A Philosophy of Metrics (POM) Presentation Copyright© June ...POM ANALYSIS ON THE MULTILATERAL...

ANALYSIS ON THE MULTILATERAL MONETARY TRANSITIONPOM

A Philosophy of Metrics (POM) Presentation Copyright© June, 2015 www.philosophyofmetrics.com



THE BRETTON WOODS CONFERENCE OF 1944

The original conception of a global monetary framework which was brought forward at Bretton Woods consisted of using the bancor as the international money clearing unit.

The bancor was proposed as a supra-national (non-domestic) currency which would facilitate the process of correcting trade imbalances.

The International Clearing Union was proposed as the institution meant to clear all trade using bancor.

The United States vetoed the use of the bancor and instead placed the domestic dollar as the international money clearing unit.



Yen

USD

Pound Sterling

French Franc

Deutsche Mark

HISTORIC STRUCTURE OF THE BRETTON WOODS MONETARY SYSTEM

Pound Sterling Countries:All areas of the British Empire

Deutsche Mark Countries:Germany, Benelux countries, and Denmark

French Franc Countries:Benin, Burkina, Faso, Cameroon, Central African Republic, Chad, Republic of Congo, Cote d’lvoire, Mali, Niger, Senegal, and Togo



For 25 years the Bretton Woods system was based on stable and adjustable exchange rates. Imbalances were adjusted based on the following criteria:

1. Countries with a trade surplus had their domestic currency appreciated.2. Countries with a trade deficits had their domestic currency depreciated.

In 1960 Belgian-American economist Robert Triffin explained how fundamental imbalances are created in the Balance of Payments when the domestic currency of one country is used as the international reserve asset, or money clearing unit.

As global demand for the reserve currency increases so does the accumulation of the currency in the foreign reserve accounts around the world. This accumulation of domestic currency causes imbalances by building a large trade deficit for the country who holds the reserve currency.




In 1971 Bretton Woods effectively ended, though the US dollar remained as the reserve currency with free floating exchange rates.

The ending of the gold standard by President Richard Nixon allowed for levels of USD in foreign reserves to be increased.

With the currencies of most large economies pegged to the USD, it was the other currencies which would be adjusted in value against the dollar.

American interests worked hard to keep the dollar from depreciating. In order to correct the imbalances and account for the growing trade deficit, the dollar should have been depreciated.




FACTORS CONTRIBUTING TO THE FINANCIAL CRISIS

1. Loose Monetary Policies • Encourages the formation of asset bubbles• No tightening of monetary conditions

2. Loose Fiscal Policies• Increases deficit spending• Increased sovereign debt risk• Debt-to-GDP ratio becomes unsustainable

3. Easy Credit & Subprime Lending• Channels inflationary pressure into real estate and stock markets• Granting loans to high risk borrowers with poor credit ratings




4. Financial Innovation• Creation of financial instruments such as CDO’s (Collateralized Debt

Obligations)• Spread trade and credit risk across institutions

5. Lack of Supervision and Regulation• No assessment of risk associated with the last 4 causes• Not enough leverage in a unipolar framework to encourage data reporting

standards

6. Inevitable Deflation of Asset Bubble• Decreases the value of the collateral to the loans granted by financial

institutions• Influences balance sheet of lending institutions• Leading to credit tightening in the real economy




7. Global Imbalances• Trade deficits are being funded by financial account surpluses• Imbalances in the Balance of Payments system.• Global imbalances have created the need for all 6 previous factors

Global Imbalances had minimal effect before Bretton Woods because:• Underdeveloped countries with low GDP ran trade deficits• Gold standard forced early adjustment process of BoP• British pound was global reserve currency supported by a strong trade

surplus history

Global Imbalances had increasing effect after Bretton Woods because:• International trade relations increased• Fiduciary money expanded in lieu of functioning gold standard• Imbalances began to distort exchange rates and international reserve

levels• Largest economies (western) have now become the greatest debtors with

massive trade deficits• Imbalances affect relative prices instead of adjustments at the level of

nominal prices



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US Historical Balance of Payments



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U.S. Historical Debt-to-GDP 1790+



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U.S. Historical BoP vs Debt-to-GDP

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US Trade Deficit vs China Trade Surplus

US China



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Major Economies - Balance of Payments



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European Union - Balance of Payments



EUROPEAN UNION DEBT CRISIS

The sovereign debt crisis in the Euro Zone is also a balance of payments problem. Like on the global macro scale, any countries with a debt-to-GDP ratio above 80% and a persistent and epidemic trade deficits, are vulnerable to systemic and rapid fiscal deterioration, like Greece is currently experiencing.



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European Union - Balance of Payments vs Debt-to-GDP

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Major Economies - Balance of Payments vs Debt-to-GDP

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ASEAN ECONOMIC COMMUNITY – AECASIAN CURRENCY UNIT - ACU

Single region common market of ASEAN countries, 600 million people, with the following benefits:• Regional cooperation to improve efficiencies and competitiveness• Enable easier movement of goods, services, investment, capital and people• Coordinating supply chains and creating access to new markets• Expanding to zero tariffs on all goods• Remain engaged with the global economy through regional-level free trade

agreements. Currently ASEAN has such agreements with China, Japan, Korea, India, Australia and New Zealand.

• Investment in emerging markets is more desirable than in the US and Europe.• Increase of infrastructure development – roads, bridges, airports, etc..• Asian Currency Unit will be developed for use by ASEAN members and trade

partners. ACU will be a basket of currencies like the ECU preceded the euro.• AEC will be implemented on January 1, 2016.



COMPOSITION OF THE EUROPEAN CURRENCY UNIT

ECU Composition

Germany France Netherlands Belgium Luxembourg Italy

Denmark Ireland Great Britain Greece Spain Portugal



INCREASE IN RENMINBI DEPOSITS



• China transitioning from a “trade exporting” economic model to a “trade services” economic model.

• 100 million rural population migrating into urban centers by 2020

A Philosophy of Metrics (POM) Presentation Copyright© June ...POM ANALYSIS ON THE MULTILATERAL...

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Transcript of A Philosophy of Metrics (POM) Presentation Copyright© June ...POM ANALYSIS ON THE MULTILATERAL...