Stock Market Crash Global Financial Crisis

Analysis of the Stock Market Crash and Global Financial Crisis

The stock market crash in the autumn of 1987 is labeled as one of the sharpest markets down in history. Stock markets around the world plummeted in a matter of hours. The Black Monday, as it is labeled, is market as one of the major contemporary global financial crisis after the great depression that hit the global market between 1929 and 1941 (Markham, 2002). In the US, the stock market crash was marked by the 22.6 percent drop in a single trading session of the Dow Jones Industrial Average (DJIA).

In the years leading up to the stock market crash on October 19, 1987, there was an extension of a continuation of a highly powerful bull market. At this period, running from 1982, the market had started to embrace globalization and the advancement in technology. In the years 1986 and 1987, the bull market was fueled by hostile takeovers, low-interest rates, leveraged buyouts and increased mergers (Bloch, 1989).

The business philosophy at the time encouraged exponential business growth by acquisition of others. At the time, companies used leveraged buyouts to raise massive amounts of capital to fund the procurement of the desired companies. The companies raised the capital by selling junk bonds to the public. The junk bonds refer to the bonds that pay high-interest rates by the virtue of their high risk of default. Initial public offering or IPO was another trend used to drive market excitement.

During that time of increased market activity, the US Securities, and Exchange Commission (SEC) found it extremely hard to prevent shady IPOs and the existing market trends from proliferating. 

In the events leading to the stock market crash, the stock markets witnessed a massive growth during the first half of 1987. The Dow Jones Industrial Average (DJIA) had by August that year gained a whopping 44 percent in just seven months. The ballooned increase in sales raised concerns of an asset bubble. The numerous news reports about a possible collapse of stock markets undermined investor confidence and further fueled the additional volatility in the markets.

At the time, the federal government announced that there were a larger-than-expected trade deficit and this lead to the plunge of the dollar in value. Earlier in the year, the SEC conducted investigations on illegal insider trading that spooked the investors (Bloch, 1989). High rates of inflation and overheating were experienced at the time due to the high level of credit and economic growth. The Federal Reserve tried to arrest the situation by quickly raising short-term interest rates to decrease inflation, and this dampened the investors’ enthusiasm in the market.

Markets began to show a prediction of the record loses that would be witnessed a week later. On October 14th, some markets started registering significant daily losses in trading.  At the onset of the stock market crash, many institutional trading firms began to utilize portfolio insurance to cushion them against a further plunge in stock (Markham, 2002). The portfolio insurance hedging strategy uses stock index futures to shield equity portfolios from broad stock market declines. In the midst of increased interest rates, many institutional money managers tried to hedge their portfolios to cushion the businesses from the perceived stock market decline.

The stock markets had started plunging in other regions even before the US markets opened for trading that Monday morning. On October 19, the stock market crashed. The crash was caused by the flooding of stock index futures with sell orders worth billions of dollars within a very short time. The influx of the sell orders in the market caused both the futures and the stock market to crash. Additionally, due to the increased volatility of the market, many common stock market investors tried to sell their shares simultaneously and which overwhelmed the stock market.

Stock Market Crash and Global Financial Crisis
Stock Market Crash and Global Financial Crisis

On the same day, the 500 billion dollars in market capitalization vanished from the Dow Jones Stock Index within minutes. The emotionally-charged behavior by the common stock investors to sell their shares led to the massive crash of the stock market. Stock markets in different countries plunged in a similar fashion. The knowledge of a looming stock market crash resulted in investors rushing to their brokers to initiate sales of their assets. Many investors lost billions of investment during the crash. The number of sell orders outnumbered willing buyers by a wider margin creating a cascade in stock markets. Following the 19th October 1987 crash, most futures and stock exchanges were shut down in different countries for a day.

Federal Reserve Stock Market Crash

The Federal Reserve in a move to reduce the extent of the crisis, short-term interest rates were lowered instantly to avert a recession and banking crisis. The markets recovered remarkably from the worst one-day stock market crash. In the aftermath of the stock market plunge, regulators and economists analyzed the events of the Black Monday and identified various causes of the crash.

