Global Finance PRISMS Are the benefits of Keynesian national financial deficits greater than the costs? Should FDI be used for political purposes? Who should benefit from a nation’s currency policy?
Is it fair for nations to manipulate the trading value of their currencies? • Should governments have the right to regulate currency inflows & outflows across their borders?
THE FINANCING OF NATIONS
THE TWIN "C" ACCOUNTS
Is Bill Gates checking account an accurate measure of his wealth? (No, because it doesn’t include his non-cash, capital wealth)
TWO WAYS TO MEASURE TRADEBETWEEN NATIONS: • Current Account: Annual exports of goods & services – Annual imports of G&S • America borrowed $2 billion every day in 2003 for imports, producing a record current account deficit of $500 billion (5% of GDP). 2004 estimated deficit = $600B (6% of GDP). • America imports twice as much merchandise as it exports
America’s annual current account has been mostly negative in recent decades (a trade deficit) because Americans consume more than they produce—we import more than we export. • The trade deficit has doubled over the past 20 years, from 3.1% of the overall economy to 6.5%
So how is it still possible for the U.S. economy to be so strong and dominant in the world? • Capital Account: Current account + annual exported Foreign Direct Investment – annual imported FDI (money invested in your nation by foreign companies & investors)
America’s capital account has always been positive in recent decades because American companies & investors invest more money in other nations (by buying stocks & bonds & building factories, etc.) than the rest of the world invests in the American economy. Thus America makes up for importing more than we export (the negative current account) by investing so much capital around the world.
Because economics and politics are opposite sides of the same coin, the size of a nation’s capital account has great bearing on its foreign influence. Nations that own lots of assets in other nations (land, real estate, technology, manufacturing facilities, stocks and bonds, etc.) have a greater capacity to control their own destiny.
CURRENT ACCOUNT DEFICITS: Compromise a nation’s financial freedom Eliminate skilled labor BC jobs Weaken currency control
Boost the economies of rival exporting nations Weaken the trade deficit nation’s foreign policy power Boost national consumption > production
FEDERAL GOVT DEFICITS: Increase a nation’s international indebtedness Empower creditor nations Jeopardize the debtor nation’s standard of living Weaken the nation’s capital account
FDI: INVISIBLE ROOTS OF THE GLOBAL ECONOMY
Foreign direct investment is the global economy’s blood circulation system. Circulating capital, technology, & knowledge nourishes the growth of nations, corporations, and stockholders. • Nations that invest in one another have a stake in one another which prompts cooperation. You don’t “bite the hand that feeds you.” • To use another analogy, FDI is the invisible root system of the global economy. As is true of trees, these roots nourish economic growth and provide stability.
Without FDI, America’s goose is cooked FDI is the invisible root system of global economic stability. Just ask Bin Laden.
Bin Laden’s main objective for attacking America was to destabilize the world economy through destabilizing the American economy (by scaring consumers into seeking security by saving more & spending less, thus causing an economic recession) • Bin Laden understood that the U.S. is the main driver of the world economy because of how much Americans import and export. Thus, cripple the American economy, cripple the global economy.
Bin Laden realized that he could increase America’s already heavy debt burden by pulling the U.S. into a Middle Eastern war that would have to be financed largely by foreign creditors. He also realized that by invading Iraq, America would be heavily pressured to push Israel to grant more concessions to the Palestinians (such as the resulting Gaza pull-out) as a way to show the world that America did not intend to colonize more of the Middle East beyond Iraq.
The EU has invested the most in other nations (55% of the world’s total); the U.S. is second highest with 25%. • China now receives the most incoming FDI in the world annually ($54B in 2003); France receives the most of any industrialized nation ($47B in 2003); the U.S. received $30B in 2003 (a large decline compared to 2000).
3. China currently has the largest cache of foreign currency reserves in the world--$833B. This stems from their huge trade surplus (taking in more foreign currency via exporting than China yields to the rest of the world of its currency via importing). Japan has the second highest foreign currency reserves ($830B). Asia as a region has 2/3 of the entire world economy’s FCRs--$2.5T.
OTHER WAYS NATIONS INVEST IN EACH OTHER • Technology sharing • Job creation through trade • Immigrant labor • Supply chains: global sourcing of raw materials for manufactured products • Corporate joint ventures
U.S. HIGHWAYS FOR SALE • A new FDI trend in America has foreign companies buying or leasing American highways & bridges. • An Austrian-Spanish corporate partnership paid $3.8B for a long-term lease on the Indiana Toll Road. • An Australian company obtained a 99-year lease on the profits of Virginia’s Pocahontas Parkway, while its subsidiary leased the tolls on the U.S. side of the tunnel between Windsor, Canada & Detroit.
