315_World_Money - World Money Bretton Woods 1944 the...

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1 World Money Bretton Woods • 1944 the Bretton Woods Agreement pegged the $US to gold at $35/ounce and all other major currencies to the dollar. – Minimum fluctuation. You had to “buy back” your currency if too much was in circulation. – No point in speculation. • U.S. opened its market to Europe and Japan to rebuild their economies after WWII to block spread of Communism. – Small annual trade deficits mounted as nations piled up dollars. – Creditors began to doubt if the dollar was “as good as gold.” The Birth of Global Money • In the 1960s, Johnson refused to raise taxes so he borrowed money to finance the war in Vietnam. – Deficit spending overheated the economy – Created inflation • In 1971, Nixon devalued the dollar and in 1973 abandoned Bretton Woods and floated the dollar creating basis for world money markets. – Now big money to be made guessing how the £ would compare to the €, to the $. – Created the need for options and other hedges against loss.
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2 The Rebirth of Global Money • Reagan fueled a “phony boom” using global bond markets to finance Republican tax cuts and Democratic social programs. – In 1983 total U.S. bonds sold abroad were $50b – In 1993 total U.S. bonds sold abroad were $500b • Trading in unmatured bonds, the “secondary market” created demand with bond market trades about $200b daily. • The global stock market is still small at $25b daily but is having an impact as investors demand “best practice” and high Return on Investment. Financial Futures Trading • US company wants to build plant in 2005 in Germany. How much will it cost in Euros? • Trading through LIFFE, they get a contract to buy €10m for $10m in 2005 guaranteed.
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This note was uploaded on 03/19/2008 for the course ISS 315 taught by Professor Hussain during the Fall '08 term at Michigan State University.

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315_World_Money - World Money Bretton Woods 1944 the...

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