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The International Monetary System

The International Monetary System. The International Monetary System. About the IMS Brief History High Level of Interdependence Advantages of GN IMS Issues. About the IMS. About the IMS. The means for exchanging currency or money between countries

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The International Monetary System

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  1. The International Monetary System

  2. The International Monetary System • About the IMS • Brief History • High Level of Interdependence • Advantages of GN • IMS Issues

  3. About the IMS

  4. About the IMS • The means for exchanging currency or money between countries •  Measures of monetary wealth of countries • Gross Domestic Product (GDP) • Gross National Product (GNP)

  5. About the IMS Big Mac Index • About it • Tracks inflation • Over/undervalued currency • Shows purchasing power ¤

  6. About the IMS Purchasing Power Parity (PPP) • Compares buying power from market to market • GN currencies = more buying power Effect: 1) Exchange US $ for MSX $, go to Mexico • Peso increases in value relative to dollar 2) US demand drops; MX demand increases • US price drops; MX price increases 3) Market should adjust over time • Lose incentive to cross border ¤

  7. About the IMS About currency adjustments • Devaluing a currency • Intentionally make it weaker • Imports more expensive • Exports more appealing • Strengthening it • Buying up currency so less is in circulation • Imports less expensive • Exports less appealing • Redenomination of a currency • Russian 1998- ruble revalued ¤

  8. Brief History

  9. Basis for Modern System European exploration, colonization • British domination • Gold Standard • What is Gresham’s Law? • Clipping, altered alloy content • Bad $ drives out good • Why was the gold standard significant? • Set equivalence • Established fixed exchange rates • Provided stability • Post-WWII-US hegemony ¤

  10. Post WWII Why did the US assume hegemony after WWII? • Democracy • Trade partners • Allies ¤

  11. Post WWII How 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 ¤

  12. End of US Gold Standard Why did the system end? • US as central banker = Big strain • Lots of US dollars held outside of US • Large investment outflows by MNCs • Declining exports • Rising oil prices, cartel • Vietnam War • US civil rights movement • New competition • Japan, Germany = Nixon delinks $ • Fixed to floating exchange rate¤

  13. End of US Gold Standard Effects • Floating exchange rate system • Hard on GS • Peg to major currency • Belize, Venezuela, Saudi Arabia-USD • Former African colonies-euro • Morocco, Ivory Coast, Cameroon ¤

  14. End of US Gold Standard Effects (cont.) • Adopt foreign currency • Ecuador, Panama-USD • European microstates • euro • Accept/trade in foreign currencies • ATM – Cambodia ¤ http://www.phnompenhpost.com/business/acleda-ups-security-measures

  15. End of US Gold Standard Zimbabwe’s situation • 100 T dollars- couldn’t buy bread • Adopted $ in 2009 • Use rands, dollars, pounds • Problems • Can’t print currency • Coin shortage • Affects SA • Ecuador- mints centavos ¤

  16. IMS Interdependency

  17. interdependency Global 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/remnimbiat 8.66% http://online.wsj.com/article/SB10001424052748704421104575463901973510496.html

  18. interdependency Primary Banking Centers -60% of global capital through 4 cities http://www.ap.jll.com/asia-pacific/en-gb/Research/global-capital-flows-2013q4.pdf

  19. Interdependency How the GS became indebted • Post WWII- colonies gained independence • Reliance on primary resources • Cash crops • Raw materials • Desire to industrialize • Needed to borrow $ ¤

  20. Interdependency GS= Lots of debt GN: Lend $ to make interest GS: Export goods to GN Invest Petrodollars to earn interest GS: Borrow money to buy oil

  21. interdependency Economic crisis in one country contagion • Where it all began • Great Depression 1929 • Next - Mexico, 1982 • Why couldn’t Mexico declare bankruptcy? • Followed later by…

  22. GN Advantages

  23. Historical Advantages • Industrial Revolution • Colonization & Imperialism • Colonies = Resource suppliers • GS become indebted • Creation of Institutions (post WWII) ¤

  24. Created Institutions International Monetary Fund (IMF) • Bretton Woods Agreement (1944) • Purpose: Monetary stability • Short-term crises • GN dominance • Choose Chief- Christine Lagarde • Voting advantage • Austerity plans • Structural Adjustment Plans (SAPs) ¤

