currency peg

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pages: 782 words: 187,875

Big Debt Crises by Ray Dalio

Asian financial crisis, asset-backed security, bank run, banking crisis, basic income, Ben Bernanke: helicopter money, break the buck, Bretton Woods, British Empire, business cycle, capital controls, central bank independence, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, declining real wages, European colonialism, fiat currency, financial innovation, German hyperinflation, housing crisis, implied volatility, intangible asset, Kickstarter, large denomination, manufacturing employment, margin call, market bubble, market fundamentalism, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Northern Rock, Ponzi scheme, price stability, private sector deleveraging, purchasing power parity, pushing on a string, quantitative easing, refrigerator car, reserve currency, short selling, sovereign wealth fund, too big to fail, transaction costs, universal basic income, value at risk, yield curve

The money printing occurs in two classic waves—central banks first provide liquidity to stressed institutions, and then they conduct large-scale asset purchases to broadly stimulate the economy. Below we show the average real exchange rate versus trade partners, which reflects the strength/weakness of a currency relative to the country’s trade partners. Typically, governments with gold-, commodity-, or foreign-currency-pegged money systems are forced to have tighter monetary policies to protect the value of their currency than governments with fiat monetary systems. But eventually the debt contractions become so painful that they relent, break the link, and print (i.e., either they abandon these systems or change the amount/pricing of the commodity that they will exchange for a unit of money). For example, when the value of the dollar (and therefore the amount of money) was tied to gold during the Great Depression, suspending the promise to convert dollars into gold so that the currency could be devalued and more money created was key to creating the bottoms in the stock and commodity markets and the economy.

Similarly, the central bank capped the amount they would loan to businesses and raised borrowing rates. To further build faith in the new currency… …The central bank built up large reserves of foreign currency assets. They were able to do this by borrowing foreign exchange from the Allies and encouraging German citizens who had fled the currency during the hyperinflation to repatriate their savings. Earlier one-off measures (e.g., the short-lived currency peg, capital controls) hadn’t been enough—Germany needed a comprehensive and aggressive policy shift that abolished the currency, accepted hard backing, and placed extreme limits on monetization, credit creation, and government spending. It helped that years of economic crisis had made the public eager to find a currency that they could actually use. However, none of this would have been possible if the reparation burden was not substantially reduced.

Imagine borrowing a lot of money to live an expensive life style; it can continue for the near term but is unsustainable and will result in bad times when the adjustment happens. capital inflows/outflows: The movement of money and credit across borders to buy capital/investment assets (like bonds, currency, equities, a factory, etc.). Foreigners buying/selling a country’s assets are ‘inflows’ and domestic players buying/selling foreign assets are ‘outflows.’ core inflation: Inflation that excludes the prices of especially volatile goods, such as commodities. currency peg: An exchange rate policy in which a country tries to keep its currency at a fixed value to another currency, a mix of currencies, or an asset such as gold. current account balance: Exports minus imports plus net income receipts. Think of it as essentially being net income (income minus expenses). If a country has a current account deficit, its expenses are more than its income, so it has to make up the difference with capital transactions (like borrowing or selling equity) that are accounted for in the capital account balance.


pages: 381 words: 101,559

Currency Wars: The Making of the Next Gobal Crisis by James Rickards

Asian financial crisis, bank run, Benoit Mandelbrot, Berlin Wall, Big bang: deregulation of the City of London, Black Swan, borderless world, Bretton Woods, BRICs, British Empire, business climate, buy and hold, capital controls, Carmen Reinhart, Cass Sunstein, collateralized debt obligation, complexity theory, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, Deng Xiaoping, diversification, diversified portfolio, Fall of the Berlin Wall, family office, financial innovation, floating exchange rates, full employment, game design, German hyperinflation, Gini coefficient, global rebalancing, global reserve currency, high net worth, income inequality, interest rate derivative, John Meriwether, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, Mexican peso crisis / tequila crisis, money market fund, money: store of value / unit of account / medium of exchange, Myron Scholes, Network effects, New Journalism, Nixon shock, offshore financial centre, oil shock, one-China policy, open economy, paradox of thrift, Paul Samuelson, price mechanism, price stability, private sector deleveraging, quantitative easing, race to the bottom, RAND corporation, rent-seeking, reserve currency, Ronald Reagan, sovereign wealth fund, special drawing rights, special economic zone, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, time value of money, too big to fail, value at risk, War on Poverty, Washington Consensus, zero-sum game

The key to this new social contract was the steady creation of millions of jobs for the new job seekers. With memories of Tiananmen fresh in their minds and the historical memory of over a century of chaos, the leadership knew the survival of the Communist Party and the continuation of political stability depended on job creation; everything else in Chinese policy would be subordinate to that goal. The surest way to rapid, massive job creation was to become an export powerhouse. The currency peg was the means to this end. For the Communist Party of China, the dollar-yuan peg was an economic bulwark against another Tiananmen Square. By 1992, reactionary elements in China opposed to reform again began to push for a dismantling of Deng’s special economic zones and other programs. In response, a visibly ailing and officially retired Deng Xiaoping made his famous New Year’s Southern Tour, a personal visit to major industrial cities, including Shanghai, which generated support for continued economic development and which politically disarmed the reactionaries.

It gave the G20 access to enormous expertise without its having to create and build an expert staff on its own. For the IMF, it was more like a reprieve. As late as 2006 many international monetary experts seriously questioned the purpose and continued existence of the IMF. In the 1950s and 1960s, it had provided bridge loans to countries suffering temporary balance of payments difficulties to allow them to maintain their currency peg to the dollar. In the 1980s and 1990s it had assisted developing economies suffering foreign exchange crises by providing finance conditioned upon austerity measures designed to protect foreign bankers and bondholders. Yet with the elimination of gold, the rise of floating exchange rates and the piling up of huge surpluses by developing countries, the IMF entered the twenty-first century with no discernable mission.

From June 2010 through January 2011, yuan revaluation had moved at about a 4 percent annualized rate and Chinese inflation was moving at a 5 percent annualized rate so the total increase in the Chinese cost structure by adding revaluation and inflation was 9 percent. Projected over several years, this meant that the dollar would decline over 20 percent relative to the yuan in terms of export prices. This was exactly what Senator Chuck Schumer and other critics in the United States had been calling for. China now had no good options. If it maintained the currency peg, the Fed would keep printing and inflation in China would get out of control. If China revalued, it might keep a lid on inflation, but its cost structure would go up when measured in other currencies. The Fed and the United States would win either way. While revaluation and inflation might be economic equivalents when it came to increasing costs, there was one important difference. Revaluation could be controlled to some extent since the Chinese could direct the timing of each change in the pegged rate even if the Fed was forcing the overall direction.


pages: 586 words: 160,321

The Euro and the Battle of Ideas by Markus K. Brunnermeier, Harold James, Jean-Pierre Landau

Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, battle of ideas, Ben Bernanke: helicopter money, Berlin Wall, Bretton Woods, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, collective bargaining, credit crunch, Credit Default Swap, currency peg, debt deflation, Deng Xiaoping, different worldview, diversification, Donald Trump, Edward Snowden, en.wikipedia.org, Fall of the Berlin Wall, financial deregulation, financial repression, fixed income, Flash crash, floating exchange rates, full employment, German hyperinflation, global reserve currency, income inequality, inflation targeting, information asymmetry, Irish property bubble, Jean Tirole, Kenneth Rogoff, Martin Wolf, mittelstand, money market fund, Mont Pelerin Society, moral hazard, negative equity, Neil Kinnock, new economy, Northern Rock, obamacare, offshore financial centre, open economy, paradox of thrift, pension reform, price stability, principal–agent problem, quantitative easing, race to the bottom, random walk, regulatory arbitrage, rent-seeking, reserve currency, road to serfdom, secular stagnation, short selling, Silicon Valley, South China Sea, special drawing rights, the payments system, too big to fail, union organizing, unorthodox policies, Washington Consensus, WikiLeaks, yield curve

For example, a government will think twice about whether to default on systemic (undercapitalized) banks, as at the end of the day it simply has to bailout these banks and so has achieved little from the restructuring of its debt. External Commitments: Currency Pegs, Unions, and the Gold Standard Historically, government often looked for other external commitment devices that make it difficult to inflate away the public debt. The basic idea underlying the use of external commitment devices is rather simple. A country pegs the value of its own currency to some anchor—either foreign currency or a commodity (gold)—over whose value it has little control. If the value of the anchor does not change too quickly, and if the peg is credible, then the domestic currency will also remain stable. From Currency Pegs to Currency Unions Many countries around the world tie or have tied the real value of their currency to a foreign currency (or a basket of currencies).

Printed in the United States of America 13579108642 Contents 1 Introduction 1 PART I: POWER SHIFTS AND GERMAN-FRENCH DIFFERENCES 2 Power Shifts 17 Lethargy of European Institutions 18 The First Power Shift: From Brussels to National Capitals 20 The Second Power Shift: To Berlin-Paris and Ultimately to Berlin 27 After the Power Shift 33 3 Historical Roots of German-French Differences 40 Cultural Differences 41 Federalism versus Centralism 43 Mittelstand versus National Champions 48 Collaborative versus Confrontational Labor Unions 51 Historical Inflation Experiences 54 4 German-French Differences in Economic Philosophies 56 Fluid Traditions: Switch to Opposites 56 German Economic Tradition 59 French Economic Tradition 67 International Economics 74 PART II: MONETARY AND FISCAL STABILITY: THE GHOST OF MAASTRICHT 5 Rules, Flexibility, Credibility, and Commitment 85 Time-Inconsistency: Ex Ante versus Ex Post 86 External Commitments: Currency Pegs, Unions, and the Gold Standard 89 Internal Commitments: Reputation and Institutional Design 91 Managing Current versus Avoiding Future Crisis 94 6 Liability versus Solidarity: No-Bailout Clause and Fiscal Union 97 The No-Bailout Clause 98 Fiscal Unions 100 Eurobonds 111 Policy Recommendations 115 7 Solvency versus Liquidity 116 Buildup of Imbalances and the Naked Swimmer 117 Solvency 118 Liquidity 119 Crossing the Rubicon via Default 125 Sovereign-Debt Restructuring and Insolvency Mechanism 126 Fiscal Push: Increasing Scale and Scope of EFSF and ESM 127 Monetary Push 131 Policy Recommendations 133 8 Austerity versus Stimulus 135 The Fiscal Multiplier Debate 137 The Output Gap versus Unsustainable Booms Debate 143 Politics Connects Structural Reforms and Austerity 145 The European Policy Debate on Austerity versus Stimulus 148 Lessons and Policy Recommendations 153 PART III: FINANCIAL STABILITY: MAASTRICHT’S STEPCHILD 9 The Role of the Financial Sector 157 Traditional Banking 159 Modern Banking and Capital Markets 162 Cross-Border Capital Flows and the Interbank Market 166 10 Financial Crises: Mechanisms and Management 173 Financial Crisis Mechanisms 175 Crisis Management: Monetary Policy 185 Crisis Management: Fiscal Policy and Regulatory Measures 194 Ex Ante Policy: Preventing a Crisis 206 11 Banking Union, European Safe Bonds, and Exit Risk 210 Banking in a Currency Union 211 Safe Assets: Flight-to-Safety Cross-Border Capital Flows 222 Redenomination and Exit Risks 226 Policy Recommendations 233 PART IV: OTHERS’ PERSPECTIVES 12 Italy 237 Battling Economic Philosophies within Italy 237 Mezzogiorno: Convergence or Divergence within a Transfer Union 239 Italy’s Economic Challenges 242 Politics and Decline 245 13 Anglo-American Economics and Global Perspectives 249 Diverging Traditions 251 The United States: The Politics of Looking for Recovery 261 The United Kingdom: Brexit and the Politics of Thinking Outside Europe 267 China and Russia 279 Conclusion 286 14 The International Monetary Fund (IMF) 287 The IMF’s Philosophy and Crisis Management 289 The IMF’s Initial Involvement in the Euro Crisis 295 The IMF and the Troika 300 A Change in the IMF’s Leadership 304 Loss of Credibility: Muddling Through, Delayed Greek PSI 306 15 European Central Bank (ECB) 313 The ECB before the Crisis: Institutional Design and Philosophy 315 The ECB’s Early Successes and Defeats 325 The ECB and Conditionality 331 Lending and Asset Purchase Programs 343 Single Supervisory Mechanism (SSM) for European Banks 368 Taking Stock: Where Does the ECB Stand?

In contrast, Germans see rules as a way to avoid the build-up of future risks and are worried that a flexible crisis response sows the seed for the next crisis. In particular, this chapter tries to answer the following questions: •What advantages do rules have in avoiding and managing crises, and what are their costs? •How do rules help to overcome time-inconsistency problems—that countries find it advantageous to first create the impression that they would do one thing but ex post do another? •Historically, how were the gold standard, currency pegs, and other external commitment devices used to find the right balance between containing time-inconsistency problems and maintaining flexibility? •How can reputation replace external commitment devices? •How can delegation to an independent central bank help to overcome time-inconsistency problems? In particular, can an institutional environment in which an independent central bank and a government are engaged in a “game of chicken” help to find the right balance?


pages: 515 words: 142,354

The Euro: How a Common Currency Threatens the Future of Europe by Joseph E. Stiglitz, Alex Hyde-White

bank run, banking crisis, barriers to entry, battle of ideas, Berlin Wall, Bretton Woods, business cycle, buy and hold, capital controls, Carmen Reinhart, cashless society, central bank independence, centre right, cognitive dissonance, collapse of Lehman Brothers, collective bargaining, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, currency peg, dark matter, David Ricardo: comparative advantage, disintermediation, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial innovation, full employment, George Akerlof, Gini coefficient, global supply chain, Growth in a Time of Debt, housing crisis, income inequality, incomplete markets, inflation targeting, information asymmetry, investor state dispute settlement, invisible hand, Kenneth Arrow, Kenneth Rogoff, knowledge economy, light touch regulation, manufacturing employment, market bubble, market friction, market fundamentalism, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, neoliberal agenda, new economy, open economy, paradox of thrift, pension reform, pensions crisis, price stability, profit maximization, purchasing power parity, quantitative easing, race to the bottom, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, Silicon Valley, sovereign wealth fund, the payments system, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, transfer pricing, trickle-down economics, Washington Consensus, working-age population

There is a simple answer to this apparent puzzle: a fatal decision, in 1992, to adopt a single currency, without providing for the institutions that would make it work. Good currency arrangements cannot ensure prosperity, but flawed currency arrangements can lead to recessions and depressions. And among the kinds of currency arrangements that have long been associated with recessions and depressions are currency pegs, where the value of one country’s currency is fixed relative to another or relative to a commodity. America’s depression at the end of the 19th century was linked to the gold standard, where every country pegged its currency’s value to gold and, therefore, implicitly to each other’s currencies: with no new large discoveries of gold, its scarcity was leading to the fall of prices of ordinary goods in terms of gold—to what we call today deflation.3 In effect, money was becoming more valuable.

The economic costs of these crises are enormous; they are felt not only in the high unemployment and lost output today but in lower growth for years—in some cases, decades. Such crises have happened repeatedly, with the euro crisis being only the most recent and worst example. In chapter 2, for instance, I described the Argentine crisis in 2001–2002. It is easy to understand why such crises are so common with currency pegs. If somehow the exchange rate becomes too high, there will be a trade deficit, with imports exceeding exports. This deficit has to be financed somehow, offset by what are called capital inflows. These can take the form of debt or direct investments. The problems posed by debt are most obvious: eventually the debt reaches so high a level that creditors’ sentiments begin to change. They worry that they will not be repaid.

Moving from where the eurozone is today to one of these alternatives will not be easy, but it can be done. For the sake of Europe, for the sake of the world, let us hope that Europe sets out to do so. NOTES Preface 1 More precisely, around 45 percent at the start of 2016, according to Eurostat. 2 The address was published as Robert E. Lucas Jr., “Macroeconomic Priorities,” American Economic Review 93, no. 1 (2003): 1–14; the quote appears on p. 1. 3 With every country’s currency pegged to gold, the value of each currency relative to the other was also fixed. 4 Bryan uttered this phrase in his July 9, 1896, speech at the Democratic National Convention in Chicago. 5 See Barry Eichengreen, Golden Fetters: The Gold Standard and the Great Depression, 1919–1939 (New York: Oxford University Press, 1992). 6 The equivalent value for US and China GDPs are $17.9 trillion and $11.0 trillion, respectively.


pages: 576 words: 105,655

Austerity: The History of a Dangerous Idea by Mark Blyth

"Robert Solow", accounting loophole / creative accounting, balance sheet recession, bank run, banking crisis, Black Swan, Bretton Woods, business cycle, buy and hold, capital controls, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, collateralized debt obligation, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, deindustrialization, disintermediation, diversification, en.wikipedia.org, ending welfare as we know it, Eugene Fama: efficient market hypothesis, eurozone crisis, financial repression, fixed income, floating exchange rates, Fractional reserve banking, full employment, German hyperinflation, Gini coefficient, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, information asymmetry, interest rate swap, invisible hand, Irish property bubble, Joseph Schumpeter, Kenneth Rogoff, liberal capitalism, liquidationism / Banker’s doctrine / the Treasury view, Long Term Capital Management, market bubble, market clearing, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, Occupy movement, offshore financial centre, paradox of thrift, Philip Mirowski, price stability, quantitative easing, rent-seeking, reserve currency, road to serfdom, savings glut, short selling, structural adjustment programs, The Great Moderation, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, unorthodox policies, value at risk, Washington Consensus, zero-sum game

That gave the German economy the advantage in producing less-than-great stuff too, thereby undercutting competitors in products lower down, as well as higher up the value-added chain.47 Add to this contemporary German wages, which have seen real declines over the 2000s, and you have an economy that is extremely hard to keep up with. On the other side of this one-way bet were the financial markets. They looked at less dynamic economies, such as the United Kingdom and Italy, that were tying themselves to the deutsche mark and saw a way to make money. The only way to maintain a currency peg is to either defend it with foreign exchange reserves or deflate your wages and prices to accommodate it. To defend a peg you need lots of foreign currency so that when your currency loses value (as it will if you are trying to keep up with the Germans), you can sell your foreign currency reserves and buy back your own currency to maintain the desired rate. But if the markets can figure out how much foreign currency you have in reserve, they can bet against you, force a devaluation of your currency, and pocket the difference between the peg and the new market value in a short sale.

