To know more about quantitative easing : Click here

    NEARLY 1 IN 3 WORKING FAMILIES ARE STRUGGLING NOW

    Dec 21, 2010: A statistic reveals that nearly 1 in 3 working families are struggling now to manage their basic needs in the United
    States.In other words, about 100 million people are struggling out 308 million, the population size of the United States.

    Situation may get deteriorated further in 2011 if Govt cut social security spending to manage its deficit of USD 1.4 trillion now.

    Annual US Federal Govt budget stands at almost USD 3.5 trillion but half of it goes to support the needy people of the society
    through social security program (unemployment benefit, food etc), medicaid (health support) and medicare (health support)
    program.

    Almost 13-17 percent of the population are living below the poverty line in USA and without govt support they may not even
    survive especially no one can afford medical bill. In USA, the medical bill is always a giant figure. So if you are sick and if you do
    not have any medical insurance or if you are not attached with any Govt health program such as medicare or medicaid, you will
    have to spend all of your properties for treatment.

    In USA, if you are sick you can admit any medical hospital for treatment. Hospital will treat you whether you can pay or not. After
    treatment they will send you the medical bill.

    Suppose your medical bill has been USD 10 thousand. If you are not capable to pay right now (you do not have any medical
    insurance also), hospital may ask you to pay in 4/5 years time. They will set an installment amount for every month so that you
    can pay in next 4/5 years.

    By law, a hospital can not deny your treatment by saying that you are not capable to pay. Treatment first whoever (citizen, illegal,
    tourist, student etc) you are.


    SHOULD US CONGRESS APPROVE TAX CUT?

    Dec 15,2010: The question is raised now whether US Congress should pass the tax cut bill. There are pros and cons involved
    with this tax cut bill being debated in US Congress. They are:

    First, If the tax cut is approved, the Government budget deficit will increase (as govt revenue goes down) to a new height
    (currrently, it is almost 1.3 trillion). As a result, Govt will have to borrow more to finance its deficit, so total debt will be hieghtened
    further. Currently debt is almost 14 trillion, 100 percent of US economic size or GDP ( GDP is the total value of goods and
    services produced in a year)

    Second, If there is a tax cut, certainly investment by the business and spending by the households would be boosted. Hence
    more employment and output.

    As interest rate is gone down to almost zero percent and the tax cut is on its way, US economy is likely to experience at least 3-4
    percent growth in 2011 and 2012 if other factors remain unchanged. Hence, more employment and output. But this enhancement
    will be achieved at the cost of increased govt debt (due to tax cut).

    Third, if the economy really tends to grow at 3 percent or more in 2011 and 2012, Prof Bernanke, the Chief of US Central Bank is
    likely to come down hard with his monetary weapons. They are likely to mop up excess liquidity from the financial system by
    selling bond from Central Bank's possession. This mop up procedure will be conducted to reduce excess demand so as to control
    inflation.

    Forth, As I said, US Central Bank is injecting USD 600 billion now to lower the interest rate. But Central Bank only can control the
    short run interest rate but not long run. If you see the current Yield to Maturity (YTM) curve, you will find that it is steeper now
    meaning that yield of the bond will go up in the long run especially in the case of treasury bonds linked with 10 years and 30
    years maturity. In other words, we are expecting higher interest rates in the long run.

    Interest rate will be high in the long run meaning that economy will be growing at a faster rate in future as has been reflected in
    the steeper Yield to Maturity (YTM) curve.

    Long run (30 years) fixed mortgage rates are all on the rise as they normally follow Yield to Maturity (YTM) curve. As a result,
    long run industries especially housing one may be affected adversely due to hike mortgage rates.

    Since economy is likely to experience inflation in the long run due to tax cut, it would be preferable to invest in stocks rather than
    bonds as bond prices will be lowered in the long run as YTM will be on the rise in future.

    I am expecting 3-4 percent growth in 2011 and 2012 due to tax cut and low interest rate but the whole process will be nullified if
    the Central Bank fails to contain inflation, likely to come due to excess spending.

    Historically we have observed that inflation is the most disturbance element for an economy as it eats up our asset, income and
    standard of living.  

    So if there is tax cut,  employment and economic growth will be accelerated but at the cost of debt. So we have to decide which
    one we prefer.

    Should we accept debt for attaining lower unemployment rate? I would like to discuss this issue in another article.

    To know some meanings of economics words, you are welcome to visit my personal website. Click here


    INTEREST RATE IN ASIA IS GETTING STABLE

    Feb 5, 2007: Interest rate in Asia is gradually getting stable. In the month of January, Central Bank of Japan has kept its interest
    rate unchanged on its Jan 19 meeting while Thai Central Bank has cut its rate on Jan 17 meeting. Bank Negara largely known as
    Central Bank of Malaysia has also kept its interest rate unchanged on its Jan 26 meeting. Finally Federal Reserve System of USA
    also kept its rate as before on its Jan 31 meeting. Keeping interest rate unchanged, has been a sign of stability in the money
    market in Asia, would contribute greatly in enhancing business environment.

    Asian economies are registering lower rate of inflation in recent months, have allowed Central Banks to keep interest rate
    unchanged. Lower rate of inflation has been possible because of the plummeting of oil prices in recent days. In addition to that,
    Central Banks in Asia are maintaining a higher interest rate for several years to tackle possible inflation due to hike in oil prices.


    Interest rate in Asia has been stable further as the Federal Reserve System of USA has maintained its interest rate on its January
    31 meeting.

    The task of the Central Bank is to manage interbank or money market interest rate by controlling money supply using its various
    instruments.


    CENTRAL BANK OF USA HAS KEPT FED RATE UNCHANGED

    Jan 31, 2007: Federal Reserve System of USA, largely known as Central Bank of United States has kept its interest rate
    unchanged at 5.25 percent in its meeting held on Jan 31. The interest rate also kept unchanged at 5.25 percent in the past five
    consecutive meetings of the Central Bank.

    Federal Reserve raised its rate 17 times over the period of 2004 to 2006 to tackle inflation due to high fuel prices.

