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Global Financial Crisis and
Financial Inequality:
a Perspective from Current
International Monetary System
Gang Gong, Yunnan University of
Economics and Finance,
Part I
Stylist Facts of Current International Monetary
System
Part II
Foreign Currency Strategy
Part III
Financial Crisis: the Outcome of a Weaker
Pretending to be a Strong?
Part I
Stylist Facts of Current
International Monetary System
Breton Woods System (1944 - 1972)
• U.S. dollar obtained its position as a world currency;
• But the dollar's behavior had been the regulated: the
United States promised that the dollar was
convertible to the gold at a fixed rate;
• It is a system of fixed exchange regime pegged to
the gold;
• Opening capital market is also not encouraged, and
thus to a certain extent, the dollar floating to the
world is limited;
• The financial system in the world is relatively stable.
It was a golden age to the world economy.
• In 1972, the United States broken its promise and
thus the Breton Woods system collapsed.
Jamaica System (1974 - Present)
• The Jamaica system made the world into the
era of paper money;
• It was a system without restrictions: countries
are supposed to be entitled the rights to choose
their own exchange regimes and decide
whether opening their capital markets.
• Under this free system, countries began their
competition by adopting different currency
strategies that naturally lead to the following
stylized facts with regard to international
monetary system
• Yet, U.S. still holds the advantages given by
Breton Woods system, but without the
responsibility it token in the Breton Woods
system
– Dollar is still a world currency;
– U. S. still hold a veto power in IMF.
Fact 1: The Distribution of Exchange
Regime
• Developed countries generally choose floating
exchange regime without government
intervention.
• Developing countries usually prefer fixed
exchange regime or manageable floating
exchange regime, both of which , indicate the
intervention from government.
表1-7 各国汇率制度之分布（2011年4月30日）
资料来源：International Monetary Fund（2011）
Fact 2: Currency Devaluation
• Since developed countries generally prefer
floating exchange regime without government
intervention, their exchange rates are often
close to the exchange rate computed by
purchase power parity (PPP), or their currency
is not devaluated.
• The currencies of developing countries are
often devaluated due to the intervention from
government, mainly in terms of using domestic
currency to buy foreign currency (dollars).
4.76
索马里
3.75
土库曼斯坦
3.19
塞舌尔
3.13
柬埔寨
3.13
马绍尔群岛
3.10
老挝
2.99
布隆迪
2.90
塔吉克斯坦
2.87
基里巴斯
2.81
越南
吉尔吉斯斯坦 2.77
2.74
乌克兰
2.73
埃塞俄比亚
2.72
印度
2.67
白俄罗斯
2.64
巴基斯坦
2.60
冈比亚，
2.55
乌干达
2.44
蒙古
2.43
汤加
2.40
卢旺达
2.40
坦桑尼亚
2.39
尼泊尔
2.38
几内亚
2.37