Soros could do this because he knew that there was no way the United Kingdom or Italy could be as competitive as Germany without serious price deflation to increase cost competitiveness, and that there would be only so much deflation and unemployment these countries could take before they either ran out of foreign exchange reserves or lost the next election. Indeed, the European Exchange Rate Mechanism was sometimes referred to as the European “Eternal Recession Mechanism,” such was its deflationary impact. In short, attempts to maintain an anti-inflationary currency peg fail because they are not credible on the following point: you cannot run a gold standard (where the only way to adjust is through internal deflation) in a democracy.48 Well, you can try, and the Europeans building the EU are nothing if not triers. Following the Exchange Rate Mechanism debacle, in a scene reminiscent of one in Monty Python’s movie The Holy Grail in which the king tells his son that “they said you couldn’t build a castle on a swamp, so I did it anyway, and it fell down, so I did it again, and it fell down, so I did it again, and it fell down,” the Europeans decided to go one step further than pegging to the deutsche mark—they would all become German by sharing the same currency and the same monetary policy.

Germany’s response to the crisis, and the crisis itself, both spring from the same ordoliberal instruction sheet. Ordoliberal Europe When the rest of Europe stagnated in the late 1970s, Germany suffered the least and recovered the quickest of all the major European states.35 Its ability to withstand the inflationary pressures of the period became the model for other European states: first, through the abortive currency pegs to the deutsche mark of the 1980s and 1990s; second, through the incorporation of ordoliberal principles into the ECB constitution and the EU Commission’s competition-focused policies; and third, through the rules-based approach to governing the Euro project. From the Maastricht convergence criteria to the Stability and Growth Pact to the proposed new fiscal treaty—it’s all about the economic constitution—the rules, the ordo.36 For example, the centrality of competitiveness as the key to growth is a recurrent EU motif.


pages: 275 words: 82,640

Money Mischief: Episodes in Monetary History by Milton Friedman

Bretton Woods, British Empire, business cycle, currency peg, double entry bookkeeping, fiat currency, financial innovation, fixed income, floating exchange rates, full employment, German hyperinflation, income per capita, law of one price, money market fund, oil shock, price anchoring, price stability, transaction costs

., [>] Forrest, William, [>] France avoids hyperinflation, [>]–[>] bimetallic standard in, [>], [>], [>], [>], [>], [>], [>]–[>], [>], [>], [>] gold standard in, [>], [>], [>]–[>], [>], [>] monetary reforms in, [>], [>] Revolution, [>], [>], [>] Franco-Prussian War (1870–71), [>], [>], [>] Free coinage eliminated, [>]–[>], [>] significance of, [>]–[>] Free-silver issue deflation and, [>]–[>] political opposition to, [>] political support for, [>], [>], [>] in presidential campaign of 1896, [>], [>], [>], [>]–[>], [>], [>], [>]–[>], [>]–[>], [>] Friedman, Milton 8c Anna Schwartz, A Monetary History of the United States, 1867–1960, [>], [>], [>], [>], [>], [>] Froman, Lewis, "Bimetallism Reconsidered," [>] Furness, William Henry, III, The Island of Stone Money, [>]–[>] Germany Allied occupation of, [>]–[>] gold standard in, [>], [>], [>], [>]–[>], [>], [>] hyperinflation in, [>]–[>], [>], [>], [>], [>] inflation rates in, [>]–[>], [>]–[>], [>], [>] postwar recovery in, [>] Giffen, Sir Robert, The Case Against Bimetallism, [>]–[>] Gold demonetized, [>]–[>] nonmonetary use of, [>]–[>], [>], [>] Roosevelt raises legal price of, [>] Gold-exchange standard, [>], [>] Gold points, [>], [>] Gold-silver price ratio, [>]–[>], [>]–[>], [>]–[>], [>]–[>], [>]–[>], [>]–[>] effect of silver standard on, [>]–[>] fixed by market, [>], [>], [>] in Great Britain, [>]–[>] legally defined, [>], [>] market points in, [>], [>] naive estimate of, under bimetallic standard (hypothetical continuation of), [>]–[>] political component of, [>]–[>], [>]–[>], [>], [>]–[>], [>], [>]–[>] Gold standard, [>]–[>], [>], [>], [>], [>], [>] adopted by Western nations, [>], [>], [>], [>]–[>], [>], [>]–[>], [>], [>], [>], [>] Coinage Act (1873) and, [>]–[>] and deflation, [>]–[>], [>]–[>], [>]–[>] economic effects of, [>], [>] industrialized nations abandon (1930s), [>], [>], [>] and international exchange rates, [>]–[>], [>] and low-value coins, [>] Redish on, [>]–[>] vs. silver standard, [>]–[>], [>]–[>], [>], [>]–[>], [>]–[>] Gold strikes, economic effects of, [>]–[>], [>], [>], [>], [>]–[>], [>]–[>], [>], [>], [>] Goods and services, output of, money supply and, [>]–[>], [>], [>] natural limits, [>] Government revenues from bonds, [>]–[>], [>] from inflation, [>]–[>], [>]–[>], [>] Government spending, and money supply, [>]–[>], [>], [>] Great Britain attempts to peg pound to German mark, [>]–[>] bimetallic standard in, [>], [>], [>], [>], [>], [>] goes off gold standard (1931), [>]–[>], [>] gold-silver price ratio in, [>]–[>] gold standard in, [>], [>]–[>], [>]–[>], [>]–[>] inflation rates in, [>], [>]–[>], [>]–[>], [>], [>] monetary reform in (1690s), [>] U.S. sells silver to, [>] Greek coinage, as commercial standard, [>]–[>] Greenback inflation, Civil War and, [>], [>]–[>], [>], [>]–[>], [>]–[>], [>] Greenback party, [>], [>] Greenback standard, [>], [>], [>]–[>], [>] Gresham's law, [>], [>] Hamilton, Alexander and Coinage Act of 1792, [>]–[>] supports bimetallic standard, [>]–[>], [>] Treasury Report on the Establishment of the Mint (1791), [>] Hanna, Mark, [>] Hetzel, Robert, on inflation cure, [>]–[>] High Price of Bullion, The (Ricardo), [>] History of Bimetallism in the United States, The (Laughlin), [>] History of Economic Analysis (Schumpeter), [>] Hofstadter, Richard, [>] Hong Kong currency pegged to British pound in, [>] currency pegged to U.S. dollar in, [>]–[>], [>] monetary policies of, [>]–[>] Hume, David, [>]–[>], [>] Hungary, hyperinflation in, [>] Hunt brothers, silver speculation by, [>] Hyperinflation, [>], [>], [>]. See also Inflation in Argentina, [>]–[>], [>], [>] in Bolivia, [>], [>], [>] in Brazil, [>]–[>], [>]–[>], [>]–[>], [>], [>] as cause of totalitarianism, [>]–[>] causes of, [>]–[>] in Chile, [>], [>], [>], [>], [>], [>] in China, [>], [>]–[>], [>], [>] following World War I, [>], [>], [>], [>]–[>], [>], [>], [>], [>], [>], [>] following World War II, [>]–[>], [>], [>], [>], [>], [>], [>], [>], [>], [>] in Germany, [>]–[>], [>], [>], [>], [>] in Hungary, [>] in Israel, [>], [>]–[>], [>] in Mexico, [>] in Nicaragua, [>] and paper money, [>]–[>] in Russia, [>]–[>], [>] war and, [>], [>] Income, nominal, [>] Income flow, [>], [>], [>]–[>], [>] India goes off gold standard (1931), [>] gold standard in, [>] silver standard in, [>], [>], [>], [>], [>], [>] Inflation.

It requires no financial operations by the Hong Kong currency board to keep it there, other than to live up to its obligation to give 7.8 Hong Kong dollars for 1 U.S. dollar, and conversely. And it can always do so because it holds a volume of U.S. dollar assets equal to the dollar value of the Hong Kong currency outstanding. An alternative arrangement is the one adopted by Chile and Israel: exchange rates between national currencies pegged at agreed values, the values to be maintained by the separate national central banks by altering ("coordinating" is the favorite term) domestic monetary policy appropriately. Many proponents of a common European currency regard a system of pegged exchange rates, such as the current European Monetary System (EMS), as a step toward a unified currency. I believe that such a view is a serious mistake.


pages: 584 words: 187,436

More Money Than God: Hedge Funds and the Making of a New Elite by Sebastian Mallaby

Andrei Shleifer, Asian financial crisis, asset-backed security, automated trading system, bank run, barriers to entry, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, Bretton Woods, business cycle, buy and hold, capital controls, Carmen Reinhart, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency manipulation / currency intervention, currency peg, Elliott wave, Eugene Fama: efficient market hypothesis, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, financial intermediation, fixed income, full employment, German hyperinflation, High speed trading, index fund, John Meriwether, Kenneth Rogoff, Kickstarter, Long Term Capital Management, margin call, market bubble, market clearing, market fundamentalism, merger arbitrage, money market fund, moral hazard, Myron Scholes, natural language processing, Network effects, new economy, Nikolai Kondratiev, pattern recognition, Paul Samuelson, pre–internet, quantitative hedge fund, quantitative trading / quantitative finance, random walk, Renaissance Technologies, Richard Thaler, risk-adjusted returns, risk/return, Robert Mercer, rolodex, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical arbitrage, statistical model, survivorship bias, technology bubble, The Great Moderation, The Myth of the Rational Market, the new new thing, too big to fail, transaction costs

When the Bush administration had tried and failed to lift the dollar in August, no calamity had ensued; the dollar was floating anyway, so there was no sudden break in its fortunes. But the currency pegs of Finland, Italy, Britain, and Sweden were a different matter; they presented speculators with targets that were too appealing to pass up, exposing their economies to wrenching dislocations. In committing to the exchange-rate mechanism, European governments had made a promise that they lacked the ability to keep. They had bottled up currency movements until a power greater than themselves had blown the cork into their faces. The implications of a world featuring Druckenmiller and other macro investors were not immediately absorbed by policy makers. As happens after every financial crisis, the first instinct was to vilify the markets rather than to learn the awkward lessons that they teach: in this case, that currency pegs were dangerous. The week after the pound’s devaluation, when the French franc came under pressure, French finance minister Michel Sapin suggested that troublemaking traders should be guillotined, as during the French revolution.52 The following summer, after the exchange rate mechanism suffered another round of disruptions, French premier Edouard Balladur argued that governments had an economic and moral responsibility to curb speculators.

Macro trading exploited a prime example of this insight: Governments and central banks were clearly not trying to maximize profits. At the height of the sterling crisis, John Major effectively bought sterling from Stan Druckenmiller at a price both knew to be absurd. Major did this for a reason that appears nowhere in financial texts: He wanted to force political rivals to share responsibility for devaluation. Druckenmiller’s coup also served to show that currency pegs were vulnerable in a world of deep and liquid markets. During the 1950s and 1960s, the system of fixed currencies worked well because regulations restricted the flow of capital across borders; but now that these controls were gone, it was time for governments to accept the limits to their power over money. They could either use interest rates to manage the value of their currency, so dampening exchange-rate swings, or they could use them to manage their economic ups and downs, so dampening recessions.

Until now, he said simply, Thailand had accepted whatever interest rates proved necessary to maintain the exchange rate within its designated band. But now priorities might have to shift. Given the growing troubles at the banks, getting interest rates down might matter more than defending the level of the currency.13 The official might as well have offered up a suitcase full of money. He had conceded that Thailand’s currency peg was unsustainable, meaning that shorting the baht was a no-brainer. Fraga and his colleagues could practically visualize the suitcase, cash spilling from its seams; but in order to reel in their prize, they had to pretend they hadn’t noticed it. If their host realized the full power of his comment, he could snatch the suitcase back: The central bank could hike interest rates, raising the cost of borrowing the baht in order to sell it short; or it might resort to some administrative crackdown on foreign speculators.


pages: 376 words: 109,092

Paper Promises by Philip Coggan

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, balance sheet recession, bank run, banking crisis, barriers to entry, Berlin Wall, Bernie Madoff, Black Swan, Bretton Woods, British Empire, business cycle, call centre, capital controls, Carmen Reinhart, carried interest, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, delayed gratification, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, falling living standards, fear of failure, financial innovation, financial repression, fixed income, floating exchange rates, full employment, German hyperinflation, global reserve currency, hiring and firing, Hyman Minsky, income inequality, inflation targeting, Isaac Newton, John Meriwether, joint-stock company, Kenneth Rogoff, Kickstarter, labour market flexibility, light touch regulation, Long Term Capital Management, manufacturing employment, market bubble, market clearing, Martin Wolf, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Myron Scholes, negative equity, Nick Leeson, Northern Rock, oil shale / tar sands, paradox of thrift, peak oil, pension reform, plutocrats, Plutocrats, Ponzi scheme, price stability, principal–agent problem, purchasing power parity, quantitative easing, QWERTY keyboard, railway mania, regulatory arbitrage, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, time value of money, too big to fail, trade route, tulip mania, value at risk, Washington Consensus, women in the workforce, zero-sum game

The idea behind the board was that inflation is a psychological phenomenon. If workers expect inflation to be 10 per cent, they will demand 10 per cent wage increases. That will push up the costs of businesses, forcing companies to increase prices. So the expectation of high inflation will by itself create inflation. In contrast, if workers expect the central bank to control inflation because of a need to maintain a currency peg, they will demand less in the way of wage increases. And that will reduce the cost pressures on businesses. The problem with such pegs, however, is the same one that confronted countries during the gold standard era. There may be occasions when one has to choose between maintaining the peg and avoiding a recession in the domestic economy. It needs a remarkable degree of political consensus to stick to a currency system, whose benefits can seem nebulous, when millions of jobs are at stake.

Manufacturing employment in China surged. The result was one of the biggest migrations in history as rural workers moved to the big cities. Much of the rest of the world may have abandoned the Bretton Woods approach but China did not. The Chinese Communist party had no intention of letting their interest or exchange rates be controlled by the markets; they opted for capital controls and a managed currency, pegged to the dollar. The corollary of this policy was that they accumulated a massive current-account surplus which (being China) the government controlled. These foreign-exchange reserves were then held in Treasury bonds and bills, making it easier for the US to finance its trade deficit. In his book Fixing Global Finance, Financial Times columnist Martin Wolf argues convincingly that the ‘savings glut’ of China and others was more responsible for the imbalance than American profligacy. 3 His argument is that a low level of real interest rates indicated an excess of desired saving over investment.

Arguably, this is not the Fed’s proper role and creates the danger that the market will collapse if the Fed withdraws its support. Another possibility is that QE has proved more successful in reflating the economies of the developing world than the developed. Countries which peg their currency to the dollar effectively import US monetary policy, since investors are enticed by the prospect of higher returns with reduced currency risk. Inevitably, a currency peg also means that interest rates in the pegged countries cannot diverge too far from each other (unless, like the Chinese, you have extensive capital controls). In 2010, many developing countries found themselves dealing with rising inflation rates, driven by higher commodity prices. In some cases, they also experienced sharply higher property prices and booming equity markets. The danger is that QE, as it did in John Law’s day, might lead to asset bubbles, albeit not in the country of origin.


pages: 422 words: 113,830

Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism by Kevin Phillips

algorithmic trading, asset-backed security, bank run, banking crisis, Bernie Madoff, Black Swan, Bretton Woods, BRICs, British Empire, business cycle, buy and hold, collateralized debt obligation, computer age, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency peg, diversification, Doha Development Round, energy security, financial deregulation, financial innovation, fixed income, Francis Fukuyama: the end of history, George Gilder, housing crisis, Hyman Minsky, imperial preference, income inequality, index arbitrage, index fund, interest rate derivative, interest rate swap, Joseph Schumpeter, Kenneth Rogoff, large denomination, Long Term Capital Management, market bubble, Martin Wolf, Menlo Park, mobile money, money market fund, Monroe Doctrine, moral hazard, mortgage debt, Myron Scholes, new economy, oil shale / tar sands, oil shock, old-boy network, peak oil, plutocrats, Plutocrats, Ponzi scheme, profit maximization, Renaissance Technologies, reserve currency, risk tolerance, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, Satyajit Das, shareholder value, short selling, sovereign wealth fund, The Chicago School, Thomas Malthus, too big to fail, trade route

The alternative pursued in the late 1990s, which may yet boomerang, was to debase the consumer price index statistics maintained by the federal Bureau of Labor Statistics (BLS). This tinkering did not go unanswered. By 2007, most top officials of the central banks or new sovereign wealth funds of China, Japan, Russia, Saudi Arabia, Qatar, Kuwait, and the United Arab Emirates, nations with major U.S. dollar holdings or local currencies pegged to the dollar, would have heard of California-based Bill Gross, managing director of the Pacific Investment Management Company (PIMCO). Sometimes called the world’s leading bond investor, billionaire Gross was colloquially known as “the bond king.” Were he to send these bureaucrats notes saying, “My sense is that the [U.S.] CPI is really 1% higher than official figures and that real GDP is 1% less,” they would quickly infer his advice: Rethink your treasury bonds and notes before people get wise and their values tumble.

Global respect for the United States slumped drastically in 2002 and following the invasion of Iraq, and then again in 2005-7 as the survey data in the appendix so unfortunately illustrates. The value of the U.S. dollar has followed pretty much the same course. Between the deepening dislike of the United States in much of the Muslim world and the decline of the greenback, Persian Gulf states that once reinvested most of their oil revenues in U.S. bonds and kept their currencies pegged to the dollar no longer believe that Washington is a capital city that keeps faith. Given U.S. dollar policy in 2007, it is easy to see why. Ill repute from selling “contaminated” mortgage-backed securities and structured investment packages has been a body blow to Wall Street, damaging bank profits and prestige. For some months, foreign skepticism also dried up the foreign purchases of long-term U.S. securities that financial leaders had trumpeted as vital to offset the U.S. current account deficit.