One of the findings shows that in the preceding years, foreign investors had flooded the US markets, accounting for the meteoric appreciation in stock prices several years before the crisis. The popularization of the portfolio insurance, a new product from the US investment firms was found to be a cause of the meltdown in stock markets. The product accelerated the pace of the crash because its extensive use of options encouraged further rounds of selling after the initial losses.

Soon after the crisis, the economists and regulators identified some flaws that exacerbated the losses experienced in the stock market crash. These flaws were addressed in the following years. First, at the time when the crisis hit the market, stock, options, and futures markets used different timelines for clearing and settlement of trades. The differences in timelines for clearing and settlements of trades created a potential for negative trading account balances and forced liquidations.

At the time of the crisis, the securities exchange had no powers to intervene in the large-scale selling and rapid market declines. Soon after the Black Monday, the trade-clearing protocols were overhauled to bring homogeneity to all important market products. Other rules known as circuit breakers were introduced, enabling exchanges to stop trading temporally in the event of exceptionally large price meltdowns. Under current rules, for instance, the NYSE is mandated to halt trading when the S&P 500 stock exchange plunged by 7%, 13%, and 20% (Markham, 2002). The reasoning behind the formation of this rule is to offer investors a chance to make informed decisions in cases of high market volatility.

The Federal Reserve responded to the crisis by acting as the source of liquidity to support the financial and economic system. The Federal Reserve also encouraged banks to continue lending money to securities firms on their usual terms. The intervention of the Federal Reserve after the Black Monday restored investors’ confidence in the central bank’s ability to restore stability in the event of severe market volatility.

The intervention of the Federal Reserve made securities firms recover from the losses encountered in the Black Monday crisis. The DJIA gained back 57% or 288 points of the total losses incurred in the black Monday crisis in two trading sessions (Bloch, 1989). In a period of less than two years, the US stock markets exceeded their pre-cash highs.

Stock Market Crash – Explain the role played by derivative trading in the 2008 global financial crisis

The world economy faced one of the most severe recessions in 2008 since the great depression of the 1930s (Landuyt, Choudhry, Joannas, Pereira, & Pienaar, 2009). The meltdown began in 2007 when the high home prices in the US began to drop significantly and quickly spreading to the entire US financial sector. The crisis later spread into other financial markets overseas. The financial crisis hit the entire banking industry; two government-chartered companies to provide mortgages, two commercial banks, insurance companies, among others like companies that rely heavily on credit. During the crisis, the share prices dropped significantly throughout the world. The Dow Jones Industrial Average recorded a 33.8% loss of its value in 2008.

Derivatives are defined as financial contracts that obtain their value from an underlying asset. These financial contracts include; stocks, indices, commodities, exchange rates, currencies, or the rate of interest. The financial instruments help in making a profit by banking on the future value of the underlying asset.

Their derivation of value from the underlying asset makes them adopt the name, “Derivatives.” However, the value of the underlying asset changes from time to time. For instance, the exchange rate between two currencies may change, commodity prices may increase or decrease, indices may fluctuate, and stock’s value may rise or fall (Santoro & Strauss, 2012). These variations can work for or against the investor. The investor can make profits or losses according to these changes in the market. The correct guessing of the future price could lead to additional benefits or serve as a safety net from losses in the spot/cash market, where the trading of the underlying assets occurs.

Standard derivatives are usually traded on an exchange. Other types of derivatives are traded over the counter and are unregulated. The use of derivatives can be dangerous when used for investment or speculation without enough supporting capital. Various factors caused the financial crisis of 2008; derivative trading was among them.

Financial innovation can be associated with the 2008 fall in the global financial market. The financial innovation invented derivative securities that claimed to produce safe instruments by diversifying/removing the inherent risks in the underlying assets. The financial innovations, however, did not reduce the inherent risk but increased it (Santoro & Strauss, 2012).

Derivative instruments were created to help manage risks and create insurance against a financial downturn. In the period leading to the 2008 financial crisis, the intentions of the derivatives have been entirely altered. The derivatives were initially invented to defend against risks and protect against the downside. However, in 2003-2007, the derivatives became speculative tools to make more risk in a move to make more profits and returns. During this period, securitized products which were difficult to analyze and price were traded and sold. Additionally, many positions were leveraged with the aim of maximizing the profits gained from trading the derivatives.

