FIN415 Class Web Page, Spring '25

Jacksonville University

Instructor: Maggie Foley

The Syllabus                             Overall Grade

Term Project Part I (due with final)              
Term project part II (excel questions) (due with final)     

 

Weekly SCHEDULE, LINKS, FILES and Questions 

Week

Coverage, HW, Supplements

-        Required

Supplemental Reaching Materials

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/fin415-25spring

2.   Password for this private game: havefun.

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

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

·       Follow the instructions and start trading!

3.   Game will be over on 4/25/2025

 

4.     Risk Tolerance Test (FYI)

 

5.    Game

 

·       Mutual Fund Selection Game (FYI)

·       Order Type Explained Game (FYI)

 

6.    Youtube Instructions

·       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)

 

 

 

The Implications of Trump's Return on U.S. Trade Policy: Will Tariffs and Trade Wars Resurface?

 

Background

Trump's presidency (2017-2021) featured aggressive trade policies, including significant tariffs on China and other trading partners, renegotiations of trade agreements, and discussions about protecting American manufacturing through quotas and tariffs.

 

Discussion Topics

·       U.S.-China Trade Relations: What would a potential second Trump presidency mean for the ongoing U.S.-China trade war and the tariffs imposed during his first term?

·       Impact on Global Supply Chains: How would renewed tariffs or quotas affect global supply chains, especially in key sectors like technology, agriculture, and automotive manufacturing?

·       Trade Protectionism vs. Free Trade: Analyzing the economic and political implications of shifting back toward protectionist policies.

·       Geopolitical Strategies: How might Trump's trade policies impact relations with allies and adversaries in a changing global landscape?

 

Policy Tool

Potential Action

Domestic Impact

Global Impact

Tariffs

High tariffs on imports (e.g., steel, aluminum, Chinese goods)

o   Boost for domestic industries (e.g., manufacturing, steel).

o   Retaliatory tariffs from trade partners.

o   Increased costs for businesses reliant on imports.

o   Reduced market access for U.S. exporters.

o   Higher consumer prices (inflation).

o   Strained alliances.

Quotas

Strict import quotas on key goods (e.g., cars, tech components)

·       Operational delays for companies due to limited imports.

·       Encourages foreign firms to relocate production to the U.S.

·        Potential cost increases for manufacturers.

·       Risk of WTO disputes.

Trade War

Launching or escalating trade wars (e.g., with China or EU)

o   Economic slowdown.

o   Destabilization of global markets.

o   Job losses in export-reliant industries.

o   Formation of alternative trade agreements excluding the U.S.

o   Supply chain disruptions for manufacturers.

 

Sanctions

Expanded sanctions targeting industries (e.g., semiconductors, rare earths)

·       Reduced competitiveness for U.S. tech firms reliant on global supply chains.

·       Targeted countries may diversify trade systems.

·       Growth opportunities for domestic tech and rare earth industries.

·       Risk of fracturing global tech supply chains.

Trade Agreement Renegotiations

Renegotiating or withdrawing from trade agreements (e.g., USMCA, WTO)

o   Jobs secured in some industries if agreements favor domestic production.

o   Erosion of U.S. leadership in trade.

o   Uncertainty during negotiations deters investment.

o   Allies may turn to other powers (e.g., China, EU) for trade deals.

Currency Manipulation

Labeling countries (e.g., China) as manipulators to justify penalties

·       Potential benefit for exporters due to a weaker dollar.

·       Widened rift with major trading partners.

·       Increased trade uncertainty affects import-reliant industries.

·       Financial or trade restrictions in retaliation.

Export Controls

Restrictions on exporting sensitive technologies (e.g., AI, semiconductors, 5G)

o   Loss of revenue for U.S. tech firms.

o   Accelerated competition in tech from targeted countries.

o   Encouragement of domestic innovation in critical technologies.

o   Fragmentation of global tech standards.

Reshoring Incentives

Tax breaks or subsidies to relocate production to the U.S.

·       Job creation in critical sectors (e.g., semiconductors, pharmaceuticals).

·       Disruption of global supply chains.

·       Higher production costs passed to consumers.

·       Retaliation from countries affected by reduced exports.

 

 

Policy

Year

Purpose

Outcome

Smoot-Hawley Tariff Act

1930

Protect American farmers and manufacturers

Led to global trade retaliation, worsened the Great Depression

Tariff of Abominations

1828

Protect Northern industries from cheap imports

Benefited Northern manufacturers but hurt the Southern economy; increased regional tensions

U.S. Steel Tariffs

2002

Save American steel jobs and domestic industry

Raised steel prices, hurt steel-using industries, led to WTO ruling against the U.S.; tariffs removed in 2003

Voluntary Export Restraints (VERs)

1981

Protect U.S. automobile industry from Japanese imports

Higher car prices in the U.S.; Japanese automakers established factories in the U.S.

Textile Quotas (Multi-Fiber Arrangement)

1974-2004

Protect textile industries in developed countries

Higher prices for consumers; after lifting in 2005, significant increase in imports, impacting domestic producers

 

 

Industry

Impact of Tariff

Jobs

Cost of Living

Availability of Goods

Automotive

Tariffs on imported cars or car parts increase production costs.

o   Potential job growth in U.S. car manufacturing.

o    Cars become more expensive due to higher production and import costs.

o   Fewer car options for consumers, especially for foreign brands.

o   - Job losses in assembly plants dependent on imports.

Technology

Tariffs on electronics (e.g., phones, laptops) increase prices for imported components and products.

·        May encourage domestic tech manufacturing, creating new jobs.

·       Higher prices for electronics like smartphones and laptops.

·       Slower availability of new tech or limited models due to disrupted global supply chains.

·        Job losses in export-dependent sectors.

Agriculture

Tariffs on imports like fruits, vegetables, and grains benefit U.S. farmers but lead to retaliation abroad.

o   Job growth in domestic farming.

o   Food prices increase (e.g., fruits, vegetables, meat) due to higher import costs or reduced supply.

o   Seasonal produce may become scarce without imported goods.

o   Job losses in export-heavy states if foreign markets retaliate.

Steel & Aluminum

Tariffs on steel and aluminum imports protect U.S. industries but increase input costs for manufacturers.

·       Job creation in steel and aluminum production.