Financial Times columnist John Authers half joked that “whether they realise it or not, investors’ positive sentiment in the U.S. may rest on the weak dollar.”42 To be sure, any serious treasury secretary would have a point in declining to leave real-world U.S. asset management to the sort of market triumphalism that flourishes in few places beyond the editorial pages of the Wall Street Journal. The last several years have seen mounting evidence of a global mercantilist or state-capitalist resurgence in more than a dozen economic dimensions: spreading resource nationalism, government-run national oil companies; a shrinking private oil market; internal energy subsidies; energy alliances that double as military organizations (the SCO); export subsidies; currency pegging; mercantilist buildups of Asian central bank currency reserves; the overshadowing of private investors by Asian sovereign wealth funds; the enlargement of foreign state-owned portions of Western commercial banks and investment banks; the mimicry of early-twentieth-century dollar diplomacy by twenty-first-century renminbi, ruble, and even Venezuelan bolivar diplomacy; political reregulation of capital flows; and apparent Third World success in hobbling or stalling two market triumphalist enforcement mechanisms—the International Monetary Fund and the World Trade Organization.


pages: 471 words: 124,585

The Ascent of Money: A Financial History of the World by Niall Ferguson

Admiral Zheng, Andrei Shleifer, Asian financial crisis, asset allocation, asset-backed security, Atahualpa, bank run, banking crisis, banks create money, Black Swan, Black-Scholes formula, Bonfire of the Vanities, Bretton Woods, BRICs, British Empire, business cycle, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collateralized debt obligation, colonial exploitation, commoditize, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, deglobalization, diversification, diversified portfolio, double entry bookkeeping, Edmond Halley, Edward Glaeser, Edward Lloyd's coffeehouse, financial innovation, financial intermediation, fixed income, floating exchange rates, Fractional reserve banking, Francisco Pizarro, full employment, German hyperinflation, Hernando de Soto, high net worth, hindsight bias, Home mortgage interest deduction, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, iterative process, John Meriwether, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour mobility, Landlord’s Game, liberal capitalism, London Interbank Offered Rate, Long Term Capital Management, market bubble, market fundamentalism, means of production, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, Naomi Klein, negative equity, Nelson Mandela, Nick Leeson, Northern Rock, Parag Khanna, pension reform, price anchoring, price stability, principal–agent problem, probability theory / Blaise Pascal / Pierre de Fermat, profit motive, quantitative hedge fund, RAND corporation, random walk, rent control, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, seigniorage, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spice trade, stocks for the long run, structural adjustment programs, technology bubble, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Bayes, Thomas Malthus, Thorstein Veblen, too big to fail, transaction costs, undersea cable, value at risk, Washington Consensus, Yom Kippur War

Exchange rate stability made for predictable pricing in trade and reduced transaction costs, while the long-run stability of prices acted as an anchor for inflation expectations. Being on gold may also have reduced the costs of borrowing by committing governments to pursue prudent fiscal and monetary policies. The difficulty of pegging currencies to a single commodity based standard, or indeed to one another, is that policymakers are then forced to choose between free capital movements and an independent national monetary policy. They cannot have both. A currency peg can mean higher volatility in short-term interest rates, as the central bank seeks to keep the price of its money steady in terms of the peg. It can mean deflation, if the supply of the peg is constrained (as the supply of gold was relative to the demand for it in the 1870s and 1880s). And it can transmit financial crises (as happened throughout the restored gold standard after 1929). By contrast, a system of money based primarily on bank deposits and floating exchange rates is freed from these constraints.

The history of Argentina illustrates that the bond market is less powerful than it might first appear. The average 295 basis point spread between Argentine and British bonds in the 1880s scarcely compensated investors like the Barings for the risks they were running by investing in Argentina. In the same way, the average 664 basis point spread between Argentine and US bonds from 1998 to 2000 significantly underpriced the risk of default as the Cavallo currency peg began to crumble. When the default was announced, the spread rose to 5,500; by March 2002 it exceeded 7,000 basis points. After painfully protracted negotiations (there were 152 varieties of paper involved, denominated in six different currencies and governed by eight jurisdictions) the majority of approximately 500,000 creditors agreed to accept new bonds worth roughly 35 cents on the dollar, one of the most drastic ‘haircuts’ in the history of the bond market.68 So successful did Argentina’s default prove (economic growth has since surged while bond spreads are back in the 300-500 basis point range) that many economists were left to ponder why any sovereign debtor ever honours its commitments to foreign bondholders.69 The Resurrection of the Rentier In the 1920s, as we have seen, Keynes had predicted the ‘euthanasia of the rentier’, anticipating that inflation would eventually eat up all the paper wealth of those who had put their money in government bonds.

The answer is that, until recently, the best way for China to employ its vast population was through exporting manufactures to the insatiably spendthrift US consumer. To ensure that those exports were irresistibly cheap, China had to fight the tendency for the Chinese currency to strengthen against the dollar by buying literally billions of dollars on world markets - part of a system of Asian currency pegs that some commentators dubbed Bretton Woods II.109 In 2006 Chinese holdings of dollars almost certainly passed the trillion dollar mark. (Significantly, the net increase of China’s foreign exchange reserves almost exactly matched the net issuance of US Treasury and government agency bonds.) From America’s point of view, meanwhile, the best way of keeping the good times rolling in recent years has been to import cheap Chinese goods.


pages: 561 words: 87,892

Losing Control: The Emerging Threats to Western Prosperity by Stephen D. King

Admiral Zheng, asset-backed security, barriers to entry, Berlin Wall, Bernie Madoff, Bretton Woods, BRICs, British Empire, business cycle, capital controls, Celtic Tiger, central bank independence, collateralized debt obligation, corporate governance, credit crunch, crony capitalism, currency manipulation / currency intervention, currency peg, David Ricardo: comparative advantage, demographic dividend, demographic transition, Deng Xiaoping, Diane Coyle, Fall of the Berlin Wall, financial deregulation, financial innovation, fixed income, Francis Fukuyama: the end of history, full employment, G4S, George Akerlof, German hyperinflation, Gini coefficient, hiring and firing, income inequality, income per capita, inflation targeting, invisible hand, Isaac Newton, knowledge economy, labour market flexibility, labour mobility, liberal capitalism, low skilled workers, market clearing, Martin Wolf, mass immigration, Mexican peso crisis / tequila crisis, Naomi Klein, new economy, old age dependency ratio, Paul Samuelson, Ponzi scheme, price mechanism, price stability, purchasing power parity, rent-seeking, reserve currency, rising living standards, Ronald Reagan, savings glut, Silicon Valley, Simon Kuznets, sovereign wealth fund, spice trade, statistical model, technology bubble, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Market for Lemons, The Wealth of Nations by Adam Smith, Thomas Malthus, trade route, transaction costs, Washington Consensus, women in the workforce, working-age population, Y2K, Yom Kippur War

Central bankers may wish for fully flexible exchange rates to provide a guarantee of complete monetary sovereignty, but, in the real world, exchange-rate regimes are a mixture of floating, fixed and every variation in between. When the Federal Reserve sets interest rates, it’s doing so not just for the US but also for huge chunks of the emerging world, whether it likes it or not. By ignoring their needs, global monetary conditions can end up either too tight or too loose. Fourth, monetary sovereignty is a myth. Whether through currency pegs, carry trades, unexpected price shocks or any one of a number of other examples, central banks are, individually, not as powerful as they’d like to believe. The gravitational pull being exercised by the emerging markets should change for ever the cosy Western attitudes towards monetary policy. No longer are developed-world central banks in control. The key question for policymakers to ask is this: if price stability is all it’s believed to be, why was its achievement during the Great Moderation followed by one of the biggest economic crises of the past hundred years?

Widening euro membership presents an interesting antidote to the conflict between a single global capital market and the proliferation of nation states. In effect, it reduces the monetary sovereignty of nation states while allowing them to maintain sovereignty in other areas, at least to the extent allowable under European Union law. Importantly, those who join the euro have voting rights on monetary policy. Unlike other currency arrangements – full-scale dollarizations and the various currency pegs arrangements described in Chapter 5 – membership of the euro gives a country a seat at the policy table. There is a loss of sovereignty, but it is not a complete loss. Meanwhile, the trials and tribulations of currency upheavals are, at least in theory, permanently removed.1 To date, euro membership is confined to members of the European Union and is contingent on countries meeting specified ‘convergence criteria’.


pages: 87 words: 25,823

The Politics of Bitcoin: Software as Right-Wing Extremism by David Golumbia

3D printing, A Declaration of the Independence of Cyberspace, Affordable Care Act / Obamacare, bitcoin, blockchain, Burning Man, crony capitalism, cryptocurrency, currency peg, distributed ledger, Elon Musk, en.wikipedia.org, Ethereum, ethereum blockchain, Extropian, fiat currency, Fractional reserve banking, George Gilder, jimmy wales, litecoin, Marc Andreessen, money: store of value / unit of account / medium of exchange, Mont Pelerin Society, new economy, obamacare, Peter Thiel, Philip Mirowski, risk tolerance, Ronald Reagan, Satoshi Nakamoto, seigniorage, Silicon Valley, Singularitarianism, smart contracts, Stewart Brand, technoutopianism, The Chicago School, Travis Kalanick, WikiLeaks

Bitcoin advocates make repeated reference to the superiority of gold-backed money, despite the fact that governments fixed even the price of gold at many moments in history to tame volatility, and in the face of current stories about gold and silver prices being part of the Libor price-fixing scandal.[3] This preference for gold versus what they somewhat inaccurately call the “fiat currency” of nation-states only shows the ideological nature of their assertions, since gold exists right now, is widely traded and can be untraceable, largely resistant to counterfeiting, and yet is widely used (though not as a currency peg) by the very nation-states and central banks that Bitcoin advocates say they are in the process of dismantling. Just as revealing are statements like those by self-described “currency trader and economics nerd” Brian Kelly, who in The Bitcoin Big Bang inaccurately attributes the threefold nature of money to currency, and despite this, after laying out the case that Bitcoin only serves the medium-of-exchange function, suggests that “we are too tethered to the conventional definition of a currency as a medium of exchange, a store of value, and a unit of account” (2015, 13).


pages: 354 words: 92,470

Grave New World: The End of Globalization, the Return of History by Stephen D. King

9 dash line, Admiral Zheng, air freight, Albert Einstein, Asian financial crisis, bank run, banking crisis, barriers to entry, Berlin Wall, Bernie Sanders, bilateral investment treaty, bitcoin, blockchain, Bonfire of the Vanities, borderless world, Bretton Woods, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collateralized debt obligation, colonial rule, corporate governance, credit crunch, currency manipulation / currency intervention, currency peg, David Ricardo: comparative advantage, debt deflation, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, Edward Snowden, eurozone crisis, facts on the ground, failed state, Fall of the Berlin Wall, falling living standards, floating exchange rates, Francis Fukuyama: the end of history, full employment, George Akerlof, global supply chain, global value chain, hydraulic fracturing, Hyman Minsky, imperial preference, income inequality, income per capita, incomplete markets, inflation targeting, information asymmetry, Internet of things, invisible hand, joint-stock company, Kickstarter, Long Term Capital Management, Martin Wolf, mass immigration, Mexican peso crisis / tequila crisis, moral hazard, Nixon shock, offshore financial centre, oil shock, old age dependency ratio, paradox of thrift, Peace of Westphalia, plutocrats, Plutocrats, price stability, profit maximization, quantitative easing, race to the bottom, rent-seeking, reserve currency, reshoring, rising living standards, Ronald Reagan, Scramble for Africa, Second Machine Age, Skype, South China Sea, special drawing rights, technology bubble, The Great Moderation, The Market for Lemons, the market place, The Rise and Fall of American Growth, trade liberalization, trade route, Washington Consensus, WikiLeaks, Yom Kippur War, zero-sum game

Unfortunately, this approach often didn’t work: the apparent guarantee of stability typically encouraged excessive capital inflows, domestic credit booms, unproductive investments and a subsequent rush for the exit. Think, for example, of the Mexican tequila crisis in the mid-1990s, the Asian crisis shortly thereafter, the 1998 Russian debt default, the collapse of Argentina’s currency board at the turn of the century and, most obviously, the global financial crisis. Given these experiences, an increasing number of emerging nations began to reject currency peg arrangements as a way of advertising their financial probity. Many shifted to floating currency arrangements, aware that attempts to fix foreign exchange rates in a world of free-flowing cross-border capital had only given rise to repeated booms and busts. And it is not only emerging nations that have had this problem. All countries are faced with what is known as the ‘impossible trinity’, an ultimate financial limit on economic sovereignty.

In the year 690, the ruling caliph issued Islamic coins stating, unsurprisingly, that ‘There is no God but God alone’ and that ‘Mohammad is the messenger of God’. Constantinople retaliated, issuing coins with the emperor relegated to the reverse and Jesus Christ on the front. Of the three surviving gold coins from the reign of Offa, king of Mercia from 757 to 796, one is a copy of an Abbasid dinar of 774, with Latin on one side and Arabic on the other, perhaps an early attempt at a currency peg arrangement: at the time, England was, at best, an emerging market and, for many, not to be trusted. Meanwhile, there were plenty of opportunities for currency debasement. Before the advent of fiat money, coins themselves were made of precious metal, mostly gold and silver. Some coins were ‘clipped’, thereby reducing the precious metal content (one reason why, even today, many coins have ridged edges).


How an Economy Grows and Why It Crashes by Peter D. Schiff, Andrew J. Schiff

Bretton Woods, business climate, currency peg, hiring and firing, indoor plumbing, offshore financial centre, price stability, Robert Shiller, Robert Shiller, technology bubble

But when a country’s currency rises, its products become more expensive. This gives a competitive opportunity to countries with weak currencies to start selling some of their products into that market. When they sell more, demand for their currencies rises. This currency counterweight should keep runaway trade imbalances in check. But the dollar’s reserve status, and the decision of the Chinese government to maintain the currency peg, has gummed up the machinery and has allowed the situation to grow dangerously out of kilter. CHAPTER 13 CLOSING THE FISH WINDOW Eventually, as Fish Reserve Notes continued to pour out of Usonia and pile up on islands throughout the ocean, some foreign holders began questioning the ability of Usonia to redeem them with actual fish. Chuck DeBongo, the charismatic leader of the Bongobians, gained favor at home by deriding the arrogance and power of Usonia.


pages: 372 words: 107,587

The End of Growth: Adapting to Our New Economic Reality by Richard Heinberg

3D printing, agricultural Revolution, back-to-the-land, banking crisis, banks create money, Bretton Woods, business cycle, carbon footprint, Carmen Reinhart, clean water, cloud computing, collateralized debt obligation, computerized trading, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, David Graeber, David Ricardo: comparative advantage, dematerialisation, demographic dividend, Deng Xiaoping, Elliott wave, en.wikipedia.org, energy transition, falling living standards, financial deregulation, financial innovation, Fractional reserve banking, full employment, Gini coefficient, global village, happiness index / gross national happiness, I think there is a world market for maybe five computers, income inequality, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, Kenneth Rogoff, late fees, liberal capitalism, mega-rich, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, naked short selling, Naomi Klein, Negawatt, new economy, Nixon shock, offshore financial centre, oil shale / tar sands, oil shock, peak oil, Ponzi scheme, price stability, private military company, quantitative easing, reserve currency, ride hailing / ride sharing, Ronald Reagan, short selling, special drawing rights, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, too big to fail, trade liberalization, tulip mania, WikiLeaks, working poor, zero-sum game

This provided an opening for the emergence of the foreign exchange (ForEx) currency market, which has grown to an astonishing four trillion dollars per day in turnover as of 2010. In 1999, most members of the European Union opted into a common currency, the euro, that floated in value like the Japanese yen. One of the motives for this historic monetary unification was the desire for a stronger currency that would be more stable and competitive relative to the US dollar. For decades, China has been one of the countries that kept its currency pegged to the dollar at a fixed rate. This enabled the country to keep its currency’s value low, making Chinese exports cheap and attractive — especially to the United States. However, for smaller countries, fixed exchange rates have meant vulnerability to currency attacks. If speculators decide to sell large amounts of a country’s currency, that country can defend its currency’s value only by holding a large cache of foreign reserves sufficient to keep its fixed exchange rate in place.

Spiro, The Hidden Hand of American Hegemony: Petrodollar Recycling and International Markets (Ithaca, NY: Cornell University Press, 1999). 22. See Marvin Friend, “A Short History of US Monetary Policy,” The Powell Center, powellcenter.org/econEssay/history.html. 23. Bill Black, “The EU’s New Bailout Plan Will Exacerbate Political Crises,” Business Insider, posted December 13, 2010. 24. See Wikipedia.org, “Foreign Exchange Market.” 25. To read more, see Edward Harrison, “Currencies Pegged to the Dollar Under Pressure to Drop Peg,” CreditWritedowns.com, posted October 13, 2009; Michael Hudson, “Why the US Has Launched a New Financial World War — And How the Rest of the World Will Fight Back,” alternet.org, posted October 12, 2010. 26. Michael Sauga and Peter Müller, “The US Has Lived on Borrowed Money For Too Long,” an interview with German Finance Minister Schäuble, Spiegel online, posted November 8, 2010. 27.


pages: 405 words: 109,114

Unfinished Business by Tamim Bayoumi

algorithmic trading, Asian financial crisis, bank run, banking crisis, Basel III, battle of ideas, Ben Bernanke: helicopter money, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business cycle, buy and hold, capital controls, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, currency manipulation / currency intervention, currency peg, Doha Development Round, facts on the ground, Fall of the Berlin Wall, financial deregulation, floating exchange rates, full employment, hiring and firing, housing crisis, inflation targeting, Just-in-time delivery, Kenneth Rogoff, liberal capitalism, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, market bubble, Martin Wolf, moral hazard, oil shale / tar sands, oil shock, price stability, prisoner's dilemma, profit maximization, quantitative easing, race to the bottom, random walk, reserve currency, Robert Shiller, Robert Shiller, Rubik’s Cube, savings glut, technology bubble, The Great Moderation, The Myth of the Rational Market, the payments system, The Wisdom of Crowds, too big to fail, trade liberalization, transaction costs, value at risk

With all of that said, the main precursor to the Maastricht Treaty was the Werner Report of 1970 which, like the Delors Report almost 20 years later, set out a plan and a timetable for a currency union. The Werner Report was part of an effort to deepen as well as widen the European Community to create a counterweight to the US dollar. Unlike the earlier gold standard, the Bretton Woods system set up at the end of World War II involved a two-tiered global system, with the dollar pegged to gold and other currencies pegged to the dollar. Since the dollar was the major international reserve asset (with sterling playing a smaller and diminishing role as the British Empire faded) the United States was guaranteed a steady increase in demand for its assets as the need for reserves expanded along with the global economy. In the view of the Europeans, the low cost of borrowing coming from this “exorbitant privilege” (in the words of then Finance Minister Giscard d’Estaing of France) was being used to finance excessive fiscal deficits such as those used to pay for the Vietnam War in the late 1960s.

