Book summary: The Asian Financial Crisis by Shalendra Sharma

This book describes how the 1997 Asian Financial Crisis transpired.

Impacted countries

  • South Korean
  • Indonesia
  • Thailand
  • Malaysia
  • Singapore
  • Hong Kong
  • China

Key lessons

  • Only 2 of these three conditions can be allowed to be true without causing inflationary recession
    • Fixing the currency exchange rates against other reserve currencies
    • Control over domestic interest rates
    • Control over capital inflow
  • On foreign capital flows
    • huge volume of foreign capital flows into a country
      • economic growth rate increases
      • inflation rate stays low
    • huge volume of foreign capital flows out of country
      • economic growth rate decreases
      • inflation rate goes up

Common pattern across countries

The build up

  • Long periods of high export lead GDP growth attracts high levels of foreign investments. Huge volume of foreign funds originated from Japan which was having a very loose monetary policy
  • Countries peg their exchange rates to reserve currency to ensure stable prices for both imports of raw materials and exports value added products
  • Countries currencies are not reserve currency, hence foreign loans were denominated in foreign currency
  • Excessive leverage within the country by domestic parties who take on short term loans denominated in foreign currencies at lower interest rates to finance long term projects that generate returns in domestic currencies
    • Stocks are purchased with borrowed money. These stocks are then further used as collaterals to borrow more money
    • Real estate are purchased with borrowed money. These real estates are then further used as collaterals to borrow more money
  • Moral hazard due to corruption of financial system
    • banks are arm twisted to finance projects that are not financially viable by governments and politicians

The economic headwinds

  • countries face increasing export market pressure
    • Competition at the low end of the export markets from China
    • Competition at the high end of the export markets from Japan
  • Japanese government instructs central bank to tighten monetary policy to reduce real estate. This severely restricted liquidity from Japan and reduced availability of short term foreign loans to affected countries

The crash

  • Borrowers within these countries increasingly experienced difficulties rolling over their foreign denominated short term loans to finance their long term illiquid domestic projects
  • Many of them started defaulting on their loans
  • Foreign investors started getting spooked and started withdrawing their funds or refusing to allow their loans to roll over
  • Non-performing loans builds up amongst banks within these countries
  • Capital flight continues causing downward pressure on the exchange rates of these countries
  • Countries continued defending their exchanges rates by buying up their own currency and selling off foreign reserves (assets held in foreign currencies)
  • Countries deplete their foreign reserves and are unable to uphold their exchange rates. Since most debts are denominated in foreign currencies, they are not able to print money to pay off these loans.
  • The economy grinds to a halt and hyper-inflation occurs within their financial system at this point
    • domestic production stops and locally produce foods is no longer available for sale
    • due to shortage of foreign reserves imported products become very expensive in local currency
  • Countries approach IMF for loans to tide through this liquidity crunch.
  • IMF steps in and with a lack of understanding of the economic patterns imposes these requirements:
    • Countries required to impose high domestic interest rate. It has the effect of further reducing the money supply within these countries causing more defaults domestically.
    • Countries will reform the financial systems to remove cronyism lead financing
  • Riots ensures and Anti-establishment governments get elected in some countries

The recovery

  • IMF releases the misstep in policies and relents
    • Countries lower their domestic interest rates to increase liquidity within their financial system
    • Countries allow their exchange rates to float freely
  • Relatively cheap asset prices within these countries starts attracting foreign investments again

Federal Chairman Jerome Powell on 0.25% interest rate cuts

Overview

  • Outlook for the US economy is favorable but
    • core inflation is only at 1.6% instead of 2%
    • cutting interest rate by 0.25% from 2.5% to 2.25%
  • insurance against downside risk
    • global growth is slowing
    • trade policy tension is a new stimulus to the equation and it is a concern
  • key objectives
    • strong job economy
    • 2% inflation rate
  • adopt an iterative approach by observing how economy reacts to policy changes

