ANALYSIS ON THE MULTILATERAL MONETARY TRANSITIONPOM
A Philosophy of Metrics (POM) Presentation Copyright© June, 2015 www.philosophyofmetrics.com
ANALYSIS ON THE MULTILATERAL MONETARY TRANSITIONPOM
A Philosophy of Metrics (POM) Presentation Copyright© June, 2015 www.philosophyofmetrics.com
THE BRETTON WOODS CONFERENCE OF 1944
The original conception of a global monetary framework which was brought forward at Bretton Woods consisted of using the bancor as the international money clearing unit.
The bancor was proposed as a supra-national (non-domestic) currency which would facilitate the process of correcting trade imbalances.
The International Clearing Union was proposed as the institution meant to clear all trade using bancor.
The United States vetoed the use of the bancor and instead placed the domestic dollar as the international money clearing unit.
ANALYSIS ON THE MULTILATERAL MONETARY TRANSITIONPOM
A Philosophy of Metrics (POM) Presentation Copyright© June, 2015 www.philosophyofmetrics.com
Yen
USD
Pound Sterling
French Franc
Deutsche Mark
HISTORIC STRUCTURE OF THE BRETTON WOODS MONETARY SYSTEM
Pound Sterling Countries:All areas of the British Empire
Deutsche Mark Countries:Germany, Benelux countries, and Denmark
French Franc Countries:Benin, Burkina, Faso, Cameroon, Central African Republic, Chad, Republic of Congo, Cote d’lvoire, Mali, Niger, Senegal, and Togo
ANALYSIS ON THE MULTILATERAL MONETARY TRANSITIONPOM
A Philosophy of Metrics (POM) Presentation Copyright© June, 2015 www.philosophyofmetrics.com
For 25 years the Bretton Woods system was based on stable and adjustable exchange rates. Imbalances were adjusted based on the following criteria:
1. Countries with a trade surplus had their domestic currency appreciated.2. Countries with a trade deficits had their domestic currency depreciated.
In 1960 Belgian-American economist Robert Triffin explained how fundamental imbalances are created in the Balance of Payments when the domestic currency of one country is used as the international reserve asset, or money clearing unit.
As global demand for the reserve currency increases so does the accumulation of the currency in the foreign reserve accounts around the world. This accumulation of domestic currency causes imbalances by building a large trade deficit for the country who holds the reserve currency.
HISTORIC STRUCTURE OF THE BRETTON WOODS MONETARY SYSTEM
ANALYSIS ON THE MULTILATERAL MONETARY TRANSITIONPOM
A Philosophy of Metrics (POM) Presentation Copyright© June, 2015 www.philosophyofmetrics.com
In 1971 Bretton Woods effectively ended, though the US dollar remained as the reserve currency with free floating exchange rates.
The ending of the gold standard by President Richard Nixon allowed for levels of USD in foreign reserves to be increased.
With the currencies of most large economies pegged to the USD, it was the other currencies which would be adjusted in value against the dollar.
American interests worked hard to keep the dollar from depreciating. In order to correct the imbalances and account for the growing trade deficit, the dollar should have been depreciated.
HISTORIC STRUCTURE OF THE BRETTON WOODS MONETARY SYSTEM
ANALYSIS ON THE MULTILATERAL MONETARY TRANSITIONPOM
A Philosophy of Metrics (POM) Presentation Copyright© June, 2015 www.philosophyofmetrics.com
FACTORS CONTRIBUTING TO THE FINANCIAL CRISIS
1. Loose Monetary Policies • Encourages the formation of asset bubbles• No tightening of monetary conditions
2. Loose Fiscal Policies• Increases deficit spending• Increased sovereign debt risk• Debt-to-GDP ratio becomes unsustainable
3. Easy Credit & Subprime Lending• Channels inflationary pressure into real estate and stock markets• Granting loans to high risk borrowers with poor credit ratings
ANALYSIS ON THE MULTILATERAL MONETARY TRANSITIONPOM
A Philosophy of Metrics (POM) Presentation Copyright© June, 2015 www.philosophyofmetrics.com
FACTORS CONTRIBUTING TO THE FINANCIAL CRISIS
4. Financial Innovation• Creation of financial instruments such as CDO’s (Collateralized Debt
Obligations)• Spread trade and credit risk across institutions
5. Lack of Supervision and Regulation• No assessment of risk associated with the last 4 causes• Not enough leverage in a unipolar framework to encourage data reporting
standards
6. Inevitable Deflation of Asset Bubble• Decreases the value of the collateral to the loans granted by financial
institutions• Influences balance sheet of lending institutions• Leading to credit tightening in the real economy
ANALYSIS ON THE MULTILATERAL MONETARY TRANSITIONPOM
A Philosophy of Metrics (POM) Presentation Copyright© June, 2015 www.philosophyofmetrics.com
FACTORS CONTRIBUTING TO THE FINANCIAL CRISIS
7. Global Imbalances• Trade deficits are being funded by financial account surpluses• Imbalances in the Balance of Payments system.• Global imbalances have created the need for all 6 previous factors