    Why the rate has been kept unchanged?  Firstly, the fuel prices are on the way to plummet, secondly although US economy has
    registered 3.5 percent growth in the 4th quarter of 2006, the rate of inflation has been dwindled. The inflation rate that excludes
    food and energy gets down to 2.1 percent in the 4th quarter of 2006.

    Most of the stock indices such as Dow Jones Average, Standard and Poor and the NASDAQ are showing some upward trend due
    to the stability in the Fed rate. Fed rate is the interest rate at which one commercial bank charges each other overnight basis to
    maintain its mandatory reserve requirement.

    In this month of January, Thailand has cut its interest rate while Japan and Malaysia have kept their interest unchanged.


    CENTRAL BANK OF JAPAN HAS KEPT INTEREST RATE UNCHANGED.

    Jan 19, 2007: Central Bank of Japan has kept its benchmark interest rate, known as unsecured overnight call rate unchanged at
    0.25 percent. Central Bank raised interest rate to 0.25 percent in last July after maintaining almost zero percent in last six years.

    Interest rate in Japan has been kept lowest in the world to fight deflation and recession, Japan is experiencing over the last ten
    years. Low interest rate has allowed Yen to depreciate and hence the competitiveness in export has been robust. Currently,
    Japan’s trade surplus is one of the highest in the world, contributing to pile up its foreign reserve to almost 900 billion US dollar.

    Many analysts believe that it is not appropriate time to hike interest rate as the economy is just recovering from recession. The
    real GDP is growing at a moderate rate, stands at 2.8 percent over the year 2006 and the fuel prices are on the way to plummet.


    BANK OF JAPAN MAY INCREASE INTEREST RATE AT ITS JAN 17-18 MEETING.

    Jan 12, 2007: Central Bank of Japan may hike interest rate on its 17-18 Jan meeting as the core consumer prices that exclude
    foods are gaining momentum in recent days. High payroll paid by US employers and record low unemployment in USA may
    influence Bank of Japan to raise its rate.


    WHETHER THE US CENTRAL BANK WOULD RAISE INTEREST RATE ON ITS JAN 31, 2007 MEETING?

    Jan 5, 2007: The price of US benchmark 10 year Treasury note has gone down with an expectation that US Central Bank will hike
    interest rate in its Jan 31, 2007 meeting. Since the price of Treasury note gone down, its yield has gone up as usual. The
    employers in USA has paid higher payroll in recent days. In addition to that, the rate of unemployment has been record low 4.5
    percent recently and the economy is growing at a steady rate. All these factors are signaling towards inflation due to excess
    demand. Whenever the economy shows signal about inflation, Central Bank is likely to raise interest rate to combat inflation.


    WHERE TO PUT MONEY?

    October 1, 2006: Money should not be kept idle. Once we have some extra money, we need to invest it so that we can generate
    some extra income out of it. Generally assets are of two types. They are financial assets and real assets. Examples of the
    financial assets are stock, bond, mutual fund, fixed deposit etc while real assets are land, house, car etc. This section will discuss
    primarily about the prospects and challenges that are linked with financial
    assets.

    First of all, we need to buy some books on investment issue and acquire some basic knowledge about stock, bond, mutual fund,
    fixed deposit account etc. In addition to that, we can talk to a financial planner to exchange our views and acquire knowledge
    before investing money. Many companies in recent days provide free financial advice for us. Companies who are issuing bond
    and stock usually publish their prospectus where we can see all their activities including asset and liability of the company, sale
    volume, nature of the business etc. We can indeed gather knowledge from the prospectus.

    As said, there are a number of financial instruments that are available in the financial market for our money gets invested. The
    most popular financial instruments are stock, bond, mutual fund and fixed deposits. Before deciding of the investment, first of all,
    we will have to know what type of person we are. Are we risk lover? Can we invest money for long term?

    If we want to have higher total return from financial assets, we will have to invest money in stock but investment must be made for
    a long term. Experiences and statistics suggest that total return from stocks is higher than any other financial instruments but
    money must be parked for a long term in that particular stock portfolio. Stock portfolio is an accumulation of stocks that you are
    holding. Best suggestion is to buy all blue chips and keep it for next 10 years.

    Total return from the bond is guaranteed if you can hold the bond until maturity. Investment in bond is less risky compared to
    stock as the interest and principle payment by the bond issuer is guaranteed. But total return from bond is lower than stock, on
    average.

    When the Central Bank increases interest rate to take the excess money out from the financial system to tackle inflation, prices of
    stock go down due to shortage of money supply in the financial system. This is the best time to buy stocks. Our profit always lies
    with the purchase. If we can purchase at lower price, profit is almost certain. On the other hand, yield of the bond goes up with
    the interest hike. When the bond yield goes up, price of the bond always goes down. In this case, we can hold the bond until
    maturity to get interest (coupon rate) plus principle. The best suggestion is to keep the bond until maturity and meanwhile we can
    enjoy higher yield. Indeed, there exists an opposite relationship between price of the bond and its yield.

    When the Central Bank reduces the interest rate in the economy to tackle recession, money supply increases in the financial
    system. This increased money supply enhances demand for stock and hence stock prices shoot up. This is not good time to
    purchase stock but good time to sale. On the other hand, due to low interest rate, yield of the bond goes down while price of the
    bond goes up. We better sale the bond now at higher prices and reinvest the money in a higher yielding bond.

    Central Banks around the world are maintaining foreign reserve to defend their currencies as well as to take part in international
    trade. Suppose the Central Bank of Malaysia is currently holding about US $80 billion as foreign reserve. The largest portion of
    this foreign reserve is invested in US treasury securities (bond). Not only Malaysia, the largest portion of the Asian foreign
    reserve is invested in US treasury securities. Why US treasury securities? because the US government has never been defaulted
    to pay the money back as soon as the securities get matured. Investment in the US treasury security is the safest in the world.
    The Federal government of the United States borrows money through securities (bond) to meet its deficit, which is very common
    in the years of American history.

    So, when the US currency depreciates, the value of the US treasury security (bond), kept by the Asian Central Banks gets
    squeezed. In recent years, US dollar is depreciating against all major currencies. As a result, Asian Central Banks are confused
    whether they should keep reserve in dollar denominated security (bond). With the dropping US dollar value, investment in US
    treasury may get squeezed. The reduction in investment is likely to affect adversely the capital account balance of the United
    States. As for information, US is always experiencing a huge current account deficit and this deficit is largely met by the surplus of
    the capital count balance since long.