Banks created securitized instruments and sold them to investors. The Federal National Mortgage Association rolled out a concerted effort to make home loans more accessible to citizens with lower savings than the required amount by the lenders. The reasoning behind this idea was to help each American citizen acquire the American dream of home ownership.

However, the banks issued poor underlying credit quality which was passed on to the investors. The information that the rating agencies offered the investors about the certification of the quality of the securitized instruments was not sufficient (Allen, 2013). Usually, derivatives ensure against risk if used correctly, in the case of the events leading to the financial crisis of 2008, neither the borrower nor the rating agency understood the risks involved.

In the turn of events in the meltdown, the investors got stuck holding securities that proved to be as risky as holding the underlying loan. The banks were as well stuck because they held many of these instruments as a way of satisfying fixed-income requirements. They used the assets as collateral.

Financial institutions incurred write-downs during the crisis. A write-down refers to the reduction of the book value of an asset because it is overvalued compared to the prevailing market value. In the events leading to the financial plunge in 2008, assets were overvalued, and the financial institutions and investors felt an enormous negative surprise for holding these “safe instruments.”

In the years leading to the financial plunge, banks borrowed funds to lend so as to create more securitized products. Consequently, most of the instruments were created using borrowed capital or margin meaning that the financial institutions did not have to issue a full outlay of capital. The use of leverage (the use of different financial instruments or borrowed capital like margin to increase the potential profit of investment) magnified the crisis.

Credit default swaps also played a part in the crisis. Unlike options and futures, CDSs are traded in over-the-counter (OTC) markets meaning that they are unregulated. In the period before the financial bubble, the advantageous leverage, and convenience of the CDSs made dealers rush to issue and purchase CDSs written only in debt that they did not own.

The derivatives on different underlying assets are traded in unregulated markets. Derivatives such as CDSs are not widely understood since they are not exchange traded (Allen, 2013). Counterpart default risk in OTC markets produces a series of inter-dependencies among market actors and creates room for risk volatility. The result of this is a systemic risk as witnessed in 2008 in the case of Lehman Brothers Holdings Inc. the lack of transparency in the OTC markets played a part in the occurrence of the economic bubble in 2008. The OTC derivatives and risks associated with them were priced incorrectly, and it overwhelmed the financial market during the recession.

References

Allen, S. (2013). Financial risk management. Hoboken, N.J.: Wiley.

Bloch, E. (1989). Inside investment banking. Homewood, Ill.: Dow Jones-Irwin.

Landuyt, G., Choudhry, M., Joannas, D., Pereira, R., & Pienaar, R. (2009). Capital market instruments ;Analysis and valuation. Basingstoke: Palgrave Macmillan.

Markham, J. (2002). A financial history of the United States. Armonk, N.Y.: M.E. Sharpe.

Santoro, M. & Strauss, R. (2012). Wall Street values. Cambridge: Cambridge University Press.

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Finance Dissertation Momentum Trading Strategy

Utilizing Momentum Trading Strategy on the UK Stock Market: Challenging Efficient Market Hypothesis

A number of studies have illustrated that stock returns may be predictable through implementing a momentum trading strategy, which contradicts the whole concept of the Efficient Market Hypothesis. This paper will discuss the Efficient Market Hypothesis and focus on its challenges in the face of behavioral finance. In addition, empirical research is conducted to test whether a momentum strategy can be implemented to successfully beat the market.

This dissertation draws on the framework developed by Jegadeesh & Titman (1993), while also taking ideas from other relevant scholars in the field, and analyses the monthly returns generated from the momentum strategy used, examining whether the returns in each constructed portfolio is greater than the return of the UK stock market (FTSE All-Share market index) for the period 2016, based around Brexit, an event which had an influence on the stock market as a whole, and construct another set of portfolios one-year prior to the event, to act as a control for comparability and to test validity of the momentum strategy being used to generate excess returns.

From the empirical data, it is seen that in the Brexit portfolios, every portfolio beat the market, however for the pre-Brexit portfolio, a few portfolios under performed the market, with the majority beating the market. Although the two time periods tested had dissimilar results, this dissertation can still confirm that the use of the momentum strategy can be used to predict future returns, and manage to earn abnormal returns.

