currency peg

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pages: 381 words: 101,559

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

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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, 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, labour mobility, 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: 576 words: 105,655

Austerity: The History of a Dangerous Idea by Mark Blyth

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accounting loophole / creative accounting, balance sheet recession, bank run, banking crisis, Black Swan, Bretton Woods, 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: 515 words: 142,354

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

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bank run, banking crisis, barriers to entry, battle of ideas, Berlin Wall, Bretton Woods, 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, labour market flexibility, labour mobility, 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 Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, Silicon Valley, sovereign wealth fund, the payments system, 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: 275 words: 82,640

Money Mischief: Episodes in Monetary History by Milton Friedman

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Bretton Woods, British Empire, 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: 376 words: 109,092

Paper Promises by Philip Coggan

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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, 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, 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: 584 words: 187,436

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

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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, 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, 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, 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: 471 words: 124,585

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

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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, 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, 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, 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, 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: 422 words: 113,830

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

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algorithmic trading, asset-backed security, bank run, banking crisis, Bernie Madoff, Black Swan, Bretton Woods, BRICs, British Empire, 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: 372 words: 107,587

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

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3D printing, agricultural Revolution, back-to-the-land, banking crisis, banks create money, Bretton Woods, 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, post-oil, 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, 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: 378 words: 110,518

Postcapitalism: A Guide to Our Future by Paul Mason

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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 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, knowledge economy, knowledge worker, late capitalism, low skilled workers, market clearing, means of production, Metcalfe's law, 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, 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: 561 words: 87,892

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

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Admiral Zheng, asset-backed security, barriers to entry, Berlin Wall, Bernie Madoff, Bretton Woods, BRICs, British Empire, 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, 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: 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, 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, 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, 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).


pages: 823 words: 206,070

The Making of Global Capitalism by Leo Panitch, Sam Gindin

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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, 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, 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: 497 words: 150,205

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

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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, Bretton Woods, BRICs, British Empire, 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, 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, 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: 466 words: 127,728

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

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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, 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, labour mobility, 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, 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: 318 words: 77,223

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

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activist fund / activist shareholder / activist investor, Airbnb, balance sheet recession, bank run, barriers to entry, break the buck, Bretton Woods, British Empire, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, collapse of Lehman Brothers, corporate governance, currency peg, 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

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Asian financial crisis, bank run, banking crisis, Bretton Woods, 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: 310 words: 90,817

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

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bank run, banks create money, British Empire, capital controls, Carmen Reinhart, central bank independence, currency peg, fixed income, Fractional reserve banking, German hyperinflation, global reserve currency, inflation targeting, Kenneth Rogoff, 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: 254 words: 14,795

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

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

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 185 P1: OTA/XYZ P2: ABC c18 JWBT075/Midler February 20, 2009 186 8:40 Printer Name: Courier Westford, Westford, MA Poorly Made in China 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.


pages: 397 words: 112,034

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

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affirmative action, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Berlin Wall, Black Swan, Bretton Woods, 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, labour market flexibility, labour mobility, 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, 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: 276 words: 82,603

Birth of the Euro by Otmar Issing

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accounting loophole / creative accounting, Bretton Woods, business climate, 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: 357 words: 99,684

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

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back-to-the-land, balance sheet recession, bank run, banking crisis, Berlin Wall, 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, 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.

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

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banking crisis, banks create money, barriers to entry, 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: 309 words: 95,495

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

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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, 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, 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, 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.


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

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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, 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, 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: 488 words: 144,145

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

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Albert Einstein, bank run, banking crisis, Black Swan, Bretton Woods, British Empire, 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: 349 words: 134,041

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

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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 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: 538 words: 147,612

All the Money in the World by Peter W. Bernstein

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Albert Einstein, anti-communist, Berlin Wall, Bill Gates: Altair 8800, call centre, 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

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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, 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, 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

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Asian financial crisis, asset allocation, Berlin Wall, Bretton Woods, Brownian motion, 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, 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: 504 words: 139,137

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

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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, 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, 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: 566 words: 163,322

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

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3D printing, Asian financial crisis, backtesting, bank run, banking crisis, Berlin Wall, Bernie Sanders, BRICs, business climate, 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, knowledge economy, labor-force participation, 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.


pages: 537 words: 144,318

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

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Albert Einstein, Asian financial crisis, asset allocation, asset-backed security, backtesting, banking crisis, Bernie Madoff, Black Swan, Bretton Woods, BRICs, British Empire, business process, 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, 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, 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

(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: 264 words: 115,489

Take the money and run: sovereign wealth funds and the demise of American prosperity by Eric Curt Anderson

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asset allocation, banking crisis, Bretton Woods, business continuity plan, business intelligence, business process, 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.

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

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air freight, airline deregulation, Albert Einstein, asset-backed security, bank run, Berlin Wall, Bretton Woods, business process, 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, labour market flexibility, 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, 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, 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: 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

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activist fund / activist shareholder / activist investor, Albert Einstein, Asian financial crisis, banks create money, Bretton Woods, British Empire, capital controls, 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, 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: 1,242 words: 317,903

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

airline deregulation, airport security, Andrei Shleifer, anti-communist, Asian financial crisis, balance sheet recession, bank run, barriers to entry, Benoit Mandelbrot, Bretton Woods, 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, 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.