Since 1945, the world has seen an era of American leadership. Now, with the populist mindset swaying in favor of protectionist policies and the 2008 Financial Crisis still reverberating in the pockets of the public, a new stage has been set with the receding role of the US in international leadership. Reminiscent of, though not entirely resembling, the American isolationist period of the 1930s, this power vacuum will grow and peak in 2018, when the full impact of the Congressional budget comes into play. The fair question: which actors will fill this vacuum, and with what currency?

Enter Saudi Aramco, a private oil company that currently supplies one out of every nine barrels of oil produced in the world [2]. Founded by the Standard Oil Company of California, now Chevron, in 1933, shares were completely bought out by the government of Saudi Arabia by 1980 [3]. Whilst contributing up to nine-tenths of Saudi revenues [4], the global perception of climate change and the subsequent push for renewable, non-oil, energy resources has prompted Saudi Arabia to propose a hard-turn diversification program – Vision2030 [2]. The plan begins with the Initial Public Offering (IPO) of up to 5% of Aramco stake by late 2018, with a predicted price at $100 billion [3], trumping Alibaba Group’s record-bearing offering of $25 billion in 2014 [5].

The Saudi Arabian government has stated that the valuation of the company will by $2 trillion on the public market [2], but other estimates, like that of Wood Mackenzie Ltd., come up with a valuation of $400 billion [5]. However, these lower bound estimates are based on the current financial structure of the company, and with JPMorgan working with the Saudi authorities on broad changes in regards to regulatory exposure, disclosure rules, dividend policy and exchange listing options, this valuation estimate is likely to be higher [2].

Further, the Saudi government’s financial restructuring and other initiatives in line with Vision2030 will be the greatest factors of success before this momentous listing. One such government scheme is the Citizen’s Account, which will dole out $6.7 billion worth of public disbursements in 2017, increasing to almost $20 billion by 2020, in order to limit the influence of energy price increase on citizens and subsequently soften the effect of austerity measures. Additionally, a new excise tax on ‘harmful products’, like tobacco and energy drinks, will begin, along with a 5% value-added tax in 2018 [6]. As well as that, there have been talks to review Aramco’s income tax rate from 85% to as low as 50% [7]. Further, the biannual reduction of fuel, water and electricity subsidies that started in 2015 will continue. Moreover, to counter the current slowdown, considering the 3.4% to 1.1% growth from 2015 to 2016 and an expectant growth of 0.9% in 2017, a stimulus package of almost $60 billion will be allotted until 2020 [6].

Along with the dynamic attitude of the Saudi government, Aramco’s own restructuring and diversification projects are underway. Advisors and company executives are discussing whether to make Aramco a ‘global industrial conglomerate’ or a ‘specialized international oil company’. Leaning towards the former, Saudi officials are considering the reformation into something reminiscent of a ‘Korean chaebol’, a reference to South Korean family-owned conglomerates, thus expanding the company’s role in petrochemicals and other sectors. As Aramco begins to diversify, with a $5 billion ship repair and construction complex on the East coast, $400 billion forging and casting projects with General Electric and plans to build solar and wind power facilities, the risks of investment become more diverse and the company gets harder to value [7]. However, the synchronization of company and government initiatives, as enabled by Deputy Crown Prince Mohammad bin Salman Al Saud, doubling as the owner of Aramco and chairman of the Council for Economic and Development Affairs, will result in the growth and valuation of the company at a much higher level than some anticipate.

Even when withholding the effects of diversification, Aramco is still expanding its natural gas production capacity, and wants to double it from 12 billion to 24 billion cubic feet per over the next 10 years [8]. And given that the oil market will continue to perform well, as it has done since the production cut in November 2016 when OPEC reached an output agreement [5], Aramco’s success in this sector seems inevitable.

