Download Paper

Simulation of Monetary Policy Impact on Asian Financial Crisis, Recovery ,
Sustainable Growth and Risks ManagementX, M. Ji, Graduate School of Economics, Hua-zhong Univ. of Science & Tech Wuhan, China,. Email :
[email protected]
Warren Huang
OSA Global Investing, (corresponding author)
Box 130, 706, Sacramento, San Francisco, Ca. 94108, USA
Tel: 510-524-0283 Fax: 510-524-4484 Email: [email protected],
[email protected]
Website : www.osawh.com
.
Monetary Policy Impact on Global Money, Currency, Stocks and Derivatives Markets Prices
The global central bankers have been facing daily challenges from the macro economic growth , prices stability in the
trillion dollar Asian, Russia, Brazil currency crisis and the mature financial markets turbulence like last summer 4 billion
dollar LTCM failure betting on the wrong side of interest rate, bond spread resulted global credit crunch in the 70
trillion dollar financial derivatives markets.
The global central bankers are playing dual role in provide prudent monetary policy to achieving nations price and
growth stability and monitoring it’s impact on the economics and the daily financial market dynamics ( normal and crisis
discontinuous) responses and supervising the banking industry providing prudent credit decisions to support the
economic growth and healthy financial markets trading process.
The Root Causes of Asian , Russia, Brazil Asset Bubble Burst resulted Currency Crisis and LTCM Failure
The root causes of Asset Bubble boom and bust, and LTCM failure came from :
A. Emerging Markets Macro-economics imbalance, soaring prices, costs, debts resulted export decline, mounting
trade and current account deficit, all came from poor understanding of the monetary policy impact on macro economics
imbalance resulted excessive money supply resulted soaring stock markets, fueling consumer and business demand,
pushing skyrocketing properties, and labor costs(wentup more than ten-fold in 6 years) among the ASEAN four tigers
and Asian four dragons in the 1990s, draws huge capital inflow and raising mounting low interest debt from Japan,
Europe, Taiwan and US
B. Asian Bubbles Bursts: Following 1990 Taiwan and Japan asset bubble burst, (When Taiwan suffered 13 % inflation
ten fold rise in labor costs, 50 times increase in equities value during 1985 and 1990, Taiwan stock index plunge from
12400 to 2400 in 9 month , responding interest rate hike form 5 % to 15 %, money supply growth tightened from 8 % to
–8 %, the properties prices plunge 50 %, Japan repeat the story, in 1990, Nikkei index plunged from 38500 to 13000 in
7 years, the properties prices also down 70 %. Responding to tightening money supply from 13.5 % to 4 %
The onset of bubble burst ASEAN and E. Asia came form over valued currency crisis. After Asian dragons double
digit growth miracle asset bubble burst in 1990, the global players turning into ASEAN four tigers, leading by Thailand, it
repeated the same style economic boom and bust during 1990 and 1996, the bubble finally burst in July 1997, when
central bank announced to float it’s overpriced Bhat currency, it’’s instantaneous plunge to 50 to release it’s overpriced
stress due to one billion dollar trade deficit, Thai had to raised interest rate to 25 % to stabilize Bhat at 46, The stock
markets plunged from 1000 to 300 to release it’s overpriced stress, these waves of bubble burst spread quickly to other
ASEAN tigers and Hong Kong in 1997, and drag Japan into the crisis, which suffered trillion dollars low interests in
these countries stocks, properties, and manufacturing industry. Korea Bubble bursts due to Won and stock plunge
plunge 60 %,
The onset of LTCM failure:
A. Russian Credit Default : Russia followed the same pattern of boom and bust. The !997 and 98 Asian crisis cutting
demand for oil and commodities laed to 50 % plunge of oil prices(from 20 to 10 ), Russia asset bubble was formed
in 1997, the soaring stock prices pushed labor, housing and government spending and mounting debt, losing its
export competieivenaes , entering 1998, Russia facing export decline and mounting trade deficit due to slumping oil
income the bubble burst in Sept. 1998 as Yelzin annouced to float it’s ruble currency, Ruble and stock markets
plunge forced banks margin call, lead to credit defaults
The on set of LTCM failure turbulence of mature financial derivatives (bond and interest rate spreads) :
L TCM top management and international financial markets expert using VaR risk models, based on the probability of
bond spread diverged over 2 % are small( ignoring the global monetary policy impact on macro economics imbalance,
interest rate, bond, currency and stock markets dynamics, applying excessive leverage, exposed to trillion dollar interest
rate spread hedging fund, betting Russia crisis will be over, interest rate and bond spread will be converged to 2 %
(The Russian default forced int’l capital rushed into US T-bond, pulling it’s yield to 4.6% The spread between 30 yr T
bond and Merrill Lynch Corporate bond yield broke 6 % , Korean bond spread exceeded 10 % Russia junk bond plunge.
energy crisis, nor the 1995 Mexico, 1997 Asian, 1998 Russia and current Brazil financial crisis) US commercial bankers
reported 33 trillions dollars contracts in global financial markets with annual growth rate of 20 %
Monetary Policy Impact on Economic Cycles- Simulation of Asset Bubble Burst:
Submitted for presentation to ICCG1 Conference ,Bangkok, Thailand, Oct. 22, 1999
1
It is obvious now, that the global currency crisis and LTCM related financial derivatives hedging failure share the same
common causes: Insufficient knowledge of Monetary Policy Impact on Asset Prices Dynamics- Dynamics simulation of
Asset prices bubble formation and bursts.