·       Higher prices for goods like cars, appliances, and construction materials.

·       Domestic materials may meet demand, but global quality or price competition decreases.

·       Job losses in industries that use steel (e.g., construction).

Textiles & Apparel

Tariffs on imported clothes and fabrics raise production costs for retailers.

o   Some job growth in U.S. textile production.

o   Clothes and shoes become more expensive, especially for foreign brands.

o   Fewer affordable clothing options for budget-conscious consumers.

o   Retailers may downsize due to higher costs.

Pharmaceuticals

Tariffs on medicine ingredients from abroad increase drug manufacturing costs.

·       Minimal direct impact on jobs; limited reshoring possible due to high costs.

·       Higher prices for essential medicines, potentially unaffordable for low-income households.

·       Slower production and potential shortages of life-saving drugs.

Energy (Oil & Gas)

Tariffs on imported crude oil or equipment for renewable energy increase domestic production costs.

o   Job growth in U.S. oil and gas extraction.

o   Higher energy costs (e.g., gas, electricity) due to increased input costs.

o   Renewable energy projects may be delayed, reducing clean energy options.

o   Potential slowdown in renewable energy projects.

Consumer Goods

Tariffs on items like furniture, appliances, and toys raise retail prices.

·       Few new jobs created, as these goods are often not manufactured domestically.

·       Significant price hikes for everyday items, burdening consumers.

·       Limited options for foreign brands; delays in availability of popular goods.

Luxury Goods

Tariffs on imported cars, wine, cheese, or designer goods impact high-end consumers and businesses.

o   Minimal impact on jobs, as luxury production is already niche.

o   Luxury items become much more expensive (e.g., European cars, wines, and fashion).

o   Reduced availability of high-end imported goods.

 

Key Insights

1.     Jobs:

    • Tariffs generally boost domestic jobs in industries like steel, aluminum, and farming.
    • Export-dependent industries (e.g., agriculture, tech) face potential job losses due to retaliation.

2.     Cost of Living:

·       Prices rise for everyday goods (e.g., food, clothes, electronics) when tariffs increase import costs.

·       Higher energy costs can have widespread effects across industries.

3.     Availability of Goods:

·       Imported goods (e.g., seasonal produce, luxury cars, and tech gadgets) may become limited or delayed.

·       Domestic alternatives might not match global competition in terms of quality, price, or innovation.

 

Now, let’s work on this survey about tariffs. Tariff Survey

 

Game: Tariff Trade Simulation   A simple game

 

No Homework on the topic of Tariff

 

 

Chapter 1 – Part 1 - World Economy Review of 2024

 

 

Aspect

Details

Source

Global Growth

Global economy grew by 3.2%, with inflation declining to 4.2%.

AP News

United States

Achieved 2.7% growth, supported by strong consumer spending and labor market resilience.

AP News

Europe

Germany contracted by 0.2% for the second consecutive year, citing challenges in manufacturing.

Economic and Finance

China

Growth slowed due to real estate downturn but retained significance in global trade.

AP News

Trade Policies

Policy uncertainties, including trade tariffs, were highlighted as risks to global trade and stability.

AP News

Climate Change

Debate on aggressive net-zero strategies raised concerns about their economic impacts.

NY Post

Outlook for 2025

IMF projects a slight growth improvement to 3.3%, tempered by geopolitical and policy risks.

Sunday Times

 

Region/Country

2024 Expected GDP Growth (%)

Key Insights

Source

Global Growth

3.2

Stable yet modest expansion, projected to improve slightly to 3.3% in 2025.

IMF

United States

2.7

Driven by strong consumer spending and a robust labor market.

IMF

Euro Area

0.7

Facing challenges from high energy costs and manufacturing sector weaknesses.

IMF

China

4.2

Growth supported by exports and stimulus measures despite real estate sector challenges.

IMF

Japan

1

Indicating steady but subdued economic activity.

IMF

United Kingdom

0.9

Growth revised upward, with expectations to outpace major European economies in subsequent years.

IMF

https://www.imf.org/en/Publications/WEO/weo-database/2024/October/select-country-group

 

 

Currency Performance Analysis: Changes from January 1, 2024, to December 31, 2024

Currency

Jan 1, 2024 Rate

Dec 31, 2024 Rate

Difference

Strengthened/Weakened

Euro (EUR)

1 EUR = 1.1038 USD

1 EUR = 1.0350 USD

-0.0688 USD (-6.23%)

Weakened

British Pound (GBP)

1 GBP = 1.2731 USD

1 GBP = 1.2516 USD

-0.0215 USD (-1.69%)

Weakened

Mexican Peso (MXN)

1 USD = 16.964 MXN

1 USD = 20.869 MXN

+3.905 MXN (+23.02%)

Weakened

Canadian Dollar (CAD)

1 USD = 1.3245 CAD

1 USD = 1.4393 CAD

+0.1148 CAD (+8.67%)

Weakened

Russian Ruble (RUB)

1 USD = 89.250 RUB

1 USD = 113.750 RUB

+24.500 RUB (+27.45%)

Weakened

Brazilian Real (BRL)

1 USD = 4.8539 BRL

1 USD = 6.1849 BRL

+1.3310 BRL (+27.42%)

Weakened

Japanese Yen (JPY)

1 USD = 140.94 JPY

1 USD = 157.36 JPY

+16.42 JPY (+11.65%)

Weakened

Chinese Yuan (CNY)

1 USD = 7.0786 CNY

1 USD = 7.2979 CNY

+0.2193 CNY (+3.10%)

Weakened

Australian Dollar (AUD)

1 AUD = 0.6812 USD

1 AUD = 0.6185 USD

-0.0627 USD (-9.20%)

Weakened

Norwegian Krone (NOK) 

1 USD = 10.182 NOK

1 USD = 11.384 NOK

+1.202 USD  (+11.81%)

Weakened

Swiss Franc (CHF) 

1 CHF = 1.1878 USD

1 CHF = 1.1017 USD

-0.0861 USD (-7.25%)

Weakened

https://www.exchange-rates.org/exchange-rate-history/eur-usd-2024

 

 

In Class Discussion Questions    Curency_jigsaw_game       Self-Produced Video           Quiz

 

Question

Details to Consider

Why Weakened to USD?

