Exploring mainly Heterodox type Economics, Monetary Reform, Environmental Sustainability, and Climate Change. It is a resource of Internet articles, and also promotes awareness of a futuristic modern universal Paradigm known as TFE, or Transfinancial Economics which is probably the most advanced, and most "scientific" form of Economics in the world .
Showing posts with label international finance. Show all posts
Showing posts with label international finance. Show all posts
Sometimes referred to as multinational finance, international finance is additionally concerned with matters of international financial management. Investors and multinational corporations must assess and manage international risks such as political risk and foreign exchange risk, including transaction exposure, economic exposure, and translation exposure.[4][5]
The foreign exchange and political risk dimensions of international finance largely stem from sovereign nations having the right and power to issue currencies, formulate their own economic policies, impose taxes, and regulate movement of people, goods, and capital across their borders.[6]
The idea of fiat currency was established just over a thousand years ago in China during the Yuan, Tang, Song and Ming dynasties. In the Tang Dynasty (618-907) there was a high demand for metallic currency that exceeded the supply of precious metals. The people were already familiar with the use of credit notes, and they rapidly began accepting pieces of paper or paper drafts.[7]
A shortage of coins forced these people to change from coins to notes. During the Song Dynasty (960-1276), there was a booming business in the Sichuan region that led to a shortage of copper money. This led to traders issuing private notes covered by a monetary reserve. This was considered to be the first ever legal tender. Paper money became the only legal tender in the Yuan Dynasty (1276-1367) and issuing of notes was conferred to the Ministry of Finance during the Ming Dynasty (1368-1644).[7] Fiat money can serve as a good currency if it can handle the role that a nation's economy needs of its monetary unit: storing value, providing a numerical account, and facilitating exchange. It also has excellent seigniorage, meaning it is more cost-efficient than a currency directly tied to produce than a currency directly tied to a commodity.[8]
On the International stage fiat currencies were not truly relevant until the US removed its currency from the gold standard in 1971.[8] At this point other nations followed suit creating an environment where an infinite amount of money could be created. Before this, a nation's currency—which was unaccredited by precious metals—would not be accepted in exchange for goods and services outside of the host country where it was produced.[9]
The Establishment of the International Monetary Fund (IMF) and the World Bank are one of the most significant turning points in the History of international finance. Through Decades of negotiation between international powers and the persistence of economic superpowers no single event inspired unity of determining the fair rules of trade and monetary policy than the Second World War. In Bretton Woods, New Hampshire, delegates from 44 nations gathered to determine what would be the rules for international trade after the war.[10]
After the Bretton Woods Conference was completed the framework for the IMF and World Bank were laid out and begun to be developed. As a result, international trade skyrocketed since exchange between countries and between continents finally had a measurable way to determine exchange rates and fair value of currency.[11] Individual countries' banks were no longer the determining factor in determining a fair exchange rate, removing inconsistencies between individual countries' monetary systems.[12]
The Bretton Woods system did not last very long, as after WW2 the United States was the physical owner of most of the world's gold supply. This meant countries' currencies were supposed to be pegged to a resource over which the US had a near monopoly. This state of affairs only lasted around 20 years as most notably in 1971 the French who were skeptical of the US dollar being the world's reserve currency reclaimed most of their gold that they exported to the US for protection.[13] This action was inherently a destabilizing force to the US dollar since at any time before this individuals or businesses were able to exchange their US dollars for gold. Many other nations followed suit in a metaphorical “Gold Rush'' to get gold from the US by exchanging dollars. The result of this action was the world's reserve currency, the US dollar, no longer being pegged to gold from 1971, with Richard Nixon removing the convertibility factor of the US dollar. This fundamentally changed international finance as no longer was the world's currency based on anything physical, it transitioned into a fiat currency.[14]
^(Blume, Lawrence; Steven N. Durlauf, eds. (2008). The new Palgrave dictionary of economics (2nd ed.). Basingstoke, Hampshire: Palgrave Macmillan. pp. 544–546)
^N. Gregory Mankiw (2014). Principles of Economics. p. 220. ISBN978-1-285-16592-9. fiat money: money without intrinsic value that is used as money because of government decree
The euro and US Dollar are by far the most used currencies in terms of global reserves.
