7/31/2019 Ppt Slides Chapters Six
1/27
Global Risk / Global OpportunityTen Essential Tools for Tracking
Minds, Markets & Money
Shlomo Maital and D.V.R. Seshadri
RISK OPPORTUNITY 1
7/31/2019 Ppt Slides Chapters Six
2/27
2
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.
7/31/2019 Ppt Slides Chapters Six
3/27
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.
.
3
7/31/2019 Ppt Slides Chapters Six
4/27
4
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.
7/31/2019 Ppt Slides Chapters Six
5/27
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.
5
7/31/2019 Ppt Slides Chapters Six
6/27
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.
6
7/31/2019 Ppt Slides Chapters Six
7/27
7
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.
7/31/2019 Ppt Slides Chapters Six
8/27
8
7/31/2019 Ppt Slides Chapters Six
9/27
9
7/31/2019 Ppt Slides Chapters Six
10/27
10
7/31/2019 Ppt Slides Chapters Six
11/27
11
Action Learning:
7/31/2019 Ppt Slides Chapters Six
12/27
12
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.
7/31/2019 Ppt Slides Chapters Six
13/27
13
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.
7/31/2019 Ppt Slides Chapters Six
14/27
14
"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
7/31/2019 Ppt Slides Chapters Six
15/27
15
IMMEDIATELY AFTER (JAN. 23):
$ billionCommercial Banks Federal Reserve
Assets Liabilities Assets LiabilitiesReserves $1,100 Deposits $10,000 Bonds $2,100 Currency $1,000
Loans 7,000 Reserves 1,100
Bonds 900
S. Equity 1,000
-----------------
7/31/2019 Ppt Slides Chapters Six
16/27
16
ONE WEEK LATER (JAN. 30):$ 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
7/31/2019 Ppt Slides Chapters Six
17/27
17
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.
7/31/2019 Ppt Slides Chapters Six
18/27
18
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
7/31/2019 Ppt Slides Chapters Six
19/27
19
Toolbox
Tool #1:Toolbox: Tool #6 Economic Momentum
Economic Momentum (GDP) equalsMoney times Velocity, or
M x V
7/31/2019 Ppt Slides Chapters Six
20/27
20
GDP
Money
Velocity
7/31/2019 Ppt Slides Chapters Six
21/27
21
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
7/31/2019 Ppt Slides Chapters Six
22/27
22
14,41314,200
2008 3Q 2008 4Q
M
V
7/31/2019 Ppt Slides Chapters Six
23/27
23
Figure 6.5. Very short-term "Federal Funds" interest rates, U.S. 1952-2009
7/31/2019 Ppt Slides Chapters Six
24/27
24
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
7/31/2019 Ppt Slides Chapters Six
25/27
25
0
1
2
3
4
5
6
7
8
NOMINALNOMINAL
REAL
%
Fig. 6.7 Nominal and Real Interest Rates, Selected Countries, March 21, 2009
7/31/2019 Ppt Slides Chapters Six
26/27
26
TheThe ecologyecology 44--markets modelmarkets model
goods market
capital market
foreign exchange market
labor market
Figure 6.8. The four-market ecology model
7/31/2019 Ppt Slides Chapters Six
27/27
27
J.M. Keynes radio broadcast
Recommended