More Money For Everybody!

A Cambridge man, one for whom Mr. Keynes might otherwise admire once wrote:

“Although the price of provisions is at present very high, they cannot with propriety be said to be dear. Nothing is properly dear, except some commodity, which either from real or fictitious scarcity bears a higher price than other things in the same country, at the same time. In the reign of Henry II the value of money was about fifteen times greater than in the present age: a fowl then was sold for a penny, which cannot now be bought under fifteen pence; but fowls are not for that reason dearer now, than they were at that time; because one penny was then earned with as much labour, and when earned would fetch as much of everything at market, as fifteen will in these days.”

Soame Jenyns, Thoughts on the Causes and Consequences of the Recent High Price of Provisions, 1767

Mortgage Rates Continue To Decline

Do Exchange Rates Really Matter?

There are several schools of thought with regard to the significance of exchange rates and its effect on MNCs. According to Madura (2008), “Some have argued that exchange rate risk is irrelevant” (p. 280). Proponents of this theory subscribe to one of a number of ideas that assert that either purchasing power parity exists, that risk can be hedged, and/or attest to diversification arguments. In theory, or rather in a perfect world, prices would be offset, perfect knowledge of markets would exist, and MNCs would be equally exposed in all currency markets. However in the real world, these arguments largely do not hold. Organizations must remain aware of their potential exposure in order to remain successful.

There are three major forms wherein exchange rate exposure surfaces: transaction, economic, and translation exposure. Transaction exposure is essentially the net cash flow position at any given time taken as a whole of the organization in each currency. In certain cases, a negative cash flow in one currency might be off-set by an equal and positive cash flow by a different division within the same organization. This event would fit the idealized scenario of those who subscribe to the currency diversification argument. Unfortunately, the probability of this perfect storm occurring is gaunt.

According to Madura (2008), “The sensitivity of the firm’s cash flows to exchange rate movements is referred to as economic exposure” (p. 289-290). Economic exposure is the result of internal conditions of the host country as they relate to the ability of countries to find less costly equivalent products elsewhere. Translation exposure results from the need to exchange currency (on paper) to create financial statements in the host country of the MNC. Some may argue that this will not affect the bottom line of the organization. However, the reduction of earnings on the balance sheet will ultimately reduce the valuation of the organization, thereby reducing the optimal capitalization. Exposure to exchange markets can have a significant effect on the organization. Organizations must carefully monitor their potential to be influenced by these markets.

References

Madura, J. (2008). International Financial Management (9th ed.). Ohio: Cengage Learning
Keyword: management cadre, global economy, international business, exchange rates, economic incentive, foreign investment

A discussion about the Money Supply

http://lenderama.com/2009/01/how-much-is-your-share-of-the-us-money-supply/

...in response to Jay Fray

This has been posted in comments section in reply to “Stimulus creates new Jobs for Americans” (1/24/09), but I am posting the reply nevertheless:


We do not need to compete for lower paying jobs in third-world countries. As Adam Smith would have seen it, we have an advantage in some areas (capital markets and innovation) and we benefit from those products we can import at rates less costly than we could produce.

Take, for instance, an attorney; the attorney can type 75 wpm. If his secretary can only type 50 wpm should the attorney type the letters? The answer is that the greatest utility for the attorney is in doing what can return the greatest value to his organization. The natural tendency of market forces to operate most efficiently without government intervention is a principle that is undeniable.

I defer to Adam Smith:

“Two greyhounds, in running down the same hare, have sometimes the appearance of acting in some sort of concert. Each turns her towards his companion, or endeavours to intercept her when his companion turns her toward himself. This, however, is not the effect of any contract, but of the accidental concurrence of their passions in the same object at that particular time.”


Keyword: management cadre, global economy, international business, exchange rates, economic incentive, foreign investment

The Art of War is the Art of Business

Sun-tzu said,

There are five factors from which victory can be known:

• One who knows when he can fight, and when he cannot fight, will be victorious.
• One who recognizes how to employ large and small numbers will be victorious.
• One whose upper and lower ranks have the same desires will be victorious.
• One who, fully prepared, awaits the unprepared will be victorious
• One whose general is capable and not interfered with by the ruler will be victorious.