    So if the US dollar continues to have a very steady decline, we should not put our money is US dollar denominated security or
    bond. Since United States is a potential economy, its dollar value will not continue to fall and its value is likely to shoot up in near
    future. Current sluggishness in dollar value may be a temporary one.


    There are prevailing a number of financial agencies/companies, who are grading bond issuing companies or grading on a
    particular bond time to time. Investor can purchase bond on the basis of the grading rate. Historically, we have observed that
    established companies are paying lower interest rate compared to newly growing companies against their bonds. Although
    interest income paid by the established companies is low, they have stability and credibility. Amount of interest income is not
    important. Important is its ability to pay interest and principle. Established companies or bonds are usually enjoy higher grading
    rate given by Moody, Standard and Poor etc

    If we buy or sale stock or bond from the market, we need to pay fees to brokerage house meaning that our return gets squeezed
    with this payment. To avoid this cost, we can invest money in mutual fund. Mutual fund is a fund which consists of various types of
    financial instruments ranging from stock, bond to fixed deposit. Various types of financial instruments are accumulated to diversify
    the investment in order to spread risk. Mutual fund is managed by a group of fund managers who use their expertise and
    experiences to invest our money in various financial instruments. The good news lies here, we do not need to pay any brokerage
    charge to sale or buy our financial instruments once we become a member of a mutual fund. The money invested in mutual fund
    can be converted to cash any time. At the same time, money or profit can be reinvested without any fees.

    The most secured investment is to put the money in a fixed deposit account. If we are  risk averse, we can put our entire saving in
    fixed deposit account and continue to enjoy return. But the return from fixed deposit is lower than bond and stock. In other words,
    lower the risk attached with financial instruments, lower the return is expected and vice versa.


    BANK OF JAPAN MAY INCREASE INTEREST RATE AT THE END OF THE YEAR

    Nov 18, 2006: Nikkei 225 stock index, key stock index in Japan dropped with a fear that Bank of Tokyo would increase interest
    rate at the end of this year.

    Higher economic performance may prompt the Bank of Japan to raise interest rate at the end of the year.

    Currently, the benchmark overnight interest rate set by Bank of Japan is 0.25 percent. Yen is likely to appreciate with rising
    interest rate.



    RESERVE BANK OF INDIA LEAVES REVERSE REPO RATE UNCHANGED

    Oct 31, 2006: Reserve Bank of India raised repo rate to 7.25 percent from 7 percent, the rate at which Reserve Bank gives loan
    to financial intermediaries. Rising repo rate indicates that financial institutes will have to be prudent in managing their cash flow
    as the lending rate has been expensive.

    Reverse repo rate unchanged at 6 percent, the key indicator of financial intermediaries on their prime rate. Cash Reserve Ratio
    is kept unchanged as well.

    Indian economy is expected to grow at about  8 percent while inflation rate has been target in between 5 to 5.5 percent.


    BANK OF ENGLAND HAS RAISED RATE

    Nov 9, 2006: Bank of England has raised rate to 5 percent, the highest level in last five years. Rate has been hiked to cut excess
    money supply in the system as well as to cool down over heated property market.

    Rate hike is likely to increase the debt especially originated from house and car loan.


    AUSTRALIAN CENTRAL BANK HAS RAISED INTEREST RATE TO 6.25 PERCENT TO COMBAT INFLATION

    Nov 8, 2006 :  Australian Central Bank has raised its key interest rate to 6.25 percent today. The key interest rate is known as
    Cash Rate, a rate at which all financial intermediaries charge each other.

    Few reasons have been identified behind current hike. Firstly, to combat inflation Secondly, the world economy is growing very
    fast in recent months despite US economy has been sluggish in recent days Thirdly, world economy is expected to grow at a
    steady rate in the year 2007 and hence there will be huge excess demand may cause price hike.

    Current rate of inflation as per September 2006/2007 stands at 3.9 percent which is above the targeted rate of 2-3 percent. Due
    to hike key interest rate, overall spending in the economy is likely to go down, may cause a  reduction in the inflation  rate.

    US inflation rate in Sept 2006 is 2.1 percent just half of Aussie. So US Federal Reserve did not increase its interest rate over the
    last three meetings.

    Official key interest rate hike will increase all types of interest rates in Australia including mortgage rates. The debtor will face
    hardship to pay  increased rates especially who have borrowed using variable rates. Bond prices are likely to go down while yield
    will go up.

    Increase interest rate will bring an appreciation in the Aussie dollar and inflow of foreign currency which will in turn  increase
    foreign reserve of the country. Current foreign reserve as per Oct 2006 stands at US $ 50.095 billion that includes foreign
    exchange, SDRs, reserve position in the IMF and gold.


    EUROPEAN CENTRAL BANK HAS RAISED INTEREST RATE TO 3 PERCENT

    August 3, 2006: European Central Bank has raised its key rate to 3 percent immediately after the interest rate hike of the Bank of
    England. The hike of the interest rate had been due to contain inflation.

    The prices in Euro Zone are continuously increasing due to hike in energy prices. Energy prices have been escalated further due
    to current war between Israel and Lebanon. So the inflationary pressure is cost push type, so there requires a hike in the interest
    rate to reduce overall economic activities and spending.

    The higher interest rate would make the interest rate bearing assets more attractive while the equity market would be adversely
    affected. It would increase cost of mortgage and all types of loans but investors will get benefit from higher yield on bonds.

    Higher interest rate is likely to contribute Euro appreciation. European Central Bank maintains an interest rate corridor. The key
    interest rate which is main
    refinancing operation is set at 3 percent while marginal lending rate (upper ceiling) and deposit rate (floor) are set at 4 percent
    and 2 percent respectively

    It is expected that key interest rate (main refinancing rate) would increase to 3.5 percent by the end of this year as Federal
    Reserve Bank of USA and other Central Banks are likely to hike rates.

    Although Euro Zone, a 12 member association is experiencing relatively low level of
    unemployment compared to previous all years, the inflation is hiking due to energy price surge.