In the foreign exchange market and international finance, a world currency, supranational currency, or global currency refers to a currency that is transacted internationally, with no set borders.
Prior to and during most of the 19th century, international trade was denominated in terms of currencies that represented weights of gold. Most national currencies at the time were in essence merely different ways of measuring gold weights (much as the yard and the meter both measure length and are related by a constant conversion factor). Hence some assert that gold was the world's first global currency. The emerging collapse of the international gold standard around the time of World War I had significant implications for global trade.
Before 1944, the world reference currency was the United Kingdom's pound sterling. The transition between pound sterling and United States dollar and its impact for central banks was described recently.[3]
The Belarusian ruble is pegged to the euro, Russian ruble and U.S. dollar in a currency basket.
In the period following the Bretton Woods Conference of 1944, exchange rates around the world were pegged against the United States dollar, which could be exchanged for a fixed amount of gold. This reinforced the dominance of the US dollar as a global currency.
Since the collapse of the fixed exchange rate regime and the gold standard and the institution of floating exchange rates following the Smithsonian Agreement in 1971, most currencies around the world have no longer been pegged against the United States dollar. However, as the United States remained the world's preeminent economic superpower, most international transactions continued to be conducted with the United States dollar, and it has remained the de facto world currency.
Only two serious challengers to the status of the United States dollar as a world currency have arisen. During the 1980s, the Japanese yen became increasingly used as an international currency,[citation needed] but that usage diminished with the Japanese recession in the 1990s. More recently, the euro has increasingly competed with the United States dollar in international finance.
Since the mid-20th century, the de facto world currency has been the United States dollar. According to Robert Gilpin in Global Political Economy: Understanding the International Economic Order (2001): "Somewhere between 40 and 60 percent of international financial transactions are denominated in dollars. For decades the dollar has also been the world's principal reserve currency; in 1996, the dollar accounted for approximately two-thirds of the world's foreign exchange reserves" (255).
Many of the world's currencies are pegged against the dollar. Some countries, such as Ecuador, El Salvador, and Panama, have gone even further and eliminated their own currency (see dollarization) in favor of the United States dollar. The U.S. dollar continues to dominate global currency reserves, with 63.9% held in dollars, as compared to 26.5% held in euros (see Reserve Currency).
The euro inherited its status as a major reserve currency from the German mark (DM) and its contribution to official reserves has increased as banks seek to diversify their reserves and trade in the eurozone expands.[4]
As with the dollar, some of the world's currencies are pegged against the euro. They are usually Eastern European currencies like the Bulgarian lev, plus several west African currencies like the Cape Verdean escudo and the CFA franc. Other European countries, while not being EU members, have adopted the euro due to currency unions with member states, or by unilaterally superseding their own currencies: Andorra, Monaco, Kosovo, Montenegro, San Marino, and Vatican City.
As of December 2006[update], the euro surpassed the dollar in the combined value of cash in circulation. The value of euro notes in circulation has risen to more than €610 billion, equivalent to US$800 billion at the exchange rates at the time (today equivalent to circa US$968 billion).[5]
On 16 March 2009, in connection with the April 2009 G20 summit, the Kremlin called for a supranational reserve currency as part of a reform of the global financial system. In a document containing proposals for the G20 meeting, it suggested that the International Monetary Fund (IMF) (or an Ad Hoc Working Group of G20) should be instructed to carry out specific studies to review the following options:
Enlargement (diversification) of the list of currencies used as reserve ones, based on agreed measures to promote the development of major regional financial centers. In this context, we should consider possible establishment of specific regional mechanisms which would contribute to reducing volatility of exchange rates of such reserve currencies.