Key areas of concern

global growth slow down

  • US core inflation rate is at 1.6% – excludes food and energy inflation which are cyclical
    • US GDP sustained
  • US manufacturing declined in 2019Q1 and 2019Q2
  • US business fixed investment slowed in 2019Q1 and fell in 2019Q2
    • companies uncertain about investment spending
    • not seeing additional demand for products
  • June US job growth slowed in 2019Q2
  • disinflation rates observed in other countries
    • manufacturing in rural China and the EU are slowing

highly leverage business sector within the US

  • Business borrowings are excessive
  • loans have moved off balance sheet of banks to market based vehicles

Positive signals of sustained US economy

  • rising household income drives confidence
  • no booming sectors observed hence no concerns for busts

Federal Reserves framework for monitoring risks

  • Excessive leverage in the Financial sector
  • Excessive asset valuations
  • Excessive debt loads in households and business
  • Funding risks that could result in sudden shortfall of liquidity

Structure of the US economy

  • US capital requirements within banks are at 2X of what is required to tide through tough times
  • Allocations
    • 70% consumer
    • 30% investments and manufacturing
      • not growing
      • remains healthy

Related references

Manias, Panics and Crashes – balance of trade mechanism

In a world where currencies are not pegged to gold or other currencies price stability is achieved when major trading partners all target the same inflation rates. Otherwise wild fluctuations in rear asset prices and exchange rates will likely occur.

We should expect the following loops to occur.

Loop #1 – When central bank pursues expansionary monetary policy

  1. Central bank pursues an expansionary monetary policy
  2. investors expect inflation rates to go up
  3. investors expect currency value to drop in overseas market
  4. investors sell off real assets within country and exit funds out of country to other countries
  5. due to decreased demand, stocks, real estates and commodity drops in value.
  6. Exports become more competitive and balance of trade surplus results.

Loop #2 – When central bank pursues deflationary monetary policy

  1. Central bank pursues deflationary monetary policy
  2. investors expect inflation rates to go down
  3. investors expects currency values to increase in overseas market
  4. investors move funds into country to buy up real assets
  5. Due to increased demand, stocks, real estate and commodities within the country appreciates in value
  6. Exports become less competitive overseas and trade deficit results

Key insights

US has been experiencing a balance of trade deficit since 1980. This is partially due to the result of going off the gold standard.

While it did not actively pursued a deflationary monetary policy, it’s stable politic system and high level of technology innovation, relative to other countries, has an overall deflationary effect on its economy.

The net effect is the same as if the central bank pursues a deflationary policy.

Related readings

Analysis of the Facebook Libra Token

High level

  • The launching of Libra Token will allow large swath of people access to banking
  • It will also allow corporations with a huge stock pile of cash the access to alternate forms of investment

Libra currency liquidity

Every Libra token that gets created is backed by a reserve of real assets. Close examination of partner balance sheet figures shows approximately USD148 billion dollars of cash and equivalent available for deployment right out the gates.

Libra social impact

One of Libra’s goals is to provide banking access to segments of the world’s population that don’t. Close examination of partners’ reach to this segment of the world shows 7.9million people. This is not including the 204 million African Internet Users on Facebook.

Related References

20190619 – Federal reserve chairman Powell’s speech

Federal Reserve’s two pronged mission

  • Maximum employment
  • Price stability at 2% inflation

Indicators utilized to proxy inflation

  • Unemployment levels
  • wage levels
  • consumption levels
  • Agriculture
  • manufacturing
  • Business investments
  • trade levels

Departments overview

US treasury and Federal Reserve are non-political entities

  • Government
  • US treasury – controls exchange rates
  • Federal reserve focus on domestic concerns only

Observations

  • will not act on sentiment driven from cross currents like Trade war and China’s deleveraging
  • will wait to see more of how trends pan out before acting
  • most countries find it challenging to sustain a 2% inflation rate
  • wage level increases has remained subdued despite increase demand for labor
  • balance sheets of banks are well stress tested
  • balance sheets of non-banks like mutual funds are not well tested

Reflections on the subject of economics

Man as an automaton

The average man eats, sleeps, shits and reproduce.

