie expecting to come out of the movie theater feeling blown away when in reality, I always end up feeling disappointed and going through my usual bout of self loathing I always feel after watching a comic book movie yet again.

So why do I keep watching comic book movies if that's how I always end up feeling? It's obviously because I am insane. Just like how every four years (or five years in other countries) people always come out to vote for Candidate Elephant Excrement or Candidate Donkey Douche for president. It's because we are all bloody insane.

Basically, to boil down the essence of Suicide Squad into a single sentence, it is The Dirty Dozen except that it's on crack and acid at the same time and instead of disgraced US soldiers waiting on death row, we have supervillains (of various skills or the lack thereof) and instead of Nazi officers, we have a powerful ancient witch called Enchantress (Cara Delevingne) who for all intents and purposes looks like a college sophomore who ingested way too many funky mushrooms during Burning Man and forgot to take a shower for a year. By the way, she's the main antagonist.

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Suicide Squad's plot is thinner than the broth that is typically served in any ROK Army chow hall. Granted, one of the complaints of Batman v Superman: Dawn of Justice was that it seemed like as though content that could have been spread out over six movies was crammed into one. So I expected that Warner Brothers would insist on a simpler plot for Suicide Squad but they apparently decided to go with the "little to no plot" route instead.

Anyway, back to the plot. Taking place after the events of Batman v Superman: Dawn of Justice with the death of Superman, Amanda Waller (Viola Davis), who is acting like the kind of government employee that the most paranoid libertarians believe actually exist in all levels of government, decides to round up a group of supervillains to create a paramilitary unit because the next Superman might be an enemy of the United States. She actually calls these supervillains metahumans but it's clear that most of them are NOT metahumans. The only metahumans in the team are El Diablo (Jay Hernandez) who is basically DC's answer to the X-Men's Pyro except he has facial tattoos (because who cares about ever getting a job?) and the aforementioned college sophomore.

The rest are a hitman with a heart of gold-ish (Will Smith), a bubbly nutcase with a baseball bat (Margot Robbie), a guy who is good with a boomerang (Jai Courtney), and a guy who either has a bad skin condition or is actually a human crocodile (Adewale Akinnuoye-Agbaje). And they're overseen by a soldier named Rick Flag (Joel Kinnaman) - because that's obviously not the perfect stage name of an adult film star - who happens to be in love with the college sophomore; and a ninja (Karen Fukuhara) who uses a sword that is able to trap the souls of those it kills because reasons.

That's the team. Seriously. So here's an obvious question. Why use supervillains who don't like or care for authority and who must be threatened with a bomb in their necks when there are perfectly good soldiers that the government could have easily used? For God's sake, one of the bad guys, the college sophomore's brother - who came out of nowhere by the way - was defeated with what looks like C4 explosives. Did the government suddenly forget that they have Tomahawk cruise missiles?

Here's another reason it doesn't make sense. In a post-credit scene, Amanda Waller and Bruce Wayne (Ben Affleck) are having a private meeting and Waller hands over a file to Wayne, which is full of information about the Flash and Aquaman! The government is aware of these two amazingly powerful metahumans and Waller decided that the best she could do was to form a team of people who use boomerangs and comically large mallets?! For God's sake! Was there not a single writer on the production team whose mother did not snort liquid cocaine while she were pregnant with him/her?

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But of course, the villain that the Suicide Squad has to defeat is the college sophomore. She's a powerful wizard but she has a habit of not keeping her heart in her chest where you would think it belongs because, again, reasons. So Waller borrows a page from Pirates of the Caribbean: Dead Man's Chest's equally lousy and stupid plot and threatens to stab holes into the heart unless the college sophomore does as she commands. So the college sophomore rescues her brother who is also a witch (I told you he came out of nowhere) to help retrieve her heart and when he does so, she proceeds to do a weird belly dance to create a weapon that looks like a cloud with rocks swirling around it (which takes a long time) to destroy humanity. Because apparently this powerful witch can't hijack nukes. Makes total sense.

But fighting the college sophomore wasn't even their mission. The Suicide Squad's actual mission was to enter the city (whose name I had forgotten the moment I heard it) where the college sophomore is doing her Burning Man with Bad JuJus routine in order to rescue a high value target. But there is a plot twist! That high value target is Amanda Waller herself! But then they botch the rescue and then end up fighting the college sophomore even when the bombs that have been planted in their necks have been deactivated, which was the only reason they agreed to join this group, because reasons.

