Hospitals & Asylums
Devaluating United Nations Currency Enforcement CAP = US$ -7%, € -5.5%:
Price of Bailouts under
Rule of Law HA-13-11-08
By Tony J. Sanders
Table of Contents
B. Economic Outlook of the United
States…9
C. Root of Bailout…16
D. Global Economic Outlook…27
E. Principles of the
International Monetary System…46
F. Countervailing Duty to
Devaluate the US Dollar…55
Fig.
A-1 American Dollar to 1 Euro: 120 Day
Fig.
B-1 Dow Jones Industrial Average 2008
Fig.
B-2 Monthly Unemployment Rate 2003-2008
Fig. C-1 Dow Jones Industrial Average
2000-2008
Fig.
D-1 GDP at Constant Market Prices % Change 2004-2008
Fig. E-1 Exchange
Rate Arrangement of a Few Nations
Fig. F-1 Balance of US International Trade in Goods and Service 1970-2006
Fig. F-2 Cost of Bailout 2008
About the Author. I have been writing Hospitals & Asylums since 2001. I wrote the original reparation treaty for Iraq that was bombed on the Spring Equinox 2003, when I send out my newsletter, and enforced it with the first draft of the New Iraq Constitutional Elections (NICE) that led to the largest reparation in the history of international law – you bomb it you buy it – to coin a phrase. After four years of federally financed pain (torture) instead of pay I terminated service to the federal government and United Nations, a little early. A few days later on the Fall Equinox 2008 Secretary Paulson introduced his plan to subsidize the financial sector. John Maynard Keynes once said that “practical men, who believe themselves to be quite exempt from any intellectual influence (Governors of the Federal Reserve haven’t cited an author in nearly half a year), are usually the slaves of some defunct economist”. The Federal Reserve explains their action is primarily the result of “overcoming information that prevents credit for worthy borrowers”. Without the ethical reflex to disdain market subsidies and loans, in general, the Chairman of the Federal Reserve forced the degrading plan through Congress. As a result, money fled private markets to purchase government bonds, interfering with commerce, causing lay-offs, corporate insolvency and falls on Wall St. when the government wasn’t illegally investing their money there, much like the way the highest foreclosure rate on record occurred in the month after the bailout of the government sponsored mortgage lenders, earlier this year. This essay is written to apologize for the errors of the USA and their colonial buddies made in response to flight of their moral conscious, Hospitals & Asylums, to bailout the bailout, to enforce the existing international economic rule of law that devaluates the currencies of nations that print unearned money, to spare the EU and USA a recession by devaluating the dollar to promote international trade, to arrange for developing nations to multi-laterally appreciate their currencies against the US dollar and Euro to independently take the biggest leap forward toward global equality since the Millennium Development Goals began fostering global welfare dependency.
Fig. A-1 American Dollar to 1 Euro: 120 Day
1. When a nation
prints money that they didn’t earn, and they don’t have sufficient reserves of
foreign currency to cover the expense, that currency is devaluated. This law has been enforced many times against
developing nations and in recent years against the United States by the
European Union when the USA could not justify their deficit or as in September
of 2007 when the USA announced the incredibly inflated economic growth rate of
4% on counterfeit traveler’s checks from European internet companies. However as the result of short term market
manipulation, and dire threats to rewrite the international financial system,
the exact opposite has occurred during this bailout. After the bailout was passed the dollar at
first devaluated against the Euro, but when the EU, the only enforcer of this
economic law with the USA, announced an even bigger, Euro bailout, then instead
of depreciating the dollar appreciated 18% and is predicted to increase another
5% in the near term (Zieminski 2008).
The EU is however a far more rule based society and the euro weakened 20
percent since climbing to a record $1.6038 on July 15. The bailout is however
counter-intuitive, much like the increase in value of the dollar, causing
diverse private investments to be consolidated into huge insured government
bailout bonds that are to be dispersed to bolster the lending of a few elite
financial institutions, causing the increase in unemployment and slump in
retail, manufacturing, and trade we have witnessed on the stock markets. As the result, the International Monetary
Fund (IMF) expects all Group of Seven economies except Canada to contract in
2009 (McGee & Mnyanda 2008; White & Kruger 2008).
2.
The purpose of this essay is to bailout the bailout by convincing the USA to
devaluate the dollar by means of the multi-lateral appreciation of the
currencies of developing nations, who are so far unaffected by the crisis. This financial crisis of the first world does
not need to impede global economic growth and development. Developing nations are hereby counseled to
take advantage of the financial crisis of the colonial powers, to appreciate
their currencies. The developing
countries will thus bolster their financial systems and prices of natural
resources that recently crashed, at the expense of their export markets, which
are expected to grow nevertheless. At
the same time developing nations would use their increased purchasing power to
buy first world technology needed for social progress and development that will
in turn bolster economic growth and employment in industrial and developing
nations alike. Properly governed by the
rules of the international financial system this rare turn of events, colonial
financial crisis, can be a great leap forward for global economic equality -
prosperity for everyone.
3. To address these issues and convince the USA and EU to devaluate the dollar and euro with developing nations, upcoming conferences promise to establish a new international financial order as grand as the Bretton Woods conference at the end of WWII. The world's richest nations and biggest emerging economies are set to gather in Washington on November 15 within the framework of the Group of 20 to address the worldwide financial turmoil. The President of the European Commission expressed hope to arrive at concrete and important decisions about overhauling the international financial system (Barosso 2008). Of the existing Bretton Woods institutions, the World Bank and the IMF, the IMF is clearly the leader of the debate, however having discredited loans and moved currency exchange to the center of their study of international economics, is also under fire by the corrupt interests of the bailout. Will the protective interests of the colonial powers attending the conference ignore or intimidate the IMF into incoherence, to continue on the self-destructive path of economic strife for all mankind, or will a new balance, offsetting the cost of the bailout, be achieved by valuing the currencies of developing nations?
4. The first set of talks was a summit between Asian and European leaders, in Beijing. The attitude is that the U.S. dollar is losing people's confidence. The world, acting democratically and lawfully through a global financial organization, urgently needs to change the international monetary system based on U.S. global economic leadership and U.S. dollar dominance (Jianxun 2008). Investors are turning to the yen for stability, tumbling stock markets and falling currencies are causing global concern, but the Japanese yen is generating high anxiety for rising too much. The yen quickly surged more than 10 percent against the dollar and an astounding 34 percent against the euro (Fackler 2008). Economic officials from 20 leading nations meeting in Sao Paolo, Brazil called for increased government spending to boost the troubled global economy and said developing countries deserve a prominent role in talks to overhaul the world financial system. EU officials have given 100 days for the drafting of new international financial rules (Clendenning 2008). For the Washington conference to succeed a great deal of honesty and integrity will be required of the USA, EU and China to admit that currency market manipulation to overvalue the dollar, undervalue the yuan rinminbi, deficit spending, market subsidies and corporate spying rather than regulation are the unsustainable strategies that are hurting the economy. The question is, will the Washington conference enable global currency exchange to take center stage and appreciate the currencies of developing nations?