This dissertation is inspired by the desire to gain a greater understanding of the financial markets, through implementing momentum trading strategies and examining anomalies to exploit any market inefficiencies. The research is motivated by a strong personal interest in the general topic areas and perceived gaps in existing literature. Moreover, financial market efficiency is the central importance to practitioners, investors, corporations and regulators, with financial theory being based around the belief that financial agents and markets are rational.

Furthermore, investors depend greatly on strategies which observe stock market behaviour, a key focus of this research. Also, with the continuous success of individuals such as George Soros and Warren Buffett, they represent the most immutable contradiction of market efficiency theories, that returns are unpredictable.

Momentum Trading Strategy Dissertation
Momentum Trading Strategy Dissertation

 

Momentum Trading Strategy Dissertation

Dissertation Contents

1: Introduction
Background to the study
Rationale
Research objectives
Importance of the study
Structure of the dissertation

2: Literature Review
An introduction to the Efficient Market Hypothesis (EMH)
Testing the efficient market hypothesis
Testing the weak-form efficiency
The Filter approach
The Dow Theory
Testing the semi-strong form efficiency
Event Studies
Stock Splits
Testing the strong-form efficiency
Anomalies
The calendar effect
The January effect
Behavioural Biases
Under-reactions, over-reactions and contrarian strategy
Momentum trading

3: Methodology
Data
Time period to test
The United Kingdom’s withdrawal from the European Union (Brexit)
One year prior to United Kingdom’s withdrawal from the European Union (pre-Brexit)
Formation Period and Holding Period returns
The Zero-Cost Trading Strategy
Validity test
Strategies characteristics
Hypothesis Test
Null Hypothesis (H0)
Alternative Hypothesis (H1)

4: Results and Analysis
Findings
Results for 3-months formation period
Results for 6-months formation period
Results for 9-months formation period
Results for 12-months formation period
Testing the validity of the research results
The January Effect
Effect of the EU Referendum on the test results
Summary of research results

5: Conclusion
Summary
Limitations of the study and suggestions for further research

Bibliography

Appendix

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Corporate Decision Making Capital Structure Financial Markets

Capital Structure and Corporate Decision Making: The Role of Compensation Plans on Managerial Decisions in Relation to Stock Performance in the Financial Markets

This dissertation attempts to answer the research question as to whether compensation plans provide better incentives for managers to take risks and increase stock performance in financial markets by corporations. Objectives aimed at examining whether compensation plans influenced managerial decisions and overall future stock performance in corporations. Another objective assessed effectiveness of compensation plans towards managerial risky decisions and performance. The author’s central argument was that compensation arrangements and efficient market information functionality motivated managerial decisions that increased future stock performance in corporations. The research methods adopted comprised of qualitative research methods that linked past evidence, theories and research works by other scholars to reaffirm or refute previous theories.

The methodology maintained an empiricist paradigm and research that made sense through objectivity realised from collected data. The models sought explanations and predictions with an aim of confirming, or substantiating relationships, as well as assembling generalisations on theoretical frameworks. Qualitatively, trends, gaps and opportunities were critically examined using desktop appraisal of secondary literature, documents, journals, books and reports. Content analysis method detailed systematic assessment of substances in specific materials aimed at identifying patterns, themes, or biases.

Capital Structure Financial Markets
Capital Structure Financial Markets

The review finds consistent literature to demonstrate that indeed compensation arrangements contribute to performance by managers. Organizations that link compensation plans with individuals could attract egoistic kind of CEO. Extrinsic incentives, particularly money, correlated with the largest productivity in terms of stock performances. Skills-based compensation plan now forms the new trend when identifying potential CEOs. Additionally, when designing compensation arrangements, one should balance with conflicting objectives by the shareholders, executives and corporations. What worked for firm A cannot be assumed to work for firm B because each corporation is distinct in size, philosophy, values and objectives.

