IAU University The New International Money Game 7th Ed Ch 2 3 5 & 17 Discussions


Business Finance

Imam Abdulrahman Bin Faisal University

Question Description

- First, read chapter 2, 3, 5, and 17 of "The New International Money Game, 7th Ed. (the material is attached below)

- Choose few topics of each chapter to write about them for example:

Chapter 2 : International Finance

Chapter 3 : Gold's Monetary Role

Chapter 5 : Monetary Agreement such IMF

Chapter 17 : (OPEC cartel, and the price of energy)

You are free to change the topics above, but the topic should be included in the chapter.

- Second, write what you think or feel while reading those chapters, using MS word file posted below and don't change the format of the file such (font name, font size, line spacing....).

- The length of the writing should be two pages or more, but not more than three pages.

- No plagiarism please

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The New International Money Game Also by Robert Z. Aliber MONETARY REFORM AND WORLD INFLATION NATIONAL MONETARY POLICIES AND THE INTERNATIONAL FINANCIAL SYSTEM (editor) CORPORATE PROFITS AND EXCHANGE RISK THE MULTINATIONAL PARADIGM YOUR MONEY AND YOUR LIFE MONEY, BANKING, AND ECONOMIC ACTIVITY (co-author) MANIAS, PANICS, AND CRASHES (co-author) The New International Money Game Seventh Edition Robert Z. Aliber Professor of International Economics and Finance Emeritus at the Booth Graduate School of Business of the University of Chicago © Robert Z. Aliber 2011 Softcover reprint of the hardcover 7th edition 2011 978-0-230-01894-5 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6-10 Kirby Street, London EC1N 8TS. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2011 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan in the US is a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries. ISBN 978-0-230-01897-6 ISBN 978-0-230-24672-0 (eBook) DOI 10.1057/9780230246720 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue record for this book is available from the British Library. A catalog record for this book is available from the Library of Congress. 10 9 8 7 6 5 4 3 2 1 20 19 18 17 16 15 14 13 12 11 Transferred to Digital Printing in 2014 Contents List of Figure, Tables, and Boxes xi Preface and Acknowledgments xii List of Abbreviations and Acronyms xiii Introduction 1 1 A System Is How the Pieces Fit Fitting the pieces: central bank monetary policies Fitting the pieces: the market in national currencies The waxing and waning of financial hegemony The plan of the book 8 11 13 14 15 2 The Name of the Game Is Money – But the Disputes Are about Where the Jobs Are International finance Changes in the price of the US dollar The value of the currency, jobs, and inflation The management of currency values Parities and shocks Pegged currencies and floating currencies Devaluations and revaluations Exporting national problems The politics and technology of money The challenge of the newly industrializing countries The new international money game Interdependence of business and currency values 17 17 17 19 19 20 22 22 26 26 28 29 30 Part I International Monetary Arrangements, Money, and Politics 3 Gold – How Much Is a ‘Barbarous Relic’ Worth? The morphing of commodity gold into money Fiat currency and the money-back guarantee The decline in the monetary role of gold Changes in the purchasing power of gold What should be done with a monetary relic? Political implications of alternative monetary roles for gold v 35 35 37 38 42 46 48 vi Contents 4 The Gnomes of Zurich Play in the Largest Market in the World The global market in currencies Spot exchange contracts, forward exchange contracts, and swaps Winners and losers in the currency market To Float or Not to Float, That’s the Question Changes in the price of the US dollar The debate about exchange market arrangements – pegged vs. floating one more time Which way after floating? 5 The Greatest Monetary Agreement in History The gold standard – rules and myths The gold standard in practice Monetary arrangements in the 1920s and the 1930s The Bretton Woods Agreement Stress on the IMF arrangements US payments deficits in the 1950s and 1960s Policy responses to the persistent payments imbalances ‘Paper gold’ and special drawing rights The monetary impacts of the Vietnam War Changes in currency values The devaluation of the US dollar Monetary artifacts and the Smithsonian Agreement The EMU is not a bird – but the euro is money The future of monetary agreements 6 Radio Luxembourg and the Eurodollar Market Are Both Offshore Stations Offshore stations and externalized activities The external currency market, née the Eurodollar market Where Eurodollars come from Links among offshore deposits denominated in different currencies A house of cards? 51 51 53 55 56 59 61 63 65 66 68 69 71 72 73 75 76 76 77 77 78 80 81 82 82 83 86 88 89 7 The Dollar and Coca-Cola Are Both Brand Names Brands of money Market position of national currency brands Whither the US dollar on the currency hit parade? 