Greenspan in his Aug. 27 speech again, he is disappointed that US stocks soaring ahead after his two interest rate
hike in June Aug, these capital gain has been fueling US consumer and business spending which leading to overheated
housing and labor markets. He is very concerned about the asset bubble bursts, leading to last summer sudden change
of consumer, investor confidence resulted LTCM betting in the wrong direction of interest rates, bond spread and credit
squeez.
He criticized the current financial market decision and risk management models are based on the unreliable normal
equilibrium approach probabilistic Monte Carlo VAR model based normal stable continuous data and speculation,
following the crowd, betting on the wrong side of interest rate spread( the convergence of US and Junk bond, ignoring
the mounting global crisis, discontinuous behaviors resulted deviation and ill-liquidity, resulted billion dollars loses by
LTCM)
The need for improved deterministic risk analysis and stress testing models simulating global financial markets crisis
discontinuous dynamics
Greenspan indicated the increased supervision and capital requirement regulation will not be sufficient to prevent
Future LTCM incidence., current quantitative approaches based on the probability distribution of past continuos stable
economy fail to predict the last summer discontinuous market crisis dynamics He suggests the bankers to improve
their risk modeling on market discontinuous dynamics behavior analysis in regular risk management stress testing.
Reliable deterministic global financial markets crisis discontinuous dynamics risk Operations Simulation Analysis (OSA)
and financial markets stress dynamics testing models application:
The senior author Huang has over 30 years refinery, petrochemical process and strategic management dynamics
simulation experience, developed, implemented 32 global strategic management decisions analysis systems out of over
20 years daily stable, normal continuous and crisis ( accident, explosion) discontinuous operating data. These
deterministic, state variable form AI expert systems based simulators have been tracking, predicted the refinery plant
explosion and global central bankers monetary policy impact on last 20 years normal, stable, continuous, and crisis,
discontinuous GNP, inflation, interest rate, currency, stock, bond, derivatives prices data with average error below 1.5 %
and correlation constant above 0.95 These simulator accurately predicted 1987 Dow crash, 1994 the onset and spread
to 1995, 1997, 1998, 1999 Mexico, Asian, Russia, Brazil crisis and the widening of bond yield spread in last summer
resulted LTCM failure
Global Academic University Teaching and Research: for over 1000 chemical engineering, economics, global strategic
risks management operations research senior and graduates teaching and research program.
Monetary Policy Impact on Global Economics ,Financial Markets, Banking Crisis, Systems Risks Simulation:
These banking and finance knowledge based expert systems will provide the global central bankers reliable decision
tool in daily what, when and how of monetary policy tracking on the response of it’s impact on macro economic
inflation, GNP, and financial markets normal and crisis discontinuous risks behavior and derivatives markets risk
management
This paper will discuss the development and implementation of Neoclassical Economic Synthesis monetary economics
approach of Paul Samuelson, Milton Friedman . Thousands of simulators tracking, simulating central bankers monetary
policy and various external shocks(oil, commodities prices, government fiscal, bilateral,
multilateral currency crisis) impact on GNP, inflation, major economics performance indicators, financial markets interest
rates, currency rate, commodities, corporate profit margins, bond, stocks, derivative prices. These determinaistics state
form simulators tracking the financial markets risks down to the simulation of portfolio and industrial products prices
level Without any prior knowledge of probabilistic distribution. Which is further improvement of current VAR and FRB/US
and FRB/Global models
US inflation, GNP, Dow Jones Index, Fed fund rate and 30 yr bond yield, financial future prices simulation will be
demonstrated for US fed monetary policy impact simulation, including last summer credit crunch and 3 interest rate
cuts impact on the Dow Jones and dollar exchange rate for tracking the onset, spread of Asian crisis to Russia credit
default and LTCM failure.
Monetary Policy Impact on Global Economy and Financial Markets Dynamics OSA
What is OSA and what OSA has accomplished in crisis and risks simulation and management
OSA ( Operations Simulations Analysis), pioneered by the senior author Huang, is an extension of Operations
Research, a powerful systematic method for the development and implementation of problem solving and decision
analysis tools, applied extensively by the US defensive and aerospace industries using artificial intelligence pattern
recognition, nonlinear stochastic process filtering and control for the Apollo moon landing tracking in the 1960's. As the
senior author extended to his PhD dissertation to knowledge based processing plant design and operations
improvement, safety, explosion risk management , global investment risk, marketing and sales management in his
association with Mobil, AMOCO, Phillips Petroleum, Rhone-Poulenc, Bechtel's US headquarters.
