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