Download Slide 1

THE INTERNATIONAL
MONETARY SYSTEM
THE INTERNATIONAL MONETARY SYSTEM
1.
2.
3.
4.
5.
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
 Measures of monetary wealth of countries


Gross Domestic Product (GDP)
Gross National Product (GNP)
Country
GDP (IMF 2012)
GDP per capita (IMF 2012
United States $16.24 T
China
$8.22 T
Japan
$5.96 T
$51,704
$6,071
$46,707
India
Germany
EU
$4,000
$41,866
$32,518
$1.84 T
$3.45 T
$16.67 T
ABOUT THE IMS
Big Mac Index
 About it
 Tracks inflation
 Over/undervalued currency
 Shows purchasing power
¤
ABOUT THE IMS
Purchasing Power Parity (PPP)


Compares buying power from market to market
GN currencies = more buying power
Country
Price
Currency Exchange Rate
U.S.
Wooden baseball bat US $40
US $1 buys 10 MXN $
Mexico
Wooden baseball bat MXN $15
US$ buys 2 2/3 bats in Mexico
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
ABOUT THE IMS
About currency adjustments

Devaluing a currency


Strengthening it


Buying up currency so less is in circulation
 Imports less expensive
 Exports less appealing
Redenomination of a currency

¤
Intentionally make it weaker
 Imports more expensive
 Exports more appealing
Russian 1998- ruble revalued
ABOUT THE IMS
Currency adjustment effects

Weak yen= expensive luxury brands in Japan


Weak euro= more investment in non-euros


Denmark, Switzerland drop interest rates below 0%
Strong Swiss franc = higher interest payments

¤
“Hermes Warned of Lower Profits under Abenomics”
Mortgage borrowers in Poland suffer
BRIEF HISTORY
BASIS FOR MODERN SYSTEM
European exploration, colonization
 British domination

Gold Standard
 Gresham’s Law
 Clipping, altered alloy content
 Bad $ drives out good
 Significance
 Set equivalence
 Established fixed exchange rates
•Provided stability
 Post-WWII-US
¤
hegemony
POST WWII
Why did the US assume hegemony after
WWII?
Democracy
 Trade partners
 Allies

¤
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
¤
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
¤
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
END OF US GOLD STANDARD
Effects (cont.)
o Adopt foreign currency
Ecuador, Panama-USD
European microstates
euro

o
Accept/trade in
foreign currencies
ATM
– Cambodia
¤
http://www.phnompenhpost.com/business/acleda-ups-security-measures
END OF US GOLD STANDARD
What is 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

¤
PEGGING CURRENCIES

Post- Bretton Woods, common



Benefits



Stability
Ties
 Ex-pats
 Common language
 Familial ties with émigrés
Problems



¤
Former Caribbean, African colonies to Europeans
LA to US
Float at market rates
If dollar, yen, euro, etc., too strong, need to adjust
Domestic issues- can’t hold peg
IMS INTERDEPENDENCY
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/remnimbi at 8.66%
Global currency exchange
http://www.economist.com/news/economic-and-financial-indicators/21586351-global-foreign-exchange-turnover
INTERDEPENDENCY
Primary Banking Centers
-60% of global capital through 4 cities
Rank
City
2014
2013
In Billions
In 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%
http://www.joneslanglasallesites.com/gcf/global-capital-markets-research/cities
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 $
DEBT CREATION
Oil-rich
countries
Developing
countries
Western
banks
INTERDEPENDENCY
GS= Lots of debt
GN Banks
GN: Lend $ to
make interest
GS: Export
goods to GN
Invest
Petrodollars to
earn interest
Oil States
GS States
GS: Borrow money
to buy oil
INTERDEPENDENCY
Economic crisis in one country contagion
 Where

 Next

it all began
Great Depression 1929
- Mexico, 1982
Why couldn’t Mexico declare bankruptcy?
 Followed
later by…
Crisis
Year
Mexico “Tequila Crisis”
1994
“Asian Flu” Crisis
1997
Russian “Ruble Crisis”
1998
Argentina
2001, 2014
Global Recession (US, EU)
2008
Eurozone
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 crises
GN dominance
Choose Chief- Christine Lagarde
 Voting advantage


Austerity plans

¤
Structural 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 growth
 GN policy dominance

¤
President- GN- Jim Yong Kim
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- 19 members
 Common currency
¤
http://www.economist.com/blogs/graphicdetail/2015/02/european-economy-guide
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
 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: 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
 Drop interest rates to encourage inflation
 Advantage= encourage spending to stimulate
economy

¤
IMS ISSUES: EUROZONE CRISIS
1.
2.
3.
4.
5.
What caused the Eurozone crisis? (video, news)
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?
IMS ISSUES: EUROZONE CRISIS
1.
What caused the Eurozone crisis?
 Long-term


Short-term

¤
Structural problems
 Lack of competitiveness
 Bloated public sectors
 Lack of political and economic coordination
Global recession
 EU banks took a hit, reduced lending
 Effect: reduced consumption, investment
 Sovereign debt crisis
IMS ISSUES: EUROZONE CRISIS
2.
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

¤
IMS ISSUES: EUROZONE CRISIS
3.
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

¤
IMS ISSUES: EUROZONE CRISIS
4.
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 CRISIS
5.
Why was Germany unscathed by the crisis?
Already reformed risky policies, improved
competitiveness
 World’s second largest exporter by value and
volume
 Within EU




Outside EU


¤
Respectable products with same currency
Borrowed money to buy goods
Euro value decreased, made goods cheaper
Drop in unemployment rates
IMS ISSUES: EUROZONE EXPANSION
1.
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?
2.




¤
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
THE SPICE TRADE
IMS ISSUES: PRICES & STABILITY
1.
2.
3.
4.
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?
IMS ISSUES: PRICES & STABILITY
1.
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 & STABILITY
2.
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
IMS ISSUES: PRICES & STABILITY
2.
Why is reliance on cash crops so risky? (cont.)
 Price volatility
Vulnerable to weather, disasters
 Competition
 Lack insurance


¤
Effects of FTAs, new producers
IMS ISSUES: PRICES & STABILITY
3.
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 & STABILITY
4.
Why did Vietnam enter pepper production?
 Less pepper competition
 Better profits than current crops
 Less land, fewer inputs
What global effect did this have?
 Greater supply = lower prices
 More competition for Indian farmers
 Earn less from lower world prices
¤
SPICE TRADE: RECAP
 Colonization;
neocolonialism
 Established IMS
 Precursor for MNCs
 Prices and stability




¤
Primary v. manufactured goods
Currency speculation
Price volatility
Lack of national unity
THE INTERNATIONAL MONETARY SYSTEM
1.
2.
3.
4.
5.
About the IMS
Brief History
High level of interdependence
Advantages of GN
Issues in the IMS