Development and implementation OSA/Global and OSA/US simulation systems
He started the daily US Wall Street activities and global financial markets dynamics simulation(including naomal
stable continuous and crisis discontinuous data ) in 1972. Thousands of knowledge based US, EURO, European,
Asian Pacific, Russia, South America central bankers monetary policy and financial markets simulators have been
2
developed through applying Artificial Intelligence neural net, fuzzy logic, chaos algorithms out of last 20 years IMF
statistics and daily US, Asian, European Wall Street Journals and Taiwan, China, Hong Kong's daily financial markets
news papers, trading and corporate earning data(including normal stable continuous and discontinuous crisis data)
combined with training and feedback from 20 millions chief finance officer, fund managers, traders, investors market
psychology in authors nationwide radio and TV program and conference lectures in Taiwan, Japan and China, US,
Europeans integrated into the Neoclassics Sythesis of Paul Samuelson, Milton Friedman’s demand side monetary
economic theory. It pinpoints each financial market crisis beforehand by simulating the global central bankers daily
money supply and it's impact on macro economic GNP, inflation and trade economics, commodities, industrial raw
materials, products demand and prices, financial economics interest rates, currency exchange rates and corporate
operating margins, US, European, Russia, South America stocks and bonds, commodities and financial future and
derivatives(call/put option, warrants) prices. Which have been tracking, simulating last 20 years daily US, Global and
Euro countries financial markets operations and crisis, risks in central bankers, government policy risks, trillions dollars
global financial institutions credit risks due to poor credit rating simulation in Asian crisis investment, resulted bad debt,
trillions dollars equity markets trading loses due to betting on the wrong side of financial markets investments (
currency, stock, bond, financial future, derivative and corporate merger/acquisitions and investment, procurement,
market shares risks.. These systems extended US FRB/US and FRB/Global models to the monetary policy impact to
the portfolio , interest rate, bond spread, currency and derivatives prices level, provide direct tracking of global monetary
policy, oil prices impact on interest, currency, commodities, stocks, bond, and it’s derivatives prices)
Monetary Policy impact on Derivatives for Global Strategic Cost Reduction and Risk Management:
Almost 70 trillion dollars have been traded for commodities, and financial derivatives extensively by the global
financial industries for raw material costs, interest rate, currency and markets risk reduction management, while
hedging fund have exposed to three trillions dollars on the leverage fund management, which all relied on the current
unreliable risk and options models, which required probability input and betting on the wrong side of the interest rates,
currency and stock, bond prices. This paper will present our options/warrants prices models are much simpler and
more reliable than Black-Schole formula. Since it provide direct tracking, simulation of central bankers monetary policy
impact on interest rate, currency, corporate profit margin and stock prices simulation and integrate into the financial
derivatives call/put options, warrant calculation( striking price, date to expiration, and the simulation of current prices).
Global Central Bankers Monetary Policy, Macroeconomic Risks Simulations
Monetary Policy for Sustainable Growth: OSA—Global and US Asset Price Bubble Burst
US Fed Chairman Greenspan in his Aug 27, raised serious concern on overheated US stock markets resulted excessive
consumer and business demand may lead to abrupt change in consumer, investor confidence caused burst of asset
bubble and stock, properties prices plunge happened in 1997-98 in Asian and Russia crisis
Country Economics, Business Cycle boom and bust, asset bubble burst risks simulation
Goal: Dynamic tracking simulation of last 20 years US, Japan, China, Taiwan, Hong Kong, Korea, ASEAN, Russia,
South America, European stocks, properties prices impact on consumer and business spending, macro economics
GDP performances , to predict, forecast overpriced asset prices resulted consumers spending imbalance and business
profit slump, leading to bubble burst and abrupt change in consumer and business confidence caused stock prices
plunges with average error below 1.5 %, correlation constant above 0.95.
These deterministic, dynamic simulation of last 20 years global asset prices, and economy boom and bust of the asset
bubble vicious cycle of excessive monetary policy, low interest rate induced sustained long term bull markets stocks
prices gain caused consumer and business spending in real estate properties pushed soaring housing prices and rent.
And deficit spending (negative saving) in stock markets, pushed the stock s even higher, until abrupt reverse of
consumer and investor confidence --the bubble burst- plunge of stocks and properties prices as it happened in US,
Japan, Taiwan in 1980, 1987, 1990, energy crisis, EURO 1992 currency crisis, 1994 China runaway inflation, 1995
Mexico crisis, 1997-98 ASEAN, Japan, Korea, Russia, Brazil currency crisis, all caused by overpriced stock prices due
to excess monetary policy and high GDP growth
1.
2.
3.
4.
5.
6.
7.
8.
Monetary Policy on global stock prices,:
Global stock prices and monetary policy impact on consumer and business spending.
Global stock prices, monetary policy impact on housing properties prices and rent
Global stock prices, monetary policy impact on GDP macro-economics performance.
Global stock prices, monetary policy impact on procurement manager index
Global stock prices, monetary policy impact on consumer and business confidence
Global stock prices, monetary policy impact on saving rate.
Global stock prices, monetary policy impact on corporate profit margin
9. Global monetary policy, external shocks( commodities, currency and credit default) impact
on burst, burst, abrupt change of consumer, business confidence (Asian crisis, LTCM)
The Onset, Spread of Currency Crisis Simulation: These structural deterministic risks systems ( no probabilistic
input is required) tracking, simulate, forecast 1980, 1987, 1990, energy crisis, US stock crash, 1992 European , 1994
Mexico, 1997-98 ASEAN, Asian, Russia, Brazil currency crisis one month ahead of the central banks floating currency
resulted currency slump, soaring interest rates and stocks slump,
The Onset, Spread of Derivatives excessive hedging, betting in the wrong direction of interest rate spread,
resulted LTCM failure
3
Global interest rate, bond deterministic risks simulation systems ( no probabilistic input is required) tracking, simulate,
forecast last 20 years interest rate, bond spread, avoided betting in the wrong direction resulted trillion dollar loses since
1980
Mission: Tracking , simulating the causes, onset, spread, recovery and prevent of global asset bubble burst under
various shocks and overpriced asset prices due to excessive monetary policy, provide prudent monetary to prevent ,
predict the burst of the bubble causes abrupt change in investor, consumer confidence resulted stocks and properties
prices plunge (more than 50 %) and supporting daily banking, finance industry credit risks capital requirement
supervision and regulation
Performance Tracking :
Goal, mission, performance oriented Bubble burst Risks Operations Simulation Analysis (OSA) strategic, execution
teams, develop, implement thousands of neural net expert systems based structural bottom up Internal Risks
Dynamics Simulation Deterministic Models tracking last 20 years central banks monetary policy, causes, onset, spread
of major boom and bust asset bubble bursts impact of stock prices simulation analysis on macro-economics
performance, household, business spending and prices, predict the bubble burst leading to abrupt change of investor,
consumer confidence caused stocks and properties plunge
Developed, implemented, supported by OSA pioneer Dr. Warren Huang out of his 30 years global bubble burst risk
simulation, control experience for US multinational, Asian government, corporate , banking finance industry consulting,
on the job training for 20 million CEO, CFO, fund, procurement, trade managers in coping last 20 years major crisis
Goal Mission, Performance oriented pizza chart multidisciplinary Risk Operations Simulation Analysis(OSA) strategic,
execution teams tracking, control country, currency, interest rate, commodity, operation related credit
default(nonperformance loan )risks supporting Prudential supervision, regulation, Basal capital requirements
Hundred OSA teams have been implemented in Taiwan, China, US: Integrating daily central banks Monetary operation
into banking, financial markets transparency, supervision, Basal, Prudential Regulations tracking and prevent various
financial systemic risk related credit defaults and government, banking, financial markets, corporate reform,
reengineering , management, technological innovation to improve global competitiveness have been applied to tracking,
improvement corporate
Global Academic University Teaching and Research: These expert systems have been applied to the training over
1000 chemical engineering, economics, global strategic management operations research senior and graduates
teaching and research program. Pre and post crisis recovery , corporate reform, restructuring, reeengineering, cost
reduction
Simulation results of Thailand, Japan, Korea, Singapore, Hong Kong, China, Taiwan , US inflation, GNP, interest
rates, FDI capital flow, bank defaults rate, Tokyo, China, Hong Kong Properties prices, Currency, stock, bond index,
profit margin and corporate stock prices will be demonstrated in the conference.