5. Political energy for greater global financial regulation, which some have called the building of a new Bretton Woods consensus, may already be here. Trade is the low-hanging fruit in a complex set of issues requiring collective action now. Governance today is and is likely to remain mostly local, within the nation-states, given legitimacy considerations. However, global issues stemming from increasing interdependence need to be tackled more efficiently to ensure world peace and stability. As we have seen with the financial crisis, purely national solutions are not enough. Global governance in today's key economic areas — trade, finance and the environment — is mostly about global regulations. Building these rules require four elements: a collective political will to go global; a consensus on the concept or on the agenda of how to regulate globally; a place to negotiate binding commitments, and to administrate and enforce them; and finally a capacity to compromise, which means bringing on board domestic constituencies. In the area of finance, the problem starts with the absence of the first element: no collective political will to go global because of the division between proponents of traditional regulation and proponents of self regulation (Lamy 2008).
6. The embryo of regulation stemming from the constellation around the Bank for International Settlements in Basel has proven largely insufficient to address the shortcomings leading to today's financial crisis. Trade is not the cause of financial turmoil but good trade policies may be but part of the solution. Trade allows unused resources linked to the fall in domestic markets to be exported. Trade opening can also be useful, by increasing the efficiency of affected economies, bringing fresh capital inflows — in financial services for example — and by providing new export opportunities. The resort to protectionism is made much more difficult for countries that wish, in a non-cooperative mode, to shield themselves from the exports of crisis-stricken countries, or in the case of the overvalued US dollar to shield against inflation. Director-General of the WTO Pascal Lamy reported to the General Council on 14 October 2008 that he had “constituted a Task Force within the Secretariat to follow up the effects of the financial crisis”. He suggested that WTO members “keep the situation under review, and be ready to act as necessary”. The question is posed to the WTO, “do the USA and EU have a countervailing duty to devaluate their currencies under the Agreement on Subsidies and Countervailing Measures?”
7. After the Washington conference, the UN General Assembly or IMF should host a follow up conference, in December or January, so developing nations could negotiate the permanent appreciation of their currencies. However, the colonial powers will have to call the shots; they will have to get over their protectionist instincts and short sighted greed, to achieve their real self-interest, which is global equality. The UN Secretary General Ban Ki Moon from South Korea, a nation that recently bailed out its proportionally enormous financial sector, has allied himself with the propaganda of the USA and totally eschews currency exchange theories of the IMF, in favor of propaganda regarding keeping Official Development Assistance (ODA) levels up. Currency exchange enforcement is a trade off between sinking values, of ODA, international trade and foreign direct investment with the greater sovereign wealth and purchasing power of developing nations that would result from currency appreciation. Currency exchange must therefore take center stage in the debate whereas it is the single hottest topic at this time – it is the only way to offset the enormous government debts incurred by the bailout. Ban’s offer to host a G-8 style conference on the financial crisis in December has not been endorsed by any nation but colonial Great Britain, that is the nation hardest hit by the financial crisis and countervailing duties pertaining to the bailout (Petesch 2008).
8. Another G-8 style conference on the global financial crisis is simply redundant and only likely to strengthen the resolve of developed nations to continue their protectionism. What is really needed is for the Washington conference to result in the EU and USA to agree to the unilateral and proportional devaluation of their money with all nations that did not print out money to redress the financial crisis so that the UN General Assembly of IMF could convene to host currency negotiations in behalf of the developing nations who have been prepared through legislation and research, to benefit from the appreciation of their currency, while protecting the poorest and people likely to be impoverished by a strengthening of developing nation currencies. By devaluating their currencies developed nations should enjoy improved employment from the international trade that constitutes two thirds of economic growth. If the USA would obey this international financial rule to devaluate they would be likely to forestall an official recession, otherwise the damage caused by the cost of the bailout will probably stimulate a recession in the USA. The rest of this essay is intended to convince the elite nations attending the Washington conference and drafting the rules of the international financial system of the wisdom of scheduling a meeting of the UN General Assembly or IMF to negotiate the multi-lateral appreciation of developing nation currencies.
B.
Economic
Outlook for the United States
Fig. B-1 Dow Jones Industrial
Average 2008
9. The Federal Reserve has indicated for nearly a year that the
United States may already be in a recession and has stressed that as the
economy slows, strong export performance will be particularly important to the
US economy. On an annualized basis, second quarter export growth and slowing
imports were responsible for GDP growth of 2.9%. The federal government then, however,
embarked on a massive campaign of market subsidies to redress the sluggishness
in the economy, and, we presume, accidently undermined trade and the economy in
general, although it is very likely to be the parting sabotage of the most
corrupt President in our lifetime (Gold 2007).
The first damaging subsidy was the Housing and Economic Recovery Act of 2008 of July 30, 2008, that put
Fannie Mae and Freddie Mac into conservatorship, at an estimated cost of $200
billion, immediately led to the highest number of foreclosures in history. In August the total number of U.S.
properties that received foreclosure filings as well as the national
foreclosure rate were the highest in any month since RealtyTrac began issuing
reports in January 2005. 303,879
foreclosures in August 2008 was an increase of 12% from the previous month and
27% from August of the previous year.
However the annual increase is lower than the previous year when it was
hovering around 50-65% (Realty Trac 2008). Also in August consumer credit is reported by the G-19 Federal Reserve
Statistical Release to have decreased at a rate of -2.9% although it is nearly
always positive. It is this drop in
consumer credit that caused official to panic and call for the even larger
bailout that drove the US economic growth below zero.
10.
The three page $700 billion Legislative Proposal for Treasury Authority to
Purchase Mortgage-Related Assets introduced on September
20, 2008 by Treasury Secretary, former Golman-Sachs CEO, Paulson quickly
grew to a 109 page Emergency Economic Stabilization Act that failed to pass in
the House by a vote of 205 to 228.
Following this defeat, the stock market lost $1.2 trillion in a single
day, some of which was restored. The Senate passed the measure on a
bipartisan vote of 74-25. On Friday
October 3, 2008 the House passed a second version, titled A bill to provide authority for
the Federal Government to purchase and insure certain types of troubled assets
for the purposes of providing stability to and preventing disruption in the
economy and financial system and protecting taxpayers, to amend the Internal
Revenue Code of 1986 to provide incentives for energy production and
conservation, to extend certain expiring provisions, to provide individual
income tax relief, and for other purposes, by a vote of 263 to 171, it
is 451 pages. The President quickly
signed it into law.
11. The U.S. economy shrank at a -0.3 percent annual rate in the third quarter, its sharpest contraction in seven years as consumers cut spending and businesses reduced investment in the face of rising fears that recession was setting in. The Commerce Department said the third-quarter contraction in gross domestic product was the steepest since the corresponding quarter in 2001 though it was slightly less than the 0.5 percent rate of reduction that Wall Street economists surveyed by Reuters had forecast. Consumer spending, which fuels two-thirds of U.S. economic growth, fell at a 3.1 percent rate in the third quarter -- the first cut in quarterly spending since the closing quarter of 1991 and the biggest since the second quarter of 1980. Spending on nondurable goods -- items like food and paper products -- dropped at the sharpest rate since late 1950 (Willis 2008; Willis & Miller 2008).
14. The third-quarter GDP number would have been worse except for a surge in federal government spending, which shot up at a 13.8 percent annual rate. That was more than double the second quarter's 6.6 percent rate of increase and was the strongest since the second quarter of 2003 when the war in Iraq began. Prices were still rising relatively strongly in the third quarter, with the personal consumption expenditures index up at a 5.4 percent annual rate, the sharpest since early 1990. Even excluding volatile food and energy items, core prices grew at a 2.9 percent rate, up from the second quarter's 2.2 percent rise (Somerville 2008). "We are being held up here by government spending, which added 1.1 percentage points to GDP growth," said Robert Brusca, chief economist with Fact And Opinion Economics in new York. "The GDP number doesn't reveal the weakness because (of) the impact of international trade, it's a warning how weak the economy is."
