Why U. S. Federal Reserve increase interest rates? How does the Fed efficiently use financial information? Which effect does it make in the City of London?
After the recently increase by the Federal Reserve –U.S.’ central bank– of the interest rates, there are a number of questions up in the air. Carrying out a monetary base strategy, it tries to influence the real side of the economy by exercising a sophisticated mechanism on the financial side of the economy in order to impact on the demand for non-interest bearing money –as traditionally Keynesians support.
Basically speaking, there is a positive relation between money and the demand for cash. If income goes up so the demand for money goes up. If interest rates of bonds go up the demand for money goes down. If the transactions cost goes up, then also the demand for cash goes up. Bearing in mind the Baumol-Tobin model of the transactions demand for money (Baumol, 1952; Tobin, 1956), it can be stated that the trade-off between the liquidity provided by holding money or the ability to carry out transactions –which only applies to monetary base and possibly M1– and the interest forgone by holding one’s assets in the form of non-interest bearing money –cash– has three key variables on demand for money. These three factors are the nominal interest rate, the level of real income –the model find the optimum amount of money demand given a certain level of income– and the fixed transaction costs of transferring one’s wealth between liquid money and interest-bearing assets. In order to set the working ground for policymakers it is necessary to add up to this formulation the target every central bank wants to achieve, which is to keep inflation around the 2% as well as keeping the economy operating at its full level of employment –recalling that the latter rate differs among countries. In this context the U.S.’ central bank has taken out an ace up its sleeve by raising its interest rates to between 0.25 and 0.5 per cent.
The great question is whether the Fed will achieve its target. If it is looked at the economic theory, it can be held a blooming prospect upon the aforementioned strategy. If reality doesn’t follow the economic theory it could just due to an untrusting situation within the economy by the people. If people do not put their money inside banks yet the interest rates are higher, it indicates they don’t trust in the economy right now which wouldn’t be consistent with the economic theory. Other factor which influences the credibility of the central bank relates to its track records –the way that central bank has met what it was announced that was going to be achieved. What mainly contributes to it is the degree of dependence which central banks takes with. The more independent the central bank is the more likely is to achieve its objectives.
Another powerful tool for monetary policy target achieving is the information role. As this manoeuvre had been anticipated, it provides a great case study of the ability of financial markets to efficiently process information. The monopolistic money supplier central bank uses the aforementioned information tool to get people aware of its purposes and make them react in the way it wants them to react.
Regarding to the role that the information plays on this market situation, it can be considered the relation between the U.S. Federal Reserve information and the behaviour of interest rates. It has been found by researchers at the University of California, Berkeley that exists an asymmetry between the Fed’s and the market’s information, which would explain why interest rates of maturities rise following contradictory monetary policy actions. As economic theory of interest rates suggests, a shift by the Fed to narrow monetary policy is likely to temporarily raise short-term rates but cut them in the long run and should cut rates on bonds of long maturities. Researchers conclude that the Fed has information about future inflation that market participants do not have. The information revealed by the Fed policy actions explains the behaviour of interest rates following monetary contraction (Romer and Romer, 2000). In the light of this outcome and as economic literature backs up, a 1% increase in broad stock indexes is caused by a hypothetical unanticipated 25-basis-point cut in the Federal funds rate target. Board members of Governors of the Federal Reserve System state that “the effects of unanticipated monetary policy actions on expected excess returns account for the largest part of the response of stocks prices can explain the stock market’s reaction to the Federal Reserve policy” (Bernanke and Kuttner, 2005).
This financial manoeuvre has direct effects on the Sterling pound as it doesn’t force the hand of the Bank of England but puts pressure on it to respond. Even independent experts warn that an increase looks inevitable, there is no rush to rise rates in the U.K. following the Bank of England Governor Mark Carney’s statements. Technically speaking, an increase in US interest rates would theoretically rise the value of the dollar against the Sterling pound and other currencies such as the Eurozone. Historically, British interest rates closely followed US interest rates due to the strong financial and transactional inter-connections between both. Hence, it can be asserted that the UK is bound to follow but not yet. It could be considered this wait as a strategy to better fight against this systematic risk factor which lies ahead of the whole economy.
Friend-shoring: India’s rising attractiveness for an emerging partnership
There are numerous forces currently affecting investment flows in the global climate for foreign investment. Investor concern has been caused by the many geopolitical issues, which had repercussions even as countries were recovering from the pandemic. Businesses are being forced to re-evaluate the global business environment and potential fault lines as a result of these disruptions. India has constantly improved the business environment (EoDB). It may now advance by utilising the advantages to strengthen its place in the global economy and fulfil the ambitions of its sizable, primarily young population. The country’s business and investment climate has significantly improved as a result of the fast and steady pace at which reforms have been implemented.
