FIN415 Class Web Page, Spring '23

Jacksonville University

Instructor: Maggie Foley

The Syllabus

Term Project Part I (due with final) Part I video
Term project part II (excel questions) (due with final) part II - A video part II B video

 

Weekly SCHEDULE, LINKS, FILES and Questions

Week

Coverage, HW, Supplements

-        Required

Supplemental Reaching Materials

Week

1

Marketwatch Stock Trading Game (Pass code: havefun)

Use the information and directions below to join the game.

1.     URL for your game: 
https://www.marketwatch.com/game/fin415-23spring    

2.     Password for this private game: havefun.

3.     Click on the 'Join Now' button to get started.

4.     If you are an existing MarketWatch member, login. If you are a new user, follow the link for a Free account - it's easy!

5.     Follow the instructions and start trading!

6. Game will be over on 4/17/2019

 

 

How to Use Finviz Stock Screener  (youtube, FYI)

 

How To Win The MarketWatch Stock Market Game (youtube, FYI)

 

How Short Selling Works (Short Selling for Beginners) (youtube, FYI)

 

-

 

World Economy of 2022 by World Bank

https://www.worldbank.org/en/news/immersive-story/2022/12/15/2022-in-nine-charts

 

Highlights from the World Bank Group-IMF 2022 Annual Meetings: Navigating an Uncertain World (youtube)

 

 

 

 

 

 

 

 

 

World Bank shares its 2022 review after a challenging year

https://en.hespress.com/56355-jenna-ortega-accused-of-anti-semitism-for-supporting-palestine.html

 

Hespress EN, Thursday 5 January 2023 - 19:21

 

In a study summarizing 2022, the World Bank provided charts showing how various factors disrupted the world and led to a crisis in global development.

 

Slowing growth contributed to a reversal of progress on the global poverty agenda and an increase in global debt, said the World Bank.

 

Global vaccination campaigns helped nations to begin recovering from the pandemic and brought millions of children back to school, but the report noted that the long-term effects of recent learning losses could linger for years.

 

It highlighted that as a result of climate change and Russias invasion of Ukraine, food inflation and food insecurity increased considerably throughout the year, pushing up the cost of food, fuel, and fertilizer.

 

The World Bank worked with its partners all year to help turn shareholder contributions and equity into expanded support for countries to meet their most pressing needs, as stated in the report, in order to combat these multiple crises and contribute to a more stable and equitable recovery.

 

The first element that the World Bank elaborated on is slowing growth.

 

With worldwide consumer confidence already experiencing a considerably greater decrease than during the lead-up to past global recessions, the global economy is currently experiencing its worst slowdown since a post-recession recovery began in 1970.

 

The three largest economies in the world, the US, China, and the euro area, have all seen a significant slowdown. Given the situation, even a slight blow to the world economy over the course of the ensuing year might send it into a recession, explained World Bank.

 

The second element is poverty, as the COVID-19 pandemic dealt the largest setback to global poverty reduction efforts in decades, and the recovery has been highly uneven, declared the organization.

 

The year 2022 will now go down in history as the second-worst year for reducing poverty (after 2020).

 

According to current projections, 7% of the worlds population, or around 574 million people, will still be living in extreme poverty in 2030, which is well behind the worldwide target of 3%.

 

The third factor is the evolving nature of debt, as overall debt levels for developing nations have risen over the past ten years, with almost 60% of the worlds poorest nations either in debt crisis or at risk of it.

 

World Bank said that over-encumbered with debt, the worlds poorest are not able to make critical investments in economic reform, health, climate action, or education, among other key development priorities.

 

The COVID-19 health response has received the most funding from the World Bank Group, making the disease the fourth aspect of the report.

 

Over 100 nations received about $14 billion from the organization, including over 30 that were affected by violence, war, and fragility.

 

The fifth factor is rising food insecurity and inflation as 2022 was characterized by a sharp increase in food insecurity globally.

 

The World Bank Group has responded by allocating $30 billion over the course of 15 months to alleviate food insecurity.

 

Ramping up Climate Investment is the organizations sixth priority on the list.

 

Delivering a record $31.7 billion in climate finance, the highest ever in a single year in its history, the World Bank Group increased its assistance to help countries address climate and development issues jointly.

 

Energy was the seventh component because, in the first half of 2022, the worlds energy markets experienced one of the biggest shocks in decades, which caused energy prices to soar, exacerbated energy shortages and security concerns, and slowed down efforts to achieve universal access to affordable, reliable, sustainable, and modern energy by 2030.

 

The vulnerability and isolation of populations without electricity have prompted countries to increase their focus on energy access and affordability in their COVID-19 recovery plans, noted the organization.

 

The eighth element is the bodys response to the learning crisis.

 

The World Bank recommends that nations keep schools open and extend instructional time in order to address this issue, evaluate students and equip teachers to adapt their instruction to students levels of learning.

 

It also suggested streamlining the curriculum and concentrating on the fundamentals, and establishing a national political commitment to learning recovery that is informed by reliable learning measurement.

 

 

Part II In class exercise practice of converting currencies

If the dollar is pegged to gold at US $1800 = 1 ounce of gold and the British pound is pegged to gold at 1200 = 1 ounce of gold. What should be the exchange rate between US$ and British ? How much can you make without any risk if the exchange rate is 1 = 2$? Assume that your initial investment is $1800. What about the exchange rate set at  1 = 1.2$? What about your initial investment is 1200?

 

Solution: 

 

1 = 2$ (note that the exchange rate is set at 1 = 1.5$ since $1800 = 1500=1 ounce of gold  $1.5=1).

 With $1800, you can buy 1 ounce of gold at US $1800 = 1 ounce of gold. With one ounce of gold, you can sell it in UK at 1200 = 1 ounce of gold, so you can get back 1200  convert to $ at $2=1 as given get back 1200 * 2$/ = $2400 > $1800, initial investment  you could make a profit of $600 ($2400 - $1800=$600)  Yes.

 

1 = 1.2$ (note that the exchange rate is set at 1 = 1.5$ since $1800 = 1500=1 ounce of gold  $1.5=1).

       With $1800, you can buy either 1 ounce of gold at US $1800 = 1 ounce of gold.  With one ounce of gold, you can sell it in UK at 1200 = 1 ounce of gold, so you can get back 1200  convert to $ at $1.2=1 as givenget back 1200 * 1.2$/ = $1440 < $1800  you will lose $360 ($1440 - $1800=$-360)  No.

      So should convert to first and then buy gold in UK  With $1800, you can convert to 1500 ($1800 / (1.2$/ = 1500 ).  buy gold in UK at 1200 = 1 ounce of gold, so you can get back 1500/1200 = 1.25 ounce of gold  Sell gold in US at  US $1800 = 1 ounce of gold  So get back 1.25 ounce of gold * $1800 = $2250 > $1800  you will make a profit of $450 ($2250 - $1800=$450)  Yes.

 

 

Homework chapter1-1 (due with first midterm exam)

 

1.     If the dollar is pegged to gold at US $1800 = 1 ounce of gold and the British pound is pegged to gold at 1500 = 1 ounce of gold. What should be the exchange rate between US$ and Euro ? How much can you make without any risk if the exchange rate is 1 = 1.5$? (hint: $1800 get gold sell gold for euro convert euro back to $) How much can you make without any risk if the exchange rate is 1 = 0.8$? (hint: $1800 get euro buy gold using euro sell gold for $) Assume that your initial investment is $1800.   (answer: $1.2/euro, $450, $900)

 

2.     What is your opinion on arbitrage across borders? Do you think that arbitrage crypto will work? (Optional homework question)

Crypto arbitrage:Cryptocurrency arbitrage is a strategy in which investors buy a cryptocurrency on one exchange, and then quickly sell it on another exchange for a higher price. Cryptocurrencies trade on hundreds of different exchanges, and often the price of a coin or token may differ on one exchange versus another.

https://www.sofi.com/learn/content/crypto-arbitrage/#:~:text=Cryptocurrency%20arbitrage%20is%20a%20strategy,on%20one%20exchange%20versus%20another.

 

How I Became A Crypto Billionaire In 5 Years (CNBC)

 

The FTX Collapse, Explained | What Went Wrong | WSJ (youtube)

 

 

Jan 11 Class video (covers in class exercise)

 

 

 

 

Sam Bankman Fried Explains His Arbitrage Techniques

Nicholas Pongratz, April 9, 20213 min read

https://www.yahoo.com/video/sam-bankman-fried-explains-arbitrage-132901181.html

 

A former ETF trader at Jane Street, Sam Bankman-Fried developed a net worth of $9 billion from trading crypto in three and a half years. He explained his success comes from lucrative arbitrage opportunities in crypto.

 

Bankman-Fried launched a crypto-trading firm called Alameda Research in 2017. The company now manages over $100 million in digital assets. The firms large-scale trades made Bankman-Fried a self-made billionaire by the age of 29. He is also the CEO and founder of the FTX Exchange, a cryptocurrency derivatives trading exchange.

 

Upon entering the crypto markets, he discovered that Bitcoin was growing very rapidly in trading volumes. This meant there would also be large price discrepancies, making it ideal for arbitrage, taking advantage of the price differences.

 

The Kimchi Premium

One opportunity he exploited was what is known as the kimchi premium. While Bitcoin was pricing at around $10,000 in the US, it traded for $15,000 on Korean exchanges. This was because of a huge demand for Bitcoin in Korea, Bankman-Fried said.

 

Around its peak, there was a vast spread of around 50%, he said. However, because the Korean won is a regulated currency, it was difficult to scale this arbitrage. Bankman-Fried said:

 

Many found a way to do it for small size. Very, very hard to do it for big size, even though there are billions of dollars a day volume trading in it because you couldnt offload the Korean won easily for non-crypto.

 

Although nowhere near as significant, the premium still exists today. According to CryptoQuant, the premium is listed at 18%.

 

10% Daily Returns in Japan

Bankman-Fried then sought a similar opportunity in other markets, which he found in Japan. He said:

 

It wasnt trading quite the same premium. But it was trading at a 15% premium or so at the peak, instead of 50%.

 

After buying Bitcoin for $10,000 in the US, investors could send it to a Japanese exchange. There they could sell it for $11,500 worth of Japanese yen. At that point, they could convert the amount back to dollars.

 

Because of the trades global nature and the wire transfers involved, it would take up to a day to perform. But it was doable, and you could scale it, making literally 10% per weekday, which is just absolutely insane, Bankman-Fried said.

 

Bankman-Fried was successful where others were not because he managed to facilitate all the different components involved in the trade. For example, finding the right platform to buy Bitcoin at scale, then getting approval to use Japanese exchanges and accounts. There was also the difficulty of even getting millions of dollars out of Japan and into the US every day.

 

You do have to put together this incredibly sophisticated global corporate framework in order to be able to actually do this trade, Bankman-Fried said. Thats the real task, the real hard part.