When presented with environment stimulus that signals more of the above, his brain emits dopamine which elicits are warm fuzzy sensation in his body which he interprets as pleasant.

When presented with environment stimulus that signals less of the above, his brain emits adrenaline which elicits muscular tension and heat in various parts of his body which he interprets as unpleasant.

Physics as the upper bound constrain for economic activities

Economic activity is what man as a collective organism engages in as it goes about fulfilling its above stated needs.

A quantum leap in economic activity is only possible when there is significant break through in the field of physics.

A large increase in numeric valuation of such economic activities without corresponding increase in actual physical throughput volume will result in either an inflation or a subsequent correction.

Characterization of economic activities

Aerobic economic activity is when the environment remains at equilibrium during energy extraction for the above stated needs.

Anaerobic economic activity is when the environment equilibrium is disturbed during energy extraction for the above stated needs.

Framing as a high level principle

He who controls the frame determines what goes within it.

The jug shapes the water.

The player controlling the outer edges of the Othello board generally wins the game

The country which controls the currency for all international commerce control the direction and level of cross border commercial activities.

US controls the global USD supply which majority of foreign economic activities and debts are denominated in. US controls the future economic outputs creditors will receive in the future.

Major creditors for US debts like China and Russia are moving towards Gold as the denominator.

Key take aways from The Governance of China by Xi JinPing

Vision

  • The Chinese dream
    • make country strong and prosperous
    • revitalize the nation
    • make people live better lives
  • 2 centenary dream
    • baseline being the 1840 opium war
    • a moderately prosperous society by 2021
    • fully rejuvenating China to its former glory by 2049

Modus operandi

  • perpetual learning and improvement
  • the path of socialism with Chinese characteristics
  • further develop the theory of socialism
  • system to guarantee outcome
  • holistic view when developing policies
  • A wise man changes his way as circumstances change; a knowledgeable person alters his means as times evolve
  • Employ the way of the gentleman
  • Fostering of core values to ensure population knows what the right thing to do
  • A warlike state, however big it may be, will eventually perish

Strategic objectives

  • System integrity
    • stem out corruption within the public service
    • safeguarding state sovereignty
    • coordinating national security in the environment of rapid technology innovations
    • staying close to the people in the grassroots
  •  Reform
    • figuring out the relationship between the government and the market
    • Free the mind
    • Develop productive forces
  • Progress
    • Education to cultivate young people to boldly strive forth and including overseas
    • Technological invention and innovation combined with social development
      • internet
      • Bandwidth
      • cyber security
      • AI
      • robotics
    • Management know-how
    • Urbanization of rural areas
    • Military build up
    • Energy sufficiency – one belt one road, climate change
  • Consolidation
    • Hong Kong
    • Macao
    • Taiwan
    • All foreign Chinese nationals

Key challenges

  • Allow market to play decisive role in allocating resources and let government perform its function better
  • imposing order on the markets to prevent people seeking economic benefits through
  • dealing with production lags
  • effective competition to yield superior outputs
  • inconsistent market rules leading to rampant protectionism within local markets
  • fiscal and taxation systems to divide power between national and local government
  • management of technology security risk

foreign relations

  • inclinations
    • averse to hegemony
    • averse to war
    • averse to intervention
  • Mexico, Latin America
  • Russia – trade using local currencies and go off the USD
  • US – on cyber security
  • Asia
    • 67% of world’s population
    • aims to become leader in region
    • increase imports from this region into China
    • improve regional security
  • One belt one road
    • Africa – technology transfer and trade via one belt one raod
    • EU – trade
    • Central Asia and Middle East – invesments, trade and oil for energy needs via one belt one road

Related references

  • Taoism
  • Mohism
  • The Mencius, Meng Zi
  • Strategies of the states, Zhan Guo
  • The Great Learning, Confucianism
  • The book of songs, King Wen
  • The book of rites
  • Advice to my son, Zhuge Liang
  • The methods of Sima, Si Ma Fa

Book summary: The Fate of Rome

Climate is both an enabler and disruptor of human endeavors. Nature balances the population it supports. Technology enables increased rate of energy extraction from environment to further human purposes.