15. The
outlook is for a recession in the US economy during the coming winter. Real GDP
growth is expected to fall to 1½% this year and to -½% in 2009. As the impact
of the massive easing of monetary policy becomes stronger, together with an
expected decline in inflation on the back of lower oil prices, economic
activity should rebound gradually from the second half of 2009 onwards. The
pronounced deterioration in the fiscal position implies an increase in the
budget deficit to 9% of GDP by 2010. The
US economy performed
better than expected in the first half of 2008, due to sharply improving net
exports, against the background of dollar depreciation and softening domestic
demand, reflecting inter alia the ongoing housing correction. Moreover,
consumer spending held up reasonably well, as a result of the sizeable tax
rebates. Thanks to the positive carry-over from 2007 and the performance in the
first half of the year, real GDP growth in 2008 is projected to be 1.5%. Real GDP is projected to decline from
mid-2008 to mid-2009, resulting in a contraction of annual GDP by 0.5% in 2009.
Already in the third quarter of 2008, private consumption is projected to
contract (for the first time since the recession in 1990-91). Households are
reining in their spending as employment falls, real wages are declining, credit
conditions are tightening, and lower house and equity prices are reducing
wealth. Importantly, the depression in the housing sector continues to deepen.
Residential investment has already fallen by 40% since the peak of the housing
boom (European Commission 2008). In
the Crash of 2008, 40 percent of stock value has vanished, almost $9 trillion.
Some $5 trillion in real estate value has disappeared. A recession looms with
sweeping layoffs, unemployment compensation surging, and social welfare
benefits soaring. America's first
trillion-dollar deficit is at hand. In Fiscal Year
2008 the deficit was $438 billion (Buchanon 2008).
16. As in all past crises, at the
root of the problem is a loss of confidence by investors and the public in the
strength of key financial institutions and markets, which has had cascading and
unwelcome effects on the availability of credit and the value of savings. The financial systems in the United States
and in much of the rest of the industrialized world are under extraordinary
stress, particularly the credit and money markets. The losses suffered by many
banks and nonbank financial firms have both constrained their ability to lend
and reduced the willingness of other market participants to deal with them.
Great uncertainty about the values of financial assets, particularly more
complex and opaque assets, has made investors extremely reluctant to bear
credit risk, resulting in further declines in asset prices and a drying up of
liquidity in a number of funding markets.
On the heels of nearly a year of stress in credit markets, investors'
and creditors' concerns about funding and credit risks at financial firms
intensified over the summer as mortgage-related assets deteriorated further,
economic growth slowed, and uncertainty about the economic outlook increased.
As investors and creditors lost confidence in the ability of certain firms to
meet their obligations, their access to capital markets as well as to
short-term funding markets became increasingly impaired and their stock prices
fell sharply. Among the companies that experienced this dynamic most forcefully
were the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac;
the investment bank Lehman Brothers; and the insurance company American
International Group (AIG) (Bernanke 2008).
Fig. C-1 Dow Jones
Industrial Average 2000-2008 
17. In the Crash of 2008, 40 percent of stock value has
vanished, almost $9 trillion. Some $5 trillion in real estate value has
disappeared. A recession looms with sweeping layoffs, unemployment compensation
surging, and social welfare benefits soaring.
America's first trillion-dollar deficit is at hand. In Fiscal Year 2008 the deficit was $438 billion (Buchanon
2008). Japan, Germany, France,
and Italy all recorded negative growth in Q2 2008. Annual UK GDP growth was
3.1% in 2007 compared with 2.0% in the US and 2.7% in the Euro-zone (House of
Commons Library 2008). It must be added that government intervention has a
tendency to exacerbate rather than ameliorate financial crisis to such an
extent that historians generally identify financial crisis by the market
subsidies that threw scarce capital on the fire. The Crash of 2008 is eerily similar to the Crash
of 2003 that preceded the Iraq invasion and can be presumed to the result of
the Bush Administration taking what they can and destroying the rest (Conyers 2008). The two year time frame of the bailout is
presumably the time in which Bush officials are to make off with their loot
before a new administration balances the budget and has the wherewithal to
begin looking for stolen assets and prosecuting kleptocrats. The stock market collapse can be attributed
to private capital being absorbed by insured government bonds, war bonds in
2003 and bailout bonds in 2008.
18. The stock market crash of October 24
1929 began very similarly to this crash with thousands of investors losing
their savings in the stock market crash after a five-day frenzy of heavy
trading. Too much speculation with borrowed money, much like the hundreds of
billions of dollars illegally invested by the Bush administration, had inflated
stock market capitalization unrealistically.
The infamous Smoot-Hawley Tariff Act of the 1930s - which I am
sure you are all too familiar with - raised US tariffs on over 20,000 imported
goods to record levels, spread through other nations which also took their own
protectionist measures (Lamy 2008). Then, despite enormous subsidies poured
into corporations and social welfare programs it took WWII to pull the world
out of the Great Depression. Then in
another ominously similar crash in 1975,
during the Oil shortage caused by OPEC refusing to sell oil to the west, New
York and Washington, D.C. had to be bailed out.
On October 19, 1987
there was panic on the floor of the New York Stock Exchange as the Dow Jones
dropped more than 500 points - the largest decline in modern times amid
frenzied selling. On Black Monday, the Dow Jones Industrial Average stock
barometer plunged 22.61% to 1,738.41 points.
Later that decade, Citibank,
Chase-Manhattan and Bank of America were staring into the abyss, as Latin
American regimes, to whom they had lent scores of billions, were balking at
paying their debts. Uncle Sam stepped in.
Then came the Mexican and Asian financial crises and the U.S.-IMF
bailouts of the 1990s. For the countries
bailed out, like Mexico, Thailand, Indonesia and South Korea, were forced to
devalue. This radically reduced the wages of their workers relative to American
workers and slashed the price of foreign goods relative to U.S. goods, cheap
imports flooded in (Buchanon 2008).
19. During the past decade, one of the most prominent themes
sounded by policymakers, observers, and analysts of international economic
developments has been "globalization." Based on rapid advances in
trade, finance, transportation, and communications, the world economy has
become increasingly tightly knit. Large numbers of the world's
population--including those in China, India, and the former Soviet Union--have
emerged from their relative isolation to participate more fully in the global
economic system. The impression has been that national borders and regional
differences are becoming less and less relevant as businesses increasingly
operate in a single global market. In
the past year or so, however, especially as the housing sector in the United
States slowed sharply and turmoil erupted in many financial markets, a
different theme has come to the foreground: "decoupling." This term
refers to apparent divergences in economic performance among different regions
of the world economy. Part of the reason
the hypothesis of decoupling has gained so much traction is that the economies
of the world had appeared particularly "coupled" during the last
major downturn in the United States, the high-tech slowdown in 2001 and 2002.
