The New International Money Game Sixth Edition Robert Z. Aliber The New International Money Game Also by Robert Z. Aliber MONETARY REFORM AND WORLD INFLATION NATIONAL MONETARY POLICIES AND THE INTERNATIONAL FINANCIAL SYSTEM CORPORATE PROFITS AND EXCHANGE RISK THE MULTINATIONAL PARADIGM The New International Money Game Robert Z. Aliber Sixth Edition Palgrave Macmillan Robert Z. Aliber is professor of international economics and finance and director of the Center for Studies in International Finance in the Graduate School of Business of the University of Chicago. He is author of Money, Banking, and Economic Activity(Norton, 5th ed., 1993) and The Multinational Paradigm (MITPress, 1993), among many other books. The University of Chicago Press, Chicago 60637 Palgrave Publishers Ltd., Houndmills, Basingstoke, Hampshire RG21 6XS ISBN 978-0-333-72544-3 ISBN 978-0-230-50097-6 (eBook) DOI 10.1057/9780230500976 ©2002 Robert Z. Aliber Reprint of the original edition 2002 All rights reserved. Sixth edition published 2002 11 10 09 08 07 06 05 04 03 02 1 2 3 4 5 ISBN 978-0-226-01396-1 (cloth) ISBN 978-0-226-01397-8 (paper) Library of Congress Cataloging-in-Publication Data Aliber, Robert Z. The new international money game / Robert Z. Aliber.—6th ed. p. cm. Rev. ed. of: The international money game. 5th rev. ed. c1987. Includes index. ISBN 978-0-226-01396-1 (cloth : alk. paper)—ISBN 978-0-226-01397-8 (pbk. : alk. paper) 1. International finance. I. Title. HG3881 .A44 2000 332—dc21 99–055593 The paper used in this publication meets the minimum requirements of the American National Standard for Information Sciences—Permanence of Paper for Printed Library Materials, ANSI Z39.48–1992. Contents List of Figures, Tables, and Boxes x Preface and Acknowledgements xi List of Abbreviations and Acronyms xii Introduction xv 1 A System is How the Pieces Fit 1 Relationships among the key components 1 Fitting the pieces: the foreign exchange market 2 Fitting the pieces: national financial policies 6 Fitting the pieces: the supply of international money 10 Who fits the pieces together? 15 2 The Name of the Game is Money 17 International finance 17 The politics and technology of money 28 The plan of this book 35 PART I INTERNATIONAL MONETARY ARRANGEMENTS, MONEY, AND POLITICS 3 ‘The Greatest Monetary Agreement in History’ 39 International agreements 39 Rules and myths of the gold standard 40 The Bretton Woods system 46 Policy responses to payments imbalances 49 The monetary impact of Vietnam 52 Monetary artifacts and the Smithsonian Agreement 55 The EMU is not a bird – but the euro is a money 57 The future of monetary agreements 58 4 The Gnomes of Zurich Play in the Largest Market in the World 60 Foreign exchange transactions 60 Buy low and sell high 61 Gnomes and non-gnomes 64 The source of exchange crises 70 v vi Contents The politics of parity 71 The search for flexibility: floating rates and sliding parities 75 Floating rates – arguments and experience 80 Which way after floating? 85 5 Gold – How much is a ‘Barbarous Relic’ Worth? 86 Gold’s role as an international money 86 Before gold was a ‘barbarous relic’ 88 The persistent gold shortage 93 Turbulence in the gold market 97 Political and international generalizations 103 6 The Dollar and Coca-Cola are both Brand Names 106 The money-producing industry 106 The market position of currency brands 110 A dollar standard world? 117 The dollar on the hit parade 120 The euro’s challenge to the dollar 122 7 Radio Luxembourg and the Eurodollar Market are both Offshore Stations 124 Externalized activities 124 The external currency market 125 Links between external deposits in different currencies 131 Internalizing regulation 131 8 They Invented Money so They Could Have Inflation 135 The value of money 135 Watergate economics 141 Carter economics 144 Differences in inflation rates 145 Reaganomics 146 The waves rule Britannia 147 The tunnel at the end of the light 150 9 Oil and OPEC Roller Coaster 152 OPEC to rule the world? 152 Recycling money 155 Every surplus requires a deficit 161 10 The Threes Ds – Disinflation, Deflation, and Depression 168 Currency reform 168 Disinflation 171 Contents vii Disinflation and financial institutions 175 Disinflation and the government deficit 177 The Asian financial crisis and the world inflation rate 177 11 Optimal Bankrupts – Deadbeats on an International Treadmill 179 Ponzi finance 179 International lending – the background 184 The source of developing country debt crises 188 The economics of debt service 191 The optimal bankrupt 192 Workouts, reschedulings, and bankruptcy 195 12 Central Bankers Read Election Returns, not Balance Sheets 199 The grail of monetary reform 199 Bureaucracy is a growth industry 207 The new mercantilists 209 Reform requires a consensus? 211 13 Monetary Reform – Where Do the Problems Go When They’re Assumed Away? 213 Resolving conflicts among competing interests 213 Economic expertise cannot solve political problems 227 PART II THE COSTS OF 100 NATIONAL MONIES 14 The Money Game and the Level Playing Field 231 Why is the playing field bumpy? 231 Outgrowing the market 235 Planned and transition economies 237 15 Underground Economies and the Cost of Regulation 239 The role of government 239 Why don’t the trains run on time? 245 16 Tax Avoidance – A Game for the Rich 249 Tax havens 249 Low-tax jurisdictions 250 Transfer pricing 250 Economic impact of taxation 252 Why tax rates differ 253 Corporate tax rates in industrial countries 255 Taxes on foreign income 260 viii Contents Taxes on money 263 Tax anything that can’t move 264 17 Banking on the Wire 265 Banking competition 265 What banks produce 268 The payments mechanism 270 Competition among international banks 273 The competitive edge 275 18 Zeros, Swaps, and Options – The Revolution in Finance 279 A hole in the hedge 279 Where do financial revolutions come from? 282 Index funds 286 Swaps 287 Derivatives and options 288 ‘The collapsing house of cards’? 290 19 The World Market for Stocks and Bonds 294 The implications of globalization 294 Is the world stock market integrated or segmented? 295 Investing the lottery prize in bonds 299 The horse race in stocks 303 20 Why are Multinational Firms Mostly American? 307 The American challenge? 307 Patterns of market penetration 312 Why firms invest abroad 315 The costs of direct foreign inverstment 324 Whither the conflict? 328 21 Japan – The First Superstate? 330 The Japanese challenge 330 Japan, Inc. 335 The asset price bubble 339 The external impact of Japan 342 22 China – The 800lb Gorilla 347 China’s ‘big history’ 347 The economy of the overseas Chinese 350 23 Zlotys, Rubles, and Leks 356 The new Central Europe 356 Market prices and the planned economy 358 Contents ix East European finance 362 The move to the market economy 366 24 Transition Economies – Who Lost Russia? 370 The command and the market economy 370 Where do market institutions come from? 373 The débâcle in Russian finance 378 25 Fitting the Pieces Once Again 380 A common international currency? 380 Collapse of rules of behaviour 381 New rules or international monetary institutions? 382 Exchange controls? 383 The role of gold 384 Index 387