 

High Edge, Low Risk

The decentralized aspect of the crypto ecosystem enables these large arbitrage premiums to exist. With other financial markets, there is a cross merging between exchanges and central clearing firms or brokers, Bankman-Fried explained. So its really capital-intensive, and also you have to worry about counterparty risk, he added.

 

But once investors and traders come to understand the crypto space intimately, they can figure out where the counterparty risk is close to zero, but the edge is still high.

 

According to Bankman-Fried:

 

Theres a lot of money to be made, if you can really figure out and pinpoint when there is and isnt a ton of edge and when there is and isnt a ton of actual counterparty risk.

 

Part III: Multilateral Trade vs. Bilateral Trade

 

 

Trade agreement (video)

 

What is MULTILATERALISM? (youtube)

 

 

Take away:

 

       Multilateral trade agreements strengthen the global economy by making developing countries competitive. 

       They standardize import and export procedures giving economic benefits to all member nations. 

       Their complexity helps those that can take advantage of globalization, while those who cannot often face hardships.

         

For class discussion: Do you agree with the above points? Why or why not?

 

Multilateral Trade Agreements With Their Pros, Cons and Examples

5 Pros and 4 Cons to the World's Largest Trade Agreements 

https://www.thebalance.com/multilateral-trade-agreements-pros-cons-and-examples-3305949

BY KIMBERLY AMADEO REVIEWED BY ERIC ESTEVEZ Updated October 28, 2020

 

Multilateral trade agreements are commerce treaties among three or more nations. The agreements reduce tariffs and make it easier for businesses to import and export. Since they are among many countries, they are difficult to negotiate

That same broad scope makes them more robust than other types of trade agreements once all parties sign. 

 

Bilateral agreements are easier to negotiate but these are only between two countries. They don't have as big an impact on economic growth as does a multilateral agreement.

 

5 Advantages of multilateral agreements

         Multilateral agreements make all signatories treat each other equally. No country can give better trade deals to one country than it does to another. That levels the playing field. It's especially critical for emerging market countries. Many of them are smaller in size, making them less competitive. The Most Favored Nation Status confers the best trading terms a nation can get from a trading partner. Developing countries benefit the most from this trading status.

         The second benefit is that it increases trade for every participant. Their companies enjoy low tariffs. That makes their exports cheaper.

         The third benefit is it standardizes commerce regulations for all the trade partners. Companies save legal costs since they follow the same rules for each country.

         The fourth benefit is that countries can negotiate trade deals with more than one country at a time. Trade agreements undergo a detailed approval process. Most countries would prefer to get one agreement ratified covering many countries at once. 

         The fifth benefit applies to emerging markets. Bilateral trade agreements tend to favor the country with the best economy. That puts the weaker nation at a disadvantage. But making emerging markets stronger helps the developed economy over time.

As those emerging markets become developed, their middle class population increases. That creates new affluent customers for everyone.

 

4 Disadvantages of multilateral trading

         The biggest disadvantage of multilateral agreements is that they are complex. That makes them difficult and time consuming to negotiate. Sometimes the length of negotiation means it won't take place at all. 

         Second, the details of the negotiations are particular to trade and business practices. The public often misunderstands them. As a result, they receive lots of press, controversy, and protests

         The third disadvantage is common to any trade agreement. Some companies and regions of the country suffer when trade borders disappear.

         The fourth disadvantage falls on a country's small businesses. A multilateral agreement gives a competitive advantage to giant multi-nationals. They are already familiar with operating in a global environment. As a result, the small firms can't compete. They lay off workers to cut costs. Others move their factories to countries with a lower standard of living. If a region depended on that industry, it would experience high unemployment rates. That makes multilateral agreements unpopular.

Pros

  • Treats all member nations equally.
  • Makes international trading easier.
  • Trade regulations are the same for everyone.
  • Helps emerging markets.
  • Multiple nations are covered by one treaty.

Cons

  • Negotiations can be lengthy, risk breaking down.
  • Easily misunderstood by the public
  • Removing trade borders affects businesses.
  • Benefits large corporations, but not small businesses.

 

Examples

Some regional trade agreements are multilateral. The largest had been the North American Free Trade Agreement (NAFTA), which was ratified on January 1, 1994. NAFTA quadrupled trade between the United States, Canada, and Mexico from its 1993 level to 2018. On July 1, 2020, the U.S.-Mexico-Canada Agreement (USMCA) went into effect. The USMCA was a new trade agreement between the three countries that was negotiated under President Donald Trump.

The Central American-Dominican Republic Free Trade Agreement was signed on August 5, 2004. CAFTA-DR eliminated tariffs on more than 80% of U.S. exports to six countries: Costa Rica, the Dominican Republic, Guatemala, Honduras, Nicaragua, and El Salvador. As of November 2019, it had increased trade by 104%, from $2.44 billion in January 2005 to $4.97 billion.

The Trans-Pacific Partnership would have been bigger than NAFTA. Negotiations concluded on October 4, 2015. After becoming president, Donald Trump withdrew from the agreement. He promised to replace it with bilateral agreements. The TPP was between the United States and 11 other countries bordering the Pacific Ocean. It would have removed tariffs and standardized business practices.

All global trade agreements are multilateral. The most successful one is the General Agreement on Trade and Tariffs. Twenty-three countries signed GATT in 1947. Its goal was to reduce tariffs and other trade barriers.

In September 1986, the Uruguay Round began in Punta del Este, Uruguay. It centered on extending trade agreements to several new areas. These included services and intellectual property. It also improved trade in agriculture and textiles. The Uruguay Round led to the creation of the World Trade OrganizationOn April 15, 1994, the 123 participating governments signed the agreement creating the WTO in Marrakesh, Morocco. The WTO assumed management of future global multilateral negotiations.

The WTO's first project was the Doha round of trade agreements in 2001. That was a multilateral trade agreement among all WTO members. Developing countries would allow imports of financial services, particularly banking. In so doing, they would have to modernize their markets. In return, the developed countries would reduce farm subsidies. That would boost the growth of developing countries that were good at producing food.

Farm lobbies in the United States and the European Union doomed Doha negotiations. They refused to agree to lower subsidies or accept increased foreign competition. The WTO abandoned the Doha round in July 2008.

On December 7, 2013, WTO representatives agreed to the so-called Bali package. All countries agreed to streamline customs standards and reduce red tape to expedite trade flows. Food security is an issue. India wants to subsidize food so it could stockpile it to distribute in case of famine. Other countries worry that India may dump the cheap food in the global market to gain market share. 

 

 

Bilateral Trade

By JULIA KAGAN Updated December 21, 2020, Reviewed by TOBY WALTERS, Fact checked by ARIEL COURAGE

https://www.investopedia.com/terms/b/bilateral-trade.asp

 

What Is Bilateral Trade?

Bilateral trade is the exchange of goods between two nations promoting trade and investment. The two countries will reduce or eliminate tariffs, import quotas, export restraints, and other trade barriers to encourage trade and investment.

 

In the United States, the Office of Bilateral Trade Affairs minimizes trade deficits through negotiating free trade agreements with new countries, supporting and improving existing trade agreements, promoting economic development abroad, and other actions.

 

KEY TAKEAWAYS

       Bilateral trade agreements are agreements between countries to promote trade and commerce.

       They eliminate trade barriers such as tariffs, import quotas, and export restraints in order to encourage trade and investment.

       The main advantage of bilateral trade agreements is an expansion of the market for a country's goods through concerted negotiation between two countries.

       Bilateral trade agreements can also result in the closing down of smaller companies unable to compete with large multinational corporations.

 

Understanding Bilateral Trade

The goals of bilateral trade agreements are to expand access between two countries markets and increase their economic growth. Standardized business operations in five general areas prevent one country from stealing anothers innovative products, dumping goods at a small cost, or using unfair subsidies. Bilateral trade agreements standardize regulations, labor standards, and environmental protections.

 

The United States has signed bilateral trade agreements with 20 countries, some of which include Israel, Jordan, Australia, Chile, Singapore, Bahrain, Morocco, Oman, Peru, Panama, and Colombia.

 

The Dominican Republic-Central America FTR (CAFTA-DR) is a free trade agreement signed between the United States and smaller economies of Central America, as well as the Dominican Republic. The Central American countries are El Salvador, Guatemala, Costa Rica, Nicaragua, and Honduras. NAFTA replaced the bilateral agreements with Canada and Mexico in 1994. The U.S. renegotiated NAFTA under the United States-Mexico-Canada Agreement, which went into effect in 2020.2

 

Advantages and Disadvantages of Bilateral Trade

Compared to multilateral trade agreements, bilateral trade agreements are negotiated more easily, because only two nations are party to the agreement. Bilateral trade agreements initiate and reap trade benefits faster than multilateral agreements.

 

When negotiations for a multilateral trade agreement are unsuccessful, many nations will negotiate bilateral treaties instead. However, new agreements often result in competing agreements between other countries, eliminating the advantages the Free Trade Agreement (FTA) confers between the original two nations.

 

Bilateral trade agreements also expand the market for a country's goods. The United States vigorously pursued free trade agreements with a number of countries under the Bush administration during the early 2000s.

 

In addition to creating a market for U.S. goods, the expansion helped spread the mantra of trade liberalization and encouraged open borders for trade. However, bilateral trade agreements can skew a country's markets when large multinational corporations, which have significant capital and resources to operate at scale, enter a market dominated by smaller players. As a result, the latter might need to close shop when they are competed out of existence.

 

Examples of Bilateral Trade

In October 2014, the United States and Brazil settled a longstanding cotton dispute in the World Trade Organization (WTO). Brazil terminated the case, relinquishing its rights to countermeasures against U.S. trade or further proceedings in the dispute.

 

Brazil also agreed to not bring new WTO actions against U.S. cotton support programs while the current U.S. Farm Bill was in force, or against agricultural export credit guarantees under the GSM-102 program. Because of the agreement, American businesses were no longer subject to countermeasures such as increased tariffs totaling hundreds of millions of dollars annually.

 

In March 2016, the U.S. government and the government of Peru reached an agreement removing barriers for U.S. beef exports to Peru that had been in effect since 2003.

 

The agreement opened one of the fastest-growing markets in Latin America. In 2015, the United States exported $25.4 million in beef and beef products to Peru. Removal of Perus certification requirements, known as the export verification program, assured American ranchers expanded market access.

 

The agreement reflected the U.S. negligible risk classification for bovine spongiform encephalopathy (BSE) by the World Organization for Animal Health (OIE).

 

The United States and Peru agreed to amendments in certification statements making beef and beef products from federally inspected U.S. establishments eligible for export to Peru, rather than just beef and beef products from establishments participating in the USDA Agricultural Marketing Service (AMS) Export Verification (EV) programs under previous certification requirements.

 

How Geopolitics Is Redrawing the Worlds Busiest Trade Routes

By Bryce Baschuk, December 5, 2022 at 7:00 AM EST

https://www.bloomberg.com/news/newsletters/2022-12-05/supply-chain-latest-how-geopolitics-is-redrawing-trade-routes

American astronomer Carl Sagan once said you have to know the past to understand the present.

