Asia's rainy day economics. Currency wars and market volatility

Risk Managing National Economies “ Business Risk Management” Series BA-41

Why Asia Saves?

Why US does not save?

Asia Bears The Brunt Of War
China Japan War
Korean War
India Pakistan War
Vietnam War
China India War
Arab Israel War
Cambodian War
Current ongoing conflicts
Major Wars after 2 nd World war were fought in Asia.
This makes Asia insecure .

No Wars Fought In the US after the forties
No war has been fought on US Soil after the Pearl Harbor attack. US has been involved in global wars by its own choice and not due to compulsion .
US has been the major arms supplier in most of the wars, hence it has been the major commercial beneficiary.
This gives US extreme confidence.

1942 China
1943 Bengal
1945 Vietnam
1960 China
1966 India
1974 Bangladesh
1975 Cambodia
2008 North Korea
2008 Afghanistan
2008 Myanmar
Asia has faced major famines This makes Asia insecure

US has been the major donor nation in most of the famines
This gives US extreme confidence .
US has never seen famine

Hence Asia Invested Its Surplus In Rainy-day funds

And Rainy-day Funds Invested In US Treasury Bonds , To Stay Liquid.
Even Before The Debt Crisis Of 2008 , The Wealth Funds Of China And The Middle East Heavily Invested In The US Dollar And Treasury Bonds.
Dollar Opportunities http://bit.ly/dlxrXq

And the US spend the intakes double quick
Spending as percent of GDP spiralled

Money Supply M2 jumped from 4.5 Trillion in 2000 to over 8.5 Trillion in 2010

The added spending did not create more jobs
Instead it created volatility in oil prices

It drove up US housing prices and created a huge market for sub-prime mortgages that eventually collapsed and brought
ABOUT A WOLRD WIDE CREDIT CRISIS

Now the excess liquidity is driving up food prices
Wheat Prices jumped in July 2010 to record the highest increase in 37 years due to speculation in the commodity markets that the Russian wheat crop will fail due to inclement weather.
http://www.bbc.co.uk/news/business-10866508

The excess liquidity caused commodity index to rise
In 2003 the investment in commodity index funds by institutional investors was $15 Billion
In 2008 due to market volatility, and super profits, $317 Billion had been invested in commodities .

As money moved to speculative ventures
The US Banks lost interest in lending to the small and medium unit
Consequently the job market in US suffered and economic revival became an uphill task.

As the US economic recovery lost momentum the investors moved to the emerging economies
Brazil, Russia, India, China (BRIC nations)
felt the first rush
of investors. South Korea, Taiwan, Vietnam, Indonesia, Malaysia and Thailand, also witnessed very high FDI inflows.

The real problem was excess liquidity driving volatility.
The FDI investment came through the Wall Street banks and also directly. It brought with it hot money too. The stock markets and currencies of emerging economies heated up. Brazil witnessed a 37% appreciation of the Real in 2 years.

In Oct 2009 the Brazilian currency heated up and the Real had appreciated by 20%
Brazil took unprecedented steps and slapped a 2% Tax on Investment on Stocks and Bonds ( Not on FDI)
Both stock markets and the Real nosedived for some time.
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article6883027.ece

Though the US Economy was slow the emerging economies kept buying US Treasury bonds and the Dollar to keep it strong.
The prime reason was to keep the dollar strong and the oil and commodity prices under control.
Also they knew that a strong Dollar ensured sustained exports to the US.
It also ensured lesser volatility in the currency markets.

The US felt the pressure of this strong Dollar as its exports stagnated and imports soared
Cheap Chinese products were flooding the market and the US budget deficit was soaring.
To keep deficit in check and ensure adequate liquidity the US Federal Reserve resorted first to TARP Stimulus and then Quantitative easing QE2

What is Quantitative easing? The QE2 ?
Quantitative easing is not monetary easing done by printing new money.
It is done by borrowing.
In this case the Fed will borrow $277 billion from the Treasury and balance from the Wall street banks to buy the Treasury bonds.
http://www.forbes.com/2010/09/27/federal-reserve-economy-quantitative-easing-opinions-columnists-wesbury-stein.html

This would help reduce the deficit as it would lower Debt by 277 Bn. and increase Revenue by $600 Bn. It would also improve the high Debt/Revenue Ratio

Since the US economy was slow and deficit was high Quantitative easing technique was resorted to
The first round of TARP had also helped higher revenues and the deficit had fallen to around 13% at $90.5 billion
http://www.bloomberg.com/news/2010-09-13/budget-deficit-in-u-s-narrows-13-to-90-5-billion-on-rising-tax-receipts.html

But It Will Increase The Liability Of The Federal Reserve by 877 billion, which already has a 2.4 Trillion outstanding.
http://bit.ly/cRM7n6

However the Fed too profits by the Risk taken on behalf of the Treasury.
Last year the Federal Reserve earned a profit of $68 billion due to the TARP stimulus.
This year it is expected to earn $30 billion more.
http://bit.ly/cRM7n6

But the stakeholders who profit most are the Wall Street banks .
The Fed will borrow over $300 billion from the Banks on which it will pay interest.
But most importantly it will add to market liquidity by buying Treasury bonds of $75 billions each month. That will prop up the bond markets and the stock markets. Bill Gross was perhaps worried that a bigger player than PIMCO is making its presence in the bond market when he initially slammed Fed’s decision.

