The right response to America's Quantitative easing is not competative devaluation but Financial Transaction Tax on speculative investments to curb market volatility and currency appreciation

1. Risk Managing National Economies
“Business Risk Management” Series
BA-41

2. Why Asia Saves?

3. Why US does not save?

4. Asia Bears The Brunt Of War
China Japan War
Korean War
India Pakistan War
Vietnam War
China India War
 Arab Israel War
Cambodian War
Current ongoing conflicts
Major Wars after 2nd
World war were fought in Asia.
This makes Asia insecure .

5. No Wars Fought In the US
after the forties
No war has been fought on US
Soil after the Pearl Harbor attack.
US has been involved in global
wars by its own choice and not
due to compulsion.
US has been the major arms
supplier in most of the wars,
hence it has been the major
commercial beneficiary.
This gives US extreme confidence.

6. 1942 China
1943 Bengal
1945 Vietnam
1960 China
1966 India
1974 Bangladesh
1975 Cambodia
2008 North Korea
2008 Afghanistan
2008 Myanmar
Asia has faced major famines
This makes Asia insecure

7. US has been the major
donor nation in most of the
famines
This gives US extreme
confidence.
US has never seen famine

8. Hence Asia Invested Its Surplus In Rainy-day funds

9. And Rainy-day Funds Invested In US
Treasury Bonds , To Stay Liquid.
Even Before The Debt Crisis Of 2008 , The Wealth
Funds Of China And The Middle East Heavily
Invested In The US Dollar And Treasury Bonds.
Dollar Opportunities http://bit.ly/dlxrXq

10. And the US spend the
intakes double quick
Spending as percent of GDP spiralled

11. Money Supply M2 jumped from 4.5 Trillion in
2000 to over 8.5 Trillion in 2010

12. The added spending did not create more jobs
Instead it created volatility in oil prices

13. It drove up US housing prices and created a huge market for
sub-prime mortgages that eventually collapsed and brought
ABOUT A WOLRD WIDE CREDIT CRISIS

14. Now the excess liquidity
is driving up food prices
Wheat Prices jumped in July 2010 to record the highest
increase in 37 years due to speculation in the commodity
markets that the Russian wheat crop will fail due to inclement
weather.
http://www.bbc.co.uk/news/business-10866508

15. The excess liquidity caused
commodity index to rise
 In 2003 the investment in
commodity index funds by
institutional investors was $15
Billion
In 2008 due to market volatility,
and super profits, $317 Billion had
been invested in commodities .

16. As money moved to
speculative ventures
 The US Banks lost
interest in lending to the
small and medium unit
Consequently the job
market in US suffered and
economic revival became
an uphill task.

17. As the US economic
recovery lost momentum
the investors moved to
the emerging economies
Brazil, Russia, India,
China (BRIC nations)
felt the first rush
of investors. South Korea,
Taiwan, Vietnam,
Indonesia, Malaysia and
Thailand, also witnessed
very high FDI inflows.

18. The real problem was
excess liquidity driving
volatility.
The FDI investment came through
the Wall Street banks and also
directly. It brought with it hot
money too. The stock markets and
currencies of emerging economies
heated up. Brazil witnessed a 37%
appreciation of the Real in 2 years.

19. In Oct 2009 the Brazilian currency heated
up and the Real had appreciated by 20%
Brazil took unprecedented steps and
slapped a 2% Tax on Investment on Stocks
and Bonds ( Not on FDI)
Both stock markets and the Real nosedived
for some time.
http://business.timesonline.co.uk/tol/business/industry_sect
ors/banking_and_finance/article6883027.ece

20. Though the US Economy was slow the emerging
economies kept buying US Treasury bonds and
the Dollar to keep it strong.
The prime reason was to keep the dollar strong
and the oil and commodity prices under control.
Also they knew that a strong Dollar ensured
sustained exports to the US.
It also ensured lesser volatility in the currency
markets.

21. The US felt the pressure of this strong Dollar as its
exports stagnated and imports soared
Cheap Chinese products were flooding the market and
the US budget deficit was soaring.
 To keep deficit in check and ensure adequate
liquidity the US Federal Reserve resorted first to
TARP Stimulus and then Quantitative easing QE2

22.  What is Quantitative easing? The QE2 ?
Quantitative easing is not monetary easing
done by printing new money.
It is done by borrowing.
In this case the Fed will borrow $277 billion
from the Treasury and balance from the Wall
street banks to buy the Treasury bonds.
 http://www.forbes.com/2010/09/27/federal-reserve-economy-quantitative-easing-opinio

23. This would help reduce the deficit as it
would lower Debt by 277 Bn. and increase
Revenue by $600 Bn. It would also improve
the high Debt/Revenue Ratio

24. Since the US economy was slow and deficit was high
Quantitative easing technique was resorted to
The first round of TARP had also helped
higher revenues and the deficit had fallen to
around 13% at $90.5 billion
http://www.bloomberg.com/news/2010-09-
13/budget-deficit-in-u-s-narrows-13-to-90-5-
billion-on-rising-tax-receipts.html

25. But It Will Increase The Liability Of The
Federal Reserve by 877 billion, which
already has a 2.4 Trillion outstanding.
http://bit.ly/cRM7n6

26.  However the Fed too profits by the Risk
taken on behalf of the Treasury.
 Last year the Federal Reserve earned a profit of $68
billion due to the TARP stimulus.
 This year it is expected to earn $30 billion more.
 http://bit.ly/cRM7n6

27.  But the stakeholders who profit most
are the Wall Street banks.
 The Fed will borrow over $300 billion from the
Banks on which it will pay interest.
 But most importantly it will add to market liquidity by
buying Treasury bonds of $75 billions each month.
That will prop up the bond markets and the stock
markets. Bill Gross was perhaps worried that a
bigger player than PIMCO is making its presence in
the bond market when he initially slammed Fed’s
decision.

