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The Persistence of Global Financial Imbalances

The Persistence of Global Financial Imbalances. Mary Malliaris Tassos Malliaris LOYOLA UNIVERSITY CHICAGO CONFERENCE on ECONOMIC ASYMMETRIES AND GLOBALIZATION INDIAN INSTITUTE OF MANAGEMENT LUCKNOW December 16-18, 2010. Focus of the Paper.

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The Persistence of Global Financial Imbalances

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  1. The Persistence of Global Financial Imbalances Mary Malliaris Tassos Malliaris LOYOLA UNIVERSITY CHICAGO CONFERENCE on ECONOMIC ASYMMETRIES AND GLOBALIZATION INDIAN INSTITUTE OF MANAGEMENT LUCKNOW December 16-18, 2010

  2. Focus of the Paper • Trace the Evolution of the Global Monetary System • Emphasize the Persistence of Global Financial Imbalances • Evaluate Economic Policies

  3. Evolution of Global Monetary System • Bretton Woods I • Bretton Woods II • Bretton Woods III ?

  4. 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

  5. The Gold Standard Period

  6. “It is characteristic of a freely convertible international standard that it throws the main burden of adjustment on the country which is the debtor position on the international balance of payments.” Keynes, Post War Currency Policy, 1941, pp. 29-30

  7. “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 a contractionist, pressure on world trade “ Keynes, Post War Currency Policy, 1941, pp. 29-30

  8. 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

  9. 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)

  10. Collapse of Bretton Woods I • Global Imbalances • French Conversion of Imbalances into Gold • U.S. Inflationary Monetary and Fiscal Policies

  11. The Modern History of Gold *Non-Inflation adjusted prices

  12. 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

  13. The Dollar-coaster

  14. 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

  15. Collapse of U.S. Trade Balances

  16. 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

  17. China’s Dollar Holdings

  18. Inflation

  19. 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

  20. 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

  21. Global Dimension of the Crisis

  22. 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

  23. 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

  24. 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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