·       Analyze why these currencies weakened against the US dollar.

 

·       Consider factors like US economic strength, monetary policies, and global trade patterns.

 

·       Example: Why did the Euro weaken by 6.23%, and the Brazilian Real by 27.42%?

Role of US Monetary Policy

o   How did the Federal Reserve's interest rate decisions in 2024 affect the strength of the USD?

 

o   Discuss the impact of high interest rates attracting foreign capital to USD-denominated assets.

Geopolitical Impacts

·       What role did global events (e.g., Ukraine war, sanctions) play in the weakening of currencies like the Russian Ruble and Euro?

2025 Projections

o   Predict currency performance for 2025 based on 2024 trends.

 

o   Will currencies like the Mexican Peso or Japanese Yen recover?

 

o   How could China's trade policies or Japan's monetary decisions impact their currencies?

Divergent Performances

·       Discuss why the Euro (-6.23%) and Australian Dollar (-9.20%) weakened similarly but due to different factors (trade dependencies, policies).

Impacts on Trade

o   How might a strong USD affect trade balances for countries like Japan or Brazil?

 

·       Example: Will a weaker Yen boost Japanese exports?

Currency Strategies

o   As an investor or policymaker, what strategies would you adopt in response to these currency trends?

 

o   Should countries prioritize monetary adjustments or fiscal reforms?

 

Homework - Chapter 1-1 (due with the first midterm exam): 

  1. Do you think tariffs against China, the Eurozone, and Mexico will help strengthen or weaken the U.S. dollar? Explain your reasoning by considering the following factors in your response:

1)     How tariffs affect trade balances (exports vs. imports)

2)     The impact of reduced imports on foreign demand for the dollar

3)     How tariffs might influence global investor confidence in the U.S. economy.

2       Do you prefer a strong dollar or a weak dollar? Why?

·        Advantages of a strong dollar:

                                                                   I.          Cheaper imports for consumers.

                                                                  II.          Increased purchasing power for U.S. travelers abroad.

·        Advantages of a weak dollar:

                                                                   I.          Boosts U.S. exports by making them more competitive globally.

                                                                  II.          Supports domestic manufacturing and job creation.

·        Discuss which groups (e.g., consumers, exporters, travelers) benefit from each scenario and why you hold your preference.

Submission Requirements: Write a 250-300 word response addressing both parts of the assignment.

 

Hint:

Factor

Scenario Description

Impact on Currency (Strong/Weak)

Tariffs

U.S. imposes tariffs on imports from China, reducing Chinese imports significantly.

Weakens (reduced demand for USD)

Interest Rates

The Federal Reserve raises interest rates to combat inflation.

Strengthens (attracts foreign capital)

Trade Balance

The U.S. trade deficit widens as imports increase faster than exports.

Weakens (more USD sent abroad)

Global Uncertainty

A geopolitical crisis increases demand for "safe-haven" currencies like the U.S. dollar.

Strengthens (USD seen as stable)

Economic Growth

The U.S. economy grows rapidly, while growth in Europe and Asia slows.

Strengthens (confidence in USD)

Commodity Prices

Oil prices rise significantly, increasing costs for U.S. businesses and consumers.

Weakens (reduced economic efficiency)

Export Competitiveness

The U.S. dollar strengthens too much, making U.S. exports more expensive abroad.

Weakens exports (feedback loop)

Foreign Investment

Foreign investors flock to the U.S. due to attractive returns on Treasury bonds.

Strengthens (capital inflows)

 

 

Part 2 - In class exercise – practice of converting currencies 

 

1.     If the dollar is pegged to gold at US $1800 = 1 ounce of gold and the British pound is pegged to gold at Ł1200 = 1 ounce of gold. What should be the exchange rate between US$ and British Ł? How much can you make without any risk if the exchange rate is 1Ł = 2$? Assume that your initial investment is $1800. What about the exchange rate set at  1Ł = 1.2$? 

 

Solution: 

 

1Ł = 2$ (note that the exchange rate is set at 1Ł = 1.5$ since $1800 = Ł1500=1 ounce of gold č $1.5=1Ł).

č With $1800, you can buy 1 ounce of gold at US $1800 = 1 ounce of gold. čWith one ounce of gold, you can sell it in UK at Ł1200 = 1 ounce of gold, so you can get back Ł1200 č convert Ł to $ at $2=1Ł as given čget back Ł1200 * 2$/Ł = $2400 > $1800, initial investment č you could make a profit of $600 ($2400 - $1800=$600) č Yes.

 

                         image194.jpg

 

 

1Ł = 1.2$ (note that the exchange rate is set at 1Ł = 1.5$ since $1800 = Ł1500=1 ounce of gold č $1.5=1Ł).

      č With $1800, you can buy either 1 ounce of gold at US $1800 = 1 ounce of gold. č With one ounce of gold, you can sell it in UK at Ł1200 = 1 ounce of gold, so you can get back Ł1200 č convert Ł to $ at $1.2=1Ł as givenčget back Ł1200 * 1.2$/Ł = $1440 < $1800 č you will lose $360 ($1440 - $1800=$-360) č No.

     č So should convert to Ł first and then buy gold in UK č With $1800, you can convert to Ł1500 ($1800 / (1.2$/Ł = Ł1500 ). č buy gold in UK at Ł1200 = 1 ounce of gold, so you can get back Ł1500/Ł1200 = 1.25 ounce of gold č Sell gold in US at  US $1800 = 1 ounce of gold č So get back 1.25 ounce of gold * $1800 = $2250 > $1800 č you will make a profit of $450 ($2250 - $1800=$450) č Yes.

 

               image195.jpg

 

 

1.     If the Euro (EUR) to US Dollar (USD) exchange rate is 1.18, and the US Dollar to Japanese Yen (JPY) exchange rate is 110, what is the implied exchange rate between Euro and Japanese Yen?

Answer: The implied exchange rate between Euro and Japanese Yen is approximately 129.80 (110 * 1.18).

