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The International Money Game PDF

382 Pages·1988·30.434 MB·English
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THE Internatlonal Money Game THE International Money Game Robert Z. Aliber FIFTH EDITION, REVISED ~ MACMILLAN ©Basic Books, Inc. 1973, 1976, 1979, 1983, 1988 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright Act 1956 (as amended), or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 33-4 Alfred Place, London WC1E 7DP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. First edition 1973 Second edition 1976 Third edition 1979 Fourth edition 1983 Fifth edition 1988 Published by THE MACMILLAN PRESS LTD Houndmills, Basingstoke, Hampshire RG21 2XS and London Companies and representatives throughout the world British Library Cataloguing in Publication Data Aliber, Robert Z. (Robert Zelwin), 1930- The International money game.-5th ed. rev. 1. International monetary system I. Title 332.4'5 ISBN 978-0-333-46782-4 ISBN 978-1-349-19566-4 (eBook) DOI 10.1007/978-1-349-19566-4 10 9 8 7 6 5 4 3 2 03 02 01 00 99 98 97 96 95 CONTENTS Preface vii PART I The International Money System: Politics and Economics 1. The Name of the Game Is Money 3 2. A System Is How the Pieces Fit 16 3. "The Greatest Monetary Agreement in History" 33 4. "The Gnomes of Zurich "-A London Euphemism for Speculation Against Sterling 54 5. Gold-How Much Is a Barbarous Relic Worth? 82 6. They Invented Money so They Could Have Inflation 103 7. Disinflation, Deflation, and Depression 123 8. Oil and the OPEC Roller Coaster 136 9. The Dollar and Coca-Cola Are Both Brand Names 153 10. Radio Luxembourg and the Eurodollar Market Are Both Offshore Stations 173 11. Central Bankers Read Election Returns, Not Balance Sheets 187 12. Monetary Reform-Where Do the Problems Go When They Are Assumed Away? 201 v Contents Part II Living with the System 13. Bargains and the Money Game 223 14. The Underground Economies and the Bureaucratic Imperative 228 15. International Tax Avoidance-A Game for the Rich 236 16. Banking on the Wire 253 17. The Rise of the House of Cornfeld-And the Fall 272 18. Why Are Multinational Firms Mostly American? 286 19. Japan: The First Superstate? 310 20. Optimal Bankrupts: Deadbeats on an International Treadmill 325 21. Zlotys, Rubles, and Leks 343 22. Fitting the Pieces Once Again 357 Index 365 vi PREFACE International finance is frequently viewed as esoteric, understood only by a few skilled speculators in the British pound and the Japanese yen and by a handful of central bankers. In part, the mystery results from the specialized use of everyday language- "gliding parities" and "sliding bands," "support limits" and "counterspeculation," "SDRs" and "Eurodollars," "cross-rates" and "intervention limits," "tax havens" and "transfer pricing." Most of the words seem straightforward, but their meanings and significance are elusive. The reader is deterred because of the effort required to learn an esoteric language. As the jargon barrier is surmounted, a second problem appears -recognized experts in the field frequently disagree about the appropriate explanation for the same event. Is the dollar "strong" because U.S. imports are down due to the recession, or because U.S. interest rates are high, or because the U.S. inflation rate is down, or because the U.S. fiscal deficit is $200 billion? Is the gold price down because the Russians are selling gold, or because inter est rates are rising, or because Ronald Reagan's anti-inflationary policies are tougher than those of Jimmy Carter? When the United States reports a trade deficit, the experts disagree about whether the problem is caused by an increase in U.S. imports of oil, the loss of a "competitive edge" in U.S. manufacturers, rapid economic growth in the United States, or the desire of other industrial coun tries to maintain undervalued currencies to promote their exports. And then, even if the experts agree on the analysis, their recom mendations for policy actions frequently differ. They can't decide whether U.S. interests are better served by remaining with floating exchange rates or by returning to a pegged exchange rate system. Some experts, and some presidential candidates, propose an in- vii Preface crease in the monetary gold price-the price at which central bankers buy and sell gold with each other-and several favor a return to a nineteenth-century gold standard. A few experts want to abandon national currencies in favor of a worldwide money, while others want to eliminate the use of the dollar and gold as international monies. The reader is left puzzled or bewildered and skeptical of the value of expertise. The International Money Game seeks to break the jargon bar rier. Technical issues are presented in a straightforward manner with minimal use of specialized terms. Concepts are clarified by use of common metaphor. Explanations are given for why experts disagree. This book is now in its fifth edition. Previous editions were prepared in different economic contexts. The first edition was completed in the early 1970s as the Bretton Woods system of pegged exchange rates, established in the mid-1940s to avoid a repetition of the "beggar-thy-neighbor" policies of the 1920s and 1930s, was breaking down. The international economy was begin ning to experience a severe peacetime inflation that had no good historical parallel in the last several hundred years. The