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