 

Its good advice for anyone looking to make sense of a world still reeling from a pandemic, Brexit, Russias war with Ukraine and a trade war between the worlds two largest economies.

 

This tumultuous period has encouraged C-suites and governments around the world to rethink the economic strategies that have driven the past three decades of globalization.

 

To understand the forward trajectory of globalization, Bloomberg dove into some data from the past three years to see what trends have emerged since the pandemic first roiled global markets.

 

In a nutshell, heres what we found:

 

       The US is regularly importing more goods from Europe than from China

       China is exporting a greater share of its goods to non-US markets

       Brexit is increasing costs and reducing market access for UK exporters

       China uses its economic might achieve strategic goals

       Germany was slow to cut off imports from Russia after Vladimir Putin invaded Ukraine

       Breaking Up Is Hard to Do

       German imports of Russian goods peaked after Putin invaded Ukraine

Source: Eurostat

 

 

Broadly, the data show that the worlds largest trading powers are rewiring their traditional relationships.

 

Thats led to a new focus on strengthening the reliability of supply chains, shifting from just in time to just in case trade strategies and reducing dependence on authoritarian regimes like China.

 

Some of these shifts are marginal, and temporary, while others represent the beginnings of longer-term structural realignments.

 

Here are a few conclusions we can draw about the future:

 

       The US and China arent engaged in a wholesale decoupling of their economies, but both nations are hedging their bets and deepening their trade flows with other nations

       A strong, mutually beneficial US-EU trade relationship is more valuable and important at a time when both regions are reducing their dependence on China.

       The shift towards market concentration among regional economic hubs will take on increased importance in the coming years particularly so in the Asia-Pacific region

       The UK must find ways to mitigate the harmful effects of Brexit as EU producers rely less and less on UK exports to feed, clothe and service European citizens

       Russias economic influence is approaching a generational nadir and it's likely to remain a pariah state for many years to come

       Whats happening is a kind of reglobalization where governments and multinational companies adapt their trade links to accommodate the new economic and geopolitical challenges. And while supply chains may be more insulated against shocks, the next chapter also has the potential to increase costs and make the world a less productive place.

 

Bryce Baschuk in Geneva

 

 

Homework chapter1-2 (due with first midterm exam)

1)     Do you support bilateral trading or multi-lateral trading? Why?

2)     What is your opinion about CPTPP? Do you think that the member countries can benefit from the CPTPP? Why or why not?

3)     Optional question (for extra credit): Shall the U.S.A. join and lead RCEP? Why do we need both CPTPP and RCEP?

World's Biggest Trade Deal RCEP (video)

Who will benefit from the world's largest free trade deal? | Inside Story (youtube)

 

 

 

What is the RCEP? | CNBC Explains (youtube)

China and 14 partners sign world's biggest trade deal without US | DW News (video)

 

The world needs more economic alliances than security ones, analyst says (video)

PUBLISHED WED, NOV 16 20221:02 AM EST, Su-Lin Tan

https://www.cnbc.com/2022/11/16/the-world-needs-more-economic-alliances-than-security-ones-analyst.html



KEY POINTS

Countries should strike up more economic alliances than security and defense ones, as those could make the world more dangerous, the president of the Center for China and Globalization said on Tuesday.

I hope that the U.S. now has settled this midterm, we can get towards economic, global alliances rather than have a lot of security, military, defense alliances which will make us more and more dangerous, Henry Wang said at the SALT iConnections conference in Singapore.

Echoing Wangs point, Nicolas Aguzin, CEO of the Hong Kong stock exchange HKEX, said on the same panel that the globalization of trade has created many benefits, including bringing the East and West closer to each other.

Countries should strike up more economic alliances than security and defense ones, as those could make the world more dangerous, the president of the Center for China and Globalization said on Tuesday.

 

Doing that would also circumvent a slide toward deglobalization, which could hold back economic development across the world. The U.S. for example, could consider joining or re-joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), Henry Wang said at the SALT iConnections conference in Singapore.

 

The U.S. is the vibe of globalization and [has] always taken the lead on globalization, Wang said.

 

It was a pity to see the U.S. pulling out of the [Trans-Pacific Partnership, which] ... set higher standards for global trade, including the digital economy, and also the liberalization of trade and facilitation of investments.

 

Wang added that there should be more economic alliances and fewer security ones such as the AUKUS, Five Eyes and the Quadrilateral Security Dialogue, an informal strategic alliance.

 

(L-R) Singapore's Minister for Trade and Industry Lim Hng Kiang, New Zealand's Minister for Trade and Export Growth David Parker, Malaysia's Minister for Trade and Industry Datuk J. Jayasiri, Canada's International Trade Minister Francois-Phillippe Champagne, Australia's Trade Minister Steven Ciobo, Chile's Foreign Minister Heraldo Munoz, Brunei's Acting Minister for Foreign Affairs Erywan Dato Pehin, Japan's Minister of Economic Revitalization Toshimitsu Motegi, Mexico's Secretary of Economy Ildefonso Guaj

The Comprehensive and Progressive Agreement for Trans-Pacific Partnership is a multilateral trade deal signed in 2018 that was formed after the United States, under the Trump administration, withdrew from the Trans-Pacific Partnership.

 

I hope that the U.S. now has settled this midterm, we can get towards economic, global alliances rather than have a lot of security, military, defense alliances which will make us more and more dangerous, Wang said.

 

The CPTPP was formerly known as the TPP, which was part of the United States economic and strategic pivot to Asia.

 

Former U.S. President Donald Trump pulled the U.S. out of the trade pact in 2017, after it drew criticism from the protectionist end of the U.S. political spectrum.

 

The TPP has since evolved into the CPTPP after other members of the pact forged on with it. It is now one of the biggest trade blocs in the world, attracting applicants such as China.

 

The U.S. has not indicated any desire to rejoin the CPTPP. Instead, it launched its own separate non-trade relationship network with Asia-Pacific, the Indo-Pacific Economic Framework.

 

Echoing Wangs point, Nicolas Aguzin, CEO of the Hong Kong stock exchange HKEX, said on the same panel that the globalization of trade has created many benefits, including bringing the East and West closer to each other.

 

I mean, it had kept prices very low around the world in a lot of areas; we had productivity, he said, adding that he doubts deglobalization would become a reality, in light of the complex interconnectedness of global supply chains.

 

We welcome anyone to join the CPTPP, including the United States, says Canadian ministerWATCH NOW

VIDEO02:47

We welcome anyone to join the CPTPP, including the U.S.: Canadian minister

With new powers emerging, tensions are bound to arise at this juncture of globalization, Aguzin said.

 

Asia, as a region, over the next 10 years, we represent about half of the output of the world. I mean youre going to have some rocky moments, because its a big shift. Theres a big shift of power and influence from West to East, he said.

 

Olympic-style competition

Economic alliances and healthy Olympic-style competition between the U.S. and China would therefore be better than confrontation, Wang added.

 

Wang said notes from the Chinese Communist Party meeting in Beijing indicate that Chinese policymakers are keen on opening up, which suggests Beijing still has appetite to promote trade and multilateralism.

 

The appointment of new Cabinet members from developed areas in China, such as Guangdong and Jiangsu, suggests Beijing has its eyes on more development, private businesses and investments from multinational companies, according to Wang.

 

 

Rust Belt   https://www.investopedia.com/terms/r/rust-belt.asp (FYI)

By JAMES CHEN

Updated Aug 25, 2020

 

What Is the Rust Belt?

The Rust Belt is a colloquial term used to describe the geographic region stretching from New York through the Midwest that was once dominated by the coal industry, steel production, and manufacturing. The Rust Belt became an industrial hub due to its proximity to the Great Lakes, canals, and rivers, which allowed companies to access raw materials and ship out finished products.

The region received the name Rust Belt in the late 1970s, after a sharp decline in industrial work left many factories abandoned and desolate, causing increased rust from exposure to the elements. It is also referred to as the Manufacturing Belt and the Factory Belt.

 

KEY TAKEAWAYS

  • The Rust Belt refers to the geographic region from New York through the Midwest that was once dominated by manufacturing.
  • The Rust Belt is synonymous with regions facing industrial decline and abandoned factories rusted from exposure to the elements.
  • The Rust Belt was home to thousands of blue-collar jobs in coal plants, steel and automotive production, and the weapons industry.

 

Understanding the Rust Belt

The term Rust Belt is often used in a derogatory sense to describe parts of the country that have seen an economic declinetypically very drastic. The rust belt region represents the deindustrialization of an area, which is often accompanied by fewer high-paying jobs and high poverty rates. The result has been a change in the urban landscape as the local population has moved to other areas of the country in search of work.

Although there is no definitive boundary, the states that are considered in the Rust Beltat least partlyinclude the following:

  • Indiana
  • Illinois
  • Michigan
  • Missouri
  • New York; Upstate and western regions
  • Ohio
  • Pennsylvania
  • West Virginia
  • Wisconsin

There are other states in the U.S. that have also experienced declines in manufacturing, such as states in the deep south, but they are not usually considered part of the Rust Belt. The region was home to some of America's most prominent industries, such as steel production and automobile manufacturing. Once recognized as the industrial heartland, the region has experienced a sharp downturn in industrial activity from the increased cost of domestic labor, competition from overseas, technology advancements replacing workers, and the capital intensive nature of manufacturing.

 

Poverty in the Rust Belt

Blue-collar jobs have increasingly moved overseas, forcing local governments to rethink the type of manufacturing businesses that can succeed in the area. While some cities managed to adopt new technologies, others still struggle with rising poverty levels and declining populations.

Below are the poverty rates from the U.S. Census Bureau as of 2018 for each of the Rust Belt states listed above.

Poverty Rates in the Rust Belt. 

There are other U.S. states that have high poverty rates, such as Kentucky (16.9%), Louisiana (18.6%), and Alabama (16.8%). However, the rust belt states haveat a minimuma double-digit percentage of their population in poverty.

 

History of the Rust Belt

Before being known as the Rust Belt, the area was generally known as the country's Factory, Steel, or Manufacturing Belt. This area, once a booming hub of economic activity, represented a great portion of U.S. industrial growth and development.

The natural resources that were found in the area led to its prosperitynamely coal and iron orealong with labor and ready access to transport by available waterways. This led to the rise in coal and steel plants, which later spawned the weapons, automotive, and auto parts industries. People seeking employment began moving to the area, which was dominated by both the coal and steel industries, changing the overall landscape of the region.

But that began to change between the 1950s and 1970s. Many manufacturers were still using expensive and outdated equipment and machinery and were saddled with the high costs of domestic labor and materials. To compensate, a good portion of them began looking elsewhere for cheaper steel and labornamely from foreign sourceswhich would ultimately lead to the collapse of the region.