Quantify the uncertainties of global central bankers monetary policy impact on economy and
financial markets by Combined Feedforward, feedback control of inflation GNP through micro-tuning policy
The global central bankers monetary policy use money supply and various interest rates instruments to control the
inflation meeting the GNP growth rate set by the economic plan.. While the commodity, oil prices and the dollar
exchange rates also influence the inflation rate through the imported inflation. While the GNP are related to money
supply growth, interest rate are used to accelerate ( rate cut) or slowdown (rate increase)the GNP and export growth,)
Numerous research within FRB have made by successfully tracking interest rate impact on output by Brian Sack and
John William’s FRB/US and FRB/Global model on Monetary policy impact on US and global macro economy and
financial markets
However, the following equations have been tracking successfully 100 IMF members countries central banker monetary
policy impact on the macro-economy :
Inflation rate = F (Money supply growth rate %, Commodity index, Dollar exchange rate)
GNP
= F (Money supply growth rate %, Interest Rate, Export Growth Rate)
OSA/US and OSA/EURO for Economy and Financial Markets Simulation:: These formulas tracking the EURO 11
member countries monetary policy interbank interest rate converged to 3 % and with 4.5 % money supply growth to
meet 2 % inflation and 2.5 % GNP this year.. US, EURO, China inflation drop below 2 % due to falling commodity prices
and strong currency and have been used by the senior author to trained 1000 economics students tracking 100 IMF
countries Macro, financial economics with average error below 1.5 %, explains last winter US three interest rate cuts
to 4.5 %, provide m2 money supply growth rate expanded to 10.5 %, and dollar plunge 20 % to boost export and
provide 4 th quarter 1998 GNP 6 %. to prevent US from danger of deflation caused by Global Financial Crisis related
credit crunch, it also predicted 1993 deflation: money supply dropped to –2 % even the fund rate cut to 3 %, led to US
GNP contracted to 3 %..
OSA/China Financial Markets and Economy Application: How China avoided 1994 Financial Crisis and made softlanding and the 1998 Asian Financial Crisis Simulation: The senior and the junior author Ji and Dai spending half time
in China during 1988 - 1998 implementing these relationships tracking Taiwan, Hong Kong and China peoples banks
monetary policy impact on inflation and GNP and interest rate, Taiwan and RMB currency and stock markets prices. It
accurately tracking and predicted daily China economy and financial markets activities, how the current Prime minister
Zhu Rongji successfully managed China's monetary policy led China avoided possible financial crisis by successfully
controlled the inflation, to bring it down from 35 % and 100 % currency depreciation to current -1 % inflation and
boost domestic demand to maintaining 15 % money supply growth 7.8 % GNP growth and Shanghai stock index
traded between 600 and 800 during 1994 and 1996 through three stages credit tightening to cut the domestic demand
4
and reduced the import duty by 30 % to reduce the importing inflation and implemented stock markets and financial
institution regulation and full transparency, ban short term foreign capital speculation in the housing and stock markets
achieved perfect soft-landing in 1996. And also predicted 1996 interest rate cuts leading to bull markets, with Shanghai
A index tripled from 520 to 1650 .The state enterprise reform and Asian crisis resulted high unemployment and export
slowdown, pulling the money supply down from 1996’s 28 % to last year’s 14 %, drag the GNP form 9.5 % to 7.8 % last
year and Shanghai index from 1600 to 1130, China’s high trade surplus at 40 billion and 140 billion foreign reserve
supported RMB at 8.3, However, the declining export, 50 billion domestic public construction deficit budget and 150
billion short term debt and slowdown in foreign direct investment will put pressure on RMB this year. . The tracking of
China’s macro, financial trade economic impact on 700 listed corporate industries trends, profit margins and stock prices
results have been invited to speak to daily and weekly nationwide TV radio program, government securities, Shanghai
Stock Exchange on investment strategy and risk management to 20 million financial and banking industries CEO,
Fund manager, investors.
