The Budget Control Act of 2011 requires the president and Congress to come up with a nine-year, $1.2 trillion deficit-reduction plan by Jan. 1, or annual defense and non-entitlement programs will be cut automatically by $109 billion.
Simultaneously, the George W. Bush tax cuts — a 2 percentage-point payroll-tax reduction, extended unemployment benefits and other assorted programs — will expire. Without new legislation, taxes will be increased and spending cut by more than $600 billion.
A sudden and massive drop in private and government spending surely would tank the economy and send the unemployment rate into the teens.
All confidence would be lost in Washington’s ability to manage its finances, bondholders would abandon U.S Treasury-issued bonds, the Federal Reserve would be compelled to print money to finance the government and avert default, and U.S. businesses would flee to more promising and better-managed venues in Asia.
And, a second Great Depression would grip the nation. Agh!
To avert calamity, President Obama and House Republicans likely will compromise to raise taxes on high-income Americans by $100 billion to $150 billion, curb spending an equal amount and renew the Bush tax cuts for families earning less than $250,000.
This will hardly be enough to right the nation’s shaky finances, yet slicing the budget deficit by as little as $200 billion or $300 billion still would throw the economy, barely growing at 2 percent, into a tailspin.
Simply put, Americans and their economy have become addicted to huge federal deficits. But, President Barack Obama said he was “open to new ideas” in efforts to resolve the fiscal crisis.
You’d be hard-pressed to find someone who argues that balance is a bad thing, but in this time of austerity versus growth and political us-versus-them, you’d be equally hard-pressed to find agreement on how to achieve balance.
In the markets and in life, we face bullish and bearish periods. Some days are good and some days are bad. But even on bad days, good things can and do happen, which may explain our sometimes Pollyanna-sounding persistence on the existence of a bright side even in the face of somber-sounding issues like fiscal cliffs and austerity measures.
There is no need to rehash the debate about whether President Obama or Speaker Boehner was responsible for the failure to reach a bipartisan “grand compromise” in the summer of 2011 during the debt ceiling crisis.
The massive deficits of the past five years are neither moral nor prudent. The American people can be analogized to wealthy parents who, having spent all of their children’s inheritance, have also mortgaged their house and taken out a huge loan in the name of their descendants. We have spent trillions of dollars for partying on our children’s credit card. We have not only run deficits in recessions, we have run deficits during growth years. We have demonstrated a bipartisan inability to keep our fiscal house in order that keeps getting worse.
Politicians will do what politicians do best and push the problem into the future.
That’s why when faced with a seemingly insurmountable challenge, it’s tempting to stick one’s head in the sand like an ostrich, and hope it goes away. Some have said that about U.S. politicians when it comes to the nation’s $1 trillion deficit.
So how do we feel standing at the edge of a cliff? Is there an urge to back away? To jump? To build a safe passage across the abyss? It remains to be seen what—if anything—Congress will do to change or delay these measures, and what longer-term solutions to tackle the deficit will be put forth.
If only we could persuade our adversaries to give up the practices of economic oppression, the world would change for everyone’s benefit. But which empire voluntarily gives up a cornerstone of its power?
While the US relationship with the Islamic world has suffered from the recent inflammatory anti-Islamic film, values-based finance has emerged as an unlikely, yet significant point of connection. Its potential lies at the intersection of Socially Responsible Investing(SRI) in the West and Islamic Finance in the East. Both are on the rise. Therefore, it’s possible Islamic finance could aid US development.
Combining social principles with the power to provide financial assistance, Islamic microfinance has huge, untapped potential
The global Muslim market is now approximately 23 percent of the world′s population, and is projected to grow by about 35 percent in the next 20 years. If current trends continue, there are expected to be 2.2 billion Muslims in 2030 that will make up 26.4 percent of the world′s total projected population of 8.3 billion. As companies currently compete for the markets of China and India, few have realized the global Muslim market represents potentially larger opportunities.
The Islamic finance and banking industry is growing at an unprecedented rate and is expected to see flourishing progression in 2012 and beyond.
In times of uncertainty or crisis, it’s natural for investors to avoid what they perceive as risky assets and seek out so-called “safe havens.” The financial crises born in over-leveraged, developed markets of the past few years have helped spur interest in Islamic banking and finance, primarily in under-leveraged emerging markets. Investments compliant with Islamic law (Syariah or Shariah), including bond-like investments called “sukuk,” are growing in popularity not only in the Muslim world, but across the globe.
”The principle of Islamic Finance is about transparency, ethics and fairness, as well as promoting entrepreneurship and sharing of risks and returns between financiers and entrepreneurs”
Today, Malaysia is the dominant market for the issuance of sukuk (with about 60-70% of global sukuk outstanding) and has established a facilitative regulatory environment for sukuk through various initiatives that include the absence of withholding tax and capital gains tax, and no restrictions on investing in Malaysian ringgit bonds.
Malaysia has been a pioneer in Islamic finance, which operates side-by-side with conventional financial markets. The roots of Islamic finance in Malaysia date back to 1969, but have gained increased government focus during the past two decades. In 2001, Malaysia provided a framework under its first 10-year “Capital Market Master Plan” for developing both the conventional and sukuk bond markets, and in 2006, Malaysia launched the International Islamic Financial Centre (MIFC) to position Malaysia as an international hub of Islamic finance.
Malaysia’s bond market is the fourth largest local currency bond market in Asia after Japan, China and South Korea, and has sufficient depth to support robust issuance. In January of this year, a single sukuk issuance in Malaysia was record-breaking with an issuance size of RM30.6bn (or US$10bn).
While many developed nations are dealing with unwieldy debt burdens, Malaysia has been running current account surpluses. Foreign reserves stand at more than US$130 billion.
It has also been reported that Germany is in its relative infancy in developing Islamic finance and banking and will be getting its first Islamic bank this fall when Turkey’s Kuveyt Turk investment fund opens its first bank in the country, despite the worsening euro crisis.
Governed by religious principles, transactions are guided by ethical, moral, and social considerations and the belief that money should be used to create social value, rather than just wealth.
At the same time, Socially Responsible Investing has grown tremendously in the US, outpacing investments in traditional assets.
Apart from bridging the gap between East and West, Islamic Finance has also proved to be a veritable point of convergence between the Islamist and the secularist movements in most countries affected by the Arab Spring.
Not only as a way of doing business, but because of its importance as a connection point between the Islamic world and the West and within Islamic societies, values-based investing is poised to be a game changer.
Live and Learn. We All Do.
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