Saturday, April 22, 2000

Asia’s Meltdown

The article I selected this week I found in the archives at Fortune Magazine’s web site while doing some research earlier in this course. Entitled “Asia’s Meltdown” by Jim Rohwer, the article is a little more than 2 years old. However, I felt it presented a great backdrop for the week’s text as it touches on worker migration flow, IMF rescue programs, money supply shifts, and interest and currency risks (oh my!).


Rohwer links the Asian Meltdown to the trilogy of “debt inflation, excessive private-sector leverage, and weak financial systems.” The three have combined to make for a particularly messy situation which Singapore Prime Minister Goh Chok Tong calls “Asia’s worst crisis since the Second World War.” Regardless of the analogy though, it seems clear that the Asian financial crisis may domino through the rest of the world if solutions aren’t found and found quickly in spite of the fact that there really is no “quick fix.”

The IMF’s efforts to date, have been largely ineffective mostly, because of Asia’s “structural rigidities such as monopolies and the absence of workable bankruptcy laws.”

Additionally, compounding the currency collapse many in the region have experienced, is the fact that any bank workout will be “hard to manage because three kinds of risks have become entangled and reinforce one another.” These three risks include interest rate risks, currency risk, and credit risk. The interest rate risk comes from the huge amount of short term borrowing which was invested for long returns. The currency risk can best be understood via the plummeting valuation of various regional currencies which has, at the extreme end, culminated in corporate sectors in Indonesia for instance, actually having negative equity.

All of this is further complicated by the “dollarization” of the world economy which is forcing the Asian companies to “meet the standards of corporate and financial performance set in the U.S. This dollarization process was previously part of the region’s ability to lend stability to their own currencies. On the downside however, many of Asia’s banks and companies had the incentives to borrow heavily in dollars. The problem with this was that as the currencies of the region collapsed, the dollar-denominated debts ballooned “as much as fivefold” and the debtors found themselves unable to continue repayment. Coupled with the “strong aversion throughout Asia … to acknowledging losses and cleaning them up” such heavy debt related issues are far from being readily resolved.


If there is any positive theme in this crisis, beyond the long, long term benefit of the lasting impact of dollarization as to forcing the efficiency and productivity improvements of having to match the U.S. standards, it might be found in how the crisis coerces regional leaders to step forward.

China, “often seen as Asia’s last bulwark” may be the region’s “best hope.” Given the Chinese yuan’s “closed capital account” the currency’s stability versus the rest of the region may give it the power necessary to forge forward in this time of regional trouble. While it’s true that “China’s leaders are engaged in a tricky process of trying to reform their debt-laden, state-owned enterprises and banks… if China survives the crisis with its currency intact, its regional influence would be mightily enhanced.” In Rohwer’s opinion, if China remains stable, the Asian crisis is far less likely to become a global one.


Though it is difficult to draw a direct relationship to my work at Sony versus the Asian Meltdown, I particularly enjoyed the manner in which this article pulled together so many of the lesson from the text. With that said, the fact that Japan in general could truly spark part of the solution for the region is something that many within Sony Japan’s management recognize.

If in fact Japan can “loosen fiscal and monetary policy” adequately so as to enable their own economy to continue growing, then Asia in general could begin to grow again. This is mostly because “Japan is the economy that Asia depends on most for trade and investment flows.” Sony management does recognize this and the Chairman, Norio Ohga has been fairly vocal in calling for reform.

Regardless of the outcome, the situation in Asia should very clearly show that we are all members of the same planet. Further, today’s "wired" world is eliminating many of the previously segmented economic sectors in such a manner as to give each region a direct and definitive interest in the other.


Rohwer, J. Asia’s Meltdown. Fortune, 02/16/98.

Pugel, T. A., & Lindert, P. H. (2000). International Economics. New York: Irwin McGraw-Hill.