second edition was completed as the international economy was moving from boom to recession, one of the most severe of the postwar period. Movements in exchange rates appeared large, but it seemed that traders and investors required some time to adjust to the floating exchange rate system, which had replaced the pegged-rate system in 1973. Several smaller international banks failed, and a few larger banks incurred losses in the $50 to $100 million range, usually because of foreign exchange trading. Inter national credit flows seemed precarious: the OPEC (Organization of Petroleum Exporting Countries) countries had large payment deficits, and the major international banks, bridging borrowers and lenders, seemed threatened both by the inability of the borrowers to repay and by the threats of the OPEC countries to shift or withdraw their deposits. When the third edition was written in the late 1970s, concern viii Preface had shifted to whether the United States could significantly reduce its inflation rate. The supply of U.S. dollars was increasing more rapidly than the demand. Because of skepticism about U.S. price level performance, the U.S. dollar had taken a tremendous beating in the foreign exchange market; in a few years it had lost more than half of its value in terms of the German mark, the Swiss franc, and the Japanese yen. The U.S. dollar holdings of central banks in Western Europe and Japan had increased sharply because private parties around the world were increasingly reluctant to hold dollar assets. Suddenly, external factors became an important constraint on U.S. domestic policy choices. American policymakers were put on notice that their actions sometimes lacked credibility, and their need to regain votes of confidence prompted measures that brought the United States somewhat closer to the next recession. The inves tors and traders who set foreign exchange values had their own Proposition Thirteen referendum, and during the summer and fall of 1978 they voted no confidence in the credibility of U.S. economic policies. In the early 1980s contractive U.S. monetary policies led to a sharp reduction in the inflation rate. The high interest rates on U.S. dollar assets that had depressed the housing and auto industries have led to a sharp increase in the foreign exchange value of the U.S. dollar, stimulating U.S. imports and depressing U.S. exports. U.S. unemployment reached postwar highs. Business bankruptcies were at their highest level since the Great Depression of the 1930s. There was a smell of financial disaster in the air. The disaster hit in mid-1982, when Mexico announced it could no longer pay the interest on its outstanding foreign debt of $90 billion. All of a sudden, the market value of the $800 billion owed by borrowers in the developing countries was significantly reduced, perhaps by $200 billion or even $300 billion. Certainly, few inves tors were willing to pay sixty or seventy cents on the dollar of good U.S. money for Mexican or Polish or Argentinian loans. The shock that triggered the Mexican debt crisis-a decline in the posted price of oil from $36 a barrel to $29 a barrel-effectively put Penn ix Preface Square, a small shopping center bank in Oklahoma, on the ropes. Penn Square collapsed, and suddenly the Continental Illinois-the largest bank between New York and San Francisco--was hit with a depositor run of $10 billion. Within the last decade the threat of financial crises has appeared with increasing frequency. Such crises have blurred the usual dis tinction between economics and politics. The Shah appeared tough on the oil price-and then, as he was forced from power, the future darkened. The oil price shot up again. Somehow the predicted disasters have never occurred, for the system has remarkable resili ency. But the expectation of future disasters has not abated. By the mid-1980s the United States was experiencing a major economic recovery. Employment was up by more than ten million. The U.S. inflation rate fluctuated between 3 and 4 percent-the twist was that the inflation rate was declining as employment was booming. The dark clouds had moved elsewhere-the U.S. fiscal deficit was about as large as the total federal government budget a decade earlier, and the United States had the largest trade deficit ever. The smell of protectionism was stronger in the land than in any period since the early 1930s. The question that remains is whether the U.S. economy can manage to achieve both high employment and reasonable price stability, and still retain minimal restrictions on international trade. Changes in exchange rates are inevitable because national economic policies diverge and national economic interests conflict. These exchange rate movements are much sharper and much larger than changes in relative national price levels might suggest. At times the U.S. dollar is substantially undervalued, at other times it is greatly overvalued. The ups and downs of the dollar are part of the transition of the international monetary system from its U.S.-centered, dollar-oriented phase to a more decentralized sys tem. The efforts of other industrialized countries to devise rules to limit the external impact of U.S. economic policies and to lessen the dominant U.S. international role will intensify, for monetary reform is a political process designed to accommodate changes in X

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