 

There is no definitive boundary for the Rust Belt, but it generally includes the area from New York through the Midwest.

Decline of the Rust Belt

Most research suggests the Rust Belt started to falter in the late 1970s, but the decline may have started earlier, notably in the 1950s, when the region's dominant industries faced minimal competition. Powerful labor unions in the automotive and steel manufacturing sectors ensured labor competition stayed to a minimum. As a result, many of the established companies had very little incentive to innovate or expand productivity. This came back to haunt the region when the United States opened trade overseas and shifted manufacturing production to the south.

By the 1980s, the Rust Belt faced competitive pressuredomestically and overseasand had to ratchet down wages and prices. Operating in a monopolistic fashion for an extended period of time played an instrumental role in the downfall of the Rust Belt. This shows that competitive pressure in productivity and labor markets are important to incentivize firms to innovate. However, when those incentives are weak, it can drive resources to more prosperous regions of the country.

The region's population also showed a rapid decline. What was once a hub for immigrants from the rest of the country and abroad, led to an exodus of people out of the area. Thousands of well-paying blue-collar jobs were eliminated, forcing people to move away in search of employment and better living conditions.

Politics and the Rust Belt

The term Rust Belt is generally attributed to Walter Mondale, who referred to this part of the country when he was the Democratic presidential candidate in 1984. Attacking President Ronald Reagan, Mondale claimed his opponent's policies were ruining what he called the Rust Bowl. He was misquoted by the media as saying the rust belt, and the term stuck. Since then, the term has consistently been used to describe the area's economic decline.

From a policy perspective, addressing the specific needs of the Rust Belt states was a political imperative for both parties during the 2016 election. Many believe the national government can find a solution to help this failing region succeed again.

 

 

 

This Could Be a Record Year for US-China Trade

ByShawn Donnan, December 3, 2022 at 6:45 AM EST

https://www.bloomberg.com/news/newsletters/2022-12-03/a-record-year-for-us-china-trade-new-economy-saturday

 

Bloomberg Cites Trade War as 'Failure of Our Government' (youtube)

 

Heres a data point you wont hear discussed very often: If the last few months of this year hold to trend, the US will have imported more goods from China in 2022 than in any year prior.

 

The next chunk of data will come Dec. 6 with the US release of October trade numbers, and theres still time for the trend to shift especially with Chinas current Covid lockdown travails. But whats already in the books is clear. In the first nine months of the year, the US imported $418 billion in goods from China, or $23.7 billion more than it did in the same period of 2018, the current record holder.

 

Thats worth thinking about given that, in the six years since Donald Trump launched his trade assault on China, the dominant story has been the supposed decoupling of the worlds two largest economies. The prevailing narrative of late suggests were living through the unwinding of an era of hyper-globalization, and that the world is busy reorganizing itself around geopolitical poles centered on Washington and Beijing.

 

But the trade data is a reminder that rhetoric and even policy dont always reflect the global economy.

 

Theres no doubt weve been going through a prickly period in the US-China diplomatic and trade relationships, and that there are more hawks than doves these days on both sides.

 

But for all the pandemic-driven talk of shifting supply chains away from China and reshoring factories, the value of Chinese goods purchased by the US is higher than its ever been. (The value of US exports to China this year has also been near record levels. In the first nine months of 2022, US companies sent $108.8 billion in goods to China versus $105.6 billion in the same period of 2021, the last record year.)

 

That surge in US imports has come despite the Trump tariffs that were meant to rewrite the economic relationship, and without any apparent shock to US employment. All of this is at odds with what protectionists have been arguing for years. Indeed, based on the November jobs numbers, the US has managed to add a whopping 379,000 manufacturing positions in 2022 despite all of those Chinese imports .

 

There are at least three things to take away from all of this:

 

1.     The trade relationship with China remains Americas largest by some distance. Imports from China accounted for 17% of total US imports through September of this year. No single country comes close, though Canada and Mexico together accounted for a bigger share of total US trade. For America, this state of affairs is kind of a big deal and a major foreign policy complication given that China is seen as its main economic and geopolitical rival.

 

2.     The pandemic has made all data messy, so we should be cautious. Its not just inflation at 40-year highs and the impact on the value of imports thats affecting the data. American retailers have tended to over-order from China during the pandemic, which likely affected the trade figures as well. It could be that, over the coming years, the change in the relationship everyone is talking about will slowly be reflected in the data.

 

3.     Sometimes its worth being wary of rhetoric and narratives. An economy is its people, and people often confound the intentions and expectations of policymakers.

 

 

 

Chapter 2 

 

 Chapter 2 (PPT)

 

Lets watch this video together.

 

Imports, Exports, and Exchange Rates: Crash Course Economics #15

 

     Topic 1- What is BOP?

The balance of payment of a country contains two accounts: current and capital. The current account records exports and imports of goods and services as well as unilateral transfers, whereas the capital account records purchase and sale transactions of foreign assets and liabilities during a particular year.

 

         What is the current account?

Balance of payments: Current account (video, Khan academy)

 

From khan academy

image014.jpg

 

Current vs. Capital Accounts: What's the Difference?

By THE INVESTOPEDIA TEAM, Updated June 29, 2021, Reviewed by ROBERT C. KELLY

https://www.investopedia.com/ask/answers/031615/whats-difference-between-current-account-and-capital-account.asp

 

Current vs. Capital Accounts: An Overview

The current and capital accounts represent two halves of a nation's balance of payments. The current account represents a country's net income over a period of time, while the capital account records the net change of assets and liabilities during a particular year.

 

In economic terms, the current account deals with the receipt and payment in cash as well as non-capital items, while the capital account reflects sources and utilization of capital. The sum of the current account and capital account reflected in the balance of payments will always be zero. Any surplus or deficit in the current account is matched and canceled out by an equal surplus or deficit in the capital account.

 

KEY TAKEAWAYS

       The current and capital accounts are two components of a nation's balance of payments.

       The current account is the difference between a country's savings and investments.

       A country's capital account records the net change of assets and liabilities during a certain period of time.

 

Current Account

The current account deals with a country's short-term transactions or the difference between its savings and investments. These are also referred to as actual transactions (as they have a real impact on income), output and employment levels through the movement of goods and services in the economy.

 

The current account consists of visible trade (export and import of goods), invisible trade (export and import of services), unilateral transfers, and investment income (income from factors such as land or foreign shares). The credit and debit of foreign exchange from these transactions are also recorded in the balance of the current account. The resulting balance of the current account is approximated as the sum total of the balance of trade.

 

Current Account vs. Capital Account

Transactions are recorded in the current account in the following ways:

 

Exports are noted as credits in the balance of payments

Imports are recorded as debits in the balance of payments

 

The current account gives economists and other analysts an idea of how the country is faring economically. The difference between exports and imports, or the trade balance, will determine whether a country's current balance is positive or negative. When it is positive, the current account has a surplus, making the country a "net lender" to the rest of the world. A deficit means the current account balance is negative. In this case, that country is considered a net borrower.

 

If imports decline and exports increase to stronger economies during a recession, the country's current account deficit drops. But if exports stagnate as imports grow when the economy grows, the current account deficit grows.

 

Capital Account

The capital account is a record of the inflows and outflows of capital that directly affect a nations foreign assets and liabilities. It is concerned with all international trade transactions between citizens of one country and those in other countries.

 

The components of the capital account include foreign investment and loans, banking, and other forms of capital, as well as monetary movements or changes in the foreign exchange reserve. The capital account flow reflects factors such as commercial borrowings, banking, investments, loans, and capital.

 

A surplus in the capital account means there is an inflow of money into the country, while a deficit indicates money moving out of the country. In this case, the country may be increasing its foreign holdings.

 

In other words, the capital account is concerned with payments of debts and claims, regardless of the time period. The balance of the capital account also includes all items reflecting changes in stocks.

 

The International Monetary Fund divides capital account into two categories: The financial account and the capital account.

The term capital account is also used in accounting. It is a general ledger account used to record the contributed capital of corporate owners as well as their retained earnings. These balances are reported in a balance sheet's shareholder's equity section.

 

 

https://www.bea.gov/data/intl-trade-investment/international-transactions

 

Q3 2022

-$217.1 B

Q2 2022

-$238.7 B

U.S. Current-Account Deficit Narrows in 3rd Quarter 2022 U.S. International Transactions The U.S. current-account deficit, which reflects the combined balances on trade in goods and services and income flows between U.S. residents and residents of other countries, narrowed by $21.6 billion, or 9.1 percent, to $217.1 billion in the third quarter of 2022. The narrowing mostly reflected a decreased deficit on goods that was partly offset by a decreased surplus on primary income and an increased deficit on secondary income. The third-quarter deficit was 3.4 percent of current-dollar gross domestic product, down from 3.8 percent in the second quarter.

https://www.bea.gov/sites/default/files/2022-12/trans322-fax_0.pdf

 

Exports of goods increased $7.2 billion to $547.0 billion, while imports of goods decreased $32.5 billion to $818.2 billion.

Exports of services increased $4.9 billion to $234.0 billion, while imports of services increased $1.6 billion to $173.5 billion.

Receipts of primary income increased $15.2 billion to $314.0 billion, while payments of primary income increased $26.8 billion to $268.4 billion.

Receipts of secondary income decreased $0.8 billion to $42.7 billion, while payments of secondary income increased $9.0 billion to $94.9 billion.

Net financial-account transactions were $294.2 billion in the third quarter, reflecting net U.S. borrowing from foreign residents.

 

 

       Trade in goods (table 2) Exports of goods increased $7.2 billion to $547.0 billion, reflecting increases in nonmonetary gold and in capital goods, mostly civilian aircraft engines and parts and other industrial machinery, that were partly offset by a decrease in foods, feeds, and beverages, mostly soybeans and corn. Imports of goods decreased $32.5 billion to $818.2 billion, reflecting widespread decreases in consumer goods and in industrial supplies and materials. The decrease in consumer goods was led by household and kitchen appliances and other household goods, and the decrease in industrial supplies and materials was led by metals and nonmetallic products.

       Trade in services (table 3) Exports of services increased $4.9 billion to $234.0 billion, reflecting increases in other business services, mainly professional and management consulting services, and in travel, mostly education-related travel and other personal travel. Imports of services increased $1.6 billion to $173.5 billion, reflecting increases in travel, mostly other personal travel and education-related travel, and in financial services, mostly financial intermediation services indirectly measured and financial management services, that were partly offset by a decrease in transport, mostly sea freight transport.

       Primary income (table 4) Receipts of primary income increased $15.2 billion to $314.0 billion, and payments of primary income increased $26.8 billion to $268.4 billion. The increases in both receipts and payments primarily reflected increases in other investment income, mostly interest on loans and deposits. These increases were mainly due to higher short-term interest rates that resulted from significant federal funds rate hikes by the Federal Reserve Board in May, June, July, and September. U.S. other investment assets and liabilities are mainly denominated in U.S. dollars.

