Theory In Political Economy Of Finance And Nature: A Discussion

Commonwealth Bank of Australia

Discuss about the Theory In Political Economy Of Finance And Nature.

CBA is one of the best known banks in the city of Australia and it serves its clients as a commercial bank. This means the bank is involved in the business of borrowing and lending cash to its depositors on a given interest rate (CBA 3). Commercial banks are regulated by a central body which ensures that bank lends to customers at an affordable rate without exploitation and distortion in the amount of money supply in the economy. Creating any shortages within the economy may result to rising inflation as well the inability of clients to get loans since the margin on interest on saving and lending is so huge for customers to believe that the lending rate is feasible. Therefore regulation of banks has become so critical in many countries so is the case in Australia (Sims 1) The Federal government may at times decide to introduce taxes on banking industry and it, therefore, means that the share prices of the industry will plummet especially in such instances where the all the banks are operating at the same tier. Therefore, it is the duty of the regulating body to ensure that all banks listed in ASX can provide credit, accept deposits and pay their customers dues on demand whenever the customers demand their money.

The share prices of CBA rose from 2014 from 75.62 AUD to 83.39 AUD in 2015 then fell to 78.88 AUD in 2016 and rose again in 2017 to 84.13 AUD and it is on declining date today. The inconsistencies behavior of the CBA share prices has been attributed by forces of demand and supply which more affects how the operations of a commercial bank run. For example, the rising share prices may be have been as a result of increasing demand for CBA shares because of its profitability or might have been attributed to better management of company finances or the market or the financial markets at that particular year was favoring to the banking industry. However, other factors may have played a role in declining of share prices for the commercial banks. Some of such factor may have rotated within the changes in management which made the shareholders have cast doubts on the new management systems. The industry might have been having affected by the stringent laws by the regulatory bodies revolving interest capping and tax laws. Therefore, it makes a lot of sense to say that CBA operation has not been worse as depicted by the five years series analyzed by the graph above. The election of present Donald Trump has acted in the favor of financial sector which has made the prices of CBA shares to be on the rise compared to others. However, the investors have been warned to be cautious because they may tempt to invest in the company shares without knowing that the dividends paid by the bank have declined over the years. Therefore, investors should be warned about the impact of impulse buying without conducting due diligence on their nature of investment which might cause them to lack merits based on their risk appetite.

BHP Billiton Ltd

The shares prices of BHP Billiton Ltd traded at 34.02 AUD in 2014 and since then they have been on a declining trajectory. The share is trading at a minimum of 29.57 AUD in 2018. In 2014, the company reported a profit of $4 billion after a long period of losses and low profits. The company is in the mining industry of copper and oil as the main drivers of its total revenue. Iron ore business has been flat for quite a long period of time due to low demand for the same products (BHP Billiton 19). However, the management has developed mechanisms to ensure that it has the capacity to collect all its revenue by developing a mechanism of mixing a different kind of products such diamond and gold which will see its revenue go high. It is prudent to assert that the higher commodities prices and solid performance delivered free 4.19 billion in revenue (Yahoo 23). Additionally, the company was in a position to reduce it total debts by 10% and managed to pay some of its suppliers. But since then the operations of BHP has ever changed and things might not turn the way they were previously as a result of increased debts and losses accompanied by tax evasion cases.

The company has failed in many avenues in pleasing its investors in terms of health and having the ability to manage their business as well as maintaining sustainable development in their the United Kingdom. The waste the company produce has been spilled all over the areas of residence and this causes the organization to have a poor stakeholder management which has seen it lost much of its revenue since most people are not willing to stake their money with the company. The catastrophic collapse of tailings that is the fine waste at Samarco iron ore mine in Brazil on 5 November 2015 led to a loss of lives for twenty people and polluted hundreds of miles of rivers and sea.

The information by itself is much conclusive and it does outline the challenges the firm has faced since then. The most intriguing part was BHP owns 50% stake of the dam that collapsed affecting both the life of fauna and flora thus tainting their image to their stakeholders. However, the company has been on redemption through the implementation of five strategies the chairman of the organization brought to light in the Annual General Meeting: work safety was guaranteed for both internal and external stakeholders, evaluation of portfolio to foster diversification and reduce risks, cultivating capital discipline for all the employees and the organization, rejuvenation of culture capability and social licensing to operate in different geographical areas all over the world.

Fiscal Position of Australia Federal Government

Another factor that has played a pivotal role in declining of BHP shares has been related to non-compliance with regulatory authorities. The company has evaded taxes over the years amounting to $5.7 billion in 2005 and 2014 and this has made it lose its image and relationship with the regulatory authorities. The tax on precious stones has been on the rise and this has made the organization have difficulties in clearing the taxes owed (Nakata 240). Additionally, taxes levied has made the business of mining to be quite cost-intensive compared to other industries all over the world. However, the company has decided to seek for tax havens in order to generate profits for the year 2017. Therefore, the BHP management is working at all cost to ensure everything runs smoothly as expected to meet all their needs. The shares went ahead and slumped after the company was forced to write down nearly US$1.4 billion and cut its target for iron ore production amid falling prices. All these have contributed to declining level of stock prices at BHP.