With the ambitious objective to create a sovereign wealth fund that will anchor Saudi state revenue by 2030, there’s no doubt this IPO will have a monumental impact on the cash flows of the East. A survey conducted by investment bank EFG Hermes at an investment conference in Dubai, polling 510 international fund managers, shows that 63% predict Aramco’s market capitalization to be over $1 trillion, while 36% predict under $1 trillion [9]. Such a valuation falls in the middle, though leans upward, between Saudi Arabia’s prediction and Wood Mackenzie Ltd.’s harsher rough valuation of $400 billion. 

If the valuation were to reach the upper bound, Aramco could swallow Apple twice and still have enough room for Google’s parent, Alphabet. On the lower bound, the company would still shake up and redistribute markets and begin its capitalist conquest through mergers, acquisitions, investments at an entrance point just above Facebook. With a 5% float of the company, the number of shares of Aramco available for trading, the company is estimated to account for 2.4% of the MSCI Emerging Markets Index’s gauge. This would thrust Aramco into the top five, alongside Samsung and Alibaba, and inflows to the Saudi Arabian foreign money market are expected to be at $6.6 billion from MSCI trackers and $2.5 billion from FTSE investors [5].

However, the Tawadul, Saudi Arabia’s Stock Exchange, has a market cap of only $440 billion, and so Aramco will seek out another Exchange, or multiple others, to list itself on. Preference is for a listing in the NYSE, despite a Congressional law being passed in 2016 that could allow American terror victims to sue Saudi Arabia. This, along with Trump’s islamophobic rhetoric, has potential to derail a NYSE listing [11], or elicit partial listings in multiple Exchanges, in which case the London, Toronto, Singapore and Hong Kong Exchanges are other stated options [5]. Regardless of the listing location, as trade barriers go up in Europe and the US enters an era of isolationism, Chinese and OPEC influence will rise and their bond will create the foundations of this global power shift.

Money as we all know is an important unit of account and an essential tool for trade. Recently, there has been great speculation on the benefits of going paperless once and for all. Currency has been the fundamental pillar in our monetary system and has given rise to trade and investment. The reason why speculations regarding going paperless is more prominent than ever is due to the fact that we live in a virtual society. Money is often sorted through intermediaries and many trades and investments are made without actually physically seeing any coins or bills exchanged. What are the benefits of completely digitizing currency and what are the costs of abandoning our existing system?

Stimulating the Economy and Negative Interest Rates

One key reason for the removal of physical currency is the incentive that if all money is held in financial institutions then people would be forced to invest their money. Currently, people are simply able to withdraw any amount of money they possess and take it out of circulation by keeping it in their homes. The purpose of financial institutions is to bring people who have money but no time to create businesses and connect them with people with spare time and capabilities to create businesses but lack liquid capital. By withdrawing the money it is removed from circulation and a central function of banks is rendered useless. It has been proven that people would rather hold cash in their closet than place it in assets such as bank CDs and treasury bills offering 3-5% interest. [1] Harbouring money keeps it from being utilized for investments and has some effect in impeding the economic expansion.

Due to slow growth of the Canadian economy many are looking at alternative ways to stimulate expansion. In recent years there has been some success in European countries with negative interest rates. In Switzerland there exists 30 year bonds that offer negative interest rates directly contending the Swiss franc with the euro system in place. It is highly difficult to push interest rates into negative areas as vast amounts of cash are hard to maintain. Moving to a cashless economy could allow central banks more flexibility to push the interest rates as negative as preferred to induce an expansionary monetary policy during a recession or depression. Negative interest rates are difficult to achieve and require much more than simply going paperless but would give governing institutions the help they need in times of financial crisis.

Bypassing Hidden Costs

Another reason for why keeping cash is a burden is the existence of hidden costs. There are many costs associated with possessing physical money including the cost of maintaining the currency itself. Printing, minting, and redesigning currency are all costly projects funded by the government through tax payer dollars. The Bureau of Engraving and Printing produces 38 million notes a day with a face value of approximately $541 million USD. Although $541 million is printed 95% of that amount goes to replacing notes already in circulation. Adopting electronic processes saves the environment because it would make use of virtual currency that do not have a physical denominations. The elimination of cash also forces the discontinuation of paper receipts and reports which are frequently mailed. The cost of sending a receipt or replacing a financial document can waste time and resources. The accessibility of physical currency accounts for a minority of transactions and only 14% of exchange is done with paper  in US. [2] Eliminating that 14% can drastically benefit the US economy and allow them to focus on reforming the financial system for the 21st century.