Apart from the fact that India is one of the largest economies in the world with the quickest rate of growth, the government’s emphasis on infrastructure and manufacturing, strong consumption patterns, digitization, and a burgeoning services sector all contribute to this optimism. The persistent efforts of the Indian government to lower regulatory hurdles are also fuelling MNCs’ favourable opinion of India. However, India’s expanding domestic consumer base and digital economy are the greater draws. After the US and China, the estimated actual growth in consumption is the third-highest. Given that all of these markets are sizable but relatively saturated and growing at a slower rate, India presents a particularly good opportunity for MNCs seeking growth opportunities in the ensuing ten years.This has acquired more traction in the US context as it has become clear that the nation cannot overcome all production issues on its own and that cooperation with friendly or ally nations is essential for all-around development. The term “friend-shoring,” a hybrid of the terms “onshoring” and “near shoring,” refers to forming business alliances with people who have similar principles and interests.
In a world driven extensively by globalisation, it is inevitable to not just make ally’s or create partnerships that are not only strategic and synergistic, but also facilitate a purpose driven iterative connection between two nations. A strategy used by the US to persuade companies to relocate their sourcing and manufacturing operations to friendly shores—often back to the same shores in the case of the US—is known as friend-shoring or ally-shoring. And the goal is to protect their supply networks against countries with less compatible policies, like China. But is it the best course of action? Global supply chains have changed production by enabling businesses to produce things wherever it is most affordable, thanks to decreased tariffs, lower transportation, and communication costs. This typically means that low-end production shifts to emerging markets and developing countries, while high-value-added inputs (such as research and development, design, advertising, and finance) are provided from established economies.
A commitment to cooperate with nations that “have a strong adherence to a set of norms and values about how to function in the global economy and about how to govern the global economic system” was described as “friend-shoring” in Secretary Yellen’s statements of April 13, 2022. But is it the best course of action? Any type of protectionism will worsen the already shaky global supply chain after the years-long Covid-19 shutdown has had an impact on the world economy. Despite its political unrest, China has been devoting its resources to manufacturing since the 1990s, and many businesses have already established manufacturing operations there since their suppliers are all nearby.
Even though Vietnam, India, and Thailand are also known for their low-cost manufacturing, moving the manufacturing sites could be expensive and risky for businesses because they would need to reorganise their entire supply chain for all materials required. In addition, other Asian countries might not have the full infrastructure needed to support manufacturing in some sectors. The world of today is at its best because of international cooperation. Each country’s disadvantage is made up for by having it use its greatest asset to boost global economic growth. Although there are many differences and even disagreements between nations and we are still far from full globalisation, offshoring does not seem like a good answer for a better future for the global supply.
USA is believed to pursue the “friend-shoring” strategy of deepening economic integration with dependable trading partners like India to diversify away from nations that pose geopolitical and security risks to supply chains. This is in response to an “extremely challenging” global economic outlook and geopolitical instability. She claimed that some economies’ debt loads were becoming unmanageable due to the Russia-Ukraine war-related spike in food and energy costs, and that steps to reduce these debt loads would need to be explored. Countries that already have well-established production and business service networks are those that are seen as friendly partners in the US context. India is attempting to draw MNCs that are moving their subsidiary supply chain networks and activities in this wave of supply chain restructuring and diversification of their specialised ecosystems.
Pakistan’s elite and the current economic crisis
Former Pakistan Finance Minister Miftah Ismail in a media interview made some very interesting points. While Ismail lashed out at his successor and current Finance Minister Ishaq Dar saying that the latter’s Anti International Monetary Fund (IMF) approach was one of the key reasons behind the current economic crisis in Pakistan. He also underscored some other points.
First, he said that if countries like Bangladesh and India have left Pakistan behind, there are some serious deficiencies in Pakistan’s governance model.
Second, Ismail stated that different forms of government – democracy, parliamentary democracy, dictatorship – have been tried out, but the country is invariably ruled by a small elite, and this is amongst the key reasons for the numerous challenges the country is facing today.
In recent years, has been increasing criticism of Pakistan’s foreign policy and its excessive economic dependence upon other countries for its economic survival. While earlier strategic commentators and analysts questioned the skewed nature of Pakistan’s ties with the US, in recent years several strategic commentators have begun to question the excessive dependence upon Islamabad and the terms and conditions of China Pakistan Economic Corridor (CPEC), and the lack of transparency of the project.
If one were to look at the current economic crisis which has engulfed Pakistan, there have been a series of opinion pieces critical of domestic policies, the country’s dependence upon external sources for aid not just the US, but also Gulf Countries and China and how the IMF rescue program would impact certain sections of the population more than others.
Maleeha Lodhi, a former Pakistani diplomat, and a prominent writer and commentator, in a hard hitting article titled Elite Politicsfor Dawn (December 5, 2022)argues:
‘The availability of external resources as a result of Pakistan’s foreign policy alignments during the Cold War and beyond created a habit of dependence on ‘outside help’. This habit urged successive governments — representing rural and urban elites — to avoid economic reform, mobilise adequate revenue or tax its network of influential supporters’.