Keyword: management cadre, global economy, international business, exchange rates, economic incentive, foreign investment

恭喜發財 - Gong Xi Fa Cai!

Gong Xi Fa Cai!

Let Tsai Shen Yeh smile upon you.

Methods of Forecasting Exchange Rates

Organizations engaged in international business transactions must remain cognizant of prevailing exchange rates and the possibility for change within those markets. The challenges inherent in understanding how the value of a currency might move over the course of a production cycle may ultimately determine the success or failure of a business unit. According to Madura (2008), “The numerous methods available for forecasting exchange rates can be categorized into four general groups: technical, fundamental, market based, and mixed” (p. 252).

Technical forecasting, similar to technical analysis of stock price movements, assumes movements will occur in response to trends. Benjamin Graham (1973) was not particularly fond of technical analysis:

"The one principle that applies to nearly all these so-called ‘technical approaches’ is that one should buy because a stock or the market has gone up and one should sell because it has declined. This is the exact opposite of sound business sense everywhere else, and it is most unlikely that it can lead to lasting success on Wall Street.” (p. 2-3)

I believe that the wisdom of Graham can be applied similarly to the question at hand. The idea that what goes up will shortly thereafter come down is not a very scientific approach to analysis.

Fundamental analysis uses complex modeling algorithms to estimate future rates of exchange. According to Madura (2008), “A forecast may arise simply from a subjective assessment of the degree to which general movements in economic variables in one country are expected to affect exchange rates” (p. 254). While modeling may be able to accurately account and discount the multitude of variables, future results may not reflect congruence with previous findings. As such, even the most complex fundamental modeling techniques may result in significant inaccuracies.

Market based forecasting generally assumes that current speculation will reflect the actuality of future conditions. Relying on market indicators, proponents of this method use spot rates or forward rates to determine the movement of currencies. In light of the significant speculation inherent in these market indicators, market based forecasting will not always result in accurate predictions.

Mixed forecasting is the natural result of the lack of a single and superior method of predicting rates of exchange. Essentially, mixed forecasting assigns weighted values to the results derived from other valuation techniques. The success of this method will depend on the subjective interpretations of the organization that apply it. If all indicators seem to lead to the conclusion that a currency will devalue, for example, the likely conclusion is that it is so. By utilizing the combined utility of each method, mixed forecasting stands out as the most useful method for making interpretations on future currency exchange rates. With that said, mixed forecasting exists because of the failure of any of the other methods to present reliable and accurate findings.

So essentially, we utilize the collective and unreliable results of other methods to attempt to derive accurate conclusions. Mixed forecasting, unlike the other techniques, offers no singular theory but rather relies on the results of the others. Weighing these results by assigning a relative value, we speculate on which factors are most important. In the end, currency markets remain speculative in nature. Organizations must remain cognizant of this and hedge their risk against the potential for miscalculation.

References

Graham, B. (1973). The Intelligent Investor – Revised Edition. New York:
HarperCollins Publishers.

Madura, J. (2008). International Financial Management (9th ed.). Ohio: Cengage Learning

Keyword: management cadre, global economy, international business, exchange rates, economic incentive, foreign investment

Stimulus creates new Jobs for Americans?

Milton Friedman has rolled over a few times in his grave in the past year as our government marches down the path of intervention. I think a few more of our country’s top economists need to go back and review the writings of Adam Smith and Friedman. For some reason, I keep hearing John Maynard Keynes name brought up on television to defend the current stimulus package. Like offering bleeding as a cure to disease, Keynesian theories have hence become believed to be in the wrong. I digress, however, read Friedman and your eyes will open to this man’s wisdom that tells us more about the current crisis than anything you will hear coming out of Washington.

The idea, and cries for, increasing the value of Chinese currency relative to the dollar, as has been popular for some time now is of little consequence to America’s imbalance of trade. We are not going to start manufacturing for WalMart, however expect WalMart to shift its source of supply to a different LDC in the event of this devaluation. Americans, jobless as we are, consistently turn to illegal immigrants to build our houses and roads (ironically the jobs we expect to fill with stimulus). This country is in need of service jobs - not jobs that pay a bowl of rice a day! The lack of rudimentary economic education that persists in both media and, worse yet, Congress, is enormously disconcerting.