       Secondary income (table 5) Receipts of secondary income decreased $0.8 billion to $42.7 billion, reflecting a decrease in general government transfers, mostly fines and penalties. Payments of secondary income increased $9.0 billion to $94.9 billion, reflecting an increase in general government transfers, mostly international cooperation.

 

 

       Financial-Account Transactions (tables 1, 6, 7, and 8) Net financial-account transactions were $294.2 billion in the third quarter, reflecting net U.S. borrowing from foreign residents.

       Financial assets (tables 1, 6, 7, and 8) Third-quarter transactions increased U.S. residents foreign financial assets by $411.0 billion. Transactions increased portfolio investment assets, mostly equity and long-term debt securities, by $368.9 billion; direct investment assets, mainly equity, by $56.7 billion; and reserve assets by $0.8 billion. Transactions decreased other investment assets by $15.5 billion, resulting from partly offsetting transactions in loans and deposits.

       Liabilities (tables 1, 6, 7, and 8) Third-quarter transactions increased U.S. liabilities to foreign residents by $671.2 billion. Transactions increased portfolio investment liabilities, mostly long-term debt securities and equity, by $463.2 billion; other investment liabilities, mostly loans, by $106.6 billion; and direct investment liabilities, mostly equity, by $101.4 billion.

 

         What is the Capital Account

Balance of payments: Capital account (video, Khan Academy)

 

 

https://fred.stlouisfed.org/tags/series?t=capital+account

 

Top Trading Partners - November 2021

https://www.census.gov/foreign-trade/statistics/highlights/toppartners.html

 

Rank

Country

Exports

Imports

Total Trade

Percent of Total Trade

---

Total, All Countries

1,724.4

2,737.0

4,461.4

100.0%

---

Total, Top 15 Countries

1,200.5

2,117.7

3,318.3

74.4%

1

Canada

298.5

371.0

669.5

15.0%

2

Mexico

273.9

382.1

655.9

14.7%

3

China

124.5

462.6

587.0

13.2%

4

Japan

67.5

122.6

190.1

4.3%

5

Germany

60.8

119.0

179.8

4.0%

6

Korea, South

60.0

95.6

155.6

3.5%

7

Vietnam

9.7

109.6

119.4

2.7%

8

United Kingdom

62.9

52.2

115.2

2.6%

9

India

39.7

73.5

113.1

2.5%

10

Taiwan

35.9

77.0

112.9

2.5%

11

Netherlands

60.1

28.6

88.7

2.0%

12

France

38.1

47.8

85.9

1.9%

13

Switzerland

32.2

51.2

83.4

1.9%

14

Ireland

13.4

68.0

81.5

1.8%

15

Italy

23.3

57.0

80.3

1.8%

       JANUARY 5, 2023 The U.S. Census Bureau and the U.S. Bureau of Economic Analysis announced today that the goods and services deficit was $61.5 billion in November, down $16.3 billion from $77.8 billion in October, revised.

       Exports, Imports, and Balance (Exhibit 1) November exports were $251.9 billion, $5.1 billion less than October exports. November imports were $313.4 billion, $21.5 billion less than October imports. The November decrease in the goods and services deficit reflected a decrease in the goods deficit of $15.3 billion to $84.1 billion and an increase in the services surplus of $1.0 billion to $22.5 billion. Year-to-date, the goods and services deficit increased $120.1 billion, or 15.7 percent, from the same period in 2021. Exports increased $439.4 billion or 18.9 percent. Imports increased $559.5 billion or 18.1 percent.

 

 

Topic 2: Trade war with China to reduce trade deficit (current account deficit)

 

For Class Discussion:

Has the US won the trade war against China? Can trade war help reduce the US current account deficit?

 

America v China: why the trade war won't end soon | The Economist (youtube)

 

 

2022 : U.S. trade in goods with China

NOTE: All figures are in millions of U.S. dollars on a nominal basis.

https://www.census.gov/foreign-trade/balance/c5700.html

2022 : U.S. trade in goods with China

NOTE: All figures are in millions of U.S. dollars on a nominal basis, not seasonally adjusted unless otherwise specified. Details may not equal totals due to rounding. Table reflects only those months for which there was trade.

Month

Exports

Imports

Balance

January 2022

11,475.2

47,846.9

-36,371.7

February 2022

11,594.0

42,260.0

-30,666.0

March 2022

13,375.1

47,373.5

-33,998.4

April 2022

11,201.7

41,772.2

-30,570.5

May 2022

12,321.3

43,864.4

-31,543.1

June 2022

11,678.4

48,625.3

-36,946.9

July 2022

12,267.2

46,664.1

-34,396.9

August 2022

12,906.7

50,348.8

-37,442.1

September 2022

11,953.5

49,247.9

-37,294.4

October 2022

15,698.3

44,572.0

-28,873.6

November 2022

15,576.0

36,876.4

-21,300.4

TOTAL 2022

140,047.5

499,451.6

-359,404.1

 

 

Month

Exports

Imports

Balance

Jan-21

12,860.90

39,111.20

-26,250.20

Feb-21

9,410.50

34,027.40

-24,617.00

Mar-21

12,542.30

40,229.00

-27,686.70

Apr-21

11,759.90

37,589.80

-25,829.90

May-21

12,411.30

38,732.10

-26,320.70

Jun-21

12,102.00

39,946.00

-27,843.90

Jul-21

11,720.00

40,368.30

-28,648.30

Aug-21

11,258.70

42,997.30

-31,738.70

Sep-21

10,910.60

47,414.00

-36,503.40

Oct-21

16,635.30

48,032.20

-31,396.80

Nov-21

16,069.00

48,385.00

-32,316.00

TOTAL 2021

137,680.50

456,832.20

-319,151.00

 

 

U.S. tariffs on Chinese goods didnt bring companies back to the U.S., new research finds

These tariffs instead resulted in collateral damage to the U.S. economy

By Jiakun Jack Zhang and Samantha A. Vortherms, September 22, 2021 at 5:00 a.m. EDT

https://www.washingtonpost.com/politics/2021/09/22/us-tariffs-chinese-goods-didnt-bring-companies-back-us-new-research-finds/

 

Treasury Secretary Janet L. Yellen recently argued that tariffs from the U.S.-China trade war covering more than $307 billion worth of goods hurt American consumers, yet the negotiations really didnt address in many ways the fundamental problems we have with China.

 

U.S. tariffs on Chinese exports jumped sixfold between 2018 and 2020, but tariffs failed to decouple the two economies. As the Biden administration conducts its comprehensive review of China trade policy and contemplates new tariffs, our research helps explain whether existing tariffs achieved their policy objective.

 

Tariffs increase the cost of doing business overseas by making those goods more expensive to import. The Trump administrations logic was that tariffs would hurt U.S. and other multinational corporations engaged in U.S.-China trade and push more companies to divest from China and shift supply chains to the United States. Tariff proponents argued the Chinese economy would suffer, giving U.S. negotiators more leverage over China at the negotiating table.

 

Fear of terrorism shaped U.S. foreign policy after 9/11. Will the U.S. make China the next big obsession?

 

In fact, these tariffs resulted in collateral damage to the U.S. economy without pressuring China to change its economic policies. Heres why.

 

The U.S. hoped to see multinationals walk away from China.

 

In a recent working paper, we built a new data set on foreign-invested enterprises registered in China to identify multinationals that choose to divest each year.

 

We found that new U.S. tariffs in 2018 and 2019 had a minimal effect on divestment. More than 1,800 U.S.-funded subsidiaries closed in the first year of the trade war, a 46 percent increase over the previous year. U.S. company exits immediately after the onset of the trade war were not concentrated in manufacturing or information technology, two sectors most directly affected by the trade war.

 

We estimate that less than 1 percent of the increase in U.S. firm exits during this period was due to U.S. tariffs. And U.S. firms were no more likely to divest than firms from Europe or Asia. Instead, company exits were driven more by the companys capacity to mitigate political risk. Larger and older multinational were significantly less likely to exit China after the onset of the trade war.

 

These findings may surprise politicians, but are fully in line with recent research explaining how tariffs pass through to U.S. consumers. Rather than leaving China or finding alternative suppliers, U.S. firms simply raised prices for their customers. Survey data show large U.S. businesses remain optimistic about the Chinese market and plan to increase their investments there. Most of these firms are already In China, for China those that are exposed to tariffs are taking advantage of workarounds such as the first sale rule or passing on costs to suppliers.

 

Tariffs provided little leverage for either country

 

If U.S. multinationals arent rushing to exit China, are they pressuring the U.S. government for tariff relief, as the Chinese government hoped? Many analysts believed the U.S. business community would push back, and stop the trade war from escalating. We investigated the political behavior of a sample of 500 large U.S. multinationals with subsidiaries in China to see if they engaged in political activities such as commenting, testifying or lobbying in opposition to the U.S. Section 301 tariffs.

 

We found that most U.S. companies adopted an apolitical strategy. They didnt exit China, but also didnt put public pressure on Washington to roll back the tariffs. Even though 63 percent of U.S. multinationals in our sample were adversely impacted by the trade war, only 22 percent chose to voice opposition and 7 percent chose to exit China. The majority (65 percent) did neither.

 

The U.S. and China finally signed a trade agreement. Who won?

 

Many of the multinationals we coded as voicing opposition did so through associations such as the US-China Business Council rather than under their own name. An even larger number unsuccessfully lobbied for tariff exclusion for specific products, rather than a more general rollback of Section 301 tariffs.

 

Smaller businesses saw greater collateral damage

 

Our findings suggest that U.S. companies arent divesting from China as much as U.S. policymakers would like or pushing back against tariffs as much as Chinese policymakers had hoped. Instead, large companies responded to the increased cost of business by passing the cost of tariffs on to their customers. And individual consumers in the United States paid higher prices for imports from China.

 

Smaller companies and those newer to China were more likely to exit. Firms with older and larger subsidiaries in China face higher sunk costs from leaving China altogether, which makes them more likely to continue China operations.

 

This finding parallels reports about small businesses in the United States who were unable to find alternative suppliers or afford expensive lobbyists during the trade war. The higher tariffs on raw materials imported from China made it tougher for some small businesses, particularly if they lacked the leverage to pass these costs on to customers or the resources to mitigate them.

 

Would other trade tools work?

 

Despite intensifying political hostility between Beijing and Washington and the mounting economic cost of tariffs, Chinese and U.S. businesses remain deeply integrated in terms of financial, knowledge and production networks. And despite the trade war, foreign investment inflows into China grew by 4.5 percent from 2019 and hit a record $144.37 billion in 2020. Theres little sign that U.S. multinationals have embraced the idea of decoupling from China.

 

While U.S. Trade Representative Katherine Tai justified the Biden administrations hesitancy to remove tariffs on the grounds that tariffs provide leverage against China, our research demonstrates that U.S. tariffs havent produced the intended results. Instead, multinationals continue to navigate the uncertain U.S.-China relationship and related political risks. Smaller firms, in particular, may find it difficult to absorb the costs generated by the trade war.

