Sparking Yen

There have much of the sparks flowing between two of the biggest Asian economies recently. Owing to the financial hassle today more or less survival has become the basis to move on and all of the economies are struggling to do that. As most of the economies are keeping their currencies exceptionally undervalued to boost exports and make imports costly the question remain who ultimately will buy ? Since everyone is following the same, and is ready to sell, but no one is in, to buy it is difficult to predict the future.

Added to the situational paradox, there are financial hassles and problems where the economies are fighting with each other to survive. Chinese recently, started buying large chunks of yen from the market to push their values up. China and Japan both run an export driven economy and sustain it through artificial exchange rate manipulation. Recently as China released its grip over its currency by nearly 2% many of the international currencies like Yen have started threatening its market. This has led China to buy up large chunks of Japanese money to push their values up.

As the Japanese currency went up it might have benefited the Chinese, as the Americans now found it better to buy from China than Japan but it started hurting the Yen trade. For the past one month the value of the Japanese currency has been high and large amounts of its trade is being affected by it. Starting from a value close to 100 yen per dollar last year, it went down to a 15 year lowest value at 83. Japanese trade was literally wiped out as it continued to strengthen against the dollar.

As a result the Bank of Japan last week released a buffer package to cushion the deadly cycle that was troubling its trade. An amount to the tune of nearly 20 billion USD worth of Yen was released in the market last week to buy American treasury bonds to depreciate the value of Yen. Americans had till now been very concerned about the Chinese artificial manipulation but this is the first time a similar story related to Japan is coming out.

With such huge rate manipulations going around today, this does not seems to be a really big thing. But the question is would be a long term benefit? Obviously not. Likewise China, Japan will now have to keep buying American treasury bonds on a regular basis to keep the exchange rate fixed. Regarding benefitting this is just going to be a minute long story. Japan has used to artificially boost its exports for a very short period of time whose tunes are going to die very soon. It may affect Chinese sales to a certain limit but not to a larger extent. The main impact would be seen in a short while on how the Japanese government fairs in its own policies. On one side it is facing deflationary circumstances and huge unemployment and on the other hand a competent stage. The economics of the Japanese industries has still not left behind recession made bruises, and the country is diluting the currency to keep itself in a selling posture, but what will you give to your citizens when they are spending more to make something which you are deliberately trying to sell cheaply internationally.

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Decision Indecision

Much of banking supervision that is exercised today is what was decided by Basel Accord developed in 1988 by the Bank of International Settlements. The accord was announced to control the risky banking services that are heavily prevalent and some way or the other affects all the economies of the world.

The entire cycle of boom and burst is a near fourteen year cycle which if properly analysed could be predicted before occurrence. The cycle completely relies of the numbers of defaulters that grow year after year up to the point when their number actually leads the economies into recession. This theoretic assumption has no buffer to define the mercenary attitude of banks or any such financial activities that have been the prime causes of recession. There is no account given to the messy governmental policies or the new instruments that companies tend to launch each year which one way or the other affect everyone. Interestingly these instruments make the effects of the scenario even more ramified and insoluble.

On going by the book the next big market crash is delayed up till 2014 if all goes well, but this is usually not the case. There are still situational faults attached. Who would have though once so regal Mortgage Based Securities would hamper the world economy so much that giants like AIG would have to settle as a public owned body? The end point of the situation is what comes around goes around. As a result in light of the market crashes since 1988 the bank of international Settlements has been framing rules to contain what little it can the reckless nature of the banks. Baking institutions however have always found a way to get through the situation, thus it goes with the saying that every time the rules are going to be broken and more or less the public end up suffering.

Beginning with the latest Basel Committee meeting that was organised by BIS at Switzerland, there economist from the G20 nations decided over the future of banking regulations. There were some very interesting clauses that were added to the accord. The banks do not hold the practice of holding large chunks of cash with themselves because cash in circulation can only bring returns. Stagnant cash is like money in vain. The amount of money held in liquid form by the bank is defined by the capital adequacy ratio.

Capital adequacy ratio is supposed to be the amount of cash that the banks own at any point of time divided by the entire amount of the risky assets. The definition of the money that banks own is defined by the types of ownership rights the share owners have on the bank. There are some shares that have ownership rights (tier I) i.e. you literally own some part of the bank and some that only pays you dividends (tier 2). When the bank is being foreclosed it is this capital that banks own is used to pay out the public who had invested.

Previously the definition of the capital adequacy definition was somewhat faulty. The definition was tightened by keeping the numerator restricted to only tier I and increasing it to 4.5% by 2015 and another 2.5% later to bring a total of 7%. Previously the calculation the ratio was carried out by considering both tier I and tier 2 assets. So when Basel II had decided to keep the sum of tier I + tier II at 8% due to banking instruments the ratio was a mere 1.6%. The banks had brought up a new instrument called credit default swap where betting on the securities they were selling helped them achieve a capital ratio of 8% by a mere holdings of 1.6%.

