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Chapter 3, Part III. Look in the rearview mirror. Page 4

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 14, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

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    After some time in the 60s the German and Japanese economics rose significantly and their gold reserves became even greater than those of the USA. They had gained monetary interdependence by the return to convertibility of Western European currencies in 1958 and the Japanese yen in 1964. This led to a vast expansion of international financial transactions. In fact, Germany and Japan had each become great economic powers.

    In the meantime, the US had problems due to the Cold War and the Vietnam War that caused growing inflation and an increasing trade deficit. Due to these reasons there was growing dissatisfaction with the privileged role of the U.S. dollar as the international currency. In an increasingly interdependent world, U.S. policy greatly influenced economic conditions in Europe and Japan. In addition, as long as other countries were willing to hold dollars, the USA could carry out massive foreign expenditures for its own political purposes—military activities and foreign aid—without the threat of balance-of-payments constraints.

    In the late 1960s, the dollar was overvalued with its current trading position, while the Deutsche Mark and the yen were undervalued. Naturally, the Germans and the Japanese had no desire to revalue and thereby make their exports more expensive, whereas the U.S. sought to maintain its international credibility by avoiding devaluation. Meanwhile, the pressure on government reserves was intensified by the new international currency markets, with their vast pools of speculative capital moving around in search of quick profits.

    By the early 1970s, as the Vietnam War accelerated inflation, the United States as a whole began running a trade deficit. The crucial turning point was 1970, which saw U.S. gold coverage deteriorate from 55% down to 22%. This, in the view of neoclassical economists, represented the point where holders of the dollar lost faith in the ability of the US to cut its budget and trade deficits.

    In 1971 more and more dollars were being printed in Washington to be pumped overseas to pay for government expenditures on military and social programs. In the first six months of 1971, assets of $22 billion fled the US.



    Furthermore, then France exchanged their dollars to the physical gold with the US. Germany and Japan epressed their wish to do the same as US Gold reserves fell to $11.1 Billion. In response, on August 15, 1971, Nixon unilaterally imposed 90-day wage and price controls, a 10% import surcharge, and most importantly "closed the gold window", making the dollar inconvertible to gold directly, except on the open market. Unusually, this decision was made without consulting members of the international monetary system or even his own State Department, and was soon dubbed the Nixon Shock. The Bretton Woods system and dollar-gold standard has failed.

    Bretton Woods II

    Some refer to the current currency exchange system as Bretton Woods II. The major reason for this is the fact that we still have a single dominant currency in the world, the US Dollar, and other nations on the periphery threatening to destabilize that position. In the 1960s, the periphery was Europe and Japan. This old periphery has since graduated, and the new periphery is Asia and Emerging markets.




    P.S. This lesson was written by Sive Morten, who has been working for a large European Bank since April of 2000, and is currently a supervisor of the bank's risk assessment department. Sive's knowledge of forex market and banking industry is vast and quite complete. If you have any specific questions about forex, banking industry, or any other financial instruments, please post them on the next page and Sive should answer them soon.



    Note: FPA ranks are earned in the battles against scam, not in the classroom.
     
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