 

The lack of U.S. leverage resulting from the trade war may dispel the notion that tariffs are tough on China and may help focus the policy debate on the harm to U.S. consumers from tariffs that remain in place. The Biden administration has at its disposal an array of alternative tools besides tariffs for economic competition with China that may result in less collateral damage on the U.S. economy.

 

After all, economic coercion can be a double-edged sword: These tools tend to inflict collateral damage on ones economy while hurting that of the target, but tariffs are the bluntest tool of all.

 

 

Chapter 2 part 1  (Due with the first mid term exam)

1.     Based on the classroom discussion, and documents posted and available online, do you think that the trade war against China could help US to reduce its trade deficit (or current account deficit)? Please be specific.

2.     United States Current Account deficit accounted for 3.4 % of the country's Nominal GDP in Sep 2022, compared with a 3.8 % deficit in the previous quarter. What is your opinion about the increasing current account deficit since the outbreak of the Covid 19 pandemic? Is the US current account deficit a problem? Why or why not?

For reference, please visit https://www.imf.org/external/pubs/ft/fandd/basics/current.htm

 

 

 

3-.      Internet exercises (not required, information for intereted students only)

a.      IMF, world bank and UN are only a few of the major organizations that track, report and aid international economic and financial development. Based on information provided in those websites, you could learn about a countrys economic outlook.

      IMF: www.imf.org/external/index.htm

      UN: www.un.org/databases/index.htm

      World bank: www.worldbank.org

      Bank of international settlement: www.bis.org/index.htm

b.    St. Louis Federal Reserve provides a large amount of recent open economy macroeconomic data online. You can track down BOP and GDP data for the major industrial countries. 

      Recent international economic data: research.stlouisfed.org/publications 

      Balance of Payments statistics: research.stlouisfed.org/fred2/categories/125

 

Balance of payments: Current account (video, Khan academy) (FYI)

 

Balance of payments: Capital account (video, Khan Academy) (FYI)

 

Current vs. capital accounts: what is the difference (youtube)?

 

 

 

 

Reference of useful websites for global economy

International Trade Statistics (PDF)

 

Current Account (BOP) Data World Bank

http://data.worldbank.org/indicator/BN.CAB.XOKA.CD

 

IMF, world bank and UN are only a few of the major organizations that track, report  and aid international economic and financial development. Using these website, you can summarize the economic outlook for each country.

IMF: www.imf.org/external/index.htm

 

UN: www.un.org/databases/index.htm

World bank: www.worldbank.org

Bank of international settlement:  www.bis.org/index.htm

 

St. Louis Federal Reserve provides a large amount of recent open economy macroeconomic data online. You can track down BOP and GDP data for the major industrial countries. 

 

Recent international economic data: research.stlouisfed.org/publicaitons/ie 

 

 

Global Current Account Balances Widen Amid War and Pandemic

https://www.imf.org/en/Blogs/Articles/2022/08/04/blog-global-current-account-balances-widen-amid-war-pandemic-080422

 

The war in Ukraine and resulting increase in commodity prices are expected to contribute to a further widening this year.

Giovanni Ganelli, Pau Rabanal, Niamh Sheridan August 4, 2022

 

The lingering pandemic and Russias invasion of Ukraine are dealing a setback to the global economy. This is affecting trade, commodity prices, and financial flows, all of which are changing current account deficits and surpluses.

 

Global current account balancesthe overall size of deficits and surpluses across countriesare widening for a second straight year, according to our latest External Sector Report. After years of narrowing, balances widened to 3 percent of global gross domestic product in 2020, grew further to 3.5 percent last year, and are expected to expand again this year.

 

 

Larger current account balances arent necessarily negative on their own. But global excess balancesthe portion not justified by differences in countries economic fundamentals, such as demographics, income level and growth potential, and desirable policy settings, using the Funds revised methodologycould fuel trade tensions and protectionist measures. That would be a setback for the push for greater international economic cooperation and could also increase the risk of disruptive currency and capital flow movements.

 

Pandemic effects in 2021

 

The pandemic widened global current account balances, and its still having an asymmetric impact on countries depending, for example, on whether they are exporters or importers of tourism and medical goods.

 

The pandemic and associated lockdowns also shifted consumption to goods from services as people reduced travel and entertainment. This also widened global balances as advanced economies with deficits increased goods imports from emerging market economies with surpluses. In 2021, we estimate that this shift increased the United States deficit by 0.4 percent of gross domestic product and contributed to an increase of 0.3 percent of GDP in Chinas surplus.

 

 

Surplus economies like China saw also increases due to greater shipments of medical goods that often flowed to the United States and other deficit economies. Surging transportation costs also contributed to widening global balances in 2021.

 

War and tightening in 2022

 

Commodity prices are one of the biggest drivers of external positions, and last years rally in oil prices from pandemic lows affected exporters and importers asymmetrically. Russias February invasion of Ukraine exacerbated the surge in energy, food, and other commodity prices, widening global current account balances by raising surpluses for commodity exporters.

 

Monetary policy tightening is driving currency movements as rising inflation is leading many central banks to accelerate the withdrawal of monetary stimulus. Revised expectations about the pace of the US monetary tightening brought about sizable currency realignment this year, contributing to the projected widening of balances.

 

Capital flows to emerging markets were disrupted so far in 2022 by increased risk aversion triggered by the war, with further outflows amid changing expectations about the increased pace of monetary tightening in advanced economies. Cumulative outflows from emerging markets have been very large, about $50 billion, with a magnitude thats similar to outflows during March 2020 but a pace thats slower.

 

 

Our outlook for next year and beyond is for a steady decline of global current account balances as pandemic and war impacts moderate, though this expectation is subject to considerable uncertainty. Global current account balances could continue to widen should fiscal consolidation in current account deficit countries take longer than expected. Moreover, the stronger dollar could widen the US current account deficit and increase global current account balances.

 

Other factors that could widen these balances include a prolonged war that keeps commodity prices elevated for longer, the varying degrees of central bank interest-rate increases, and greater geopolitical tension causing economic fragmentation, disrupting supply chains, and potentially triggering a reorganization of the international monetary system.

 

A more fragmented trade system could either increase or decrease global balances, depending on how trade blocs are reconfigured. Either way, though, it would reduce technology transfers, and decrease the potential for export-led growth in low-income countries and thus unambiguously erode welfare gains from globalization.

 

Policy priorities

 

The war in Ukraine has exacerbated existing trade-offs for policymakers, including between fighting inflation and safeguarding economic recovery and between providing support to those affected and rebuilding fiscal buffers. Multilateral cooperation is key in dealing with the policy challenges generated by the pandemic and the war, including to tackle the humanitarian crisis.

 

Policies to promote external rebalancing differ based on individual economies positions and needs. For economies with larger-than-warranted current account deficits that reflect large fiscal shortfalls, such as the United States, its critical to reduce government deficits with a combination of higher revenue and lower spending.

 

Rebalancing is a different proposition for countries with excessive surpluses, such as Germany and the Netherlands, which can be reduced by intensifying reforms that encourage public and private investment and discourage excessive private saving, including by expanding social safety nets in some emerging markets.

 

 

  

Rolling back U.S.-China tariffs would ease inflation in the U.S., former Treasury secretary says

PUBLISHED TUE, NOV 30 2021, Weizhen Tan

https://www.cnbc.com/2021/11/30/removing-us-china-trade-tariffs-would-ease-inflation-jacob-lew.html

 

KEY POINTS

       Eliminating tariffs imposed on goods during the worst of the trade war would help ease inflation in the U.S., former Treasury Secretary Jacob Lew told CNBC.

       But theres currently no political space to do so, he said on CNBCs Street Signs Asia.

       Worries over inflation have shot up this year, as energy prices spiked and the ongoing supply chain crisis led to shortages of goods. But Lew said theres been a bit of excess nervousness about inflation.

U.S. fiscal stimulus package is unlikely despite omicron: Ex-Treasury Secretary

Eliminating tariffs imposed on goods during the worst of the trade war would help ease inflation in the U.S., former Treasury Secretary Jacob Lew told CNBC on Tuesday.

 

But theres currently no political space to do so, he said on CNBCs Street Signs Asia.

 

I think that the United States and China have deep differences. Ive never thought it should just be about negotiating the exchange of one good or another on one side or the other. It should be about a level playing field, Lew said. He served as treasury secretary from 2013 to 2017 during the Obama administration.

 

He continued: Ive thought from the beginning that the tariffs were an ineffective way to deal with their attacks on American consumers. And right now, with inflation being an issue, rolling back tariffs would actually reduce inflation in the United States.

 

Relations between Washington and Beijing took a turn for the worse in 2018, when the Trump administration imposed tariffs on billions of dollars worth of Chinese goods and Beijing retaliated with similar punitive measures, drawing both sides into a protracted trade war.

 

U.S. tariffs on Chinese goods stood at an average of 19.3% on a trade-weighted basis in early 2021, while Chinese tariffs on American products were at about 20.7%, according to data compiled by think tank Peterson Institute for International Economics earlier this year.

 

Before the trade war, U.S. tariffs on Chinese goods were on average 3.1% in early 2018 while Chinas tariffs on American goods were at 8%, the data showed.

 

Referring to rolling back tariffs, Lew said: Both the leaders have to, I think, create political space in our two countries for these issues to be issues where you can move and make progress, because otherwise we either stay where we are. It gets worse. I think we can do better.

 

American businesses are bearing most of the cost burden from the elevated tariffs imposed at the height of the U.S.-China trade war, according to a report from Moodys Investors Service earlier this year.

 

The ratings agency said that U.S. importers absorbed more than 90% of additional costs resulting from the 20% U.S. tariff on Chinese goods. That means U.S. importers pay around 18.5% more in price for a Chinese product subject to that 20% tariff rate, while Chinese exporters receive 1.5% less for the same product, according to the report.

 

Excess nervousness about inflation

Worries over inflation have shot up this year, as energy prices spiked and the ongoing supply chain crisis led to shortages of goods.

 

The U.S. consumer price index, which tracks a basket of products ranging from gasoline and health care to groceries and rent, rose 6.2% in October from a year ago, the highest in 30 years.

 

But Lew told CNBC its likely much of the inflation that were seeing will work its way through.

 

I dont think anyone is predicting hyperinflation, he said. But I think theres been a bit of excess nervousness about inflation. And candidly, the public reaction to inflation is very strong.

 

But Lew warned that policymakers have to walk a fine line and ensure that measures used to combat inflation dont slow the economy down so much that they dampen growth.

 

CNBCs Yen Nee Lee, Jeff Cox contributed to this report.

 

Khan Academys view of the trade deficit with China (video)

 

 

In class exercise:

3.      If U.S.  imports > exports, then the supply of dollars > the demand of the dollars in the foreign exchange market, ceteris paribus. True/False?       