Over the two years prior, during 1999 and 2000, quarterly real GDP growth in
the United States averaged about 3-1/2 percent at an annual rate; U.S. growth
then slowed sharply to about 1 percent during 2001 and 2002 before recovering
over the subsequent two years. In other major industrialized countries, average
growth slowed similarly, but the recovery was slower. In the emerging market world, economic growth
moved in tandem with U.S. growth, falling from more than 6 percent to about
3-1/2 percent, then recovering to more than 6-1/2 percent. As financial markets of many industrial
countries have been roiled by the turmoil that emerged August 2007, conditions
in the traditionally volatile financial markets of emerging market economies,
where the rule based international financial system has been most effective,
have proved surprisingly resilient (Kohn 2008).
20. Moving into 2008, concerns
about potential spillovers from slower U.S. growth and weaknesses in the
financial system weighed increasingly on advanced economy equity markets.
Throughout the world, the challenges posed by weakening economic activity were
further complicated by mounting inflationary pressures as food and energy
prices soared. The initial assessment
that the United States had decoupled from the rest of the world was incorrect,
and that, in fact, the global economy remains closely connected by both trade
and financial linkages. Investments made by U.S. residents abroad and by
foreigners in the United States are enormous, both in absolute terms and as
shares of GDP. Last year, for example, U.S. liabilities to foreigners totaled
more than $20 trillion, exceeding 140 percent of U.S. GDP. At the same time,
U.S. claims on foreigners totaled $17.5 trillion, roughly 130 percent of U.S.
GDP. Even the net liability position of the United States is sizeable, $2.5
trillion or more than 17 percent of GDP (Kroszner 2008). At the beginning of
the chain of causation for the financial crisis in industrial nations is the
housing cycle in the United States. The difference between this housing
cycle and others over past decades is primarily the willingness of lenders to
tolerate--or, in some cases, encourage--huge increases in loan-to-value ratios
added to the demand for housing, especially by people who normally might not
have had the savings to enter the market. Expectations of house price
appreciation facilitated and interacted with the increasing complexity of
mortgage securities, including multiple securitizations of the same loan.
The absence of investor caution and due diligence was especially noticeable for
the highest-rated tranches of securitized debt (Kohn 2008). Financial markets continue to show the ill
effects of turmoil triggered by mortgage losses. The real economy is
underperforming in terms of growth and job creation, a result in part of
financial strains. And financial institutions themselves are affected by
the generalized pullback in liquidity and deteriorating credit quality.
Nearly one year after the onset of financial market distress, many financial
institutions have retreated from certain business lines, limited their
participation in markets for some financial products, delevered their balance
sheets, and taken other actions aimed at balance sheet repair (Warsh 2008).
21. The
IMF World Economic Outlook of October 2008 reassures us that the global
economic slowdown is real. If it is just
the bill for damages by corporate spies of the lame duck Bush administration,
whose misbehavior cost them their clients, those damages to the labor market
are real and as a consequence of the myopic and prohibitively expensive bailout
of financial institutions, can be expected to extend into 2009 and to a lesser
extent 2010. The
world economy is in fact entering a major downturn in the face of the most
dangerous shock in mature financial markets since the 1930s. Against an
exceptionally uncertain background, global growth projections for 2009 have
been marked down to 3 percent, the slowest pace since 2002, and the outlook is
subject to considerable downside risks. The major advanced economies are
already in or close to recession, and, although a recovery is projected to take
hold progressively in 2009, the pickup is likely to be unusually gradual, held
back by continued financial market deleveraging. In this context, elevated
rates of headline inflation should recede quickly, provided oil prices stay at
or below current levels. Over
the past year, the global economy has been buffeted by the deepening crisis in
financial markets, by major corrections in housing markets in a number of
advanced economies, and by surges in commodity prices. Indeed, the financial
crisis that erupted in August 2007 after the collapse of the U.S. subprime
mortgage market entered a tumultuous new phase in September 2008 that has badly
shaken confidence in global financial institutions and markets. Most
dramatically, intensifying solvency concerns have triggered a cascading series
of bankruptcies, forced mergers, and public interventions.
22.
The economic cause of the financial crisis in the US and other colonial
economic systems, namely the EU, are that the burst of the housing bubble
spurred by defective lending products in an unregulated financial market abused
for prosecution by government officials and discriminatory “rich” people, was
aggravated by the inflation in the OPEC controlled price of oil, and
countervailing increases in energy, distribution and food prices, to the point
where there was a significant shortage of money to meet costs and banks had to
curtail their lending, so people and corporations could not cheat their way
through the hard times, resulting in insolvency, bankruptcy, lay-offs and more
foreclosures. The economic warfare of
OPEC, that broke the camel’s back, was clearly in retaliation for the
occupation of Iraq, a founding member of OPEC, and Afghanistan, and it was
permitted to occur because the Bush administration and Congress and allied
colonial leaders in the EU could benefit from the high cost of oil and energy,
as the result of their own personal investments, ie. bribery. This conflict of interest was too much for
the free market dogma of these predictably self-interested, military
controlled, domestic spying, colonial leaders who propaganda for war
misunderstands the free market to mean deregulation to such a degree that any
government intervention into the financial sector, other than that of the
prosecutor whose torturers are immune from civil damages caused by unwarranted
spying, must be purchased with illegal market distorting subsidies, graft. However these energy interests made enough
profit to seriously distort the market with their flight, now that regulators
are clamping down, and as the result of the enormous size of the subsidies the
damage to trade is severe. Alan
Greenspan himself admitted that he made a mistake by not regulating the markets
more (Felsenthal 2008).
23. Consumer prices rose by 4.1 percent for
all of 2007, up sharply from a 2.5 percent increase in 2006. The CPI
report showed that the 4.1 percent increase in overall prices was the
biggest since a 6.1 percent jump in prices in 1990. Energy costs rose by 17.4 percent this past
year while food costs rose by 4.9 percent. Both were the biggest increases
since 1990. Gasoline prices were up 29.6 percent, the biggest increase since
they soared by 30.1 percent in 1999. The
2.4 percent rise in prices outside of food and energy was the smallest since a
2.2 percent rise in 2005. Clothing costs and the price of new cars actually
fell for the year, both dropping by 0.3 percent, while airline fares,
reflecting higher fuel costs, were up 10.6 percent and medical care, always one
of the leading areas of price increases, rose by 5.2 percent for 2007. Workers' wages failed to keep up with the
higher inflation. Average weekly earnings, after adjusting for inflation,
dropped by 0.9 percent in 2007, the biggest setback since a 1.5 percent fall in
2005 (Crutsinger 2008). The best explanation for the
current financial crisis that is affecting the stock market, mutual funds and
credit markets, mostly in the US and EU but also in other nations that could be
called colonial, is that OPEC reported speculation in the stock market as the
major reason for the persistent spike in the price of a barrel of oil and the
law of supply and demand would therefore not work to reduce the price of oil
(Haylin 2008). Government regulation
seems to have eliminated this corrupt stock market speculation, at the
unnecessary cost of trillions of dollars of illegal market subsidies, and the
price of oil has tumbled to $63 in October after a high of $143 in July (Georgy
2008). The housing correction however continues
unabated whereas it is the result of incompetent government intervention, that
failed to prohibit the extortionate ARM loans, and the expensive Wall St.
bailout, is a Catch 22. Investors are
purchasing insured government bonds for the bailout rather than risky stocks
resulting in a flight of capital from the private market, slightly greater than
the slower moving government subsidies.