瓦努阿图
2.37
孟加拉国
2.36
马拉维
2.35
塞拉利昂
2.35
伯利兹
2.32
危地马拉
2.31
乍得
2.30
萨摩亚
2.29
格林纳达
2.29
乔治亚
巴布亚新几内亚 2.25
2.25
海地
2.24
玻利维亚
2.22
古巴
2.22
尼加拉瓜
2.21
多米尼加
2.21
不丹
乌兹别克斯坦 2.18
2.16
毛里塔尼亚
2.16
摩尔多瓦
2.15
巴巴多斯
2.13
布基纳法索
2.10
伊朗
2.08
利比里亚
牙买加
莫桑比克
中国
马达加斯加
吉布提
洪都拉斯
斯里兰卡
埃及
圣萨尔瓦多
马其顿
阿富汗
泰国
所罗门群岛
保加利亚
文莱
塞尔维亚
东帝汶
赞比亚
中国
厄瓜多尔
几内亚比绍
亚美尼亚
厄立特里亚
多哥
利比亚
菲律宾
加纳
突尼斯
阿尔巴尼亚
贝宁
也门
波黑
肯尼亚
巴拉圭
台湾
马里
博茨瓦纳
苏里南
喀麦隆
哈萨克斯坦
圭亚那
圣露西亚
秘鲁
马来西亚
中非共和国
帕劳
阿塞拜疆
哥斯达黎加
2.05 阿根廷
2.03 罗马尼亚
2.01 塞内加尔
1.99 尼日尔
1.98 特立尼达与多巴哥
1.97 阿尔及利亚
1.97 俄罗斯
1.97 波兰
1.96 沙特阿拉伯
1.96 莱索托
1.95 立陶宛
1.91 圣多美和普林西比
1.91 黎巴嫩
1.89 刚果（金）
1.89 斯威士兰
1.89 印度尼西亚
1.89 伊拉克
1.88 叙利亚
1.85 密克罗尼西亚
1.85 巴拿马
1.84 墨西哥
1.84 摩洛哥
1.81 苏丹
1.81 匈牙利
1.80 黑山共和国
1.80 科摩罗
1.80 巴林
1.79 韩国，共和国
1.78 毛里求斯
1.78 哥伦比亚
1.78 斐济
1.78 约旦
1.75 科特迪瓦科特迪瓦
1.73 阿曼
1.73 香港
1.73 捷克
1.69 智利
1.68 爱沙尼亚
1.68 斯洛伐克
1.68 拉脱维亚
1.68 佛得角
1.67 澳门
1.66 马尔代夫
1.66 安提瓜和巴布达
1.65 克罗地亚
1.64 尼日利亚
1.64 新加坡
1.63 巴哈马群岛
1.62
1.60
1.59
1.58
1.57
1.57
1.56
1.55
1.55
1.55
1.52
1.51
1.50
1.50
1.49
1.48
1.48
1.48
1.47
1.47
1.46
1.43
1.43
1.43
1.42
1.42
1.39
1.38
1.38
1.38
1.38
1.37
1.34
1.33
1.32
1.32
1.31
1.31
1.30
1.29
1.29
1.28
1.27
1.27
1.26
1.26
1.25
1.25
多米尼加
土耳其
加蓬
圣文森特及格林纳丁斯
马耳他
南非
斯洛文尼亚
阿拉伯联合酋长国
乌拉圭
波多黎各
纳米比亚
葡萄牙
英国
安哥拉
圣基茨和尼维斯
希腊
西班牙
塞浦路斯
卡塔尔
刚果共和国
美国
以色列
科威特
冰岛
新西兰
德国
巴西
意大利
奥地利
荷兰
加拿大
法国
比利时
卢森堡
爱尔兰
澳大利亚
委内瑞拉
芬兰
瑞典
日本
丹麦
挪威
瑞士
津巴布韦
赤道几内亚
百慕大群岛
1.24
1.23
1.23
1.22
1.22
1.21
1.20
1.19
1.12
1.09
1.09
1.06
1.06
1.02
1.02
1.02
1.02
1.02
1.01
1.01
1.00
0.99
0.99
0.99
0.96
0.96
0.94
0.93
0.92
0.92
0.91
0.89
0.88
0.87
0.86
0.84
0.82
0.81
0.81
0.80
0.69
0.66
0.66
0.60
0.60
0.59
Fact 3: Foreign Exchange Reserve
• The choice of floating exchange regime by
developed countries also indicates that their
central banks will not try to accumulate
foreign exchange reserves.
• For those developing countries, the choice of
government intervention and currency
devaluation also indicates that they attempt to
accumulate foreign exchange reserve.
Foreign exchange reserve over GDP,
2010, major countries (or area)
1.2
1.0
0.8
0.6
0.4
0.2
美国
加拿大
英国
澳大利亚
欧元区
法国
德国
意大利
墨西哥
南非
巴西
印尼
印度
日本
韩国
菲利宾
俄罗斯
马来西亚
中国
泰国
新加坡
香港
0.0
• Note
– Hong Kong and Singapore are exemptions, due to
their special currency regime.
– Although some developed country, such as Japan,
still hold a large amount of foreign exchange
reserve, it is due to their historical accumulation.
The increase in foreign exchange reserve over GDP,
1990-2010, major countries (or area)
9
8
7
6
5
4
3
2
1
英国
欧元区
美国
加拿大
意大利
德国
澳大利亚
法国
日本
南非
墨西哥
巴西
印尼
印度
俄罗斯
韩国
菲律宾
泰国
马来西亚
香港
新加坡
中国
0
Fact 4: Capital Market Opening
• The capital markets in developed countries are
often more opened.
• For developing countries, though there exists a
large differential in the degree of opening
capital market, on average, their capital
markets are often less opened.