Difficult for Illicit Activities

The elimination of cash would discourage people from illicit activities. It would be difficult for someone to transport a large quantity of money without being detected. Currently, transporting millions of dollars is an easy task. We have seen it in movies where a villain easily carries a briefcase filled with cash to a drop off location. If cash is eliminated then criminals would have difficulty transporting money and completing illicit transactions. If crime money is stored in banks it would leave a clear financial trail which is easily detectable. Eliminating cash also helps with preventing street crime. Thieves would have less initiative to rob people knowing that they would not be carrying cash. A study from Missouri during its mid 1990s transition with welfare benefits suggested that going from a cashable cheque to a debit card allowed the crime rate to drop roughly 10%. [2]

Drawback of Eliminating Cash

With all these positive features of a virtual currency why has it not been implemented?The one benefit of holding cash is anonymity, cash is nameless and offers no history of transactions. It allows people to make purchases that cannot be traced and is an essential freedom to our private lives. Hoarding cash also allows people with massive amounts of wealth to fool tax organizations or even family members. By going digital we are forgoing our right to private transactions. The concern is where the line on personal privacy lies and at what point is it no longer acceptable for a third party to have information on our daily lives. If cash is eliminated this would grant government entities who upkeep their respective currencies unlimited power to manipulate currencies. The existence of cash keeps government power in check and creates a buffer for monetary policy using natural market mechanisms.
Cash is an important part of any economy and serves an essential function in our everyday lives. Having physical currency is important and cannot be ignored when contemplating the future of the global economy. However, it is important to recognize the issues with our monetary system as it is. Money works best in an economy when it is treated as a hot potato, allowing it to circulate instead of it being idle.

References

[1] http://www.rcwfinancial.com/cashless-society
[2] http://time.com/money/4307717/getting-rid-of-cash/

Canada’s sharing economy is booming. According to Statistics Canada, almost 3 million Canadians spent over CAD 1.3 billion participated in the sharing economy [1]. Companies like Uber and Airbnb are revolutionizing their respective industries. And with Uber set to enter into British Columbia by the end of this year [2], the impact of the sharing economy will only grow.

However, there is a major problem that tax collectors are starting to find – Canadians aren’t reporting income generated from the sharing economy. According to an article from the CBC, the misconception occurs because many people are new to self-employment[3].

Uber has solved the problem for sales taxes, though. Since it doesn’t add in the cost of taxes to the amount the rider pays, what Uber does is take the money straight from the consumer to Uber itself, and then pays the rider with taxes deducted. So, essentially the driver is getting paid less than what the consumer pays. Unfortunately, this isn’t as simple to do with income tax, as it is far more complex than sales taxes.

To counter some of these problems Airbnb is sending out reminder emails letting  hosts know to declare their income. Meanwhile, Uber and Airbnb both are partnering with different tax preparing companies, like TurboTax and H&R Block, to help their users get the taxes right [4].

As the sharing economy continues to explode, it will be interesting to see how tax collectors respond, to ensure tax evasion doesn’t continue to grow with it. Thus far it still largely remains an underground sharing economy unknown to tax authorities.

 

References

[1] http://www.cbc.ca/news/business/statistics-canada-sharing-economy-1.4004993
[2] http://www.huffingtonpost.ca/2017/03/07/bc-taxi-industry-uber_n_15223560.html
[3] http://www.cbc.ca/news/business/taxes/tax-time-2016-uber-drivers-1.3462006
[4]http://globalnews.ca/news/3305907/canadians-in-the-sharing-economy-are-running-out-of-excuses-not-to-pay-taxes/

Amid the Trump elections and fake news outrage, a summit was held in Marrakech Morocco dedicated to Climate Change. The summit named COP22 was held in November 2016 and presented a significant reality check for the ambitious goals  that were set by the Paris Agreement. With 2018 as the next major checkpoint, the United Nations Framework Convention on Climate Change (UNFCCC) began to: reevaluate those ambitious goals set by the Paris Agreement, and ratify it to add  more countries. With the commencement of the summit, the ratifications made during the Paris Agreement have been passed into law, as the number of national commitments surpassed 55% of global emissions. [1] The newest members who have ratified the Paris climate change agreement include Australia, Botswana, Burkina Faso, Djibouti, Finland, Gambia, Italy, Japan, Malaysia, Pakistan, and the UK.

