[samgheb]

I read this recently:
“Consider, by contrast, the passage from Bob Woodward’s The Agenda in which Clinton asks the rhetorical question “You mean to tell me that the success of the economic program and my re-election hinges on the Federal Reserve and a bunch of fucking bond traders?””
http://nymag.com/nymetro/news/bizfinance/columns/bottomline/199/

In my International Studies class we kept hearing about the power of the capital markets and such. I’m wondering why this happened. Were the no bond vigilantees before the 70’s and 80’s? Didn’t politicians have to placate those markets in the old days?

[jmherbener]

Wherever financial markets exist, they constrain government finance. International gold redemption, however, placed a tighter constraint on government monetary inflation and debt financing. The 20th century saw a relaxation of that constraint. After Bretton-Woods was destroyed in 1971, the federal government exercised monetary inflation and debt financing more vigorously and the financial markets reacted more severely.

[samgheb]

I ask because I kept hearing in International Studies class that since the 80’s the financial markets have grown in power and that this was horrible and caused by deregulation. Often they refer to the 50’s/60’s as a golden age where financial markets had less power. Am I right in saying that without this breakdown of the last link to goal the financial markets wouldn’t have had grown to the size it has in the last 30 years?

[jmherbener]

The McKinsey Report only goes back to 1990, but it gives an indication of the magnitude of increase in financial markets, 7.2 percent per year, which is much larger than increases in real GDP.

http://www.mckinsey.com/insights/global_capital_markets/mapping_global_capital_markets_2011

But it’s not their size that indicates their “power” vis-a-vis governments. As the report shows, the category of capital markets with the biggest increase is sovereign debt. Since breaking the fetters of gold, governments have used debt and monetary inflation more aggressively. Accordingly, they have made their own finances more dependent on capital markets.

[samgheb]

Ok then I have indeed understood it. This means that if any of my International Studies teachers were honest they would start any discussion of the power of the financial markets by talking about how goverments have empowered these markets by relying on them.

Another related question is that of economic models. In our class we talked about an Asian model(old school mercantilism just with US bonds instead of gold) and a German model(presumably industrial) as well as the Anglo model(heavy emphasis on financial markets. In the case of Asia I know their economic system is due to government policy. However with regards to Germany vs America/Britain is there really any difference and if so what is the cause of it?

[jmherbener]

Corporate financing in Germany relies more heavily on banks, i.e., financial intermediaries, while corporate financing in GB and the USA relies more heavily on financial markets, i.e., stocks and bonds. According to the following ECB study, in 2001 bank loans to the corporate sector in the Euro zone were 42.6 percent of GDP while only 18.8 percent of GDP in the USA. Outstanding debt of non-financial corporations was 6.5 percent of GDP in the Euro zone and 71.7 percent of GDP in the USA. Stock capitalization in the Euro zone was 28.9 percent of GDP in the Euro zone and 137.1 percent of GDP in the USA.

http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp547.pdf

[samgheb]

Are we to trace this back to policy structures in Europe vs America?
Or is this merely the reflection of different cultures expressing themselves?

[jmherbener]

Some of both. Most of the economics literature discusses German-style banking in terms of the efficiency of capital allocation versus capital markets and, therefore, has little on the causes of the German system. For example:

http://research.stlouisfed.org/publications/review/98/05/9805cf.pdf

For more history, here is the volume on German-style banking in a four volume work on the history of banking in different countries:

http://oll.libertyfund.org/?option=com_staticxt&staticfile=show.php%3Ftitle=2241&chapter=211367&layout=html&Itemid=27

[samgheb]

I’m writing a project on what the role of Bretton Woods was before and after its breakdown. I want to explain the centrality of monetary issues in international studies through the austrian perspective. So I want to know the effects of monetary systems on political and global issues.

Was the break down of Bretton Woods tied into the debt problems of developing countries in the late 70’s?

Are there any writings on the general effects of the break down of Bretton Woods?

[jmherbener]

Bretton-Woods began to break down in the late 1960s. The Fed had been inflating the dollar more rapidly to help pay for rising federal expenditures such as those for the Vietnam war and Great Society programs. It collapsed altogether in August 1971. Here’s some material on Bretton-Woods:

http://mises.org/money/4s5.asp

http://mises.org/document/3967

http://mises.org/daily/3325

http://www.jstor.org/stable/30036415

[samgheb]

Thanks for the links. They are very useful for understanding the system and its breakdown.

I also want to figure out what the effect of the post bretton woods system was in terms of political and economic consequences. There are different opinions on this in the literature but none of them are free market or if they are they might be monetarists which will mean they look positively on the floating currencies system. So 2 questions:

Was/is the post Bretton Woods system a positive for American political power, that is to say that it enhanced American global hegemony? Or did America benefit more from Bretton Woods since other countries were subsidising the American welfare/warfare state?

Would it be fair to say that the post bretton woods system led to directly/indirectly :
a) the oil crisis
b)price controls
c) global monetary instability which result in financial crisises like South Asian financial crisis and the third world debt problems in the late 70’s/early 80’s?

[jmherbener]

After the breakup of Bretton-Woods, from the early 70s until the early 80s, the world had no international monetary system.It was freely-floating exchange rates. In the early 80s, the U.S. decided to reconstitute an international dollar standard in Asia and Latin America. In the 70s, Europe was trying to create an European monetary system which eventually became the Euro. So American power in the world was augmented by by this arrangement. Just like under Bretton-Woods, the U.S. could have “inflation without tears.”

The global monetary instability in the 70s was the result of the absence of an international monetary system, i.e., freely-floating exchange rates. Price controls were an ignorant response to the instability in the U.S. by the Nixon administration. The oil crises was an assertion of power by the middle-east, oil- producing countries against the large oil companies of the first world countries.

Rothbard provides a brief overview of monetary history in What Has Government Done to Our Money, Section IV.

http://mises.org/money.asp

[samgheb]

The problem is that Rothbard ends the story before the 80’s so at the moment I don’t have too many sources in the period from 80’s and forward. I have listened to some of Joseph Salerno’s speeches and especially the one called International Monetary Systems which does give the overview but I can’t find any detailed writings of his that covers the same material. Stockman does a pretty good job in his book.

“The oil crises was an assertion of power by the middle-east, oil- producing countries against the large oil companies of the first world countries.”
Do you have a good source on this?

[jmherbener]

You are correct, there hasn’t been much written about the “great moderation” period from Austrian economists.

You might take a look at James Grant’s book, Money of the Mind.

http://www.amazon.com/Money-Mind-How-1980s-That/dp/0374524017

The oil crisis analysis was done by Dwight Lee. I can’t find the citation, but he might have reproduced it in his book, Common Sense Economics.

http://www.amazon.com/Common-Sense-Economics-Everyone-Prosperity/dp/B005ZO6UGY

Here is a Gordon Tullock article that presupposes the wealth transfer to the OPEC producing countries during the 1970s:

http://object.cato.org/sites/cato.org/files/serials/files/cato-journal/1986/5/cj6n1-7.pdf

[samgheb]

Thanks, I will try to look those books up

Is it correct to say that in the post-Bretton Woods system, the American welfare-warfare state can “export” their costs because Asian economies want their currencies pegged to the dollar so as long as the Asian states maintain this policy, the costs can be shifted away from Americans?

And a related question, is it fair to say that without this system America would not realistically be able to maintain current expenditures because a) American’s wouldn’t want to pay the taxes needed to replace the inflation and b) America wouldn’t be able to borrow as much since their current borrowing is predicated on America having the reserve currency

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