1. Unresolved Issues in Global Financial Imbalances
G. (Tassos) Malliaris
Mary Malliaris
LOYOLA UNIVERSITY CHICAGO
11TH Biennial International
Conference of the Athenian Policy Forum
Chalkidiki, Greece, July 1-3, 2012

2. Focus of the Paper
Trace Rapidly the Evolution of the Global Monetary System
Emphasize the Persistence of Global Financial Imbalances
Review the Global Financial Crisis
Explain How Financial Imbalances Contributed to the Global Financial Crisis
List the Unresolved Issues

3. Evolution of Global Monetary System
Bretton Woods I
Bretton Woods II
Where Are We Now? A Need for Bretton Woods III ? What Needs to be Resolved?

4. Bretton Woods I Why Was Bretton Woods Developed?
Keynes’ Incompatibility Thesis: Cannot achieve Simultaneously and Automatically Without Coordination Free Trade, Flexible Exchange Rates, Free Capital Mobility and Global Full Employment

5. The Gold Standard Period

6. “It is characteristic of a freely convertible international standard that it throws the
main burden of adjustment on the country which is the debtor position on the
international balance of payments.”
Keynes, Post War Currency Policy, 1941, pp

7. “An essential improvement in designing any international payments system requires transferring the onus of adjustment from the debtor to the creditor position. This transfer would substitute an expansionist, in place of a
contractionist, pressure on world trade “
Keynes, Post War Currency Policy, 1941, pp

8. 1944 Bretton Woods Conference
U.S. Major Creditor
Europe and Japan Are Devastated
Need to Grow Global Economy
Presence of Economic Imbalances
Keynes’ Estimate of $10 billion needed
Dexter White proposes $3 billion
Marshall Plan Over 4 Years: $13 billion

10. Bretton Woods 1947-1973 Stabilized Global Economy Promoted Growth
Created New Global Imbalances
Core or Center (U.S.) vs. the Periphery (European and Asian Countries)

11. Collapse of Bretton Woods I
US Unable to Cope with Global Imbalances
French Conversion of Imbalances into Gold
U.S. Inflationary Monetary and Fiscal Policies
August 15, 1971 U.S. Abandons Gold Convertibility

13. The Modern History of Gold
*Non-Inflation adjusted prices
Current Price: $1622/oz

14. The Global Monetary System After 1973
More Flexible Exchange Rates
Exchange Rate Volatility and Uncertainty
Accelerated Global Capital Mobility
Independent Monetary Policy
Several Currency Crises, leading to Banking Crises and often to Real GDP Declines

15. Major Facts of Bretton Woods II
Flexible Exchange Rates Do Not Resolve Global Imbalances
Several Currency Crises, Leading to Banking Crises and often to Real GDP Declines
Such Crises Expected to Occur in Emerging Nations
The Unanticipated Global Financial Crisis in U.S. and EU

16. The Dollar-coaster

17. Crisis Dates By Country: 1870-2008
From: Jorda, Schularick, and Taylor 2011

18. Major Developments of BW II
1989: Japanese Stock Market Crash and Japan’s Lost Decade
Formation of the EU and EMU: Creation of the Euro
Collapse of Former Soviet Union and the Emergence of China
Internet Bubble and Housing Bubble

19. Collapse of U.S. Trade Balances

20. Global Imbalances
Source: IMF World Economic Outlook 2010

21. Current Account Imbalances
Current account balance as a percentage of GDP, US, China, OECD and BRICs
Source: Economist Intelligence Unit, OECD, BEA-NIPA, State Administration of Foreign Exchange (China)

22. Review of Bretton Woods II
2003: Dooley, Folkerts-Laundau and Garber claim that Bretton Woods Is Revived
Core: U.S. Dollar is Used as a Global Currency; Balance of Payments Deficits.
Periphery: Export-led Growth Driven by an Undervalued Exchange Rate; Massive Accumulation of Reserves
Can Such a System Be Maintained in the Long-run?

23. Inflation
Source: Federal Reserve

24. The Global Financial Crisis of 2007-09
Started in September 2007 as a Subprime Mortgage Crisis with a $300 billion Potential Loss
Developed into a Major Financial Crisis
The Role of Easy Domestic Monetary Policies
The Bernanke/Taylor Debate of Global Savings Glut: Role of Global Imbalances
Aggressive Export Oriented Growth by China, Japan and Germany

25. Global Dimension of the Crisis

27. What Theories Guide Us?
Standard Neoclassical: Stable Markets Return to Equilibrium
Minsky-Kindleberger: Booms and Busts

28. Global Imbalances

29. Foreign Holdings of U.S. Debt
Country
Amount (billions)
China
1145.5
Japan
1066.1
Oil Exporters
252.4
Caribbean Banking Centers
247.0
Brazil
246.7
Taiwan
188.3
United Kingdom
154.2
Switzerland
151.1
Russia
146.8
Belgium
141.0
Source: U.S. Treasury
Data as of end of April 2012

30. U.S. Wealth

31. Housing price appreciation vs
Housing price appreciation vs. current account accumulation, 1996 – peak of housing market
Source: Economist Intelligence Unit, OECD, IMF, State Administration of Foreign Exchange (China), De Nederlandsche Bank, BEA. The area of each circle is proportional to 2008 GDP. 

32. Taylor Rule

33. Asset Bubbles

34. The Crisis of the Euro
While the U.S. is Assessing the Impact of Global Imbalances in Its Financial Crisis
The EMU, Viewed as a Bretton Woods System of a Smaller Scale, Experiences a Global Imbalances Crisis of its Own

35. Current Policies and Regulations
Primarily National: US, EU, England, Japan, China, others
The Emergence of the G20 as the Global Governance Group
The Designation of the Global Economy Meeting as the Bi-Monthly Central Banks Monitoring Group
The Reform and Expansion of the Financial Stability Board

36. Unresolved Issues Global Imbalances Persist
Asset Bubbles in Equity, Bonds, Housing Burst Causing Bank Failures
Sovereign Debt Crisis
Austerity vs. Growth with 4% inflation

37. More Unresolved Issues
Bretton Woods III: U.S., EU, An Asian Monetary Union?
Continued Depreciation of the U.S. Dollar?
Domestic Consumption Led Growth vs. Export- Oriented Growth?
Central Banks as Lenders of Last Resort
Importance of Hegemony: the Recycling of Accumulated Reserves

38. Total Reserves

39. Source: Federal Reserve, World Bank

40. Country Share of World GDP
Percentage shares of selected countries and areas in world GDP,  (at2005 exchange rates)
Sources: Angeloni et al (2011)