Dissertation Objectives

  1. To examine whether compensation plans influence managerial decisions and overall stock performance in corporations
  2. To assess effectiveness of compensation plans towards managerial risky decisions and performance

Dissertation Contents

1 – Introduction
Research Question
Objectives
Rationale
Statement of the Problem

2 – Literature Review
Does Compensation Plan and Risky Decision Taking Translate to Better Performance?
The Role of Financial Markets in Managerial Decision Making
Forms of Compensation Plans
Effectiveness of Compensation Plans, Risky Managerial Decisions and Performance
Theoretical Perspectives

3 – Research Methodology
Qualitative Methods
Content Analysis
Limitations

4 – Research Findings
The Hard Facts
Why Compensation arrangements and Performance Metrics?
Compensation Arrangements
Short and Long-term Bonus Measures
Performance Units/Shares
Options
Human Resource Methods
The Bogey Plan
Relative Performance Evaluation (RPE)
Informational Function of Managerial Decision Making by Financial Markets
The Correlation between Compensation Plans, Risky Decision Making and Performance
Reasons for compensation plans
Reasons against compensation plans
Compensation arrangements and its Effectiveness towards Performance

5 – Analysis and Discussion

6 – Conclusions

Bibliography

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MBA Project Globalization

MBA Project Globalization

Summary

Over the past few decades, the global scenario has changed considerably with increased interdependence amongst nations and economies. This intertwining amongst nations and sharing of ideas and technology has been termed as “Globalization”. Globalization has been a buzzword of late, with heated discussions about its pros and cons. Some consider it to be a blessing for mankind while others take it as a curse. For some it has brought about material prosperity while others have become unemployed due to it. This paper tries to analyse the effect of Increased International Trade and Globalisation on the US economy. The first section discusses the pros and cons of Globalization while the second section discusses how globalization has lead to increased foreign trade. Thereafter, it discusses the effect of globalisation and increased foreign trade on the American economy.

Introduction

Trade is believed to have taken place throughout much of recorded human history, whether as barter or in exchange of currency. Till the 1800’s, trade was limited due to difficulties in transportation, communication and restrictive trade policies. However, in the mid 19th century, with advent of free trade and nation advantage concepts, trade started to pick up (Daniels & Sullivan, International Business and Operation).  Although international trade has been present throughout much of history, for example Silk Route, its economic, social, and political importance have increased in recent centuries, mainly because of Industrialization, advanced transportation, globalization, multinational corporations, and outsourcing. Worldwide, countries are doing away with trade restrictions and lowering trade tariffs, thereby supporting free trade and making the world a global village (Daniels & Sullivan, International Business and Operation).

Globalization – Boon or Bane

The global economy is no longer an individual event and USA no longer plays the dominating role. This is apparent from the fact that ten years ago the World Trade Organization had only 80 members whereas now it has 153 members (WTO Data, 2010). Also countries like China and India are getting more bargaining power day by day. Globalization is the deepening relationship and broadening interdependence amongst the different countries of the world. The World Bank defines globalization as “the growing integration of economies and societies around the world.” This integration of regional economies into a global village has lead to increased international trade, investment, capital flows and technological advancements. Technological advancements such as the internet and cell phones have literally reduced the world to a Global village. Globalization has both its critics and it supporters. Some interpret it as a way of countries losing their cultural identities and becoming “Americanized.” Others see it as a way to reduce costs and to increase profits and efficiency. The debate over globalization is perceptible in demonstrations against the WTO in Seattle in the fall of 1999, against the Summit meetings in Quebec and Genoa and against several annual meetings of the IMF and World Bank. While on the other hand, supporters of globalisation look forward to a global village, linked together by the Internet, and enjoy the ever-increasing material well being (Daniels & Sullivan, International Business and Operation). The United States is seen by much of the world as the strongest supporter of globalization – in fact, as pushing it on everyone else. Over the years, globalization has resulted in increased foreign trade and capital flows, thereby contributing immensely to the domestic economy. In the 1990s, globalization and free trade, resulted in integration of China and the former Soviet bloc into the trading system thereby lowering inflation and opening new markets. However, as the emerging markets got stronger, the prices of commodities started rising immensely and competition from foreign workers lowered the average US wage rates. Jeffrey Garten, professor of international trade and finance at the Yale School of Management, points out that in 2000, the world’s wealthiest countries accounted for about 70 percent of the global economy, compared with 30 percent for developing economies. These rates are slowly but surely reversing. Thus, USA has seen both the positives and the negatives of globalization.