    AUSTRALIA’S KEY RATE ROSE TO 6 PERCENT

    August 2, 3006: Australian key interest rate (cash rate) has been increased to 6 percent to tackle inflationary pressure which is
    stood at around 4 percent in recent days. Possibly this is the last hike by the Ian Macfariane, the governor of Central Bank of
    Australia retiring soon.

    The target is to keep inflation rate within 2 to 3 percent in Aussie.

    This hike in interest rate is likely to pull down all stock indices in Aussie while Aussie currency is likely to get appreciated.

    This week there is expected to increases a number of rates by several Central Banks.


    RESERVE BANK OF INDIA RAISES REVERSE REPO RATE (INTEREST RATE) TO COMBAT PRICES HIKE

    June 8, 2006: The reverse repo rate, the rate at which Central Bank borrows money has been raised by 25 basis points to 5.75
    percent.  The repo rate which is linked with reverse repo rate is increased to 6.75 percent at the same time.

    The spread between repo rate and reverse repo rate is likely to be 100 basis points (one percentage point) under Liquidity
    Adjustment Facility under which short term money supply is managed.

    The current hikes in rates have been for squeezing money supply in the system for shooting inflationary pressure, primarily due
    to hike in crude oil prices.


    BANK OF CANADA BOOSTS INTEREST RATE TO 4.25 PERCENT

    May 24, 2006: Although inflation rate dropped to 1.6 in recent days, Bank of Canada hikes its key interest rate to 4.25 percent
    from 4 percent in order to tackle possible future inflation.

    Inter-bank interest rate is set at 4.25 percent is the key rate set by Central Bank of Canada. The key rate is set to keep the
    economy at targeted 2 percent inflation.

    Following reasons have been identified to raise the rate: Strong labour market and unemployment rate dropped significantly.
    Retail sales is increasing considerably Economy is growing at a rate of more than 3 percent. US has raised its interest rate again

    Of course, consumer borrowing would be affected considerably due to hike.

    Prices of bond are likely to go down as there prevails a negative relation between market interest rate and bond prices. Stock
    indices may fall due to boost interest rate.

    Hike of oil prices will not be able to affect economy much due to hike of interest rate.


    CENTRAL BANK OF NORWAY INCREASES THE INTEREST RATE BY 0.25
    PERCENTAGE POINT TO 2.5 PERCENT

    March 17, 2006: Central Bank of Norway has decided to hike interest rate (sight deposit rate –key interest rate) by 0.25
    percentage point to 2.50 percent effective from March 17, 2006. The interest rate on banks’ overnight loans is also raised by
    0.25 percentage point. So the overnight lending rate stands at 4.50 percent. So there exist 2 percentage differences between
    sight deposit rate and overnight lending rate since August 3, 1993.

    The sight deposit rate is the key interest rate of the Central Bank of Norway.

    Following reasons have influenced the executive body to raise interest rate.

    Output is growing at a faster rate while employment is rising. This positive scenario is expected to bring higher prices and inflation
    In addition to that world economy is recovering especially Japan, China and USA is growing at a faster rate. Since the world
    economy is integrated, the economic growth in other part of the world would definitely impact on Norwegian economy.

    High oil prices are expected to contribute towards general prices.


    CENTRAL BANK OF MALAYSIA HAS RAISED INTEREST RATE TO 3.25 PERCENT

    Feb 22, 2006: Central Bank of Malaysia (Bank Negara) has raised overnight policy or interest rate to 3.25 from 3 percent today
    (Feb 22, 2006) in response to tackle inflation. Currently the economy is experiencing 3.2 percent inflation due to hike in the price
    of petroleum. See the monetary policy statement of Central Bank

    http://www.bnm.gov.my/index.php?ch=8&pg=14&ac=1189


    This is the second rate hike since Asian crisis that hit the country in 1997-1998.

    Since Malaysian economy is heavily reliant on export, the hike in prices will simply bring disaster in the overall export
    performance. Statistic reveals that more than 100 percent of GDP comes from export.

    In addition to that, Central Bank has increased the rate due to recent hike of interest rate in USA as well as in Euro Zone. USA is
    experiencing 4.50 percent interest rate while Euro zone is 2.25 percent recently set by European central Bank,

    Experience suggests that a huge differential between interest rate between US and Malaysia causes a capital outflow from
    Malaysia to USA in search of higher interest rate. This outflow will cause a reduction of country’s foreign reserve upon which the
    defending power of the currency relies.

    Currently the country is enjoying almost USD 72 billion foreign reserve.


    BACKGROUND OF ASIAN FINANCIAL CRISIS                                                          

    June 20, 2005: The East Asian Crisis was a financial crisis that commenced in July 1997 in Thailand and later, it extended to the
    rest of the neighboring economies. The crisis affected stock prices, currencies and other asset prices in most of the Asian
    economies. In other words, prices of the assets plunged to a record low. The Asian tigers turned into a slump for few years but
    they rebounded later. Indonesia, South Korea and Thailand affected most severely while Malaysia, the Philippines, Singapore,
    Taiwan and Laos had a moderate affect.

    The crisis indeed began on July 2, 1997 when the Thai Central Bank withdrew its support on its currency Thai bhat which was
    tied to US dollar. The value of the Thai currency depreciated heavily against US dollar as soon as the support from Thai Central
    Bank withdrawn. Currency depreciation in Thailand brought a similar depreciation in all the neighbouring Asian currencies and
    hence financial crisis began. The first round of currency depreciation happened in Thai baht, Malaysian ringgit, Philippine peso
    and Indonesian rupiah. The second round of currency devaluation began with the Taiwan dollar, Brazilian dollar, South Korean
    won, Singapore dollar and Hong Kong dollar.



    CAUSES OF THE CRISIS

    There have been a number of schools of thoughts behind the causes of this crisis. Some of the causes are as follows.


    Interest rate crisis

    In the early 1990s, the US Federal Reserve (US Central Bank) had been increasing its interest rate to tackle possible inflation as
    the economy began to experience a growth. As we have observed, inflation intensifies with the economic growth and the Central
    Bank is likely to hike interest rate to reduce overall spending and price hike.