Global Imbalances had minimal effect before Bretton Woods because:• Underdeveloped countries with low GDP ran trade deficits• Gold standard forced early adjustment process of BoP• British pound was global reserve currency supported by a strong trade
surplus history
Global Imbalances had increasing effect after Bretton Woods because:• International trade relations increased• Fiduciary money expanded in lieu of functioning gold standard• Imbalances began to distort exchange rates and international reserve
levels• Largest economies (western) have now become the greatest debtors with
massive trade deficits• Imbalances affect relative prices instead of adjustments at the level of
nominal prices
ANALYSIS ON THE MULTILATERAL MONETARY TRANSITIONPOM
A Philosophy of Metrics (POM) Presentation Copyright© June, 2015 www.philosophyofmetrics.com
-900000
-800000
-700000
-600000
-500000
-400000
-300000
-200000
-100000
0
100000
19
60
19
61
19
62
19
63
19
64
19
65
19
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20
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20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
US Historical Balance of Payments
ANALYSIS ON THE MULTILATERAL MONETARY TRANSITIONPOM
A Philosophy of Metrics (POM) Presentation Copyright© June, 2015 www.philosophyofmetrics.com
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
17
90
17
93
17
96
17
99
18
02
18
05
18
08
18
11
18
14
18
17
18
20
18
23
18
26
18
29
18
32
18
35
18
38
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41
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18
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53
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62
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65
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68
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71
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77
18
80
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83
18
86
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89
18
92
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18
98
19
01
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19
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13
19
16
19
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22
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25
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28
19
31
19
34
19
37
19
40
19
43
19
46
19
49
19
52
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55
19
58
19
61
19
64
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67
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70
19
73
19
76
19
79
19
82
19
85
19
88
19
91
19
94
19
97
20
00
20
03
20
06
20
09
20
12
U.S. Historical Debt-to-GDP 1790+
ANALYSIS ON THE MULTILATERAL MONETARY TRANSITIONPOM
A Philosophy of Metrics (POM) Presentation Copyright© June, 2015 www.philosophyofmetrics.com
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
-900000
-800000
-700000
-600000
-500000
-400000
-300000
-200000
-100000
0
100000
19
60
19
61
19
62
19
63
19
64
19
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06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
U.S. Historical BoP vs Debt-to-GDP
BoP Debt-to-GDP
ANALYSIS ON THE MULTILATERAL MONETARY TRANSITIONPOM
A Philosophy of Metrics (POM) Presentation Copyright© June, 2015 www.philosophyofmetrics.com
-1000000
-800000
-600000
-400000
-200000
0
200000
400000
6000001
96
0
19
61
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62
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63
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64
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06
20
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20
10
20
11
20
12
20
13
20
14
US Trade Deficit vs China Trade Surplus
US China
ANALYSIS ON THE MULTILATERAL MONETARY TRANSITIONPOM
A Philosophy of Metrics (POM) Presentation Copyright© June, 2015 www.philosophyofmetrics.com
$(60,000,000,000)
$(40,000,000,000)
$(20,000,000,000)
$-
$20,000,000,000
$40,000,000,000
$60,000,000,000
$80,000,000,000
Major Economies - Balance of Payments
ANALYSIS ON THE MULTILATERAL MONETARY TRANSITIONPOM
A Philosophy of Metrics (POM) Presentation Copyright© June, 2015 www.philosophyofmetrics.com
$(30,000,000,000)
$(20,000,000,000)
$(10,000,000,000)
$-
$10,000,000,000
$20,000,000,000
$30,000,000,000
European Union - Balance of Payments
ANALYSIS ON THE MULTILATERAL MONETARY TRANSITIONPOM
A Philosophy of Metrics (POM) Presentation Copyright© June, 2015 www.philosophyofmetrics.com
EUROPEAN UNION DEBT CRISIS
The sovereign debt crisis in the Euro Zone is also a balance of payments problem. Like on the global macro scale, any countries with a debt-to-GDP ratio above 80% and a persistent and epidemic trade deficits, are vulnerable to systemic and rapid fiscal deterioration, like Greece is currently experiencing.