These strains were exacerbated by the decision to convert East German Ostmarks to West German Deutsche marks at the inflated rate of one-to-one, as well as by larger-than-necessary pressures on German government spending coming from the decision to subsidize new capital investments rather than new jobs in the former East Germany. This led to an influx of plants with large amounts of machinery that benefited from subsidies but created few jobs for unemployed East Germans. The Bundesbank responded to German economic overheating by raising interest rates aggressively, which left Germany’s partners with the conundrum of how far to raise rates to defend the currency peg at the cost of slowing growth. The final outcome of these strains was a crisis in the Exchange Rate Mechanism that resulted in the ejection of the British pound and the Italian lira in 1992 (the lira rejoined in 1996) followed by a face-saving widening of the intervention bands from 2¼ percent to 15 percent to avoid French ejection in 1993. If the Maastricht Treaty had not been in place before the economic effects of German unification became apparent, it is difficult to imagine that the plan for monetary union would have survived.


pages: 378 words: 110,518

Postcapitalism: A Guide to Our Future by Paul Mason

Alfred Russel Wallace, bank run, banking crisis, banks create money, Basel III, basic income, Bernie Madoff, Bill Gates: Altair 8800, bitcoin, Branko Milanovic, Bretton Woods, BRICs, British Empire, business cycle, business process, butterfly effect, call centre, capital controls, Cesare Marchetti: Marchetti’s constant, Claude Shannon: information theory, collaborative economy, collective bargaining, Corn Laws, corporate social responsibility, creative destruction, credit crunch, currency manipulation / currency intervention, currency peg, David Graeber, deglobalization, deindustrialization, deskilling, discovery of the americas, Downton Abbey, drone strike, en.wikipedia.org, energy security, eurozone crisis, factory automation, financial repression, Firefox, Fractional reserve banking, Frederick Winslow Taylor, full employment, future of work, game design, income inequality, inflation targeting, informal economy, information asymmetry, intangible asset, Intergovernmental Panel on Climate Change (IPCC), Internet of things, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, Kevin Kelly, Kickstarter, knowledge economy, knowledge worker, late capitalism, low skilled workers, market clearing, means of production, Metcalfe's law, microservices, money: store of value / unit of account / medium of exchange, mortgage debt, Network effects, new economy, Norbert Wiener, Occupy movement, oil shale / tar sands, oil shock, Paul Samuelson, payday loans, Pearl River Delta, post-industrial society, precariat, price mechanism, profit motive, quantitative easing, race to the bottom, RAND corporation, rent-seeking, reserve currency, RFID, Richard Stallman, Robert Gordon, Robert Metcalfe, secular stagnation, sharing economy, Stewart Brand, structural adjustment programs, supply-chain management, The Future of Employment, the scientific method, The Wealth of Nations by Adam Smith, Transnistria, union organizing, universal basic income, urban decay, urban planning, Vilfredo Pareto, wages for housework, WikiLeaks, women in the workforce

The problem is not ‘Damn, we printed too much money against the real stuff in the economy!’ It is, though few will admit it, ‘Damn, nobody believes in our state any more.’ The entire system is dependent on the credibility of the state that issues the notes. And in the modern global economy that credibility rests not just on single states but on a multilayered system of debts, payment mechanisms, informal currency pegs, formal currency unions like the Euro, and huge reserves of foreign exchange accumulated by states as insurance in case the system collapses. The real problem with fiat money comes if, or when, this multilateral system falls apart. But that lies in the future. For now, what we know is that fiat money – when combined with free-market economics – is a machine for producing boom-and-bust cycles.

There was no global central bank, but the International Monetary Fund and the World Bank were designed to reduce friction in the system, with the IMF acting as a short-term lender of last resort and enforcer of the rules. The system was overtly stacked in favour of the USA: not only was it the biggest economy in the world, it had an infrastructure undamaged by the war and – for now – the highest productivity. It also got to appoint the boss of the Fund. The system was also stacked in favour of inflation. Because the link to gold was indirect, because there was leeway in the currency peg, and because the rules on balanced trade and structural reform were loose, the system was designed to produce inflation. This was recognized by the free-market right even before the train to Bretton Woods left the station. The journalist Henry Hazlitt, a confidant of free-market guru Ludwig von Mises, railed against the plan in the New York Times: ‘It would be difficult to think of a more serious threat to world stability and full production than the continual prospect of a uniform world inflation to which the politicians of every country would be so easily tempted.’15 But this was a system also stacked against high finance.


pages: 354 words: 105,322

The Road to Ruin: The Global Elites' Secret Plan for the Next Financial Crisis by James Rickards

"Robert Solow", Affordable Care Act / Obamacare, Albert Einstein, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, Bayesian statistics, Ben Bernanke: helicopter money, Benoit Mandelbrot, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bitcoin, Black Swan, blockchain, Bonfire of the Vanities, Bretton Woods, British Empire, business cycle, butterfly effect, buy and hold, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, cellular automata, cognitive bias, cognitive dissonance, complexity theory, Corn Laws, corporate governance, creative destruction, Credit Default Swap, cuban missile crisis, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, debt deflation, Deng Xiaoping, disintermediation, distributed ledger, diversification, diversified portfolio, Edward Lorenz: Chaos theory, Eugene Fama: efficient market hypothesis, failed state, Fall of the Berlin Wall, fiat currency, financial repression, fixed income, Flash crash, floating exchange rates, forward guidance, Fractional reserve banking, G4S, George Akerlof, global reserve currency, high net worth, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Isaac Newton, jitney, John Meriwether, John von Neumann, Joseph Schumpeter, Kenneth Rogoff, labor-force participation, large denomination, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, Mexican peso crisis / tequila crisis, money market fund, mutually assured destruction, Myron Scholes, Naomi Klein, nuclear winter, obamacare, offshore financial centre, Paul Samuelson, Peace of Westphalia, Pierre-Simon Laplace, plutocrats, Plutocrats, prediction markets, price anchoring, price stability, quantitative easing, RAND corporation, random walk, reserve currency, RFID, risk-adjusted returns, Ronald Reagan, Silicon Valley, sovereign wealth fund, special drawing rights, stocks for the long run, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Bayes, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transfer pricing, value at risk, Washington Consensus, Westphalian system

IMF governance was structured in such a way that the United States maintained a veto over all important decisions. Bretton Woods participants were allowed to use capital controls to maintain dollar reserves and limit volatile capital flows in order to support their obligations under the fixed rate system. Capital controls in major Western economies were lifted in stages beginning in 1958. Full convertibility of all major currencies was not achieved until 1964. Currency pegs to the dollar were not immutable. Members could apply for exchange rate adjustments under IMF supervision. The IMF would first offer to make temporary funding available to the nation whose currency was under stress. The goal was to give that nation time to make structural reforms to improve its balance of trade, and bolster foreign exchange reserves so the peg could be maintained. Once the adjustments were made, and the reserves bolstered, the borrower could repay the IMF and the system continue as before.

A stronger dollar measured by major dollar indices from 2013 to 2016 is good evidence of global dollar demand. Acute eurodollar interbank funding problems at major Italian banks beginning in June 2016 are additional straws in the wind. Net sales of U.S. Treasury securities by China, Russia, and Saudi Arabia in the first half of 2016 were evidence of those nations’ need to obtain dollars to satisfy capital outflow demands or maintain nonsustainable currency pegs. The most intriguing piece of evidence for a dollar shortage is the tangled trio of prices in five-year TIPS, gold, and ten-year Treasury notes. TIPS stands for Treasury Inflation Protected Securities, a special type of Treasury note where the principal is indexed to inflation. This means the TIPS yield is a real yield; there is no need to add an inflation premium to a nominal yield because principal is already protected against inflation.


pages: 453 words: 117,893

What Would the Great Economists Do?: How Twelve Brilliant Minds Would Solve Today's Biggest Problems by Linda Yueh

"Robert Solow", 3D printing, additive manufacturing, Asian financial crisis, augmented reality, bank run, banking crisis, basic income, Ben Bernanke: helicopter money, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bitcoin, Branko Milanovic, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, clean water, collective bargaining, computer age, Corn Laws, creative destruction, credit crunch, Credit Default Swap, cryptocurrency, currency peg, dark matter, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, endogenous growth, everywhere but in the productivity statistics, Fall of the Berlin Wall, fear of failure, financial deregulation, financial innovation, Financial Instability Hypothesis, fixed income, forward guidance, full employment, Gini coefficient, global supply chain, Gunnar Myrdal, Hyman Minsky, income inequality, index card, indoor plumbing, industrial robot, information asymmetry, intangible asset, invisible hand, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, laissez-faire capitalism, land reform, lateral thinking, life extension, low-wage service sector, manufacturing employment, market bubble, means of production, mittelstand, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, Nelson Mandela, non-tariff barriers, Northern Rock, Occupy movement, oil shale / tar sands, open economy, paradox of thrift, Paul Samuelson, price mechanism, price stability, Productivity paradox, purchasing power parity, quantitative easing, RAND corporation, rent control, rent-seeking, reserve currency, reshoring, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, school vouchers, secular stagnation, Shenzhen was a fishing village, Silicon Valley, Simon Kuznets, special economic zone, Steve Jobs, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, total factor productivity, trade liberalization, universal basic income, unorthodox policies, Washington Consensus, We are the 99%, women in the workforce, working-age population

The liquidity support for the banking system was severely flawed. * * * In November 1932, Franklin D. Roosevelt won a landslide victory against Herbert Hoover, with the Democrats also taking large majorities in both Houses of Congress. However, FDR didn’t assume office until March 1933 and in the meantime, bank failures continued. It was widely believed that FDR would devalue the dollar or leave the gold standard altogether. It was costly to maintain a currency peg to gold, especially when the economy was in serious trouble. This encouraged the large-scale conversion of dollars into gold, putting further pressure on the banking system as dollar deposits were withdrawn. One of FDR’s first acts on taking office was a week-long banking holiday from which 5,000 banks never reopened their doors. However, this allowed the insolvent banks to be weeded out. The New Deal programme that significantly increased government spending to boost the economy was also in force, but Friedman and Schwartz pointed to the dollar devaluation of 60 per cent and its exit from the gold standard as the more important factors in halting the Great Contraction.

The second-generation currency crisis refers to the collapse of the European exchange rate mechanism (ERM) in 1992. Even though that was a crisis involving developed economies, there are similar features to the Latin American episode. Many Britons still recall Black Wednesday, when sterling and other currencies, such as the Italian lira, left the peg to the Deutschmark (DM) that they had signed up to two years earlier. A loss of market confidence meant that to keep their currencies pegged would have meant raising interest rates to unacceptable levels if investors were to be persuaded to buy sterling and maintain the exchange-rate peg. UK interest rates had reached 15 per cent, and the impact on economic growth of staying in the ERM would simply have been too detrimental during a recession. High interest rates made borrowing more expensive and depressed investment, so worsening growth.


pages: 374 words: 113,126

The Great Economists: How Their Ideas Can Help Us Today by Linda Yueh

"Robert Solow", 3D printing, additive manufacturing, Asian financial crisis, augmented reality, bank run, banking crisis, basic income, Ben Bernanke: helicopter money, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bitcoin, Branko Milanovic, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, clean water, collective bargaining, computer age, Corn Laws, creative destruction, credit crunch, Credit Default Swap, cryptocurrency, currency peg, dark matter, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, endogenous growth, everywhere but in the productivity statistics, Fall of the Berlin Wall, fear of failure, financial deregulation, financial innovation, Financial Instability Hypothesis, fixed income, forward guidance, full employment, Gini coefficient, global supply chain, Gunnar Myrdal, Hyman Minsky, income inequality, index card, indoor plumbing, industrial robot, information asymmetry, intangible asset, invisible hand, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, laissez-faire capitalism, land reform, lateral thinking, life extension, manufacturing employment, market bubble, means of production, mittelstand, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, Nelson Mandela, non-tariff barriers, Northern Rock, Occupy movement, oil shale / tar sands, open economy, paradox of thrift, Paul Samuelson, price mechanism, price stability, Productivity paradox, purchasing power parity, quantitative easing, RAND corporation, rent control, rent-seeking, reserve currency, reshoring, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, school vouchers, secular stagnation, Shenzhen was a fishing village, Silicon Valley, Simon Kuznets, special economic zone, Steve Jobs, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, total factor productivity, trade liberalization, universal basic income, unorthodox policies, Washington Consensus, We are the 99%, women in the workforce, working-age population

The liquidity support for the banking system was severely flawed. In November 1932, Franklin D. Roosevelt won a landslide victory against Herbert Hoover, with the Democrats also taking large majorities in both Houses of Congress. However, FDR didn’t assume office until March 1933 and in the meantime, bank failures continued. It was widely believed that FDR would devalue the dollar or leave the gold standard altogether. It was costly to maintain a currency peg to gold, especially when the economy was in serious trouble. This encouraged the large-scale conversion of dollars into gold, putting further pressure on the banking system as dollar deposits were withdrawn. One of FDR’s first acts on taking office was a week-long banking holiday from which 5,000 banks never reopened their doors. However, this allowed the insolvent banks to be weeded out. The New Deal programme that significantly increased government spending to boost the economy was also in force, but Friedman and Schwartz pointed to the dollar devaluation of 60 per cent and its exit from the gold standard as the more important factors in halting the Great Contraction.

The second-generation currency crisis refers to the collapse of the European exchange rate mechanism (ERM) in 1992. Even though that was a crisis involving developed economies, there are similar features to the Latin American episode. Many Britons still recall Black Wednesday, when sterling and other currencies, such as the Italian lira, left the peg to the Deutschmark (DM) that they had signed up to two years earlier. A loss of market confidence meant that to keep their currencies pegged would have meant raising interest rates to unacceptable levels if investors were to be persuaded to buy sterling and maintain the exchange-rate peg. UK interest rates had reached 15 per cent, and the impact on economic growth of staying in the ERM would simply have been too detrimental during a recession. High interest rates made borrowing more expensive and depressed investment, so worsening growth.


pages: 823 words: 206,070

The Making of Global Capitalism by Leo Panitch, Sam Gindin

accounting loophole / creative accounting, active measures, airline deregulation, anti-communist, Asian financial crisis, asset-backed security, bank run, banking crisis, barriers to entry, Basel III, Big bang: deregulation of the City of London, bilateral investment treaty, Branko Milanovic, Bretton Woods, BRICs, British Empire, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collective bargaining, continuous integration, corporate governance, creative destruction, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, currency peg, dark matter, Deng Xiaoping, disintermediation, ending welfare as we know it, eurozone crisis, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, full employment, Gini coefficient, global value chain, guest worker program, Hyman Minsky, imperial preference, income inequality, inflation targeting, interchangeable parts, interest rate swap, Kenneth Rogoff, Kickstarter, land reform, late capitalism, liberal capitalism, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, manufacturing employment, market bubble, market fundamentalism, Martin Wolf, means of production, money market fund, money: store of value / unit of account / medium of exchange, Monroe Doctrine, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, new economy, non-tariff barriers, Northern Rock, oil shock, precariat, price stability, quantitative easing, Ralph Nader, RAND corporation, regulatory arbitrage, reserve currency, risk tolerance, Ronald Reagan, seigniorage, shareholder value, short selling, Silicon Valley, sovereign wealth fund, special drawing rights, special economic zone, structural adjustment programs, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transcontinental railway, trickle-down economics, union organizing, very high income, Washington Consensus, Works Progress Administration, zero-coupon bond, zero-sum game

Thai state initiatives to liberalize and expand its financial sector (underwritten by high interest rates and the pegging of the baht to the US dollar) induced ever more foreign lending, which “served the interest of various fractions of local and transnational financial capital in different ways.”36 Growth rates averaging almost 9 percent in the decade before the onset of the crisis were also fueled by the domestic real-estate bubble produced by the alliance of Japanese developers with the Thai capitalists and army generals who controlled the construction industry. China’s devaluation of the renminbi in 1994 and the devaluation of the yen in 1995 particularly affected Thailand’s pattern of cheap exports. The Bank of Thailand responded by using its reserves to defend the currency peg with the dollar, making it especially vulnerable to any outflow of capital. All it took to produce a massive run on the baht and a collapse in Thai asset prices was a suggestion from the Japanese Finance Ministry in early 1997 that it might hike interest rates to halt the yen’s fall. In short order, the massive capital flows that had earlier poured in were suddenly a dangerous liability. In 1996, the net inflows of private capital to Thailand were 9.3 percent of GDP; in 1997 the net outflows were 10.9 percent of GDP—a stunning turnaround of over 20 percent in one year.37 Notably, while the World Bank was praising Thailand for its “outward looking orientation, receptivity to foreign investment and a market-friendly philosophy backed up by conservative macroeconomic management,” the IMF grew concerned at the way the Thai central bank was propping up the baht while concealing the extent of its interventions.38 The IMF itself soon provided a secret infusion of funds, even though the US Treasury, while insisting on tough conditionality, didn’t rate the probability of financial contagion very high given how relatively small the Thai economy was in a region “still so widely viewed as economically strong and attractive to investors.”39 It expected that Japan would be able to carry the main burden in backing up the IMF as lender of last resort, although Japan had put Thailand into the IMF’s hands by refusing a request for a bilateral loan.

Even more foreboding was the prospect that developing states might resort to extensive exchange controls, just as Malaysia did two weeks after the Russian default. Indicative of the breadth of the contagion was that international banks, which had earlier in the year shifted capital from Asia to Latin America, now began to pull their loans, and especially demanded higher premiums on Brazil’s bonds, fearing that its currency peg to the dollar would have to be abandoned. But the depth of the contagion had already been registered on Wall Street, as a massive flight to the safety of US Treasury bonds after the Russian default precipitated a sharp upward revaluation of risk in bond and foreign-exchange markets, and in the derivative markets based on them. With the US commercial paper market in corporate debt already in turmoil, word quickly got out that the formerly remarkably profitable US hedge fund Long Term Capital Management (founded by two prestigious economists who had won Nobel prizes for their econometric contributions to the development of derivative markets) suddenly faced collapse.

In contrast to what had been so common in the 1990s, it was quite remarkable that, before 2007, the Bush administration faced only two serious financial crises, both occurring in its first year.6 Like Rubin before him with the Mexican crisis, O’Neill had barely settled into his office at the Treasury when he was confronted by the outbreak of the most severe financial crisis in modern Turkish history. With the Turkish government’s attempts to maintain a currency peg undermined by financial markets’ response to its rising public debt, there was no question of letting the markets decide the fate of this crucially strategic US ally. But the US Treasury was content to leave it to the IMF, which had provided conditional loans to Turkey on eighteen occasions since 1958, to contain the Turkish crisis.7 Nevertheless, when the Argentine crisis came to a head only six months later, in August 2001, the Treasury’s behavior “encapsulated the degree to which the United States was making policy for the IMF.”


pages: 466 words: 127,728

The Death of Money: The Coming Collapse of the International Monetary System by James Rickards

Affordable Care Act / Obamacare, Asian financial crisis, asset allocation, Ayatollah Khomeini, bank run, banking crisis, Ben Bernanke: helicopter money, bitcoin, Black Swan, Bretton Woods, BRICs, business climate, business cycle, buy and hold, capital controls, Carmen Reinhart, central bank independence, centre right, collateralized debt obligation, collective bargaining, complexity theory, computer age, credit crunch, currency peg, David Graeber, debt deflation, Deng Xiaoping, diversification, Edward Snowden, eurozone crisis, fiat currency, financial innovation, financial intermediation, financial repression, fixed income, Flash crash, floating exchange rates, forward guidance, G4S, George Akerlof, global reserve currency, global supply chain, Growth in a Time of Debt, income inequality, inflation targeting, information asymmetry, invisible hand, jitney, John Meriwether, Kenneth Rogoff, labor-force participation, Lao Tzu, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, market clearing, market design, money market fund, money: store of value / unit of account / medium of exchange, mutually assured destruction, obamacare, offshore financial centre, oil shale / tar sands, open economy, plutocrats, Plutocrats, Ponzi scheme, price stability, quantitative easing, RAND corporation, reserve currency, risk-adjusted returns, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Satoshi Nakamoto, Silicon Valley, Silicon Valley startup, Skype, sovereign wealth fund, special drawing rights, Stuxnet, The Market for Lemons, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, too big to fail, trade route, undersea cable, uranium enrichment, Washington Consensus, working-age population, yield curve

The first contrasts the BELLs and the GIIPS; the second contrasts each BELLs member to the others. Experiments are typically conducted by controlling certain variables among all participants and measuring differences in the factors that are not controlled. The first control variable in this real-world experiment is that neither the BELLs nor the GIIPS devalued their currencies. The BELLs have maintained a local currency peg to the euro and have not devalued. Indeed, Estonia actually joined the euro on January 1, 2011, at the height of anti-euro hysteria, and Latvia joined on January 1, 2014. The second control variable is the depth of the economic collapse in both the BELLs and the GIIPS beginning in 2008 and continuing into 2009. Each BELL suffered approximately a 20 percent decline in output in those two years, and unemployment reached 20 percent.

