IT Revolution: A “New Economy”? IT Revolution: A Critical Juncture?

1. IT Revolution: A “New Economy”?IT Revolution: A Critical Juncture? Superstar economy Heightened income inequality Global elite…the 1 % …the 0.1 % Heightened spatial inequality Networks economies/agglomeration economies Conquest of geography? Ubiquitous progress Financial innovations Fragility and crisis A new international monetary architecture?

2. International Monetary Regimes • Classical gold standard $22/oz.  $4.86/£  4.2 M/$  20.4 M/£ • The Great War (WWI)  Suspension • Interwar instability • Hyperinflation • Restoration: Gold – Exchange Standard • Depression  Golden Fetters • Reflation – Recovery • WWII Aftermath: Bretton Woods System • Adjustable pegs to $ • Fundamental disequilibrium • IMF Support – IMF Conditionality

3. Bretton Woods System: Stability and Its Discontents • The Golden Age/The Age of Keynes: 1946 – 1973(?) • Dollar Dominance • Triffin Dilemma: Buildup of $ reserves  threat to credibility • Stop $ outflow  squeeze world trade • Continue $ investments  “bank run” Bretton Woods System Self – Destructs • Vietnam War  $ Glut • de Gaulle theatrics • Nixon Economic Plan (NEP) ~ an end to Bretton Woods • Close gold window • 10% import surtax • Wage – Price Controls

4. Floating and Its Discontents • The theory: no intervention no need for reserves • The practice: intervention  $ reserves  $ privilege • The $: vehicle currency for trade • The $: thick financial markets  Liquid $ assets • Stabilize rates against $  Stabilize cross-rates • Currency misalignments  Currency crises • Latin America’s “Lost Decade” • Tequila/East Asia • Global demand for $s  Capital inflows to US • US International Debt  Threat of “Bank Run” • The US Housing Bubble  (Developed) World in a Slump Dysfunctional US Finance/Dysfunctional US Politics  A New International Monetary Architecture???

5. The Euro: An Alternative? Why a €? • Euro economics • Transactions costs • EU Common Agricultural Policy • CAP requires fixed rates across EU currencies Fluctuations  Arbitrage opportunities • Fixed rates (snake in tunnel/worm in snake)  common currency • Import German Discipline • Seats @ BUBA’s Table • Euro politics • Integration  Peace • Tie Germany to West Europe: The German-French Condominium

6. Springtime of the Euro • German wage discipline  German competitiveness  Current account surpluses • Capital inflows to peripheral countries  Financial bubbles/Housing bubbles/Fiscal bubbles • Iceland • Cyprus • Ireland • Spain • UK • Greece • Italy • Portugal

7. The $ Prevails Measures of dominance • 75% of non-US trade invoiced in $s • 85% of foreign exchange transactions in $s • 45% of international bonds in $s • 61% of reported reserves in $s (and Bank of China doesn’t report) • Oil and other commodities priced in $s Reasons for dominance • World’s largest economy/largest financial markets • Incumbency • Quote prices in same currency as competitors use • Hedge with $ derivative contracts • Sell international bonds in thickest market • Shadow the currency others shadow  stable cross-rates • Hold $ reserves for intervention…Hold liquid US Treasuries • Peg to low ‘flation country • English: the world’s language • US Business Schools  Economics/Finance Texts

8. Credible Alternatives to $??? • UK, CH, CND too small/too little debt to be held for reserves • Japan unwilling: overvalued currency not welcome • Euro: has the size, debt securities, volume of trade, etc. • BUT • Fiscal incoherence • Policy incoherence • No government  No bonds  No guarantees • Emerging Markets…BRICS??? • Strength to lead? • Convertible currency? Thick market in government bonds? • Credibility to lead? • Regulatory framework? Rule of law? • Willingness to lead? • Bear the “burden” of an overvalued currency?