    Since money always looks for higher interest rate or return from financial and real investment, there had been a flow to US assets
    that caused the US dollar to appreciate. Since many Asian currencies maintained a fixed or close align  to US dollar, their
    currencies had been appreciated with the appreciation of US dollar. With the appreciation, these Asian economies were loosing
    export competitiveness, hence continued to face current account balance deficit. Indeed, South East Asian exports were
    plummeting dramatically since the mid of 1990s just before the crisis.


    Capital flow and hot money crisis

    As mentioned before, since the US interest rate had been increasing since the beginning of 1990s it attracted fund mangers’ hot
    money in US assets to gain higher return compared to East Asian assets. This caused a plunge in the demand for Asian assets.
    Gradual withdrawal of hot money caused a plunge in security market.

    Hot money is an investment made by fund managers for short term return generally in stock and bond, currency markets.


    Confidence crisis

    Mexico faced a currency crisis in 1994 just before the East Asian crises. Mexican crisis brought a bad impression about the
    sustainability of the growth in emerging economies like East Asia. This impression had prompted investors to pull out investment
    from East Asian economies.


    Foreign reserve crisis

    The amount of foreign reserve that Asian Central Banks had was not enough to defend their currencies especially when the
    currencies were under speculative attack at the end of 1997. With the plummeting the value of the local currencies, Central
    Banks intervened in the market to restore the value by selling foreign currency while buying local currency. After several
    attempts, the foreign reserve depleted without success. As a result, currency floating and IMF bailout were the outcomes.

    We observe that all the Asian Central Banks of today are trying to pile up foreign reserve to defend their currencies to tackle
    future downturn.

    Many economists commented that Asian currencies lost their values due to a deliberate attack of the currency speculators while
    others do not comply with this argument. They say that Asian economies were loosing confidence gradually since 1990s due to
    fragile and excessive liberalized system, which busted in the late of 1997. Native people and business rushed to banks to convert
    local currency to US dollar followed by speculators but central bank failed to supply required amount of dollar demanded and
    hence allowed to flow currency freely to tackle currency crisis. The currency crisis brought the East Asian financial crisis.

    As soon as the currency floated, many local business and governments who borrowed in US dollar externally, they found it very
    expensive to pay the debt as the US dollar has become very expensive when we compare with local currency.


    Liberalisation of financial system

    East Asian governments liberalize the financial system very rapidly without much government regulation and control. The interest
    rate ceiling was lifted and the liberalization in the transaction of current and capital account and establishment of offshore
    banking. As a result, the control of Central Banks on financial system reduced considerably. On account of  liberalisation policy,
    private sector borrowed in foreign denominated from external sources at a large amount and re-lends them to local investment at
    a higher interest rate. Sometime they borrowed for short term and but lent it in long term project domestically. With the floating of
    currency, it became huge expensive to pay the debt.


    CONSEQUENCES OF THE CRISIS

    A large portion of the debt by the government and especially private sector was in foreign denominated currency. With the
    plummeting of local currency, it became very expensive for the government and private sector to pay the debt.

    The stock market plunged, employment cut and political unrest were the outcomes. Indonesian president Suharto had to leave
    power.

    South Korea, Indonesia and Thailand sought IMF assistance for recapitalizing their Central Banks. As per the IMF condition, the
    interest rate went up to attract foreign capital and government budget squeezed considerably. Floating exchange rate system
    had been in place. The higher interest rate caused interest- bearing securities more attractive. Governments adopted austerity
    measures in all its activities. In case of Malaysia, government bailed out the distressed banks by re-capitalizing them.

    The national assets of these East Asian economies drastically dropped with the devaluation of currencies. Trade deficits of the
    United States went up as Asian economies reduced their imports amount.

    Malaysia introduced a very unconventional approach to tackle the crisis such as reduced the interest rate, pegged the exchange
    rate, introduced deficit budget and restricted capital flow. This expansionary policy brought a good result.

    Currency speculators found to be an important factor in the financial system and a new type financial system had been a search.
    Dr Mahathir commented that currency trading was immoral and should be stopped. Investors, local and foreigners had to accept
    billions of dollars loss due to a plunging in security market.


    US INTEREST RATE

    Nov 5, 2005: The Federal Reserve of USA has raised interest or Fed rate again on Nov 1, 2005 to 4 percent to tackle possible
    inflation due to hike in oil prices. The rate could hike further to almost 5 percent by the mid of next year, 2006 to squeeze overall
    spending of the economy.

    Due to this current interest hike, the overall spending will be affected especially the consumer spending will reduce considerable
    which accounts for about two thirds of the US economy. There will be a reduction especially in housing industry that relies heavily
    on mortgage interest rate.

    Hike of US interest rate may influence the monetary policy of many countries. The is an expectation that European Central Bank
    may increase its interest rate little bit which has been parked at 2 percent for the last few years. Central Bank of Malaysia may
    hike its rate to 3 percent from current rate of 2.77 percent to reduce the interest rate differential between US and Malaysia.


    UK CENTRAL BANK HAS REDUCED ITS REPO RATE (INTEREST RATE) BY 0.25 PERCENTAGE TO 4.5 PERCENT

    August 4, 2005: The Monitary Policy Committee (MPC) of the Bank of England has decided (nearly 5-4 voting) to decrease repo
    rate by 0.25 percentage to 4.5 percent amid high oil prices. Sluggishness of economic growth and reduction of consumer
    spending have forced Monitary Policy Committee to reduce repo rate. This cut will be helpful in cutting all base lending rates and
    hence cheap credit for economic boost.

    The repo rate is the interest rate at which Bank of England provides loan to financial institutes. Repo rate 4.5 percent means
    that  Bank of England will give loan to financial institutes at the rate of 4.5 percent interest rate while financial institutes will have
    to surrender securities to Bank of England as a collateral and later on financial institutes will have to buy it back again at a
    predetermined rate.

    Indeed repo operation is the short run open market operation to control money supply.

    Bank of England has been criticized for reducing its rate in an environment when oil prices are inflating and interest rates in most
    of the economies are on the rise. Many have complied with the current reduction to enhance consumer confidence and tackling
    ailing economy.


