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 W...
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 ...
1942 China
1943 Bengal
1945 Vietnam
1960 China
1966 India
1974 Bangladesh
1975 Cambodia
2008 North Korea
2008 Afg...
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...
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
ABO...
Now the excess liquidity
is driving up food prices
Wheat Prices jumped in July 2010 to record the highest
increase in 37 ...
The excess liquidity caused
commodity index to rise
 In 2003 the investment in
commodity index funds by
institutional in...
As money moved to
speculative ventures
 The US Banks lost
interest in lending to the
small and medium unit
Consequently...
As the US economic
recovery lost momentum
the investors moved to
the emerging economies
Brazil, Russia, India,
China (BR...
The real problem was
excess liquidity driving
volatility.
The FDI investment came through
the Wall Street banks and also...
In Oct 2009 the Brazilian currency heated
up and the Real had appreciated by 20%
Brazil took unprecedented steps and
sla...
Though the US Economy was slow the emerging
economies kept buying US Treasury bonds and
the Dollar to keep it strong.
The...
The US felt the pressure of this strong Dollar as its
exports stagnated and imports soared
Cheap Chinese products were f...
 What is Quantitative easing? The QE2 ?
Quantitative easing is not monetary easing
done by printing new money.
It is do...
This would help reduce the deficit as it
would lower Debt by 277 Bn. and increase
Revenue by $600 Bn. It would also impro...
Since the US economy was slow and deficit was high
Quantitative easing technique was resorted to
The first round of TARP ...
But It Will Increase The Liability Of The
Federal Reserve by 877 billion, which
already has a 2.4 Trillion outstanding.
ht...
 However the Fed too profits by the Risk
taken on behalf of the Treasury.
 Last year the Federal Reserve earned a profit...
 But the stakeholders who profit most
are the Wall Street banks.
 The Fed will borrow over $300 billion from the
Banks o...
Unfortunately the excess liquidity in the
markets will not spur loans or jobs.
 For the US banks do not want to lend
 Fo...
 Money and commodity market
volatility causes insecurity and
fear in emerging economies
 Brazil raised interest rates fr...
Brazil reacted by raising Tax on Foreign
Investment in the Bonds and Equity markets
twice in Oct 2010.
They first raised...
 Bernanke’s QE2 evoked sharp reactions
amongst emerging nations.
 Because they feared market volatility, that is making
...
Even Greenspan slammed US and China for
deliberately weakening currencies
http://www.reuters.com/article/idUSTRE6AA0032010...
Germany calls it clueless
German Foreign Minister called Bernanke’s
Quantitative easing policy clueless and its Foreign
T...
Global investors back tight
monetary policy
As per a Bloomberg investor survey more
than 65 % of global investors have ba...
What Asia fears !
Asia fears quantitative easing will unleash a torrent
of dollars that will flood the Asian markets in s...
 What are the Options to curb
market volatility ?
 To devalue own currency and enter the
currency war.
 To follow Brazi...
So what should nations do?
They must stop buying Dollars to undervalue their
currencies and look for long term solutions ...
For it is endless
It hurts exporters because normally export
consignments often involves part imports .
Any currency volat...
Brazil’s Investment Tax Harms Long Term Investors
Investor’s looking for higher returns
should not be discouraged as long
...
Why Financial Transaction Tax Is Best Option
For It creates an audit trail that can track hot money
Because the Transac...
Multiple Transactions Cause Speculation
A Brent Crude Oil contract changes hands 20 to 30 times
before the ship reaches p...
 US has a right to adjust its
balance sheet woes by
Quantitative easing
 Quantitative easing does not
mean printing new ...
Transaction Tax only answer.
 To counter money supply, competitive
devaluation is not the answer.
 The correct way is to...
The Financial Transaction Tax
 It can curb high speed swapping and keep
speculation in control.
It can track hot money t...
For Stopping currency & commodity
speculation is a must
If Dollar is weak
Oil prices zoom
Gold prices will soar
Cotton pri...
Other presentations by us
Business Risk management Series
http://www.slideshare.net/SandipSen/living-dangerously-managing-...
Business Risk Case Study – Ba 33
http://www.slideshare.net/SandipSen/business-risk-case-study-ba33
Risk Managing Oil Explo...
What is Carbon – ERM-01
http://bit.ly/bjDTl2
What is Carbon ?
Energy Risk Management Series
ERM 01
Energy Risk Management ...
Climate Change Positive Solutions Series
CE-02
http://bit.ly/4kzzIz
Climate Change Positive Solutions Series
CE-01
http://...
References:
The Project Management Time Cycle – Vol. I
TIME CYCLE MODULE: From concept to feasibility ISBN 1440493332 (fin...
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Asia's rainy day economics. Currency wars and market volatility