The degree of openness in capital market
versus per capital GDP, 2007
Fact 5: Currency Internationalization
• For the currency position, US dollar is
dominant and can be regarded as the world
currency;
• The major currencies in developed countries
(e.g., Euro, Japanese Yuan, British Pound,
among others) are also largely
internationalized;
• All currencies in developing are not
international currency.
• Question: How can we explain these
asymmetry?
• It is due to the difference in the currency
strategy adopted by different countries.
Part II
Foreign Currency Strategy
Definition: Foreign Currency Strategy
• The foreign currency strategy includes a set of
systems and policies that are related to foreign
currencies.
• It may include：
– The mode of foreign exchange
• Exchange regime（e.g. , fixed, floating and
manageable floating exchange regime)
• Whether devaluating domestic currency?
• Whether accumulating foreign exchange?
– The management on capital account
The Types of Foreign Currency
Strategies
• Hard Currency Strategy
• Soft Currency Strategy
Hard Currency Strategy
• The objective: exporting or internationalizing
domestic currency and its denominated assets as
much as possible;
• The features: prefer and want to competing,
adventuring, door opened, appear to be mighty,
• The system arrangement
– mode of exchange regime
• Floating exchange regime
• No devaluation of domestic currency
• Need not accumulation foreign exchange, but to export
domestic currency and its denominated assets.
– capital market opened
Why Exporting Domestic Currency?
• It symbolizes the strength and popularity of
domestic currency in international market, and
thus the high degree of internationalization;
• The high degree of internationalization indicates
that domestic currency can easily be used for
importing goods and service, thus taking foreign
resources to serve domestic welfare and
development;
• To form a situation of “benefit intersection”, and
thus bind other countries' initiative to maintain
the value of domestic currency;
• Dare to start a currency war when necessary!
Trading Deficit in a Supply-Determined
Economy
• Due to the exhaustion of surplus labor, developed
economy is often a supply-determined economy in
normal situation when talking about economic growth.
• In a supply-determined economy, one can easily prove
that trading surplus in long run can lead to higher per
capita GDP other things equal.
• Yet trade deficit in long run is generally impossible due
to the requirement of international balance of payment
unless one can always use domestic currency to pay
imports.
• Currently, only US and UK are running trading deficit
in long run.
Currently, only US and UK are
running trading deficit in long run.
Who Can Implement the Hard
Currency Strategy
• Only the strong can implement the hard currency
strategy
– Those who implement well: United States, European
Union, Japan, United Kingdom, and other developed
countries .
• The condition to be a strong
– National power (GDP, advance in technology)
– Institution (especially financial system).
• The weak are always in danger in pretending the
strong
– Lessons: the countries from former Soviet Union,
South America and so on.
Soft Currency Strategy
• The objective: to protect itself in a competitive
international environment
• The features: no debt, no adventure, no door
opened, accumulating hard currency as much as
possible, even allowing some “sacrifice”.
• System arrangement
– The control of capital account
– The control of exchange rate (fixed or manageable
floating exchange regime for the purpose to
devaluating domestic currency)
– No debt, but accumulating hard currency or its
denominated assets.
The Benefits of Soft Currency Strategy
• Do protect the nation’s economic security.
– As the capital market is not open, the countries can
often stay out from the world financial crisis.
• A certain degree of currency devaluation can
effectively promote exports and attract foreign
direct investment.
– To those who possess a large amount of surplus
labor in developing countries, this will speed up
the digestion of its surplus labor and thus make the
economic growth fast.
The Costs of Soft Currency Strategy
• Giving up the benefits from a hard currency strategy
– E.g., obtaining the world resources at low cost and
launching a currency war when necessary, etc.
• Making the sacrifice from maintaining a soft
currency ​strategy,
– E.g., devaluating domestic currency, accumulating hard
currency reserve;
• Being the victim of currency wars launched by the
countries implementing hard currency strategy.
• Theoretical weaknesses
– The western mainsteam economics relying on
"freedom“ and "competition" as its core concept is
essentially the theories speaking to the strong.
• The lack of support from international rule (e.g. IMF
rule)
Part III
Financial Crisis: the Outcome of a
Weaker Pretending to be a Strong?
Why Do Some Developing Countries
Adopt Hard Currency Strategy?
