Ppt Slides Chapters Six

7/31/2019 Ppt Slides Chapters Six

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Global Risk / Global OpportunityTen Essential Tools for Tracking

Minds, Markets & Money

Shlomo Maital and D.V.R. Seshadri

RISK OPPORTUNITY 1


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The Structure of this Book: Chapters Six to Ten

Chapter Six

Money Talks - Interest Rates Listen

This chapter explains what money is, how the Central Bank

controls the supply of money, how money and the rate at which

it changes hands (velocity) determine economic momentum(GDP), and why velocity of money (the rate at which money

changes hands) is a crucial and often-overlooked variable. It

explains how Central Banks control interest rates and why

tracking nominal (not adjusted for inflation) interest rates can be

disastrously misleading.


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Chapter Seven

Tracking Booms and Busts

This chapter explains the forces that drive business cycles (periods

of boom and bust), the link between demand components and

recession and the role played by two key deficits -- the trade deficit

and the budget deficit and how they interact. It explains the 2007-

9 global downturn, and the link between prices of common stockwith changes in the real economy.

.

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Chapter Eight

Tracking Trade and Forex

This chapter shows how to analyze the crucial foreign-exchangecash flow performance of countries, using the Balance of Payments

statement, and explains why official exchange rates may not reflect

true currency value, how to gauge future changes in exchange rates,

why exchange rates have become exceedingly volatile, and whyglobal businesses need to carefully track and manage exchange-rate

swings.


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Chapter Nine

Non-economic Risks

This chapter shows how there are many non-economic risks that a

manager should simultaneously monitor, and either proactivelymake moves that mitigate their impact, or capitalize on the

opportunities that they create. It presents three of the many

important risks that managers must be aware of: Political risks,

risks stemming from terrorism, and environment-related risks.Case studies of how great companies assessed and benefited from

these risks are given.

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Chapter Ten

Country Due Diligence: Reading Between the LinesThis chapter provides a systematic checklist of questions that can

help analyze the business prospects and potential of any country

using the 10 essential macroeconomic tools and adding to them,

non-economic factors related to culture, politics and ethics. Thechapter explores such key issues as: ease of doing business,

perceived lack of corruption and the four dimensions of global

competitiveness. This checklist will help global managers

systematically conduct due diligence examinations of new

geographies, before expanding their organizations businesses into

them.

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The Structure of this Book: Chapters Six to Ten

Chapter Six

Money Talks - Interest Rates Listen

This chapter explains what money is, how the Central Bank

controls the supply of money, how money and the rate at which

it changes hands (velocity) determine economic momentum(GDP), and why velocity of money (the rate at which money

changes hands) is a crucial and often-overlooked variable. It

explains how Central Banks control interest rates and why

tracking nominal (not adjusted for inflation) interest rates can be

disastrously misleading.


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Action Learning:


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Definition:

Varieties of interest ratesFederal Funds: money lent overnight among commercial banks,

in amounts of $1 million or more. Such lending is often done to

meet reserve requirements of the Federal Reserve (see below),

hence its name.Prime Rate: Base rate on corporate loans charged by the 30

biggest banks in the U.S.

Certificates of Deposit: Rate paid by major New York banks on

large-denomination CDs (Certificates of Deposit).

London Interbank Offered Rates (LIBOR): average of offered

rates for dollar deposits in London, among banks.

Treasury bills: yield of 90-day US Govt. Treasury bills: under one-

year maturities. Treasury bonds have longer maturities.


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America's Central Bank: the "Fed

The United States' Central Bank is known as the Federal Reserve System -- known

as the "Fed", for short, and "reserve", because it regulates the reserves held bycommercial banks, that underpin the banks' lending activities, and actually holds

those reserves as commercial bank deposits. It was first established by an Act of

Congress in 1913 by President Woodrow Wilson. Monetary policy -- which controls

both the quantity of money and credit and the rate of interest -- is set by a 12-

person committee, known as the Federal Reserve Open Market Committee (FOMC),which meets every six weeks. The chairperson of this committee - officially known

as Chairman of the Federal Reserve Board of Governors - was Alan Greenspan, first

appointed in 1987; he served for nearly 20 years. He was succeeded by the current

Chair, Ben Bernanke, a former Princeton University economics professor, in Feb.