Monday, April 17, 2000

Why the Global Storm Will Zap the U.S. Economy

The article I selected this week came out of the archives at Fortune Magazine’s web site. Entitled “Why the Global Storm Will Zap the U.S. Economy” by Jim Rohwer, the article is about 1 ½ years old. However, it speaks to a coming economic crash which seemed a particularly appropriate topic after Friday’s huge sell-off in the U.S. markets. What’s more, since the article touches on dollarization, commodity pricing, the IMF, the Euro, capital flows, and deflation, it seems to be a grand mix of topics given this week’s text assignment!


The bottom line for this article is the author’s belief that the “global deflationary wave let loose by the Asian financial crisis” of 1997/1998 will “weaken Japan even further, demolish Russia, shake Latin America, and threaten Europe and the United States.” With that said, while many might jump to the conclusion that this is a ‘gloom and doom’ story, Rohwer goes on to prophecy that it is instead a positive long term situation if patience can but win out.

At the root of the pending negative boom that is only now being lowered around the globe is the “imposition of ruthless American standards” of “technological and corporate efficiency that is forcing almost everybody … to conform or die.” This imposition, according to Rohwer is a deflationary force in the early stages but it will by definition, “after the coming crash” lead to a “great world [positive] boom as the standards pioneered by the U.S. become those by which all companies and economies are judged.”

Rohwer’s reason for why something that is currently a U.S. benefit will become a U.S. problem can be summarized in two broad points.

· The first is his view that “nobody has given a very good explanation for financial contagion--why the collapse of one country's markets should send the markets of other, mostly unrelated, economies down as well—but there is no doubt the process exists. The world has already seen an awful lot of this contagion, and there is no reason why it should suddenly stop at the threshold of the rich West.” Thus, the U.S. markets will suffer what the Asian nations have been dealing with already though on a delayed time reaction of up to two years.

· Secondly, Rohwer points out (what the markets proclaimed on Friday the 14th) that such contagion driven collapse will “find a nice, ripe host in the U.S. economy and its overvalued stock markets. One consequence of our seemingly unending boom in the economy and the stock market is that companies have made massive capital investments based on little more than the expectation of an unending boom in the economy and the stock market.”

What’s more, Rohwer points out that “American households, never known for their thrift, are now saving virtually nothing: They're counting on their mutual funds, which these days contain more of America's financial assets than the whole banking system. The effect of a Wall Street slump on household wealth and consumption would be enormous.” Such a slump, while nasty enough a shock to the system in its own right, could be (almost certainly) exaggerated by governmental action. (My greatest personal fear by the way!)

The way out of this mess, is the process Rohwer defines as dollarization whereby the rest of the world accepts and then implements increasing “technological and corporate efficiency” (as the U.S. has been doing). This process will be kicked off by increasingly freer flowing capital and a “bipolar currency world” where the “American pole will have a lot more magnetic attraction than the European” one.


On a personal level, such a scenario will obviously impact my immediate line of work as Sony will be forced to contend with the impact of any such world-wide deflationary situation. At the same time, this might not be for the worst as I’m in a field that should be contributing heavily to the anticipated “transmission of American standards of efficiency to the rest of the world.” Of course, the new economy part of that contribution will see its valuation and hence flexibility whacked if the author is correct, but even that might create opportunity for a company such as Sony if it possesses the boldness to move forward and seize the moment. Additionally, a collapse in wealth-effect spending could slow demand for Sony products which are fundamentally not required elements of living in spite of our marketing preferences!

However, on a truly personal level, changes in markets and the type of deflationary pressures I’m apt to deal with as an individual should be pressures I can ride out. With no extraordinary debt and adequate (I hope) time until retirement, I would expect to muddle through Rohwer’s storm to land safely on the other side. I may think twice about investment strategies, perhaps favoring Europe a bit more as Rohwer figures the “Euro project, backed by great reserves of wealth, may allow it to preserve a regime of social protection and relative economic inefficiency that nobody else will be able to afford.” But of course, since expectations and realities rarely have a habit of matching, I really don’t take much solace in my own conclusion. In actuality, I must be content in knowing that only time will tell of the impact of Rohwer’s prediction.