The plot holes in Suicide Squad are so big that it would be inappropriate NOT to make yo momma jokes.

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But what about The Joker? He was heavily shown in the trailers. What about him?

Yes, The Joker (Jared Leto) was in the movie. Barely. He didn't contribute at all to the plot (for what little there was) and the few minutes that he was on screen were already shown in the trailers. A lot of noise was made about how he remained in character throughout the filming of the movie because he's a method actor and how at one point, he mailed used condoms and anal beads to his castmates. If he really did all that just for those few inconsequential minutes that he was in the movie, then Leto truly is an asshole.

Was Leto at least a scene stealer? No, he was not, which is such a damned shame because everyone knows that the man CAN act! Asshole or not. Requiem for a Dream, anyone? When the late Heath Ledger portrayed his version of The Joker, people couldn't take their eyes off him. Ledger's Joker was charismatic, laughed like a maniac, growled like a rabid dog, and even performed a magic trick with a pencil. He was a cold-blooded sociopath who was out to make a point - that everyone was just one little push away from being as mad as he was. Leto's Joker, on the other hand, was boring. All he wanted to do was rescue his girlfriend. Hell, even Cesar Romero's Joker was more interesting than Leto's version.

If in some later movie Leto's Joker and Affleck's Batman were placed in the same room together, I wouldn't know whom I'd wish were dead more - them or me. And then there's the depressing fact that I'd still probably pay money to watch that crapfest, too, because, like I said, I'm clearly insane.

Sigh. I do miss this man.
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Earlier, I compared Suicide Squad to The Dirty Dozen except that it was on crack and acid. I shouldn't have said that. The Dirty Dozen was a great movie. The overarching plot might have been somewhat similar but The Dirty Dozen made you feel for the characters. The movie showed you the characters' flaws, their weaknesses, their malice, their madness, their contempt, their hopes, and fears - humanity in all of its shameful ugliness. Suicide Squad, being the squeeky clean PG-13 movie that it is, barely does that.

In The Dirty Dozen, the audience got to watch terrible human beings perform a heroic act for their country and then make the ultimate sacrifice as most of them die by the end of the movie. Beyond being a great action-packed war movie, it also touched on the philosophical question of whether one could escape fate; whether or not karmic justice will always find you regardless of how much you may be try to absolve yourself of your sins.

There are deaths in Suicide Squad. One character is killed off as soon as we are introduced to him so there's that. The other character that dies is El Diablo - the only character who is actually sympathetic, but his death is, of course, blanketed underneath a ton of CGI, which has the ability to make people forget what feelings feel like.

The only other character who is also somewhat sympathetic is Deadshot (Will Smith)... but the problem with Deadshot is (1) he was never really portrayed as a villain worth hating to begin with and (2) he being a loving father to an 11-year-old girl makes it hard to distinguish Smith's character in this movie from practically every other movie role that he's had in the past ten years.

As for the other characters, they aren't given any depth and the audience doesn't feel emotionally invested or fear for their safety because, of course, Warner Brothers isn't going to kill off these characters after they had just gotten the rights to them. They've got to keep making sequels and prequels and spin-offs and keep resurrecting characters to keep churning out crap that people like me will inexplicably keep consuming.

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However, there are three nice things that I will say about the movie.

One, I liked the soundtrack. A lot of the songs in the movie were classic rock songs, which I have a soft spot for, but I did feel that it was a bit too much after a while. After a while, it did feel like the filmmakers were trying to compensate for their lousy plot with an awesome soundtrack.

Two, Margot Robbie was fun to watch. Yes, she put the manic in the Manic Pixie Dream Girl role that she was given and she has pretty much guaranteed that the Harley Quinn look is going to be a permanent fixture among Halloween costumes. But more than that, she was the one thing about this sad attempt at a movie that was entertaining.

Which brings us to three. As a result of the bit of humor that Margot Robbie helped to infuse into the movie, I can say with certainty that Suicide Squad is a better movie than Batman v Superman: Dawn of Justice, but of course, that's not saying much.

Ok, I don't dislike all comic book movies. I thoroughly enjoyed Deadpool, but really, who didn't?