The fiscal position of Australia Federal Government has been wanting in terms of a level of debts, taxes paid and level of spending across the whole industry. The debt level of the government lose from -3% in 2007-2008 to 10% in 2011-2012 of the GDP which is quite pleasing compared to any other country. It did hit the peak on 2015-2016 and reached 13% of the country total GDP (Drucker 32).

The levels were not unprecedented in Australia during that period. The debt in this country is comparatively lower compared to other countries all over the world. The government fiscal position has been negative since the expenditure is more than the income generated for the years beginning 1990 to 2015. Close attention should be taken to ensure that the government increases its sources of revenue to strike a balance between expenses and income (Tuyon and Ahmad 43). Additionally, it is clear that borrowing is made to finance its recurrent expenditure which should not be the case at any point in time. Going forward the nation will be able to mitigate its debt levels to acceptable limits that will ensure everything is carried out as expected and that no much hustle is experienced in borrowing from foreign countries. Much focus on this two thing will boost the operations of the nation going forward.

The above refers to the rate at which banks borrow from each and how the lending takes place. The interbank lending is critical since it plays a major role in determining how the firms are operating in a perfect. The curve is declining to show the yield on treasury bonds for the Australian Federal government has been falling. 

The above yield curve shows that interest rates rise with the increasing maturity period. The longer the time a security takes to mature, the higher the rate of interest it will be applied. This is because it acts as a compensation of holding investor money.

According to the Expectation Theory in terms of interest rate structure. It asserts that short-term interest rates determine the long-term interest rates. However, the target cash rate for the Federal government does not comply with the above assertion as much of what is happening the target cash rate for the Federal government has declined ever 2001 at an increasing rate. The above cash rates show that in case the amount is compounded it might come close to a range close to ton10% annually. It is the same rates the commercial banks conduct their lending with to affect their transaction on an overnight loan (Christopher 10). The expectation theory is of opinion that as maturity rate of a security increases, the cash rate goes high too. The treasury bill, in this case, is behaving otherwise since T-bills in 2001 has high cash rate than those in 2017 showing that they do not subscribe to the same school of thought.

The theory suggests that cash rates are determined by the forces of demand and supply which every other market player should understand so if they want to make prudent investments. The yield for cash rates has not been consistent since 2001 to 2017 (Beck et al. 79). The above may be explained by changes in demand and supply of the treasury bills in the bid to finance their investments. It is important for investors to rely on the market segmentation theory which focuses on the market behavior rather than focusing on any other factors which apply the rule of thumb. The target rate was high 2007 and was lowest in 2017 due to changes in forces of demand and supply (Wanna, Lindquist and De Vries 9). Therefore, in this case, the segment theory tend to have much to say than any other theory since its theories are adding up to make a lot of sense to the investor.

The movement in Australia fiscal position will affect the yield on the curves negatively since the investors will lack confidence in the ability of the nation will not be in a better position to meet its short term and long terms obligations going forward (Braun 1). This makes the yields to keep on declining over time and thus affecting the investors’ initiative to invest in the government treasury bills and bonds. Additionally, the yields may even slacken further to a negative value due to the inability of the nation to raise money for investments rather than covering its expenses over time.

The target cash rate has been increasing since 2001 until 2007 when it started falling until 2017. This was attributed by the government financing most of its recurrent expenditures using debt and this led to an inability to conduct huge investments in projects that will generate high returns with the project maturity (Makin & Pearce 424). However, the government has instituted measures that will ensure much of government project are funded by debt and recurrent expenditures funded by income generating projects within the nation.

References

Australian Office of Financial Management – www.aofm.gov.au 

Australian Securities Exchange – www.asx.com.au 

Beck, R., Ferrucci, G., Hantzsche, A., & Rau-Goehring, M. (2017). Determinants of sub-sovereign bond yield spread–The role of fiscal fundamentals and federal bailout expectations. Journal of International Money and Finance, 79, 72-98.

BHP Billiton Limited – www.bhpbilliton.com 

Braun, D. (2018). Fiscal policies in federal states. Routledge.

Christophers, B., 2016. Risking value theory in the political economy of finance and nature. Progress in Human Geography, p.0309132516679268.

Commonwealth Bank of Australia – www.commbank.com.au 

Drucker, P.F., 2017. The Theory of the Business (Harvard Business Review Classics). Harvard Business Press.

Google! Finance – www.google.com/finance 

Makin, A. J., & Pearce, J. (2016). Fiscal Consolidation and Australia’s Public Debt. Australian Journal of Public Administration, 75(4), 424-440.

Nakata, Taisuke. “Optimal fiscal and monetary policy with occasionally binding zero bound constraints.” Journal of Economic Dynamics and control 73 (2016): 220-240.

Reserve Bank of Australia – www.rba.gov.au 

Sims, C.A., 2016, August. Fiscal policy, monetary policy, and central bank independence. In Kansas Citi Fed Jackson Hole Conference.

Tuyon, J., and Ahmad, Z., 2016. Behavioral finance perspectives on Malaysian stock market efficiency. Borsa Istanbul Review, 16(1), pp.43-61.

Wanna, J., Lindquist, E.A., and De Vries, J. eds., 2015. The Global Financial Crisis and Its Budget Impacts in OECD Nations: Fiscal Responses and Future Challenges. Edward Elgar Publishing.

Yahoo! Finance – www.finance.yahoo.com