Photo Credit: UN.org

Keyword: management cadre, global economy, international business, exchange rates, economic incentive, foreign investment

Why do you think a currently-successful firm might wish to expand its operations internationally?

There are numerous reasons for successful companies to expand internationally. The primary purpose for any company to be in business is to make a profit. With that said, the primary motivator for firms to expand internationally is to increase profits. There are, of course, many other reasons, but in the end, they are all aimed at creating or maintaining profits.

As a company grows, it is important to diversify its assets. By expanding operations internationally, growing firms become less reliant on the success or failure of a government. In addition, they are less likely to suffer catastrophic losses due to regulations imposed by these governments. Having diversified internationally, a successful company protects its profits against sudden shifts in taxation policy, supply networks, and/or a geopolitical event.

Being the first to reach a market has significant advantages. It is always difficult to unseat a favorite, and the favorite is often simply the first to get their product out. Successful companies might expand internationally to maintain their edge over competitors in areas where they anticipate future competition. Being too slow to get to growing markets is dangerous to future success.


I think tariffs are important to the conversation. Companies that have diversified internationally are more protected against sudden shifts in tariffs that are imposed around the world. It may be possible for production and supplies to be shifted from one country to another to reduce the effect imposed on a company by a particular host nation. Like any portfolio, one invested without diversification across various business sectors and international regions is more risky than one that is allocated properly.


Keyword: management cadre, global economy, international business, exchange rates, economic incentive, foreign investment

Developing a Global Management Cadre

As companies expand, it becomes necessary to find mangers that are skilled in markets internationally. In order for the organization to increase profits and the scope of their operations, these managers will need to overcome the many challenges that are present amongst differing cultures. By selecting both host-country nationals and transferring suitable managers from within the organization, MNCs can experience great success in developing markets throughout the world. The selection, training, and management of expatriates are the most important jobs in human resources today.

It is the job of the organization to communicate what global managers need to know in order to be successful. Cultural education should supplement technical skills to yield a more favorable experience for both the employee and the employer. According to Deresky (2006), companies should “make sure that the foreign assignment and the reintegration process are positive experiences” (p. 380). A favorable experience will allow for the organization to benefit from the investment in their global management cadre while promoting expatriate assignments to other employees. Schell and Solomon recommend that organizations address potential difficulties to prospective expatriates early in the process of selection. “In many companies, people about to go on expatriate assignment have no idea of the challenges they will face or the unique skills they need to thrive in a foreign culture” (Schell & Solomon, 1997, p. 94). Cultural education should supplement technical skills to yield a more favorable experience for both the employee and the employer.

While the selection of expatriates is of critical importance, repatriation can be an equally vital task. Deresky (2006) asserts that “the management of the reentry phase of the career cycle is as vital as the management of the cross-cultural entry and training” (p. 379). If employees see that an expatriate assignment aided the career of a co-worker, the organization is more likely to get more quality applicants applying for those positions. The global nature of business in the 21st century makes it critically important for organizations to recruit and retain the best of their global management team.

References

Deresky, H. (2006). International Management: Managing Across Borders and Cultures, 5th Ed. Pearson Prentice Hall.

Schell, M. & Solomon, C. (1997). Capitalizing on the Global Workforce: A Strategic Guide for Expatriate Management. McGraw-Hill.


Keyword: management cadre, global economy, international business, exchange rates, economic incentive, foreign investment

Asset Acquisitions

According to Benjamin Graham (1973), “An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return” (p. 18). Mr. Graham was speaking of financial investments made by individuals when considering stocks, however the language is universal. The difference between speculation and investment is the perceived or relative risk. Business mangers should not take on excessive risk with the investment monies of shareholders. With this definition firmly in mind, it is prudent for managers to practice extreme caution when making asset acquisitions.