Spain’s Cintra & a San Antonio construction firm paid $1.3B for the right to collect tolls for 50 years on a 4-mile toll road from Austin to Seguin the partnership will build. • Texas plans to build other tolls roads, potentially financed by foreign deals, along the Gulf Coast, to Shreveport & Texarkana, & from the Oklahoma border to Mexico. • Many American government officials are gung ho about such road deals, because both the U.S. federal government & many state governments lack the budgeting to expand the nation’s road infrastructure that has fallen way behind highway usage. Between 1980-2004, Americans drove 94% more highway miles than the previous decade.
FOREIGN OWNERSHIP OF AMERICAN CORPORATIONS Anheuser-Busch: Belgium Miller and Coors beer: South Africa 7-11: Japan French's mustard: Britian Citgo gas: Venezuelan government Frigidaire: Sweden Holiday Inn: Britain Shell gas: Netherlands
% Of American Industries Owned By Foreign Investors Sound recording: 97% Brokers for commodities: 79% Motion picture industry: 64% Wineries & distilleries: 64% Book publishers: 63%
Rubber products: 53% Glass products: 48% Coal mining: 48% Sugar & confectionary products: 48% Advertising: 41% Pharmaceuticals: 40% Securities brokerage: 38%
CORPORATE CONCENTRATION & CONTROL IN GLOBAL & AMERICAN INDUSTRIES 10 bio-tech companies account for ¾ of all industry revenues in America. 10 pharmaceuticals control 55% of the global drug market. 4 corporations control 60% of the American grain industry. The largest 4 meatpackers control 70+ of the American meat market. The 4 largest grocery chains control 70-88% of the American grocery industry.
Cargill controls 25% of all American grain imports & 22% of meat. Cargill's $120B in annual revenue is larger than 2/3 of the world’s national economies. 5 of the 10 largest companies in the world are oil companies. 2 or 3 corporations control almost all of the weaponry manufactured in America. The “Big Four” accounting firms perform virtually all private company audits in the world. 6 companies control 90 %+ of all media outlets in America.
The annual growth of exporting by the US has been growing steadily since the 1940s. • One third of exports are in services, including large amounts of business-related services: consulting, accounting, research, computer services. • US is 3rd largest exporter behind Germany & China. • US excels in invention/innovation exports.
THE FINANCING OF GLOBAL COMPANIES
THE 3 CHALLENGES OF DOING BUSINESS WITH FOREIGN CUSTOMERS 1. Currency risk 2. Collecting customer accounts quickly 3. Collecting bad debts
Hedging: Using a broker to lock in the future price of a currency today This increases currency exchange stability & facilitates advance business deals
Cash is the main factor in factoring For a fee, the factoring company pays you right away what the customer owes & then collects from the customer at a later time.
PER CAPITA EXTERNAL DEBT Ireland: $448,000 UK: $151,000 Netherlands: $137,000 France: $68,000 Germany: $54,000 Spain: $50,000 USA: $42,000 Russia: $2599 Brazil: $1234 China: $271 India:$130
U.S. DEBT AS % OF ANNUAL GDP 2001: 33% 2002: 34% 2003: 35% 2004: 37% 2005: 37.5% 2006: 37% 2007: 37% 2008: 41% 2009: 60% 2010 est.: 67% 2011 est: 69%
2004 GOVT. DEFICIT AS % OF TOTAL NATIONAL BUDGET USA: 26% Japan: 25% Germany: 8% UK: 7% France: 7% Italy: 7% China: 10% Canada: 4% surplus
% FOREIGN OWNERS OWN OF U.S. TREASURY SECURITIES China: 23% Japan: 21% UK: 6% Oil exporters: 5.5% Caribbean banks: 5.6% Brazil: 4% Russia: 3% Hong Kong: 3%
WHAT IS CURRENCY?
Currencies can be bought & sold by anyone in currency exchangesaround the world.
Which currency is stronger: the American dollar or the European euro? Currencies can be valued only in relation to other currencies.
Did the dollar just get stronger or weaker vs. the Euro (in comparison with the previous slide)?
WHAT DETERMINES CURRENCY DEMAND