#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.

Trump – Clinton face-off- Effect on Economies worldwide

By Isha Varma

While the result of the Trump-Clinton face-off is unknown as yet, the speculations regarding the same are at its peak.

From Clinton’s email controversy to Trump’s comment on nuclear weapons, there has been a lot to fathom about the US Presidential elections 2016.  One major feature of the Presidential election is the uncertainty and that is exactly what the financial markets don’t like. It creates an atmosphere of risk and fear of financial loss which is dangerous for businesses. Furthermore, the markets will have to adjust with the new ideology and personality of the new President.

According to a report by Merrill Lynch, on an average the first year of a new presidential term witnesses a rise in markets by 6% which is below the normal 7.5% average of all years since 1928. The markets seem to be quiet volatile at present. Political environment affects everyone’s investment behavior. There is conflict of interest between Democratic and Republican supporting investors. Some investors even hold on to the money or make limited investments so as to judge how the markets are reacting to the change and then invest accordingly. Some financial advisors and experienced investors are making strong statements which in turn might influence the investing decisions of the retail investors.

Donald Trump is expected to cut taxes by a large margin. Also, his strong remarks on countries like Mexico might affect the trade relations with these nations under his leadership. Hillary Clinton on the other hand has endorsed regulatory reforms which will prevent Wall Street from taking excessive risk. It has been experienced that the presence of Democrat Presidents has been good for stocks while Republicans are supposedly more business friendly. Also, a Republican President is likely to bring about more changes in policies and hence US financial markets could expect more fluctuations in case Donald Trump wins the elections.

With Trump leading in 168 states as against Clinton who is leading in 131 states, the markets around the globe have been tumbling. Japan’s Nikkei 225 Index dropped 2.4%, Hong Kong’s Hang Seng plunged 1.7%, South Korea’s Kospi Index fell 1.4%, Australia’s S&P ASX/200 lost 1.2%, Dow futures nosedived over 600 points, and the SENSEX crashes 1600 points. The US dollar sank against the Japanese Yen, a condition that will be unfavorable to Japanese exporters, and the Mexican peso plunged nearly 10% to record low versus USD.

However, the fact that stocks have gained under every President only except Nixon and Bush 43, should be a relief. Also it is known that investments in stock markets are usually good in the long run. Change in the economies in the coming months is inevitable. The consolation here is that the change might actually prove to be good.

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.

Feasibility Of Export Led Growth In Time Of Global Slow-Down

By- Apoorv Srivastav

The engine of the global economy has started to stagnate. One of the biggest arguments that favors this statement is that the export led growth is no more feasible. The export led growth pioneered by Germany and Japan in 50’s and 60’s was further adopted by the Four Asian Tigers: Hong Kong, Singapore, South Korea and Taiwan, before finally getting implemented by China in early 90’s. The export-led growth rose to eminence in the late 70s, replacing the import-substitution model and was a prominent global economic factor for the following four decades.

The fall of export led growth

Currently, US economy is debt saturated and still struggling to recover from the crash of 2008, and Europe is also constrained by fiscal austerity and Brexit. Export has lost its feasibility as buyers themselves are struggling. And the impact of which can be seen from Bank of Japan adopting negative interest rates & European Central Bank (ECB) implementing Quantitative Easing (QE) to increase the domestic consumption by reducing its lending rate 10 basis points to -0.4%.

Secondly, Emerging Market (EM) economies have become a larger share of the global economy, increasing from 39.1 percent in 1980 to 57 percent in 2014 and their collective export is not letting the industrialized economies recover, leading to the economic tension between EM and Industrialized nations.

For EM country, export led growth would have been a safe bet, but the recessionary condition of the US and Euro market is making hard to find buyers. This proves export led model is critically dependent on the global economy, and any global crisis will affect the economy directly.

The competition has increased with many EM countries following the same model. One of such methods is ‘Currency devaluation’ which countries like China and Japan are using to boost their exports and seeking trade advantage over other countries.

Though export led growth proved to be a sound strategy for Asian countries, but it was not the case everywhere. Mexico, whose GDP growth was 6.4% during 1950-80, reducing to 2.6% for 1980-2008 and finally 1.1% in 2013 because of export led growth model.

To conclude, we can say that the export led economy has lost its feasibility for EM and is posing a risk to the global economy. Countries need to recalibrate and shift from the export led growth to the demand led growth, with a greater role of domestic and regional demand.

Impact of Negative Interest Rate

By Payal Sachdeva

The concept of “Negative interest rate” was flourished after 2008 financial crisis when all other means to reinvigorate the economy had been exhausted. It is a monetary policy tool employed by central banks to combat deflation. This tool was first adopted by Sweden’s central bank in July 2009 when the overnight deposit rate was lowered to -0.25%. European Central bank did the same in 2014 followed by Bank of Japan recently which has resulted in $10 trillion worth of government debt carrying negative yield.

A common misconception with the concept is that the depositors think they need to pay interest for their deposits to the bank. However, this is not true. Usually, commercial banks are required to keep a certain amount of money as reserves at their central bank as a safeguard against bank runs and to accommodate for last minute loans. The central banks generally pay the interest rate on these deposits, however, in Japan and Eurozone, banks have to pay central banks for parking their reserves.

Since commercial banks are charged for parking their reserves with the central bank in negative interest rate regime, they prefer to park that money with other banks to manage liquidity and meet the reserve requirements at a lower rate with an intention to earn some interest. Since a lot of banks try to get rid of their excess reserves, the competition pushes the interbank rate down which enables banks to pass on the benefits to their customers in the form of lower mortgage, personal loan, education loan etc. This is the ultimate objective of lower interest rate – to encourage investment and consumption, thereby stimulating the economy. Also, it might encourage investors to seek avenues abroad for better returns, which eventually leads to the depreciation of the currency due to the currency outflow. This would in turn boost exports to revive the economy. Euro has depreciated against the dollar by 20% since ECB introduced negative deposit rate.

However, a major concern is that banks would be unwilling to increase the lending as the profit margin between lending and deposit rate squeezes when they absorb the cost of negative interest rate. Though central bankers say it’s too early to gauge the impact of interest rate, they predict that if more and more central banks use this tool, it could actually lead to a currency war of devaluations.

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.