International Trade

One important effect of globalization is the increased interdependence among nations which has demanded increased liberalization of markets, the dismantling of almost all trade barriers (Lee, 2005; Czinkota and Ronkainen, 2007). As a result, the forces of globalization have necessitated trade liberalization (Martin, 1993), leading to increased international trade, not only in good and services but also currency and capital. Ever since independence, America has been a supporter of Free Trade. In 1988, USA signed a Free Trade Agreement with Canada that progressively eliminated tariffs over a ten‐year period, thereby making Canada USA’s premier trading partner. Further, in 1994 the Mexican Government, in pursuit of market reforms, signed the North American Free Trade Agreement (NAFTA). The passage of the NAFTA agreement signalled the continuing support of U.S. policy‐makers for the worldwide march toward free markets and further economic globalization (Paul. S Boyer, 2001). The above agreements lead to immense increase in trade and greater market efficiency. However, by 1999 USA had a huge trade deficit of around USD 200 billion (Paul. S Boyer, 2001). The trade boom of the 1990’s had ended in a recession marked by serious job losses and the nations policy of “free trade” was being questioned. President George W. Bush insisted that America’s economic future lay with the global economy, but early in 2002 political pressures led him to slap import duties on cheap foreign steel. However, he was forced to withdraw it in 2003 due to retaliation against US exports and WTO sanctions (Paul. S Boyer, 2001)

Globalization MBA
Globalization MBA

Competition and Business Restructuring

International competition goes hand-in-hand with globalization. A company that has been very successful in the domestic market may suddenly find itself facing competition from a yet unheard of company from the other end of the globe. Survival in this new business environment calls for improved productivity, reduction in costs, up gradation in technology and advancements in supply chain management (O’Reilly, E., & Alfred, Diane., 1998). For example, In the 1980s American automobile manufacturers began losing market share to Japanese competitors who offered American consumers higher quality cars at lower prices (Brewer, G., Managerial Accounting). However, from the consumer’s point of view, increased competition promises greater quality, reduced prices and a greater variety of goods and services. China’s entrance into the global marketplace has proved that globalisation leads to competition and changes the business environment. For example, from 2000 to 2003, China’s wooden bedroom furniture exports to the United States increased by more than 233% to a total of $1.2 billion. During this same time, the number of workers employed by U.S. furniture manufacturers dropped by about a third, or a total of 35,000 workers (Fishman, T., 2005).

In a 2002 speech, the Economic counsellor to the US Embassy, Mr Lee Brudvig, said, “We have not resisted the free flow of money, goods, services, and ideas. Rather, we have subjected our companies to market competition and limited the role of government on the whole to that of facilitator, regulator and, when necessary, safety net provider. As a result, we have seen a massive reorganization of business structures. Whereas in 1960 manufacturing accounted for 27 percent of GNP, by 2001 it had dropped to below 15 percent.” The changes brought about by technology and productivity is causing both markets as well as organisations to undergo restructuring.

Labour Market Developments

An important trend in labour markets in the advanced economies has been a steady shift in demand away from the less skilled toward the more skilled (Slaughter, M., & Swagel, Philip., 1997). Studies have shown, for the advanced economies as a whole, that trade with developing countries has led to about a 20 percent decline in the demand for labour in manufacturing, with the decline concentrated among unskilled workers (Swagel, Philip., 1997). This trend has produced dramatic rises in wage and income inequality between the more and the less skilled. In the United   states, wages of less-skilled workers have fallen steeply since the late 1970s relative to those of the more skilled (Slaughter, M., & Swagel, Philip., 1997). According to a study conducted in 2007, the impact of trade flows in 2006 increased the inequality of earnings by roughly 7% (Bivens,J., 2007). The study goes on to prove that although “liberalized trade” is a win-win proposition for nations, it reduces the income of most workers. Workers employed in industries directly in competition with low-cost imports from abroad can expect to see immediate job dislocation and/or downward wage pressures.