• Yet, in reality , still many developing choose
the regime under hard currency strategy, for
instance, opening capital market and floating
exchange regime
• Why?
• We believe it is the outcome of dual pressures
– The pressure from economic theory. Mainstream
economics in terms of free competition is the
theory for the strong.
– The pressure from IMF among others
The push of floating exchange regime
by IMF
• "Currency manipulation" clause by IMF in
1977;
• Obviously, this provision is mainly against
those developing countries who implement the
fixed (or managed floating) exchange regime
• The "provision" has been used by the United
States from times to times to attack and
China’s exchange regime, whenever crisis
occur in its domestic economy.
The Push of Opening Capital Market
by IMF
• When developing countries are in need of
assistance, the IMF put forward to lending
countries the additional conditions based on
the "Washington consensus”, which often
include opening capital market.
• Precisely because of this, many developing
countries, like Haiti, Zambia, the degree of
capital market opening is very surprising.
The degree of openness in capital market versus per capital
GDP, 2007
Question
• Why does the United States and its controlled
IMF push the developing countries to open the
capital market and float the exchange rate?
• To this end, it is necessary to discuss how the
United States deal with the financial crisis by
launching a currency war----QE.
Quantitative Easing Monetary Policy
• In November 2008, the Federal Reserve launched
the first round of "quantitative easing" policy
(QE1). The Fed has launched a total of five round
of quantitative easing monetary policy.
• "Quantitative easing" is usually regarded to be
"non conventional monetary policy", because of
the purchase of the assets included some
unconventional problematical assets.
• When the United States launched its quantitative
easing monetary policy, Japan, the UK and the
euro zone countries are also competing to follow
up.
“Quantitative Easing” is a Currency War
• QE was supposed to inject more liquidity to the
domestic financial market;
• But it is really a currency war, and may have
nothing to do with increasing domestic liquidity!
• "The currency war was initiated by a country
aimed at devaluating the domestic currency”
(Richards, 2011)
• To make the dollar devaluated, you need a large
amount of U.S. dollars to be exported to the world,
that is, dollar floating!
Dollar M0 and M1 since
2500000
M1
M0
2000000
1500000
1000000
500000
0
1987
1990
1993
1996
1999
2002
2005
2008
2011
The Purpose of Currency War----Deal
with Crisis
• In financial crisis, the interest rate in U.S. has
been lower to its minimum, or U.S. economy has
been caught in a liquidity trap.
• When the economy is in a liquidity trap, only the
expansionary fiscal policy and export growth that
can recue the economy.
• Because the United States itself has repeatedly
faced the “fiscal cliff”, there is little space for its
expansionary fiscal policy.
• Therefore, by launching a currency war, making
the dollar devaluation, and thus promoting exports
is the only choice to deal with the crisis.
The Transmission Mechanism of Currency War
How Does Currency War Attack the
Developing Countries?
• On the surface , the purpose of the currency war is to
devaluate domestic currency in order to promote
exports, thereby resolving the domestic crisis.
• However, the huge amount of currency flown out to
overseas consolidate its international currency status on
the one hand, and thus secure its kidnapping;
• On the other hand, it disrupted the financial order of
other countries, interfere with the macroeconomic
management in other countries, e.g. causing the bubble
of the assets;
• More importantly, when QE stops and interest rate rises,
the money will flow out of the developing countries
and thus, the bubble is broken and currency crisis in
developing countries will occur.
The Transmission Mechanism of Currency Crisis Due to
Currency War
• Note that after such a round of flowing-in and
flown-out, the dollar flowing into a developing
country are often much less than the dollar
flown out of the country due to the bubble it
creates when flowing in.
• That is why "the dollar is our currency, but
your problem."
The Capital Market Opening
• For the effectiveness of transmission mechanism
with regard to the currency crisis in less
developed economy, there is a basic requirement
on institutional assumption, namely, opening the
capital market.
• This type of currency crisis has occurred for many
times.
• If there is no capital market opening in less
developed and emerging economies, the
effectiveness of QE will be greatly reduced.
Solution: Need the Reform of
International Monetary System
• Back to the Golden system?
– No! No growth
• Euro Currency mode?
– No! No independent monetary policy
• But do need a world currency that should not
be a sovereign currency.
• The answer might be a dual monetary system.
Thank you!