24. Now that the price of oil has
gone down, the price of commodities, such as food, should also go down or
stabilize and the truly impoverished people in developing countries, who cannot
or can barely afford such necessities, will not be more endangered. The damage has however been done to the stock
markets of the first world. The energy
speculators have sold, or are selling their shares. OPEC’s economic aggression succeeded in
making beggars of the first world, civil by comparison to the war crimes of the
first world in Islamic countries. The
first world nations have only their own people and lack of regulation to blame
for the biological warfare that accompanied the economic warfare against
colonial oppression. To recover from
this financial crisis the global economy must either swiftly devaluate the
currencies of the first world nations in proportion to the amount that the
currency’s financial sector bailout was unfunded or the financial crisis will
spread, to a limited degree, to emerging economies, who will eventually
themselves print out money and subsidize their markets, and economic recovery
will take much longer, because of a general lack of respect for global
financial rules.
25. Well-functioning financial markets are crucial to maximizing sustainable economic growth because they channel funds to the people with the most productive investment opportunities. However, financial
markets can do their job well only when they solve information problems that would otherwise impede the efficient allocation of credit to worthy borrowers. Financial liberalization and innovation bring many benefits but can also create information and incentive problems that lead to mistakes. When mistakes of this nature become evident, financial markets can seize up, with potentially significant adverse consequences for the economy (Mishkin 2008). The first mistake was for the government to get in debt to save the ailing, and corrupt, credit industry. Since the turn of the millennium deficit spending, loans
and credit in general have largely been discredited by most international economists who are tired of trying to collect debts from impoverished developing nations, insolvent colonial tyrants and hapless individuals alike. The Heavily Indebted Poor County (HIPC) initiative of the World Bank and IMF has become very successful at eliminating the debts of heavily indebted poor countries and the people are happy with this debt relief. The thinking has been that loans and credit in general, are a relic of the past that have been replaced, nearly entirely, with public assistance in the absence of a satisfactory purchase of goods and services. In 2004, the IMF’s loan portfolio was roughly $100 billion, and until 2008, it has fallen to around $10 billion annually (Engler 2008). Second, the emphasis on deregulation for the past decade can
be attributed with causing the current financial crisis. In the absence of regulation the prosecutor has been poisoning the market in response to every complaint and since the founding of the International Criminal Court (ICC) in retaliation for every good deed. Corporations have been frequently used in domestic spying operations devastating client confidence across all industries including the vital housing sector. Now a local politician or corporate executive can change a person’s home into a torture chamber, and as the result of being victimized by such meritless and malicious prosecution the state, federal and international governments inevitably side with the wall breakers for whom the courts plead immunity. This is where deregulation is fatally flawed because it is absolutely essential to a democracy and free market economy that people victimized by unlawful invasions and unwarranted searches and seizures are compensated for the damages caused by such arbitrary and lawless action, by the government in defense of civil liberties, so that the good and productive citizens are enriched while the immoral thieves, frauds, burglars and torturers are impoverished, thereby encouraging and empowering good behavior and discouraging misbehavior. Regulation is also needed to guarantee that defective products such as the Adjustable Rate Mortgage (ARM) and financial bailout are either never marketed or removed from the market when they are determined to have detrimental consequences in the long term. 26. Representative John Conyers, one of the few Congress people who voted against the $700 billion bailout, believes the tactics employed by the Treasury Secretary created an atmosphere of fear. The events of the last two weeks are reminiscent of the days leading up to the adoption of the Patriot Act, and to the invasion of Iraq, times where fear-mongering dampened the careful and deliberate consideration of alternative courses of action. He proposes a real solution to the credit crunch needed to address the concerns of Main Street, not just Wall Street. It is my belief that this legislation should have included provisions 1) enacting a moratorium on foreclosures, 2) restructuring mortgages to make them more affordable, 3) prohibiting interest rate increases associated with sub-prime loans and 4) bankruptcy reform that would give judges the freedom to renegotiate home mortgages during court proceedings. These initiatives could have been achieved without spending one dollar of the taxpayer's money. In addition, empowering the Federal Deposit Insurance Corporation to guarantee all depositors and bond holders would have provided immediate liquidity to credit markets. A plan, offered by Rep. Peter DeFazio, D-Ore., and other members of the so-called "Bailout Skeptics" Caucus, proposes some common-sense changes to Securities and Exchange Commission rules and Federal Deposit Insurance Corporation policies. Another plan, proposed by billionaire financier George Soros, mimics a successful model used in Norway and Sweden. The plan would inject credit into the markets in a direct and low-risk manner by empowering the Treasury Department to purchase preferred stock and discounted common stock from faltering lenders. I called for this type of direct capital deployment measure earlier this week, because it would provide the taxpayers with a tangible return on their investment and keep toxic mortgage-backed securities off the government's books. There are serious options for dealing with this crisis that don't involve giving away billions to the richest, most irresponsible businessmen (Conyers 2008).
D. Outlook for the Global Economy
27. While
the financial crisis was triggered by problems in the subprime segment of the
US mortgage market, it has grown in scale over the past 16 months and has been
transmitted around the global financial system via interconnected markets and
complex investment instruments of the industrialized world. Global real GDP growth is set to decelerate
from the exceptionally strong 5% recorded on average in 2004-2007, to 3¾% this
year and 2¼% in 2009 (European Commission 2008). Japan,
Germany, France, and Italy all recorded negative growth in Q2 2008 (House of
Commons Library 2008).
28. Economic inequality, discrimination, has been growing in the world's
richest countries over the past 20 years, even as trade and technological
advances have spurred rapid growth. The
Paris-based Organization for Economic Cooperation and Development said its
20-year study found inequality had increased in 27 of its 30 members as top
earners' incomes soared while others' stagnated. The U.S. has the highest inequality and
poverty rates in the OECD after Mexico and Turkey, and the gap has increased
rapidly since 2000, the report said. France saw inequalities fall as poorer
workers are better paid. In the U.S.,
the richest 10% earn an average of $93,000 -- the highest level in the OECD.
The poorest 10% earn an average of $5,800 -- about 20% lower than the OECD
average. Wealthy households are not only
widening the gap with the poor, but in countries such as the U.S., Canada and
Germany they are leaving middle-income earners farther behind. The two decades covered in the study,
1985-2005, saw a period of overall strong economic growth. With several OECD countries facing recession,
the "key question" raised is whether governments can prevent a
possible drop in top earners' incomes from sparking "a second wave"
hit to the lowest-income households, said Martin Hirsch, France's high
commissioner for fighting poverty.
29. OECD Secretary-General Angel Gurria said
greater income inequality "polarizes societies" and "carves up
the world between rich and poor" (OECD 2008). The financial crisis drives home the fact that
a Nation, in which the rich are continually getting richer, at the expense of
the poor and middle class, is a poor nation indeed. While it is too much to expect the
industrialized nations to stop persecuting their own people, it is conceivable
that, as the result of the success of the international trade and financial
system under the Millennium Development Goals, the colonial powers will allow
the independent developing nations, don’t forget it was OPEC who broke the
camel’s back, to bail out the bailout. On
the upside the financial crisis in discriminatory, colonial, industrialized
nations, has not yet seriously affected developing nations who have been
enjoying high rates of economic growth in a rule based system. The financial crisis has in fact reduced
commodity prices mitigating hunger concerns amongst the poorest, giving rise to
hope that developing nation currencies can appreciate significantly and
permanently against the euro and US dollar and developing nations whereby they
would earn greater voice from their membership in the international monetary
system and more purchasing power.
