global finance issues

Finance in Global Business

  • Joshi and Klein (2018) state that finance is both a sustainer and enabler of globalization.

Currency: Historical Context

  • Currency as a trade object primarily utilized for barter.

  • Historical currencies comprised of rare, valued objects.

    • Examples:

      • Salt: Used widely; Empire of Ghana traded salt for gold.

      • Trade beads: Seen in Alaska (1440-1480), used to signify wealth, social status, and as currency for services.

      • Shells and obsidian also served as forms of currency.

History of Money - China

  • Shang Dynasty (11th century BCE): Emergence of copper coins; strings of coins for larger transactions.

  • Tang Dynasty (618-904 CE): Introduction of paper promissory notes by merchants for safe large transactions; the concept of 'flying cash' was initiated around 800 CE.

  • By 1154: The Bureau of Paper Currency was established to oversee banknote issuance in China.

Money Evolution in China

  • Song Dynasty (11th century CE):

    • Licensed deposit shops.

    • Paper currency known as 'jiaozi' was introduced; it had expiry terms and was backed by commodities.

  • Yuan Dynasty:

    • The adoption of paper currency expanded; its introduction to Persia can be traced back to Marco Polo.

  • Ming Dynasty:

    • Ceased to issue unbacked paper money and shifted towards silver ingots from Spanish traders. The first recorded printed paper money was in Sweden (1601).

Currency and Barter System

  • Metal currencies: Gold, copper, silver from Latin America.

  • Massachusetts Bay Colony recognized wampum shells as official currency, establishing exchange rates based on bead color.

  • Early Canadian traders utilized trade beads, wampum, and barter methods.

Canadian Playing Cards as Currency

  • Playing cards inscribed with values served as Canada’s first paper currency from 1685 to 1714, providing a unique historical example of money.

Determining Money Value

  • Gold Standard: Fixed rates to gold (1870-1914).

  • Bretton Woods System: Pegged currencies to the US dollar post-WWII, resulting in high USD productivity influence.

  • Post-Bretton Woods System (1973-Present): Market-driven pricing of currencies; however, the USD remains dominant (58.22% of global reserves).

Role of Finance in Global Business

  • The rise of global financial markets emphasizes the importance of finance.

  • Financing is crucial for international trade and foreign direct investment (FDI).

  • Finance as a geopolitical tool can exert influence and power, reflecting the interconnected nature of global finance.

Financial Crises Impacting Global Finance

  • 2007-2008 Financial Crisis: Illustrates interconnected nature; failures in powerful hedge funds led to widespread damage.

  • Recent examples include:

    • Archegos Capital’s impact on banks (2021).

    • Credit Suisse crisis requiring a government-brokered acquisition by UBS (2023).

Fiscal Jolts from 2008 to Present

  • Post-2008 recovery showed structural issues still existed in the global economy.

  • The pandemic created massive challenges, leading to innovative fiscal responses:

    • US and Canadian payments to maintain workforce stability.

    • Introduction of universal basic income models during COVID-19.

  • Current concerns involve rising inflation, debt issues, and geopolitical tensions affecting trade and economics.

The Fintech Revolution

  • Blending finance with technology, covering aspects from cryptocurrencies to mobile banking.

  • Cryptocurrencies:

    • Bitcoin introduced in 2009, functioning without centralized control.

    • Significant concerns regarding security and institutional investor hesitancy due to high-profile breaches.

Bitcoin as a Protagonist

  • Forbes cites Bitcoin as potential global currency due to fixed supply and inflation resistance characteristics.

  • Recognized as legal tender in only two countries: El Salvador and the Central African Republic.

Critiques of Cryptocurrency

  • Described as environments rife with scams and risks by various critics and authors.

  • High-profile failures and losses for institutional investors indicate potential systemic issues.

Economic Factors and Interest Rates

  • Interest rate variations significantly impact currency exchange rates.

  • Higher interest rates can attract foreign capital but often lead to depreciation during inflationary times.

Global Financing: Geopolitical Tool

  • Finance effectiveness heavily influenced by geopolitics; countries like China and India are emerging as major financing players.

Debt Issues Affecting Stability

  • Rising global debt exacerbated by the pandemic; examples like doubling the government debt in Sudan highlight the need for debt restructuring and international cooperation.

The IMF's Role and Criticism

  • The IMF established in 1944 to promote international financial stability but criticized for its influence and policies that often exacerbate debt crises.

  • Introduction of alternatives like BRICS’ New Development Bank to counter Western bias.

Case Studies: Sri Lanka and Argentina

  • Sri Lanka's crisis::

    • Mismanagement and pandemic impacts led to defaulting on debts and severe inflation.

  • Argentina's history:

    • Prolonged high inflation rates leading to considerable deals with the IMF, high poverty, and necessitating austerity measures.

World Bank Overview

  • Established in 1944; aims to support developmental projects and poverty reduction through loans and grants.

Emerging Markets and Global Financial Players

  • Historical trends show a shift of financial power towards developing nations, particularly in the context of Chinese investments.

China’s Lend and Borrow Dynamics

  • China's unique position as a major lender and borrower has significantly altered global economic dynamics, particularly for low-and-middle-income countries.

Risks in Cross-border Financial Operations

  • Geopolitical tensions and uncertainties are poised to create significant financial risk.

Tax Havens and Evasion Challenges

  • The 'cat and mouse' dynamic of tax optimization through offshore accounts leads to controversies over the effectiveness of global tax regulations.

Exchange Rates: Basic Concepts

  • Definition of exchange rates and their influences, including appreciation versus depreciation.

Exchange Rate Influences

  • Factors influencing exchange rate movements: relative price, interest rates, productivity, and geopolitical events.

Floating vs. Fixed Exchange Rate Policies

  • The debate on flexible versus strategically managed exchange rates reflects broader economic stability considerations.

Canada's Economic Landscape

  • Canadian dollar influenced heavily by commodity prices, economic policies, and relations with the US.

Effects of a Depreciated Canadian Dollar

  • Positive impact on tourism and exports, but potential adverse effects on household purchasing power.

Historical Overview of the Canadian Dollar

  • Evolution of the Canadian dollar through various economic standards provides context for current currency strategies.

Canadian Agricultural Sector Insights

  • The significant impact of US dollar dynamics on Canadian agricultural businesses underscores the interconnectedness of regional economies.

Class Discussion Prompts

  • Engage with pressing global economic questions regarding finance’s role in globalization, the future of currency, and the impact of geopolitics within financial contexts.