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Entries tagged "globalization"
August 1, 2012 · By Hilary Matfess
The increasingly sordid LIBOR scandal has pulled back the curtain shielding the international financial system, revealing decaying regulatory bodies and rampant corruption. People around the world are indignant that a key financial benchmark could be distorted with such ease and that this tampering could go unnoticed for so long. This should be a wakeup call around the globe to take stock of other financial tools that are also vulnerable to manipulation and under-regulated.
The means by which exchange rates are determined is one such example. Often, exchange rates changes are discussed as if they are part of a quasi-mystical realm that is completely disconnected from the real world. But currencies don't rise and fall in accordance with some divine will. They're set by investors and speculators in financial capitals around the world. Basic international monetary economic text books explain that the exchange rate between two countries is determined by the interest rates in each country and the expected future exchange rate between the countries. The formula is: E= Expected future exchange rate [(1+interest rate of the foreign country)/(1+interest rate of the home country)].
The term "expected future exchange rate" is nothing more than a way of making what investors in London, New York, and Tokyo think might happen seem legitimate. When developing countries announce any major policy shifts, new expenditures, or forecasts for their export-driven crops, investors around the globe take note. They change their expectations about the future exchange rate, which in turn shapes the current exchange rate.
The recent debacle demonstrates that financial actors neither impartial nor ethical. The LIBOR scandal should raise concerns about the validity of any financial indicator or benchmark that hinges on the whims of financiers.
The volatility of exchange rates wouldn't be nearly as damning were developing nations able to borrow in their own currency. Investors and financial institutions that loan money to developing countries prefer to be repaid in stable currencies such as U.S. dollars, yen, or euros. Investors contend that the currencies of developing nations are risky because of the likelihood that they will depreciate.
This laughably ignores the role that the investors themselves play in that depreciation. Though countries have the option of pegging their currency to another country’s to maintain a consistent exchange rate, such as Argentina did in the 1990s, international investors can speculate against the peg and break it. This can contribute to a currency's sharp devaluation, such as the one Argentina suffered in 2001.
Many poor countries owing dollar-denominated debts that must be serviced with revenue raised in part in their own depreciating currencies are thus forced to make payments on increasingly expensive, and often untenable, loans.
This constant threat of devaluation, in addition to mounting debt, has shackled developing countries for decades. Impoverished, debt-ridden countries have modeled their policies in accordance with the whims of financial institutions to no avail. The events surrounding the LIBOR debacle shouldn't be considered an anomaly within the financial world. It's simply a new, and rather reliable, red flag signaling the urgent need to repair our corrupt and broken financial system.
<p >Bankers, investors, and financiers wield too much leverage over key financial indicators and benchmarks and regulatory systems are too anemic. The LIBOR scandal isn't an anomaly in an otherwise efficient system. It's a natural outgrowth of an untethered and corrupt sector. Deep reforms that protect against the financial industry's abuses are long overdue.
Hilary Matfess is an Institute for Policy Studies intern and a Johns Hopkins University student.
November 12, 2010 · By Sarah Anderson
There was a big brouhaha at the G-20 summit this week over what they’re dryly calling “global trade imbalances.”
In the simplest terms, what this boils down to is this: Americans buy too much stuff from China. Chinese stuff is artificially cheap because of currency manipulation, but also because of labor repression that keeps wages down. And because wages are so low, Chinese people don’t buy very much stuff, so the money from exports piles up.
China is expected to have a trade surplus of $270 billion this year, while the United States is expected to have a trade deficit of $466 billion. Other countries have trade imbalances too, but these are the biggies.
The trade deficit hurts the U.S. economy because money spent on imports is money not spent on U.S. products that support jobs in this country. Also, to fund this deficit, the United States has to borrow money from abroad. And if the deficit keeps growing, the day may come when foreign investors are no longer willing to lend.
Last month, Treasury Secretary Timothy Geithner tried to get the other G-20 governments to agree to limit their trade imbalances to no more than 4 percent of GDP. How did he pick 4 percent as the target? Well, it’s probably no mere coincidence that China’s surplus is expected to exceed that mark this year (4.7 percent), while the U.S. deficit is expected to fall below it (3.2 percent). Geithner was basically told to take a hike.
So what’s a U.S. policymaker facing a nearly 10 percent unemployment rate to do? One option would be to reinvigorate U.S. manufacturing through targeted public investment. You could pay for it by increasing taxes on the ultra-rich or by taxing financial speculation. Sadly, the outcome of the mid-term election likely put the kibosh on that kind of stimulus spending, at least for the next two years.
Instead, the Fed, which doesn’t have to worry about Tea Party opposition, did what’s called “quantitative easing” — another unnecessarily abstract term that basically means they’re printing money, to the tune of $600 billion. The Fed's idea was that all this cash will lubricate the wheels of the American economy, get credit flowing again, and create jobs.
This is largely based on faith. As Brazilian Finance Minister Guido Mantega put it, “It doesn’t help things to be throwing dollars from a helicopter.” Brazil and other fast-growing emerging markets are worried that the Fed-created cash, instead of financing U.S. job creation, will slosh into their economies, where interest rates are higher. This would drive up the value of their currencies, making their exports less competitive. Wolfgang Schaeuble, the finance minister of Germany, which is a trade surplus country like China, declared the Fed’s action “clueless.”
Such tough jabs are unusual among finance ministers. What seemed to really get their blood boiling was the fact that the Fed announced the action without giving the other governments as much as a heads up. This week’s G-20 summit in Seoul, Korea concluded without any meaningful agreement, other than a timid pledge to “refrain from competitive devaluation of currencies.” So much for the G-20 fulfilling its self-declared status as the “premier forum for international economic cooperation.”
Meanwhile, to deal with the surge of short-term “hot” money that could drive up the value of their currencies, Brazil, Taiwan, and several other countries are imposing various forms of controls on capital inflows. However, this is not really an option for the 52 countries that have signed U.S. trade or investment treaties which severely restrict the use of this policy tool. If they violate these restrictions, they run the risk of facing expensive lawsuits from affected foreign investors.
Hopefully the Obama administration will now recognize that bans on capital controls are outmoded and work to revise them. As Dani Rodrik, of Harvard University puts it, “capital controls are now orthodox.”
While giving governments the authority to use policy tools at the national level to control capital flows is critical, this patchwork approach is not ideal. We need a new international monetary system that can help prevent the kind of “currency wars” we’re seeing today. That’s something French President Nicolas Sarkozy plans to put at the center of the G-20 agenda now that he has taken over the presidency of that body for the next year. Let’s hope he can get the other leaders to stop squabbling and take the challenge seriously.