OSA/ASEAN and OSA/Asian, OSA/Russia, OSA/South America Financial Crisis Root Causes Simulation:
These formulas indicated the rest of Asian emerging countries, Russia, Mexico, Brazil failed to do so, maintaining
excessive money supply and growth, by encourage short term hot money speculating in housing and stock markets
resulted soaring stocks and properties prices and labor costs caused export decline and huge trade and current account
deficit, led to runaway currency depreciation and inflation, followed by rising interest rate and tight money supply
resulted economic contraction between 5 % and 10 % started July of 1997 , the burst of the asset bubble and windening
of bond interest rate spread
These formula provide global central bankers and IMF combined feedforward and feedback control of inflation GNP
through micro-tuning policy, meeting growth and stability control without causing damage due to deflation and inflation
Monetary Policy Impact on Global Financial Markets Dynamics Simulations:
Monetary Policy and shocks, speculative attack impact on global Financial Markets dynamics under stress:
Global Interest Rates , Bond prices and spread, Debt Markets Dynamics , Credit, Market Risk Simulations
The global central bankers use the commodity prices and inflation rate as the leading indicators for setting the
monetary policy and short term interest rates (interbank rate or Fed fund rate), while the long term interest rate bond
yield are related to the dollar exchange rate which influence the capital flow
.
Short term Interbank or Fed fund rate =F (Money supply growth rate %, commodity index, oil price, inflation )
While the long term bond yield
= F( money supply growth rate %, dollar exchange rate, inflation rate)
These formulas tracking, simulate global interest rate, bond prices dynamics accurately. It indicate that reduced
demand due to Asian turmoil have pulling down the global oils and , commodities prices and inflation, and allow the
OSA/Global and OSA/US application to US treasury and junk bond prices spread LTCM failure simulation : US, China
and EURO central bankers applying expansionary monetary policy, which lead to falling interest rates and all time high
in bond prices, T-Bond yield dropped below 4.5 % due to low inflation and strong dollar, while the junk Russia bond and
US corporate bond was hurt by global financial crisis, especially Russia’s high inflation, falling rubble , pushed yield to all
time high led to widening spread last summer. And US Fed three interest rate cut to 4.5 % due to strong dollar and low
inflation, oil prices last summer and this year oil price doubled to 22, the soaring US stock market fueling consumer,
business demand, pushing housing prices and labor prices inflation exceed 2 %, lead US Fed fund rate raised to 5.25
%, bond yield soared from 4.5 % to 6.3%, due to falling dollar, rising inflation, and concerned about asset bubble burst.
These formulas also indicate EURO inter- bank rate converge to 2..5%
These deterministic models minimize risks , saving trillion dollar loses due to central bankers monetary policy risks,
credit risks in developing countries, and betting on the wrong side of interest rates by LTCM and other banking and
financial industry executives`
OSA/ASEAN, ASIAN and Russia, Brazil crisis applications While the troubled ASEAN and Asian countries and
Russia, Brazil, Mexico central bankers have to tight the money supply, raising interest rates to fight inflation and
stabilize the currency which caused by excessive money supply and currency depreciation, led to capital outlow, bond ,
stocks, plunge, bond yield spread soared to new high, instead of converge
OSA/Global Currency: Monetary Policy Impact on Asian and Global Currency Exchange Rates Dynamics,
Risks Simulation—The Onset of global currency crisis:.
The US dollar exchange rates are related to US and the other countries trade deficit (or surplus) and the two countries
interest rates spread (which control the capital flow)
Dollar exchange rate = F (US trade deficit, the other country's trade surplus (deficit), interest rate spread)
Over 100 IMF countries dollar currency exchange rates simulations have been used for 1000 chemical engineering
and economics seniors course assignment by the senior author . The tracking results have been published in the
weekly trade journal for 100,000 Taiwan's Taipei importer/exporters members daily trading decisions
5
Asian, Russia, South American Currency Crisis, Risks Dynamics Simulation
The above formula tracking, simulating ASEAN, Asian troubled countries, Russian, Brazil daily currency dynamics
before, at the onset of , during and after the crisis with average error below 1.5 %. It accurately predicted these central
bankers must tighten money supply, raised interest rate to stabilize the exchange rate (increase the interest rate
spread) due to rising trade and current account deficit.
Pre- currency crisis root causes Dynamic simulation :The excessive money supply and pouring foreign capital inflow
led to ASEAN, Asian , Russia, Brazil economic boom and skyrocketing labor and properties, stock prices and wages,
have cut into the export market competitiveness (against China's low labor costs), lead to soaring trade and current
account deficit in Thailand, Indonesia, Malaysia, Philippines, Singapore, Korean, Hong Kong, Brazil, Russia. This
formula indicated fixed currency were overpriced(as shown)
. Dynamics Simulation of onset and during the currency crisis
The announcement of floating the currency lead to instantaneous currency deprecation according to this formula:
Thailand, had to raise to interest rate from 15 % to 30 %, to stabilize the Baht exchange rate around 50(depreciated
form 25), Hong Kong raised the interbank rate from 5 % to 25 % to allow the Hong Kong dollar stick to the 7.7), S. Korea
has to raised the interest from 20 % to 40 % to prevent it drop to 2000 (depreciated from 750) , Indonesia had to raise
interest rate from 20 % to 57 % to stabilize the Rupiah at 17000., Malaysia, Taiwan and Singapore, Australia all had to
raise interest rates to stabilize their currency due to widening trade deficit, . The central bankers must raise the interest
rate to stabilize their currency and fight inflation. Thailand, Korea, Hong Kong, Brazil, doubled interest rate Russia
tripled the interest rate to fight inflation and stabilize currency and reduce domestic consumption, thus improve trade
and current account surplus.