Syed Abul Basher, “Regional Initiative in the Gulf: Search for a GCC Currency,” paper presented at the International Institute for Strategic Studies Seminar, Bahrain, September 30, 2012, http://www.iiss.org/en/events/geo-economics%20seminars/geo-economics%20seminars/archive/currencies-of-power-and-the-power-of-currencies-38db. A logical extension, then, of the SDR basket approach . . . : The author is indebted to Dr. Syed Abul Basher for the suggestion and explication of the SDR-plus-oil approach to the currency peg, ibid. the United States would continue its loose monetary policy . . . : Ben S. Bernanke, “U.S. Monetary Policy and International Implications,” remarks at IMF–Bank of Japan seminar, Tokyo, October 14, 2012, http://www.federalreserve.gov/newsevents/speech/bernanke20121014a.htm. “Today most advanced economies remain . . .”: Ben S. Bernanke, “Monetary Policy and the Global Economy,” speech at the London School of Economics, London, March 25, 2013, http://www.federalreserve.gov/newsevents/speech/bernanke20130325a.htm.


pages: 497 words: 150,205

European Spring: Why Our Economies and Politics Are in a Mess - and How to Put Them Right by Philippe Legrain

3D printing, Airbnb, Asian financial crisis, bank run, banking crisis, barriers to entry, Basel III, battle of ideas, Berlin Wall, Big bang: deregulation of the City of London, Boris Johnson, Bretton Woods, BRICs, British Empire, business cycle, business process, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, cleantech, collaborative consumption, collapse of Lehman Brothers, collective bargaining, corporate governance, creative destruction, credit crunch, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, currency peg, debt deflation, Diane Coyle, disruptive innovation, Downton Abbey, Edward Glaeser, Elon Musk, en.wikipedia.org, energy transition, eurozone crisis, fear of failure, financial deregulation, first-past-the-post, forward guidance, full employment, Gini coefficient, global supply chain, Growth in a Time of Debt, hiring and firing, hydraulic fracturing, Hyman Minsky, Hyperloop, immigration reform, income inequality, interest rate derivative, Intergovernmental Panel on Climate Change (IPCC), Irish property bubble, James Dyson, Jane Jacobs, job satisfaction, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, labour market flexibility, labour mobility, liquidity trap, margin call, Martin Wolf, mittelstand, moral hazard, mortgage debt, mortgage tax deduction, North Sea oil, Northern Rock, offshore financial centre, oil shale / tar sands, oil shock, open economy, peer-to-peer rental, price stability, private sector deleveraging, pushing on a string, quantitative easing, Richard Florida, rising living standards, risk-adjusted returns, Robert Gordon, savings glut, school vouchers, self-driving car, sharing economy, Silicon Valley, Silicon Valley startup, Skype, smart grid, smart meter, software patent, sovereign wealth fund, Steve Jobs, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, Tyler Cowen: Great Stagnation, working-age population, Zipcar

The euro had previously been perceived as an irreversible currency union – like the United States, where nobody thinks that a default by the state of California or the city of Detroit will lead to it abandoning the dollar. Instead, the euro became, in effect, a system of fixed exchange rates that is extremely costly – but not impossible – to break. In the exchange-rate mechanism (ERM), which preceded the euro, speculation about devaluation was expressed as pressure on a currency peg (as during the ERM crisis in 1992–3); now it was expressed as pressure on sovereign bond yields and bank funding costs as capital fled vulnerable eurozone economies to Germany. This capital flight caused interest rates to soar and credit to contract across southern Europe, deepening the recession. Such was the demand for the perceived safety of German assets that Berlin was able to borrow at deeply negative interest rates.

So too was the financial cycle, because the financial sector was caged and overwhelmingly national. This deceptively stable environment tricked policymakers into thinking they could plan economic development while fine-tuning demand to maintain full employment. But the system broke down in the early 1970s as the post-war economic boom ran out of steam, efforts to boost employment resulted in ever higher inflation, the Bretton Woods system of currencies pegged to the US dollar collapsed and the oil shocks of 1973–74 resulted in the previously unthinkable combination of stagnation and inflation: stagflation. In this new stop-go world, controlling inflation became the top priority of economic policy and monetary policy the preferred tool for economic management, with central banks causing short, sharp recessions by raising interest rates whenever inflation looked like getting out of hand.


pages: 524 words: 155,947

More: The 10,000-Year Rise of the World Economy by Philip Coggan

"Robert Solow", accounting loophole / creative accounting, Ada Lovelace, agricultural Revolution, Airbnb, airline deregulation, Andrei Shleifer, anti-communist, assortative mating, autonomous vehicles, bank run, banking crisis, banks create money, basic income, Berlin Wall, Bob Noyce, Branko Milanovic, Bretton Woods, British Empire, business cycle, call centre, capital controls, carbon footprint, Carmen Reinhart, Celtic Tiger, central bank independence, Charles Lindbergh, clean water, collective bargaining, Columbian Exchange, Columbine, Corn Laws, credit crunch, Credit Default Swap, crony capitalism, currency peg, debt deflation, Deng Xiaoping, discovery of the americas, Donald Trump, Erik Brynjolfsson, European colonialism, eurozone crisis, falling living standards, financial innovation, financial intermediation, floating exchange rates, Fractional reserve banking, Frederick Winslow Taylor, full employment, germ theory of disease, German hyperinflation, gig economy, Gini coefficient, global supply chain, global value chain, Gordon Gekko, greed is good, Haber-Bosch Process, Hans Rosling, Hernando de Soto, hydraulic fracturing, Ignaz Semmelweis: hand washing, income inequality, income per capita, indoor plumbing, industrial robot, inflation targeting, Isaac Newton, James Watt: steam engine, job automation, John Snow's cholera map, joint-stock company, joint-stock limited liability company, Kenneth Arrow, Kula ring, labour market flexibility, land reform, land tenure, Lao Tzu, large denomination, liquidity trap, Long Term Capital Management, Louis Blériot, low cost airline, low skilled workers, lump of labour, M-Pesa, Malcom McLean invented shipping containers, manufacturing employment, Marc Andreessen, Mark Zuckerberg, Martin Wolf, McJob, means of production, Mikhail Gorbachev, mittelstand, moral hazard, Murano, Venice glass, Myron Scholes, Nelson Mandela, Network effects, Northern Rock, oil shale / tar sands, oil shock, Paul Samuelson, popular capitalism, popular electronics, price stability, principal–agent problem, profit maximization, purchasing power parity, quantitative easing, railway mania, Ralph Nader, regulatory arbitrage, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, savings glut, Scramble for Africa, Second Machine Age, secular stagnation, Silicon Valley, Simon Kuznets, South China Sea, South Sea Bubble, special drawing rights, spice trade, spinning jenny, Steven Pinker, TaskRabbit, Thales and the olive presses, Thales of Miletus, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Malthus, Thorstein Veblen, trade route, transaction costs, transatlantic slave trade, transcontinental railway, Triangle Shirtwaist Factory, universal basic income, Unsafe at Any Speed, Upton Sinclair, V2 rocket, Veblen good, War on Poverty, Washington Consensus, Watson beat the top human players on Jeopardy!, women in the workforce, Yom Kippur War, zero-sum game

European countries, which naturally struggled to create goods for export in the midst of post-war chaos, duly devalued en masse in 1949. All currency systems are subject to a trilemma, in which countries can choose two options but not all three. The three options are a fixed exchange rate, an independent monetary policy, and free capital movement. Under the gold standard, the currency was fixed and capital could flow freely. But monetary policy had to be adjusted in order to maintain the currency peg, with interest rates rising or falling regardless of domestic economic conditions. The Bretton Woods system chose a different pairing. Exchange rates were fixed but countries had freedom (with some limits) to adjust their own monetary policy. The only way such a system could work was by restricting capital flows. If they had not been, investors would have been free to move their capital to whichever country had the highest interest rates, confident that they could not face a currency loss by devaluation.

In the US, 80% of the richest tenth of people (by income) vote, while just 40% of the bottom tenth do so.28 Globalisation also works in the favour of the rich and of the corporate sector. In a world where the most talented employees are mobile, and where companies can shift production to other countries with ease, it is hard for politicians to push up tax rates very far. Finance reigns supreme Under the Bretton Woods system, capital movements were restricted because of the need to protect currency pegs. But once currencies were free to float, there was no need to retain these restrictions. The US, Canada, Germany and Switzerland all abolished controls quite quickly; Britain followed suit under the Thatcher government. This shift fitted into the philosophy espoused by Milton Friedman. If capital was free to move, it could be invested in the most profitable opportunities around the world, and this would improve economic growth in the long term.


pages: 597 words: 172,130

The Alchemists: Three Central Bankers and a World on Fire by Neil Irwin

"Robert Solow", Ayatollah Khomeini, bank run, banking crisis, Berlin Wall, Bernie Sanders, break the buck, Bretton Woods, business climate, business cycle, capital controls, central bank independence, centre right, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, currency peg, eurozone crisis, financial innovation, Flash crash, George Akerlof, German hyperinflation, Google Earth, hiring and firing, inflation targeting, Isaac Newton, Julian Assange, low cost airline, market bubble, market design, money market fund, moral hazard, mortgage debt, new economy, Northern Rock, Paul Samuelson, price stability, quantitative easing, rent control, reserve currency, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, savings glut, Socratic dialogue, sovereign wealth fund, The Great Moderation, too big to fail, union organizing, WikiLeaks, yield curve, Yom Kippur War

By 1927, this had created a dilemma for Montagu Norman, the brilliant and eccentric governor of the Bank of England. He faced an unpleasant choice: He could either raise interest rates in a British economy that was failing to recover from its wartime doldrums, tightening the national money supply and thereby slowing growth and encouraging unrest. Or he could risk a crisis of the pound, if people lost confidence that Britain could keep its currency pegged to gold. The dilemma was compounded by Norman’s miserable relationship with his counterpart in Paris, Banque de France governor Émile Moreau, who had made life difficult for the British by hoarding huge quantities of gold. The divide between Norman and Moreau was deeper than mere policy disputes. Moreau spoke no English and Norman spoke fluent French, yet Norman insisted that their discussions occur in his native tongue.

“Go for the jugular,” Soros told Druckenmiller that Tuesday night. The Quantum Fund, which they ran, sold pounds to anyone who could buy—the Bank of England when the London markets were open, investors around the world the rest of the time. Soon others started to dump sterling too. The Bank of England could keep buying, but the more it bought, the more British taxpayers stood to lose if the nation eventually did abandon its currency peg. That Wednesday, Prime Minister John Major’s government made an emergency decision to hike interest rates a stunning 2 full percentage points, then hiked them by another 3 percentage points on Thursday. It hoped to reverse the sell-off and leave the speculators with egg on their face, even at the risk of devastating British economic growth. But Soros and other global investors showed no hesitation.


pages: 318 words: 77,223

The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse by Mohamed A. El-Erian

activist fund / activist shareholder / activist investor, Airbnb, balance sheet recession, bank run, barriers to entry, break the buck, Bretton Woods, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, collapse of Lehman Brothers, corporate governance, currency peg, disruptive innovation, Erik Brynjolfsson, eurozone crisis, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, fixed income, Flash crash, forward guidance, friendly fire, full employment, future of work, Hyman Minsky, If something cannot go on forever, it will stop - Herbert Stein's Law, income inequality, inflation targeting, Jeff Bezos, Kenneth Rogoff, Khan Academy, liquidity trap, Martin Wolf, megacity, Mexican peso crisis / tequila crisis, moral hazard, mortgage debt, Norman Mailer, oil shale / tar sands, price stability, principal–agent problem, quantitative easing, risk tolerance, risk-adjusted returns, risk/return, Second Machine Age, secular stagnation, sharing economy, sovereign wealth fund, The Great Moderation, The Wisdom of Crowds, too big to fail, University of East Anglia, yield curve, zero-sum game

The economic recovery continuously undershot their expectations, compounding concerns not only about effectiveness but also about the eventual exit process itself—including the management of market expectations, the persistence of large central bank balance sheets, and how to coordinate all this with other government agencies (particularly the fiscal agencies).3 These concerns were summarized bluntly in the 2014 Annual Report of the Bank for International Settlements (known as the central bank of central banks) when it referred to prospects for a “bumpy exit” as central banks found it “difficult to ensure a smooth normalization.”4 And it was confirmed a few months later with the messy exit in January 2015 of the Swiss National Bank from a currency peg arrangement designed to reduce the exposure of Switzerland to the Eurozone crisis. Rather than pivot from financial normalization to full recovery, the Eurozone stalled in a multiple 1 percent zone—a low economic growth of 1 percent, “low-flation” of 1 percent, and the more generalized problem within the advanced world of the top 1 percent of the population capturing the vast majority of the income and wealth gains.


Global Governance and Financial Crises by Meghnad Desai, Yahia Said

Asian financial crisis, bank run, banking crisis, Bretton Woods, business cycle, capital controls, central bank independence, corporate governance, creative destruction, credit crunch, crony capitalism, currency peg, deglobalization, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, floating exchange rates, frictionless, frictionless market, German hyperinflation, information asymmetry, knowledge economy, liberal capitalism, liberal world order, Long Term Capital Management, market bubble, Mexican peso crisis / tequila crisis, moral hazard, Nick Leeson, oil shock, open economy, price mechanism, price stability, Real Time Gross Settlement, rent-seeking, short selling, special drawing rights, structural adjustment programs, Tobin tax, transaction costs, Washington Consensus

These results suggest caution in determining the extent to which foreign capital inflows should be encouraged. Also, the Southeast Asian three’s heavier dependence on FDI in gross domestic capital formation, especially for manufacturing investments, probably also limited the development of domestic entrepreneurship as well as many other indigenous economic capabilities due to greater reliance on foreign capabilities, associated with FDI (Jomo et al. 1997). After mid-1995, the Southeast Asian currency pegs to the US dollar – which had enhanced the region’s competitiveness as the dollar declined for a decade after the 1985 Plaza accord – became a growing liability as the yen began to depreciate once again. Stronger currencies meant higher production costs, especially with the heavy reliance on imported inputs from East Asia, as well as reduced export price competitiveness, lower export growth and increased current account deficits.


pages: 276 words: 82,603

Birth of the Euro by Otmar Issing

"Robert Solow", accounting loophole / creative accounting, Bretton Woods, business climate, business cycle, capital controls, central bank independence, currency peg, financial innovation, floating exchange rates, full employment, inflation targeting, information asymmetry, labour market flexibility, labour mobility, market fundamentalism, money market fund, moral hazard, oil shock, open economy, price anchoring, price stability, purchasing power parity, reserve currency, Y2K, yield curve

Kosovo and Montenegro have decided not to issue their own currency and to use the euro instead. Such cases are referred to as ‘euroisation’, whereby the adoption of the currency rests on a unilateral decision by the country concerned. As with the The euro as an international currency • 181 US dollar (‘dollarisation’), such decisions lie outside the control of the central bank issuing the currency. The forms taken by currency pegs range from currency boards through participation in the European exchange rate mechanism (ERM) to arrangements in which the euro has a significant weight in the respective currency basket (as for example in Russia). Table 7 illustrates the regional character of the euro’s role as anchor currency. Half of the EU countries that have not yet joined the euro area participate in ERM II, while the other EU countries, like the heterogeneous group of other countries listed in the table, have adopted a wide spectrum of exchange rate regimes.


pages: 254 words: 14,795

Poorly Made in China: An Insider's Account of the Tactics Behind China's Production Game by Paul Midler

barriers to entry, corporate social responsibility, currency peg, Deng Xiaoping, disintermediation, full employment, illegal immigration, Kickstarter, new economy, out of africa, price discrimination, unpaid internship, urban planning

as if he had no clue what was being suggested. Chinese factory owners looked for small excuses as a way of gaining minor advantages. However when there were real, substantive changes in the marketplace, these same factories found the will to keep their prices firm. The United States had been pressuring China to appreciate its currency, and China finally announced in 2004 that it would revise the currency peg, under which the U.S. dollar equaled 8.26 renminbi. In connection with the revision, the U.S. dollar would be devalued by about 3 percent against the renminbi. Every factory that I was working with then pointed to the major news announcement and sent out a notice saying that their prices would be increased by 3 percent. You had to believe them that it was necessary—it was in the news, after all.