Touqir Hussain in an article An underwhelming foreign policy written for The News (November 23, 2022) highlights how Pakistan’s dependency upon China could harm the bilateral relationship. Says Hussain:
‘Because of the dependency syndrome, even the China connection has become ever more important for Pakistan, and not for all the right reasons. It is fomenting a popular view that with China at its back Pakistan does not need to care about other relationships, inciting anti-Americanism which has become in the public mind a badge of ‘independent’ foreign policy’.
S Akbar Zaidi in an article IMF as Saviour for the Dawn (January 26, 2023) makes an interesting point about how the unequal impact of the IMF program and how the elite would not just be able to deal with it but also benefit in the long run. Says Zaidi:
‘A fistful of dollars coming in, prices being upwardly adjusted, an exchange rate which is supposedly ‘market-driven’, will offer false hope to our elite while it grumbles about the tough measures of the IMF’.
There has also been a suggestion to rethink Pakistan’s approach towards India and focus more on geo-economics. Shahzad Chaudhry, a prominent strategic commentator, in an opinion piece published in Express Tribune praised India’s foreign policy for managing to balance ties between the US and Russia, in the aftermath of the Ukraine crisis. While praising India for having been able to strike a balance he dubbed this as diplomatic coup. Chaudhry also said that Pakistan should rethink its foreign policy vis-à-vis India and focus on ‘geo-economics’.
Pakistan PM, Shehbaz Sharif in an interview to Al Arabiya TV (a Dubai based channel) had himself stated that Pakistan could not afford another war with India and had also alluded to his willingness to resume talks (The Pakistan PMO however said that Pakistan would only resume talks with India if the latter reversed the decision to revoke Article 370 in Jammu and Kashmir).
In conclusion, while Pakistan clearly has its task cut out if it is able to realize the pitfalls of excessive dependence upon external countries will it be able to put its economy firmly back on track. It is also important for Pakistan to strengthen economic ties with neighbours in South Asia rather than looking at the outside world. For this it will require Pakistani leaders to think out of the box.
Guangdong special economic zones at China
Guangdong Province in southern China is distinguished by the economic development. The sign been approached by “Made In Guangdong” is becoming so famous globally, besides the Guangdong industries and its unique culture.
Guangdong represents one of the most important provinces of China for a number of political, economic, social and natural reasons. Indications of the success of the openness experiment pursued by China since the late seventies of the last century are evident in it.
Guangdong special economic zones have made great achievements. As the province with the largest economic output in China, south China’s Guangdong Province has achieved tremendous economic development in the past 40 years, thanks to the establishment of special economic zones.
According to my information, the Guangdong region has established the “Zhuhai Doumen” intelligent manufacturing economic development zone recently, after the Guangdong Provincial Government officially approved the establishment of the “Zhuhai Doumen intelligent manufacturing economic development zone”, which will implement the existing provincial-level economic development zone policy. It is the third regional economic development zone in “Zhuhai” after “Foshan Industrial Park and Liangang Industrial Zone”.
Guangdong Province is an economic powerhouse in southern China, and the province will promote high-quality development this year by fostering new engines of growth and strengthening cooperation and communication in the regions of (Guangdong-Hong Kong-Macao Greater Bay) to deepen reform and opening up.
Guangdong Province, a major part of China’s foreign trade and industrial hub, accounts for about one-tenth of China’s GDP and is the largest of all Chinese provinces.
Guangdong Province pays close attention to the progress of China’s modernization and the overall picture of reform and opening-up and major national strategic planning. It firmly attaches importance to the reform and opening-up policy by strengthening cooperation between the province and the “Hong Kong and Macao” regions, aligning the development of Guangdong with the “Northern Metropolis” plan of Hong Kong and the economic diversification strategy of Macao, implementing the “Greater Bay Area Connection” project in a more in-depth way, and working with “Hong Kong and Macao” together to build a world-class bay area, injecting vigor and strong impetus into its modernization efforts”.
It Is remarkable that most of the cities of Guangdong Province are crowded with visitors from all over the world, especially Arabs and Africans, who come to them for the purpose of trade and search for investment. The province is considered one of the regions characterized by the diversity of its industries, quality and attractive prices, as well as commercial activities in various fields.
It Is also distinguished by the beauty and sophistication of its buildings, which embody the aesthetics of modern Chinese architecture, as well as the spread of green spaces and vibrant squares throughout the day. It is also distinguished in terms of weather, with its atmosphere that resembles the tropical atmosphere with heavy rain, and the various cities of Guangdong Province are also characterized by easy access to it from different parts of the world throughout the day, as well as ease of movement between its various cities, thanks to the presence of an infrastructure that makes most of the cities of the province at the forefront of attractive cities for investment globally.
Due to the existence of the commercial ports, Guangdong has a long experience in terms of commercial exchanges regionally and globally.
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