OSA/Brazil central bank decision to float the Real currency, cut the interest rate to save the stock market, took the Real
dropped from 1.1 to 2.4, help to boost the export, the stock responded to the interest rate cut, rebounded from 5000 to
9700, the global players are supporting the stock markets make it stick to Dow index (following Hong Kong style),
despite Brazil economy under 4 % contraction and further tightening to cut expenses, Brazil interest rate, Real currency
and impact on stock market have been simulated accurately
OSA/Global Trade Simulation
Monetary Policy Impact on Global Trade, Industrial Economics, commodities, profit margin, equity prices trading loses
risks Simulations:
The LTCM expert and global players, fund manager lack of good knowledge of global central banker monetary policy
impact on macro, financial economics interest rate, currency and it’s impact on global trade economics , corporate
earning and stocks performances. The global players MAKING INVESTMENTS DECISIONS BASED ON speculation
on the interest rates and merger acquisitions news, ignoring the Asian and Russia, South American turmoil resulted
slowdown impact on corporate profitability , pushed stock prices to new high and then plunge up to 90 %(in Hong
Kong red chips) and 20 % correction in US and EURO stock last summer.
Export Growth = F(export market central bank monetary growth, interest rate, currency exchange rate)
Import growth rate = F( central bank money supply growth, interest rate, currency exchange)
OSA/Global: indicated Asian, Russia, Brazil crisis countries all depreciated currency to boost export
OSA/US: US last winter cut interest rate led US dollar depreciate 20 % aqgainst Yen to boost US goods export to Japan,
but Japan’s sluggist demand( money supply growth stay at 3.5 %, cut into the benefit of dollar depreciation
OSA/Global and OSA/US Monetary Policy impact on US and Global capital markets commodities, equities, derivative
prices simulation
Asian , US, Global Capital Markets Dynamics Simulation, Risks Assessment, Portfolio Management
The global central bankers monetary policy risks impact on global financial markets interest rates, currency rate
risks(betting on the wrong side) and it's relation to Global stocks and bond, commodities and financial futures and
derivatives (put/call options) prices movements have been simulated through the senior author knowledge based Global
Financial Markets Operations Simulation Analysis, developed out of huge global financial markets data and knowledge
base, and implemented for global multinationals corporate finance daily decision analysis and risk management
Monetary Policy Impact on Global Commodities, Financial Futures Derivatives prices trading loses Risks OSA:
The Global Commodities, Industrial raw materials, consumers products and Futures Prices and Risks Simulations,
Forecasts
Gold, commodities cash, future prices = (current, future oil price, inflation rate, dollar exchange rate)
The risks in uncertainties in corporate profits due to global deflation, resulted product demand and prices slump in
global commodities, industrial raw material and consumers products contract and spot and futures prices and credit
crunch can be simulated to it's current and future raw material cost, downstream demand, and the dollar exchange
rates in the trading countries or spot, futures markets. Thousands of such proprietary prices simulation forecasts
models have been developed, implemented for 20 millions US, EUROS, Taiwan and China's corporate procurement,
6
marketing, sales managers and 100,000 importer/exporter members weekly global currency tracking and import/export
pricing strategy and gold and metals, feedgrains, oils, petrochemical, fibers, plastics, paper and computers companies
daily global corporate procurement, marketing strategic decisions during the last 14 years These relationships explain
the recent gold prices slump to new low of 270 is due to Asian slowdown, the strong US dollar, lower inflation and the
falling commodities, (oil prices account for 30 % gold production costs) and last winter weakness in dollar (dropped
from 145 to 111 take the crude oil price to 16 and gold rebound to 308 .Continued trouble in Brazil and Asian slowdown,
pulling down commodities prices and inflation rate took the gold prices down to 270, it is supported by US dollar
weakness and recent oil price rebound ( as confirmed by Haubrich analysis, gold close relationship to inflation) The
current economic slowdown in Asia, Russia, Brazil, caused by credit tightening due to Asian Financial Market Crisis
lead to falling oil, petrochemicals raw material and products, IC, computers prices will continue till spring of 1999, .
OSA/Oil Prices, refinery profit margin and stock prices: recent rebound of West Texas crude oil price is due to cold
weather resulted fuel oil demand and prices pushed form 33 c to 41 c, and increased gasoline demand as travel season
starting April till summer prices increased form 33 to 49, followed by OPEC cut 1.7 million BBL per day production.
However, the crude oil price will stay between 13.5 and 16, as warmer weather ahead will cut fuel oil demand and
prices. The lower ethylene price is due to lower crude oil price, naphtha price and slowdown in Asia, the Won's
depreciation.(cost) and strong US dollar ). Refinery margin dropped from 8 % to 4 % as shown in the simulation, is
benefited by high gasoline demand and prices support in US and EURO, but hurt by fuel oil and crude oil prices due to
Asian, Brazil slowdown. However, the oil and oil service stocks will rebound 20 % with the gasoline and oil prices in the
month ahead, despite it’s earning are 50 % below last year. The slump in IC DRAM and PC prices are due to strong US
dollar VS Korean Won, Japanese Yen and the technical innovation (short product life) the falling trend will stop as recent
dollar plunge.. The impact of global economic demand and production cost and dollar exchange rate impact on the
these commodity and consumers products prices in the global import and export market are simulated reliably for daily
corporate financial and marketing decisions with average error below 1.5%,
Global Credit Crunch, LTCM impact on banking finance industry profit margin, stock prices
The Global Financial Crisis, LTC, hedging fund caused Credit crunch impact on US banking profit margin , stock
price
Simulation
Greenspan's three interest rate cuts led US and global stock market rebound has temporarily improve the credit crunch
situation, US Citicorp stock rebounded more 80 % from 35 to 65), while US regional banks really benefited by the rate
cut, with profit margin of 20 % much higher than Citicorp's 5 %, the global player, EURO financial integration of banking
into global financial investment banking (recent Bundesbank merger Bankers Trust, will expose to the global capital
markets risks, while the EURO regional banks may be benefited by post EURO expansionary Monetary policy to reduce
unemployment., German Deutsche bank and France BNP bank of Paris stock prices are suppressed due to exposed to
global financial crisis resulted credit crunch as shown.