Crisis and Dollarization in Ecuador: Stability, Growth, and Social Equity by Paul Ely Beckerman, Andrés Solimano

banking crisis, banks create money, barriers to entry, business cycle, capital controls, Carmen Reinhart, carried interest, central bank independence, centre right, clean water, currency peg, declining real wages, disintermediation, financial intermediation, fixed income, floating exchange rates, Gini coefficient, income inequality, income per capita, labor-force participation, land reform, London Interbank Offered Rate, Mexican peso crisis / tequila crisis, microcredit, money: store of value / unit of account / medium of exchange, offshore financial centre, old-boy network, open economy, pension reform, price stability, rent-seeking, school vouchers, seigniorage, trade liberalization, women in the workforce

Ecuador: Consumer Prices and Weighted Trading-partner Prices at the Current Exchange Rate, December 1997–December 2001 1990 consumer prices = 100 170.00 1100 160.00 Weighted trading- partner prices 150.00 900 Consumer prices Exchange - rate floated 140.00 130.00 700 120.00 110.00 500 Real- effective exchange rate 100.00 90.00 300 80.00 Dollarization announcement Dec-01 Sep-01 Jun-01 Mar-01 Dec-00 Sep-00 Jun-00 Mar-00 Dec-99 Dep-99 Jun-99 Mar-99 Dec-98 Sep-98 Jun-98 Mar-98 70.00 Dec-97 100 Source: International Monetary Fund. The price-level increase after dollarization in Ecuador was not a unique experience. Many former Soviet republics had similar experiences when they established new currencies upon leaving the ruble area. Estonia, for example, set up a currency board in the early 1990s with its new national currency pegged to the German mark. The authorities found it difficult to determine the “right” exchange rate, especially since the ruble had depreciated sharply in the previous months, and the new currency turned out substantially undervalued at the rate chosen. Although Estonia’s currency board complied closely with textbook rules, the initial undervaluation led to annual price-level increases on the order of 15 percent for several years until parity was reached.


pages: 263 words: 80,594

Stolen: How to Save the World From Financialisation by Grace Blakeley

"Robert Solow", activist fund / activist shareholder / activist investor, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, basic income, battle of ideas, Berlin Wall, Big bang: deregulation of the City of London, bitcoin, Bretton Woods, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collective bargaining, corporate governance, corporate raider, credit crunch, Credit Default Swap, cryptocurrency, currency peg, David Graeber, debt deflation, decarbonisation, Donald Trump, eurozone crisis, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, fixed income, full employment, G4S, gender pay gap, gig economy, Gini coefficient, global reserve currency, global supply chain, housing crisis, Hyman Minsky, income inequality, inflation targeting, Intergovernmental Panel on Climate Change (IPCC), Kenneth Rogoff, Kickstarter, land value tax, light touch regulation, low skilled workers, market clearing, means of production, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, neoliberal agenda, new economy, Northern Rock, offshore financial centre, paradox of thrift, payday loans, pensions crisis, Ponzi scheme, price mechanism, principal–agent problem, profit motive, quantitative easing, race to the bottom, regulatory arbitrage, reserve currency, Right to Buy, rising living standards, risk-adjusted returns, road to serfdom, savings glut, secular stagnation, shareholder value, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, the built environment, The Great Moderation, too big to fail, transfer pricing, universal basic income, Winter of Discontent, working-age population, yield curve, zero-sum game

The end of Bretton Woods represented a profound transformation in the international monetary system. Absent any link with gold or any other commodity, money became nothing more than a promise, created by fiat by the state issuing it. The value of a currency would now be determined by the forces of supply and demand. Rather than having to limit the amount of money they were creating in order to maintain a currency peg, states would be able to create as much money as they liked, accounting only for the threat of inflation. Private banks were also now free to create currency on their behalf in the form of credit, constrained only by domestic regulation. The collapse of Bretton Woods represented the final step away from a system of commodity money, which has been the norm for most of human history, and towards fiat and credit money, which now dominate all other forms of money.


pages: 310 words: 90,817

Paper Money Collapse: The Folly of Elastic Money and the Coming Monetary Breakdown by Detlev S. Schlichter

bank run, banks create money, British Empire, business cycle, capital controls, Carmen Reinhart, central bank independence, currency peg, fixed income, Fractional reserve banking, German hyperinflation, global reserve currency, inflation targeting, Kenneth Rogoff, Kickstarter, Long Term Capital Management, market clearing, Martin Wolf, means of production, money market fund, moral hazard, mortgage debt, open economy, Ponzi scheme, price discovery process, price mechanism, price stability, pushing on a string, quantitative easing, reserve currency, rising living standards, risk tolerance, savings glut, the market place, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, Y2K

Quite plainly, by pegging its currency to the U.S. dollar, Chinese authorities have committed themselves to matching United States inflationism for the sake of obtaining a larger share of U.S. consumer spending. Mirroring U.S. inflationary monetary policy is a development strategy for China. The growing supply of dollar-denominated IOUs that is the necessary result of ongoing U.S. money production has been absorbed, not by voluntary acts of saving on the part of independent foreign individuals, but by political authorities that have accumulated them as monetary reserves, and, via a de facto currency peg, monetized them by printing matching amounts of their own paper money. Thus, a drop in international purchasing power of the initially inflating currency has been arrested. Monetary expansion in the United States could proceed further without a loss of purchasing power for the dollar on international markets. At the same time, China used its own monetary expansion to build a larger productive sector that sells into Western markets, particularly into the United States.


pages: 309 words: 95,495

Foolproof: Why Safety Can Be Dangerous and How Danger Makes Us Safe by Greg Ip

Affordable Care Act / Obamacare, Air France Flight 447, air freight, airport security, Asian financial crisis, asset-backed security, bank run, banking crisis, break the buck, Bretton Woods, business cycle, capital controls, central bank independence, cloud computing, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, Daniel Kahneman / Amos Tversky, diversified portfolio, double helix, endowment effect, Exxon Valdez, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, global supply chain, hindsight bias, Hyman Minsky, Joseph Schumpeter, Kenneth Rogoff, lateral thinking, London Whale, Long Term Capital Management, market bubble, money market fund, moral hazard, Myron Scholes, Network effects, new economy, offshore financial centre, paradox of thrift, pets.com, Ponzi scheme, quantitative easing, Ralph Nader, Richard Thaler, risk tolerance, Ronald Reagan, Sam Peltzman, savings glut, technology bubble, The Great Moderation, too big to fail, transaction costs, union organizing, Unsafe at Any Speed, value at risk, William Langewiesche, zero-sum game

The decades after 1934 are sometimes called “the quiet period” because they had no financial crises. The quiet period was quiet in part because financial freedom was tightly circumscribed. For years after the Second World War, many countries limited how much money residents could take in or out of the country or invest in another country’s stocks and bonds. The purpose of these capital controls was to tamp down the big flows of money that made it harder to keep currencies pegged to one another, as the postwar monetary system required. They were also intended to force savers to fund investments at home by making it harder to seek better returns abroad. The strategy worked, but it was burdensome: for a while Britons couldn’t take more than £100 when they traveled abroad, and Americans paid a tax when they bought foreign stocks and Treasury bills. There were other restrictions.


pages: 339 words: 95,270

Trade Wars Are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace by Matthew C. Klein

Albert Einstein, Asian financial crisis, asset allocation, asset-backed security, Berlin Wall, Bernie Sanders, Branko Milanovic, Bretton Woods, British Empire, business climate, business cycle, capital controls, centre right, collective bargaining, currency manipulation / currency intervention, currency peg, David Ricardo: comparative advantage, deglobalization, deindustrialization, Deng Xiaoping, Donald Trump, Double Irish / Dutch Sandwich, Fall of the Berlin Wall, falling living standards, financial innovation, financial repression, fixed income, full employment, George Akerlof, global supply chain, global value chain, illegal immigration, income inequality, intangible asset, invention of the telegraph, joint-stock company, land reform, Long Term Capital Management, Malcom McLean invented shipping containers, manufacturing employment, Martin Wolf, mass immigration, Mikhail Gorbachev, money market fund, mortgage debt, New Urbanism, offshore financial centre, oil shock, open economy, paradox of thrift, passive income, reserve currency, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, Scramble for Africa, sovereign wealth fund, The Nature of the Firm, The Wealth of Nations by Adam Smith, Tim Cook: Apple, trade liberalization, Wolfgang Streeck

Left unchecked, these flows would have pushed up China’s exchange rate and increased Chinese spending on goods and services. The Chinese government could have offset some of those foreign inflows by loosening its outbound capital controls and allowing Chinese savers to buy foreign assets. Liberalization, however, would have threatened the government’s control of the economy and financial system. Beijing therefore chose to buy trillions of dollars of foreign exchange reserves to sustain its currency peg. Between 1996 and the eve of the global financial crisis, SAFE spent $1.8 trillion accumulating foreign reserves, roughly two-thirds of which were invested in the United States. After the global financial crisis, the Chinese government spent another $2 trillion accumulating even more foreign assets to prevent its currency from appreciating further.30 Outside of East Asia, the major buyers of reserve assets have been commodity exporters, mainly the oil and gas producers of the Arabian Peninsula, Norway, and Russia.


We Need New Stories: Challenging the Toxic Myths Behind Our Age of Discontent by Nesrine Malik

affirmative action, Affordable Care Act / Obamacare, barriers to entry, Bernie Sanders, Boris Johnson, British Empire, centre right, cognitive dissonance, continuation of politics by other means, currency peg, Donald Trump, feminist movement, financial independence, Francis Fukuyama: the end of history, gender pay gap, ghettoisation, glass ceiling, illegal immigration, invisible hand, mass immigration, moral panic, Nate Silver, obamacare, old-boy network, payday loans, planetary scale, Ponzi scheme, race to the bottom, Ronald Reagan, Saturday Night Live, sexual politics, Steven Pinker, The Bell Curve by Richard Herrnstein and Charles Murray, Thomas L Friedman, transatlantic slave trade

‘Most of the people in the upper echelons of the American media today are the same people who were there during the Iraq War,’ he said. ‘They have not been punished. And these are the people who are now responsible for framing the dangers of Trumpism.’ If it were a real market, their stalls would have been shut down long ago. The analogy is further stretched by the fact that real marketplaces actually require a lot of regulation. There are anti-monopoly rules, there are interest rate fixes and, in many markets, artificial currency pegs. In the press, publishing and the business of ideas dispersal in general, there are players that are deeply entrenched and networked, and so the supply of ideas reflects their power. In a world where funding and lobbying groups can sponsor public opinion makers from university all the way through to publication of their first book, where lazy or time-stressed TV producers keep returning to the same voices for their commentary, and where publishers and top media executives tend to come broadly from the same pool, social class and universities, it is inevitable that there is a failure of curation.


pages: 111 words: 1

Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets by Nassim Nicholas Taleb

Antoine Gombaud: Chevalier de Méré, availability heuristic, backtesting, Benoit Mandelbrot, Black Swan, commoditize, complexity theory, corporate governance, corporate raider, currency peg, Daniel Kahneman / Amos Tversky, discounted cash flows, diversified portfolio, endowment effect, equity premium, fixed income, global village, hedonic treadmill, hindsight bias, Kenneth Arrow, Long Term Capital Management, loss aversion, mandelbrot fractal, mental accounting, meta analysis, meta-analysis, Myron Scholes, Paul Samuelson, quantitative trading / quantitative finance, QWERTY keyboard, random walk, Richard Feynman, road to serfdom, Robert Shiller, Robert Shiller, selection bias, shareholder value, Sharpe ratio, Steven Pinker, stochastic process, survivorship bias, too big to fail, Turing test, Yogi Berra

Would you like to know with great precision the date of your death? Would you like to know who committed the crime before the beginning of the movie? Actually, wouldn’t it be better if the length of movies were kept a secret? The Scrambling of Messages Besides its effect on well-being, uncertainty presents tangible informational benefits, particularly with the scrambling of potentially damaging, and self-fulfilling, messages. Consider a currency pegged by a central bank to a fixed rate. The bank’s official policy is to use its reserves to support it by buying and selling its currency in the open market, a procedure called intervention. But should the currency rate drop a tiny bit, people will immediately get the message that the intervention failed to support the currency and that the devaluation is coming. A pegged currency is not supposed to fluctuate; the slightest downward fluctuation is meant to be a harbinger of bad news!


pages: 357 words: 99,684

Why It's Still Kicking Off Everywhere: The New Global Revolutions by Paul Mason

anti-globalists, back-to-the-land, balance sheet recession, bank run, banking crisis, Berlin Wall, business cycle, capital controls, centre right, citizen journalism, collapse of Lehman Brothers, collective bargaining, creative destruction, credit crunch, Credit Default Swap, currency manipulation / currency intervention, currency peg, do-ocracy, eurozone crisis, Fall of the Berlin Wall, floating exchange rates, Francis Fukuyama: the end of history, full employment, ghettoisation, illegal immigration, informal economy, land tenure, low skilled workers, mass immigration, means of production, megacity, Mohammed Bouazizi, Naomi Klein, Network effects, New Journalism, Occupy movement, price stability, quantitative easing, race to the bottom, rising living standards, short selling, Slavoj Žižek, Stewart Brand, strikebreaker, union organizing, We are the 99%, Whole Earth Catalog, WikiLeaks, Winter of Discontent, women in the workforce, working poor, working-age population, young professional

But in March 1930, as the Wall Street Crash cratered the German economy, a cross-party coalition government of the centre-left and -right collapsed. It was replaced by the first of three ‘appointed’ governments, led by Hein-rich Brüning and designed to prevent either the communists or the now-growing Nazis gaining power. Faced with a recession, Brüning followed a policy of austerity while keeping Germany’s currency pegged to the Gold Standard (much as Greece as follows a policy of austerity dictated by euro membership). This made the recession worse. As unemployment rocketed, so did the Nazi vote: in a shock breakthrough they came second in the elections of September 1930, with 18 per cent. But Brüning was determined to maintain order: he cracked down on both the right and left, banning the Nazi paramilitary organization, the sturmabteilung, along with the rival communist uniformed groups.


pages: 371 words: 98,534

Red Flags: Why Xi's China Is in Jeopardy by George Magnus

3D printing, 9 dash line, Admiral Zheng, Asian financial crisis, autonomous vehicles, balance sheet recession, banking crisis, Bretton Woods, BRICs, British Empire, business process, capital controls, carbon footprint, Carmen Reinhart, cloud computing, colonial exploitation, corporate governance, crony capitalism, currency manipulation / currency intervention, currency peg, demographic dividend, demographic transition, Deng Xiaoping, Doha Development Round, Donald Trump, financial deregulation, financial innovation, financial repression, fixed income, floating exchange rates, full employment, Gini coefficient, global reserve currency, high net worth, hiring and firing, Hyman Minsky, income inequality, industrial robot, Internet of things, invention of movable type, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, labour market flexibility, labour mobility, land reform, Malacca Straits, means of production, megacity, money market fund, moral hazard, non-tariff barriers, Northern Rock, offshore financial centre, old age dependency ratio, open economy, peer-to-peer lending, pension reform, price mechanism, purchasing power parity, regulatory arbitrage, rent-seeking, reserve currency, rising living standards, risk tolerance, smart cities, South China Sea, sovereign wealth fund, special drawing rights, special economic zone, speech recognition, The Wealth of Nations by Adam Smith, total factor productivity, trade route, urban planning, Washington Consensus, women in the workforce, working-age population, zero-sum game

In his view, the reason was that ‘the monetary system of a people reflects all that the people wants, does, endures, is, and that simultaneously the monetary system of a people exercises a significant influence upon its economic activity and its destiny in general’.1 For many years, China has been driven to maintain the stability of its currency, partly for economic purposes, but also to anchor expectations at home about the management of money and finance, and to build trust abroad in the Renminbi itself, and in the Chinese foreign exchange rate regime. It is, in effect, a form of soft power. During the Asian crisis in 1997–98, the IMF and other bodies urged China to devalue, but China resisted the path followed by several Asian governments, whose currency pegs had proven unsustainable. It is true that China was different from its Asian neighbours. The Renminbi was not freely convertible, and China neither experienced significant capital flows from overseas, nor allowed capital to leave China freely. Never-theless, China’s concern was to build trust in its reputation as a stabilising force, to be a leader in east and Southeast Asia, and ultimately to develop a Renminbi bloc with other Asian countries, albeit to the chagrin of Japan, South Korea and Taiwan.


pages: 571 words: 106,255

The Bitcoin Standard: The Decentralized Alternative to Central Banking by Saifedean Ammous

Airbnb, altcoin, bank run, banks create money, bitcoin, Black Swan, blockchain, Bretton Woods, British Empire, business cycle, capital controls, central bank independence, conceptual framework, creative destruction, cryptocurrency, currency manipulation / currency intervention, currency peg, delayed gratification, disintermediation, distributed ledger, Ethereum, ethereum blockchain, fiat currency, fixed income, floating exchange rates, Fractional reserve banking, full employment, George Gilder, global reserve currency, high net worth, invention of the telegraph, Isaac Newton, iterative process, jimmy wales, Joseph Schumpeter, market bubble, market clearing, means of production, money: store of value / unit of account / medium of exchange, moral hazard, Network effects, Paul Samuelson, peer-to-peer, Peter Thiel, price mechanism, price stability, profit motive, QR code, ransomware, reserve currency, Richard Feynman, risk tolerance, Satoshi Nakamoto, secular stagnation, smart contracts, special drawing rights, Stanford marshmallow experiment, The Nature of the Firm, the payments system, too big to fail, transaction costs, Walter Mischel, zero-sum game

Federal Reserve was in charge of a sharp contraction in reserves in 1920–21, and then the sharp bust of 1929, whose fallout lasted until the end of 1945. From then on, economic depressions became a regular and painful part of the economy, recurring every few years and providing justification for growing government intervention to handle their fallout. A good example of the benefits of sound money can be found looking at the fate of the Swiss economy, the last bastion of sound money, which had kept its currency pegged to gold until its ill‐fated decision to abandon global neutrality and join the International Monetary Fund in 1992. Before that date, the unemployment rate had always been practically zero, virtually never exceeding 1%. After they joined the IMF, whose rules prevent governments from tying their currency's value to gold, the Swiss economy began to experience the pleasures of Keynesian funny money, with unemployment rate rising to 5% within a few years, rarely ever dropping below 2%.


pages: 338 words: 104,684

The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy by Stephanie Kelton

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, Affordable Care Act / Obamacare, American Society of Civil Engineers: Report Card, Asian financial crisis, bank run, Bernie Madoff, Bernie Sanders, blockchain, Bretton Woods, business cycle, capital controls, central bank independence, collective bargaining, COVID-19, Covid-19, currency manipulation / currency intervention, currency peg, David Graeber, David Ricardo: comparative advantage, decarbonisation, deindustrialization, discrete time, Donald Trump, eurozone crisis, fiat currency, floating exchange rates, Food sovereignty, full employment, Gini coefficient, global reserve currency, global supply chain, Hyman Minsky, income inequality, inflation targeting, Intergovernmental Panel on Climate Change (IPCC), investor state dispute settlement, Isaac Newton, Jeff Bezos, liquidity trap, Mahatma Gandhi, manufacturing employment, market bubble, Mason jar, mortgage debt, Naomi Klein, new economy, New Urbanism, Nixon shock, obamacare, open economy, Paul Samuelson, Ponzi scheme, price anchoring, price stability, pushing on a string, quantitative easing, race to the bottom, reserve currency, Richard Florida, Ronald Reagan, shareholder value, Silicon Valley, trade liberalization, urban planning, working-age population, Works Progress Administration, yield curve, zero-sum game

