global finance the political economy of states, firms, and markets · 2019-11-10 · currency...
TRANSCRIPT
Global Finance The Political Economy of
States, Firms, and Markets
Today’s Agenda
• Brief Review
• Breakdown of Bretton
Woods System
• Debt and Financial Crises
Breakdown of Bretton Woods
System
U.S. Fiscal and Trade Deficits• In the United States,
spending on Vietnam, along
side new domestic social
programs, increased under
President Johnson,
contributing to rising fiscal deficits and growing inflation.
• U.S. trade deficits also grew
as consumers bought more
goods from rebounding
foreign economies.
The End of Bretton Woods4.9 U.S. Exports and Imports, 1960-1972
Billions of dollars
The End of Bretton Woods4.11 U.S. Fiscal Deficits, 1965-1972
Billions of dollars
Nixon and the End of the Gold Standard • On August 15th 1971,
President Nixon declared that the United States would bring an end to the convertibility of the dollar to gold, effectively ending of the gold standard used for Bretton Woods-era.
Financialization & the Globalization of Finance
• The end of the Bretton
Woods era contributed to
the growth of financial markets, which was
accelerated by the financial
deregulation of the 1970s
and 1980s.
• Deregulation of banking relaxed Depression-era
price controls over credit
and savings, allowing banks
to operate in a wider array
of investment areas around
the world.
Eliminating Capital Controls
From the 1970s to the 1990s,
governments lifted controls on
capital, for example:
•1981 U.S. removes
restrictions on international
banking
•1984 ¥/$ agreement
liberalizes Japanese
investment
•1986 London Stock Exchange
accepts foreign securities
deals
• Rise of institutional capital investment
• Greater mobility of capital for efficient production
• Greater currency speculation & market volatility
http://data.worldbank.org
http://data.worldbank.org
Foreign Direct Investment FlowsLiberalized capital flows brought a major shift in the volume and distribution of foreign direct investment (FDI) around the world.
1970 2015
• Capital investment flowed to new areas of opportunity in the developing world.
• By the year 2000, FDI in Chinareached over $40 billion.
http://data.worldbank.org
• In recent years, FDI in China has exceeded $200 billion.
• In part, this dramatic increase in FDI reflects China’s economic opening to market forces starting in 1978.
http://data.worldbank.org
Remember when
$40 billion seemed
like a big deal back
in 2000?
The Future of Capital: Asia
Understanding Financial Markets
The Rise of Financial Markets• While trade involves the use of
capital to purchase goods and
services, the world of finance
and investment involves the use of capital to obtain other forms of capital.
• Financial markets include a
variety of different types of
capital exchange and investment.
1. Equity markets
(public/private)
2. Bond markets
3. Derivative
markets
4. Currency markets
1. Equity Markets• Stocks are ownership shares in
companies, also called “equities.” • Equities may be reserved for private
ownership (e.g., a family business), also known as “private equity.”
• Publicly traded equities (or stocks) can be purchased on major stock exchanges (e.g., NYSE) or traded “off-exchange” between parties.
Stockholders need to monitor their investments, both in publicly and privately traded companies.
Major U.S. Stock Exchanges
Chicago Board Options Exchange (CBOE) is the largest U.S. options exchange.
NY Stock Exchange, founded 1792; world’s largest stock exchange (by market cap).
National Association of Securities Dealers Automated Quotations, dealer-based exchange.
The Investors Exchange was founded as an alternative exchange in 2012 and received SEC approval to list companies in 2017.
The Chicago Exchange was founded in 1882 and was purchased by NYSE’s parent company (Intercontinental Exchange) in 2019, ending its 136-year run.
There are several stock market exchanges in the United States, though only the NYSE and NASDAQ exchanges have a market capitalization of greater than $1 trillion.
Sto
ck
p
erfo
rm
an
ce
o
n U
.S
. e
xch
an
ge
s
(O
cto
be
r 2
01
8-O
cto
be
r 2
01
9)
Dow Jones Industrial Average,
1900-2019Housing Market Crash
Nasdaq Composit
Index, 1978-2019
Dot Com Crash
World Stock Markets
• Bonds and other notes of debt are a commitment to pay an established rate of return or interest within a specified period of time.
• Governments, companies, and other entities can borrow capital by issuing bonds to finance their activities.
2. Bond Markets
Securities are effectively tradable loans to governments and private firms.
3. Derivative Markets•Derivatives are a type of security whose value is established by the underlying value of something else
•Common types of derivatives include options, futures, and swaps.
•Derivatives can be simple or complex collateralized debt obligations (e.g., structured investment vehicles, or SIVs)
Options: The right to
buy/sell (e.g. stock) at a
specified price.
Futures: Contract to buy
an asset today at a
specified price.