Unfortunately the excess liquidity in the
markets will not spur loans or jobs.
For the US banks do not want to lend
For lending rates in the US are absurdly low
US Banks can’t earn profit from loans like Banks in Brazil or India
As the money does not flow downstream, jobs are not created due to funds from stimulus
So Banks play in the currency and commodity markets to earn profits and don’t want to loan to the small biz that creates jobs. This market play creates volatility.

Money and commodity market volatility causes insecurity and fear in emerging economies
Brazil raised interest rates from 8.75 % to 10.75 % to contain inflation
But that resulted in the excess liquidity from US markets to flow to Brazil in search of higher profits.
As a result the Real heated up and Brazil lost its export competitiveness.

Brazil reacted by raising Tax on Foreign Investment in the Bonds and Equity markets twice in Oct 2010.
They first raised the tax to 4% and when that failed to curb inflows they raised it again to 6% within a month and also warned of imminent currency wars.
http://www.bloomberg.com/news/2010-10-18/brazil-to-boost-foreigners-fixed-income-investment-tax-to-6-to-cool-real.html

Bernanke’s QE2 evoked sharp reactions amongst emerging nations.
Because they feared market volatility, that is making currencies appreciate fast and commodities expensive.
Emerging economies have large populations to feed. If the commodity prices rise beyond common man’s reach there could be political repercussions.
http://online.wsj.com/article/BT-CO-20101104-716972.html

What are the Options to curb market volatility ?
To devalue own currency and enter the currency war.
To follow Brazil’s one time investment tax on bonds and equity markets for capital control.
To impose a marginal tax on all financial transactions across all products including commodities, so that investment is not hurt but speculation is discouraged. Long term investors are taxed only once, but the speculators who play markets are repeatedly taxed on each transaction they make .

So what should nations do?
They must stop buying Dollars to undervalue their currencies and look for long term solutions that do not start a currency war .
They must instead invest in oil and other commodities critical to their survival so that when prices jump they may stop buying and even sell to market to stabilize commodity prices.

For it is endless
It hurts exporters because normally export consignments often involves part imports .
Any currency volatility works against business because business needs stability to prosper.
Currency war is no solution

Brazil’s Investment Tax Harms Long Term Investors Investor’s looking for higher returns should not be discouraged as long as they do not cause market volatility and speculative bubbles .

Why Financial Transaction Tax Is Best Option
For It creates an audit trail that can track hot money
Because the Transaction Tax can be raised to curb speculation without hurting long term investors

Multiple Transactions Cause Speculation
A Brent Crude Oil contract changes hands 20 to 30 times before the ship reaches port without physical transfer of goods. The traders, the oil majors, Banks, hedge funds and the cartel members swap the commodity in high speed round trip trading at the ICE Exchange in London and raise prices before Oil hits the retail market. If each transaction gets taxed the speculation can be curbed. http://levin.senate.gov/newsroom/release.cfm?id=297513

US has a right to adjust its balance sheet woes by Quantitative easing
Quantitative easing does not mean printing new money, but it does enhance liquidity and money supply.

Transaction Tax only answer.
To counter money supply, competitive devaluation is not the answer.
The correct way is to levy the Financial Transaction tax, so that any commodity swapped 20times is taxed 20times.

The Financial Transaction Tax
It can curb high speed swapping and keep
speculation in control.
It can track hot money to leave an audit trail.
This way the speculator is tracked and penalised and not the long term investor .

Other presentations by us Business Risk management Series http://www.slideshare.net/SandipSen/living-dangerously-managing-risks-in-business-ba01ppt Business Risk Case Studies Ba31 http://www.slideshare.net/SandipSen/business-risk-case-study-ba31 Business Risk Case Studies Ba32 http://www.slideshare.net/SandipSen/business-risk-case-study-ba-32-1751378

Business Risk Case Study – Ba 33 http://www.slideshare.net/SandipSen/business-risk-case-study-ba33 Risk Managing Oil Explorations. http://www.slideshare.net/SandipSen/cfakepathrisk-managing-oil-explorations-erm-03

What is Carbon – ERM-01 http://bit.ly/bjDTl2 Countering Peak Oil – ERM-02 bit.ly/c451np

Climate Change Positive Solutions Series CE-02 http://bit.ly/4kzzIz Climate Change Positive Solutions Series CE-01 http://www.slideshare.net/SandipSen/cop15bullshitting-15-years-on-climate-change http://tinyurl.com/luzxss Climate Change Positive Solutions Series CE-82 http://bit.ly/XUrUd

References: The Project Management Time Cycle – Vol. I TIME CYCLE MODULE: From concept to feasibility ISBN 1440493332 (find at Amazon) Economy to Ecology: (Google Page Rank4) Our goal is to help promote clean, safe and better practices in economy and ecology worldwide. Balanced, efficient and a little more sustainable. Kindle Blog Ecothrust ASIN: B0029ZAUAY For non kindle users : www.ecothrust.blogspot.com Follow us at twitter : www.twitter.com/ecothrust Acknowledgements: To Google, flickr and other image sources. For any queries mail to Sandip Sen [email_address]

Asia's rainy day economics. Currency wars and market volatility

by Sandip Sen on Nov 07, 2010

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