The Asian, Russia, South America financial crisis caused global credit crunch have caused global financial industries
billion dollars loses and trillions dollars bad loan took global banking and financial stocks like Citicorp plunge 50 %
From 74 to 29. As simulated due to money supply growth contracted to 6.9 %, daily fed fund rate % soared to 6 %, dollar
plunge to 111. , While the 1991 global deflation took US money supply down to 0.3 %, Fed fun rate to 9 %, caused
Citicorp huge loss, the stock plunged to 10,details can be found in the simulation charts.
OSA/Global Capital Market :Monetary Policy Impact on Global Capital Markets Portfolio Prices
impact on global stock market indices cash and futures trading loses risks simulation:
Stock Index/Bond cash and future price = F (M2 money supply growth, interest rate, dollar exchange rate)
This relationship simulated last 15 years 40 daily international stock market stock indices, including normal and major
crisis (under stress discontinuous data) with average error below 1.5 %. It predicted 1987 crash: and 1995 Baring betting
on the wrong side of Nikkei Index.
OSA/US Dow Jones Index risk dynamics simulation:,
1987 crash :The high US inflation rate (6.5% ) complicated by the Iranian war in early Oct. 17, 1987, pushed the oil
price to 25, lead US Fed credit tightening, reduce the money supply growth from 9 % to 7 %,, raised the Fed fund rate
from 9 % to 9.75%, the Dollar Yen exchange rate drop from 150 to 136, took the Dow instantaneously crashed from
2250 to 1520 It also indicate the Dow responding to last winter 3 Fed fund rate cut , each 25 base point corresponding
to raise the money supply 1 % and pushed Dow 800 points ( the first rate cut pushed money supply from 6.9 % at the
credit crunch, Dow rebounded from 7400 bottom to 8200, the second rate cut pushed money supply from 8.5 % to 9.5
%, pushed Dow from 8200 to 9000, while the third rate cut led to overheated stock and properties prices and
speculation, the money supply growth pushed to 10.5 % in January, took the Dow marching toward 10,000 and making
new highs in mid March, due to high money supply growth of 10 .5% and three Fed fund rate cuts to 4.5 %,dollar
plunge 20 % to boost export (IC and computer industry are benefited)
OSA/EURO Stocks :Monetary Policy and LTCM impact on EUROS stock markets risks simulation : This formula
also predicted 1992 European currency crisis caused stock market plunge and 1998 July German, DAX, Italy, CAC,
London Financial Times stock markets rally to new highs due to union central bank announcement of the post union
interest will converge to 4 %, and expansionary money supply .
And recent US three interest rate cuts followed by EURO central bank announcement interest rate cut to 3 %, money
supply growth to 4.5 %, to most EURO stock index rebound more than 20 % , with UK, France, Spain rally to new high,
as indicated in the simulation charts.
The Russia crisis and LTCM hedging fund loses resulted banking and financial industry credit crunch have caused
EURO billions dollars loses (German and Swiss, Sweden suffered the most with 30 % loses) However, any Euro stock
markets setback will provide good investment opportunities for the post union stock markets rally.
7
OSA/Asian and Emerging Stock Market Crisis, Credits Risks and LTCM hedging fund Risks Simulations:
This stock index formula accurately predicted the ASEAN Currency crash has spilled over to Japan, Korean, due to
mounting trading and current deficit, the credit tightening in support the currency caused their stocks plunge more than
50 % (especially Hong Kong raise the interest rate to stick to the dollar) caused their stock index plunged more than 70
%, Japan was drag into the crisis by trillions dollars trading and currency exchange rate, credit loses in bank loan,
Global Stocks, Bond Options Hedging Risks Simulation: While Japan is badly hurt due to heavily invested in Asia, The
Tokyo Nikkei index Plunged to 12800 as Yen dropped to 147 and the contracting money supply growth(domestic
demand slumped )..These simulations forecasted on the website, HK Henseng Index plunged more than 50 % to
6100 due to interbank rate pushed up to 25 %(to support HK dollar, money supply slumped from 18 % to 3.5 %) and
while China Shanghai Stock Index down 30 % from it's top due to Asian slowdown, money supply dropped below 15 %,
and The global credit crunch pushed Fed fund rate to 6 %, dollar soared to 147, money supply dropped to 6.8 % took
US DOW JONES retreated to 7100, While Korea's Seoul Index crashed 50 % due to Won exchange rate plunged from
800 to 2000, interest rate hike to 30 % and Russia's interest rate tripled to 200 % to stabilized Ruble from 20 to 10
(LTC betting on the wrong side of interest rate took the Russia stock index tumbled from 1340 to 130, all have been
simulated accurately by our expert systems shown in the work.,
This formula provide reliable hedging, decisions and option pricing support to cut the down side risks while maximize
profits.