Solution: Import means using $ (spending $, or out flow of $) to buy foreign goods    In the FX market, supply of $ increases  So when supply increases and assume that demand is unchanged,  the value of $ will drop

 

2.      If Japan exports > imports, then yen would appreciate against other currencies.     True/False?      

Solution: Export means selling domestic products for yen ( in flow of yen from importers who will pay yen for the goods made in Japan; there is an increased demand for yen)    In the FX market, demand of yen increases  So when demand increases and assume that supply is unchanged,  the value of yen will rise.

 

3.      If the interest rate rises in the U.S., ceteris paribus, then capital will flow out of the U.S.      True/False?      

Solution: Interest rate rises  financial market will become more attractive to foreign investorscapital will flow in, not out of the U.S.

 

 

 

Part II of Chapter 2 --- Evolution of international monetary system

Finance: The History of Money (combined) (video, fan to watch)

Review of history of money: A brief history of money - From gold to bitcoin and cryptocurrencies (video)

         Bimetallism: Before 1875

         Classical Gold Standard: 1875-1914

The Gold Standard Explained in One Minute (video)

  International value of currency was determined by its fixed relationship to gold.

  Gold was used to settle international accounts, so the risk of trading with other countries could be reduced.

         Interwar Period: 1915-1944

  Countries suspended gold standard during the WWI, to increase money supply and pay for the war.

  Countries relied on a partial gold standard and partly other countries currencies during the WWII

         Bretton Woods System: 1945-1972

The Bretton Woods Monetary System (1944 - 1971) Explained in One Minute (video)

  All currencies were pegged to US$.

  US$ was the only currency that was backed by gold.

  US$ was world currency at that time.

         The Flexible Exchange Rate Regime: 1973-Present

FLOATING AND FIXED EXCHANGE RATE (video)

 

For class discussion:

Read the following. Is there any knowledge that is new to you?

 

Bretton Woods Agreement and System

By JAMES CHEN Updated April 28, 2021, Reviewed by SOMER ANDERSON

https://www.investopedia.com/terms/b/brettonwoodsagreement.asp#:~:text=The%20Bretton%20Woods%20System%20required,the%20IMF%20and%20World%20Bank.

 

What Was the Bretton Woods Agreement and System?

The Bretton Woods Agreement was negotiated in July 1944 by delegates from 44 countries at the United Nations Monetary and Financial Conference held in Bretton Woods, New Hampshire. Thus, the name Bretton Woods Agreement.

 

Under the Bretton Woods System, gold was the basis for the U.S. dollar and other currencies were pegged to the U.S. dollars value. The Bretton Woods System effectively came to an end in the early 1970s when President Richard M. Nixon announced that the U.S. would no longer exchange gold for U.S. currency.

 

The Bretton Woods Agreement and System Explained

Approximately 730 delegates representing 44 countries met in Bretton Woods in July 1944 with the principal goals of creating an efficient foreign exchange system, preventing competitive devaluations of currencies, and promoting international economic growth. The Bretton Woods Agreement and System were central to these goals. The Bretton Woods Agreement also created two important organizationsthe International Monetary Fund (IMF) and the World Bank. While the Bretton Woods System was dissolved in the 1970s, both the IMF and World Bank have remained strong pillars for the exchange of international currencies.

 

Though the Bretton Woods conference itself took place over just three weeks, the preparations for it had been going on for several years. The primary designers of the Bretton Woods System were the famous British economist John Maynard Keynes and American Chief International Economist of the U.S. Treasury Department Harry Dexter White. Keynes hope was to establish a powerful global central bank to be called the Clearing Union and issue a new international reserve currency called the bancor. Whites plan envisioned a more modest lending fund and a greater role for the U.S. dollar, rather than the creation of a new currency. In the end, the adopted plan took ideas from both, leaning more toward Whites plan.

 

It wasn't until 1958 that the Bretton Woods System became fully functional. Once implemented, its provisions called for the U.S. dollar to be pegged to the value of gold. Moreover, all other currencies in the system were then pegged to the U.S. dollars value. The exchange rate applied at the time set the price of gold at $35 an ounce.

 

KEY TAKEAWAYS

       The Bretton Woods Agreement and System created a collective international currency exchange regime that lasted from the mid-1940s to the early 1970s.

       The Bretton Woods System required a currency peg to the U.S. dollar which was in turn pegged to the price of gold.

       The Bretton Woods System collapsed in the 1970s but created a lasting influence on international currency exchange and trade through its development of the IMF and World Bank.

 

Benefits of Bretton Woods Currency Pegging

The Bretton Woods System included 44 countries. These countries were brought together to help regulate and promote international trade across borders. As with the benefits of all currency pegging regimes, currency pegs are expected to provide currency stabilization for trade of goods and services as well as financing.

 

All of the countries in the Bretton Woods System agreed to a fixed peg against the U.S. dollar with diversions of only 1% allowed. Countries were required to monitor and maintain their currency pegs which they achieved primarily by using their currency to buy or sell U.S. dollars as needed. The Bretton Woods System, therefore, minimized international currency exchange rate volatility which helped international trade relations. More stability in foreign currency exchange was also a factor for the successful support of loans and grants internationally from the World Bank.

 

The IMF and World Bank

The Bretton Woods Agreement created two Bretton Woods Institutions, the IMF and the World Bank. Formally introduced in December 1945 both institutions have withstood the test of time, globally serving as important pillars for international capital financing and trade activities.

 

The purpose of the IMF was to monitor exchange rates and identify nations that needed global monetary support. The World Bank, initially called the International Bank for Reconstruction and Development, was established to manage funds available for providing assistance to countries that had been physically and financially devastated by World War II.1 In the twenty-first century, the IMF has 189 member countries and still continues to support global monetary cooperation. Tandemly, the World Bank helps to promote these efforts through its loans and grants to governments.2

 

The Bretton Woods Systems Collapse

In 1971, concerned that the U.S. gold supply was no longer adequate to cover the number of dollars in circulation, President Richard M. Nixon devalued the U.S. dollar relative to gold. After a run on gold reserve, he declared a temporary suspension of the dollars convertibility into gold. By 1973 the Bretton Woods System had collapsed. Countries were then free to choose any exchange arrangement for their currency, except pegging its value to the price of gold. They could, for example, link its value to another country's currency, or a basket of currencies, or simply let it float freely and allow market forces to determine its value relative to other countries' currencies.

 

The Bretton Woods Agreement remains a significant event in world financial history. The two Bretton Woods Institutions it created in the International Monetary Fund and the World Bank played an important part in helping to rebuild Europe in the aftermath of World War II.  Subsequently, both institutions have continued to maintain their founding goals while also transitioning to serve global government interests in the modern-day.

 

 

The Evolution of US Currency

Video

At times, America may not be the most popular nation in the world, but one thing is for sure: it is famous for its green. The greenback has been iconic since its inception.

This infographic above misses a few key instances in US currency history namely the birth of the Federal Reserve in 1913 and Nixon ending convertibility to gold in 1971. Both events were catalysts to massive money printing which leaves the USD with only a fraction of the purchasing power that it once had.

image077.jpg

 

image076.jpg

 

 

 

 

 

 

Bitcoin Could Become World Reserve Currency, Says Senator Rand Paul

CONTRIBUTOR Namcios  Bitcoin Magazine, PUBLISHED OCT 25, 2021 1:55PM EDT

https://www.nasdaq.com/articles/bitcoin-could-become-world-reserve-currency-says-senator-rand-paul-2021-10-25

 

Bitcoin could rise to that spot as people keep losing faith and confidence in governments and their policies, Paul said.

 

As people lose confidence in the government institutions, bitcoin could benefit and rise to become the world's reserve currency, Senator Rand Paul said.

 

"I've started to question now whether or not cryptocurrency could actually become the reserve currency of the world as more and more people lose confidence in the government," he said.

Senator Paul has never publicly endorsed any cryptocurrency other than Bitcoin.

Bitcoin could become the world's reserve currency if more people lose trust in the government, said Senator Rand Paul, who accepted BTC donations in its 2016 campaign. The Republican Senator was interviewed on Axios, discussing the future of bitcoin and fiat currency in the U.S.

 

"The government currencies are so unreliable they're also fiat currencies. They're not backed by anything," Sen. Paul said.

 

A Gallup poll published on September 30 highlighted how Americans' trust in government remains low. The survey found that overall trust in the federal government to handle international problems sits at a record-low 39%, whereas confidence in the judicial branch is at 54%, down 13 points since 2020. U.S. citizens' trust in their state (57%) and local (66%) governments continues to be higher than trust in the federal government.

 

As people keep losing faith in their government's ability to handle problems and best represent their interests, Bitcoin and cryptocurrencies are set to benefit and be even more embraced, Senator Paul highlighted.

 -

"I've started to question now whether or not cryptocurrency could actually become the reserve currency of the world as more and more people lose confidence in the government," he said.

 

The Senator has touted cryptocurrency before. During his presidential campaign in 2016, in addition to donations in U.S. dollars, Paul accepted donations in bitcoin.

 

Even though the Republican Senator was not specific about which cryptocurrency he was referring to in the interview, he has not publicly endorsed any cryptocurrency other than BTC, indicating he was likely referring to bitcoin itself. Which shouldn't come as a surprise, given that BTC is the only cryptocurrency suitable to function as currency.

 

 

 

Central Bank Digital Currency (CBDC)

By SHOBHIT SETH Updated August 25, 2021, Reviewed by ERIKA RASURE

https://www.investopedia.com/terms/c/central-bank-digital-currency-cbdc.asp

 

What Is a Central Bank Digital Currency (CBDC)?

The term central bank digital currency (CBDC) refers to the virtual form of a fiat currency. A CBDC is an electronic record or digital token of a country's official currency. As such, it is issued and regulated by the nation's monetary authority or central bank. As such, they are backed by the full faith and credit of the issuing governmentCBDCs can simplify the implementation of monetary and fiscal policy and promote financial inclusion in an economy by bringing the unbanked into the financial system. Because they are a centralized form of currency, they may erode the privacy of citizens. CBDCs are in various stages of development around the world.

 

KEY TAKEAWAYS

       A central bank digital currency is the virtual form of a country's fiat currency.

       A CBDC is issued and regulated by a nation's monetary authority or central bank.

       CBDCs promote financial inclusion and simplify the implementation of monetary and fiscal policy.

       As a centralized form of currency, they may erode the privacy of citizens.

 

Although they aren't formally being used, many countries are exploring the introduction and use of CBDCs in their economy.

 

How Central Bank Digital Currencies (CBDCs) Work

Fiat money is the term that refers to currency issued by a country's government. It comes in the form of banknotes and coins. It is considered a form of legal tender that can be used for the sale and purchase of goods and services along with kinds of transactions. A central bank digital currency is the virtual form of fiat money. As such, it has the full faith and backing of the issuing government, just like fiat money does.