Introduction of a supra-national reserve currency to be issued by international financial institutions. It seems appropriate to consider the role of IMF in this process and to review the feasibility of and the need for measures to ensure the recognition of SDRs as a "supra-reserve" currency by the whole world community."[9][10]
On 24 March 2009, Zhou Xiaochuan, President of the People's Bank of China, called for "creative reform of the existing international monetary system towards an international reserve currency," believing it would "significantly reduce the risks of a future crisis and enhance crisis management capability."[11] Zhou suggested that the IMF's special drawing rights (a currency basket comprising dollars, euros, yen, and sterling) could serve as a super-sovereign reserve currency, not easily influenced by the policies of individual countries. US President Obama, however, rejected the suggestion stating that "the dollar is extraordinarily strong right now."[12] At the G8 summit in July 2009, the Russian president expressed Russia's desire for a new supranational reserve currency by showing off a coin minted with the words "unity in diversity". The coin, an example of a future world currency, emphasized his call for creating a mix of regional currencies as a way to address the global financial crisis.[13]
On 30 March 2009, at the Second South America-Arab League Summit in Qatar, Venezuelan President Hugo Chavez proposed the creation of a petro-currency. It would be backed by the huge oil reserves of the oil producing countries.[14]
An alternative definition of a world or global currency refers to a hypothetical single global currency or supercurrency, as the proposed terra or the DEY (acronym for Dollar Euro Yen),[15] produced and supported by a central bank which is used for all transactions around the world, regardless of the nationality of the entities (individuals, corporations, governments, or other organizations) involved in the transaction. No such official currency currently exists.
Advocates, notably Keynes,[16] of a global currency often argue[16] that such a currency would not suffer from inflation, which, in extreme cases, has had disastrous effects for economies. In addition, many[16] argue that a single global currency would make conducting international business more efficient and would encourage foreign direct investment (FDI).
There are many different variations of the idea, including a possibility that it would be administered by a global central bank that would define its own monetary standard or that it would be on the gold standard.[17] Supporters often point to the euro as an example of a supranational currency successfully[dubious– discuss] implemented by a union of nations with disparate languages, cultures, and economies. Alternatively, digital gold currency can be viewed as an example of how global currency can be implemented without achieving national government consensus.
A limited alternative would be a world reserve currency issued by the International Monetary Fund, as an evolution of the existing special drawing rights and used as reserve assets by all national and regional central banks. On 26 March 2009, a UN panel of expert economists called for a new global currency reserve scheme to replace the current US dollar-based system. The panel's report pointed out that the "greatly expanded SDR (special drawing rights), with regular or cyclically adjusted emissions calibrated to the size of reserve accumulations, could contribute to global stability, economic strength and global equity."[18]
In addition to the idea of a single world currency, some evidence suggests the world may evolve multiple global currencies that exchange on a singular market system. The rise of digital global currencies owned by privately held companies or groups such as Ven[19] suggest that multiple global currencies may offer wider formats for trade as they gain strength and wider acceptance.
Some economists argue that a single world currency is unnecessary, because the U.S. dollar is providing many of the benefits of a world currency while avoiding some of the costs.[20] If the world does not form an optimum currency area, then it would be economically inefficient for the world to share one currency.
In the present world, nations are not able to work together closely enough to be able to produce and support a common currency. There has to be a high level of trust between different countries before a true world currency could be created. A world currency might even undermine national sovereignty of smaller states.
The interest rate set by the central bank indirectly determines the interest rate customers must pay on their bank loans. This interest rate affects the rate of interest among individuals, investments, and countries. Lending to the poor involves more risk than lending to the rich. As a result of the larger differences in wealth in different areas of the world, a central bank's ability to set interest rate to make the area prosper will be increasingly compromised, since it places wealthiest regions in conflict with the poorest regions in debt.
Usury – the accumulation of interest on loan principal – is prohibited by the texts of some major religions. In Christianity and Judaism, adherents are forbidden to charge interest to other adherents or to the poor (Leviticus 25:35–38; Deuteronomy 23:19). Islam forbids usury, known in Arabic as riba.[21]
Some religious adherents who oppose the paying of interest are currently able to use banking facilities in their countries which regulate interest. An example of this is the Islamic banking system, which is characterized by a nation's central bank setting interest rates for most other transactions.[citation needed]
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