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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