Conclusions :
US Fed Chairman Greenspan has been putting more focus on the dynamics monetary policy impact on Asset Price
Bubble and The Asset bubble interaction with monetary policy and macroeconomic demand and bubble burst resulted
another LTCM type financial derivative markets failure
The expert systems presented will provide rational decision tool to predict and prevent future excessive monetary policy
and financial market decisions based on the current VaR models betting on the wrong side
References:
Global Financial Markets Simulation Reference
MF report on Global Economic Outlook and Capital Markets Implications Dec. 15, 1998
EURO convergence report, Dec 18, 1998 by European Central Bank
Federal Reserve Board Systems working papers, speeches:
Brian Sack: Uncertainty, Learning and Gradual Monetary Policy, July 1998
Michael Gordy: A Comparative Anatomy of Credit Risk Models: Dec. 1998
Greenspan: Speech on Financial Derivative, Mar, 19,1999 and Asset Bubble Aug. 27, 1999
John Rogers: Aggregate Disturbance, Monetary and the Macro economy The FRB/Global Model\, 1998
John Williams: Aggregate Disturbance, Monetary and the Macro economy The FRB/ US Model, 1998
Marvin Goodfriend: The Neoclassical Synthesis and the Role of Monetary Policy, June 1997
Warren Huang References : Banking and Finance
:
.
1. Huang, W, Ji, X. M "Monetary Policy Impact on Global Financial, Banking Crisis, Recovery and Risk Management",
presented to Int'l Central Bank Governors Conference on Policy to Sustainable Growth, May 14-15, 1999, Macau,
Organized by China Peoples Bank and Monetary Authority of Macau, Hong Kong, central bank governors from Japan,
England, Thailand, Philipines , IMF
2. Huang, W, " Government and Business Operations Simulations based Global Risk Management", presented to
Government and Business Strategy conference in Capital Hilton Washington DC, June 30, 1999 ,with combined Global
financial Crisis panel discussions(including IMF, World Bank, Oxford Economics and S &P DRI, Goldman Sachs,
Agricultural economics research directors
3. Huang, W, Ji, X. M " Real Time simulation of global financial crisis, Recovery impact on post EURO capital markets
price and risk management ", presented to European Finance Conference, Barcelona, Spain, June 4, 1999
4. David Walker( Georgetown University), Huang, W,, IMF director, Panel Discussion on " Emerging markets crisis,
economy", June 3,1999, Barcelona, Spain
4. Huang, W. "Simulation of Monetary Policy Impact on Global Financial Crisis, US financial Markets and Risk
Management", presented to Washington DC area Finance Conference, Apr. 30, 1999, Fairfax, Va.
5. Huang, W, Ji X., M. " Real Time simulation of global financial crisis impact on Pacific Basin capital, Derivatives
markets prices ,risk management ", presented to 7 th Pacific Basin Finance Economic Conference, Taipei, Taiwan, May
28-29, 1999
6. Huang, W, Ji, X. M " Simulation of global financial crisis impact on Multinational Corporate Finance Performance""
presented to Multinational Finance Conference,Toronto, Canada July 7,1999
7. Huang, W,. " Real Time simulation of global financial crisis impact on EURO Capital Markets Risks Management"
presented to UK Royal Statistics Society Risk Management Conference , Warwick, UK, July 14, 1999
8. Huang, W, Ji, X. M " Real Time simulation of global financial crisis impact on South American financial markets and
Risk Management" presented to Conference on new idea, Mexico City, Mexico, Aug, 14-18
9.Huang, W, " Monetary Policy Impact on Asian Financial Crisis, Recovery, Risk management", to be presented to Int'l
Conference on Challenges in Globalization", Oct. 22, 1999, Bangkok,Thailand
10. osawh.com :daily tracking Simulation of ASEAN, Asian, Russia, South America Financial crisis,recovery impact on
global deflation, impact on Global Financial Markets, Import/Export, risks simulation and investment strategy
8
11. Huang, W. "Goal, Mission Performance oriented OSA Models Predictive Control” to be presented to American
Institute of Chemicals Eng. Annual meeting, Dallas, Nov. 5, 1999
12. Huang, W. "Real Time simulation of Asian, Russia Financial Crisis Impact on US financial market and risk
management " presented to Midwest Finance conference Mar. 28, 1999, Nashville, Tenn, US
13. Huang, W. "Real Time simulation of Asian, Russia Financial Crisis Impact on Post EURO financial market "
presented to finance , banking conference on post EURO finance, banking strategy, Nov.-27, 1998, Rome
14. Huang, W. "Asian Financial Crisis Impact on Financial Derivatives Prices Simulation", Accepted by QFM98,
Computational Methods in Financial Derivatives Conference, Dec.16, 1998, Sydney, Australia,
15. Huang, W." Financial crisis impact on global Financial Markets prices performance "presented to EC2, Econometrics
Forecasting Conference Dec.19, 1998 Stockholm Sweden
Corporate Reform, manufacturing industries restructuring, reengineering,, technology innovation
1. Huang, W. OSA 32 global strategic management systems recommended by US Houston Gulf publishing,
Hydrocarbon Processing control and information management handbook, Sept, 1991,1993,1995,1996,1997,1999
1 Huang, W. "Operations Simulation Restructuring, reengineering Maximize Refinery, Olefin Plant Productivity,
Flexibility", Sept. 1989 ASCOPE, Oct. 2, 1991, Oct. 6, 1995 Singapore, Beijin, Antwerpan,
3. X M Ji, Huang, W. "Operations Simulation Supported Reengineering Maximize Corporate Productivity and
Flexibility", to World Economic Management Conf. July 20 , 1997,Shanghai China.
Huang, W. ,"Financial and Macroeconomic Impact on Int'l Petrochemical prices, demand, Trade", "OSA supported
Education and Training ",to World Congress III, Oct. 1986, Tokyo.
9