group 6 - asia’s policy dilemma_ pause of pre-emptive strike

8/3/2019 Group 6 - Asias policy dilemma_ pause of pre-emptive strike

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ASIAS POLICY DILEMMA: PAUSE OF PRE-EMPTIVE STRIKE

Prepared By: Group 6

Ashiqur Rahman Khan ZR-26

Abdullah Al Mahmud ZR-27

Sadman Safat ZR-36

Tanvir Alam ZR-37

Shafquat Ahmed ZR-38

Ashfaqul Haq Chowdhury ZR-44

Abir Hasan Niloy ZR-62

December 15, 2011


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The EU imports from Asia labor intensive goods &exports capital & technology intensive goods &services.

Starting in the 1950s, trade agreements with Asiafollowed the general pattern of EU trade policyliberalization.

Asia & Europe


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Asia & Europe

Value Share

Exports Exports Imports

Total 1394 100.0 100.0

Region

North America 367 26.3 17.2

Latin America 35 2.5 1.6

Western Europe 252 18.1 15.4

C./E. Europe/Baltic States/CIS 13 0.9 1.4

Africa 21 1.5 1.3Middle East 37 2.6 6.4

Asia 650 46.6 56.7

Product group

Agricultural products 99 7.1 10.6

Mining products 87 6.3 14.5

Manufactures 1177 84.5 72.5


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Poorer Consumers

Cheaper Products

Euro zone Crisis


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Quantitative Easing


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Quantitative Easing

Interest rate cut

People withdrawing

money/taking loan

Inflation

Currency valuedepreciates

Cheaper products


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Suppose 1 Euro= 100 BDT

Average labor salary is 200 BDT or 2 Euro

Currency Depreciates

1 Euro= 200 BDTAverage labor salary is 200 BDT or 1 Euro

How Products Get Cheaper


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Downside ofQE

IF Eurozone rebounds Asian economies will beoverheated

Downside ofQE


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Downside ofQEDownside ofQE

More capitalinflow

People gettingricher

Largeraggregatedomesticdemand

Shortage offunds/capacity

to meet thedemand


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Major policies proposed so far

EFSF

ESM Eurobond

Fiscal Integration

More control of ECB over national banks


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EFSF & ESM

Not enough commitment of funds to calm the

markets

Leveraged mechanisms compete with sovereign

bonds


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Fiscal Integration (Or Austerity Union?)

the priority should be

a march towards

greater fiscal

discipline, to be

enforced by strong

referees

- Merkozy


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Fiscal Integration (Or Austerity Union?)

The focus is on-

Implementing more austerity measures

Increasing taxes

Reducing social security benefits

Reducing sovereign budget deficits

Bringing down the debt to GDP ratio


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Bottom-line

VERY LITTLE FOCUS ONGROWTH


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Faults of the proposed solutions

Fiscal Integration (Austerity Union??) But as weve witnessed for more than a year, cutting

alone wont bolster investor confidence. They simply

dont believe that the financial adjustments thesecountries must make can be achieved in anyreasonable period of time. What these countries arebeing asked to do is reverse years in some cases,decades of fiscal policy in a matter of months.

(France hasnt recorded a budget surplus since 1974.)


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DEBTGDP


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DEBT

GDP

Higher

taxesLower AD

Lowermoneysupply

Higherinterest

rates

Fewer

investment

Little job

creation


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DEBTGDP


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DEBTGDP


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What Should Asia Do?


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ASIA

EUROZONE

BUSINESS FIRMS

$

$ Resources

Products

Business with Europe declining

Local businesses struggling

Lay offs

Hinder growth


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Cut the Interest Rate


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Side effects

Overheated economy

Inflation

Asset Bubble


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9.2

10.3 9.6

6.8

10.4

8.2

1.7

6.9

5.4

2009 2010 2011

GDP GrowthChina

India

ASEAN-5


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8.32%

7.68%

6.04%

4.19%

2.80%

Bangladesh India ASEAN 5 China Malaysia

Inflation


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5.0%

6.0%

3.7%

2.8%

1.0%

5.0%

6.0%

4.0%

2.8% 2.8%

Bangladesh India ASEAN 5 China Malaysia

Central Bank Rates

2009 2010


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High InflationHigh Inflation

+ Low Interest Rate+ Low Interest Rate

Negative Real Interest RateNegative Real Interest Rate

Asset BubblesAsset Bubbles


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Asset Bubble

Low interest rate and Bubble

Too much money chasing Two few Assets

Greater Fool Theory


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Low interest rate and Bubbles

Real interest Rates below zero

Cash and Short Term investment lose money

Impossible to find decent yields Investors forced to turn to assets that gives

return above inflation


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Too much money after Too few assets

Causes Both Good and Bad Assets to appreciateexcessively over their fundamental price


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Bubbles

The Dot Com Bubble

The 1970s Gold Boom

1997 Asian Crisis 2007-08 Real estate bubble


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1970s Gold Boom


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Greater Fool Theory

If I am a fool, there is a bigger fool. If there is a

bigger fool, there is an even bigger fool, If

there is no bigger fool , I AM THE BIGGEST

FOOL!!!


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Focused Quantitative Easing

Increase money supply without disturbing the

interest rate.

FocusedQ

uantitative easing to supportdeprived economic sectors which are

operating inside the PPF


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TAKEAWAYS

Major Asian economies face a policy dilemma:

Quantitative easing? OR,

Wait & See?

We believe the current proposals would take

years if not decades to come to effect


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TAKEAWAYS

Hence, to maintain business with Europe, it is

best for Asia to take pre-emptive actions such

as cutting interest rates now

However, it might have some negative side

effects, for instance inflation and propertybubble


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Thank You!

group 6 - asia’s policy dilemma_ pause of pre-emptive strike

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