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 2nd 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.
Asia has faced major famines

 1942 China
 1943 Bengal
 1945 Vietnam
 1960 China
 1966 India
 1974 Bangladesh
 1975 Cambodia
 2008 North Korea
 2008 Afghanistan
 2008 Myanmar
This makes Asia insecure
US has never seen famine

US has been the major

donor nation in most of the
famines

This gives US extreme

confidence.
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_sect
ors/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-easin
g-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-i
ncome-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.
Currency war is no solution

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.
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

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Business Risk Case Studies Ba32

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http://www.slideshare.net/SandipSen/business-risk-case-study-ba33

Risk Managing Oil Explorations.

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What is Carbon – ERM-01
http://bit.ly/bjDTl2

En e r g y R i sk M a n a g e m en t Se r i e s
En e r g y R i sk M a n a g em e n t Se r i e s
ER M 0 1
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Countering Peak Oil – ERM-02

bit.ly/c451np
 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-02

http://bit.ly/4kzzIz

Climate Change Positive Solutions Series CE-82

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References:
The Project Management Time Cycle – Vol. I
TIME CYCLE MODULE: From concept to feasibility ISBN 1440493332 (find at
Amazon)

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