World War III: An Economy Annihilator

We all know about World War 1 and World War 2, the destruction that it has caused to life, property and mother nature is something that, no one has forgotten. The effects of the war is still seen. Today we are again on brink of war, a war of money rather than weapons, “Trade War”.

According to Wikipedia, “A trade war refers to two or more states raising or creating tariffs or other trade barriers on each other in retaliation for other trade barriers. Increased protection causes both nations’ output compositions to move towards their autarky position”. Autarky is the quality of being self-sufficient. Autarky exists whenever an entity can survive or continue its activities without external assistance or international trade.

The world is on the brink of trade war, President Donald Trump announced on Thursday that he would impose tariffs on $50 billion worth of Chinese exports to the United States. Beijing quickly outlined new import taxes of its own on US products worth $3 billion.

The increasingly aggressive statement from both ends suggest that further escalation is possible: Trump described his actions targeting China as “the first of many,” while Beijing said “it is impolite not to reciprocate” and promised a “fight to the end.”

Some of the world’s top economists and business leaders were in Beijing for the annual China Development Forum, and one topic overshadowed the entire gathering: The looming threat of a trade war between the U.S. and China.

Nobel-prize winning economists Robert Shiller and Joseph Stiglitz were also at the annual meeting, and they predicted pain ahead for the U.S. economy if Beijing and Washington ramp up tit-for-tat trade penalties.

U.S. companies, Shiller warned, are not prepared to have China cut out of their supply chains or business models.

“The immediate thing will be an economic crisis because these enterprises are built on long-term planning, they’ve developed a skilled workforce and ways of doing things. We have to rediscover these things in whatever country after the imports are cut off,” Shiller told CNBC. “It’s just chaos: It will slow down development in the future if people think that this kind of thing is likely.”

Stiglitz, for his part, warned that China’s leaders are likely prepared to initiate tariffs based on “a very good economic map with which they will target certain places in the United States where the pain will be maximized.”

An escalating trade war, the Nobel laureate said, could have political ramifications for Trump — especially if trade partners’ retaliations hit the president’s base.

“If there is a broad range increase in tariffs, it would affect their cost of living, the inflation would lead the Fed to raise interest rates at a higher rate, it would certainly impose a risk to the return to the U.S. to robust economic growth,” Stiglitz said.


The beginning of the war has already started to have effects on world economy, China’s Shanghai Composite, Hong Kong’s Hang Seng, Japan’s Nikkei and Korea’s Kospi all plunged sharply up to 3 per cent. Indian indices declined over 1 per cent after China threatened to raise tariffs on about $3 billion of US imports. The Dow DJIA, -1.77%  dropped more than 700 points on Thursday and declined by more than 400 points on Friday, leaving the blue-chip gauge with a weekly drop of 5.7%. The S&P 500 SPX, -2.10%  dropped nearly 6% on the week – marking the biggest one-day percentage drop for both since early February.

Both the sides are not intending to stop, forcing other countries especially emerging country like India to choose side whereby taking the trade war to another level. Thus, all in all, Trade War is a condition which always happens around the world, the only problem is its extreme form, every country wants to promote its product and taxing import is not a bad thing, the only problem is the extent and fairness of taxing and not considering the situation and product on which taxes are enforced, thus unbalancing the dedicated thread of trust between the leaders and thereby deteriorating the economic condition.


Time Value of Money: Holy word from Non Religious book

For many people money, means survivability, independence, a new hope, a mean to pursue happiness. Money is the only religion which everyone follows irrespective of religion, caste, sex, etc. and thus everyone knows everything about money or they don’t? What if i say that no one except few handful of people knows exactly what’s the TRUE VALUE OF MONEY. In order to understand True Value of Money, it is important to know  the following basic concept relating to TIME VALUE OF MONEY, which is the building block or foundation stone to understand the secrets of money.


Money has time value in that individuals value a given amount of money more highly the earlier it is received. Therefore a small amount of money NOW may be equivalent in value to a larger amount received at a future date.

Time Value of Money is the principles governing equivalence relationships between cash flows with different dates.

The idea of equivalence relationship is relatively simple. For Example. If you pay $1,000 today and receives $900 today itself in exchange for the amount you have paid would you accept that? It is irrational to even ask, no one will accept, however say you will pay $1,000 one year after and will receive $900 now, will you accept it? the answer is yes, because a payment of $1,000 after a year would be less worth to you than paying it write now. This is the power of Time Value.

Example (TVM)

To understand the concept better in terms of its equation, it is important to understand what is interest rate, present value and future value.

Interest Rate, denoted by r, is rate of return that reflects the relationship between differently dated cash flows. Interest rates can be thought of as Required Rate of Return, Discount Rate and Opportunity Cost.

r= Real risk free interest rate + Inflation Premium + Default risk Premium + Liquidity Premium + Maturity Premium.

Present Value (PV) means the present discounted value of future cash flows: For assets, the present discounted value of the future net cash inflows that the asset is expected to generate; for liabilities, the present discounted value of the future net cash outflows that are expected to be required to settle the liabilities.

Future Value (FV) means the amount to which a payment or series of payments will grow by a stated future date.

EQUATION TO CALCULATE FV for a single cash flow:

                                                     FVN = PV(1+r)N

Where, PV  = Present Value of the investment

             FVN = Future Value of the investment N Periods from today

             r      = Rate of interest per period

             N     = Number of Compounding periods

The Fact that present value and Future value are separated in time has following important consequences:

  • We can add more amount of money only if they are indexed at the same point in time
  • For a given interest rate, the future value increases with the number of periods
  • For a given number of periods, the future value increases with the interest rate

The most important point to remember while using the above equation is that N and r must be compatible i.e. they are defined in same time unit.

(1+r)N is also known as future value factor, however, if compounding is more frequent than annual then the said is not future value factor. If compounding is more frequent than annual, then future value formula can be expressed as under:

FVN = PV(1+rs/m)mN

Where, FVN = Future Value of the investment N period from now,

              PV  = Present Value of Investment

                rs    = stated annual interest rate or quoted interest rate

              N    = Number of annual years

              m    = Number of compounding periods per year.


In all the above equation, compounding word is often used, but what exactly is compounding? Compounding means the process of accumulating interest on interest.

For example: Say you invested $100 for 2 years at interest rate of 10%, at the end of year 1 year you will receive $10 as interest, assuming the same is reinvested for 1 year at the same interest rate, at the end of year 2 you will receive the following:

Principal amount  = $100, Interest for the first year $10, Interest for the second year based on original investment = $10 and Interest for the second year based on interest earned in the first year i.e. $10 x 0.1 = $1.

The said interest earned on interest provides us the first glimpse of the phenomenon known as Compounding.

Time Value of Money and Compounding are inseparable forces, when used simultaneously is quite lethal. The importance of Compounding increases with the magnitude of interest rate.


Thus, Time Value of Money as a principle is equivalent to the principle relating to forces of nature both in terms of complexity and voluminous, by understanding, the above terminology and equation one has the foundation to understand the other principles and theories relating to time value of money.