They also frequently recommend that developing countries peg the value of their currency to a stronger currency, like the euro, yuan, or US dollar. This policy mix amounts to recommending that the developing country forsake any effort to enhance its monetary sovereignty. Whatever the intention, the actual results from this package are perverse: when countries sacrifice monetary sovereignty but cannot acquire sufficient foreign currency to defend the target exchange rate, their currency pegs collapse, potentially causing a downward spiral, as governments, businesses, and even households cannot favorably convert domestic currency to repay debts denominated in foreign currency.29 Hyperinflation can set in, as the exchange rate plummets, and the cost of crucial imports skyrocket in price. Then the recommended austerity and tight monetary policy crush the domestic economy, driving up unemployment and poverty, all in the name of luring in another batch of Western investors who will start the whole cycle over again.


pages: 264 words: 115,489

Take the Money and Run: Sovereign Wealth Funds and the Demise of American Prosperity by Eric C. Anderson

asset allocation, banking crisis, Bretton Woods, business continuity plan, business process, buy and hold, collective bargaining, corporate governance, credit crunch, currency manipulation / currency intervention, currency peg, diversified portfolio, fixed income, floating exchange rates, housing crisis, index fund, Kenneth Rogoff, open economy, passive investing, profit maximization, profit motive, random walk, reserve currency, risk tolerance, risk-adjusted returns, risk/return, Ronald Reagan, sovereign wealth fund, the market place, The Wealth of Nations by Adam Smith, too big to fail, Vanguard fund

Back to the Present For the moment (2008) it does not appear as though Washington will have to grapple with the consequences of Bretton Woods III before the November 2008 presidential election. As of early August 2008, oil-exporting countries in the Middle East were still pouring capital from their central banks into the U.S. Treasury.31 This cash flow appears primarily driven by efforts to maintain the value of the U.S. dollar. Having decided to retain currency pegs to the U.S. dollar, UAE, Saudi Arabia, Qatar, Oman, and Bahrain are confronted with a growing problem. The 33% decline in the dollar’s value against the Euro since 2003 has been accompanied by similar currency degeneration in these Middle Eastern states.32 The result has been a surge to double-digit inflation. With oil ranging between $120 and $150 a barrel, however, these major oil producers have struggled to place a finger in the dike by shifting their windfall into U.S.


pages: 397 words: 112,034

What's Next?: Unconventional Wisdom on the Future of the World Economy by David Hale, Lyric Hughes Hale

affirmative action, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Berlin Wall, Black Swan, Bretton Woods, business cycle, capital controls, Cass Sunstein, central bank independence, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, debt deflation, declining real wages, deindustrialization, diversification, energy security, Erik Brynjolfsson, Fall of the Berlin Wall, financial innovation, floating exchange rates, full employment, Gini coefficient, global reserve currency, global village, high net worth, Home mortgage interest deduction, housing crisis, index fund, inflation targeting, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Just-in-time delivery, Kenneth Rogoff, Long Term Capital Management, Mahatma Gandhi, Martin Wolf, Mexican peso crisis / tequila crisis, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, mortgage tax deduction, Network effects, new economy, Nicholas Carr, oil shale / tar sands, oil shock, open economy, passive investing, payday loans, peak oil, Ponzi scheme, post-oil, price stability, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, rent-seeking, reserve currency, Richard Thaler, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, sovereign wealth fund, special drawing rights, technology bubble, The Great Moderation, Thomas Kuhn: the structure of scientific revolutions, Tobin tax, too big to fail, total factor productivity, trade liberalization, Washington Consensus, Westphalian system, WikiLeaks, women in the workforce, yield curve

CORPORATE COMPLIANCE: The observance of statutory and company regulations on lawful and responsible conduct by the company, its employees, its management, and supervisory bodies. COST OF CAPITAL: The required return that is necessary to make a capital budgeting project worth pursuing. CREDIT CRUNCH: A period of time when credit is costly and/or difficult to obtain. CROWDING-OUT EFFECT: The reduction in private consumption or investment that occurs because of an increase in government expenditures. CURRENCY PEG: A publicly announced fixed exchange rate that is often made against a major currency or basket of currencies and maintained by monetary authorities. CURRENCY SPECULATION: The process of buying, selling, and/or holding currencies in order to make a profit from favorable exchange rate fluctuations. CURRENT ACCOUNT: A country’s trade deficit plus interest payments on what the country borrows from foreigners to finance the trade deficit.


pages: 349 words: 134,041

Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives by Satyajit Das

accounting loophole / creative accounting, Albert Einstein, Asian financial crisis, asset-backed security, beat the dealer, Black Swan, Black-Scholes formula, Bretton Woods, BRICs, Brownian motion, business process, buy and hold, buy low sell high, call centre, capital asset pricing model, collateralized debt obligation, commoditize, complexity theory, computerized trading, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, currency peg, disintermediation, diversification, diversified portfolio, Edward Thorp, Eugene Fama: efficient market hypothesis, Everything should be made as simple as possible, financial innovation, fixed income, Haight Ashbury, high net worth, implied volatility, index arbitrage, index card, index fund, interest rate derivative, interest rate swap, Isaac Newton, job satisfaction, John Meriwether, locking in a profit, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, Marshall McLuhan, mass affluent, mega-rich, merger arbitrage, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mutually assured destruction, Myron Scholes, new economy, New Journalism, Nick Leeson, offshore financial centre, oil shock, Parkinson's law, placebo effect, Ponzi scheme, purchasing power parity, quantitative trading / quantitative finance, random walk, regulatory arbitrage, Right to Buy, risk-adjusted returns, risk/return, Satyajit Das, shareholder value, short selling, South Sea Bubble, statistical model, technology bubble, the medium is the message, the new new thing, time value of money, too big to fail, transaction costs, value at risk, Vanguard fund, volatility smile, yield curve, Yogi Berra, zero-coupon bond

The Asian currency market was ‘highly’ liquid with ‘sophisticated’ local and foreign players. I was really stupid, it seemed. ‘We use sophisticated cross hedge and proxy models? Didn’t you have correlation hedges in your day, old timer?’ The traders were using baskets of dollars, yen and European currencies to hedge Asian markets. The Asian rates were ‘pegged’ and ‘managed’ by the central banks. The end came swiftly. In 1997, the currency pegs collapsed; the market found a new ‘level’; the traders were carried out in body bags. Modellers mused about ‘paradigm shifts’ and ‘discontinuous markets’. Some banks had been smart, they had just matched trades between two suicidal players. This didn’t help: the people who entered into the transactions were affected by amnesia. It could have been the shock of the losses, a common medical phenomenon.


pages: 537 words: 144,318

The Invisible Hands: Top Hedge Fund Traders on Bubbles, Crashes, and Real Money by Steven Drobny

Albert Einstein, Asian financial crisis, asset allocation, asset-backed security, backtesting, banking crisis, Bernie Madoff, Black Swan, Bretton Woods, BRICs, British Empire, business cycle, business process, buy and hold, capital asset pricing model, capital controls, central bank independence, collateralized debt obligation, commoditize, Commodity Super-Cycle, commodity trading advisor, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, diversification, diversified portfolio, equity premium, family office, fiat currency, fixed income, follow your passion, full employment, George Santayana, Hyman Minsky, implied volatility, index fund, inflation targeting, interest rate swap, inventory management, invisible hand, Kickstarter, London Interbank Offered Rate, Long Term Capital Management, market bubble, market fundamentalism, market microstructure, moral hazard, Myron Scholes, North Sea oil, open economy, peak oil, pension reform, Ponzi scheme, prediction markets, price discovery process, price stability, private sector deleveraging, profit motive, purchasing power parity, quantitative easing, random walk, reserve currency, risk tolerance, risk-adjusted returns, risk/return, savings glut, selection bias, Sharpe ratio, short selling, sovereign wealth fund, special drawing rights, statistical arbitrage, stochastic volatility, stocks for the long run, stocks for the long term, survivorship bias, The Great Moderation, Thomas Bayes, time value of money, too big to fail, transaction costs, unbiased observer, value at risk, Vanguard fund, yield curve, zero-sum game

As with many success stories, I benefited in part from being the right person in the right place at the right time. (See Figure 7.1.) Figure 7.1 Asia Crisis, 1997-1998 SOURCE: Bloomberg. What was your first setback as a trader? The market always teaches you a lesson, and the first setback that I recall was due to concerns about a Chinese devaluation in 1997. After much research, one of my trades was fading risk premium in Chinese currency forwards on the thesis that China would not adjust its fixed currency peg. I was fading probably 1 to 2 percent annualized risk premium in the renminbi forward market when the Thai baht devalued. Frankly, it was a very sound thesis. But suddenly there was speculation of a Chinese devaluation, which I found confounding and astonishing because a large, sudden move occurred in the forward points of something that had been pegged for a long time. Since I sized the position as a low volatility trade, it was very painful.


pages: 496 words: 131,938

The Future Is Asian by Parag Khanna

3D printing, Admiral Zheng, affirmative action, Airbnb, Amazon Web Services, anti-communist, Asian financial crisis, asset-backed security, augmented reality, autonomous vehicles, Ayatollah Khomeini, barriers to entry, Basel III, blockchain, Boycotts of Israel, Branko Milanovic, British Empire, call centre, capital controls, carbon footprint, cashless society, clean water, cloud computing, colonial rule, computer vision, connected car, corporate governance, crony capitalism, currency peg, deindustrialization, Deng Xiaoping, Dissolution of the Soviet Union, Donald Trump, energy security, European colonialism, factory automation, failed state, falling living standards, family office, fixed income, flex fuel, gig economy, global reserve currency, global supply chain, haute couture, haute cuisine, illegal immigration, income inequality, industrial robot, informal economy, Internet of things, Kevin Kelly, Kickstarter, knowledge worker, light touch regulation, low cost airline, low cost carrier, low skilled workers, Lyft, Malacca Straits, Mark Zuckerberg, megacity, Mikhail Gorbachev, money market fund, Monroe Doctrine, mortgage debt, natural language processing, Netflix Prize, new economy, off grid, oil shale / tar sands, open economy, Parag Khanna, payday loans, Pearl River Delta, prediction markets, purchasing power parity, race to the bottom, RAND corporation, rent-seeking, reserve currency, ride hailing / ride sharing, Ronald Reagan, Scramble for Africa, self-driving car, Silicon Valley, smart cities, South China Sea, sovereign wealth fund, special economic zone, stem cell, Steve Jobs, Steven Pinker, supply-chain management, sustainable-tourism, trade liberalization, trade route, transaction costs, Travis Kalanick, uber lyft, upwardly mobile, urban planning, Washington Consensus, working-age population, Yom Kippur War

As Asian countries emulate one another’s successes, they leverage their growing wealth and confidence to extend their influence to all corners of the planet. The Asianization of Asia is just the first step in the Asianization of the world. The Asianization of the World The legacy of the nineteenth-century Europeanization and twentieth-century Americanization of the world is that most nations have been shaped by the West in some significant way: European colonial borders and administration, US invasions or military assistance, a currency pegged to the US dollar, American software and social media, and so forth. Billions of people have acquired personal and psychological connections to the West. They have English or French as a first or second language, have relatives in America, Canada, or Great Britain, cheer for an English Premier League football team, never miss films starring their favorite Hollywood actor or actress, and follow the ins and outs of US presidential politics.


pages: 504 words: 139,137

Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined by Lasse Heje Pedersen

activist fund / activist shareholder / activist investor, algorithmic trading, Andrei Shleifer, asset allocation, backtesting, bank run, banking crisis, barriers to entry, Black-Scholes formula, Brownian motion, business cycle, buy and hold, buy low sell high, capital asset pricing model, commodity trading advisor, conceptual framework, corporate governance, credit crunch, Credit Default Swap, currency peg, David Ricardo: comparative advantage, declining real wages, discounted cash flows, diversification, diversified portfolio, Emanuel Derman, equity premium, Eugene Fama: efficient market hypothesis, fixed income, Flash crash, floating exchange rates, frictionless, frictionless market, Gordon Gekko, implied volatility, index arbitrage, index fund, interest rate swap, late capitalism, law of one price, Long Term Capital Management, margin call, market clearing, market design, market friction, merger arbitrage, money market fund, mortgage debt, Myron Scholes, New Journalism, paper trading, passive investing, price discovery process, price stability, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, Renaissance Technologies, Richard Thaler, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, selection bias, shareholder value, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, stocks for the long run, stocks for the long term, survivorship bias, systematic trading, technology bubble, time value of money, total factor productivity, transaction costs, value at risk, Vanguard fund, yield curve, zero-coupon bond

Macro traders are therefore often reluctant to base their investment in a managed currency on its carry. If they believe that a currency band is stable, they may bet on mean-reversion, buying the currency as it nears its lower bound and selling it close to its upper bound. Figure 11.1. The distribution of quarterly excess returns from the currency carry trade. Source: Brunnermeier, Nagel, and Pedersen (2008). More dramatically, macro traders may bet that a currency peg will break, as George Soros famously did when he “broke the Bank of England” in 1992. This is a story often told, but let me mention here that such a trade has a negative carry. Said differently, the carry trade will be positioned in the opposite direction. To defend a currency under attack, the central bank must raise the local interest rate (as the Bank of England did in 1992). This move induces a negative carry for someone shorting the currency, but this negative carry is more than offset if the currency breaks quickly and violently.


pages: 488 words: 144,145

Inflated: How Money and Debt Built the American Dream by R. Christopher Whalen

Albert Einstein, bank run, banking crisis, Black Swan, Bretton Woods, British Empire, business cycle, buy and hold, California gold rush, Carmen Reinhart, central bank independence, commoditize, conceptual framework, corporate governance, corporate raider, creative destruction, cuban missile crisis, currency peg, debt deflation, falling living standards, fiat currency, financial deregulation, financial innovation, financial intermediation, floating exchange rates, Fractional reserve banking, full employment, global reserve currency, housing crisis, interchangeable parts, invention of radio, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, means of production, money: store of value / unit of account / medium of exchange, moral hazard, mutually assured destruction, non-tariff barriers, oil shock, Paul Samuelson, payday loans, plutocrats, Plutocrats, price stability, pushing on a string, quantitative easing, rent-seeking, reserve currency, Ronald Reagan, special drawing rights, The Chicago School, The Great Moderation, too big to fail, trade liberalization, transcontinental railway, Upton Sinclair, women in the workforce

Since the fiat paper dollar was the center of the post-WWII financial world, America’s ultimate victory in the Cold War was assured. But as with the Civil War, the cost of victory has been extremely high. The Dollar’s Golden Age The 1950s and 1960s are considered the golden age of modern American culture, albeit one that existed in a highly controlled economy. Today the idea of using price controls or a currency peg to manage an economy may be considered laughable, effectively creating a target of opportunity for George Soros and other global speculators—the modern day heirs of Jay Gould—to attack. But in the restricted financial markets of the 1950s and 1960s, when much of the global economy was still recovering from decades of depression and war, the system of pegging other currencies to the dollar appeared to work, at least initially.


pages: 538 words: 147,612

All the Money in the World by Peter W. Bernstein

Albert Einstein, anti-communist, Berlin Wall, Bill Gates: Altair 8800, call centre, Charles Lindbergh, corporate governance, corporate raider, creative destruction, currency peg, David Brooks, Donald Trump, estate planning, family office, financial innovation, George Gilder, high net worth, invisible hand, Irwin Jacobs: Qualcomm, Jeff Bezos, job automation, job-hopping, John Markoff, Long Term Capital Management, Marc Andreessen, Martin Wolf, Maui Hawaii, means of production, mega-rich, Menlo Park, Mikhail Gorbachev, new economy, Norman Mailer, PageRank, Peter Singer: altruism, pez dispenser, popular electronics, Renaissance Technologies, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Sand Hill Road, school vouchers, Search for Extraterrestrial Intelligence, shareholder value, Silicon Valley, Silicon Valley startup, stem cell, Stephen Hawking, Steve Ballmer, Steve Jobs, Steve Wozniak, the new new thing, Thorstein Veblen, too big to fail, traveling salesman, urban planning, wealth creators, William Shockley: the traitorous eight, women in the workforce

Soros made his investment judgments without any analytical materials from Wall Street. Instead, he relied on his own investment savvy, garnered from newspapers and an army of paid informants around the globe who worked in central banks and on trading desks. Charges of insider trading61 have dogged him.†14 In 1992 he became infamous when he shorted the British pound, betting that its value would drop. The pound was part of the European currency peg, which obliged Common Market countries to value their currencies within close reach of one another. The British government tried to prop up the pound to keep it near the stronger German mark, buying it heavily and raising interest rates despite high unemployment—to no avail. Britain was forced to withdraw from the European Exchange Rate Mechanism (ERM), the pound plunged, and Soros’s $20 billion hedge—the idea of his chief investment officer, Stanley Druckenmiller—made him $1 to $2 billion.


pages: 524 words: 143,993

The Shifts and the Shocks: What We've Learned--And Have Still to Learn--From the Financial Crisis by Martin Wolf

air freight, anti-communist, Asian financial crisis, asset allocation, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Black Swan, bonus culture, break the buck, Bretton Woods, business cycle, call centre, capital asset pricing model, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collateralized debt obligation, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, deglobalization, Deng Xiaoping, diversification, double entry bookkeeping, en.wikipedia.org, Erik Brynjolfsson, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, floating exchange rates, forward guidance, Fractional reserve banking, full employment, global rebalancing, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, mandatory minimum, margin call, market bubble, market clearing, market fragmentation, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, negative equity, new economy, North Sea oil, Northern Rock, open economy, paradox of thrift, Paul Samuelson, price stability, private sector deleveraging, purchasing power parity, pushing on a string, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, Richard Feynman, risk-adjusted returns, risk/return, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, shareholder value, short selling, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, too big to fail, Tyler Cowen: Great Stagnation, very high income, winner-take-all economy, zero-sum game

The domestic counterparts of the capital inflows were huge private-sector financial deficits: 23 per cent of GDP in Latvia, 19 per cent in Estonia and 13 per cent in Lithuania. As usual, the booms flattered fiscal positions: Estonia’s net public debt was minus 4 per cent of GDP in 2007, Latvia’s 5 per cent and Lithuania’s 11 per cent. Then came the four horsemen of financial crises: ‘sudden stops’ in capital inflows, asset-price collapses, recessions and fiscal deficits. In response, the Baltics decided to stick to currency pegs and embrace austerity. A substantial rescue package was also negotiated for Latvia in late 2008, with support from the European Union, the International Monetary Fund, the Nordic countries and others. Yet some doubted whether the programme would work. Olivier Blanchard, the IMF’s economic counsellor, stated in June 2013 that ‘Many, including me, believed that keeping the peg was likely to be a recipe for disaster, for a long and painful adjustment at best, or more likely, the eventual abandonment of the peg when failure became obvious.’12 He was wrong.


pages: 442 words: 39,064

Why Stock Markets Crash: Critical Events in Complex Financial Systems by Didier Sornette