2006. The appointment is for four years, renewable.


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"the Federal Reserve (Fed) lowered the Fed Funds Rate today by 3/4 point to 3.5

percent, in the biggest cut in 18 years. It was a surprising move in that the group is

scheduled to meet next week, when they were widely anticipated to lower rates.

However, over worldwide fears that the United States is heading into or possibly

already in a recession, the Fed got a jump on things and took this key interest rate

down this morning in an effort to stimulate the economy."

Jan. 22/2008

($ billion)

Commercial Banks Federal ReserveAssets Liabilities Assets Liabilities

Reserves $1,000 Deposits $10,000 Bonds $2,000 Currency $1,000Loans 7,000 Reserves 1,000

Bonds 1,000

S. Equity 1,000


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IMMEDIATELY AFTER (JAN. 23):

$ billionCommercial Banks Federal Reserve

Assets Liabilities Assets LiabilitiesReserves $1,100 Deposits $10,000 Bonds $2,100 Currency $1,000

Loans 7,000 Reserves 1,100

Bonds 900

S. Equity 1,000

-----------------


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ONE WEEK LATER (JAN. 30):$ billion

Commercial Banks Federal ReserveAssets Liabilities Assets Liabilities

Reserves $1,100 Deposits $11,000 Bonds $2,100 Currency $1,000

Loans 8,000

Reserves 1,100

Bonds 900

S. Equity 1,000


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Loans, Deposits

Reserves

?

Money and Credit Expansion. When Central Banks expand reserves (the red block),

by buying bonds, commercial banks MAY then expand loans and deposits (money) by a

multiple of the additional reserves (the yellow block). The question mark beside the

yellow block emphasizes the word 'may' -- banks are not compelled to lend, and may for

various reasons choose instead to hold the reserves rather than lend them. This in fact iswhat has occurred.


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The Table below shows the remarkable shift in the American commercial

banks' reserve position between August 2008 (just before the collapse of

the leading investment bank Lehman Brothers, on Sept. 15, 2008, and April

8, 2009:

Reserves of Commercial Banks, U.S., Aug. 2008, April 2009

$ billion

Total Reserves Required Reserves Excess ReservesAugust 2008 $ 44,565 $42,571 $ 1,993

April 2009 $861,537 $56,733 $804,805


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Toolbox

Tool #1:Toolbox: Tool #6 Economic Momentum

Economic Momentum (GDP) equalsMoney times Velocity, or

M x V


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GDP

Money

Velocity


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2007-I 2007-II 2007-III 2007-IV 2008-I 2008-II 2008-III 2008-IV9.9 10.1 10.2 10.3 10.3 10.3 9.9 8.9

Figure 6.3. Velocity of Money (GDP/M1), United States, 2007 - 2008


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14,41314,200

2008 3Q 2008 4Q

M

V


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Figure 6.5. Very short-term "Federal Funds" interest rates, U.S. 1952-2009


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country nominal interest rate * real interest rate *

U.S. 2.53 3.13

Japan 1.31 2.11

China 3.21 3.41

Britain 3.11 2.11

Canada 2.86 2.36

Euro Area 3.22 2.62

India 7.25 1.85

Brazil 6.16 1.76

Table. Nominal and Real Interest Rates, 8 Countries, March 21, 2009


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0

1

2

3

4

5

6

7

8

NOMINALNOMINAL

REAL

%

Fig. 6.7 Nominal and Real Interest Rates, Selected Countries, March 21, 2009


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TheThe ecologyecology 44--markets modelmarkets model

goods market

capital market

foreign exchange market

labor market

Figure 6.8. The four-market ecology model


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J.M. Keynes radio broadcast

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Ppt Slides Chapters Six