30. In the euro area, a net balance of 43%
of banks (subtracting those easing standards from those banks tightening them)
tightened lending standards vis-à-vis firms in Q2/2008, indicating the fourth
consecutive broad-based tightening of bank lending standards in a row. Banks
are expected to have tightened standards further in Q3/2008. In Q2/2008 a
near-record net balance of 30% of all banks reported a tightening of standards
as regards loans for house purchase and a record 24% of all banks, on balance,
reported a tightening of standards on consumer loans. As of June 2008, the year-on-year change in
net issuance of non-financial corporate debt securities declined to 4.0%, down
from the 7.8% recorded in March 2008 (European Commission 2008). The situation is the same in Europe. Falling gross domestic product (GDP) in the
second quarter has been followed by alarming developments such as the temporary
closure of major car plants throughout Europe and the collapse of a number of
jobs in the temporary agency work sector. Moreover, leading business cycle
indicators point to a severe downturn.
Plans to inject hundreds of billions of euros in the banking system are
not securing the economy. Given these developments and the seriousness
of the credit squeeze, the European Trade Union Confederation (ETUC) expects
growth in the euro area economy to turn negative in 2009 (Janssen 2008).
31. When the multibillion European plan to
recapitalize the banking system was pieced together at the beginning of October
2008, its basic aim was to break the vicious circle of: loss of banking capital
because of write downs on ‘toxic’ assets and ‘firesale’ asset sales to respect
Basel II solvency ratios. Governments,
by injecting massive amounts of new capital into banks, were trying to stop
this downward spiral. This, however, has not been entirely successful. The reason for this is that financial markets,
after a first reaction of relief that governments had intervened in the sector,
started to note that the banking rescue plan failed to save the real economy as
well and that troubles in the real economy would spill back over into the
financial sector, thereby adding to existing banking problems. These are not ‘normal’ times. Financial
markets are not operating as usual but are seriously distressed. Interbank
lending rates are high above official interest rates, banks distrust each other
and are reluctant to lend to each other. Liquidity is not transformed any
longer into credits for investment but is put into safe-haven investment
categories such as government bonds or is even returning back to the central
bank in the form of central bank deposits (Janssen 2008). Japan
announced a $51 billion stimulus package last week for Asia's largest economy
and Germany plans to provide a 50 billion euro ($64.2 billion) boost to
Europe's biggest economy (Kim 2008).
32. The 10 New Member States of the European Union (EU10) are affected by the ongoing global financial crisis, and growth will be slower this year and next due to weak external demand and tight credit conditions, The World Bank is ready to provide one billion Euros as part of a program supported by the IMF and European Union. The international financial crisis intensified since early October and resulted in an acute tightening of interbank markets, bank consolidation and takeovers in developed economies, and a sharp drop in global equity prices. These developments have been accompanied by a dramatic increase in volatility for equities, commodities, and currencies. The financial turmoil has spread quickly to reach to EU 10 countries and credit default swaps have widened. Also, some countries in the region are experiencing a shortage of liquidity reflected in sharp increases in interbank rates. Weakness in external demand and tightening credit conditions will likely result in a decline in exports and investment growth. While further moderate slowdown appears likely in Bulgaria, the Czech Republic, Poland, and Slovenia, other countries are likely to face a larger slowdown, but also from higher rates of economic growth. The Baltic countries and Hungary may face a more prolonged downturn. Inflation has peaked but remains elevated. To respond to the international crisis, fiscal discipline must be enhanced through prudent budget management and improvements in the effectiveness and quality of public services to Romanian citizens across the board. Whether in education, health or pensions, social assistance or transport, the agenda for the modernization of public administration and financial management remains long (World Bank 2008). The Australian currency has dropped 29 percent in the past six months against the dollar, from an average of 82 cents in September to an average of 68 cents in October (Kim 2008).
33. South Korea plans a 14
trillion won ($10.8 billion) boost to the economy next year as the nation
tackles the biggest crisis since it needed an International Monetary Fund
bailout a decade ago. The package includes spending an extra 4.6 trillion won
on regional infrastructure and providing 3 trillion won in tax benefits, mainly
extending tax breaks on investment in factories. Relief measures announced this year now total
33 trillion won, according to the finance ministry. The currency and stocks rose after the
government said the measures will add 1 percentage point to economic growth and
create an extra 200,000 jobs. Exports, the main engine of growth, rose by the
least in 13 months in October because shipments to China fell for the first
time since 2002. The government will
provide 1.3 trillion won to the state- run financial institutions, including
Korea Development Bank, so the banks can lend more to smaller companies and
exporters. It will extend tax breaks for
companies investing in factories by one year, out until the end of 2009. South
Korea also said it will spend an extra 1.3 trillion, mainly on medical services
for low-income earners and creating jobs for the elderly and internships for
younger people. The Kospi stock index, which recorded the biggest monthly
decline since 1997 in October, rebounded 2.9 percent to 1,144.78. South Korea's
economic growth cooled to 0.6 percent in the third quarter, the weakest pace
since 2004, as exports declined by the most in seven years and consumer
spending stagnated. Manufacturers and
retailers have been firing workers this year as demand eases and Korean
builders are reeling under the largest backlog of unsold homes in a decade. The
government announced Oct. 21 it will spend as much as 8 trillion won to buy
land and unsold homes. Lawmakers last
week approved the government's guarantee of $100 billion in bank debts to help lenders
struggling to access foreign funds. South Korea cut interest rates and will
also supply banks with $30 billion in U.S. currency from the Federal
Reserve. The government's total
expenditure will increase to 283.8 trillion won in 2009 from a previous
forecast of 273.8 trillion won. National debt will be 34.3 percent of gross
domestic product next year, up from an earlier prediction 32.3 percent. The won rose 0.5 percent to 1,284.30 against
the dollar rebounding from an earlier decline. Korea's won has fallen 28
percent this year, Asia's worst performer, as investors dumped assets in
emerging markets (Kim 2008).
34. Beijing
began its astonishing rise by devaluing its currency 45 percent in 1994,
slashing the prices of exports in half and making imports twice as
expensive. China's worldwide trade
surplus in manufactures, $31 billion in 2001, hit $401 billion in 2007, a 1,300
percent increase, and may reach $500 billion in 2008. China has shoved Germany
aside to become the world's greatest exporter and now leads the world in the
export of manufactured goods to Japan and the European Union, as well as the
United States. Before 2004, China's
manufacturing trade surplus with America was largely in textiles and apparel.
But, since then, China's rocketing trade surplus in electronics, computers and
parts has far exceeded her surplus in textiles and apparel. China's trade
surplus in computers and components rose from $8.1 billion in 2001 to $73.5
billion in 2007. In cellular phones and parts, her worldwide trade surplus grew
from $3 billion in 2003 to $50 billion in 2007, and may reach $60 billion by
year's end. With her immense trade surpluses, China's reserves have surged from
$200 billion in 2002 to $2 trillion. As
America plunges into recession and our industry hollows out, while China is
still growing at 9 percent, the terrible danger we all face is from
"protectionism" (Buchanan 2008).
In its communiqués of October 2004 and of February and April of
2005, G-7 Finance Ministers and Central Bank Governors stated: “… that more
flexibility in exchange rates is desirable for major countries or economic
areas that lack such flexibility to promote smooth and widespread adjustments
in the international financial system, based on market mechanisms.” On April 6,
2005, sixty seven US senators voted to support an amendment, sponsored by
senators Schumer (D- New York) and Graham (R-South Carolina), that called for
imposing an across-the board tariff of 27.5 percent on China’s exports to the
United States if negotiations between China and the United States on the value
of the RMB proved unsuccessful. In its May 2005 “Report to Congress on
International Economic and Exchange Rate Policies,” the US Treasury [2005, p.
