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Published byPauline Payne Modified over 9 years ago
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IT Revolution: A “New Economy”? IT Revolution: A Critical Juncture? Superstar economy Heightened income inequality Global elite…the 1 % …the 0.1 % Heightened spatial inequality Networks economies/agglomeration economies Conquest of geography? Ubiquitous progress Financial innovations Fragility and crisis A new international monetary architecture?
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International Monetary Regimes Classical gold standard $22/oz. $4.86/£ 4.2 M/$ 20.4 M/£ The Great War (WWI) Suspension Interwar instability – Hyperinflation – Restoration: Gold – Exchange Standard – Depression Golden Fetters – Reflation – Recovery WWII Aftermath: Bretton Woods System – Adjustable pegs to $ Fundamental disequilibrium – IMF Support – IMF Conditionality
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Bretton Woods System: Stability and Its Discontents The Golden Age/The Age of Keynes: 1946 – 1973(?) Dollar Dominance Triffin Dilemma: Buildup of $ reserves threat to credibility Stop $ outflow squeeze world trade Continue $ investments “bank run” Bretton Woods System Self – Destructs Vietnam War $ Glut – de Gaulle theatrics – Nixon Economic Plan (NEP) ~ an end to Bretton Woods Close gold window 10% import surtax Wage – Price Controls
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Floating and Its Discontents The theory: no intervention no need for reserves The practice: intervention $ reserves $ privilege – The $: vehicle currency for trade – The $: thick financial markets Liquid $ assets – Stabilize rates against $ Stabilize cross-rates Currency misalignments Currency crises – Latin America’s “Lost Decade” – Tequila/East Asia Global demand for $s Capital inflows to US US International Debt Threat of “Bank Run” The US Housing Bubble (Developed) World in a Slump Dysfunctional US Finance/Dysfunctional US Politics A New International Monetary Architecture???
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The Euro: An Alternative? Why a €? Euro economics – Transactions costs – EU Common Agricultural Policy CAP requires fixed rates across EU currencies Fluctuations Arbitrage opportunities Fixed rates (snake in tunnel/worm in snake) common currency – Import German Discipline – Seats @ BUBA’s Table Euro politics – Integration Peace – Tie Germany to West Europe: The German-French Condominium
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Springtime of the Euro German wage discipline German competitiveness Current account surpluses Capital inflows to peripheral countries Financial bubbles/Housing bubbles/Fiscal bubbles – Iceland – Cyprus – Ireland – Spain – UK – Greece – Italy – Portugal
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The $ Prevails Measures of dominance 75% of non-US trade invoiced in $s 85% of foreign exchange transactions in $s 45% of international bonds in $s 61% of reported reserves in $s (and Bank of China doesn’t report) Oil and other commodities priced in $s Reasons for dominance World’s largest economy/largest financial markets Incumbency – Quote prices in same currency as competitors use – Hedge with $ derivative contracts – Sell international bonds in thickest market – Shadow the currency others shadow stable cross-rates – Hold $ reserves for intervention…Hold liquid US Treasuries – Peg to low ‘flation country English: the world’s language – US Business Schools Economics/Finance Texts
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Credible Alternatives to $??? UK, CH, CND too small/too little debt to be held for reserves Japan unwilling: overvalued currency not welcome Euro : has the size, debt securities, volume of trade, etc. – BUT Fiscal incoherence Policy incoherence No government No bonds No guarantees Emerging Markets…BRICS??? – Strength to lead? Convertible currency? Thick market in government bonds? – Credibility to lead? Regulatory framework? Rule of law? – Willingness to lead? Bear the “burden” of an overvalued currency?
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