Explanation: 

·       1 EUR = 1.18 USD; 1 USD = 110 JPY. So  1.18 USD/EUR * 110 JPY/USD = 1.18 * 110 = 129.80 JPY/EUR (one EUR = 129.80 JPY)

·       Or, 1 EUR = 1.18 USD č 1 USD = (1/1.18) EUR; 1USD = 110 JPY, so č (1/1.18)EUR = 110 JPY č 1 EUR = 110/(1/1.18) = 129.80 JPY

 

2.     If the Euro to the British Pound (GBP) exchange rate is 0.85, and the Swiss Franc (CHF) to Euro exchange rate is 1.10, what is the implied exchange rate between British Pound and Swiss Franc?

Answer: The implied exchange rate between British Pound and Swiss Franc is approximately  (1/0.85)/1.1 = 1.07 CHF/GBP č one GBP is worth 1.07 CHF

Explanation: 

·       1 EUR = 0.85 GBPč 1 GBP = (1/0.85) EUR, 1 CHF = 1.10 EUR, so (1/0.85) EUR/ GBP / 1.1 EUR/CHF = (1/0.85)/1.1 CHF/EUR = 1.07 CHF/GBP

·       Or 1 EUR = 0.85 GBP, 1 CHF=1.1 EUR č 1 EUR = (1/1.1) CHF, so 1 EUR = 0.85 GBP = (1/1.1) CHF č 1 GBP = (1/1.1)/0.85 = 1.07 CHF

 

3.     If the Australian Dollar (AUD) to US Dollar exchange rate is 0.75, and the Canadian Dollar (CAD) to US Dollar exchange rate is 1.25, what is the implied exchange rate between Australian Dollar and Canadian Dollar?

Answer: The implied exchange rate between Australian Dollar and Canadian Dollar is 0.60 (0.75 / 1.25).

Explanation:

·       1 AUD = 0.75 USD, 1 CAD = 1.25 USD, So 1 AUD can get 0.75 USD, and since 1 USD can get (1/1.25=0.8) 0.8 CAD, so 1 AUD = 0.75 *(1/1.25) = 0.6 CAD. So one AUD is worth 0.6 CAD.

·       Or, 0.75USD/AUD * (1/1.25) CAD/USD = 0.75 * 0.8 CAD/AUD = 0.6 CAD/AUD

 

4.     Are there any arbitrage opportunities based on the information provided below? Why or why not?

Currency

Interest Rate (%)

Exchange Rate (1 Currency to USD)

Euro (EUR)

2.36

1.04

British Pound (GBP)

4.75

1.23

Norwegian Krone (NOK)

4.5

0.088

Swiss Franc (CHF)

0.5

1.10

 

 

 

Homework chapter1-2 (due with the 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 č get gold č sell gold for euro č convert euro back to $)  How much can you make without any risk if the exchange rate is 1€ = 0.8$? (hint: $1800 č get euro č buy gold using euro č sell gold for $) Assume that your initial investment is $1800.   (answer: $1.2/euro, $450, $900)

2.     If USD to the Chinese Yuan (CNY) exchange rate is 7.35, and USD to the Indian Rupee (INR) exchange rate is 94.20, what is the implied exchange rate between Chinese Yuan and Indian Rupee, eg 1 CNY = ? INR? (answer: 1 CNY = 12.816 INR)

3.     If the New Zealand Dollar (NZD) to Australian Dollar (AUD) exchange rate is 1.05, and the Singapore Dollar (SGD) to New Zealand Dollar exchange rate is 0.94, what is the implied exchange rate between Singapore Dollar and Australian Dollar? (answer: 1 AUD = 1.013 SGD, or 1 SGD = 0.987 AUD)

 

Swiss franc carry trade comes fraught with safe-haven rally risk (FYI)

By Harry Robertson

September 2, 20241:03 AM EDTUpdated 5 months ago

https://www.reuters.com/markets/currencies/swiss-franc-carry-trade-comes-fraught-with-safe-haven-rally-risk-2024-09-02/

 

 

LONDON, Sept 2 (Reuters) - As investors turn to the Swiss franc as an alternative to Japan's yen to fund carry trades, the risk of the currency staging one of its rapid rallies remains ever present.

The Swiss franc has long been used in the popular strategy where traders borrow currencies with low interest rates then swap them into others to buy higher-yielding assets.

Its appeal has brightened further as the yen's has dimmed. Yen carry trades imploded in August after the currency rallied hard on weak U.S. economic data and a surprise Bank of Japan rate hike, helping spark global market turmoil.

 

The Swiss National Bank (SNB) was the first major central bank to kick off an easing cycle earlier this year and its key interest rate stands at 1.25%, allowing investors to borrow francs cheaply to invest elsewhere.

By comparison, interest rates are in a 5.25%-5.50% range in the United States, 5% in Britain, and 3.75% in the euro zone.

"The Swiss franc is back as a funding currency," said Benjamin Dubois, global head of overlay management at Edmond de Rothschild

 

STABILITY

The franc is near its highest in eight months against the dollar and in nine years against the euro , reflecting its status as a safe-haven currency and expectations for European and U.S. rate cuts.

But investors hope for a gradual decline in the currency's value that could boost the returns on carry trades.

Speculators have held on to a $3.8 billion short position against the Swiss franc even as they have abruptly moved to a $2 billion long position on the yen , U.S. Commodity Futures Trading Commission data shows.

 

"There is more two-way risk now in the yen than there has been for quite some time," said Bank of America senior G10 FX strategist Kamal Sharma. "The Swiss franc looks the more logical funding currency of choice."

BofA recommends investors buy sterling against the franc , arguing the pound can rally due to the large interest rate gap between Switzerland and Britain, in a call echoed by Goldman Sachs.

 

The SNB appears set to cut rates further in the coming months as inflation dwindles. That would lower franc borrowing costs and could weigh on the currency, making it cheaper to pay back for those already borrowing it.

Central bankers also appear reluctant to see the currency strengthen further, partly because of the pain it can cause exporters. BofA and Goldman Sachs say they believe the SNB stepped in to weaken the currency in August.

"The SNB will likely guard against currency appreciation through intervention or rate cuts as required," said Goldman's G10 currency strategist Michael Cahill.

 

'INHERENTLY RISKY'

Yet the Swissie, as it is known in currency markets, can be an unreliable friend.

Investors are prone to pile into the currency when they get nervous, thanks to its long-standing safe-haven reputation.

Cahill said the franc is best used as a funding currency at moments when investors are feeling optimistic.

