Download INTERNATIONAL FINANCE AND BANKING

INTERNATIONAL BANKING AND FINANCE
How has the world of international finance changed since 1960?
In 1960
1. Foreign currency exchange rates were fixed by governmental
agreement (fiat) under the Bretton Woods system (1944)
Knew in advance how many German DM/USD
or Japanese Yen/USD
would be obtained in foreign currency markets
NOTE: the USD functions as a vehicle currency
2. The majority of the worlds currencies were fixed (pegged) to
the USD - which became the premier international reserve currency
e.g., 4.25 DM / USD or 360 Yen / USD
In turn, value of the USD was fixed in gold weight
e.g., 35 USD = 1 troy ounce of gold
Thus, 4.25 DM x 35 USD = 148.75 DM = 1 troy ounce of gold
(148.75DM / 35 USD = 4.25 DM / USD)
360 Yen x 35 USD = 12,600 Yen = 1 troy ounce of gold
(12,600 Yen / 35 USD = 360 Yen / USD
Known as the International Gold Standard System
USD WAS KING AND GOOD AS GOLD
LINCHPIN OF BRETTON WOODS:
The U.S. government would redeem dollars for gold upon
demand
3. Global Trade Volumes were relatively small and unimportant
1960: World Exports 80 billion USD
About 5% - 6% of Gross World Product (GWP)
4. Little cross-border investment activity (less than 4% of GWP)
due to substantial controls and limitations placed upon the
importing and exporting of capital (real or portfolio) by
governments
(confined to Multinational Corporations)
Mostly wealthy nations investing in other wealthy nations
(Page 10, 1-4)
U.S. PERSPECTIVE
5. Not dependent upon international trade for economic growth
or employment
1960: U.S. exports 25.3 billion USD and under 5% of GNP
Trade Share: Exports + Imports / GDP = 9% (page 8, 1-2)
6. U.S. Registered a Balance of Trade (BOT) Surplus
BOT: Exports - Imports
1960: 25 billion - 22 billion = +3 billion
7. U.S. was a Net Creditor on the World Market
U.S. Foreign Investments Abroad > Foreign Investments in U.S.
Generated a net income flow into the USA from the Rest of the
World (ROW)
1960: net + 1.1 billion USD
(Page 25, 1-5)
By the start of the 21st century all this has radically changed
1. During the last 30 years, virtually all exchange rates fluctuate daily
e.g., 1970: 360 Yen / USD
1975: 240 Yen / USD
1990: 98 Yen / USD
2004: 106 Yen / USD
One no longer knows in advance how many units of another countrys
currency one unit of your countrys currency will buy in the future
2. The USD, and thus the worlds other currencies, are no longer linked
to a gold weight (ended in 1972)
Thus, the USD began to share its dominance with the DM
(now the Euro), the Yen, and the British Pound
And many nations that have continued to try and peg their currency
to the USD have failed in this goal
Argentine Peso (failed in January 2002)
Brazilian Real (failed in January 2001)
Although some have been successful
(HK Dollar and the Chinese Yuan)
And some nations have given up their own currency and use that
of another country:
Ecuador and Panama use the USD
Called “dollarization”
3. Seen a massive increase in global trade volumes
1960: World Exports 80 billion USD: 5% - 6% GWP
2003: World Exports 8,300 billion USD: 24% GWP
a more than a 100 fold increase in trade flows
Discounting for inflation: last three decades (1971-2002)
world exports increased 5  times (page 7, 1-1, and page 9)
And world exports have doubled from 1992-2002
4. Seen a massive increase in international investment flows:
in cross border real foreign direct investment (FDI),
bank loans/deposits,
and portfolio investment (foreign stocks and bonds)
(Page 10, 1-4 again)
Now comprises globally almost 80% of GWP:
20+ fold growth since 1960
e.g., Retirement System of Alabama has invested about
30% of all retirement funds in foreign stocks and bonds
And more investment flows from wealthy countries to lesser
developed nations (page 11, 1-5)
U.S. PERSPECTIVE
5. Trade share has increased substantially
1960 Exports + Imports/ GDP = 9%
2002 1062 + 1594 / 10,300 = 26%
See chart page 8, 1-2 and 1-3
6. Gone from balance of trade surplus in 1960 to a balance of trade
deficit
2000 Exports - Imports = - 369 billion USD
2002 Exports - Imports = - 532 billion USD
Increase in the trade deficit of about 45% in two years
7. The U.S. has become the worlds largest debtor (page 16, 1-4)
Foreign Investments in the U.S. > U.S. Investments Abroad
2002:
631 billion USD >
157 billion USD
Generated a net income payment to the ROW of 257 billion USD
up from 14 billions USD in 2000
Also see page 25, 1-6
Net debt to the ROW: 29% of GDP; 3.2 trillion USD
OTHER GLOBAL CHANGES
8. New currency: EURO (January 2002)
Consolidation of 12 European currencies into one
(Germany, Austria, Italy, Spain, Portugal, Belgium, Netherlands,
Luxembourg, Ireland, Greece, Finland, and France)
Will rival the USD for currency dominance
9. Development of Regional Trade Agreements to facilitate cross border
trade and investment flows
European Union (15 nations with an additional 6-10 joining soon)
North American Free Trade Agreement : U.S., Canada, and
Mexico
and many others (more than 100 currently operate)
10. As trade and investment flows have increased, so also has the
foreign currency exchange turnover level grown (page 10, 1-1)
Annual foreign currency turnover:
1979 $17.5 trillion USD
2003 $650.0 trillion USD ($1.8 trillion USD/day)
37 fold increase in about 25 years
THE WORLD OF INTERNATIONAL TRADE AND FINANCIAL
FLOWS HAS RADICALLY CHANGED DURING THE LAST FOUR
DECADES
THIS COURSE WILL SHOW YOU HOW IT WORKS
WHY HAVE THESE CHANGES OCCURRED?
GLOBALIZATION
INTEGRATION