the international monetary system
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THE INTERNATIONAL MONETARY SYSTEM
THE INTERNATIONAL MONETARY SYSTEM
1. About the IMS2. Brief History3. High Level of Interdependence4. Advantages of GN5. IMS Issues
ABOUT THE IMS
ABOUT THE IMS The means for exchanging currency or
money between countries Measures of monetary wealth of
countriesGross Domestic Product (GDP)Gross National Product (GNP)Country GDP (IMF 2012) GDP per capita (IMF
2012
United States $16.24 T $51,704China $8.22 T $6,071Japan $5.96 T $46,707India $1.84 T $4,000Germany $3.45 T $41,866EU $16.67 T $32,518
ABOUT THE IMSBig Mac Index
About itTracks inflationOver/undervalued currencyShows purchasing power
¤
ABOUT THE IMSPurchasing Power Parity (PPP)
Compares buying power from market to marketGN currencies = more buying power
Effect: 1) Exchange US $ for MSX $, go to Mexico
Peso increases in value relative to dollar2) US demand drops; MX demand increases
US price drops; MX price increases3) Market should adjust over time
Lose incentive to cross border¤
Country Price Currency Exchange RateU.S. Wooden baseball bat US $40 US $1 buys 10 MXN $Mexico Wooden baseball bat MXN
$15US$ buys 2 2/3 bats in Mexico
ABOUT THE IMSAbout currency adjustments
Devaluing a currencyIntentionally make it weaker
Imports more expensiveExports more appealing
Strengthening itBuying up currency so less is in circulation
Imports less expensiveExports less appealing
Redenomination of a currencyRussian 1998- ruble revalued
¤
ABOUT THE IMSCurrency adjustment effects
Weak yen= expensive luxury brands in Japan “Hermes Warned of Lower Profits under
Abenomics”Weak euro= more investment in non-
euros Denmark, Switzerland drop interest rates
below 0%Strong Swiss franc = higher interest
payments Mortgage borrowers in Poland suffer
¤
BRIEF HISTORY
BASIS FOR MODERN SYSTEMEuropean exploration, colonization
British dominationGold Standard
Gresham’s LawClipping, altered alloy contentBad $ drives out good
SignificanceSet equivalenceEstablished fixed exchange rates
• Provided stability Post-WWII-US hegemony¤
POST WWIIWhy did the US assume hegemony
after WWII?Democracy Trade partnersAllies
¤
POST WWIIHow did the US promote economic
hegemony? US Central banker
Gold standard 1840 to ~WWI based on £1944 on $
• US$35=1 oz. gold Foreign Aid: IGOs, Bilateral
Marshall Plan, Truman Plan, IBRD Rebuild WE and Japan; secure Turkey & Greece
Military Aid Investment through MNCs
¤
END OF US GOLD STANDARDWhy did the system end?
US as central banker = Big strain Lots of US dollars held outside of USLarge investment outflows by MNCsDeclining exportsRising oil prices, cartel
Vietnam WarUS civil rights movement New competition
Japan, Germany= Nixon delinks $Fixed to floating exchange rate ¤
END OF US GOLD STANDARDEffects
Floating exchange rate system Hard on GS
Peg to major currencyBelize, Venezuela, Saudi Arabia-USDFormer African colonies-euro
•Morocco, Ivory Coast, Cameroon¤
END OF US GOLD STANDARDEffects (cont.)o Adopt foreign currency
Ecuador, Panama-USDEuropean microstates
euroo Accept/trade in
foreign currenciesATM – Cambodia
¤
http://www.phnompenhpost.com/business/acleda-ups-security-measures
END OF US GOLD STANDARDWhat is Zimbabwe’s situation?
100 T dollars- couldn’t buy bread
Adopted $ in 2009Use rands, dollars, pounds
ProblemsCan’t print currencyCoin shortage
Affects SAEcuador- mints centavos
¤
PEGGING CURRENCIESPost- Bretton Woods, common
Former Caribbean, African colonies to Europeans LA to US
Benefits Stability Ties
Ex-pats Common language Familial ties with émigrés
Problems Float at market rates If dollar, yen, euro, etc., too strong, need to adjust Domestic issues- can’t hold peg
¤
IMS INTERDEPENDENCY
INTERDEPENDENCYGlobal Currency Flows Most traded currency?