Given the volatility in the markets, the seemingly exorbitant valuations that the “new economy” ventures are seeing, and the debt levels currently being carried, I’m left wondering if Rohwer’s article is an accurate prediction of our current economic game in the 7th inning. If so, I’m all for taking the stretch and then anxiously looking forward to the glorious ending he predicts. A time when “the world's economic efficiency and wealth-producing capacity are radically upgraded” and a time when “the world is going to be a lot better off for it.”


Rohwer, J. Why the global storm will zap the U.S. economy. Fortune, 09/28/98.

Pugel, T. A., & Lindert, P. H. (2000). International Economics. New York: Irwin McGraw-Hill.

Sunday, April 09, 2000

US Patent Office - A Favorite Past Time

In searching for articles to review this week, I visited one of my favorite pure browsing sites. Though not a site you might first consider for an International Economics course, I wandered over to to see what I could find. This is the web site for the United States Patent & Trademark Office. The search feature of the site is pretty powerful allowing you to search by inventor’s name, patent number, or keyword(s). I’ve used the site for work and (almost!) pleasure but to date I’ve never used it as a source of an article review. Nonetheless, the complete patent filings are an interesting place to fish for ideas so I thought I’d try it for this week’s article review.

At the Boolean search box for the patent database, I entered “currency” and ‘trading’ and of the 53 patents returned, one of them was titled “Foreign Exchange Transaction System.” Invented by S. Rosen, awarded on November 2, 1999 and assigned to Citibank, the 26 page document sets out the basis for a real-time multilateral foreign exchange settlement system designed to eliminate foreign exchange settlement risk.


Foreign exchange settlement risk or Herstatt risk as it is sometimes referred to, describes the “risk of failure by any of the participants” in a foreign exchange trading transaction during the time lag between the trade commitment and the settlement date. The problem behind this risk was “demonstrated in 1974 when the Herstatt Bank in Germany was declared insolvent at the end of the banking day” leaving any pending trades in the lurch.

Because “foreign exchange trading is by convention settled two business days following the trading day” if the “counterparty to the Herstatt Bank had paid his marks and had not received his dollars” prior to the insolvency announcement, then said party’s German marks could be forever lost. Given the settlement timing gap, further exacerbated by the fact that Germany is seven-ten hours ahead of the US banks, there is a definite opportunity for risk to come into play and this “has the central banks of the major economies concerned.”

What the patent purports to enable is the development of a real-time exchange of currencies via a form of electronic money which can be denominated in multiple monetary units via a secure electronic network. Such an approach could eliminate the risk as opposed to merely reducing the risk as suggested by various industry studies touting “solutions incorporating extended banking hours, coordinating central bank accounting systems, and setting up multi-currency clearing banks.” Such a technology driven solution, if secure, could work as it solves the problem by attacking at the root cause and eliminating the time lag of the current systems.


The text walks through the basics of foreign exchange trading describing the existing systems, including some of the inherent risk points. Additionally, the NY Times article I posted earlier today exposed a related risk factor due to the lack of real time information in trading systems today. When combined with the text’s explanation of triangular arbitrage, I found myself drawn to this patent as means to improve upon the trading process in its entirety via a real-time system. As is usually the case, information is the key to success. This is especially so in the trading arena where timely availability of that information can produce fortunes or loss.

This patent application offers an interesting means of outlining the need for change in the manner in which foreign currency exchanges occur. While obviously beneficial to Citibank given the protection of the patent process, the benefit to the market and its participants in providing more timely and thus more perfect information could raise the efficiency of the market at large.

Though it may be highly unusual to attempt to tie together an economics text, a NY Times article, and a US Patent, I enjoyed the challenge and found it to be quite interesting!


US Patent & Trademark Office. 2 November, 1999. Rosen, S. “Foreign exchange transaction system.”

Hulbert, M. Monitoring Trade for the Good of a Fund [Online].

