1. Global Monetary Instability and the Role of the Financial Crisis
G. (Tassos) Malliaris
Mary Malliaris
LOYOLA UNIVERSITY CHICAGO
The Korea Institute of Finance and
The Athenian Policy Forum Conference
Seoul, Korea
June 16-18, 2013

2. Focus of the Paper State Keynes’ Incompatibility Hypothesis
Emphasize the Persistence of Global Financial Instabilities
Explain How Global Financial Instabilities Have Contributed to the Global Financial Crisis
Examine Policy Choices

3. Keynes’ Incompatibility Thesis
The Global Economy Cannot Achieve Simultaneously and Automatically Free Trade, Flexible Exchange Rates, Free Capital Mobility, Financial Stability and Global Full Employment.

4. Problem Restated for 2013
What is needed for the U.S., the Eurozone, China, Japan, the other Asian countries, Emerging Economies and the Rest of the World to avoid …
Currency Wars? Financial Instabilities and Crises?
Answer: Global Coordination vs. Domestic Economic Policies
Lessons from Economic History

5. The Gold Standard Period

6. Global Instabilities Now

7. Global Imbalances
Source: IMF World Economic Outlook 2010

8. “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

9. “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

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

11. 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

13. 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)

14. Collapse of Bretton Woods I
U.S. 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
Global Imbalances Lead to Global Instability

16. The Modern History of Gold
Current Price: $ /oz ( )

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

18. 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.

19. Collapse of U.S. Trade Balances

20. The Dollar-coaster

22. Appreciation of Chinese Yuan

23. 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

24. What Theories Guide Us?
Standard Neoclassical: Stable Markets Return to Equilibrium
Minsky-Kindleberger: Booms and Busts
Conflicting: Market Adjustment vs. Policy

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

26. Asset Bubbles
Source: Fred

27. 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. 

28. Current Policies and Regulations
Primarily National: U.S., EU, England, Japan, China, others
Quantitative Easing Strategies
The Emergence of the G20 as the Global Governance Group
The Reform and Expansion of the Financial Stability Board

29. Current Difficulties Global Imbalances Persist
Asset Bubbles in Equity and Bonds
Sovereign Debt Crisis
Currency Wars
Austerity vs. Growth

30. Future Possible Scenarios
Domestic Consumption Led Growth vs. Export- Oriented Growth? Central Banks as Lenders of Last Resort.
Keynes and Kindleberger: Importance of Hegemony: the Recycling of Accumulated Reserves; Bold and Unlikely.
An Asian Monetary Union? China, Japan, Others
Continued Depreciation of the U.S. Dollar?