U.S. dollar- 81.01% of world’s trade http://www.reuters.com/article/2013/12/03/us-markets-offshore-yuan-idUSBRE9B204020131203?feedType=RSS&feedName=businessNews
Second most traded currency?Yuan/remnimbi at 8.66%
2004$1.9 T
2007$3.3 T
2010$4 T
2013$5.3 T
http://www.economist.com/news/economic-and-financial-indicators/21586351-global-foreign-exchange-turnover
Global currency exchange
INTERDEPENDENCY
http://www.joneslanglasallesites.com/gcf/global-capital-markets-research/cities
Rank City 2014In Billions
2013In Billions
Change
1 London $44.4 $44.2 +<1%
2 New York $35.9 $31.4 +1.2%
3 Tokyo $30.3 $18.4 + 39%4 Paris $22.1 $16.6 +25%
Primary Banking Centers-60% of global capital through 4 cities
INTERDEPENDENCYHow the GS became indebted
Post WWII- colonies gained independence Reliance on primary resources
Cash crops Raw materials
Desire to industrialize Needed to borrow $
¤
DEBT CREATIONOil-rich
countries
Western banks
Developing
countries
INTERDEPENDENCYGS= Lots of debt
GN Banks
GS States
Oil States
GN: Lend $ to make interestGS: Export goods to GN
GS: Borrow money to buy oil
Invest Petrodollars to earn interest
INTERDEPENDENCYEconomic crisis in one country contagion Where it all began
Great Depression 1929 Next - Mexico, 1982
Why couldn’t Mexico declare bankruptcy? Followed later by…
Crisis YearMexico “Tequila Crisis” 1994“Asian Flu” Crisis 1997Russian “Ruble Crisis” 1998Argentina 2001,
2014Global Recession (US, EU) 2008Eurozone 2010
GN ADVANTAGES
HISTORICAL ADVANTAGES Industrial Revolution Colonization & Imperialism
Colonies = Resource suppliers GS become indebted Creation of Institutions (post WWII)¤
CREATED INSTITUTIONS
International Monetary Fund (IMF)Bretton Woods Agreement (1944)Purpose: Monetary stability
Short-term crisesGN dominance
Choose Chief- Christine LagardeVoting advantage
Austerity plansStructural Adjustment Plans (SAPs)
¤
CREATED INSTITUTIONS
International Bank for Reconstruction and Development (IBRD)
Also Bretton Woods (1944)Present-day World Bank Group (WB)Purpose: Rebuild Europe, promote growthGN policy dominance
President- GN- Jim Yong Kim¤
CREATED INSTITUTIONSEuropean Coal & Steel Community (ECSC)
Regional IGO (1951) of 6 statesPurpose: Reduce tariffsPresent-day EU- now 28Western Europe
dominanceSignificance to IMS
Eurozone- 19 membersCommon currency
¤
http://www.economist.com/blogs/graphicdetail/2015/02/european-economy-guide
CREATED INSTITUTIONSGroup of Five (G-5) (1985)
Purpose: Coordinate monetary policy US, UK, France, Germany, Japan Added Italy, Canada= G-7 Added Russia = G-8 Deleted Russia = G-7 (blame Putin)
G-20 (1999) Sort of replaced G-8 (2009) Include EEs
GDP (85%) Trade (80%) Population (66%)
G-7 still active¤
kkk
IMS ISSUES: INFLATIONDisparity between the value of a good/service
and its costMeans less purchasing powerDetermined by consumer price index
Looks at changes over timeNeed to find balance
Raise interest rates to curb inflationEffect- help lower consumer prices
More people save, fewer spend, prices dropDrop interest rates to encourage inflation
Advantage= encourage spending to stimulate economy
¤
IMS ISSUES: EUROZONE CRISIS1. What caused the Eurozone crisis? (video,
news)2. What problems did the ECB encounter?3. What was Greece’s situation?4. How did the crisis in Greece cause a
contagion? 5. Why was Germany unscathed by the crisis?
IMS ISSUES: EUROZONE CRISIS1. What caused the Eurozone crisis?
Long-termStructural problems
Lack of competitivenessBloated public sectorsLack of political and economic coordination
Short-termGlobal recession
EU banks took a hit, reduced lendingEffect: reduced consumption, investment
Sovereign debt crisis¤
IMS ISSUES: EUROZONE CRISIS2. What problems did the ECB encounter?