Apart from tightening the cash held by the banks provisions for countercyclic buffers have been initiated. The main objective of the countercyclic buffers is to neutralise whatever peaks the wavy nature of economic boom and burst takes. How we are able to control any further financial earthquakes it is difficult to predict. The Basel Committee has definitely tried to fill the void which has been one of the chief reasons for the wipe out of all the assets that banks previously controlled. Previously banks did not keep to themselves any money but put all in circulation. This was a very risky mal practice and the result is very much evident. However how the future banking functionalities turn out, let us wait and see. Human mind has seldom learnt anything from mistakes and it usually finds repenting much better than to try effectuating caution beforehand. Control is decisive when the control is welcome and not when it is forced upon.

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Protectionism Eat Out

Even though the global meltdown has left us two years ago, steady growth rates in any of the major economies still seem like a bleak opportunity. Countries which previously boasted of their mercantilism and free trade today have shrunk to the levels of protectionism. Previously America used to blame China for the same but today even America is practicing more or less the same. Heavy tariffs and import substitution through indigenous growth is hurting severely many of the emerging economies. The list includes the likes of India, China, and Brazil etc who along with materials also export services. The IT industry in India is down, situation at Bangalore looks gloomy and it would continue if against a democratic stalemate in the US, Obama would trade Indian outsourced jobs.

Protectionism is word that was coined at the time of Adam Smith when communities started imposing additional tariffs on goods that were brought in from other places or imported. The basic objective of the polity was to keep indigenous industries moving and to prevent any form of competitive heat it might feel at the hands of imports. Before the 2008 financial earthquake there were very few names on the table that used such measures to grow. Fingers were always pointed out to China which manipulated the exchange rate mechanism to increase exports and control imports.

China had the problem to feed its ever increasing problem and presence of a competition in its own market would have led to two problems: it would have to fight to feed its own people and the standard of living of the people would increase which is a negative sign when the government is fascist or communist. This was why is resorted to protectionist measures. Coming to today, various economies have taken to protectionism post the global meltdown. The question that is to answer is who is going to be benefitted from all this. Protectionism more or less works like a vicious circle in which government bodies enter in to control the system stability.

Suppose a nation tries to stop any form of imports but keeps on increasing exports to increase income, as is the case of all nations practicing the same, what will be the end like. If everybody wants to sell, and no one wants to buy, ultimately prices will slide. It is universal truth that ultimately the controlling behaviour will lead the customers back to a meltdown. Today most scrutinised and world leaders are leading the way to protectionism. They are definitely going to eat their way into the plates of developing economies.

Nearly 17 out the G 20 nations are imposing heavy tariffs on the countries with which they previously had study trade relations. Much of the services sector in most of the companies is on the rocks. It is not that protectionism is not good or indigenous growth should not be provoked but the gap in the plan is that it constricts free trade. Trade is an option to a business when it is ripe of fit to trade. Cases are coming where the quality of services and goods are going down with the protectionist ideology due to lack of competition.

Analysts like Alan Greenspan and Paul Krugman have been world champions against the practices of protectionism. German Chancellor keeps arguing how the world has submerged into debt. She keeps on telling how the world should and revive through free trade and build up of policies that would benefit both indigenous and foreign entities. However in a way she never acknowledges how Germany has fuelled the latest European financial breakdown. The cheap tax free export oriented German methods have made the entire European Union depended much on whatever it produces.

This has led to what we call a one sided cycle where in countries like Greece and Spain are taking loans from German banks to pay off on good brought from Germany itself and when they spiral into a debt closure they eventually end up paying the loans through debt issued by Germany itself.

Playing politics on the propriety is Obama who is gliding himself through the situation. First the American government through repetitive global pressure has forced volatility in Yuan exchange rates and made Chinese made goods finally a little costly. Added to this he is advocating his own people before the November polls by putting on trade restrictions on many Indian exported services. Lots of BPOs are going to go under the axe ones America decides to do all of it itself. There is little what we can see about the future but artificial impregnations in to the financial build up has always triggered fiscal pandemonium and each time a more striking one.

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A current debate is going on regarding deregulation of the prices of petrol, diesel and other fuels. Our petroleum minister argues that this deregulation is best suited or the economy, our prime minister remarks that this policy is in the best interests of the people our country but is it only I or even you are alien to the benefits that our politicians claim to shower on us.

What exactly is deregulation? Deregulation is the euphemism for “I don’t give a shit to what happens to the economic situation of the common man”. It simply takes off subsidies from the spectrum of fuels. Many experts argue that deregulation is a strong statement towards building of a stronger economy and setting fuel prices free, that is they should depend openly on the crude oil price in the world.