One major cause for concern during the summit is skepticism regarding whether or not goals set by the Paris Agreement will be met as well as the transparency of the cooperations between nations. Voluntary national emission targets have not had the desired effect as countries like the USA that  contribute over 16% of global emissions for CO2 have yet to commit to cut back their emissions. [3] With only a year left until the next checkpoint, the COP22 summit focused on improving current agreements to make countries more accountable instead of laying down more policies. On the bright side, improvements were made to the agreements of the Climate Vulnerable Forum, which is a coalition of developing countries committing to ultimately reach 100% renewable energy. The proposed strategy was to have rich nations contribute USD 100 billion to developing countries so that they can transition to renewable energies. This will reduce the need for developing countries to consume and invest in cheaper fuel options. One clear problem with this commitment is Climate Finance. The US, Germany and, and UK contributed: USD 50 million to improve carbon accounting in developing countries, USD 23 million for a centre to share clean technology expertise, and Germany single handedly replenished the adaptation fund with USD 80 million. [5] Although these numbers show progress, it is only a drop in the bucket for the goal of USD 100 billion by 2020, set by the Paris Agreement. The COP22 summit did not produce any significant new financial pledges for ratified nations but instead worked on clarifying financial contributions nations need to make, highlighting the need for adaptation funds to the poorest nations who are being affected by climate change the most.

The summit marked the emergence of clear demands from African countries. These demands include more funding to enforce the goals set by the Paris Agreement and mechanisms to move away from dependence on foreign aid. The ambitious African Renewable Energy Initiative (AREI) will be a self-sustaining initiative that plans to achieve 10 gigawatt of additional generation capacity by 2020 and 300 gigawatt by 2030. [1] This initiative will attract investors in public and private realms due to its highly ambitious results and profit margins.

Now that the summit has ended and U.S. presidential elections are finished many questions are being asked as 2018 approaches. Trump has famously proclaimed that upon his ascension to the presidency he would disengage the United States from the Paris Agreement established by Obama administration. Moving forward, if the Trump administration sticks to their claims it would mean the loss of support from the USA who carry the second highest emissions in total kiloton, up to 5,335,000kt in 2014, the USA accounts for approximately 16% of global CO2 emissions and without their support on this agreement it would be almost impossible to achieve the goals set by the Paris Agreement. [4]
Just north of the USA, Canada is holding firm to commitments made in the Paris Agreement as well as spearheading other initiatives. Canadian Minister of the Environment and Climate Change, the Honourable Catherine McKenna, stated during the summit that since COP21 Canada has negotiated an amendment to the Montreal Protocol to phase down hydrofluorocarbons in air-conditioners and refrigerants. [5] Canada has also co-chaired the Climate and Clean Air Coalition, and are implementing new measures to reduce emissions from aviation under the Civil Aviation Organization. Like many developing nations including China who are investing billions into renewable energy, Canadians are also committing more resources to increase innovations in climate resilience and adaptation technologies. The future although still uncertain, is without a doubt moving towards a low carbon way of life. [2]

In today’s article, we will extend our knowledge of the Simple Linear Regression Model to the case where there are more than one explanatory variables. Under certain conditions, the Gauss Markov Theorem assures us that through the Ordinary Least Squares (OLS) method of estimating parameters, our regression coefficients are the Best Linear Unbiased Estimates, or BLUE (Wooldridge 101). However, if these underlying assumptions are violated, there are undesirable implications to the usage of OLS.