    RATE OF INTEREST IN MALAYSIA

    August 1, 2004: Malaysian second finance minister has pledged once again to maintain overnight interest rate at 2.7 percent to
    bolster the economy. It is anticipated that the overnight interest rate (inter-bank rate) may hike little bit if the economy can grow
    around 6-7 percent.


    HIKE OF US INTEREST RATE

    June 30, 2004: The US Federal Reserve has raised the interest rate (fund rate) from 1 percent to 1.25 percent to tackle the
    possible inflation. The US economy registered more than 4 percent growth in the 1st quarter of 2004, seems to be an attractive
    drive for local as well as world economy. Together with other factors, $1.3 trillion tax cut enacted by US congress in 2001 has
    fuelled today's US economy. But the ballooning budget and current account deficit have been a
    threat to US economy.


    BANGLADESH UNVEILED ITS NATIONAL BUDGET FOR 2005-2006

    June 25, 2005: The national budget of Bangladesh is unveiled on 9th June, 2005 for the fiscal year 2005-2006. Some of the
    features of the budget are given below:

    Total expenditure would be 64 thousand 383 crore taka (643.83 billion taka). Since the targeted revenue is expected to be
    smaller than total expenditure, the size of the deficit would be 4.5 percent of GDP. This deficit is expected to meet by local
    resources (borrowing by the government) and foreign assistance.

    The share of foreign loans and grants are 10.9 percent and 5.1 percent respectively of the total budget. The highest allocation
    has been given to education and information technology which stands at 15 percent followed by transport and communication
    sector, 10 percent.

    The budget is expecting to enjoy 6 percent growth rate in the fiscal year 2005-2006. In the last fiscal year 2004-2005, the country
    has enjoyed 5.5 percent growth despite flood and natural calamities.

    Critics say that, the size of the budget is too big and over ambitious and hence can not be materialized. In the past, it has been
    observed that almost half of the targeted development budget has not been spent due to inefficiency of the government sector.

    Agricultural subsidy has been doubled in the budget to support the poor. The provision for converting black money into ‘white’
    has been extended for another one year which has received considerable criticism.


    MALAYSIAN ECONOMY IN LAST THIRTY YEARS

    January 22, 2005: Just 30 years back the majority of the Malaysian were living in rural and semi urban areas where agriculture
    was the primary means of economic activities. Over the years they have been scientists, physicians, engineers, programmers
    and so forth primarily due to a dramatic shift from agriculture to manufacturing export and the economy is currently venturing into
    knowledge based economy aiming at fulfilling the vision 2020. Coupled with considerable political stability, heavy investment on
    educational sector helped the nation to build appropriate human resources. Moreover the pragmatic and investment friendly
    policy attracted considerable amount of foreign direct investment resulted Malaysia as hub of foreign companies.

    Malaysia has become the world supplier of manufacturing goods and turned into a trading nation. Since the developed
    economies are unable to enjoy economies of scale in producing manufacturing products in their homeland, they installed
    manufacturing plants in Malaysia to enjoy competitive advantage while they have furnished their economies with capital intensive
    high value added service and knowledge sector.


    MALAYSIAN NATIONAL BUDGET FOR 2005

    October 1, 2004: The Federal budget has been declared by the Prime Minister as well as the Finance Minister Dato Seri
    Abdullah Ahmad Badawi on the September 10, 2004 for the year 2005. The special features are given below:

    The government has targeted to spend an amount of RM 117.4 billion (USD 30.9 billion). The estimated revenue will be around
    RM 99.2 billion. So the Federal budget deficit would stand at 3.8 percent of GDP.

    The government has targeted to make the badger balanced by 2007. Of the total budget, 75.9 percent would be spent for
    operating expenditure (Non-development expenditure) while the rest on development expenditure.

    It has been observed that operating expenditure takes the largest share of the budget in case of semi-developed and developed
    economies. The reason lies behind that these economies have already developed their infrastructure. Hence, need to spend
    more on maintain ace (operating cost).

    6 percent growth is expecting in 2005. The main thrust has been given on human resource development, high value added
    activities, improve the government’s financial management and better living environment.

    As before civil servants will get benefits in terms of bonus. Teachers, principles, police officers and mosque officials will get some
    benefits. Incentives are given to agriculture to reduce import bill which stood at RM 13.9 billion in 2003. Agriculture has been
    given as third engine of growth after manufacturing and service sector. Adoption of modern technology in agriculture will be given
    emphasis. Commercialization of agriculture has been a target through R&D.

    Increase the excise duty in cigarettes to have a healthy society. Incentives are given to arts and culture to make Malaysia as an
    international centre. To enhance health tourism, immigration conditions for foreign medical specialists and patients would be
    relaxed. Tax rebate will be given for the purchase of personal computers to RM 500 from RM 400 in order to enhance ICT sector.

    Halal food produces will receive various incentives. Malaysia wants to be an international center of Islamic banking.

    Bumiputra will continue to receive special government assistance as before. The target of the government is to create an
    entrepreneurial class in the Bumiputra race. The budget did not explain the detailed description about the expected total revenue
    and expected expenditure.


    BUDGET DEFICIT STOOD AT 5.3 PERCENT IN MALAYSIA IN 2003

    Sept 2, 2004: Since the Asian crisis in 1997/1998, Malaysian Federal government has been formulating deficit budget to tackle
    unemployed economy. Currently the country is experiencing almost full employment and the growth rate is expected to be 6
    percent or above this year. In 2003, budget deficit had been 5.3 percent of GDP. Since there has been continuous deficit
    financing over the last 6 years, the national debt is likely to hike. The national debt stands at almost 50 percent of GDP which is
    still manageable and the federal government may borrow
    further to tackle economic woes. The federal government has targeted to come up with a balanced budget by 2007.


    US NATIONAL DEBT IS BREACHING ITS LIMIT

    September, 2004: The national debt or public debt of the US Federal government has been record high, $ 7.3 trillion this month
    just adjacent to the debt limit of $7.4 trillion set by US congress.

    In the beginning of August the US Treasury Secretary John Snow appealed to the US Congress to breach the debt limit of $ 7.4
    trillion otherwise the government would be defaulted by late November this year on its debt what never happened in its 228 year
    history. It is anticipated that US Congress would comply with the appeal made by John Snow soon. A Federal default will simply
    force the rate of interest higher and cause a panic in the bond market.

