#Fincabulary19 – Mancession

MeaningAn economic instance in which the unemployment rate is substantially higher among men than it is among women.

The term “mancession” was coined during the financial crisis of 2008-2009, during which men bore the brunt of the job losses in the United States, at rates close to 50% higher than those of women. Analysts have tried to understand the mancession phenomenon, and have offered a few possible reasons. First, during the financial crisis of 2008-2009, the majority of jobs that were initially cut were in the male-dominated manufacturing and construction industries, leading to disproportionate levels of joblessness among males. Also, at the time it was reported that women in the United States accounted for nearly 60% of the college degrees handed out during that period, meaning that a greater number of women were working white-collar jobs, especially in publicly-funded industries such as education and   healthcare, which saw far fewer cutbacks than male-dominated industries.

QUANTITATIVE EASING: A WAY OF STIMULATING ECONOMIC ACTIVITY?

By- Purvee Khandelwal

One of the main tools to control growth is raising or lowering interest rates. Lower interest rates encourage people or companies to spend money, rather than save. But when interest rates are at almost zero, central banks need to adopt different unconventional policies – such as pumping money directly into the financial system i.e. quantitative easing, or QE.

How does it work?

The Central bank purchases financial assets – mostly government bonds – from pension funds, insurance companies, and banks, among other institutions, with electronic cash. It paid for these bonds by creating new central bank reserves – the type of money that bank use to pay each other and the amount of commercial bank money used for lending purposes.

Who has tried QE?

Between 2008 and 2016, the US Federal Reserve in total bought bonds worth more than $3.7 trillion. The UK created £375bn ($550bn) of new money in its QE program between 2009 and 2012. Then in August 2016, the Bank of England said it would buy £60bn of UK government bonds and £10bn of corporate bonds, amid uncertainty over the Brexit process and worries about productivity and economic growth.  The Eurozone began its program of QE in January 2015 and has so far pumped in $600bn of extra money.

What are the expected gains?

 The new money swells the size of bank reserves in the economy by the quantity of assets purchased—hence “quantitative” easing. Like lowering interest rates, QE is supposed to stimulate the economy by encouraging banks to make more loans. The idea is that banks take the new money and buy assets , such as give loans, to replace the ones they have sold to the central bank. That raises stock prices and lowers interest rates, which in turn boosts investment, spending, and consumption.

What are the risks?

The biggest concern is that pumping more money into the economy could ultimately lead to an inflation problem. Also, the newly created money usually goes directly into emerging markets (through financial markets) and commodity-based economies. Thus, local businesses may not get adequate loans. BRICS countries argue that such actions amount to protectionism and competitive devaluation as QE causes inflation to rise in their countries and penalizes their industries. Thus, a far more effective way to boost the economy would be for the Central bank to create money, grant it directly to the government, and allow the government to spend it directly into the real economy. However, this could also lead to reckless spending by government. Hence, the debate on what tool to use to boost growth continues.

Abenomics: Has it really worked for Japan?

By Keerthana Raghavan

Abenomics refers to a set of policies adopted by the Japan Prime Minister Shinzo Abe when he was selected as Prime Minister for the second time in 2012. The policies were implemented in the background of near zero growth rate for past 20 years and huge government debt. The policies were aimed to fight deflation by encouraging private investments and consumer spending.

The Three “Arrows” of Abenomics:

  1. Monetary Stimulus: Monetary stimulus like quantitative easing (when the Central Bank buys bonds from people to lower rates and increase money supply in the economy which would trigger spending) was undertaken. In 2013, the Bank of Japan purchased bonds to reach its inflation target of 2%. The rates are currently negative (-0.1%) in Japan which means the banks need to pay interest to the Central Bank for keeping excess reserves. The whole point is to increase lending and prevent people from saving and also to break the chain of deflation and low spending.
  1. Fiscal Stimulus: Relates to government spending in three main areas ranging from welfare of the people to the infrastructure. The government is trying to create a good environment for business with big building projects. The focus on infrastructure relates to building schools, roads etc. and buildings for the upcoming Tokyo Olympics in 2020. Other measures include fulfilling of its debt obligation which is very high.
  1. Structural Reforms- Policies targeted towards long-term growth focusing on the productivity of its labour force, improving the ease of doing business, deregulation of various industries, increasing inbound tourism etc. productivity of labour force is vital since the demographics of Japan are skewed more towards the older population.

In spite of all these reforms in 4 years nothing much has changed. The GDP growth is still flat this quarter and capex has declined 0.4%. The prime minister has also delayed the hike in consumption tax to 10% to 2019 for the worry of consumer spending taking a hit.

 Why has Abenomics failed?

The major problem in Japan has been a chronic lack of demand for goods. The problem is rooted in the demography. The growth is possible only if there is a major technological growth driver that can revive the economy or if there is huge immigration to balance out the ageing population and shrinking workforce. The fiscal stimulus cannot keep continuing since the budget of Japan is already constrained. The need of the hour is to accept the fact that Abenomics has failed and look for reforms that may boost the economy.

IMPACT OF BREXIT ON EU

Author: TANUJ GUPTA

Love gone bad! No I am not referring to any Bollywood couple’s breakup but Britain’s exit from the European Union (EU). On 23rd June 2016, the people of Britain voted for the most important decision of their life which will impact not only them but also the future generations of Great Britain and EU. BREXIT will surely transform the economic, political and social landscape of EU.

ECONOMIC – Official trade statistics show that EU is the destination for half of British exports. But Britain’s share of intra-EU exports and imports is only 10.1% and 6.0% respectively. This number is also inflated because goods exported by Britain out of Europe are transited through Rotterdam port in The Netherlands. This phenomenon is termed as ROTTERDAM EFFECT.