92 92 95 101 8 They Invented Money So They Could Have Inflation Inflation in the twentieth century Where does inflation come from? The inflation tax Watergate economics 105 106 107 110 111 Contents Reaganomics Inflation targeting – a new religion vii 116 117 9 Global Imbalances and the Persistent US Trade Deficit A life-cycle model of a country’s net creditor position Global imbalances – is the United States the cause or the victim? The sustainability of the US trade deficit Soft landings and hard landings 118 119 122 126 131 10 Five Asset Price Bubbles in 30 Years – A New World Record ‘Countries don’t go bankrupt’ – the 1970s surge in bank loans to Mexico, Brazil, Argentina, and other developing country borrowers ‘The mother of all asset price bubbles’ – Tokyo real estate The asset price bubbles in Thailand et al. ‘Irrational Exuberance’ and the bubble in US stocks The bubble in Anglo-Saxon real estate Linkages within each asset price bubble Cash flows and bubbles Links among successive waves of bubbles The uniqueness of the post-1970 period 134 138 139 141 142 144 147 149 150 153 11 A New World Record – Four Financial Crises in 25 Years Cash flows and financial crises Mexico and the developing country debt crisis of the early 1980s The implosion of the asset price bubble in Tokyo The Mexican debacle of the mid-1990s and the Asian financial crises The implosion of the global housing bubble in 2007 Financial crises, illiquidity, and insolvency 157 159 161 163 165 168 172 12 Central Bankers Read Election Returns, Not Balance Sheets The holy grail of monetary reform Have floating exchange rates delivered on promises? Reform of the monetary system The politics of international financial stability Inflation is no accident Bureaucracy is a French word and a growth industry Managing the international economy The new mercantilists Nationalization and privatization Reform requires a consensus 178 178 179 180 181 182 183 185 186 187 187 13 Monetary Reform – Where Do the Problems Go When Assumed To Have Been Solved? Competing national interests The institutional talisman Politicizing economic conflict: an international money 189 189 190 193 viii Contents New problems An SDR system The nonpolitical market solution Currency values as a policy instrument The limited scope for reform Economic expertise cannot solve political problems 194 196 198 198 200 201 Part II The Cost of 100 National Monies 14 Globalization 1.0 – The Silk Road to Asia and the Salt Caravans across the Sahara Nonmarket responses to the declining cost of economic distance Trade in money and securities Financial crises and an overview of Part II 209 210 212 15 Taxation, Regulation, and the Level Playing Field Financial crisis leads to government creep Taxes and the level playing field Low-tax jurisdictions Economic impacts of different national tax rates Why national tax rates differ Corporate tax rates Economic impacts of corporate tax rate Taxes on foreign income Why don’t the trains run on time? Privatization 219 219 222 223 224 225 226 228 231 233 234 16 Banking on the Wire The financial crisis and global banking Competition in banking Branching and acquisitions Changes in the technology of payments The profits in banking The market area of a bank The use of checks for payments and the expansion of bank branches Competition among international banks Competitive edge Financial crises, banking, and globalization 100.0 236 236 237 238 239 240 241 242 244 245 248 17 The Reverend Thomas Malthus, the OPEC Cartel, and the Price of Energy from 1800 to 2100 A horse race – money in the bank vs. oil in the ground OPEC and Malthus Globalization 100.0 and the real price of energy 250 253 255 256 205 Contents ix 18 The World Market for Bonds and Stocks The impacts of globalization The world markets for bond and stock – segmented or integrated? One world stock market? Segmentation or integration? The horse race in stocks 260 260 261 262 262 265 19 MBSs, ABSs, CMOs, CDOs, Zeros, Swaps, Options, and Credit Default Swaps – The Revolution in Finance The new world of finance Securitization and the subprime mess What are hedge funds? Where do financial revolutions come from? Debt, stock prices, and junk bonds Financial engineering Index funds Swaps Derivatives and options ‘The collapsing house of cards?’ 268 268 270 271 272 273 274 275 276 277 279 20 Why Are Multinational Firms Mostly American? Direct foreign investment The new imperialism Patterns of market penetration Integration of manufacturing Why do firms invest abroad? Compensating advantages and superiority theorems US firms on the hit parade of multinationals The costs of direct foreign investment Whither the conflict? 