[OPE] Weird scenes inside the gold mine

In June, UNCTAD reported that in Q12009 global FDI inflows dropped by 50%
and MNCs were set to cut back FDI expenditure by nearly two-thirds in 2009.
Global FDI inflows in 2009 could be 40-50% lower than in 2008, i.e. around
$1 trillion, a sort of setback for globalization theory.

Yet there is a lot of spare cash sloshing around the world economy, because
of the uncertainty of the economic outlook.

Suppose you live in country A and you invest a spare $5m in country B at
10%. What does the portfolio picture look like? The yield would be $500,000
and you would then own $5.5m, but in a foreign currency. But now let's say
meantime the exchange rate for money in the foreign country drops, for
example, by 5%. This affects not just the income from the capital, but the
total value of the capital. Effectively, by the exchange rate dropping by 5%
you have then lost $275,000. You are left with $5.2m which means that your
return on investment in real terms wasn't 10%, but 4.5%, and you realise
that with much less trouble you could have just left the capital in the bank
at home, or at any rate invested somewhere else. This adds another
dimension to Marx's theory of the falling rate of profit, surely.

How then to make money from a foreign investment? Essentially it depends a
lot on:

- the precise relationship between currency movements, interest rates,
profit rates, and inflation rates internationally
- relationship between the length of investment and perceptions of the
economic outlook in the recipient country and the investor country.
- timing of placements

In the press, you just read about "sentiments" and "risks" but the
real work is in figuring out the investment itself. That investment
knowledge is worth a lot of money, and that's why you don't read about it in
the press much. You have to move in there, take the profit, and move out of
there again, before you are disadvantaged by currency movements or
policy changes.

It's a sort of in-out operation, in-out, in-out and so on. The more volatile
the exchange rates, the more quickly you have to do it, human judgment being
assisted by computer models which calculate the probable impacts for
thousands of data strings to the last decimal place. So what does exchange
rate volatility actually accomplish, apart from speculation? A focus on
shortterm profit, which is not conducive to a longterm recovery.

The rhetorics about "risk" are rather deceptive in this sense, because in
an overall sense the game has nothing much to do with entrepreneurial
risk, but mainly with insuring the value of capital for possible losses,
and guaranteed returns. It's insurance terminology.

The "New Economy" was premised on the idea of a win-win capitalism
in which there are no losses (unless you are a total moron). But as we
now know, losses there are. Certainly fund managers take "calculated
risks" on behalf of the owners, such as deciding to invest or disinvest
on the basis of computer models of probable price trends. It is not
as easy as it sounds. But in an overall sense, capitalist investments are
profoundly conservative, the best proof of which is the personal
portfolios of the world's wealthiest people (those owning more than
a million dollars - see e.g. the CapGemini World Wealth Report -
about 60-70% or so is invested in real estate, cash deposits and fixed
income placements -
http://www.us.capgemini.com/DownloadLibrary/files/Capgemini_FS_APWWR08.pdf ).

What few people have done so far is to weigh the capital risks against human
risks. In a place like Bangladesh, for example, millions of people are under
threat of starvation. The risk they and more particularly their infants run
is almost literally a risk of being dead or alive. Mr Stiglitz and Mr
Sarkhozy want a "happiness index", but surely, for the sake of a more
balanced risk analysis, we ought to be concerned with human risks? I don't
want to sound like a Kennedy, but I think there are surely big conceptual
and moral problems in the political economy of the modern world? Shoot me if
you like, but if there is nothing even to eat, there will not be a better
world.

Jurriaan

http://www.youtube.com/watch?v=3qkWcfmd5ec

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Received on Thu Oct 1 13:59:05 2009