Forces of Gravity in Emerging Markets

Laws of Gravity

In 1687 Physicist Isaac Newton laid the foundation for the rules of motion describing the physical relationship between a body and the forces acting upon it. One of the rules he founded was that to each and every action there is an equal and opposite reaction.

Even in today’s age of scientific advancement this physical law has held its ground and proved the basis for mathematical modeling of moving objects, projectiles and the like. Today if a car was modelled to slow down without having to exert an opposite force or increase the friction at the wheels, the driving experience would be riskier, crash bound and a blood induced. Similarly if planes did not have an equal and opposite force exerted on the engines upon landing – flying would be a disastrous experience and ruled out as mode of transport.

Generating wealth also has to have ground rules in order to prohibit thieves, gangsters and money launderers from masquerading around as legitimate businesses, routinely driving the world economy into disaster. The fundamental rule of wealth generation is to ensure that money itself is not used as a means of creating more money.

Cancerous Growth

Bankers today offer a range of attractive investments through their investment arms. Customers can invest into money markets, also known as FOREX markets which generate money from fluctuations in foreign money currencies. Trading money in exchange for more money in the form of bonds and securities are also available on the investment menu.bacteria-microscope

What these types of trading have in common is that they do not add value to anyone, anywhere except short term profit to the bank and the investor. The money itself does get to see real life tangible projects or innovations. It is simply multiplies through currency devaluations and changes in interest rates. I compare it to the asexual reproduction of eubacteria where a single cell splits and multiplies several times without ever having to interact with other cells in its local community, selfishly passing genome from parent to sibling. Investments in FOREX markets behave in similar fashion; money multiplies without ever being passed through the hands of business start-ups, or innovations, or society enhancing programs. Nothing tangible is created, only the multiplying of paper money through forecasting that paper money in other currencies will increase in value.

The loophole created by asexual type investments has a horrid effect on the economy and causes many societal issues. For the rest of society the ground rules of wealth creation is mandatory – man has to work or innovate to generate income.

Energy 

Money can be gained by many legitimate means. Whether you own a business or you are an employee– you earn money by offering a good or a service that someone is willing to pay you for.

In the case of a business owner you have probably taken many personal risks to get the company where it is. You have steered it away from the jaws of competition to find a suitable spot in the market where your business can flourish. In the process you have faced many failed attempts and have dedicated much of your time and effort to ensure the success of the business.

A similar pattern can be drawn for employees. Finding a job is hard work – sometimes harder than the job itself. A person has to prepare their documents, CV, reference, training and qualifications and effectively make a case that he or she is the person for the job. Much like a sales person selling goods- a job hunter is actually in the business of selling himself as a potential asset to a company.

If the company decides to hire you- you go through the process of relocation, finding a place to stay and spend your first days completely absorbed in trying to impress your boss that he or she made the right decision hiring you.

The more time and effort you put on your ambitions, the higher the returns.

Your Savings – No effort required

The ironic aspect of the banking business is that the banker makes windfall profits from other people’s deposits. Even the moneylenders making deals in the temple that Jesus referred to as the “Den of Thieves” actually owned the money they were lending out; Bankers today have taken it a step further by issuing loans using your savings.

Very basically, banks earn money by charging more interest on loans than they pay on savings deposited into the bank. The greater the number of loans it can offer the higher the profits.

For example, John loans from the bank $ 1,000,000 at 20% annual compound interest. After one year the bank will demand the sum of the original loan $1,000,000 plus the interest $200,000.  A total amount payable of $1,200,000 after 1 year. If John cannot pay the bank after one year and pays it the next year then he will have to return $1,440,000 instead after 2 years. The longer the payback duration the higher the interest payment John has to make and the more profitable the bank becomes.thinking money

Ahmed on the other hand wants to place a saving in an account, and is offered a 4% interest rate for his savings, much lower than the 20% charged upon loaning. So placing $1,000,000 after 1 year of savings will be becomes $1,040,000. After 2 years of saving will become $1,081,600.

If John and Ahmed were the only two customers the bank had and made their transactions at the same time, the bank would make a profit of $1,440,000 – $1,081,600 = $358,400 after 2 years without having to lift a finger.

The only legwork the bank has to do is manage the cycle of loans and savings between John (debtor) and Ahmed (creditor). The genius operation, also called risk management can be done by trained monkeys using simple mathematics. In fact computers do a lot of the legwork in today’s technology savvy banks in which quantities of credits and savings can be easily read from graphs and money indicators on plasma screens.

However even this simple task of managing risk is often miscalculated by banks. The most recent famous banking bankruptcy that took place in 2008 was a direct result of money mismanagement and the inability of the banks to recognise it had lent past its limits.

Infrastructure

Instead of investing into money markets that may or may not materialize and have no societal benefit – a safe alternative is to invest in tangible developments projects such as infrastructure where the natural forces of gravity regulate losses and returns i.e. money does not mysteriously appear and disappear.

One of the secret blessings of emerging markets is that the financial products are not as developed and assorted as in the developed world which means that investments are less likely to end up into FOREX, bond , securities and other money markets and more likely to end up in physical infrastructure and tangible markets.

Returns to growth from infrastructure are well established. According to the IMF, a 1% increase in spending on infrastructure leads to an average of 1.5% points in GDP growth over four years. In countries where infrastructure is well planned and well executed, the return is even greater—2.6 % points over four years.

According to McKinsey and Company insight there is $106 trillion of institutional capital available in the form of pension and sovereign-wealth funds. The Organisation for Economic Co-operation and Development estimates that only 1.6% of that is directed to infrastructure. Research from the Global Infrastructure Hub states that 69% of institutional-investor funds want to increase allocations to the infrastructure sector in particular emerging markets.

Profitable investment is not limited to the multiplication of stored cainfrastructure-treesh over time. Investments into people, the community they inhabit, the built environment that surrounds them and the businesses that employ them can prove more fruitful returns to the investor, many times more valuable the cost of the initial investment.

By providing leadership, defining a strategy, and creating effective planning and implementation agencies, governments can create the conditions that will encourage the private sector to invest in infrastructure markets, improving the well-being of people and communities in the process.

 

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