Swaps: Contract to
exchange cash flows in
the future.
4. Currency Markets• Foreign currency trading, also
known as foreign exchange, Forex,
or FX, is the global market for buying and selling currencies, with daily trading volume exceeding $5 trillion (world’s largest market).
• Foreign exchange (forex) market trading has such a large impact on the supply and demand for currencies that it can undermine central bank policies.
Foreign Reserves by Country• The United
States had foreign currency reserves of $123.5 billion as of August 2018.
• The United Kingdom had $187.4 billion in foreign reserves as of August 2018.
Currency Traders• Currency traders, also called
currency speculators, buy and sell international currencies to profit from fluctuations in currency values.
• George Soros, a Greek holocaust survivor, made billions by trading international currencies. In 2018, Soros had a net worth of $8 billion, after donating $18 billion to his philanthropic agency, Open Society Foundations.
Implications of Liberalized Finance • In a world where capital moves
freely, quickly, and in many forms and directions across
national borders, there are
greater rewards for investors,
but also greater risks.
• When a large number of
borrowers cannot repay their
lenders or investors, this
creates the potential for major financial crisis.
"If you owe your bank a hundred pounds, you have a problem. But if you owe your bank a million pounds, it has."- John Maynard Keynes
Debt and Financial Crises
The Good Old Days• During the Bretton Woods era,
capital controls contributed to
a relatively high degree of stability in currency values
and financial markets.
• These arrangements became
untenable due to the limits of
U.S. macro-economic policy, as
well as the growth of financial
markets.
Major Debt & Financial Crises
• Since the 1970s, the rapid movement of short-term capital, or “hot money,” has caused a series of devastating debt and financial crises.
• Some of these crises have been interrelated, as worried investor have rapidly withdrawn capital from entire regions, contributing to a “contagion” effect.
• 1980s Debt Crisis
• 1990s Devaluations
• 2000s Financial Crisis
1980s Debt Crisis
Explanation for the Crisis• In the 1970s, ”petrodollars” from
oil rich countries provided a
source of newfound investment in
developing countries, causing
third world debt to increase from
$100 to $600 billion.
• When world interest rates more
than doubled from 1979-82, a
stronger dollar made this debt
more expensive (imposing $22
billion in interest payments) amid
a global recession that slowed
domestic economies.
1990s Currency Devaluations
• 1994 Tequila Crisis
• 1997 Asian Flu
• 1998 Ruble Devaluation
Case Study: 1994 Mexican Peso Crisis• Political instability
(Chiapas, Colosio)• Foreign direct
investment flows reverse
• Imbalance of payments
• Depleted foreign reserves
• December Devaluation
Despite jubilation over Mexico�s entry to NAFTA in 1994, a series of domestic political crises spooked international investors, leading to capital flight, and a severe devaluation of the national currency.
Tequila Crisis
Ganapolsky & Schmukler, 1998
Thailand spent billions of dollars of its foreign reserves to defend the Thai baht against speculative attacks, but ultimately had to devaluate its currency, causing a 20% drop in value.
Case Study: 1997 Thai Baht CrisisFrom mid-1980s to 1997, a massive injection of FDI and loans fuels
5-15% growth and speculative real estate bubble.
From Thai Crisis to Global Contagion
Despite IMF intervention to help support the Thai baht,
there was a region wide panic in SE Asian financial markets,
leading to massive capital flight with impacts around the
world.
Russian Ruble DevaluationIn the 1990s, Russia struggled with the economic challenges of maintaining a fixed rate of exchange for the ruble (for political stability) amid negative growth and deficit spending, partly due to the costs of the war in Chechnya.
2008 Global Financial CrisisU.S. Housing, Debt, and Deliverance
Since 1929, real (inflation-adjusted) home prices have grown at a rate of about 2% annually.
HOUSING MARKET
BUBBLE
Lending to high-risk
(subprime)
borrowers,
contributed to
growing home-
ownership, but an
unprecedented
inflationary bubble.
When �interest only,�adjustable rate
mortgages reset many
borrowers found
themselves in over
their heads.
HOUSING MARKET BUBBLE
Generous lending conditions, including to high-risk (subprime) borrowers,
contributed to growing home-ownership, but an unprecedented
inflationary bubble. When �interest only� adjustable rate mortgages reset,
many borrowers found themselves in over their heads.
Deriv
ativ
es a
nd C
olla
tera
lizat
ion
Some Other Contributing Factors:
Supportive Monetary Policy: Made ample capital available to borrowers.
New forms of investment expanded the market.
Optimistic Analysts: Many investors got pumped up by exuberant forecasts and strategies.
Fanny & Freddy
expanded lending
to subprime
borrowers, and
owned or
guaranteed about
half of all U.S.
mortgages.
—FIN—