    The national debt generally gets heightened due to the accumulation of all fiscal deficits (minus in case of budget surpluses).
    Historically it is observed that most of the years the US Federal government drafted deficit budget either to tackle recession or
    funding the war that caused today’s huge debt.  Massive tax cut also played a role in swelling deficit and hence national debt.
    The accumulated debt that has cropped up over the last 200 years reached at somewhere $ 1 trillion
    at the beginning of 1980s but just in last 22 years from 1982 to date the debt figure augmented to a record high at $7.3 trillion
    recently. This phenomenon indicates that US Congress as well as the Federal Government has been aggressively outlaying
    since 1982 onward.


    If we look at the US debt history, the national debt peaked at 120 percent of GDP in 1946 due to heavy spending on Second
    World War. Since then the national debt continued to decline and plunged to a record low during President Jimmy Carter period
    (1977-81), registered at less than 35 percent of GDP. But when President Ronald Regan (1981-89) took the office in 1981 the
    debt began to hike at a robust rate and reached at a considerable height at the end of President H.W. Bush reign (1989-93)
    about 64 percent of GDP. Massive tax cut and tackling the recession have been the reasons behind the mounting debt during
    1981 to 1993. The debt dwindled again in the last five years of President Clinton’s (1993-2001) reign to about 57 percent of
    GDP. This has been possible because of formulating surplus budget to contain debt. The debt situation worsened again during
    President George W. Bush as his administration practiced huge deficit to tackle recession and terrorism as well as funding the
    Iraq and Afghanistan war. The budget deficit is expected to be around $ 450 billion this year, close to 5 percent of GDP. At this
    moment the national debt is around 70 percent of GDP, that is $ 7.3 trillion, the highest in the world. In terms of absolute value
    the US debt is the highest but when it considers in terms of GDP ratio, the United States is far below than Japan, Italy, Belgium
    etc.


    The US Federal Government borrows fund through selling securities to the local and international markets. These securities are
    associated with particular return and maturity date. Almost 78 percent of the securities are owned by the US state and local
    governments, Federal Reserve, financial institutions and individuals while the rest 22 percent are owned by the foreigners. Most
    of the Asian foreign reserve is now invested in US securities in search of better return and security.

    Since the large portion of the national debt belongs to US agency and individuals, they say: Our debt is to our people Although
    there has been a huge accumulation of debt, the country enjoyed a steady growth over the decades. Coupled with the availability
    of millions of knowledge workers the risk taking attitude and the presence of full blown knowledge industry has made the country
    most competitive in the world.


    AGRICULTURAL SUBSIDY AND WTO ACCORD

    August 26, 2004: Eventually WTO consisted of 147 members in Geneva have been able to come to an accord to eliminate
    agriculture and export subsidy as well as support to the farmers of world's wealthiest nations namely United States, EU and
    Japan.  The wealthiest nations have signed the accord with a condition that developing world will have to open their
    manufacturing, auto and service sector to them. In other words, tariff and non-tariff barriers will have to eliminate or reduce so
    that they can enter the market of developing world. The agriculture in Australia and New Zealand are not really subsidized but
    market driven.  

    The World Bank, IMF and Oxfam International are criticizing and pressurizing the wealthiest nations since long to eliminate all the
    subsidies to their farmers so that poor farmers in developing nations can enter their market. An estimate reveals that the size of
    the subsidy and support stands at almost US $ 300 billion annually provided by wealthiest nations to their farmers.  Another
    statistic estimates that the current amount of subsidy has been almost six times than the foreign aid wealthiest nations give to that
    developing world. Since the wealthiest nations are giving subsidy, there occurs an over production and this over produced
    agricultural commodities are dumped in the world market, causes a huge reduction of agri- prices in the world market. Since the
    prices are low of agri-produces, farmers in developing world do not get their revenue properly.  

    Dumping is prohibited as per WTO rule. Moreover, wealthiest nations impose high tariff so as to protect their farmers. For
    example, Japan has imposed almost 490 percent tariff on rice to support their rice cultivators. In fact, the last WTO talk held in
    Cancun, Mexico had been failed on subsidy issue as the EU, United States and Japan declined to eliminate or reduce their
    subsidy and export support to their farmers.

    If the developing world would have faced fare agri-prices, their income would have increased many times and hence the
    millennium goal of halving the world poverty by 2015.



    EUROPEAN COURT CONDEMNING GERMANY AND FRANCE

    July 13, 2004: EU Court in Luxemburg has condemned Germany and France for breaching Growth and Stability Pact. Under this
    pact each Euro member must contain budget deficit within 3 percent of GDP. Germany and France may be fined up to 10 billion
    and 7 billion Euro respectively for violating the pact.



    ESTONIA, LITHUANIA AND SLOVAK ARE JOINING EURO

    June 30, 2004: Three countries namely Estonia, Lithuania and Slovenia started action from June 27, 2004 to join Euro.  Initially
    they will have to follow 'Exchange rate mechanism (ERM-2)' for minimum two years i.e. their currencies should not fluctuate
    against Euro by more than 15 percent over the next two years. If they are successful these three newly joined EU economies will
    be allowed to join Euro some time in 2007.

    In addition to that these economies will also have to maintain maximum 3 percent budget deficit and maximum 1.5 percent rate of
    inflation to get the Euro membership.


    EU SUBSIDY ON SUGAR AND WORLD’S FARMERS

    June 27, 2004: EU commissioner Franz is trying to eliminate or reduce subsidy on the sugar.  Under this package, the
    guaranteed price may be reduced by one-third and farmers will have to cut production. Under this reform if can be implemented
    there would be a huge reduction of sugar production in EU.

    In fact, EU is being criticized by the developing world for its subsidy to sugar producers. The WTO is pressurizing EU to dismantle
    all types of agri-subsidy and open the door for farmers of developing world. Since the sugar regime is very influential in Europe, it
    would be hard for Agri commissioner to reduce or eliminate subsidy. Estimation by Oxfam international reveals that for every one
    euro worth of sugar exports, the EU's spending is almost 3.30 euro as subsidy.