  25. Created Institutions International Bank for Reconstruction and Development (IBRD) • Also Bretton Woods (1944) • Present-day World Bank Group (WB) • Purpose: Rebuild Europe, promote growth • GN policy dominance • President- GN- Jim Yong Kim ¤

  26. Created Institutions European Coal & Steel Community (ECSC) • Regional IGO (1951) of 6 states • Purpose: Reduce tariffs • Present-day EU- now 28 • Western Europe dominance • Significance to IMS Eurozone- 18 members • Common currency ¤

  27. Created Institutions Group of Five (G-5) (1985) • Purpose: Coordinate monetary policy • US, UK, France, Germany, Japan • Added Italy, Canada= G-7 • Added Russia = G-8 • Now G-20 (2009) • Purpose: Include EEs ¤ kkk

  28. IMS Issues: Inflation • Disparity between the value of a good/service and its cost • Means less purchasing power • Determined by consumer price index • Looks at changes over time • Need to find balance • Raise interest rates to curb inflation • Effect- help lower consumer prices • More people save, fewer spend, prices drop • India- 2014 election year • Drop interest rates to encourage inflation • Advantage= encourage spending to stimulate economy ¤

  29. IMS Issues: Eurozone Crisis • What caused the Eurozone crisis? • What problems did the ECB encounter? • What was Greece’s situation? • How did the crisis in Greece cause a contagion? • Why was Germany unscathed by the crisis?

  30. IMS Issues: Eurozone Crisis • What caused the Eurozone crisis? • Long-term • Structural problems • Lack of competitiveness • Bloated public sectors • Lack of political and economic coordination • Short-term • Global recession • EU banks took a hit, reduced lending • Effect: reduced consumption, investment • Sovereign debt crisis ¤

  31. IMS Issues: Eurozone Crisis • What problems did the ECB encounter? • Gov’ts had to borrow $ to bail out their banks, stimulate economies • Too much government spending • Higher unemployment • Lower business profits • Fewer tax revenues • Set up permanent bailout fund (2011) • European Stability Mechanism • €500 B ¤

  32. IMS Issues: Eurozone Crisis • What was Greece’s situation? • High public debt • Too much gov’t spending (high debt-to-GDP ratio) • Couldn’t borrow $ • Interest rates increased on borrowing • Higher risk demands higher interest rates • Subject to IMF, EU (ECB) austerity (SAP) policies • Led to protests • Gov’t fell ¤

  33. IMS Issues: Eurozone Crisis • 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

  34. IMS Issues: Eurozone Crisis • 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 ¤

  35. IMS Issues: Eurozone Expansion • What issues did Latvians encounter when transitioning to the euro? • Felt change was anti-nationalist • Why would Latvia want to join the Eurozone, considering the crisis? • Easier to do business with other euro countries • Avoid fees for exchanging lats into euros • Want link to Western Europe (v. Russia) • Small economy—likely to benefit from integration ¤

  36. IMS Issues: The US & Bonds • Quantitative 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 ¤

  37. IMS Issues: The US & Bonds • Effects • 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 ¤

  38. IMS Issues: The US & Bonds • Implications • 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 ¤

  39. IMS Issues: Prices & Stability • How did the spice trade lead Europe into global monetary dominance? • Why is reliance on cash crops so risky? • What are the pros and cons of FTAs for farmers? • Why did Vietnam enter pepper production? What global effect did this have?

  40. IMS Issues: Prices & Stability • 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 ¤

  41. IMS Issues: Prices & Stability • Why is reliance on cash crops so risky? • Economies not diversified • Large % of population dependent on cash crop income • Currency speculation • Affects purchasing power, prices of exports/imports • Investment recovery not guaranteed • Debt cycle • Vulnerable to weather, disasters • Lack insurance • Price volatility • Competition

  42. IMS Issues: Prices & Stability • 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 ¤

  43. IMS Issues: Prices & Stability • Whydid Vietnam enter pepper production? What global effect did this have? • Less pepper competition • Better profits than current crops • Less land, fewer inputs ¤

  44. The International Monetary System • About the IMS • Brief History • High level of interdependence • Advantages of GN • Issues in the IMS

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