Global Financial Crisis and Financial Inequality

1. Global Financial Crisis and Financial Inequality: a Perspective from Current International Monetary System Gang Gong, Yunnan University of Economics and Finance,

3. Part I Stylist Facts of Current International Monetary System Part II Foreign Currency Strategy Part III Financial Crisis: the Outcome of a Weaker Pretending to be a Strong?

4. Part I Stylist Facts of Current International Monetary System

5. Breton Woods System (1944 - 1972) • U.S. dollar obtained its position as a world currency; • But the dollar's behavior had been the regulated: the United States promised that the dollar was convertible to the gold at a fixed rate; • It is a system of fixed exchange regime pegged to the gold; • Opening capital market is also not encouraged, and thus to a certain extent, the dollar floating to the world is limited; • The financial system in the world is relatively stable. It was a golden age to the world economy. • In 1972, the United States broken its promise and thus the Breton Woods system collapsed.

6. Jamaica System (1974 - Present) • The Jamaica system made the world into the era of paper money; • It was a system without restrictions: countries are supposed to be entitled the rights to choose their own exchange regimes and decide whether opening their capital markets.

7. Under this free system, countries began their competition by adopting different currency strategies that naturally lead to the following stylized facts with regard to international monetary system • Yet, U.S. still holds the advantages given by Breton Woods system, but without the responsibility it token in the Breton Woods system • Dollar is still a world currency; • U. S. still hold a veto power in IMF.

8. Fact 1: The Distribution of Exchange Regime • Developed countries generally choose floating exchange regime without government intervention. • Developing countries usually prefer fixed exchange regime or manageable floating exchange regime, both of which , indicate the intervention from government.

9. 表1-7 各国汇率制度之分布（2011年4月30日） 资料来源：International Monetary Fund（2011）

10. Fact 2: Currency Devaluation • Since developed countries generally prefer floating exchange regime without government intervention, their exchange rates are often close to the exchange rate computed by purchase power parity (PPP), or their currency is not devaluated. • The currencies of developing countries are often devaluated due to the intervention from government, mainly in terms of using domestic currency to buy foreign currency (dollars).

12. Fact 3: Foreign Exchange Reserve • The choice of floating exchange regime by developed countries also indicates that their central banks will not try to accumulate foreign exchange reserves. • For those developing countries, the choice of government intervention and currency devaluation also indicates that they attempt to accumulate foreign exchange reserve.

13. Foreign exchange reserve over GDP, 2010, major countries (or area)

14. Note • Hong Kong and Singapore are exemptions, due to their special currency regime. • Although some developed country, such as Japan, still hold a large amount of foreign exchange reserve, it is due to their historical accumulation.

15. The increase in foreign exchange reserve over GDP, 1990-2010, major countries (or area)

16. Fact 4: Capital Market Opening • The capital markets in developed countries are often more opened. • For developing countries, though there exists a large differential in the degree of opening capital market, on average, their capital markets are often less opened.

17. The degree of openness in capital market versus per capital GDP, 2007

18. Fact 5: Currency Internationalization • For the currency position, US dollar is dominant and can be regarded as the world currency; • The major currencies in developed countries (e.g., Euro, Japanese Yuan, British Pound, among others) are also largely internationalized; • All currencies in developing are not international currency.

19. Question: How can we explain these asymmetry? • It is due to the difference in the currency strategy adopted by different countries.

20. Part II Foreign Currency Strategy

21. Definition: Foreign Currency Strategy • The foreign currency strategy includes a set of systems and policies that are related to foreign currencies. • It may include： • The mode of foreign exchange • Exchange regime（e.g. , fixed, floating and manageable floating exchange regime) • Whether devaluating domestic currency? • Whether accumulating foreign exchange? • The management on capital account

22. The Types of Foreign Currency Strategies • Hard Currency Strategy • Soft Currency Strategy

23. Hard Currency Strategy • The objective: exporting or internationalizing domestic currency and its denominated assets as much as possible; • The features: prefer and want to competing, adventuring, door opened, appear to be mighty, • The system arrangement • mode of exchange regime • Floating exchange regime • No devaluation of domestic currency • Need not accumulation foreign exchange, but to export domestic currency and its denominated assets. • capital market opened

24. Why Exporting Domestic Currency? • It symbolizes the strength and popularity of domestic currency in international market, and thus the high degree of internationalization; • The high degree of internationalization indicates that domestic currency can easily be used for importing goods and service, thus taking foreign resources to serve domestic welfare and development; • To form a situation of “benefit intersection”, and thus bind other countries' initiative to maintain the value of domestic currency; • Dare to start a currency war when necessary!

25. Trading Deficit in a Supply-Determined Economy • Due to the exhaustion of surplus labor, developed economy is often a supply-determined economy in normal situation when talking about economic growth. • In a supply-determined economy, one can easily prove that trading surplus in long run can lead to higher per capita GDP other things equal. • Yet trade deficit in long run is generally impossible due to the requirement of international balance of payment unless one can always use domestic currency to pay imports. • Currently, only US and UK are running trading deficit in long run.

26. Currently, only US and UK are running trading deficit in long run.

27. Who Can Implement the Hard Currency Strategy • Only the strong can implement the hard currency strategy • Those who implement well: United States, European Union, Japan, United Kingdom, and other developed countries . • The condition to be a strong • National power (GDP, advance in technology) • Institution(especially financial system). • The weak are always in danger in pretending the strong • Lessons: the countries from former Soviet Union, South America and so on.