 

CBDCs are meant to represent fiat currency. The goal is to provide users with convenience and security of digital as well as the regulated, reserve-backed circulation of the traditional banking system. They are designed to function as a unit of account, store of value, and medium of exchange for daily transactions. CBDCs will be backed by the full faith of the issuing governmentjust like fiat currency. Central banks or monetary authorities will be solely liable for their operations.

 

There were 83 countries around the world pursuing CBDC development as of October 2021.Their reasons for pursuing this venture varied. For example:

 

Sweden's Riksbank began developing an electronic version of the krona (called e-krona) after the country experienced a decline in the use of cash.

 

The United States wants to introduce CBDCs in its monetary system to improve the domestic payments system.

 

Developing countries may have other reasons. For instance, a significant number of people in India are unbanked. Setting up the physical infrastructure to bring the unbanked into the financial ecosystem is costly. But establishing a CBDC can promote financial inclusion in the country's economy.

 

 CBDCs are not meant to be interchangeable with the national currency (fiat or otherwise) of a country or region.

 

Types of CBDCs

There are two types of CBDCs: Wholesale and retail central bank digital currencies. We've listed some of the main features of each below.

 

Wholesale CBDCs

Wholesale CBDCs use the existing tier of banking and financial institutions to conduct and settle transactions. These types of CBDCs are just like traditional central bank reserves.

 

One type of wholesale CBDC transaction is the interbank payment. It involves the transfer of assets or money between two banks and is subject to certain conditions. This transfer comes with considerable counterparty risk, which can be magnified in a real-time gross settlement (RTGS) payment system.

 

A digital currency's ledger-based system enables the setting of conditions, so a transfer won't occur if these conditions are not satisfied. Wholesale CBDCs can also expedite and automate the process for cross-border transfers.

 

Current real-time settlement systems mostly work in single jurisdictions or with a single currency. The distributed ledger technology (DLT) available in wholesale CBDCs can extend the concept to cross-border transfers and expedite the process to transfer money across borders.5

 

Retail CBDCs

Wholesale CBDCs improve upon a system of transfers between banks. Retail CBDCs, on the other hand, involve the transfer of central government-backed digital currency directly to consumersThey eliminate the intermediary risk or the risk that banking institutions might become illiquid and sink depositor funds.

 

There are two possible variants of retail CBDCs are possible, depending on the type of access they provide:

 

Value- or cash-based access: This system involves CBDCs that are passed onto the recipient through a pseudonymous digital wallet. The wallet will be identifiable on a public blockchain and, much like cash transactions, will be difficult to identify parties in such transactions. According to Riksbank, the development of a value- or cash-based access system is easier and quicker compared to token-based access.

 

Token- or account-based access: This is similar to the access provided by a bank accountThus, an intermediary will be responsible for verifying the identity of the recipient and monitoring illicit activity and payments between accounts. It provides for more privacy. Personal transaction data is shielded from commercial parties and public authorities through a private authentication process.

 

 The two types of CBDCs are not mutually exclusive. It is possible to develop a combination of both and have them function in the same economy.

 

Advantages and Disadvantages of CBDCs

Advantages

CBDCs simplify the process of implementing monetary policy and government functions. They automate the process between banks through wholesale CBDCs and establish a direct connection between consumers and central banks through retail CBDCs. These digital currencies can also minimize the effort and processes for other government functions, such as distribution of benefits or calculation and collection of taxes.

 

Disbursement of money through intermediaries introduces third-party risk to the process. What if the bank runs out of cash deposits? What if there is a bank run due to a rumor or an external event? Events like these have the potential to upset the delicate balance of a monetary system. A CBDC eliminates third-party risk. Any residual risk that remains in the system rests with the central bank.

 

One of the roadblocks to financial inclusion for large parts of the unbanked population, especially in developing and poor countries, is the cost associated with developing the banking infrastructure needed to provide them with access to the financial system. CBDCs can establish a direct connection between consumers and central banks, thus eliminating the need for expensive infrastructure.

 

CBDCs can prevent illicit activity because they exist in a digital format and do not require serial numbers for tracking. Cryptography and a public ledger make it easy for a central bank to track money throughout its jurisdiction, thereby preventing illicit activity and illegal transactions using CBDCs.

 

Disadvantages

CBDCs don't necessarily solve the problem of centralization. A central authority (the central bank) is still responsible for and invested with the authority to conduct transactions. Therefore, it still controls data and the levers of transactions between citizens and banks.

 

Users would have to give up some degree of privacy since the administrator is responsible to collect and disseminate digital identifications. The provider would become privy to every transaction conducted. This can lead to privacy issues, similar to the ones that plague tech behemoths and internet service providers (ISPs). For example, criminals could hack and misuse information, or central banks could disallow transactions between citizens.

 

The legal and regulatory issues pertaining to CBDCs are a black hole. What will be the role of these currencies and who will regulate them? Considering their benefits in cross-border transfers, should they be regulated across borders? Experiments in CBDCs are ongoing, and this could translate to a long-term frame.

 

The portability of these systems means that a strong CBDC issued by a foreign country could end up substituting a weaker country's currency. A digital U.S. dollar could substitute the local currency of a smaller country or a failing state. Let's look at Ecuador, which replaced its official currency (the sucre) with the U.S. dollar in 2000 after high inflation forced citizens to convert their money to U.S. dollars.

 

CBDCs vs. Cryptocurrencies

The idea for central bank digital currencies owes its origins to the introduction of cryptocurrencies which are digital currencies secured by cryptography. This makes them hard to duplicate or counterfeit. They are decentralized networks that are based on blockchain technology. The invention of a secure and immutable ledger allows transactions to be tracked. It also enables seamless and direct transfers, without intermediaries and between recipients simplifies the implementation of monetary policy in an economy.

 

The cryptocurrency ecosystem also provides a glimpse of an alternate currency system in which cumbersome regulation does not dictate the terms of each transaction. Established in 2009, Bitcoin is one of the world's most popular cryptocurrencies. No physical coins actually trade hands. Instead, transactions are traded and recorded on a public, encrypted ledger, which can be accessed by anyone. The process of mining allows all transactions to be verified. No governments or banks back Bitcoin.

 

Though the current cryptocurrency ecosystem does not pose a threat to the existing financial infrastructure, it has the potential to disrupt and simplify the existing system. Some experts believe the moves by central banks to design and develop their own digital currencies will act as a measure to pre-empt such an eventuality. Facebook's, now Meta's (FB), proposed cryptocurrency, formerly known as Libra, was an example of such a system, one that existed beyond borders and was not regulated by a single regime.

 

Examples of CBDCs

Central-bank-backed digital currencies haven't been formally established yet. Many central banks have pilot programs and research projects in place that are aimed at determining the viability and usability of a CBDC in their economy. China is the furthest along this route, having already laid down the groundwork and initiated a pilot project for the introduction of a digital yuan.

Russia's plan to create the CryptoRuble was announced by Vladimir Putin in 2017Speculators suggest that one of the main reasons for Putin's interest in blockchain is that transactions are encrypted, making it easier to discreetly send money without worrying about sanctions placed on the country by the international community.

 

A number of other central banks have been researching the implementation of a CBDC, including:

 

Sweden's Riksbank, which began exploring the issuance of a digital currency in its economy in 2017 and has published a series of papers exploring the topic.

The Bank of England (BoE), which is among the pioneers to initiate the CBDC proposal.

The Bank of Canada (BOC).

The central banks of Uruguay, Thailand, Venezuela, and Singapore.1

 

Gold at $4,000? Analysts share their 2023 outlook as inflation, recession fears linger

DEC 22 20222:10 AM Charmaine Jacob

https://www.cnbc.com/2022/12/22/gold-at-4000-analysts-share-their-2023-outlook-for-prices.html

 

KEY POINTS

       Gold prices could surge to $4,000 an ounce in 2023 as recession fears persist, said Juerg Kiener, managing director and chief investment officer of Swiss Asia Capital.

       Kiener explained that many economies could face a little bit of a recession in the first quarter, which would lead to many central banks slowing their pace of interest rate hikes and make gold instantly more attractive.

 

Gold prices could surge to $4,000 per ounce in 2023 as interest rate hikes and recession fears keep markets volatile, said Juerg Kiener, managing director and chief investment officer of Swiss Asia Capital.

 

The price of the precious metal could reach between $2,500 and $4,000 sometime next year, Kiener told CNBCs Street Signs Asia on Wednesday.

 

There is a good chance the gold market sees a major move, he said, adding its not going to be just 10% or 20%, but a move that will really make new highs.

 

Kiener explained that many economies could face a little bit of a recession in the first quarter, which would lead to many central banks slowing their pace of interest rate hikes and make gold instantly more attractive. He said gold is also the only asset which every central bank owns.

 

According to the World Gold Council, central banks bought 400 tonnes of gold in the third quarter, almost doubling the previous record of 241 tonnes during the same period in 2018.

 

Since [the] 2000s, the average return [on] gold in any currency is somewhere between 8% and 10% a year. You havent achieved that in the bond market. You have not achieved that in the equity market.

 

Kiener also said investors would look to gold with inflation remaining high in many parts of the world. Gold is a very good inflation hedge, a great catch during stagflation and a great add onto a portfolio.

 

Investors should have some gold in their portfolios: Indian brokerage firm

 

 

 

 

 

 

Despite strong demand for gold, Kenny Polcari, senior market strategist at Slatestone Wealth, disagreed that prices could more than double next year.

 

I dont have a $4,000 price target on it, although Id love to see it go there, he said on CNBCs Street Signs Asia on

 

 

 

Thursday.

 

Polcari argued that gold prices would see some pullback and resistance at $1,900 an ounce. Prices would be determined by how inflation responds to interest rate hikes globally, he said.

 

I like gold. Ive always liked gold, he said. Gold should be a part of your portfolio. I think it is going to do better, but I dont have a $4,000 price target on it.

 

Gold rallied on Tuesday as the U.S. dollar weakened after Japans central bank adjusted its yield curve control policy. The announcement caused gold prices to rise 1% above the key $1,800 level, before dipping lower Wednesday as the dollar recovered ground.

 

Chinas a big buyer

When asked if supply is low due to high demand, Swiss Asia Capitals Kiener said theres always supply, but maybe not at the price you want.

But high prices are no match for buyers in China who are paying a premium for the precious metal, he said.

 

Earlier this month, Chinas central bank announced it added about $1.8 billion worth of gold to its reserves, bringing the cumulative value to around $112 billion, Reuters reported.

 

Asia has been a big buyer. And if you look at the whole trade, essentially gold is leaving the West, and its going into Asia, he added.

 

Advice for investors

Nikhil Kamath, co-founder of Indias largest brokerage Zerodha, said investors should allocate 10% to 20% of their portfolio to gold, adding that its a relevant strategy going into 2023.

 

Gold also traditionally has been inversely proportional to inflation, and it has been a good hedge against inflation, Kamath told CNBC on Wednesday.