Monday, July 11, 2016

What Going Cashless Could Mean

A few months ago, news broke that the Korean government plans to eliminate coins from its money supply by 2020. However, eliminating coins is not the end goal in and of itself. The ultimate goal is to eventually also phase out paper money. However, there is no set date for that yet.

At first glance, this makes sense. More and more people are using debit cards, credit cards, various smartphone apps such as Samsung Pay and Kakao Pay, as well as virtual cryptocurrencies such as Bitcoin (though Bitcoin does not seem to have become mainstream in Korea just yet) to make financial transactions. Considering the overall social trend that we are seeing in Korea unfold before our very eyes, it is understandable when the Korean government says that eliminating coins from the overall money supply would be able to help it reduce minting costs, which is about ₩60 billion (US$52.1 million) per year.

Although it is likely that the Korean government still has a positive seigniorage rate -- the profit made by a government by issuing currency, especially the difference between the face value of coins and their production costs -- in the long term, eliminating coins would be more profitable because of inflationary pressures that devalue money.

So going cashless certainly has benefits. An added bonus that comes with the elimination of cash is that it would severely inconvenience those engaged in criminal activity. As more and more people use cards, physical or virtual, to make and/or receive payments, it would become much harder for activities like tax evasion, gambling, money laundering, terrorism financing, human trafficking, and the drugs trade to go unnoticed by the government. And in Korea's case, it would help the government to better monitor the clandestine flow of money into North Korea, which is no small matter!

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However, there is another reason, a rather big reason, that the government prefers a cashless society; and it is one that is seldom talked about by those outside of groups that focus on cryptocurrencies or economics in general. The reason is that a cashless society would make it much easier for the central bank, in Korea's case that being the Bank of Korea, in tandem with the government, to potentially impose negative interest rates.

What are Negative Interest Rates?

Central banks all over the world are tasked with maintaining a certain level of stability in each country's financial system. Among the tools that central banks possess, nothing is as powerful as their ability to increase or decrease the discount rate, which is the interest rate charged to commercial banks and other depository institutions for loans received from the central bank.

So, for example, if a central bank decreases the discount rate, which is what is typically being done around the world these days, it would make it cheaper for commercial banks to borrow money from the central bank. In turn, the commercial banks would be able to pass on those savings to their customers -- you and me -- in the form of lower interest rates charged on things like auto loans or mortgage loans.

This would compel individuals to borrow and spend more money. That way, a stagnant economy would get the boost that it needs and it might be able to stave off or perhaps even recover from a recession.

Similarly, if an economy is overheating -- witnessing dangerously high inflation rates -- the central bank will increase the discount rate, which would then have a domino effect of making it more costly for people to borrow money, which would then help to cool the economy.

At least that's the theory anyway. But what happens if the theory doesn't match reality?

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What happens if an economy doesn't experience growth despite the fact that interest rates are kept close to zero? For example, interest rates in Japan have been kept at nearly zero for more than 20 years, but it has not helped Japan to escape from its deflationary trap. When we consider the fact that much of Korea's economy was modeled after Japan's economy (see here and here for more wonkish comparison) and also take into account that, like Japan, Korea has an aging population, the possibility of falling into a decades-long deflationary trap is not an unfounded fear.

As a result, more and more governments are now flirting with an idea that was once panned as being ridiculous -- negative interest rates. Basically, it's taking the idea of imposing lower interest rates to stimulate economic growth and injecting it with steroids.

The idea is that the central bank will go all in and impose a discount rate below zero percent for commercial banks. The idea is that if a central bank imposes a discount rate of, say, -0.5%, commercial banks would be less willing to park their money in the central bank where they would be charged money for doing so. So, instead, commercial banks may prefer to lend money to each other. The theory is that when more and more money circulates among commercial banks, then banks would more willingly lend money to their customers, which would in turn help to stimulate economic growth.

Does this mean that the Average Joe/Jane will have to pay to keep money in a bank?

That is a popular argument that many have made in regards to the negative interest rate. However, I think it is unlikely that commercial banks would actually do that. People who make that argument often neglect to look deeper into the very different relationship between central banks and commercial banks and the relationship between commercial banks and their customers.

Whereas the relationship between KB Kookmin Bank and me is one that can be characterized as a business/customer relationship, the same cannot be said of the relationship between Kookmin (or insert other banks here) and the the Bank of Korea. That is because central banks act much like regulators over their respective financial industries. In other words, consent is practically non-existent in the relationship between central and commercial banks. For good or for ill, central banks make the rules and regulations and in order to stay in business, commercial banks have to obey those rules.