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The right response to America's Quantitative easing is not competative devaluation but Financial Transaction Tax on speculative investments to curb market volatility and currency appreciation

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

  1. 1. Risk Managing National Economies “Business Risk Management” Series BA-41
  2. 2. Why Asia Saves?
  3. 3. Why US does not save?
  4. 4. 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 2nd World war were fought in Asia. This makes Asia insecure .
  5. 5. 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.
  6. 6. 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
  7. 7. US has been the major donor nation in most of the famines This gives US extreme confidence. US has never seen famine
  8. 8. Hence Asia Invested Its Surplus In Rainy-day funds
  9. 9. 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
  10. 10. And the US spend the intakes double quick Spending as percent of GDP spiralled
  11. 11. Money Supply M2 jumped from 4.5 Trillion in 2000 to over 8.5 Trillion in 2010
  12. 12. The added spending did not create more jobs Instead it created volatility in oil prices
  13. 13. 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
  14. 14. 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
  15. 15. 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 .
  16. 16. 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.
  17. 17. 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.
  18. 18. 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.
  19. 19. 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_sect ors/banking_and_finance/article6883027.ece
  20. 20. 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.
  21. 21. 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
  22. 22.  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-opinio
  23. 23. 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
  24. 24. 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
  25. 25. 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
  26. 26.  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
  27. 27.  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.
  28. 28. 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.
  29. 29.  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.
  30. 30. 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-incom
  31. 31.  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
  32. 32. Even Greenspan slammed US and China for deliberately weakening currencies http://www.reuters.com/article/idUSTRE6AA00320101111?loomia_ow=t0:s0:a49:g43: A few days before the Seoul summit of G20, the former boss of the Fed. Alan Greenspan told Financial Times that the US is deliberately following currency weakening policies and along with China is embracing protectionist policy that will lead to volatility in other nations
  33. 33. Germany calls it clueless German Foreign Minister called Bernanke’s Quantitative easing policy clueless and its Foreign Trade Association said the policy rift across the Atlantic was widening http://www.reuters.com/article/idUSTRE6A920R20101110?
  34. 34. Global investors back tight monetary policy As per a Bloomberg investor survey more than 65 % of global investors have backed Germany’s policy of low deficit and debt and only 35% approved of the US policy. http://www.bloomberg.com/news/2010-11-11/merkel-cameron-win-investor-
  35. 35. What Asia fears ! Asia fears quantitative easing will unleash a torrent of dollars that will flood the Asian markets in search of higher returns. This will raise prices of Oil, Sugar Corn and Wheat that are critical high consumption commodities for the emerging economies
  36. 36.  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.
  37. 37. 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.
  38. 38. 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
  39. 39. 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 .
  40. 40. 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
  41. 41. 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
  42. 42.  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.
  43. 43. 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.
  44. 44. 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.
  45. 45. For Stopping currency & commodity speculation is a must If Dollar is weak Oil prices zoom Gold prices will soar Cotton prices will rise Sugar prices will jump Wheat prices will spiral So don’t fight currency wars ! …tackle price volatility jointly as the top priority
  46. 46. 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
  47. 47. 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
  48. 48. What is Carbon – ERM-01 http://bit.ly/bjDTl2 What is Carbon ? Energy Risk Management Series ERM 01 Energy Risk Management Series ERM 01 Countering Peak Oil – ERM-02 bit.ly/c451np
  49. 49. 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
  50. 50. 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 sen.sandip@gmail.com

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