Gov’ts had to borrow $ to bail out their banks, stimulate economies
Too much government spendingHigher unemploymentLower business profitsFewer tax revenuesSet up permanent bailout fund (2011)
European Stability Mechanism€500 B
¤
IMS ISSUES: EUROZONE CRISIS3. What was Greece’s situation?
High public debtToo much gov’t spending (high debt-to-GDP ratio)
Couldn’t borrow $Interest rates increased on borrowing
Higher risk demands higher interest ratesSubject to IMF, EU (ECB) austerity (SAP)
policiesLed to protestsGov’t fell
¤
IMS ISSUES: EUROZONE CRISIS4. How did the crisis in Greece cause a contagion?
Italy, Spain, Portugal, Ireland Loans at higher interest rates Forced to accept SAP terms for bailouts*
Reduce budget deficits Public debt Private debt Lack of competitiveness Higher inflation rates Ignored Eurozone spending rules
Deficits, debt level Led to ‘fiscal pact’ between most EU countries Rules agreed upon re: budget deficits ¤
*Situations/terms varied by country
IMS ISSUES: EUROZONE CRISIS5. Why was Germany unscathed by the crisis?
Already reformed risky policies, improved competitiveness
World’s second largest exporter by value and volume Within EU
Respectable products with same currency Borrowed money to buy goods
Outside EU Euro value decreased, made goods cheaper
Drop in unemployment rates¤
IMS ISSUES: EUROZONE EXPANSION1. What issues did Latvians encounter when
transitioning to the euro?Felt change was anti-nationalist
2. Why would Latvia want to join the Eurozone, considering the crisis?
Easier to do business with other euro countriesAvoid fees for exchanging lats into eurosWant link to Western Europe (v. Russia)Small economy—likely to benefit from
integration¤
IMS ISSUES: THE US & BONDSQuantitative Easing- policies gov’ts use to
protect economy US, UK, EU, Japan
US bought bonds to stimulate economy Put $ into the system to stimulate growth
Federal Reserve decreasing bond buying by $10 B/mo Stopped October 2014
¤
IMS ISSUES: THE US & BONDSEffects
US bought bonds Investors go elsewhere for higher
growth/interest rate returns Affected EEs
US decreased bond buying Investors turned back to US Safer investment market
¤
IMS ISSUES: THE US & BONDSImplications
Less money in EEs MNCs get less revenue
EEs use foreign reserves to protect own currency rather than buy US bonds
‘Fragile Five’ TKY, BZ, IN, IND, SA
Possible contagion¤
THE SPICE TRADE
IMS ISSUES: PRICES & STABILITY1. How did the spice trade lead Europe
into global monetary dominance?2. Why is reliance on cash crops so risky?3. What are the pros and cons of FTAs for
farmers?4. Why did Vietnam enter pepper
production? What global effect did this have?
IMS ISSUES: PRICES & STABILITY1. How did the spice trade lead Europe into
global monetary dominance? Used to rely on commodities as ‘cash’
• Spices, metals, shells, etc. Colonization
• Cash crops Trade Currency system
Pieces of eight Gold Standard
¤
IMS ISSUES: PRICES & STABILITY2. Why is reliance on cash crops so risky?
Economies not diversified Large % dependent on cash crop income Currency speculation
Affects purchasing power, prices of exports/imports
Investment recovery not guaranteed Debt cycle
Price volatility Vulnerable to weather, disasters Competition
Lack insurance Effects of FTAs, new producers
IMS ISSUES: PRICES & STABILITY3. What are the pros and cons of FTAs for
farmers? Competition
• Domestic, foreign, new Cheaper, better quality goods Greater market access Limited options if can’t compete
¤
IMS ISSUES: PRICES & STABILITY4. Why did Vietnam enter pepper
production? What global effect did this have? Less pepper competition Better profits than current crops Less land, fewer inputs
¤
SPICE TRADE: RECAP
Colonization; neocolonialism Accrued debts in 1960s and 1970s
Lack autonomy over debt management Prices and stability
Primary v. manufactured goodsPrice volatilityLack of national unity
THE INTERNATIONAL MONETARY SYSTEM
1. About the IMS2. Brief History3. High level of interdependence4. Advantages of GN5. Issues in the IMS
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