Britain’s Total Export to EU 402.3 Billion Euro Britain’s share in total intra – EU exports Britain’s share in total intra – EU imports
Britain’s Total Import to EU 344.2 Billion Euro 10.1% 6.0%

Foreign investments in EU might dry up as companies use Britain as gateway to Europe because of Zero–tariff environment and free movement of labour and capital. Britain with 28% has the highest foreign investment in EU.

EU will have to find a replacement for London which has long served as the financial nerve centre of EU. Many investment banks having headquarters in London will have to move out of London so as to serve the European market. Germany which imports 14% of financial services will be the biggest loser in EU because of increase in cost of financial services.

POLITICAL – For starters, EU would lose an influential member which would have helped them to crack trade deals and have a say in World politics and economics. There will certainly be a shift in the power of decision-making in EU. Germany and France will want the decision-making power to shift towards them which might create further political frictions.

SOCIAL – Another pressing issue is immigration. The free movement of labour might be restricted in Britain due to BREXIT. This will result in the surge of low-wage migrant labourers from Africa and Middle East to EU. This might add fuel to the existing anti-immigration movements in EU and may lead to further political differences amongst EU members.

SECURITY – With the growing threat of ISIS, security is a key issue for EU. Britain is home to world-class intelligence agencies like MI5 and MI6. BREXIT will put EU at the back foot in counter terrorism and intelligence operations. The plans for building a unified European army will also be hit.

The EU after BREXIT will be an impaired regional and a geopolitical union as compared to the current EU, which already punches far below its economic weight in regards with  the global and regional diplomatic and strategic matters.

A Myth: Devaluation helps exports

Author: Nayan Saraf

The conventional wisdom says, “If you devalue your currency, then it will give a boost to your export as it would look cheaper in the global market.” This wisdom has been running through the veins of economists and governments from many decades and played a vital role in determining the government’s economic policies. But over the years, with the increase in globalization and development of the financial market, this wisdom appears to be a myth now.

The first reason is the availability of derivative instruments such as Currency Swaps, Futures and Forwards, which helped importers as well as exporters in hedging the currency risk. This reduces the immediate impact of devaluation.

Second reason is that many exporters import their raw materials from across the world. For example, a car manufacturer imports different parts such as engine from one country, steel from another country and so on. In one way, he might think that his cars would be cheaper in the global market due to devaluation; on the other hand, his input costs have gone up since the cost of imported raw materials would be higher. Hence, he wouldn’t be benefited much from this currency devaluation, as he needs to maintain his profit margins.

Third reason is the increase in the labor cost, due to prevailing inflation in the economy. Currency devaluation leads to higher import costs that will eventually cause inflation. Hence, the work-force have to pay more for the same goods which will reduce their real wages, and soon they will demand for higher nominal wages which will eventually increase the labor costs for a firm.

Devaluation also leads to law of unintended consequences. Suppose China devalues Yuan to make its exports attractive abroad, it might get competitive advantages by doing so, and will help its economy and exporters to grow. But over the time, the manufacturers in other country will largely suffer due to the loss of market share. It will cause closure of plants, layoff, bankruptcy, and eventually, recession in those countries. And due to the spillover effect, a wider recession may result which might cause in declines in the sales of Chinese goods itself because of lack of demand abroad.

At last, other countries might use “Beggar thy neighbor Policy” of competitive devaluation or can put capital controls and other currency restrictions or can provide subsidies to protect their exporters.

All these practical implications don’t allow a country to boost its exports when it devalues its currency. Though there would always be short-term benefits, but in the long term, the country with low labor cost and efficient manufacturing would boost exports.

Shadow Banking

By Monica V

What is Shadow Banking? 

Paul McCulley of PIMCO coined the term “shadow bank” in 2007. The Financial Stability Board defines the shadow banking system as “credit intermediation involving entities and activities (fully or partially) outside the regular banking system”, servicing assets worth $80 trillion globally.

Components of the shadow banking system broadly include mobile payment systems, pawnshops, securitization vehicles, asset-backed commercial paper [ABCP] conduits, private equity funds, hedge funds, money market funds, markets for repurchase agreements, investment banks, and mortgage companies.

How they work? 

Shadow banks issue short-term securities and use the proceeds to buy longer-term assets. For instance, an ABCP conduit would issue commercial papers, which is bought by a money market fund, to raise funds, to purchase securitized products created by an investment bank.

What are their merits? 

* Ability to provide credit more cost-efficiently than traditional banks

* Provide funding to traditional banks

* Ensure credit growth and liquidity in the economy

* Alternative source of funding for risky borrowers

* Alternative to bank deposits for large investors

* Risk diversification

What is the risk? 

* Liabilities are liquid and assets are relatively illiquid

* Highly leveraged as their source of funding is not deposits but collateralized borrowing

* Involved in “chain of transactions”, which could lead to spillover of risk to the regulated banking sector, thus, leading to systemic risk

* Do not have safety nets, such as, Central Bank borrowing and Deposit Insurance, and no capital cushion, thus, raising concerns of run on the banks.

Conclusion: 

Shadow banks have been held responsible for the global financial crisis and the Chinese Slowdown. The Dodd Frank Act, passed by the U.S. Congress, has introduced many regulations such as moving OTC derivatives to exchanges, and registration requirements for some hedge funds. There is a need to propose regulations such that spillover effect between the banking sectors is mitigated, susceptibility of money market funds to runs is reduced, incentives associated with securitization are aligned, pro-cyclicality associated with securities financing transactions is dampened.