A quick rally in the currency used to fund carry trades can wipe out gains and cause investors to rapidly unwind their positions, as the yen drama showed. High levels of volatility or a drop in the higher-yielding currency can have the same effect.

The SNB and Swiss regulator Finma declined to comment when asked by Reuters about the impact of carry trades on the Swiss currency.

As stock markets tumbled in early August, the Swiss franc jumped as much as 3.5% over two days. The franc-dollar pair has proven sensitive to the U.S. economy, often rallying hard on weak data that causes U.S. Treasury yields to fall.

 

"Any carry trade is inherently risky and this is particularly true for those funded with safe-haven currencies," said Michael Puempel, FX strategist at Deutsche Bank.

"The main risk is that when yields move lower in a risk-off environment, yield differentials compress and the Swiss franc can rally," Puempel added.

A gauge of how much investors expect the Swiss currency to move , derived from options prices, is currently at around its highest since March 2023.

"Considering the central banks, you can see how there may be more sentiment for some carry players to prefer the franc over the yen," said Nathan Vurgest, head of trading at Record Currency Management.

"The ultimate success of this carry trade might still be dependent on how quickly it can be closed in a risk-off scenario," Vurgest said, referring to a moment where investors cut their riskier trades to focus on protecting their cash.

Get the latest news and expert analysis about the state of the global economy with the Reuters Econ World newsletter. Sign up here.

Reporting by Harry Robertson; Editing by Dhara Ranasinghe and Alexander Smith

 

Key Insights from the Article:

1.     Swiss Franc as a Funding Currency:

    • The Swiss franc has gained popularity as a funding currency for carry trades due to its low-interest rate (1.25%), particularly as the yen has become less favorable after recent volatility and a surprise rate hike by the Bank of Japan.

2.     Carry Trade Dynamics:

    • Investors borrow currencies with low interest rates (e.g., the Swiss franc) and invest in higher-yielding currencies like the British pound or U.S. dollar.
    • The attractiveness of the Swiss franc is tied to its low borrowing costs and the potential for a gradual decline in its value.

3.     Safe-Haven Risks:

    • The Swiss franc's safe-haven status introduces risk for carry trades. In times of market stress, investors flock to the franc, causing it to rally and potentially wiping out carry trade gains.
    • This was evident when the franc jumped 3.5% over two days in early August during stock market turmoil.

4.     Central Bank Influence:

    • The Swiss National Bank (SNB) is expected to cut rates further, which could lower borrowing costs for the franc and make it cheaper for carry trades.
    • The SNB appears to actively intervene in the currency market to prevent excessive appreciation, supporting exporters and stabilizing the economy.

5.     Strategist Views:

    • Bank of America and Goldman Sachs favor the Swiss franc as a funding currency over the yen due to reduced volatility and predictability.
    • BofA and Goldman Sachs recommend buying higher-yielding currencies like sterling against the franc to benefit from interest rate differentials.

6.     Risks of Swiss Franc Carry Trades:

    • Sudden rallies in the franc (often triggered by safe-haven demand or weak U.S. data) pose significant risks to carry trades.
    • Yield compression in risk-off scenarios can amplify losses for traders.

7.     Investor Sentiment:

    • The success of Swiss franc carry trades depends on investor optimism and the ability to close trades quickly during market stress.
    • Volatility expectations for the franc are currently elevated, reflecting concerns about market risks.

This analysis highlights the opportunities

 

 

Part III: Multilateral Trade vs. Bilateral Trade

 

Multilateralism Explained | Model Diplomacy (youtube)              Game            quiz

 

Feature

Multilateral Trade Agreements

Bilateral Trade Agreements

Definition

Trade agreements involving three or more countries.

Trade agreements between two countries.

Scope

Broad, covering multiple nations, industries, and regulations.

Narrower, focusing on agreements between two nations.

Complexity

Highly complex and lengthy to negotiate due to involvement of multiple parties.

Simpler and quicker to negotiate, involving only two nations.

Time to Implementation

Longer, as all member countries must ratify the agreement.

Faster, as fewer parties are involved.

Economic Impact

Significant, as it covers a wide range of trade opportunities and industries, benefiting multiple countries.

Limited, as the agreement only expands access between two countries’ markets.

Regulation Standardization

Uniform rules and regulations across all member countries, reducing legal and compliance costs for businesses.

Standardizes rules between the two participating countries only.

Equality Among Members

Treats all member nations equally, ensuring a level playing field.

May favor the stronger economy in the agreement, creating potential imbalances.

Impact on Small Businesses

May disadvantage small businesses due to competition with multinational corporations familiar with global operations.

Small businesses may face less pressure compared to multilateral agreements but still compete with larger firms.

Examples

- NAFTA (now USMCA): U.S., Canada, Mexico.

- U.S. bilateral trade agreements with Israel, Jordan, Australia, and Singapore.

- GATT/WTO: Global trade negotiations.

- CAFTA-DR: Central America.

 

Key Takeaways:

1.      Multilateral Trade Agreements:

    • Broader scope and impact.
    • Better for integrating multiple countries into global trade but harder to negotiate and implement.
    • Examples: NAFTA (USMCA), WTO, CAFTA-DR.

2.      Bilateral Trade Agreements:

    • Easier and faster to negotiate.
    • More focused, benefiting two countries, but with limited global impact.
    • Examples: U.S.-Australia FTA, EU-U.S. trade.

 

 

Homework chapter1-3 (due with first midterm exam)

1)     What is bilateralism? What is Multilateralism?

2)     Do you advocate for bilateralism or multilateralism as being more suitable for the U.S. economy? Why

 

  

 

 

Chapter 2 : International Trade

 

Let’s watch this video together.

 

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

 

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.

 

Summary:

Current Account:

·       Definition: The current account represents the country's transactions in goods, services, income, and current transfers with the rest of the world.

·       Components:

A.    Trade Balance: The difference between exports and imports of goods.

B.    Services: Transactions related to services (e.g., tourism, transportation).

C.    Income: Receipts and payments of interest, dividends, and wages.

D.    Current Transfers: Gifts, aids, and remittances.

Capital Account:

·       Definition: The capital account tracks capital transfers and the acquisition or disposal of non-financial assets. Now includes financial account.