It goes without saying that banks hold a lot of leverage over their customers, but no matter how powerful commercial and investment banks may be, there is one power they do not possess over their customers. They have no control over their customers' choices. For example, if Bank A charges their depositors an annual fee to keep their money in their bank, those depositors will more than likely look for other banks to save their money in where they won't have to pay such a fee. And Banks B and C and D and others will only be too happy to oblige.

That is why it is unlikely that commercial banks will somehow end up cannibalizing their customer base. Especially during periods of economic slowdown, market expansion might be a more practical strategy for long-term survival than profit maximization.

However, it does not change the fact that commercial banks would still be losing money because of the negative interest rates. So, they may partially push those costs to their customers by other means such as higher overdraft fees or eliminating free account transfers. So there is a chance that regular bank depositors might end up having to pay additional hidden fees, but being directly charged for saving money in a bank account sounds like a tinfoil hat conspiracy theory.

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What does this have to do with a cashless society?

The theory behind negative interest rates is almost sound. Incentives are important and when there is no incentive to save -- in fact, if there is every incentive to spend -- people will spend more money, which would help to stimulate economic growth. However, there is a problem with the theory. It depends entirely on the assumption that human beings think and act like Homo Economicus. The problem is that Homo Economicus does not exist.

Homo Economicus is all about maximizing one's economic utility and is aware of all publicly known information and responds accordingly. So for example, if the government taxes kale at 100% but taxes candy bars at only 10%, and assuming that they are the only two things that anyone can buy and depending on the utils that Homo Economicus derives from kale and candy bars, respectively, there is a very good chance that Homo Economicus would buy only candy bars. None of that describes a typical human being.

Human beings do not possess all publicly known information. Everyone suffers from asymmetric information from one degree to another, we are all biased, and we all tend to act emotionally. And one of the most powerful emotions that dictates how people think and act is fear.

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Theoretically, a negative interest rate will drive individuals to make the necessary cost-benefit analysis and decide that spending one's money would be more profitable than saving money at zero percent interest. However, the theory discounts humans' fear of the future. Though we do not possess all publicly known information, we are a species that is aware of our own frailty and mortality. Barring any unforeseen circumstances that could potentially snuff out our lives at any given moment, we will all some day grow old. Our bodies will become weak, our minds will become feeble, and we will all die. That is ultimately why we save our money and not spend every penny that comes our way (if you do spend your money like this, STOP IT!).

Negative interest rates could potentially wreak havoc on people's retirement plans. If the interest rate is above zero, we can save our money with the full knowledge that the balance that we end up with at the time of our retirement will be greater than the principal that we started out with (assuming that our savings are not canceled out by inflation). Unlike interest rates that can be changed at will, however, assuming there is no sudden medical breakthrough that will cure everything, the aging process does not change. So even if the interest rate is at zero percent, it will not change the fact that we still have to plan for retirement. But zero percent compounded for X years is still zero. That means that in order to reach our targeted savings goal for our retirement, we need to save more money than we would have to had the interest rate been above zero.

This is one of the possible reasons that might explain the ineffectiveness of keeping interest rates low.

So especially in aging societies like Korea and Japan, it is possible that imposing negative interest rates could lead to drastic unintended consequences (not to mention the fact that lower profit margins that negative interest rates would impose on banks in general could drive a lot of smaller banks out of business, thus inadvertently exacerbating the "too big to fail" phenomenon).

So imagine what you would do if you were planning for retirement but the bank is basically telling you that it will do nothing more than simply hold your money. What would you do? The more risk averse among us would still likely keep our money in our bank accounts despite the zero percent interest. After all, the money in the banks are insured by the government. But for those who are more prone to taking risks for whatever reason, it is likely that they will pull their money out of the bank and invest it in something that will give them a greater long-term yield. That is why so many people who can afford to do so buy property (though everyone should always keep an eye out for economic bubbles).

But if enough people pulled their money out of their banks to look for greener pastures, couldn't that lead to a bank run and wouldn't that be catastrophic? Yes, it would certainly be catastrophic. But what if there were no cash to withdraw from the banks to begin with? When there is no physical money that you can hold in your hands or literally stuff under your mattress, when the only money that you can use is all digital e-money and, unlike cryptocurrencies like Bitcoin, it can all be tracked by the central bank, then you literally cannot flee from the banks. Or at least it would be really hard to do so.

