The Persistence of Global Financial Imbalances
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The Persistence of Global Financial Imbalances
Mary MalliarisTassos Malliaris
LOYOLA UNIVERSITY CHICAGOCONFERENCE on ECONOMIC ASYMMETRIES AND
GLOBALIZATION INDIAN INSTITUTE OF MANAGEMENT LUCKNOW
December 16-18, 2010
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Focus of the Paper
• Trace the Evolution of the Global Monetary System
• Emphasize the Persistence of Global Financial Imbalances
• Evaluate Economic Policies
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Evolution of Global Monetary System
• Bretton Woods I
• Bretton Woods II
• Bretton Woods III ?
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Bretton Woods I
• Why Was Bretton Woods Developed?
• Keynes’ Incompatibility Thesis: Cannot achieve Free Trade, Flexible Exchange Rates, Free Capital Mobility and Global Full Employment
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The Gold Standard Period
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“It is characteristic of a freely convertible international standard that it throws themain burden of adjustment on the country which is the debtor position on theinternational balance of payments.”
Keynes, Post War Currency Policy, 1941, pp. 29-30
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“An essential improvement in designing any international payments system requires transferring the onus of adjustment from the debtor to the creditor position. This transfer would substitute an expansionist, in place of acontractionist, pressure on world trade “
Keynes, Post War Currency Policy, 1941, pp. 29-30
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1944 Bretton Woods Conference
• U.S. Major Creditor• Europe and Japan Are Devastated• Need to Grow Global Economy• Presence of Economic Imbalances• Keynes’ Estimate of $10 billion needed• Dexter White proposes $3 billion• Marshall Plan Over 4 Years: $13 billion
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Bretton Woods 1947-1973
• Stabilized Global Economy
• Promoted Growth
• Created New Global Imbalances
• Core or Center (U.S.) vs. the Periphery (European and Asian Countries)
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Collapse of Bretton Woods I
• Global Imbalances
• French Conversion of Imbalances into Gold
• U.S. Inflationary Monetary and Fiscal Policies
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The Modern History of Gold
New York Gold Price Per Ounce
$0.00
$200.00
$400.00
$600.00
$800.00
$1,000.00
$1,200.00
1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Year
$/oz
*Non-Inflation adjusted prices
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The Global Monetary System After 1973
• More Flexible Exchange Rates• Exchange Rate Volatility and Uncertainty• Accelerated Global Capital Mobility• Independent Monetary Policy• Several Currency Crises, leading to Banking
Crises and often to Real GDP Declines
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The Dollar-coaster
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Three Major Developments
• 1989: Japanese Stock Market Crash and Japan’s Lost Decade
• Formation of the EU and EMU: Creation of the Euro
• Emergence of China
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Collapse of U.S. Trade Balances
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Bretton Woods II
• 2003: Dooley, Folkerts-Laundau and Garber• Bretton Woods Revived• Core: U.S. Dollar is Used as a Global Currency;
Balance of Payments Deficits.• Periphery: Export-led Growth Driven by an
Undervalued Exchange Rate; Massive Accumulation of Reserves
• System Can Be Maintained in the Long-run
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China’s Dollar Holdings
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Inflation
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An Evaluation
• Argument for Bretton Woods II is Supported by Reality
• There Are also Several Differences Between BWI and BWII
• Periphery: Numerous and Heterogeneous• Existence of the Euro• Free Capital Mobility• Liberalization of Financial Markets
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The Global Financial Crisis of 2007-09
• Started in September 2007 as a Subprime Mortgage Crisis with a $300 billion potential loss
• Developed into a Major Financial Crisis • The Role of Easy Domestic Monetary Policies• The Bernanke/Taylor Debate of Global Savings
Glut
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Global Dimension of the Crisis
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The Crisis of the Euro
• While the U.S. is Assessing the Impact of Global Imbalances in Its Financial Crisis
• The EMU, viewed as a Bretton Woods System of a Smaller Scale, Experiences a Global Imbalances Crisis of its Own
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Current Policies and Regulations
• The Emergence of the G20 as the Global Governance Group
• The Designation of the Global Economy Meeting as the Bi-Monthly Central Banks Monitoring Group
• The Reform and Expansion of the Financial Stability Board
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Future Possible Scenarios
• Bretton Woods III: Public Sector U.S. Growth• An Asian Monetary Union? • Continued Depreciation of the U.S. Dollar?• Domestic Consumption Led Growth vs. Export-
Oriented Growth?• Recycling of Accumulated Reserves as Foreign
Aid to Developing Nations? • Are There Reasons for Optimism?
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