2] summed-up its evaluation of China’s exchange rate policies as follows:
“…current Chinese policies are highly distortionary and pose a risk to China’s
economy, its trading partners, and global economic growth…. If current trends
continue without substantial alteration, China’s policies will likely meet the statute’s
technical requirements for designation” (as an economy that is manipulating its
currency). On July 27, 2005 the US House of Representatives passed by a 255-168
margin a bill sponsored by Representative English (R-Pa) that would not only
extend countervailing duty or anti-subsidy law to non-market economies (China
among them) but would also place additional requirements on the US Treasury in
its reporting to Congress on the practice of currency manipulation (Goldstein
2005).
35. Mongolia is in many ways a typical developing country,
depending heavily on resource-based exports -- in this case, copper and other
minerals. The copper price has boomed in recent years, which has helped
Mongolia grow faster and expand public programs. Yet the end of the global boom
means the end of the commodity boom. Within a short time the copper price has
dropped from over $8,000 per metric ton to under $4,000 today. Some see this as a good time to enact fiscal
rules that require a larger share of future windfalls be saved. That way, the
country can have stable expansion of development programs that are insulated
from boom-bust commodity cycles. The
challenge for Mongolia is to use the country’s mineral wealth in a way that
preserves and enriches the country’s unique natural and cultural heritage
(World Bank 2008).
36. Developing nations had faced a sudden convergence of food, fuel and financial crises as development and finance ministers gathered for the Bank and IMF Annual Meetings. Countries already suffering food and fuel price inflation may now also see declines in exports, trade and investment as a result of financial turmoil that is becoming increasingly global. A new Bank report says the number of malnourished people globally will grow by 44 million, to 967 million, in 2008, after several countries experienced double-digit food inflation. The Bank created a US$1.2 billion rapid financing facility and called for a New
Deal for a Global Food Policy to promote agricultural development and food security in Africa. The Bank’s Global Food Response Program has approved and started disbursing $188 million in 19 countries as
of October 2, with $663 million earmarked for another 13 countries. Developing countries must prepare for a drop in trade, capital flows, remittances, and domestic investment, as well as a slowdown in growth (Zoellick 2008) High food and fuel prices that prevailed until recently will increase the number of malnourished people in the world by about 44 million to a total of 967 million. Young children who do not receive proper nutrition will suffer the health effects of early malnutrition well into adulthood. Also, many poor families have been forced to cut back on education costs in order to feed themselves.
37. At a recent roundtable discussion, World Bank Chief Economist Justin Yifu Lin said the food crisis highlights the need to restore confidence in global grain markets,” said Lin, “The recent price fluctuations reflect a collapse in market confidence, not just a temporary imbalance in supply and demand.” Key grain prices have fallen in the past few months with Thai medium grade rice prices declining from a peak of
$1100/ton in May 2008 to $730/ton in September. Nevertheless, rice prices remain double their average level in 2007, and prices for most major food crops are projected to remain well above 2004 levels through 2015. Median inflation in non- OECD countries rose from 5 percent in 2006 to 8.1 percent in 2008 in some nations inflation was even more - Kyrgyz Republic (32 percent), Vietnam (26 percent) and Chile
(16 percent) (Human Development Network & Poverty Reduction and Economic Management Network 2008). 38. There is concern that the financial crisis will reduce foreign aid and remittances. The international movement of workers leads to macroeconomic consequences, particularly for smaller developing countries. In 2007, an estimated $240 billion in remittances went to developing countries, more than double the flow in 2001. These remittances represent a significant source of developing country income and broaden the scope for cyclical spillovers (Kohn 2008). Two things need to happen for the crisis to lead to a significant reduction in foreign aid. First, the financial crisis has to lead to a major recession in donor countries.
Second, the recession leads to such fiscal constraints that foreign aid is cut. Aid in the form of money, goods or technical assistance can develop infrastructure, strengthen institutions, or address humanitarian
crises in recipient countries. Foreign aid can exceed 10% of a recipient country’s national income in many instances. Support for foreign aid can be seen as part of a general orientation to foreign policy labeled “cooperative internationalism” as opposed to “militant internationalism”. Citizens of colonial powers are likely to be better informed about events in the developing world, understand development issues facing other countries, and be aware of inequality between colonizers and the colonized. These citizens may also feel a greater sense of responsibility for the welfare of people in ex-colonies and the rest of the developing world. Many Americans view their role as international policeman as a substitute for development aid. The United States spent about 0.16 percent of gross national income (GNI) in 2007, compared to the average of 0.45% among the 22 DAC members. Increasing U.S. aid is challenging however in the face of low public support. Only 55.5% of Americans favor aid to poorer countries and only 45% favor increasing aid. The United States channels only about one tenth of its aid through multilaterals. In contrast, in most years Italy channels over one half of its aid through multilaterals (Paxton & Knack 2008). 39. A seminar between African bankers and international investment analysts, held under the auspices of the World Bank-IMF Annual Meetings, discussed how the current global financial crisis might affect Africa and what countries can do to protect themselves. Sub-Saharan Africa already has seen some effect as a result of the crisis. Stock markets in Africa’s larger economies are mirroring those of developed markets, and international bond issues that were growing have slowed. The small size of African markets also means that even limited withdrawals could have significant impact and, although major capital withdrawal from foreign investors is unlikely, as the current crisis deepens, it could have an effect. Participants noted that African markets are at varying levels of development, that debt in the public sector
dominates, and that there is a focus on primary markets rather than secondary – leaving many investors with no capacity for emergency exits – and no bond markets exist outside of the West Africa Economic and Monetary Union (WAEMU), several countries do not have a market system (World Bank 2008). African Ministers of Finance have urged developed countries to maintain pledged levels of aid to African
countries despite the volatility of the international financial markets. At a press conference in Washington, ministers from three countries said their governments were still studying the possible implications of the financial markets meltdown in order to prepare to take steps to mitigate any potential fallout. They urged donors to offer flexible programs in support of Africa’s development efforts. 40. The African Development Bank is expected to organize a seminar in November to explain how the crisis could affect Africa. The problems global markets are experiencing could have been avoided had
developed countries adhered to IMF financial management tenets. The fallout on economies of such countries as Kenya would depend on the steps their major trading partners, Europe in particular, intend to take to contain the crisis. The ministers also raised the question of voice for African countries in international financial institutions. Gambia’s Bala-Gaye said his country is anticipating a decline in tourist traffic in light of the economic problems developed countries are likely to experience, and a drop in remittances by the Gambian Diaspora living in those countries. Cameroon’s minister explained how the delayed effects of the crisis are likely to affect the economy of his country as the prices of export commodities drop due to reduced demand in the traditional export markets. The ministers stressed that the crisis underscores the need for African countries to institute reforms to create favorable climates for investment, especially in agriculture, that will in turn lead to increased production and self reliance in food. They emphasized the importance of creating goods and services while pursuing south-south cooperation among their countries, especially on the sharing of technical skills and experiences. The ministers explained the steps that individual African countries have taken to deal with food and fuel crisis. They emphasized that investment in infrastructure and agriculture is crucial for realizing the envisaged growth and development of African economies, and they called on donors to focus on the two sectors as a matter of priority (World Bank 2008). 41. Modern currency crises often
begin with a government immobilized by contending demands to sustain a fixed
rate and to devalue. Latin American
emerging market countries demonstrate the tendency for overvaluation spells, in
contrast to the experience of emerging Asian countries. The perception that some Asian countries, and
in particular, China, have pursued active exchange rate policies has renewed
interest on a debate about the merits of the neo-mercantilist view that an
undervalued currency should provide protection to domestic industries in order
to stimulate the tradable sector. Latin
American countries have often allowed their currencies to appreciate, or maintained
artificially appreciated official exchange rates in the presence of large black
market premiums, and have achieved lower growth rates and been prone to
periodic bouts of macroeconomic instability.
