Armstrong Testimony to Congress

TheintroductiontothetestimonyofMartinA.ArmstrongbeforetheHouseWays

&

MeansCommitteeJuly1996

1

July

18,1996

Testimony

ot

Martin

A.

ArmstrongChairmanPrincetonEconomicInstitute214CarnegieCenterPrinceton,NJ08540Mr.Chai~an,m~mbersofthecommittee.IwouldliketothankyouforinvitingmeheretodaytoofferwhatInformationPElhasgatheredfromourexperienceindealing

\"lith

the

multinationalcorporateandinstitutionalsectoroftheglobaleconomy.Asabrief

background,PEI

maintainsoffices

in

the

US,

Tokyo,HongKong,SydneyandLondon.Wecurrenttyprovidecorporate

and

institutionaladviceundercontractonglobalassetsexceedingUS$2:5tri~ipn.anamountequaltoabouthalfoftheUSnationaldebt.InourqJpacityasanadvisorservingtheinternational.cornmunityinreallifedecisjonmakingratherthan~ry,PEl

may

beuniquetyqualifiedinprovidinginsightastohowaodwhybothinvestment

andbusiness

capital

flowsare

affectedbyanation'sdomesticpolicyobjectives.Ithasbeenourexperience.thatthereatefivekeyfactors

that

provide

theCOre

stimulus

behind

capital

<flows

internationally.

•1)FonaignExchange•2)Taxation

•3)LaborCoati

•4)Jnfl.tiona.InterestRates

•5)5&cumy(geopoJitical

&.

financial)

let~begin

withforeign

exchange

asan

iIIustnition

ofhow

capital

is

being

affected

beforediscussingtaxation.ForeignExchange

fluctuations

havebecomethenumber

one

cause.ofcorporatelosses.Thepercentagemovementintheexchangevalue

of

currenc~ahllsbecome;ashighas40%ov.era

two

yearperiod.ExchangelOsseshaveimpactedeverysectorofbusiness·ineverynation

to

thepointiJlat~.•verywaymultinationalsoperatetoday

is

drQlTlatic;allyshifting.fJom1h9t

of

only"10

yearsago.

Multinationals

havebeenforced

to

.changepJicingpolic)'a&~lIasthell:>cationof

manu~ct\Jre.n.anE!fforttoredu~extremefinanclalrisks.fortllei("sh$r$noJde($.Transactionssuch~sRocKefellerCenter.MCAetcresultedinsignificant

'0S8e8

tothe

Japanese

investors,moreso

by

the

40%

depreci<ltionofthe

dollarthanthea<;tLJaJdecli~

in

valueof.

the

underJtingassets.Japan.Airlineswas

forced

tolay-off25%of.itsworkforcelastyeardueto

the

factthattheircost

base.

wasJapaneseyenwhiletheirrevenuewas

largetyforeignQ,llTency

denominated.InGeamany,Mercedeshasbeenforcedtorestructuretheirpridngpolicyas

of

Julytst,1996due

to

fore;gnexchange_lnslaadofpricingtheproductinDMa~around

the

worki,which~

costth~m

market

share,productswillnowbepricedinlocalcurrencythereby

transferring

thecurrencynsk

bade

to

Germany..

I

Theseare•butafewexamplesofhowthemorerecentextremefhJCtuationsin

the

exchangevalueofcurrencieshasimpactedbusiness

and

investmentdecisionsonaglobal

scale.

V\lhile

it

may

bepoliticallypreferabletomanipulatecurrencyvaluesinanattempt

to

impacttradeflows,inreality,traoeaccountsfor

less

than

10%ofthetotalworldcapital

flow

movement.

Ourwarnings

deliveredinaletter

to

Congressand

the

WhiteHousebackin1985

cautioned

against:such

intentional

currencymanipulationasenactedinthe

G5

SeptemberPlazaAccord.

The

netresultofA069309

attempts

toinfluencetrade

through

currencymanipulationledtothe1987Stock

Market

Panic.

PEl'sresearchwasrequestedbytheBradyCommissionandwewouldlike

to

thinkthatwehadsomeimpactupon

its

findingssincetwoofourclientswereontheCommissionitselt.Mr.BradylaterstatedthathebelievedthatcurrencyfluctuationshadplayedaroleinthePanicof1987.Offeredhereisagraphicillustration(figure#1)ofthenetcapitalflowmovementforthatperiod.Theupperportionofthegraphplotstradeandthelowerportioncapitalmovementwhichincluded.stod<S,bondsandrealestateinvestment.Whatisimportanttonote

is

thateversinee1987.

the