28. Soft Currency Strategy • The objective: to protect itself in a competitive international environment • The features: no debt, no adventure, no door opened, accumulating hard currency as much as possible, even allowing some “sacrifice”. • System arrangement • The control of capital account • The control of exchange rate (fixed or manageable floating exchange regime for the purpose to devaluating domestic currency) • No debt, but accumulating hard currency or its denominated assets.

29. The Benefits of Soft Currency Strategy • Do protect the nation’s economic security. • As the capital market is not open, the countries can often stay out from the world financial crisis. • A certain degree of currency devaluation can effectively promote exports and attract foreign direct investment. • To those who possess a large amount of surplus labor in developing countries, this will speed up the digestion of its surplus labor and thus make the economic growth fast.

30. The Costs of Soft Currency Strategy • Giving up the benefits from a hard currency strategy • E.g., obtaining the world resources at low cost and launching a currency war when necessary, etc. • Making the sacrifice from maintaining a soft currency ​​strategy, • E.g., devaluating domestic currency, accumulating hard currency reserve; • Being the victim of currency wars launched by the countries implementing hard currency strategy. • Theoretical weaknesses • The western mainsteam economics relying on "freedom“ and "competition" as its core concept is essentially the theories speaking to the strong. • The lack of support from international rule (e.g. IMF rule)

31. Part III Financial Crisis: the Outcome of a Weaker Pretending to be a Strong?

32. Why Do Some Developing Countries Adopt Hard Currency Strategy? • Yet, in reality , still many developing choose the regime under hard currency strategy, for instance, opening capital market and floating exchange regime • Why? • We believe it is the outcome of dual pressures • The pressure from economic theory. Mainstream economics in terms of free competition is the theory for the strong. • The pressure from IMF among others

33. The push of floating exchange regime by IMF • "Currency manipulation" clause by IMF in 1977; • Obviously, this provision is mainly against those developing countries who implement the fixed (or managed floating) exchange regime • The "provision" has been used by the United States from times to times to attack and China’s exchange regime, whenever crisis occur in its domestic economy.

34. The Push of Opening Capital Market by IMF • When developing countries are in need of assistance, the IMF put forward to lending countries the additional conditions based on the "Washington consensus”, which often include opening capital market. • Precisely because of this, many developing countries, like Haiti, Zambia, the degree of capital market opening is very surprising.

35. The degree of openness in capital market versus per capital GDP, 2007

36. Question • Why does the United States and its controlled IMF push the developing countries to open the capital market and float the exchange rate? • To this end, it is necessary to discuss how the United States deal with the financial crisis by launching a currency war----QE.

37. Quantitative Easing Monetary Policy • In November 2008, the Federal Reserve launched the first round of "quantitative easing" policy (QE1). The Fed has launched a total of five round of quantitative easing monetary policy. • "Quantitative easing" is usually regarded to be "non conventional monetary policy", because of the purchase of the assets included some unconventional problematical assets. • When the United States launched its quantitative easing monetary policy, Japan, the UK and the euro zone countries are also competing to follow up.

38. “Quantitative Easing” is a Currency War • QE was supposed to inject more liquidity to the domestic financial market; • But it is really a currency war, and may have nothing to do with increasing domestic liquidity! • "The currency war was initiated by a country aimed at devaluating the domestic currency” (Richards, 2011) • To make the dollar devaluated, you need a large amount of U.S. dollars to be exported to the world, that is, dollar floating!

39. Dollar M0 and M1 since

40. The Purpose of Currency War----Deal with Crisis • In financial crisis, the interest rate in U.S. has been lower to its minimum, or U.S. economy has been caught in a liquidity trap. • When the economy is in a liquidity trap, only the expansionary fiscal policy and export growth that can recue the economy. • Because the United States itself has repeatedly faced the “fiscal cliff”, there is little space for its expansionary fiscal policy. • Therefore, by launching a currency war, making the dollar devaluation, and thus promoting exports is the only choice to deal with the crisis.

41. The Transmission Mechanism of Currency War

42. How Does Currency War Attack the Developing Countries? • On the surface , the purpose of the currency war is to devaluate domestic currency in order to promote exports, thereby resolving the domestic crisis. • However, the huge amount of currency flown out to overseas consolidate its international currency status on the one hand, and thus secure its kidnapping; • On the other hand, it disrupted the financial order of other countries, interfere with the macroeconomic management in other countries, e.g. causing the bubble of the assets; • More importantly, when QE stops and interest rate rises, the money will flow out of the developing countries and thus, the bubble is broken and currency crisis in developing countries will occur.

43. The Transmission Mechanism of Currency Crisis Due to Currency War

44. Note that after such a round of flowing-in and flown-out, the dollar flowing into a developing country are often much less than the dollar flown out of the country due to the bubble it creates when flowing in. • That is why "the dollar is our currency, but your problem."

45. The Capital Market Opening • For the effectiveness of transmission mechanism with regard to the currency crisis in less developed economy, there is a basic requirement on institutional assumption, namely, opening the capital market. • This type of currency crisis has occurred for many times. • If there is no capital market opening in less developed and emerging economies, the effectiveness of QE will be greatly reduced.

46. Solution: Need the Reform of International Monetary System • Back to the Golden system? • No! No growth • Euro Currency mode? • No! No independent monetary policy • But do need a world currency that should not be a sovereign currency. • The answer might be a dual monetary system.

48. Thank you!