Global Imbalances - Fractures in the world monetary system

Gli ultimi anni sono stati dominati da una crisi finanziaria presto trasformatasi in una crisi mondiale. Scopo di questa tesi è la miglior comprensione delle cause della crisi e delle carenze del sistema finanziario internazionale che sono all’origine della recente sequenza di crisi finanziarie. Quali sono state queste carenze e come queste hanno prodotto crisi così severe? La tesi mostra che la composizione del sistema monetario internazionale è asimmetrica. Il dollaro statunitense svolge il ruolo di moneta di riserva mondiale. Per il fatto di esserne l’emittente, gli USA sono sottoposti a un vincolo esterno meno stringente degli altri paesi. Gli Usa sono infatti nella posizione unica di poter finanziare le loro importazioni di beni e servizi creando moneta, ma questo crea forti distorsioni nell’economia mondiale.E’ importante capire che questo meccanismo, a lungo considerato benigno e associato alla fase di forte crescita economica mondiale nella prima parte degli anni 2000, è stato alla fine corresponsabile dello sviluppo delle forti turbolenze iniziate nel 2007. L’economia mondiale è stata in pratica divisa in paesi in surplus, fornitori di beni e in paesi in deficit consumatori (USA). La persistenza di questi squilibri nella bilancia dei pagamenti ha comportato flussi finanziari dai paesi in surplus verso l'area in deficit (USA) che ha favorito lo sviluppo di bolle speculative e inflazione. Lo sviluppo delle bolle creditizie è stato poi rafforzato da politiche monetarie espansive e bassi tassi di interesse. Quando le direzione della politica monetari angeli Usa è cambiata e i tassi di interesse hanno viziato a salire, l’intero sistema è collassato. Inizieremo definendo gli squilibri globali, le loro cause e i flussi e i meccanismi finanziari in funzione nel periodo precedente la crisi finanziaria globale. Nella sezione III viene sviluppato un modello a due paesi per spiegare la connessione tra dollaro e squilibri globali. La relazione tra squilibri globali e squilibri intra-UE viene analizzata nella sezione IV. Conclusioni vengono tratte nella sezione V.

The last years have economically been dominated by a financial crisis that started as the so called sub-prime crisis in 2007 and became known as the world financial crisis in the following years. The world has still not fully recovered from this crisis. After there were some signs of recovery in 2010, the world was hit by another crisis, which should become known as the euro crisis. The purpose of this thesis is to better understand the underlying causes of the crises and the deficiencies of the financial system that allowed a series of crises to arise. What were the flaws in the world financial system and how did they translate into a period of crises so severe? We find that the composition of the world monetary system is of an asymmetric nature. The US-Dollar functions currently as the reserve currency of the world. More than 60% of the world trade is executed in US-Dollar. Being the issuer of the world s reserve currency allows the US to operate with a soft external constraint. Instead of exporting goods and services to finance their imports, they are in the unique position to finance their import by exporting their currency, in the form of treasuries. On the positive side, this allows them to postpone tightening reforms and to consume foreign goods by persistently running current account deficits. But this has also negative implications. Not only does it suppress labour in the US export sector (one simply doesn t need many labourers to export T-bills), it also causes massive distortions to the world economy. It is important to understand that the same mechanisms that were considered benign and delivered solid rates of world economic growth during most of the 2000s were ultimately responsible for the turmoil that started in 2007. The world was basically split into surplus countries that provided goods and deficit countries that consumed. The problem was that every current account surplus comes with a financial account deficit and vice versa. This means that if one half of the world continuously runs huge surpluses, this half has to provide the other half of the world with the credits to finance their deficits. The corresponding inflow of capital automatically leads to bubbles and inflation, which in our world have further been fuelled by a low interest rate environment. When interest rates started to rise, the whole system collapsed. The first chapter starts with an investigation on current account imbalances and why the Asian emerging economies finance the American deficits. We show that the level of current account imbalances has been more severe than in former periods and the unwinding is far from being completed. This leads us to the conundrum of how the US managed to maintain a positive return on a negative portfolio of net foreign assets. We find a variety of means that allow the US to maintain a net foreign asset position, which is less negative than their cumulative current account deficits would suggest. The excessive use of Seigniorage seems to be one of the key factors. To understand the mechanisms behind this procedure better, in the second chapter we conduct a two country Dynamic General Equilibrium model that shows the dynamics of an asymmetric world monetary system. The model allows a deeper understanding of the consequences that follow from an asymmetric monetary system. On the one hand it softens the US external constraint, but on the other hand it leads to a permanent decay in the US current account and the external value of the US-Dollar. It forces the rest of the world into a permanent wealth transfer towards the US. On a global scale, there are the US as the main deficit- and China as the main surplus country. On a regional scale, the European Monetary Union (EMU) has been divided into north (surplus) and south (deficit). The underlying mechanism in both cases show striking similarities. Therefore the last chapter of my thesis is devoted to the euro crisis. Capital flows from north to south substituted savings in the peripheral EMU countries, what led to current account imbalances, similar to the ones described above. Further the EMU is challenged by an asymmetric structure. External capital inflows were pooled in France and Germany, which then channelled them into the peripherals. This added a mismatch of financial accounts to the already unbalanced current accounts in the EMU. When these capital flows ceased, the euro-system allowed the peripheral EMU countries to defer a rebalancing of their current accounts by replacing these private funds by public funds. The thesis enhances the existing literature by firstly providing a coherent story of the economic environment that laid the ground for the financial crisis. At the point where academic literature fails to explain how the US finance their deficits, the thesis provides a newly developed model which demonstrates how the excessive use of Seigniorage is responsible for many of the observed imbalances. The thesis further finds new explanations why the world financial crisis turned into a euro crisis. It uses a new approach by focusing on the bilateral financial accounts of the EMU countries and displays what challenges lie ahead of a rebalancing in the EMU. For many years, the US benefitted from trillions of US-Dollars of free credit that the world had to provide, given the role of the Dollar. This could end soon, as there are signs the world loses faith in the American currency. Unless the world economy finds a more balanced growth path, we will be stuck in an endless series of bubbles and a spiral of exchange rate devaluation.