The rise of labour abundant nations, like China and India, has increased the global labour pool. The price of labour-intensive commodities falls as a result of this increase in the global labour pool, and these falling prices harms the labour in professional-abundant nations like the United States. DVD Players, clothing and call centre operations, all provide examples of reduction in prices due to expansion in the global labour pool (Slaughter, M., & Swagel, Philip., 1997). Outsourcing and offshoring, has further increased unemployment and decreased national earnings. 22-29% of the U.S. workforce has been rated as potentially offshorable over the next one or two decades (Blinder, 2006). The implied loss due to offshoring would push these wages well below the 1979 levels, completely undoing the entire increase in these wages over the past three decades. The trade adjustment assistance (TAA) program has been formed as a way to compensate globalization’s victims in the United States. In 2006 TAA allocated $655 million in income supports for workers harmed by globalization, and, another $200 million for training. As quoted by Bradford, Grieco, and Hufbauer in their study, “While the gains from increased trade generate a permanent rise in income, the associated losses are temporary. Nevertheless, they are very real, and are concentrated on a small fraction of Americans”.

Financial Market Globalisation

Financial globalization has been one of the most important trends in the world economy in recent decades. Financial globalization has been one of the most important trends in the world economy in recent decades (Lane and Milesi-Ferretti 2003). International financial liberalization was also accompanied, in a

somewhat chicken-and-egg causal relationship, by the abandonment of the Bretton Woods system of adjustable exchange rate pegs and the shift to floating exchange rates among the major currencies or regional currency blocs (Eatwell 1996). When currency fluctuations are considered, it is the exchange rate between the US dollar and the euro that gets the most attention. This not only reflects the size of the respective economies using these two currencies, but also the fact that the US dollar is the most widely traded currency today. That’s because it effectively serves multiple roles: as an investment currency; as a reserve currency for many central banks. According to an IFSL research conducted in April 2007, the US dollar was involved in 86% of foreign exchange transactions, followed by the euro (37%), which proves its importance (Safar, L., 2008). The report further states that foreign currency trading increased by 70% in 2008 compared to 2004. This increase in currency trading makes it imperative for companies to learn to deal with exchange fluctuations and how to benefit from all situations. The US dollar has fallen since January 2004 against the euro as well as against most major European and Asian currencies. This has caused many companies to introduce a “fluctuation clause” in their contracts to protect themselves from losses due to exchange rate fluctuations and has also lead to the development of many financial instruments to help companies hedge their currency risks. However, times such as these when the dollar becomes weaker often works well for US producers with a larger proportion of their costs being in dollars but selling worldwide. International revenues not only translate to higher US-denominated revenues, but they also contribute to higher margins which can be achieved globally (Safar, L., 2008). For example, Q1 2008 for instance marked a milestone for Google, whose international revenues exceeded US revenues for the first time. Revenues from outside of the United States represented 51% of total revenues in the period, compared to 47% in the first quarter of 2007 and 48% in the fourth quarter of 2007. In Q2 2008, this had increased further to 52%. According to Google, “Had foreign exchange rates remained constant from the second quarter of 2007 through the second quarter of 2008, our revenues in the second quarter of 2008 would have been $249 million lower.” (Safar, L., 2008). Nothing can be predicted with 100% accuracy when it comes to exchange rates, and the only thing that can be safely said is that there will be no “business as usual” when it comes to currencies.

Political and Institutional Changes

According to CIA Global Trends 2015, 2000,” The rising tide of the global economy will create many economic winners, but it will not lift all boat. It will spawn conflicts at home and abroad, ensuring an even wider gap between regional winners and losers than exists today. Regions, countries and groups left behind will face deepening economic stagnation, political instability and cultural alienation. They will foster political, ethnic, ideological, and religious extremism, along with the violence that often accompanies it.” One of the most important and necessary features of the current process of globalization is the proliferation of international organizations. Scholars point to the emergence of expanding web of international treaties and institutions, which regulate and adjudicate on matters of interstate behaviour. The number of international organizations rose from 61 in 1940 to 260 by 1996 (Barnett 2002:110). Since 1995, when the World Trade Organization (WTO) was formed, transnational corporations have increasingly influenced political leaders to push international trade laws in the same direction of liberalization and deregulation. In addition, existing international organizations like the IMF, the World Bank and the GATT/WTO have transformed their roles substantively, gaining further powers and responsibilities (Camillery and Falk 1992:94-7; O’Brien et al. 2000). The United States has enjoyed a position of power among the world powers, in part because of its strong and wealthy economy. Due to this reason, the United States enjoys considerable bargaining powers in the WTO and World Bank. With the influence of globalization and with the help of The United States’ own economy, the People’s Republic of China has experienced some tremendous growth within the past decade, and now enjoys as much bargaining power, if not more, as USA. If China continues to grow at the rate projected by the trends, then it is very likely that in the next twenty years, there will be a major reallocation of power among the world leaders. China will have enough wealth, industry, and technology to rival the United   States for the position of leading world power (Fishman, T., 2005).