ANALYSIS ON THE MULTILATERAL MONETARY TRANSITIONPOM
A Philosophy of Metrics (POM) Presentation Copyright© June, 2015 www.philosophyofmetrics.com
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
$(30,000,000,000)
$(20,000,000,000)
$(10,000,000,000)
$-
$10,000,000,000
$20,000,000,000
$30,000,000,000
European Union - Balance of Payments vs Debt-to-GDP
Surplus/Deficit (USD) Debt-to-GDP
ANALYSIS ON THE MULTILATERAL MONETARY TRANSITIONPOM
A Philosophy of Metrics (POM) Presentation Copyright© June, 2015 www.philosophyofmetrics.com
0%
50%
100%
150%
200%
250%
$(60,000,000,000)
$(40,000,000,000)
$(20,000,000,000)
$-
$20,000,000,000
$40,000,000,000
$60,000,000,000
$80,000,000,000
Major Economies - Balance of Payments vs Debt-to-GDP
Surplus/Deficit (USD) Debt-to-GDP
ANALYSIS ON THE MULTILATERAL MONETARY TRANSITIONPOM
A Philosophy of Metrics (POM) Presentation Copyright© June, 2015 www.philosophyofmetrics.com
ASEAN ECONOMIC COMMUNITY – AECASIAN CURRENCY UNIT - ACU
Single region common market of ASEAN countries, 600 million people, with the following benefits:• Regional cooperation to improve efficiencies and competitiveness• Enable easier movement of goods, services, investment, capital and people• Coordinating supply chains and creating access to new markets• Expanding to zero tariffs on all goods• Remain engaged with the global economy through regional-level free trade
agreements. Currently ASEAN has such agreements with China, Japan, Korea, India, Australia and New Zealand.
• Investment in emerging markets is more desirable than in the US and Europe.• Increase of infrastructure development – roads, bridges, airports, etc..• Asian Currency Unit will be developed for use by ASEAN members and trade
partners. ACU will be a basket of currencies like the ECU preceded the euro.• AEC will be implemented on January 1, 2016.
ANALYSIS ON THE MULTILATERAL MONETARY TRANSITIONPOM
A Philosophy of Metrics (POM) Presentation Copyright© June, 2015 www.philosophyofmetrics.com
COMPOSITION OF THE EUROPEAN CURRENCY UNIT
ECU Composition
Germany France Netherlands Belgium Luxembourg Italy
Denmark Ireland Great Britain Greece Spain Portugal
ANALYSIS ON THE MULTILATERAL MONETARY TRANSITIONPOM
A Philosophy of Metrics (POM) Presentation Copyright© June, 2015 www.philosophyofmetrics.com
INCREASE IN RENMINBI DEPOSITS
ANALYSIS ON THE MULTILATERAL MONETARY TRANSITIONPOM
A Philosophy of Metrics (POM) Presentation Copyright© June, 2015 www.philosophyofmetrics.com
ANALYSIS ON THE MULTILATERAL MONETARY TRANSITIONPOM
A Philosophy of Metrics (POM) Presentation Copyright© June, 2015 www.philosophyofmetrics.com
ANALYSIS ON THE MULTILATERAL MONETARY TRANSITIONPOM
A Philosophy of Metrics (POM) Presentation Copyright© June, 2015 www.philosophyofmetrics.com
ANALYSIS ON THE MULTILATERAL MONETARY TRANSITIONPOM
A Philosophy of Metrics (POM) Presentation Copyright© June, 2015 www.philosophyofmetrics.com
ANALYSIS ON THE MULTILATERAL MONETARY TRANSITIONPOM
A Philosophy of Metrics (POM) Presentation Copyright© June, 2015 www.philosophyofmetrics.com
• China transitioning from a “trade exporting” economic model to a “trade services” economic model.
• 100 million rural population migrating into urban centers by 2020
ANALYSIS ON THE MULTILATERAL MONETARY TRANSITIONPOM
A Philosophy of Metrics (POM) Presentation Copyright© June, 2015 www.philosophyofmetrics.com
ANALYSIS ON THE MULTILATERAL MONETARY TRANSITIONPOM
A Philosophy of Metrics (POM) Presentation Copyright© June, 2015 www.philosophyofmetrics.com
ANALYSIS ON THE MULTILATERAL MONETARY TRANSITIONPOM
A Philosophy of Metrics (POM) Presentation Copyright© June, 2015 www.philosophyofmetrics.com
ANALYSIS ON THE MULTILATERAL MONETARY TRANSITIONPOM
A Philosophy of Metrics (POM) Presentation Copyright© June, 2015 www.philosophyofmetrics.com
ANALYSIS ON THE MULTILATERAL MONETARY TRANSITIONPOM
A Philosophy of Metrics (POM) Presentation Copyright© June, 2015 www.philosophyofmetrics.com
ANALYSIS ON THE MULTILATERAL MONETARY TRANSITIONPOM
A Philosophy of Metrics (POM) Presentation Copyright© June, 2015 www.philosophyofmetrics.com
ANALYSIS ON THE MULTILATERAL MONETARY TRANSITIONPOM
A Philosophy of Metrics (POM) Presentation Copyright© June, 2015 www.philosophyofmetrics.com
ANALYSIS ON THE MULTILATERAL MONETARY TRANSITIONPOM
A Philosophy of Metrics (POM) Presentation Copyright© June, 2015 www.philosophyofmetrics.com