1. Disinflation, Growth, Crisis and Recession, 1980-2005 By Katja Fricker Paul Volcker Ronald Reagan

2. Disinflation and the 1981-1983 Recession 1979: Federal Reserve Chairman Volcker announced an abrupt change in U.S. monetary policy aimed at fighting inflation and stemming the dollar’s fall. 1979: Federal Reserve Chairman Volcker announced an abrupt change in U.S. monetary policy aimed at fighting inflation and stemming the dollar’s fall. 1980: President Ronald Reagon was elected; the dollar appreciated again 1980: President Ronald Reagon was elected; the dollar appreciated again U.S. interest rates rose sharply what pushed the dollar even more U.S. interest rates rose sharply what pushed the dollar even more

3. Disinflation and the 1981-1983 Recession The higher dollar decreased the U.S. output by decreasing its exports and it decreased the inflation in the U.S. The higher dollar decreased the U.S. output by decreasing its exports and it decreased the inflation in the U.S. Foreign countries had their own fight with inflation and an appreciated dollar was counterproductive. Therefore foreign central banks intervened in the currency market to slow the dollar’s rise. Foreign countries had their own fight with inflation and an appreciated dollar was counterproductive. Therefore foreign central banks intervened in the currency market to slow the dollar’s rise. This interventions reduced their monetary growth rates for 1980 & 81 and increased their interest rates This interventions reduced their monetary growth rates for 1980 & 81 and increased their interest rates

4. Disinflation and the 1981-1983 Recession Synchronised monetary contraditiction in the U.S. and abroad after the heels of the second oil shock, threw the world economy into a deep recession. Synchronised monetary contraditiction in the U.S. and abroad after the heels of the second oil shock, threw the world economy into a deep recession. In 1982 and 1983 the unemployment rate increased badly and in contrast to the U.S. the unemployment rate staid in Japan and especially in Europe permanently higher In 1982 and 1983 the unemployment rate increased badly and in contrast to the U.S. the unemployment rate staid in Japan and especially in Europe permanently higher

5. Fiscal Policies, the Current Account, and the Resurgence of Protectionism 1981: The U.S. government budget deficit increased dramatically due to lower taxes and higher spending of the government, however it had a sharp fiscal stimulus to the economy 1981: The U.S. government budget deficit increased dramatically due to lower taxes and higher spending of the government, however it had a sharp fiscal stimulus to the economy The dollar increased steadily. By February 1985 the dollar’s cumulative appreciation against the German currency since the end of 1979 was 47.9% The dollar increased steadily. By February 1985 the dollar’s cumulative appreciation against the German currency since the end of 1979 was 47.9%

6. Fiscal Policies, the Current Account, and the Resurgence of Protectionism December 1982: The recession reached its low point in the U.S, and output began to recover both there and abroad as the U.S. fiscal stimulus was transmitted to foreign countries through the dollar’s steady appreciation. Also contributing to the recovery was a looser Federal Reserve monetary policy. December 1982: The recession reached its low point in the U.S, and output began to recover both there and abroad as the U.S. fiscal stimulus was transmitted to foreign countries through the dollar’s steady appreciation. Also contributing to the recovery was a looser Federal Reserve monetary policy. 1987: The U.S. had become a net debtor to foreign countries, its current account deficit was at a level of 3.6 percent of GNP – economists started to worry 1987: The U.S. had become a net debtor to foreign countries, its current account deficit was at a level of 3.6 percent of GNP – economists started to worry

7. Fiscal Policies, the Current Account, and the Resurgence of Protectionism The poor economic performance in the 1980’s had led to increased pressures on governments to protect industries in import-competing sectors. The poor economic performance in the 1980’s had led to increased pressures on governments to protect industries in import-competing sectors. 1985: protectionist pressures was so strong that the U.S. couldn’t ignore it and had to hurt the “benign neglect” 1985: protectionist pressures was so strong that the U.S. couldn’t ignore it and had to hurt the “benign neglect” Benign neglect was the policy of the U.S. toward the foreign exchange market, refusing to invervene except in unusual circumstances Benign neglect was the policy of the U.S. toward the foreign exchange market, refusing to invervene except in unusual circumstances

8. Fiscal Policies, the Current Account, and the Resurgence of Protectionism 1985: The “Plaza announcement” took place. It was important because it had two major effects, first the Dollar dropped sharply after it and second it tagged the worldwide dissatisfaction with floating exchange rates and marked the start of a period in which countries including the U.S. readily intervened, at times massively and in cooperative fashion, to influence exchange rates. 1985: The “Plaza announcement” took place. It was important because it had two major effects, first the Dollar dropped sharply after it and second it tagged the worldwide dissatisfaction with floating exchange rates and marked the start of a period in which countries including the U.S. readily intervened, at times massively and in cooperative fashion, to influence exchange rates.

9. Global slump once again, recovery, crisis, and deficits At the end of the 1980s inflationary pressures reappeared in the main industrial countries. At the end of the 1980s inflationary pressures reappeared in the main industrial countries. US: inflation in 1987 & 88, economic downturn in 1990, followed by expansion US: inflation in 1987 & 88, economic downturn in 1990, followed by expansion Europe: 1990 reunification of Germany, collapse of the former Soviet Union, European countries pegged their exchange rate to the Deutsche Mark. Europe: 1990 reunification of Germany, collapse of the former Soviet Union, European countries pegged their exchange rate to the Deutsche Mark.

10. Global slump once again, recovery, crisis, and deficits Japan: trying to fight the inflation that occurred in 1989 it felled in a recession by early 1992. It reached its deep in 1998 and the Japanese problems spilled over to the developed countries in East Asia, this effect was boosted because they fixed their exchange rate against the dollar. Japan: trying to fight the inflation that occurred in 1989 it felled in a recession by early 1992. It reached its deep in 1998 and the Japanese problems spilled over to the developed countries in East Asia, this effect was boosted because they fixed their exchange rate against the dollar. Russia: defaulted 1998 on its internal and external debt Russia: defaulted 1998 on its internal and external debt 1999: Fed and European central banks decreased interest rates. The Euro was introduced. The worst of the financial crisis seemed to be past. 1999: Fed and European central banks decreased interest rates. The Euro was introduced. The worst of the financial crisis seemed to be past.

11. Global slump once again, recovery, crisis, and deficits 2001: a mild and short recession in the U.S. after a 10 year uninterrupted growth. Tax cuts and interest rate cuts made it a short one. 2001: a mild and short recession in the U.S. after a 10 year uninterrupted growth. Tax cuts and interest rate cuts made it a short one. Swelling household deficit in the U.S. leading to a depreciation of the U.S. particular against the Euro and increase worldwide fears where this will end if the world, particular Asia isn’t willing anymore to finance the U.S. deficit Swelling household deficit in the U.S. leading to a depreciation of the U.S. particular against the Euro and increase worldwide fears where this will end if the world, particular Asia isn’t willing anymore to finance the U.S. deficit