·       Components:

A.    Capital Transfers: Non-financial transfers (e.g., debt forgiveness) and financial transfers.

B.    Acquisition/Disposal of Non-Financial Assets: Sale or purchase of non-financial assets, such as patents, goodwill, copy rights, etc, and financial assets, such as FDI, changes in reserves, portfolio investment, and financial derivative.

Balance of Payments (BoP):

·       Definition: The BoP is a comprehensive record of a country's economic transactions with the rest of the world over a specific period.

·       Equation: BoP = Current Account + Capital Account

·       Significance: It indicates whether a country has a surplus or deficit in its transactions with the rest of the world.

Summary:

·       Current Account: Records day-to-day transactions, including trade, services, income, and transfers.

·       Capital Account: Deals with transfers of non-financial and financial assets and capital transfers.

·       Balance of Payments: The overall record combining the Current and Capital Accounts, reflecting a country's economic relationship with the world.

 

 

 

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. 

 

 

Part I -  What is the current account?

 

Current vs. Capital Accounts: What's the Difference?   Interactive Game on Current Account and Capital Account

 

Aspect

Current Account

Capital Account

Definition

Tracks trade in goods, services, income, and transfers.

Tracks investments and financial flows.

Components

·       Exports/Imports of goods and services

·       Foreign direct investment (FDI)

 

·       Income from abroad (e.g., interest, dividends)

·       Portfolio investments (stocks, bonds)

 

·       Transfers (e.g., remittances, aid)

·       Loans and banking flows

Purpose

Reflects the country’s trade balance and income.

Reflects capital flows and ownership of assets.

Examples

·       Exporting cars to another country

·       A foreign company building a factory locally

 

·       Sending money to family abroad

·       Buying shares in foreign companies

Surplus/Deficit Impact

Surplus: Exports > Imports = Inflows of money.

Surplus: More investment coming in than going out.

 

Deficit: Imports > Exports = Outflows of money.

Deficit: More investment going out than coming in.

 

 

 

Balance of payments: Current account (video, Khan academy)              Quiz 1       Quiz 2

 

 

 

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

 

Q3 2024

-$310.9 B

Q2 2024

-$275.0 B

The U.S. current-account deficit widened by $35.9 billion, or 13.1 percent, to $310.9 billion in the third quarter of 2024, according to statistics released today by the U.S. Bureau of Economic Analysis. The revised second-quarter deficit was $275.0 billion. The third-quarter deficit was 4.2 percent of current-dollar gross domestic product, up from 3.7 percent in the second quarter.

 

image196.jpg

 

 

 image197.jpg

 

Capital-Account Transactions 

·       Capital-transfer receipts were $1.6 billion in the third quarter. The transactions reflected receipts from foreign insurance companies for losses resulting from Hurricane Helene. For information on transactions associated with hurricanes and other disasters, see “How do losses recovered from foreign insurance companies following natural or man-made disasters affect foreign transactions, the current account balance, and net lending or net borrowing?”. Capital-transfer payments increased $1.8 billion to $3.3 billion, reflecting an increase in infrastructure grants.

Financial-Account Transactions 

·       Net financial-account transactions were $493.6 billion in the third quarter, reflecting net U.S. borrowing from foreign residents.

https://www.bea.gov/news/2024/us-international-transactions-3rd-quarter-2024

 

 

Part II - What is the Capital Account

 

Balance of payments: Capital account (video, Khan Academy)        Quiz 3

 

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

 

 

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

1.     Can a trade war help reduce current account deficit? Why or why not?

2.     How do tariffs impact the current account deficit in the context of ongoing trade disputes?

 

3.     Below are examples of various economic activities. Based on each example, determine whether the factor increases or decreases the current account balance. Write your answers in the blank space provided.

1)     A local factory sells more goods overseas, creating jobs and income locally. Effect on Current Account: ___________

2)     Workers abroad send more money back to their families at home. Effect on Current Account: ___________

3)     Paying less interest on loans taken from international lenders. Effect on Current Account: ___________

4)     Buying fewer foreign-made products, such as cars or electronics. Effect on Current Account: ___________

5)     More tourists visit the country and spend money on hotels, food, and services. Effect on Current Account: ___________

6)     Buying more imported products, such as foreign luxury goods. Effect on Current Account: ___________

7)     Exporting fewer goods due to higher costs or less demand abroad. Effect on Current Account: ___________

8)     Traveling abroad and spending more on international vacations. Effect on Current Account: ___________

9)     Receiving less income from foreign investments due to low returns. Effect on Current Account: ___________

10) Paying more interest on loans owed to foreign banks or investors. Effect on Current Account: ___________

11) Sending more money to family members living in other countries. Effect on Current Account: ___________

Optional Homework:

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 country’s 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:  https://research.stlouisfed.org/publications/

Balance of Payments statistics:  https://fred.stlouisfed.org/categories/125

 

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 nation’s 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.

 

Topic 2 of Chapter 2 --- Evolution of international monetary system

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

 

2.   Timeline of the history of Money:     

 

·       Quiz on Gold Standard          

·       Quiz on Bretton Woods System

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

·       Quiz on Exchange Rate Regime

 

HISTORY OF EXCHANGE RATE SYSTEMS

Time Period

System

Key Features

Before 1875

Bimetallism

Gold & silver used as money.

1875 - 1914

Classical Gold Standard

Currencies fixed to gold. Gold used for international trade.

1915 - 1944

Interwar Period

·       WWI: Gold standard abandoned to print money.

·       WWII: Some countries used a mix of gold & other currencies.

1945 - 1972

Bretton Woods System

o   US dollar pegged to gold at $35/oz.

o   Other currencies pegged to the US dollar.

o   IMF & World Bank created.

1973 - Present

Floating Exchange Rates

·       No gold backing.

·       Currencies fluctuate based on market forces.

·       US dollar remains dominant.

 

Videos

·       The Gold Standard Explained in One Minute (video)

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

·       FLOATING AND FIXED EXCHANGE RATE (video)

 

3.     Bretton Woods Agreement and System

 

Topic

Details

What was the Bretton Woods Agreement?

Established in July 1944 during a conference in Bretton Woods, New Hampshire. Delegates from 44 countries aimed to develop a unified financial and monetary system post-World War II. Introduced the Bretton Woods System, which lasted until the early 1970s.