282 283 285 286 287 288 289 293 295 298 21 Japan – The First Superstate The Japanese challenge Secrets of the miracle The slowdown in the growth rate Japan, Inc. An unfair competitive advantage? The roles of the capitalists and the bankers The mother of all asset price bubbles Lousy demographics or the negative wealth effects? The external impacts of the Japanese business cycle The export of imbalances The world’s largest creditor country 300 300 301 303 304 305 306 307 309 310 311 312 22 China – The 800-Pound Gorilla China is big history The hermit kingdom and its sequel 314 314 315 x Contents Limits to Chinese growth Export-led growth, the trade surplus, and the asset price bubble The overseas Chinese economies The savings–investment paradox 316 319 320 323 23 From Marxist Command Economies to Market Capitalism The implosion of an empire What is a transition economy? The ruble was a heavy currency The command economy and the market economy Where do market institutions come from? Industrial restructuring Macro stabilization and the price level Privatization The debacle in Russian finance Prime Minister Putin’s Seven Fat Years 325 325 326 326 327 330 330 332 333 334 335 24 Fitting the Pieces Together Once Again The impacts of the 2007 financial crisis A common international currency? The collapse of rules New rules or new international monetary institutions? Exchange controls The role of gold 337 337 338 339 340 342 342 Index 345 List of Figure, Tables, and Boxes Figure 5.1 US international monetary position, 1965–2005, billion US dollars 74 Tables 2.1 3.1 3.2 7.1 9.1 9.2 15.1 15.2 17.1 The price of the US dollar, 1970–2008 US dollar price of gold in London The purchasing power of gold, 1900–2008 Interest rates nominal and real, 1970–2005 (percent) US trade deficit and US current account deficit as ratios of US GDP Adjustment to a sustainable US external balance General government total outlays, 1960–2007 (percent of nominal GDP) Corporate income tax rates The nominal and real price of oil, 1950–2008 24 43 45 99 121 129 221 229 253 Boxes 3.1 3.2 4.1 6.1 8.1 8.2 10.1 10.2 10.3 13.1 18.1 $35 an Ounce and 3.1416 Are Not the Same Kind of Numbers Changes in the Purchasing Power of Gold 10 Facts Your Mother Never Knew about the Foreign Exchange Market What Banks Produce Hyperinflation Does the Federal Reserve Cause Bank Failures? On Bubble Terminology Charlie Ponzi and the Real Estate Bubble in Albania Iceland and Its Perfect Asset Price Bubble The Flat-Earthers Investing the Lottery Prize in Bonds xi 40 44 57 83 108 114 135 136 145 191 264 Preface and Acknowledgments Several individuals have been important in the writing of this book. Martin Kessler first suggested that serious economic concepts could be discussed in a relatively light manner. Martin was a superb editor and a marvelous friend, and he is greatly missed. Fran Miller cheerfully typed the N drafts of the first edition. Without her encouraging feedback, the project would have stalled. Robert Z. Aliber xii List of Abbreviations and Acronyms ABS ADB AIG ARMs ATM BBC BIS CAP CDO CDS CIF CIR CMO CPE CPI CXT DFI EBRD EC ECB ECSC EEC EMS EMU ENEL ENI ERM EU ExImBank FDIC FOB FRY GATT GE G-7 G-20 IADB IBFs IBRD asset-backed securities Asian Development Bank American International Group adjustable interest rate mortgages automatic teller machine British Broadcasting Corporation Bank for International Settlements common agricultural policy collateralized debt obligations credit default swaps cargo insurance and freight Committee of Independent Republics collateralized mortgage obligations centrally planned economy consumer price index common external tariff direct foreign investment (also FDI) European Bank for Reconstruction and Development European Community European Central Bank European Coal and Steel Community European Economic Community European Monetary System (European) Economic and Monetary Union National Corporation for Electric Energy (Italy) National Hydrocarbon Corporation (Italy) European Exchange Rate Mechanism European Union US Export-Import Bank Federal Deposit Insurance Corporation free on board Former Republic of Yugoslavia General Agreement on Trade and Tariffs General Electric Group of Seven countries Group of Twenty countries Inter-American Development Bank International Banking Facilities International Bank for Reconstruction and Development (World Bank) xiii xiv List of Abbreviations and Acronyms IMF IRI ITO LIBOR LIFFE LTCM MBA Mercosur MITI MOF NAFTA NTB NYSE OECD OPEC OTC P/E PMI PIC PIN RDF R&D S&L SAR SDR STO TVA UNCTAD USSR WTO ZPG International Monetary Fund National Institute for Industrial Reconstruction (Italy) International Trade Organization London Inter-Bank Offer Rate London International Financial Futures Exchange Long Term Capital Management Mexico, Brazil, Argentina Mercado Comun del Sur (Common Market of the South) Ministry for International Trade and Industry (Japan) Ministry of Finance (Japan) North American Free Trade Agreement non-tariff barrier New York Stock Exchange Organisation for Economic Co-operation and Development Organization of Petroleum Exporting Countries over-the-counter (market) price/earnings ratio private mortgage insurance petroleum importing country personal identification number Radio diffusion Française (France) research and development savings and loan Special Administrative Region (of China) Special Drawing Right State Trading Organization Tennessee Valley Authority United Nations Committee on Trade and Development Union of Soviet Socialist Republics World Trade Organization zero population growth Introduction International finance is frequently viewed as an esoteric subject, understood by only a few speculators in the euro and the Swiss franc and the Japanese yen, and a handful of central bankers. In part, the mystery results from the specialized use of everyday language – ‘gliding parities’ and ‘sliding bands,’ ‘support limits’ and ‘counter-speculation,’ ‘SDRs,’ and ‘derivatives,’ ‘zero coupon bonds,’ and ‘cross-rates’ and ‘tax havens’ and ‘transfer pricing.’ Most of the words are straightforward, but both the meanings and the significance are elusive. The reader is deterred because of the effort required to learn a specialized language. Once the jargon barrier is surmounted, a second problem appears – ‘recognized experts’ frequently disagree about the most appropriate causal explanation for the same event. Is the US dollar ‘strong’ in the currency market because US imports have declined as the United States entered a recession, or because interest rates on US dollar securities are high or because the US inflation rate has declined below 2 percent or because the US Government has developed a fiscal surplus? Is the US dollar price of gold low because the Russians are selling gold, or because the Chinese have reduced their gold purchases or because the world inflation rate has declined below 2 percent? When the US trade deficit increased to more than $800 billion in 2006, the experts disagreed whether the increase in the deficit was caused by the increase in US oil import payments or by the decline in the US competitive edge in manufacturing or because of an increase in the foreign purchases of US dollar securities or because the Chinese are reluctant to allow their currency to appreciate significantly in response to the surge in their trade surplus. The ‘experts’ in both Washington and Beijing disagree on the causal relationship between Chinese purchases of US dollar securities and the US trade deficit. And even when the experts agree on their analysis, their recommendations about the most appropriate policies to adjust large imbalances often differ. The experts can’t agree on whether the US national interest is better served by continued reliance on the floating currency arrangement adopted in the early 1970s or by returning to a system of adjustable parities similar to the one that prevailed in the 1950s and the 1960s. Indeed, the experts can’t agree on the US national interest in international financial relationships. Some experts in the 1960s proposed that the United States take the initiative in raising the US dollar price of gold to $70 1 2 Introduction an ounce or even to $100 an ounce. Most experts disagreed. Subsequently, market forces led to a surge in the US dollar price of gold. The experts observe – correctly – that national inflation rates were much lower when currencies were pegged to gold in the nineteenth century; these experts prefer low inflation rates and yet very few favor a return to the gold standard. A few experts want to abandon national currencies in favor of a worldwide money, while others want to eliminate the use of the US dollar as an international money, although few have advanced proposals that would achieve this result. Disagreements among experts about the most appropriate policy solutions leave readers puzzled and skeptical about the value of expert advice. The New International Money Game seeks to break the language barrier. Technical issues are presented in a straightforward manner with minimal use of obscure terms. Metaphor is used to clarify concepts. Explanations are provided for why experts may disagree. No policy advice is offered – instead, the reader is offered the assumptions that are central to major policy issues. The seven editions of this book span more than 35 years. International financial relationships have changed dramatically during this period, especially the approach toward the organization of the currency market and the monetary roles of gold. In the 1970s the idea that the ...
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Chapter 2: The value of the currency, jobs, and inflation
The value of a currency is a vital component in the realization of economic growth and development.
Thus, it is the role of a country to device measures that will ensure the country's currency remains stable. An
increase in the currency level in a country possesses both advantages and disadvantages. The benefits of an
increase in currency level reduce the inflation level since a country can trade its products in the international
market at a higher value and also lend money to other countries at higher interest rates. Also, a country with
an increased currency level can obtain cheap imports from foreign. An increase in the currency level is
disadvantageous to the domestic traders since it reduces the competitive advantage of companies in the local
and international markets.
On the other hand, a decrease in the currency level is significant as it increases employment levels.
The reduction in currency level ensures the government employs its ...

ZeZnex (21094)
Carnegie Mellon University

Just what I needed…Fantastic!