Do you think this policy would ever work for us? The petroleum prices in India are heavily subsidized. The money spent by the government to control the prices is huge and without that support the entire working class would suffer like hell. The prices would rise exponentially and the automobile industry would spiral down as the petrol would become dearer. And in times when we are not even sure whether the recession has receded and we are out making policies that are trying to curb public spending. Are we ready to risk market destabilization at the cost of a better tomorrow when the tomorrow is still too bleak to appear?

I ask how the government dare even think to deregulate the petrol prices when it cannot assure stability and provide the people what seems to be their due. Every day our politician promise and proclaim that the food inflation would cool off soon, but could anybody explain me the mathematics which could justify these blatant lies. If you increase the price of petrol you directly increase the transportation cost, and when transportation costs increases the food prices go up as transportation is the only means to provide food to the consumer.

I think that now even a simple calculation could show that in the near future food inflation has a good possibility to go further up rather than going down. You see how all policies and benefits are entwined to make the system complex and people dependent on the government and then leaving them starving for more when they most require help. Policies help people but they should be controlled and withdrawn at time when the situation is ripe and not when the public is itself crying on the roadside for support.

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NOKIA - A Finnish Default

There is always an advantage attached to whoever enters the market first. Even if the beginning is great the rules do not end there, because the game does not end there. The main rule of the game always falls back upon who defends and play it well. Cases where in the market is mature and innovation is the basic perquisite but it becomes even more difficult to consolidate position when you know you can be outwitted any time. Mobile phone manufacturing today has become one of the most horrendous markets today. There is cutthroat competition with smaller brands entering day to day challenging propriety. Each brand has a charisma of its own. There is some new added addendums and stereotypical features and benefit in every set at much cheaper rates. Forget about brand differentiation, the mobility of the mobile industry has become more of a process and application based warfare. You got something new? The one who offers more gets more. In short what is important to the mobile market today is to innovate and stay up to dated with technology.

If it is only twitter it would not work. People want to tweet and facebooking side by side but they would love if you could YouTube along with. If we go by the tales Nokia is assumed to be the world power in the mobile manufacturing business. It was one of the companies that controlled the world by taking on the wireless network. What fun. The mere beauty of the mobile handsets is its sleek body that has been so dynamic since 1990s since it was first launched. The mobiles were first introduced by NOKIA which turned out to be one for the biggest global companies in 1990. With revenues increasing multifold in multiples of five in the first decade itself NOKIA was a promise to the future. With its 1100 it revolutionised of how people talk and look at communication. There were no lines no connection but people at opposite side of the world could actually talk. NOKIA did it all. In 2005 when it sold its 1 millionth customer a 1100 handset it proved itself to enjoy a Sun that would never set.

However time has reaped some added difficulties in NOKIA. This Finland based company is still number one in sales and manufacturing but the problem inherently lies in its inability to contain competition. By far entering a market is a lesson best learned from NOKIA but considering its current situation problems that have arose recently NOKIA seems to be in some trouble. It announced on its September 10th report its appointment of first non Finnish CEO that tells a lot about how desperately the company wants to get back on track.

NOKIA still has the tune of nearly one third global sales but today Korea based Samsung, Research In Motion made Blackberry and many other big and small brands in their area of operation are building huge performance concerns to NOKIA. Problem with NOKIA owe to the fact that, it has resumed nearing nil innovation in its initial decade of operation. This has incentivised many other manufacturers to enter. Consider the Apple’s iphone itself brought down the sales of NOKIA by nearly 49% in Western markets. NOKIA never tried to look after what was happening with headsets. From mere telephonic devices these phones were developing into computing and social networking devices. They were not merely devices that were used to communicate; they started becoming part of the human lives and this innovation NOKIA lacked. Its criteria to provide a telephonic base limited its growth and paved the way for intelligent competitor to question such a big giant.

How the situation intensified was even more interesting. With NOKIA fully aware of how computing and technology was merging through online operation on cell phones through camera, video, twitter facebook and YouTube NOKIA never tried to question its own beliefs. The problems of this disaster were evident with Sweden based Ericsson making big moves earlier in the sector but NOKIA too confident made no move to correct it. They were too sure of their own capability as a handset provider.

Furthermore another major drawback associated with NOKIA is cited to be its positioning. For banking if we go to Wall Street or Switzerland and for manufacturing France or Landon but we would never go to Finland for cell phones. Finland was definitely an odd choice for a cell phone manufacturer who wanted to make a global impact. When the market demands technology you need to make yourself in accordance with them push yourself to locations that might suit your users. It was in propriety of NOKIA to settle offshore as late as 2000. No innovation and wrong placement in its second decade eventually curtailed its growth. Even though it has brought in new features recently but its initial mistakes has let others enter the market which otherwise would not have been possible.
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