Key Features

1. The U.S. dollar was pegged to gold at $35 per ounce.

 

2. Other currencies were pegged to the U.S. dollar.

 

3. Created stable exchange rates and prevented competitive devaluations.

 

4. Two institutions were created: IMF: Monitored exchange rates and provided monetary support to countries; World Bank: Managed funds for post-war reconstruction.

Significance

o   Facilitated international trade by minimizing exchange rate volatility.

 

o   Provided a framework for economic cooperation.

 

o   Helped rebuild war-devastated economies.

 

o   Fixed exchange rates stabilized trade and capital flows.

Collapse of the System

·       By the 1970s, the U.S. faced significant economic pressures:

·       U.S. gold reserves diminished as countries exchanged dollars for gold.

·       President Nixon suspended the dollar's convertibility into gold in 1971.

·       After 1973, countries adopted floating exchange rates where currency values were determined by market forces.

Reasons for Failure

o   1. Inadequate gold reserves to back the growing U.S. dollar supply.

 

o   2. Rising U.S. deficits undermined confidence in the dollar.

 

o   3. Fixed exchange rates limited flexibility for economic adjustments.

Legacy

1. IMF and World Bank remain critical to global financial stability.

 

2. The U.S. dollar became the global reserve currency.

 

3. Highlighted the importance of international collaboration in monetary policy.

 

 

U.S. Perspective: A Comparison of the Bretton Woods System and the Post-Bretton Woods System

Aspect

Bretton Woods System (1944-1973)

Post-Bretton Woods System (1973-Present)

Exchange Rate System

Fixed exchange rates: Currencies were pegged to the U.S. dollar, which was pegged to gold at $35 per ounce.

Floating exchange rates: Currency values are determined by market forces (supply and demand).

U.S. Dollar Dominance

High: The U.S. dollar became the global reserve currency backed by gold, making the U.S. central to global trade and finance.

Still dominant: The U.S. dollar remains the global reserve currency, but without the backing of gold.

Economic Stability

Stability: Fixed rates reduced exchange rate volatility, facilitating international trade and investment.

Volatility: Floating rates introduced currency fluctuations, creating challenges for trade and investment.

Gold Reserves

U.S.-centric: The U.S. needed significant gold reserves to maintain dollar convertibility.

Not required: No need for gold reserves, as currencies are not pegged to gold.

Flexibility in Adjustments

Limited: Countries could not easily adjust to economic shocks due to fixed exchange rates.

High: Countries have more flexibility to adjust monetary policies to respond to economic shocks.

Impact on U.S. Economy

Beneficial: The U.S. dollar's role as the global reserve currency gave the U.S. significant economic influence.

Mixed: The U.S. retains dominance, but floating rates expose the dollar to global market dynamics.

Impact on Other Countries

Dependency: Countries relied on the U.S. dollar for international trade, increasing U.S. influence over global economic policies.

Competition: Countries can adopt independent monetary policies, reducing reliance on the U.S. dollar for stability.

Global Financial Institutions

IMF and World Bank established, with the U.S. playing a leading role in their operations.

IMF and World Bank continue to play significant roles, but with increasing influence from other major economies.

Pros for the U.S.

o   Central role in global trade and finance.

o   Retains reserve currency status.

o   Demand for U.S. dollars boosted its economy.

o   No need to maintain large gold reserves.

o   Ability to influence global economic policies.

o   More flexible monetary policy.

Cons for the U.S.

·       Gold reserves were drained as countries converted dollars to gold.

·       Greater exposure to global economic fluctuations.

·       U.S. deficits undermined confidence in the dollar.

·       Rising competition from other currencies like the euro and Yen.

 

For class discussion:  Why was the Bretton Woods System created after World War II, and what factors led to its collapse in 1973?

(Why the World Abandoned the Gold Standard, FYI) (Bretton Woods system, FYI)

 

 

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. dollar’s 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 organizations—the 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. White’s 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 White’s 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. dollar’s 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 System’s 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 dollar’s 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.

 

Topic 3: Shall we go back to Gold Standard for its currency?  

 

Play  the “Gold Standard Adventure Game” to learn

 

Video:

The US should not return to the gold standard for its currency: Jerome Powell (youtube)     

 (refer to: https://www.forbes.com/sites/nathanlewis/2020/03/27/what-if-we-had-a-gold-standard-right-now/?sh=1bfba3313e58)

 

 

Homework of chapter 2 part ii (due with the first midterm exam)

·               Do you support returning to gold standard? Why or why not?

Hint:

Aspect

Gold Standard

Floating Exchange Rate

Stability

Pro: Offers stable exchange rates

Pro: Allows for automatic adjustments to imbalances

 

Con: Can lead to deflationary pressures

Con: Can result in volatility and uncertainty

Economic Control

Pro: Limits government intervention

Pro: Provides flexibility for monetary policy

 

Con: Restricts policy options in times of crisis

Con: May lead to currency manipulation

Trade

Pro: Facilitates international trade

Pro: Adjusts to trade imbalances naturally

 

Con: Can lead to trade imbalances

Con: May impact export competitiveness

Public

Pro: Offers a tangible asset backing currency

Pro: Offers monetary policy independence

 

Con: Limited supply of gold

Con: Vulnerable to speculative attacks

Inflation Influence

Pro: Tends to limit inflationary pressures

Pro: Can help mitigate inflation through policy measures

 

Con: May constrain growth during deflationary times

Con: May struggle to control inflation in some cases

Job Unemployment Rate

Pro: Can help stabilize employment levels

Pro: Allows for independent monetary and fiscal policies

 

Con: Can lead to rigidities in labor markets

Con: May struggle to address structural unemployment

 

·               What is the Bretton Woods agreement? Why is the Bretton Woods Agreement a significant event in world financial history?

·               What are some alternative currencies that have emerged as potential contenders to challenge the dollar's supremacy? Chinese Yuan? Euro? Yen? Bitcoin?... And why?

(Hint: according to Why The U.S. Dollar May Be In Danger (youtube),  the three necessary conditions for a currency to be perceived as a global reserve currency are: An independent central bank; Strong military backing; A large and liquid debt market).

 

 

 

Mar 27, 2020,04:54pm EDT|30,167 views

What If We Had A Gold Standard System, Right Now?