Crime and Terrorism

At the end of the 20th century, a new phenomenon appeared—the simultaneous globalization of crime, terror, and corruption, an “unholy trinity” that manifests itself all over the world. This unholy trinity is more complex, however, than terrorists simply turning to crime to support their activities or merely the increased flow of illicit goods internationally. Rather, it is a distinct phenomenon in which globalized crime networks work with terrorists and both are able to carry out their activities successfully, aided by endemic corruption. Crime groups and terrorists have exploited the enormous decline in regulations, the lessened border controls, and the resultant greater freedom, to expand their activities across borders and to new regions of the world. The United States has been one of the worst sufferers of this new “global” terrorism. Since September 11, 2001, numerous resources have been shifted in the United States and elsewhere from addressing trans-national crime to fighting terrorism. It has increasingly become clear, that for a nation to advance, it has to keep its crime and terror activities in check.

Cultural and Other Issues

The growth of cross-cultural contacts has helped the United States participate in a new World Culture. It has helped Hollywood reach remote corners of the world while at the same time Bollywood has reached out to the Americans. Globalization has also lead to greater international travel and tourism thus greatly benefiting the tourism industry. WHO estimates that up to 500,000 people are on planes at any one time. (WHO Data, 2009). In 2008, there were over 922 million international tourist arrivals, with a growth of 1.9% as compared to 2007 (UNTWO Data, 2009). Globalization has also increased the number of illegal immigrants entering USA. The Rockridge Institute argues that globalization and trade agreements affected international migration, as laborers moved to where they could find jobs. The Mexican government failed to make promised investments of billions of dollars in roads, schooling, sanitation, housing, and other infrastructure to accommodate the new maquiladoras (border factories) envisioned under NAFTA. The 1994 economic crisis in Mexico, which occurred the year NAFTA came into effect, resulted in a devaluation of the Mexican peso, decreasing the wages of Mexican workers relative to those in the United States. Unemployment, corruption, low wages and few opportunities cause Mexican laborers to look for greener pastures and migrate illegally to the United States.

Conclusion

Globalization leads to increased international trade and reduction in trade barriers, which is beneficial for all the trading nations. Increased globalizartion has increased competition in the global economy, making it tougher for organisations to survive, and leading to greater productivity, efficiency and quality. This has in turn lead to the rise of countries like China and India, which are rich in labour. Due to the rise of labour abundant nations, the US labour market has suffered with fewer jobs being available for unskilled workers and lowering of wages. Further, outsourcing and offshoring have lead to loss of jobs and unemployment. In order to establish a set of trade rules and monitor the trading nations, institutions like WTO, IMF and World Bank have gained in importance. The United States hold a very important place in all these institutes, due to its strong economy and political power. Thus, it has a huge bargaining power when it comes to trade regulations. Overall, globalisation has affected America both positively as well as negatively but it is primarily due to globalisation and increased trade that America has a strong economy today.

References

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The author examines the effect of globalisation on wages and predicts what the future is going to be, based on mathematical models.

Blinder, Alan. 2006. Off-shoring: The next Industrial Revolution. Foreign Affairs magazine.

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Daniels & Sullivan, International Business and Operation, 11th Ed, Pearson Education

Eatwell, John. 1996, International Financial Liberalization: The Impact on World

Development, Office of Development Studies, Discussion Paper Series (September). New   York: United Nations Development Programme.

Fishman, T., 2005, How China Will Change Your Business, Inc. magazine,

O’Reilly, E., & Alfred, Diane., 1998, Innovations in Technology and Globalization,

Slaughter, M., & Swagel, Philip., 1997, Does Globalization lower wages and export jobs?, IMF Report,

UNWTO World Tourism Barometer (World Tourism Organization) 7 (2)

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