Asian financial crisis, asset allocation, Berlin Wall, Bretton Woods, Brownian motion, business cycle, buy and hold, capital asset pricing model, capital controls, continuous double auction, currency peg, Deng Xiaoping, discrete time, diversified portfolio, Elliott wave, Erdős number, experimental economics, financial innovation, floating exchange rates, frictionless, frictionless market, full employment, global village, implied volatility, index fund, information asymmetry, intangible asset, invisible hand, John von Neumann, joint-stock company, law of one price, Louis Bachelier, mandelbrot fractal, margin call, market bubble, market clearing, market design, market fundamentalism, mental accounting, moral hazard, Network effects, new economy, oil shock, open economy, pattern recognition, Paul Erdős, Paul Samuelson, quantitative trading / quantitative finance, random walk, risk/return, Ronald Reagan, Schrödinger's Cat, selection bias, short selling, Silicon Valley, South Sea Bubble, statistical model, stochastic process, stocks for the long run, Tacoma Narrows Bridge, technological singularity, The Coming Technological Singularity, The Wealth of Nations by Adam Smith, Tobin tax, total factor productivity, transaction costs, tulip mania, VA Linux, Y2K, yield curve

The maximum of the bubbles was 1997.81 (Argentina IV), 1997.51 (Brazil), 1997.80 (Mexico II), 1997.42 (Peru II), 1997.73 (Venezuela), 1997.60 (Hong Kong III), and 1997.52 (Indonesia II). These maxima are followed by sharp corrections triggered by and following the abandonment by Thailand of the fixed-exchange rate system after strong attacks on its currency. When the Thailand domino fell, three other Asian countries immediately got caught up in the turmoil: the Philippines, Indonesia, and Malaysia. None had situations as bad as Thailand, but they all had currencies pegged to a strong dollar, so they were hit hard. Such financial contagion is based on the same mechanisms as that leading to speculative bubbles. Investors’ and lenders’ moods follow regime shifts: when times are good, they think less about risk and focus on potential gain. When something bad happens, they start worrying about risk again, and the whole structure of hope and greed that had driven the market up collapses.


pages: 710 words: 164,527

The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order by Benn Steil

activist fund / activist shareholder / activist investor, Albert Einstein, Asian financial crisis, banks create money, Bretton Woods, British Empire, business cycle, capital controls, Charles Lindbergh, currency manipulation / currency intervention, currency peg, deindustrialization, European colonialism, facts on the ground, fiat currency, financial independence, floating exchange rates, full employment, global reserve currency, imperial preference, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Rogoff, lateral thinking, margin call, means of production, money: store of value / unit of account / medium of exchange, Monroe Doctrine, New Journalism, open economy, Paul Samuelson, Potemkin village, price mechanism, price stability, psychological pricing, reserve currency, road to serfdom, seigniorage, South China Sea, special drawing rights, The Great Moderation, the market place, trade liberalization, Works Progress Administration

Senators Charles Schumer and Lindsey Graham attacked the Chinese practice, declaring that “one of the fundamental tenets of free trade is that currencies should float.” This contradicted not only the intellectual history of economics, but the tenet that guided the United States at Bretton Woods.34 There is a common thread running through White’s blueprint for Bretton Woods in 1944, Nixon’s closing of the gold window in 1971, Rubin’s hailing of the Chinese currency peg in 1998, and Geithner’s condemnation of it in 2009: whether the United States supports fixed or floating exchange rates at any given point in time is determined by which will give it a more competitive dollar. Whereas such elasticity of principle can be rationalized from a narrow perspective of U.S. national interest, it is more difficult to reconcile with enduring foreign confidence in a dollar-based global monetary system.


pages: 566 words: 163,322

The Rise and Fall of Nations: Forces of Change in the Post-Crisis World by Ruchir Sharma

Asian financial crisis, backtesting, bank run, banking crisis, Berlin Wall, Bernie Sanders, BRICs, business climate, business cycle, business process, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, centre right, colonial rule, Commodity Super-Cycle, corporate governance, creative destruction, crony capitalism, currency peg, dark matter, debt deflation, deglobalization, deindustrialization, demographic dividend, demographic transition, Deng Xiaoping, Doha Development Round, Donald Trump, Edward Glaeser, Elon Musk, eurozone crisis, failed state, Fall of the Berlin Wall, falling living standards, Francis Fukuyama: the end of history, Freestyle chess, Gini coefficient, hiring and firing, income inequality, indoor plumbing, industrial robot, inflation targeting, Internet of things, Jeff Bezos, job automation, John Markoff, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, knowledge economy, labor-force participation, lateral thinking, liberal capitalism, Malacca Straits, Mark Zuckerberg, market bubble, mass immigration, megacity, Mexican peso crisis / tequila crisis, mittelstand, moral hazard, New Economic Geography, North Sea oil, oil rush, oil shale / tar sands, oil shock, pattern recognition, Paul Samuelson, Peter Thiel, pets.com, plutocrats, Plutocrats, Ponzi scheme, price stability, Productivity paradox, purchasing power parity, quantitative easing, Ralph Waldo Emerson, random walk, rent-seeking, reserve currency, Ronald Coase, Ronald Reagan, savings glut, secular stagnation, Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, Simon Kuznets, smart cities, Snapchat, South China Sea, sovereign wealth fund, special economic zone, spectrum auction, Steve Jobs, The Future of Employment, The Wisdom of Crowds, Thomas Malthus, total factor productivity, trade liberalization, trade route, tulip mania, Tyler Cowen: Great Stagnation, unorthodox policies, Washington Consensus, WikiLeaks, women in the workforce, working-age population

Instead of anticipating the crisis and making a killing, foreigners sold out at the bottom and lost a fortune. Capital flight begins with locals, I suspect, because they have better access to intelligence about local conditions. They can pick up informal signs—struggling businesses, looming bankruptcies—long before these trends show up in the official numbers that most big foreign institutions rely on. Balance of payments data show that during Mexico’s “tequila crisis” in December 1994, when the currency peg against the dollar came unstuck, locals started to switch out of pesos and into dollars more than eighteen months before the sudden devaluation. Years later Russians began to pull money out of their country more than two years before the ruble collapsed in August 1998. Savvy locals are also often the first to return. In seven of the twelve major emerging-world currency crises, locals started bringing money back home earlier than foreigners and acted in time to catch the currency on its way up.


Manias, Panics and Crashes: A History of Financial Crises, Sixth Edition by Kindleberger, Charles P., Robert Z., Aliber

active measures, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Black Swan, Bonfire of the Vanities, break the buck, Bretton Woods, British Empire, business cycle, buy and hold, Carmen Reinhart, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, Corn Laws, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency peg, death of newspapers, debt deflation, Deng Xiaoping, disintermediation, diversification, diversified portfolio, edge city, financial deregulation, financial innovation, Financial Instability Hypothesis, financial repression, fixed income, floating exchange rates, George Akerlof, German hyperinflation, Honoré de Balzac, Hyman Minsky, index fund, inflation targeting, information asymmetry, invisible hand, Isaac Newton, joint-stock company, large denomination, law of one price, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, new economy, Nick Leeson, Northern Rock, offshore financial centre, Ponzi scheme, price stability, railway mania, Richard Thaler, riskless arbitrage, Robert Shiller, Robert Shiller, short selling, Silicon Valley, South Sea Bubble, special drawing rights, telemarketer, The Chicago School, the market place, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, very high income, Washington Consensus, Y2K, Yogi Berra, Yom Kippur War

The letter pointed out that if the British pound could not be successfully defended, it would be foolish to continue to borrow foreign currencies to support it.54 Loans of $400 million in addition to the $250 million were not enough, and the British stopped supporting the pound on 21 September. The Bank of France did not show the restraint towards the United States that they had shown to the British, and together with other members of the gold bloc converted $750 million of US dollar deposits into gold. The deflationary pressure exerted by this reduction in US gold holdings, and by the depreciation of the British pound and of the currencies pegged to the pound, weakened the US banking system. The New York Fed did not ask for help or even for forbearance in the conversion of US dollar deposits into gold. The code of the central banker calls for a stiff upper lip, reminiscent of Walter Mitty refusing the blindfold before the firing squad. In 1929, when Harrison asked Norman whether the pounds that the Federal Reserve Bank of New York had bought would be convertible into gold, he received the curt reply: ‘Of course, the sterling is repayable in gold.


The Age of Turbulence: Adventures in a New World (Hardback) - Common by Alan Greenspan

"Robert Solow", addicted to oil, air freight, airline deregulation, Albert Einstein, asset-backed security, bank run, Berlin Wall, Bretton Woods, business cycle, business process, buy and hold, call centre, capital controls, central bank independence, collateralized debt obligation, collective bargaining, conceptual framework, Corn Laws, corporate governance, corporate raider, correlation coefficient, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cuban missile crisis, currency peg, Deng Xiaoping, Dissolution of the Soviet Union, Doha Development Round, double entry bookkeeping, equity premium, everywhere but in the productivity statistics, Fall of the Berlin Wall, fiat currency, financial innovation, financial intermediation, full employment, Gini coefficient, Hernando de Soto, income inequality, income per capita, invisible hand, Joseph Schumpeter, labor-force participation, laissez-faire capitalism, land reform, Long Term Capital Management, Mahatma Gandhi, manufacturing employment, market bubble, means of production, Mikhail Gorbachev, moral hazard, mortgage debt, Myron Scholes, Nelson Mandela, new economy, North Sea oil, oil shock, open economy, Pearl River Delta, pets.com, Potemkin village, price mechanism, price stability, Productivity paradox, profit maximization, purchasing power parity, random walk, reserve currency, Right to Buy, risk tolerance, Ronald Reagan, shareholder value, short selling, Silicon Valley, special economic zone, stocks for the long run, the payments system, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, total factor productivity, trade liberalization, trade route, transaction costs, transcontinental railway, urban renewal, working-age population, Y2K, zero-sum game

I recall looking across the table at Cavallo at another G20 meeting and wondering whether he was aware that the lending backstop to the peso would remain a source of support only if it was not used in excess. 342 More ebooks visit: http://www.ccebook.cn ccebook-orginal english ebooks This file was collected by ccebook.cn form the internet, the author keeps the copyright. LATIN AMERICA AND POPULISM Maintaining that large dollar buffer would likely have enabled the currency peg to hold indefinitely However, the political system of Argentina could not resist using the abundance of seemingly costless dollars in attempts to accommodate constituents' demands. Gradually but inexorably the buffer of dollar-borrowing capacity was drawn down. Dollars often were borrowed to sell for pesos in a futile effort to support the peso-dollar parity. The bottom of the barrel was reached at the end of 2001.


pages: 1,066 words: 273,703

Crashed: How a Decade of Financial Crises Changed the World by Adam Tooze

Affordable Care Act / Obamacare, Apple's 1984 Super Bowl advert, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, Boris Johnson, break the buck, Bretton Woods, BRICs, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, dark matter, deindustrialization, desegregation, Detroit bankruptcy, Dissolution of the Soviet Union, diversification, Doha Development Round, Donald Trump, Edward Glaeser, Edward Snowden, en.wikipedia.org, energy security, eurozone crisis, Fall of the Berlin Wall, family office, financial intermediation, fixed income, Flash crash, forward guidance, friendly fire, full employment, global reserve currency, global supply chain, global value chain, Goldman Sachs: Vampire Squid, Growth in a Time of Debt, housing crisis, Hyman Minsky, illegal immigration, immigration reform, income inequality, interest rate derivative, interest rate swap, Kenneth Rogoff, large denomination, light touch regulation, Long Term Capital Management, margin call, Martin Wolf, McMansion, Mexican peso crisis / tequila crisis, mittelstand, money market fund, moral hazard, mortgage debt, mutually assured destruction, negative equity, new economy, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shale / tar sands, old-boy network, open economy, paradox of thrift, Peter Thiel, Ponzi scheme, predatory finance, price stability, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, reserve currency, risk tolerance, Ronald Reagan, savings glut, secular stagnation, Silicon Valley, South China Sea, sovereign wealth fund, special drawing rights, structural adjustment programs, The Great Moderation, Tim Cook: Apple, too big to fail, trade liberalization, upwardly mobile, Washington Consensus, We are the 99%, white flight, WikiLeaks, women in the workforce, Works Progress Administration, yield curve, éminence grise

The appearance of stability offered by a fixed exchange rate encouraged a large inflow of foreign funds, which helped to stoke up domestic economic activity, creating an unbalanced trade account funded from abroad. Banks that acted as the conduit for foreign funds boomed. This set up the crisis.22 When international investors lost confidence, the result was a devastating sudden stop. Then the central bank’s foreign exchange reserves would drain and it would have no option but to let the currency peg go. Stability would give way to a disastrous devaluation. Those who got their money out first would be saved. Those who had borrowed in foreign currency would face bankruptcy. This was the saga of the 1990s: 1994 in Mexico; 1997 in Malaysia, South Korea, Indonesia and Thailand; 1998 in Russia; 1999 in Brazil. It was containing these crises that earned US Federal Reserve chairman Alan Greenspan, Treasury secretary Robert Rubin, and Larry Summers, Rubin’s number two, the accolade of the “Committee to Save the World.”23 What happened when the American superheroes were not on hand was revealed in 2001.


pages: 950 words: 297,713

Crucible: The Long End of the Great War and the Birth of a New World, 1917-1924 by Charles Emmerson

Albert Einstein, anti-communist, British Empire, continuation of politics by other means, currency peg, Etonian, European colonialism, ghettoisation, Isaac Newton, land reform, Mahatma Gandhi, Monroe Doctrine, new economy, plutocrats, Plutocrats, Solar eclipse in 1919, strikebreaker, trade route

The boss of the Reichsbank boasts that, armed with enough zeroes, paper and ink, the bank will soon be able to issue, almost every day, banknotes of a value equal to the entire current stock in circulation. But despite–or because of–this ever-increasing flood of money, no one ever seems to have enough. Each banknote printed reduces the value of the rest. Local communities try to escape the madness by creating their own currencies pegged to something–anything–which can still be trusted as a store of value. Some become fantastically rich in these months; most become poor. They look for scapegoats. PAMPLONA, SPAIN–PARIS: While André Breton is fishing in Brittany, and Albert and his son are sailing in the Baltic, Hadley Hemingway is five months pregnant and Ernest has a new hobby. It began earlier in the summer, when Hemingway travelled to Spain with a few friends, stayed in a bullfighters’ pension in Madrid, and got hooked on the idea of bull and man, the grandeur and the tragedy of the struggle of life and death represented by the corrida.


pages: 1,242 words: 317,903

The Man Who Knew: The Life and Times of Alan Greenspan by Sebastian Mallaby

"Robert Solow", airline deregulation, airport security, Andrei Shleifer, anti-communist, Asian financial crisis, balance sheet recession, bank run, barriers to entry, Benoit Mandelbrot, Bretton Woods, business cycle, central bank independence, centralized clearinghouse, collateralized debt obligation, conceptual framework, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, energy security, equity premium, fiat currency, financial deregulation, financial innovation, fixed income, Flash crash, forward guidance, full employment, Hyman Minsky, inflation targeting, information asymmetry, interest rate swap, inventory management, invisible hand, Kenneth Rogoff, Kickstarter, Kitchen Debate, laissez-faire capitalism, Long Term Capital Management, low skilled workers, market bubble, market clearing, Martin Wolf, money market fund, moral hazard, mortgage debt, Myron Scholes, new economy, Nixon shock, Northern Rock, paper trading, paradox of thrift, Paul Samuelson, plutocrats, Plutocrats, popular capitalism, price stability, RAND corporation, rent-seeking, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, Saturday Night Live, savings glut, secular stagnation, short selling, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, unorthodox policies, upwardly mobile, WikiLeaks, women in the workforce, Y2K, yield curve, zero-sum game

The first casualty was Thailand, which had pegged its currency to a basket consisting mainly of dollars. As the Thai baht followed the greenback up, Thailand lost competitiveness and its trade deficit swelled alarmingly. To pay for the excess of imports over exports, Thailand resorted to borrowing from foreigners. But this strategy could be sustained for only so long, and pretty soon speculators woke up to the fact that it was a matter of time before the currency peg shattered. The speculators sold baht aggressively, and their prophecy fulfilled itself. On July 1, 1997, the peg duly broke and the currency began a headlong fall, causing the economy to shrink by one sixth and transferring more than $1 billion of Thai savings from the central bank to the speculators.10 Once Thailand fell, the panic spread to its neighbors. In August, Indonesia was forced to let its currency fall by 11 percent, and Malaysia came under attack from the markets.


Reaganland: America's Right Turn 1976-1980 by Rick Perlstein

"Robert Solow", 8-hour work day, affirmative action, airline deregulation, Alistair Cooke, American Legislative Exchange Council, anti-communist, Ayatollah Khomeini, Berlin Wall, Bernie Sanders, Brewster Kahle, business climate, clean water, collective bargaining, colonial rule, COVID-19, Covid-19, creative destruction, crowdsourcing, cuban missile crisis, currency peg, death of newspapers, defense in depth, Deng Xiaoping, desegregation, Donald Trump, energy security, equal pay for equal work, facts on the ground, feminist movement, financial deregulation, full employment, global village, Golden Gate Park, illegal immigration, In Cold Blood by Truman Capote, index card, indoor plumbing, Internet Archive, invisible hand, Julian Assange, Kitchen Debate, kremlinology, land reform, Marshall McLuhan, mass immigration, MITM: man-in-the-middle, Monroe Doctrine, moral panic, mutually assured destruction, New Journalism, oil shock, open borders, Potemkin village, price stability, Ralph Nader, RAND corporation, rent control, road to serfdom, Robert Bork, rolodex, Ronald Reagan, Rosa Parks, Saturday Night Live, Silicon Valley, traveling salesman, unemployed young men, union organizing, unpaid internship, Unsafe at Any Speed, Upton Sinclair, upwardly mobile, urban decay, urban planning, urban renewal, wages for housework, walking around money, War on Poverty, white flight, WikiLeaks, Winter of Discontent, yellow journalism, Yom Kippur War, zero-sum game

Wanniski left those niceties to the hacks he dismissed as “academic theoreticians”—just about every school of which he managed to insult for missing “what some would call a ‘Copernican revolution’ in economic policy.” What was it these “economic doctors of Cambridge and Chicago” failed to understand? That stagflation could be easily fixed. Just combine tight money (ideally, via a “common simulated currency” pegged to the value of gold) and “fiscal ease”; in other words, radical tax cuts. Though Wanniski only called them “implied” tax cuts: for once the economy was “optimized by putting the unemployed resources to work,” they weren’t like tax cuts at all, because everyone would become richer. And unlike every other existing theory on fixing inflation, Mundell and Laffer’s “would not involve a period of suffering by the world’s population in order to achieve improvement.”