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That is because it would become much easier for the government to "direct" people from deciding against "hoarding" their money upon the imposition of a negative interest rate after cash has been eliminated. To explain, in order to have better returns, individuals may desire to take their money out of their bank accounts and invest it in private asset markets such as property or what have you. However, unlike banks, other private asset markets are not guaranteed by the state, and thus not safe for investors. At least not as safe as banks. That way, there will be incentive for people who prefer safety and risk-free investments to keep their money invested in state-guaranteed banknotes, even if all of those banknotes are purely digital.

In other words, a cashless society transfers absolute control of the money supply to the central bank. Combine that with negative interest rates and the central banks have the perfect mix of ingredients necessary to incentivize spending, disincentivize savings, AND prevent bank runs that could offset the stimulative goals of the negative interest rate. Theoretically, assuming everything goes according to plan, the macroeconomic outlook will become less dire and might be a winning strategy to overcome negative economic growth. But what will that do to individuals' savings? How will this effect retirement plans?

So why not go cashless from the get go?

Like the case in Germany, though many people prefer to use other methods of payment, cash still has a special place in everyone's hearts for various reasons (see here, here, here, here, and here).

So, a sudden abandonment of cash would be met with great resistance. It would make a lot more sense to gradually acclimate the public to going cashless.

The government has stated that people will be issued special cards for them to store their e-change. For example, if someone buys ₩9,500 worth of goods and handed over a ₩10,000 note to the cashier, instead of receiving a ₩500 coin as is done right now, the cashier would digitally wire that ₩500 worth of change to the card that the customer carries. This is perfect in many ways. That is because eventually, all the change that gets digitally wired to individuals' cards will begin to accumulate over time and once that happens, that accumulated money in people's cards will be used for transactions side by side with paper money (for as long as paper money is still circulated).

This means that the continued use of e-money could be further incentivized. Doing so would just be a matter of imagination. For example, the government could provide a favorable rate environment for e-money, or by an enticing exchange rate for swapping out of paper money for e-money via credit or point systems or special offers in partnership with Korean conglomerates.

Combine that with a a steady campaign to stigmatize the use of paper money -- as has already been done throughout Europe -- and the Korean government would be able to gradually shift toward a cashless society while facing minimal resistance. It's actually quite brilliant.

What it would mean to live in a cashless society

As I mentioned earlier, a cashless society could wreak havoc on people's retirement plans. And this is no small matter especially when we take into account how much debt the average Korean household has

There are other possible outcomes that could arise from going cashless. For one thing, a cashless society would certainly reduce privacy for the average person as our money could easily be tracked, thus making it incredibly difficult to hide our money from the Tax Man. However, it is not just the government that people will have to worry about. Once e-money is "printed" by the government and administered to the general public by private financial institutes, it could become much easier for our spending habits and history to be tracked by others such as insurance companies and marketers.

As usual, the rich will still be able to benefit. They can buy anonymity via shell companies or charities. However, for average people, anonymity would be a thing of the past. However, those who would be hit most are those who currently do not have bank accounts because of poor credit scores. Once cash becomes a thing of the past and they are still barred from banks because of their poor credit scores, their lives could become much more difficult. It would not be a stretch to conclude that this could potentially exacerbate the wealth gap.

If you're rich
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Further, it could also make life miserable for those who are deemed immoral by societal standards. Take the porn industry for example. In 2014, it was reported that Chase Bank had shut down a number of bank accounts that were discovered to have been used by porn actors. Porn is already illegal in Korea and those who are apprehended are usually prosecuted to the fullest extent of the law. Pornographers may be difficult to defend, particularly if they might also peddle revenge porn. However, other possible victims of the morality police are sex workers who already face a lot of discrimination in their lives as they might get locked out of banks, too.

Also depending on how well the relevant laws are enforced, it could also make it impossible for businesses to pay people anything lower than the minimum wage. Many people might think that this is a good thing. However, it could potentially make life much harder for marginal workers as it is possible that people might not even bother to hire them at all.

However, all of those problems pale in comparison to the much bigger issue -- what if going cashless and imposing negative interest rates on top of that still do not help to spur economic growth? What happens then? That is what people should be pondering.