“According to Rainer & Turban (2009), “All companies have a limited amount of resources available to them. For this reason they must justify investing resources in some areas, including IT, rather than in others” (Sec 10.1). Managers will conduct a cost-benefit analysis when considering new investments in technological infrastructure. This analysis will determine the potential for gain as compared to costs and risks. If the determination is unequivocally favorable, than the capital asset should be pursued. In the event that the opposite eventuality is determined to be true, than management should not engage in wasteful speculation.


References

Graham, B. (1973). The Intelligent Investor – Revised Edition. New York:
HarperCollins Publishers.

Rainer, R.K., & Turban, E., (2009). Introduction to Information Systems: Supporting and
Transforming Business (2nd ed) [Electronic version]. John Wiley & Sons. Retrieved January 20, 2009, from http://edugen.wiley.com/edugen/student/mainfr.uni

Keyword: management cadre, global economy, international business, exchange rates, economic incentive, foreign investment

The Printing Press

Hyperinflation can result from the excess supply of money into the economy without equal output. It has been observed throughout history that the sudden increase in money supply has resulted in an equal and sudden increase in consumer prices and commodities. According to Train (1985), during the hyperinflation that occurred in France around the time of the French Revolution, “As the torrent of paper poured out of the presses, specie vanished, goods were hoarded, and prices flew upward” (p. 58). As a result of the flooding of paper money into this system, its value relative to tradable goods decreased. In order to prevent this at the onset, the Assemblée of France had established an interest rate of 3 percent to attract specie from those who might otherwise question the value of paper money. The result was that a relative equilibrium was temporarily achieved as supply met demand. Greedy by the inflow of coinage, however, the Assemblée began to print money without regard to the equilibrium of supply and demand. Additionally, they reduced the rate of interest payable to zero. The result of these actions, as has been demonstrated throughout history, was hyperinflation.

References
Train, J. (1985). Famous Financial Fiascos. New York: Clarkson N. Potter, Inc., Publishers



Keyword: management cadre, global economy, international business, exchange rates, economic incentive, foreign investment

Buffett's Common Business Sense

Is that Deflation or just Cheap Gas?

Keyword: management cadre, global economy, international business, exchange rates, economic incentive, foreign investment

Exchange Rates and Fiscal Policy

There are many factors that affect exchange rates in today’s complex international business environment. The devaluation of a currency can leave the organizations within that country vulnerable to buy-outs. Additionally, the devalued currency leaves citizens and businesses with reduced purchasing power on the international stage. A weak currency can have devastating effects on the entire economy. Governments have consistently demonstrated the intent to intervene both directly and indirectly.

In an attempt to stabilize currency, governments utilize a variety of techniques to strengthen the value of their currencies. The most important tool that governments frequently adjust is interest rates. According to Madura (2008), the central bank “is likely to focus on interest rates or government controls when using indirect intervention” (p. 171). By adjusting interest rates, the government can encourage the inflow or outflow of currency into the market. Increasing the short-term rate, for example, will encourage funds to remain within the country and thus stabilize a falling currency. In the past, governments have made periodic adjustments to interest rates with measured success. While increasing interest rates encourages investment, it also increases the cost of capital for domestic corporations.

Another tool used by governments is direct intervention of the capital markets. During the Asian crisis of 1997, multiple countries attempted to infuse capital in an attempt to stabilize the falling value of their currency. In addition to adjusting interest rates, these countries invested in their own currency against the dollar. Utilizing money from their reserves, nearly every effort in this regard proved quite fruitless. Market forces, time and time again, were too large for direct intervention to alter.

Perhaps the most unrecognized and under-utilized method of government intervention is in adjusting corporate tax rates. As a method of indirect intervention, the money otherwise dumped from the reserve into capital markets might be better spent by not spending it at all. By reducing the tax burden, stimulus is achieved and foreign investment is encouraged. Governments must consider the wide variety of options available when addressing exchange rates. The stabilization of currency is a perpetual endeavor. According to our Madura (2008), “Several studies have found that government intervention does not have a permanent impact on exchange rate movement” (p. 168). In the end, governments will generally utilize a combination of all of their options.

References

Madura, J. (2008). International Financial Management (9th ed.). Ohio: Cengage Learning


Keyword: management cadre, global economy, international business, exchange rates, economic incentive, foreign investment