Pugel, T. A., & Lindert, P. H. (2000). International Economics. New York: Irwin McGraw-Hill.

Sunday, April 02, 2000

Is the Dutch Advantage Unsettling Europe?

After pondering this week’s article choice for a couple of days, not sure how I could find an appropriate article to offer a discussion on the economic integration of the European Union (EU), I decided against worrying (in other words, I decided to procrastinate!) and I sat down with the Sunday NY Times (one of my favorite Sunday activities). Luckily for me, I came across an article entitled “Is the Dutch Advantage Unsettling Europe?” by Andrew Ross Sorkin. You can find it online at though you’ll have to complete a one-time registration process to gain access to it.

The article begins by suggesting that the Netherlands is the Delaware of Europe and as such is “the place” for companies and wealthy individuals to set up shop. Gucci, Swatch, and the Rolling Stones are all Dutch entities. The article also immediately suggests that the primary reasons for setting up shop in the Netherlands may finally be forced into change as the EU’s “instinct to level every playing field” comes into being.

Currently, almost 60% of all foreign headquarters in Europe are in the Netherlands with “more than 6,800 foreign companies setting up shop” there. This is one of the reasons why the Netherlands receives more “American investment than any country except Canada and Britain”.

At the root of such popularity with foreigners is the country’s tax and legal flexibility. Especially the tax system which allows expatriate employees of the foreign corporations located there to only report 65% of their income for tax purposes. Additionally, the tax law “exempts dividends and capital gains from foreign subsidiaries making the country an ideal home for holding companies” and “considerable freedom exists in adopting a suitable system, to calculate taxable profit.” Three attractions sure to appeal to any business person!

Though the Dutch take these tactics in stride as simply part of their “trader” heritage, others in the EU have stressed the “traitor” viewpoint of such actions in creating an unfair advantage versus others in the EU.


I believe it will be difficult for the EU to ever truly strip the Dutch of their “pro-business” mentality. Tradition is a powerful thing to change and this is simply one more of the many traditions the EU is working hard to change and unify.

As a business person considering how best to serve customers throughout Europe and the Middle East, I can relate first hand to the attractiveness of the Netherlands. While working in the satellite business out of the Bay area, we entertained proposals from many parties as to how best to expand beyond San Jose and open our first International office. We wanted a better way to access and feel the pulse of our European and Middle Eastern markets and customers. (We subsequently decided that the Middle East was a completely separate issue and developed arrangements in Dubai, UAE and Cairo, Egypt).

As it turned out, we decided that our European customers could be served from a single base out of the Netherlands. From there we were able to quite readily approach the UK and Germany (two of the biggest satellite markets in Europe) as well as other European markets. As an aside, we also found the Netherlands conducive to doing business in South Africa which, at the time, was just beginning to open up as a satellite reception marketplace.

For our operation, the Netherlands turned out to be ideal for many reasons including a strong can-do attitude, superb multi-lingual (out of necessity) skills and flexible tax and business arrangements as pointed out in the article.


Having been responsible for the office outside of Amsterdam and having been to the Netherlands on numerous occasions, I can personally attest to the can-do, pro-business approach the Dutch people (in general) bring to their operations. At the same time, I’ve also seen first hand what I recognized as the relatively less than pro-business atmosphere and approach (in general) of folks in France, Spain, and the United Kingdom (in that order). With this comment, I don’t me any disrespect. It’s just that I definitely recognized a difference in how business was prioritized in the day to day world as I traveled from country to country.

The goals the EU has set for itself are challenging and far reaching. However, as the text and lectures postulate, leveling the playing field as to tariffs, tax laws, and other trade barriers will go a long way in creating “one” market. In spite of this “paper” leveling though, the natural (perhaps cultural) advantage of the EU’s individual members such as the Dutch will continue to challenge the region’s true unification and therefore economic integration progress.


Sorkin, A. Is the Dutch advantage unsettling Europe? [Online].

Pugel, T. A., & Lindert, P. H. (2000). International Economics. New York: Irwin McGraw-Hill.