    BUILDING GURU CLASS

    January 1, 2004: Several hundred years before the Christ when the people of Europe were dwelling in cave, an wonderful
    civilization was emerged in Greece. Why there was such a civilization? We notice that the citizens of Greece had an appetite for
    knowledge resulted in a creation of a number of Gurus such as scientists, artists, sculptures, teachers etc. Moreover, the
    presence of scholars like Socrates, Aristotle, Plato and Xenophon had helped in popularizing the knowledge as an attractive
    assets to the people, resulted in a creation of intellectual community in the then Greece. Socrates, for the first time identified
    knowledge as the root of all well being and expressed his great opinion ‘no one errs intentionally, one does out of ignorance'.
    People around the world had a tendency to visit Greece at that time, the way we visit to West today for higher learning.


    FORMATION OF EUROPEAN UNION

    May 10, 2004: European countries had engaged in a number of battles among themselves over the last 200 years especially the
    eruption of Second World War which caused millions of lives and huge destruction of the national assets. With the ending of the
    Second World War, a consensus is raised among the Europeans to avoid war and restore peace permanently in Europe. As a
    result, the League of Nation and ultimately United Nation emerged to maintain permanent peace.

    Moreover, French Foreign Minister Robert Schuman in his speech on May 9, 1950, declared about European integration in order
    to avoid war as well as to enhance regional business activities through economic cooperation. The declaration of Schuman was
    regarded as the first step towards achieving a united Europe. As a result, six European countries such as Luxembourg, France,
    Belgium, Germany, Italy and the Netherlands created the European Coal and Steel Community (ECSC) in 1952 by pooling their
    coal and steel resources in a common market. The ECSC laid the foundation of today’s European Union (EU) which is consisted
    of 25 members currently. The existing members are: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland,
    Italy, Luxembourg, Portugal, Spain, Sweden, The Netherlands, United Kingdom, Cyprus, Estonia, Hungary, Latvia, Lithuania,
    Czech Republic, Estonia, Hungary,Poland, Slovakia

    Another two European countries like Bulgaria and Romania will join EU in 2007. The joining of Turkey in EU is still under
    consideration by EU.

    Indeed 10 countries from 16 to 25 listed above have joined on May 1, 2004. As soon as the new10 countries have merged with
    EU, their average tariff and quota levels have reduced to EU levels, will facilitate most of the Asian exporting economies
    especially China to enter their market. Indeed China is aggressively trying to enter to these newly joined economies by exporting
    products and making investment.



    BENEFITS FROM THE EUROPEAN UNION

    • Greater voice in the World arena.
    • Sharing knowledge
    • Cheap labour from Eastern Europe can help in reducing the cost of production.
    • Creation of the United States of Europe, that is a federal type of state dreamt        
    by Victor   Hugo
    • Permanent peace in Europe


    CHALLENGES IN EUROPEAN UNION

    August 19, 2004: A number of challenges EU is facing today in its formation. Some of the major challenges are described below:


    Fiscal policy

    As per treaty, Euro member country shall have to make a budget less than 3 percent of GDP. This treaty is not favorable for
    those countries that has high rate of unemployment and low economic growth.


    EU Enlargement

    n May 1, 2004, 10 new countries have joined EU mostly from Eastern Europe.  They are Cyprus, Czech Republic, Estonia,
    Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia. As a result, the number of members has increased from 15 to
    25 supporting nearly half billion population. These communist countries endowed with cheap but skilled labor. Many companies
    from existing 15 members are migrating to these new 10 member countries in search of cheap
    manpower.  As a result labor in existing 15 members are losing job to new communist members.


    Common defense and foreign policy

    The EU has been trying to make a common defense and foreign policy but repeatedly failing to do so as the member countries
    are divided in many issues especially in the question of the status of the United States


    Knowledge based economy

    As per Lisbon strategy, the EU would become the most competitive knowledge based economy in the world by 2010 and would
    catch up the US economy by that time. This goal might not be achieved as the gap between the USA and EU is increasing
    specially on the Iraq issue. Moreover, the sluggish growth rate and huge unemployment in EU are working as hindrance towards
    achieving knowledge based economy by 2010.


    European parliamentary election

    European Parliamentary election takes place every five years since 1979 and the power of the European parliament is ever
    increasing with the signing of new treaties among the EU nations.

    The laws made in European Parliament are to be followed in member states resulting in depletion of national sovereignty. So it is
    believed that members of the European parliament seem to be more powerful than national parliament.

    Although the power of the European parliament has increased considerably over time, voter turn out in European parliament
    election is declining steadily since 1979. Statistic shows that overall turnout figure was 63 percent in 1979 while it was only 49
    percent in 1999. The figure has squeezed further in 2004 European parliament election. Less than 45 percent of 350 million
    voters from the 25 member states have voted in 2004 election for nominating 732 members in
    parliament - the lowest turnout since 1979 election. In addition to that ‘euro- skeptic parties’ at EU level have gained more seats
    than ever before. The poor participation in casting vote and surge in euro skepticism have raised questions about the future of
    European integration. There may have been few reasons stated below why the EU citizens did not turnout for casting their votes
    for European parliament.


    •  A significant number of EU citizens are reluctant to surrender their national sovereignty to European Union common authority.

    •  The EU has been divided into two groups in the foreign policy question especially on Iraq war issue. One is welcoming United
    States while the other would like to comply with the United Nation convention that forbidden Iraq war.

    •  Widespread income inequality among EU citizens as well as nations has discouraged the voters.

    •  EU citizens may not have forgotten the memories of the antagonistic relation that existed in the past within EU nations.

    •  Over dominance of the European Commission on the member nations.


    Large member size

    The EU now consists of 25 member states after adding additional 10 new countries joined on 1st May 2004. It is expected that
    another three countries will be joining EU namely Romania, Bulgaria and Hungary in 2007 resulting in the largest economic,
    social and political association. In terms of number it is increasing while there is increasingly increasing different opinions in EU
    due to large member size. Now it is to see whether EU can sustain in the long run with its various opinions.
My new area of interest: Quantitative Easing
Sayed Hossain Economic Diary - Part 1