28. Unfortunately the excess liquidity in the
markets will not spur loans or jobs.
 For the US banks do not want to lend
 For lending rates in the US are absurdly low
 US Banks can’t earn profit from loans like Banks in
Brazil or India
 As the money does not flow downstream, jobs are not
created due to funds from stimulus
 So Banks play in the currency and commodity markets
to earn profits and don’t want to loan to the small biz
that creates jobs. This market play creates volatility.

29.  Money and commodity market
volatility causes insecurity and
fear in emerging economies
 Brazil raised interest rates from 8.75 % to
10.75 % to contain inflation
 But that resulted in the excess liquidity from
US markets to flow to Brazil in search of
higher profits.
 As a result the Real heated up and Brazil lost
its export competitiveness.

30. Brazil reacted by raising Tax on Foreign
Investment in the Bonds and Equity markets
twice in Oct 2010.
They first raised the tax to 4% and when
that failed to curb inflows they raised it
again to 6% within a month and also warned
of imminent currency wars.
 http://www.bloomberg.com/news/2010-10-18/brazil-to-boost-foreigners-fixed-incom

31.  Bernanke’s QE2 evoked sharp reactions
amongst emerging nations.
 Because they feared market volatility, that is making
currencies appreciate fast and commodities expensive.
 Emerging economies have large populations to feed. If
the commodity prices rise beyond common man’s reach
there could be political repercussions.
http://online.wsj.com/article/BT-CO-20101104-716972.html

32. Even Greenspan slammed US and China for
deliberately weakening currencies
http://www.reuters.com/article/idUSTRE6AA00320101111?loomia_ow=t0:s0:a49:g43:
A few days before the Seoul summit of G20, the former
boss of the Fed. Alan Greenspan told Financial Times
that the US is deliberately following currency weakening
policies and along with China is embracing protectionist
policy that will lead to volatility in other nations

33. Germany calls it clueless
German Foreign Minister called Bernanke’s
Quantitative easing policy clueless and its Foreign
Trade Association said the policy rift across the
Atlantic was widening
http://www.reuters.com/article/idUSTRE6A920R20101110?

34. Global investors back tight
monetary policy
As per a Bloomberg investor survey more
than 65 % of global investors have backed
Germany’s policy of low deficit and debt
and only 35% approved of the US policy.
http://www.bloomberg.com/news/2010-11-11/merkel-cameron-win-investor-

35. What Asia fears !
Asia fears quantitative easing will unleash a torrent
of dollars that will flood the Asian markets in search
of higher returns.
This will raise prices of Oil, Sugar Corn and Wheat
that are critical high consumption commodities for
the emerging economies

36.  What are the Options to curb
market volatility ?
 To devalue own currency and enter the
currency war.
 To follow Brazil’s one time investment tax on
bonds and equity markets for capital control.
 To impose a marginal tax on all financial
transactions across all products including
commodities, so that investment is not hurt but
speculation is discouraged. Long term
investors are taxed only once, but the
speculators who play markets are repeatedly
taxed on each transaction they make.

37. So what should nations do?
They must stop buying Dollars to undervalue their
currencies and look for long term solutions that do
not start a currency war .
They must instead invest in oil and other
commodities critical to their survival so that when
prices jump they may stop buying and even sell to
market to stabilize commodity prices.

38. For it is endless
It hurts exporters because normally export
consignments often involves part imports .
Any currency volatility works against business
because business needs stability to prosper.
Currency war is no solution

39. Brazil’s Investment Tax Harms Long Term Investors
Investor’s looking for higher returns
should not be discouraged as long
as they do not cause market
volatility and speculative bubbles .

40. Why Financial Transaction Tax Is Best Option
For It creates an audit trail that can track hot money
Because the Transaction Tax can be raised to curb
speculation without hurting long term investors

41. Multiple Transactions Cause Speculation
A Brent Crude Oil contract changes hands 20 to 30 times
before the ship reaches port without physical transfer of
goods. The traders, the oil majors, Banks, hedge funds and
the cartel members swap the commodity in high speed
round trip trading at the ICE Exchange in London and raise
prices before Oil hits the retail market. If each transaction
gets taxed the speculation can be curbed.
http://levin.senate.gov/newsroom/release.cfm?id=297513

42.  US has a right to adjust its
balance sheet woes by
Quantitative easing
 Quantitative easing does not
mean printing new money, but
it does enhance liquidity and
money supply.

43. Transaction Tax only answer.
 To counter money supply, competitive
devaluation is not the answer.
 The correct way is to levy the Financial
Transaction tax, so that any commodity
swapped 20times is taxed 20times.

44. The Financial Transaction Tax
 It can curb high speed swapping and keep
speculation in control.
It can track hot money to leave an audit trail.
This way the speculator is tracked and penalised
and not the long term investor.

45. For Stopping currency & commodity
speculation is a must
If Dollar is weak
Oil prices zoom
Gold prices will soar
Cotton prices will rise
Sugar prices will jump
Wheat prices will spiral
So don’t fight currency wars ! …tackle price
volatility jointly as the top priority

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