INTERNATIONAL ECONOMICS ECO 3410
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This 5 page Class Notes was uploaded by Maye Cartwright on Friday October 2, 2015. The Class Notes belongs to ECO 3410 at Appalachian State University taught by Staff in Fall. Since its upload, it has received 58 views. For similar materials see /class/217697/eco-3410-appalachian-state-university in Economcs at Appalachian State University.
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Date Created: 10/02/15
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of their aftertax income and thus must borrow more to nance their housing and consumption The federal government also borrows more its budget de cit was 27 of GDP in 1978 but was 45 last year Just as an individual who spends more than he earns must borrow or sell some of his assets to pay his bills the US nances its currentaccount de cit by either borrowing or attracting foreign investment in its businesses and stock market Lately it has borrowed heavily by selling Treasury bonds and other IOUs often to foreign central banks As a result the US has gone from having net foreign assets equal to 9 of GDP in 1978 to net liabilities equaling about 25 now Mr Eichengreen says there is no historical precedent for such a large economy being so heavily in debt to the rest of the world Timothy Geithner current head of the New York Fed recently highlighted the risks quotWe are signi cantly more dependent today on the con dence of the rest ofthe world in US economic policyquot Real Emergency The rash of crises that struck emerging markets in the last decade demonstrates the consequences of a sudden and severe loss of investor con dence Brazil had moderate in ation in 2002 but large currentaccount and budget de cits The rise of a leftist presidential candidate Luiz Inacio Lula da Silva undermined investors faith that Brazil would keep in ation down and repay its debts The government struggled to sell bonds quotAll of a sudden people who thought they had a safe investment started to runquot says Arminio Fraga then the centralbank governor and now head of his own investment rm Gavea Investimentos Between April and October Brazil s currency the real plunged 40 Mr Fraga and his colleagues after meeting with Mr da Silva s advisers assured of cials overseas that Mr da Silva would pursue quotsensiblequot policies Still as the currency plunged investors were steadily ratcheting up expectations of in ation Given Brazil s history of hyperin ation in the late 1980s and early 1990s Mr Fraga knew those expectations had to be squelched But at what cost Mr Fraga concluded that quota recession was pretty much in the cards Given the loss of con dence Brazil was experiencing we felt better a managed slowdown with no threat of hyperin ation than a total loss of control which would have led to a depressionquot So the bank jacked up its target for overnight interest rates to 25 from 18 in just three months Brazil went through a recession though it was relatively mild growth was at in 2003 By comparison Mexico s economy shrank almost 7 after its currency collapsed Thailand s by 10 and Argentina s by more than 20 Economists Nouriel Roubini at New York University and Brad Setser have identi ed several common factors in 14 emergingmarket crises from Mexico in 1994 to Brazil in 2002 Among them large currentaccount or budget de cits nancing of those de cits with foreign quothot moneyquot that can leave as quickly as it comes in and political uncertainty httponlineWsjcomar1iclejrin 0SB11059991210452814600l11ml 3 0f6l252005 42625 AM wsmm umnnukmm deMyhm mm Slid39ng Dolla For Better and for Worse u y s Heda mmenunumamm mm m mam mus Lmvenuunwldehcnhumms 0m numssmwwm 5mm m Juaw wnnmssmvummmmlxm mwwmMsmmm WWWmmewm mm Wmsmsmw 5 m mm mm m rams mammals W m WM Mu muss mm m cm Mmmm wwm smsmmmm mm m s m M M mum 7w mg m s m m M 1m 11 w m m m w 2 u m m 9 z s 39s n r V un n s s s s s mm mm W in mm mm m m ms nu umwmmm mm macum m Mmsmw mm Mr R um m m n cknamed an dams wnhlmle prams ufresuluuun ands guwmgpumm urmuse de ms nanced up wnh mess twm de ms Mr Ruubm says The U s has bean waned he Eys bemuse u an sun bumw a cuntmsl m a yx Am mm R um N mm bumwmg hm fumxgusrs 15 becummgmtrasmgly dangemus Runaway Wuss de ms n n a currency dam m us My Mr n s TheUSLua y m mum msmmhmamss mulzmummmmmummsmmumsm WSJcom As Dollar Weakens Hidden Strengths May Stave Off Crisis Canada never faced a single quotcrisisquot moment at which investors balked at buying Canadian bonds and even the SampP downgrade had negligible nancial impact The lesson for the US is not to expect a quotcatalyticquot event Mr Drummond says quotIt s more of a drift where you pay more and more of a cost Nothing changes dramatically in one dayquot Foreign Aid Deep Markets The US has an additional advantage over any other country when it comes to crisis prevention Its economy is too important for the world to passively accept a dollar collapse That s one reason many countries prop up the dollar China runs a large trade surplus with the US something that would normally force its currency the yuan to rise against the dollar To prevent that China buys billions of dollars in Treasury securities That protects its exports and helps keep US interest rates low The increased depth reach and sophistication of markets is one reason Federal Reserve Chairman Alan Greenspan is optimistic the US can avoid a crisis quotAn ever more exible international nancial systemquot means global imbalances are more likely to be quotdefused with little disruptionquot he argued in November 2003 Indeed as imbalances have grown in the past decade currency markets by some measures have become more orderly It s been a decade since the dollar s drop seemed dangerous enough to spark a concerted response from the US and its allies On the morning of March 2 1995 Ted Truman then top international staffer at the Fed was getting reports of massive dollar sales some triggered by derivatives strategies driving the US currency down sharply against the deutsche mark and yen Bond yields were rising Mr Truman went to see Mr Greenspan and recommended the Fed and Treasury intervene in the markets to buy dollars quotI don t think it s going to do any goodquot Mr Truman recalls telling Mr Greenspan quotBut by not being there we are saying we totally don t care what the conditions of the markets arequot Mr Greenspan agreed and that afternoon the Fed and the Treasury waded in buying 600 million worth of dollars in exchange for marks and yen The next day it repeated the action joined by 13 central banks The dollar stabilized Bond yields dropped The US intervened to support the dollar a few more times that year but hasn t done so since markets have generally been smooth and the Clinton and Bush administrations came to see intervention as being of limited use Mr Truman now a scholar at the Institute for International Economics in Washington predicts that in the next ve years the US will have to intervene again quoteither because it s a period of disorder or because we can t withstand the political criticism from our partner countriesquot He adds quotThe very richness and increased exibility of markets that Alan Greenspan has emphasized probably translates into fewer episodes of disorder but when they come they re going to be biggerquot Write to Greg Ip at gregipwsjcom1 Corrections amp Ampli cations httponlineWsjcoInar1iclejrinI0SB11059991210452814600html 5 of6l252005 42625 AM
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