Nathan LewisContributor  https://www.forbes.com/sites/nathanlewis/2020/03/27/what-if-we-had-a-gold-standard-right-now/?sh=1bfba3313e58

For most of the 182 years between 1789 and 1971, the United States embraced the principle of a dollar linked to gold — at first, at $20.67/oz., and then, after 1933, $35/oz. Nearly every economist today will tell you that was a terrible policy. We can tell it was a disaster because, during that time, the United States became the wealthiest and most prosperous country in the history of the world.

This is economist logic.

But, even if some economists might agree with the general principle, they might be particularly hesitant to apply such monetary discipline right now, in the midst of economic and financial turmoil. This kind of event is the whole reason why we put up with all the chronic difficulties of floating currencies, and economic manipulation by central banks. Isn't it?

So, let's ask: What if we were on a gold standard system, right now? Or, to be a little more specific, what if we had been on a gold standard system for the last ten years, and continued on one right now, in the midst of the COVID-19 panic and economic turmoil?

In the end, a gold standard system is just a fixed-value system. The International Monetary Fund tells us that more than half the countries in the world, today, have some kind of fixed-value system — they link the value of their currency to some external standard, typically the dollar, euro, or some other international currency. They have fixed exchange rates, compared to this external benchmark. The best of these systems are currency boards, such as is used by Hong Kong vs. the U.S. dollar, or Bulgaria vs. the euro.

If you think of a gold standard as just a "currency board linked to gold," you would have the general idea. These currency boards are functioning right now to keep monetary stability in the midst of a lot of other turmoil. If you had all the problems of today, plus additional monetary instability as Russia or Turkey or Korea has been experiencing (or the euro ...), it just piles more problems on top of each other.

Actually, it would probably be easier to link to gold than the dollar or euro, because gold's value tends to be stable, while the floating fiat dollar and euro obviously have floating values, by design. If you are going to link your currency to something, it is easier to link it to something that moves little, rather than something that moves a lot. Big dollar moves, such as in 1982, 1985, 1997-98 and 2008, tend to be accompanied by currency turmoil around the world.

But, even within the discipline of a gold standard system, you could still have a fair amount of leeway regarding central bank activity, and also various financial supports that arise via the Treasury and Congress.

Basically, you could do just about anything that is compatible with keeping the value of the dollar stable vs. gold.

In the pre-1914 era, there was a suite of policies to this effect, generally known as the "lender of last resort," and described in Walter Bagehot's book Lombard Street (1873). Another set of solutions resolved the Panic of 1907, without ever leaving the gold standard. The Federal Reserve was explicitly designed to operate on a gold standard system; and mostly did so for the first 58 years of its existence, until 1971. Others have argued that a functional "free banking" system, as Canada had in the pre-1914 era, would allow private banks to take on a lot of these functions, without the need for a central bank to do so.

What could the Federal Reserve do today, while still adhering to the gold standard?

First: It could expand the monetary base, by any amount necessary, that meets an increase in demand to hold cash (base money). Quite commonly, when things get dicey, people want to hold more cash. Individuals might withdraw banknotes from banks. Banks themselves tend to hold more "bank reserves" (deposits) at the Federal Reserve — the banker's equivalent of a safe full of banknotes. This has happened, for example, during every major war. During the Great Depression, the Federal Reserve expanded its balance sheet by a huge amount, as banks increased their bank reserve holdings in the face of uncertainty. Nevertheless, the dollar's value remained at its $35/oz. parity.

Federal Reserve Liabilities 1917-1941.

 NATHAN LEWIS

Second: The Federal Reserve could extend loans to certain entities - banks, or corporations - as long as this lending is consistent with the maintenance of the currency's value at its gold parity. In the pre-1914 era, this was done via the "discount window." One way this could come about is by swapping government debt for direct lending. For example, the Federal Reserve could extend $1.0 trillion of loans to banks and corporations, and also reduce its Treasury bond holdings by $1.0 trillion. This would not expand the monetary base. But, it might do a lot to help corporations with funding issues.

What the Federal Reserve would not be able to do is: expand the "money supply" (monetary base) to an excessive amount — an amount that tended to cause the currency's value to fall due to oversupply, compared to its gold parity.

Now we come to a wide variety of actions that are not really related to the Federal Reserve, but rather, to the Treasury and Congress.

In 1933, a big change was Deposit Insurance. The Federal Government insured bank accounts. It helped stop a banking panic at the time. This is a controversial policy even today, and some think it exacerbated the Savings and Loan Crisis of the 1980s, not to mention more issues in 2008. But, nevertheless, it didn't have anything to do with the Federal Reserve.

In 2009, the stock market bottomed when there was a rule change that allowed banks to "mark to model" rather than "mark to market." Banks could just say: "We are solvent, we promise." It worked.

Today, Congress has been making funds available to guarantee business lending, and for a wide variety of purposes that should help maintain financial calm. Whether this is a good idea or not will be debated for a long time I am sure. But, it has nothing to do with the Federal Reserve. All of these actions are entirely compatible with the gold standard.

What about interest rates? Don't we want the Federal Reserve to cut rates when things get iffy? In the 1930s, interest rates were set by market forces. Given the economic turmoil of the time, government bond rates, and especially bill rates, were very low. The yield on government bills spent nearly the whole decade of the 1930s near 0%. Markets lower "risk-free" rates automatically, during times of economic distress, when you just allow them to function without molestation. Every bond trader already knows this.

 

   Topic 4: Will Crypto Become the World’s Primary Currency?  

 

Why Cryptocurrency Will Never Become the World’s Primary Currency

·       Economist explains the two futures of crypto | Tyler Cowen

·       Self produced video: Crypto Cannot Be Cash  

·       Self produced video: The Crypto Hustle: Easy Money or Easy Mistake?

·       Quiz

 

 

Factor

Cryptocurrency

Traditional Currency (Fiat)

Why Crypto Fails as a Global Currency

Stability

Highly volatile (e.g., Bitcoin went from $69K to $16K in a year).

Relatively stable, controlled by central banks.

People and businesses need price stability to conduct daily transactions.

Regulation

Decentralized, often facing government crackdowns.

Fully regulated and issued by governments.

Governments will resist adopting a currency they cannot control.

Adoption