In practice, it is almost impossible to find two economic variables that share a perfect relationship captured by the Simple Linear Regression Model. For example, suppose we are interested in measuring wage for different people in Canada. While it is plausible to assume that education is a valid explanatory variable, most people would agree it is certainly not the only one. Indeed, one may include work experience (in years), age, gender or perhaps even location as regressors.

As such, suppose we have collected the data for multiple variables, x₁,… x_n, and y. Through a Multiple Linear Regression Model, we can estimate the relationship between y and the various regressors, x₁,… x_n (Wooldridge 71).

• y_i is the i^th observation for the independent variable
• x_ki is the i^th observation for the k^th regressor
• β_k is the coefficient for the k^th regressor
• ε_i is the error term

As in the simple case, we can use the Ordinary Least Squares method (OLS) to derive the estimates for our coefficients in the Multiple Linear Regression Model. Recall, our goal is to summarize the sum of squared residuals, that is (Wooldridge 73) :

If we take the partial derivatives of the above equation with respect to β₀, β₁, …, β_n and set them to zero, the result is a system of n+1 equations. The solution to this system will produce the estimates for each β_i.

In general, the OLS method for estimation is preferred because it is easy to use and understand. However, simplicity comes with its limitations. Ordinary Least Squares provides us with a linear estimator of parameters in Multiple Linear Regression. In other words, we obtain a column vector of estimates for β_i that can be expressed as a linear function of the dependent variable y. Like all other linear estimators, the ultimate goal of OLS is to obtain the BLUE Let us first agree on a formal definition of BLUE. On one hand, the term “best” means that it has “lowest variance”; on the other, unbiasedness refers to the expected value of the estimator being equivalent to the true value of the parameter (Wooldridge 102).

We now turn our attention to the Gauss Markov Theorem, which guarantees that the Ordinary Least Squares method under certain conditions. They are colloquially referred to as the Gauss Markov Assumptions. It is important to note that the first four ensure the unbiasedness of the linear estimator, while the last one preserves the lowest variance (Wooldridge 105).

1. Linearity in Parameters
2. Random Sampling
3. No Perfect Collinearity
4. Exogeneity
5. Homoscedasticity

The first two assumptions are self-explanatory; the parameters we are estimating must be linear, and our sample data is to be collected through a randomized, probabilistic mechanism. The third condition, no perfect collinearity, ensures that the regressors are not perfectly correlated with one another. An example of this is including both outcomes of a binary variable into a model. Suppose we are interested in official language preferences: if we were to add English and French as regressors, the model would exhibit perfect collinearity because we know if someone prefers English, they do not prefer French at the exact same time. Mathematically, if they were both indicator variables, we would not be able to differentiate when an observation prefers English or French because one of them will always have a value of 1. Exogeneity means that the regressors cannot be correlated with the error term. The converse of this is endogeneity, and examples of this include omitted variable bias, reverse causality, and measurement error. The fifth and final assumption is homoscedasticity, which means the variance of the error term must be constant no matter what the value of regressors are.

Admittedly, no one will ever walk up to you and ask “What are the conditions for the Gauss Markov Theorem?”. However, as the first article alluded to a few weeks ago, we need to use econometric models with discretion. To put the importance of these assumptions into perspective, consider this analogy. The criminal code is in place so that the citizens of our country can function well together without harming one another. A police officer will never come up to you and ask you to recite the criminal code, but when you start violating the laws, you will likely find yourself in trouble. It is important for us to identify when we are breaking the law, and find methods to avoid doing so. The same can be said using OLS. By learning the five assumptions, we know of possible issues that we may run into when performing linear regression.

In summary, let’s end the discussion of OLS with more insights on the Gauss Markov Theorem.   If all of the conditions simultaneously hold, we know that OLS can is BLUE. In later articles, we will discuss specific ways to mitigate violations of these conditions. For example, when we have endogeneity present (the fourth assumption is violated), our OLS estimator will be biased. We will talk about methods to solve this issue like performing an Instrumental Variable Estimation to produce unbiased estimates.