During 1980–2006, an overvaluation of 15 percent or more took place
during 12 years in Argentina, 7 percent in Brazil, 8 percent in Colombia, 5
percent in Chile, and 4 percent in Mexico. Most of the overvaluation spells
mentioned above were related to the presence of fixed exchange rate regimes. A
large black market premium is perhaps a clear sign of an artificially
appreciated currency. This tendency for
Latin American countries to seek to appreciate their currencies has often been
attributed to political economy considerations.
Latin America’s large inequality is thought to provide the grounds for
strong short-term political gains from policies that redistribute rents from
the exporting sector, and exchange rate appreciation figures prominently among
such policies (Filho & Chamon 2008). Unless properly overseen,
liberalization can result in too rapid growth of bank assets, over-indebtedness
and price-asset bubbles (Gil-Diaz 2008)
42. The financial crisis that
followed the Mexican devaluation in December 1994 spilled over to the economies
of other countries, mostly in Latin American.
The Mexican devaluation occurred in an environment that did not believe
that the peso parity was sustainable and reserves fell until the government had
no other choice but to devalue. After a
couple of days and US 5 billion of capital flight, the Mexican authorities were
left with little choice but to adopt a floating exchange rate regime. Far from calming the markets, the devaluation
resulted in a financial crisis with significant spillover effects on other
countries particularly in Latin America.
The policy based on a fixed exchange rate, designed to fight
inflationary pressures, was implemented at the end of February, 1988. Beginning
in 1989, the fixed exchange regime was replaced by a crawling peg. Originally,
the crawl was fixed at one peso per day (equivalent to the annual depreciation
rate of 16%), in 1990 this was reduced to 80 centavos daily (11% annual
depreciation) and, in 1991, the crawl was fixed at 40 centavos daily (5% annual
depreciation). In November 1991, the
crawling peg was replaced by a band within which the exchange rate was allowed
to fluctuate. The ceiling of the band was adjusted daily by 0.0002 new pesos
(or 20 cents of the old pesos). This adjustment was increased in October, 1992
to 0.0004 new pesos daily while the floor was maintained at 3.0512 new pesos
per dollar. On December 20, 1994 the ceiling of the band was increased by 15%
while its subsequent daily increase of 0.0004 new pesos was maintained. This
policy proved to be unsustainable and was abandoned two days later when the
Mexican authorities were forced to adopt a floating exchange rate regime
because they had run out of international reserves (Lustig 1995).
43. The Asian financial
crisis was initiated by two rounds of currency depreciation that have been
occurring since early summer 1997. The first round was a precipitous drop in
the value of the Thai baht, Malaysian ringgit, Philippine peso, and Indonesian
rupiah. As these currencies stabilized, the second round began with downward
pressures hitting the Taiwan dollar, South Korean won, Brazilian real,
Singaporean dollar, and Hong Kong dollar. Governments have countered the
weakness in their currencies by selling foreign exchange reserves and raising
interest rates (Nanto 1998). On
the brink of hyperinflation and immersed in a deep financial crisis, Ecuador
abandoned its currency in January 2000 and adopted the U.S. dollar as its legal
tender (Filho & Chamon 2008).
44. Latin American countries have experienced cycles of
expansionary policies, currency appreciation, and devaluation crises. The
popularity of appreciations, through their effect on consumers’ purchasing
power, has been an accepted assumption in the literature despite a dearth of
studies on the distributional impact of exchange rate movements. There
is indeed evidence that politicians in Latin America have a bias toward
appreciating their currencies and distributive goals that have often generated
real appreciation and periodic crisis known as “macroeconomic populism”.
Appreciation is politically popular, in a large cross-section of Latin American
countries, they show that the currency tends to appreciate before and
depreciate after elections. For a given
level of income, changes in exchange rates that are passed through to domestic
prices affect the purchasing power of households differentially, depending on
how the prices of their consumption baskets respond to exchange rates. For
instance, to the extent that poorer households spend a larger share of their
consumption on tradable goods (food, a tradable good, tends to have a large
weight on the poor’s budget) than richer households, the pass-through or
consumption effect of an appreciation tends to be pro-poor. As exchange rate movements affect the
relative profitability of different sectors of the economy (for example,
manufacturing relative to services), it also shifts the relative demand for
labor of different skills, locations, and sector of employment, among other
characteristics. The short-term effect
of currency appreciation through the consumption channel benefits poorer
households more than proportionately as expected. For Brazil, the consumption
or pass-through effect of a 10 percent appreciation is equivalent in welfare
terms to an increase in income of 1½ percent for the poorest households and
only 1 percent for the richest ones. In Mexico, where the exchange rate
pass-through is higher, the average of that effect is 4½ percent, and the
difference between poorer and richer households is more muted (only
about¼percent), with the effects peaking at middle income levels (but varying
by less than ½ percent across the distribution) (Filho & Chamon 2008).
45. Households whose heads have
been employed in agriculture in the last 12 months are the ones whose total
income is more negatively related to appreciations. A 10 percent appreciation
in the REER is associated to a reduction in the relative income of those
households by about 2.1 percent, and that was statistically significant for all
specifications. On the other hand, the finance and business services and the
construction sectors showed positive coefficients for all specifications,
albeit less precisely estimated. That is also expected, as those two sectors
are eminently non-tradable. Somewhat
surprisingly, the relative incomes of households whose heads are in the public
administration, health, and education sector are negatively related to
appreciations. Again, the income of
poorer households fares worse following an appreciation. The distributional
effects peak at the middle of the distribution, and then decline. All else equal,
the effect of a 10 percent appreciation on the income of households will be
about ½ percent lower for the poorest and ¼ lower for the richest households
vis-a` -vis those in the middle of the distribution. All else equal, households working in the tradable
sector (agriculture, mining, and manufacturing) experience a 1.1 percent
decline in their income relative to those in the non-tradable sector following
a 10 percent NEER appreciation (or a 2.8 percent decline for a 10 percent
currency appreciation). 30–50-year-old age group tend to do better during
periods of more appreciation than the more educated and older households. In
the case of Mexico, the largest gains from appreciation remain in the lower
middle classes, with a 10 percent appreciation improving their welfare relative
to the very poor or very rich households by about ½ percent of
expenditure. In summary, the evidence
for Brazil and Mexico does not favor the view that Latin America’s large
inequality is the main culprit for these countries’ propensity to let their
currencies appreciate, because the distribution of relative welfare gains and
losses of appreciations across the expenditure distribution is fairly flat. In
contrast, the paper found significant differences in the welfare effects of
appreciations across economic sectors and regions. (Filho & Chamon 2008).