Conducive climate results in bountiful yield and has allowed Rome to rise. Land is cleared and trade networks flourish during the rise of the empire. Clearance of wild lands unlocked microbes into the human civilization.

Microbes evolve to utilize humans and other mammals as vectors of infection. Dense population and connected trading network serve as a multiplier. The worst pandemic is the white pestilence (Black Death). This wiped out more than half of human population.

Trading network collapse as a result of the decimated population. Military rank diminishes both as a result of population decimation. Problem is further compounded by collapse of financial system which makes it difficult to sustain an army.

Grounds are fertile for spread of monotheistic dooms day religion like Christianity. Emperor Justinian converts to Christianity. Classical Greek school of thoughts gets displaced.

Climate change for the worse force nomads with superior military power to migrate westwards into Roman territory.

Roman Empire with decimated population gets further crippled.

Key observations of Chinese One Belt Road Initiative in Africa

Territories observed

  • Egypt
  • Sudan
  • Ethiopia
  • Kenya
  • Tanzania
  • South Africa

Similarities observed

  • Heavy Chinese enterprise involvement in the building of roads and houses
  • Shops with Chinese labels observed in operation
  • In areas where there are construction operations, Chinese supervision and management observed aided by local manual labor
  • Ubiquity of mobile internet connection
  • Ubiquity of Samsung, Huawei and Tenco Android mobile phones ranging from USD50 among local adult and adolescent population

Macro trends

With the rise of the Chinese middle class, there is now increasing domestic demand for goods and services within China. This has driven the need to increase the overall throughput volume of such commodities. It can be speculated that the level of consumption is expected to surpass the level of production within China at some point.

Economic growth in China has for now hit a road block due to the following factors:

In light of these, China needs to start shifting its policy from an export focused economy to a domestic focused economy. To do so, it needs to feed and drive domestic demand for goods and services.

Regional trends

The Chinese government has been observed to enter into agreement with local African government to fund the build out of infrastructure, primarily roads and buildings. At the date of writing 85% of roads in Ethiopia has been completed within the country while in Zanzibar, Tanzania, all major roads are under construction and a sports stadium named Mao ZeDong stadium has been observed.

In exchange for the funding, local governments are restricted to engaging the service of Chinese companies. This safeguards the effectiveness of funds deployment for the operations aspects of the agreement while serving to three specific purposes. It minimizes the actual volume of liquidity that is tied up in loans to local government, while boosting demand for construction services within China and increasing maximum possible throughput volume of commodity exports from the region.

What is not obvious during the time of observation is how effective local governments are at managing funds during the stage between its receipt from China to its payment to the engaged Chinese companies. Discounting the inherent effectiveness of the various projects in driving local GDP, differing levels of corruption and maturity of national identify within the region will result in variance between actual ROI versus expected ROI for these projects.

On deciphering Chinese end goal within the region

At the moment of writing, it is yet clear how Chinese African relationship will crystalize for the future. Two key observations need to be made before we can get a glimpse of it.

Key observation #1 would be how China would react when the loans come to maturity and the local government have yet made sufficient returns from the infrastructure investments to pay off the debt.

Key observation #2 would be how Chinese companies would handle the post construction phase of projects that require ongoing maintenance in terms of knowledge transfer.

Related readings

Symbiotic relationships between man and other species

Somewhere along in time, Man formed semi-symbiotic relationships with selected species of plants and animals. Thereafter this cohabiting social structure was scaled up the world over. 

As the process ran its course, other species were inevitably marginalized due to habitat loss, some driven almost to the brink of extinction.

It is interesting to note, the larger the physical size of an unincorporated specie and the closer it’s distance to the brink of extinction. 

The long term trend tends towards mono-cultures and minification of species. 

Man does not share the position at the top of the food chain well with others.