Transcript Governments Monetary Policy

Instructor’s comment: A lot of
institutional search is well combined
with course materials; This paper puts
the course materials in a great contact
with real world data, and make them
alive!
USD/JPY
USA-Japanese Experiences
Can Countries Manipulate
the Forex Market
International Finances
Dr. J.D. Han
“Japan Sold $25 Billion in Yen in First Currency
Intervention in Six Years”
-Bloomberg News Sep 30, 2010
“QE2 may imperil dollar,
$600 billion bond-buying program,
The Fed's $600 billion quantitative easing program
"introduces significant uncertainty regarding the
future strength of the dollar ”
– Reuters 11/17/2010
Loose Monetary Policy Debases US
Currency
What Moves the Forex Market?
1. Governments Monetary and Fiscal Policy
2. Global Institutions' decisions (policy)- IMF
3. Inflation – Purchasing Power Parity
4. Economic strength-weakness
5. Political Environment -Stable or Unstable
6. Economic Shock
7. Technical Analysis- Psycology of the market
Governments Monetary and Fiscal
Policy
•
Governments try to exert control over their currencies.
Whoever controls currency holds power and
government almost always seek power.
• Currency is a symbol of national pride and power.
• Government’s financial arm (in the US it’s the treasury)
and the Central Bank (Federal Reserve) and in Tokyo
(Bank of Japan). These institutions can do a number of
things both short and long term that affect their nation’s
currency.
Governments Monetary Policy
Central Bank Monetary policy can be loose or tight
Tight
• Purpose: To slow down the economic growth in a
country
• Strategy 1: Higher interest rates tighter money supply
• Unintended consequence: Currency appreciation
• Strategy 2: Forex intervention – Central bank buys
currency- to slow exports
Governments Monetary Policy
Central Bank Monetary policy can be loose or tight
Loose
• Purpose: To increase the economic growth in a country
• Strategy 1: Lower interest rates rapid money supply
growth
• Unintended consequence: Currency depreciation
• Strategy 2: Forex intervention – Central bank sells
currency- to increase exports
Governments Fiscal Policy
THE CLASH BETWEEN
Governments and Forex Markets
• Governments try to exert control over their currencies.
Whoever controls currency holds power and
government almost always seek power.
• Governments can spend money voraciously. When
deficits bloom and credit is ruined (Fiscal policy), they
often resort to tricks (Monetary policy) rather than
making the painful and necessary decision to rein in
their spending, raise taxes, or both.
THE CLASH BETWEEN
Governments and Forex Markets
• This is where the market comes in . Because money today
holds no value – it is simply an article of faith, someone must
ensure that it is worth as much as a nation says it is. Forex
investors exercise the will of faith in the market. It can be
ruthless and sometimes scary, but it is also vitally necessary.
Money is far too important to be controlled by government!
• The market is always seeking true value, a spot where it can
reach equilibrium.
• At the end of each day, an average of $3.2 trillion has been
traded, dwarfing, the New York Stock Exchange, the
NASDAQ, the FTSE, the DAX and the Tokyo Nikkei
combined. US annual GDP value $14.12 Trillion.
Government tricks
Monetary Policy
Japan
• Japan, the world’s second-largest economy, uses yen for its
currency. The Japanese government often intervenes to keep
the yen at a favorable value and to ensure that Japanese
exports remain competitive in world markets.
• “Japan export fall casts doubt on trade recovery. Doubts
about the outlook for exports could be a discouraging sign for
the government as it fans concern that a rapid recovery in
shipments could slow down and weigh on Japanese growth. “
- Reuters Tue Mar 23, 2010
Government tricks
Monetary Policy
Japan
•
Strategy: Bank of Japan currency intervention (Sell Yen to
increase USD/JPY value).
• Hypotheses: Intervention will depreciate Yen value to
increase export to enhances economic growth.
• Result: 1. Lower currency value in the short term.
2. Higher currency again in the long term
(1 month later).
•
Conclusion: Japan can not manipulate the Forex Market in the
long run.
Markets True Value Always
Prevails in the Long Run!
Government Tricks
for Failed Fiscal Policy
United States
• American government budget deficits and trade deficits put tremendous
downward pressure on the dollar.
Domestic Deficit
• “The budget deficit will be $1.5 trillion next year, both higher than
previous Obama administration forecasts because of a recession that was
deeper and longer than expected.”
- White House budget chief Peter Orszag August 25, 2009
International Deficit
• “The U.S. trade deficit was $379.1 billion in the first nine months of this
year, compared to $270.2 billion in the same period in 2009, putting it on
a path to exceed $500 billion in 2010.”
-Reuters, Nov 10, 2010
Government Tricks
for Failed Fiscal Policy
United States
•
Problem: US twin deficit out of control , US economy
stagnating, monetary policy not working and US currency is
debasing.
• “Asian banks are ‘subsidizing rather than punishing American
profligacy, allowing deficits to grow for too long of a period of
time. When the inevitable correction comes it will be all the
more painful.”
- The Economist magazine, Oct 2nd 2004
• US solution (trick): Loose monetary policy-QE2
Markets True Value Always
Prevails in the Long Run!
Government tricks
Monetary Policy
United States
•
Strategy: US Federal Revere Quantitate Easing 2 (QE2)
The Federal Revere extends loose monetary policy by buying back
US government bonds to expand the money supply to keep interest
rates low and stimulate economic demand.
•
Hypotheses: Loose money supply will stimulate growth in the economy
resulting in a strong US dollar.
•
Result: 1. Little economic growth and excess dollar currency around the
world.
2. US currency continues to debase.
•
Conclusion: US can not manipulate the Forex Market even with a coordinated
effort between the US and japan.
•
Countries cannot manipulate the Forex market!
Co-ordinated Effort?
US dollar Still declines!
Conclusion
•
Monetary and Fiscal policy are important factors in moving countries
currency values.
•
Governments can influence currency directions in the short term but
not manipulate currency value in the long run.
• Manipulative and unsuccessful fiscal and monetary policy can have
unintended consequences that have a long lasting impact on currency
values.
•
The global imbalances in currency, goods and services, and capital
markets due to ineffective government policy's will continued to be
reflected in currency values fluctuating since the market is always
seeking true value, a spot where it can reach equilibrium.
•
Monetary policy tricks don’t work!
References
•
"Forex Daily Volume Volume Surpasses All." Forex News Channel. Forex News Trading Channel on
Forex Robots, Trading Softwares, System and Courses, September 21, 2009 . Web. 26 Nov 2010.
http://www.forexnewschannel.com/tag/forex-daily-volume-volume-surpasses-all
•
Homan, Timothy R. "Bloomberg Businessweek." U.S. Economy: Trade Gap Shrank as Exports
Increase. BLOOMBERG L.P., November 10, 2010. Web. 26 Nov 2010.
http://www.businessweek.com/news/2010-11-10/u-s-economy-trade-gap-shrank-as-exportsincrease.html
•
Catts , Tim . "Bloomberg." Bank of America Lowers Corporate Bond-Sale Forecast as Cash
Balances Climb. BLOOMBERG L.P , July 7, 2010. Web. 26 Nov 2010.
http://www.bloomberg.com/news/2010-07-07/bank-of-america-lowers-corporate-bond-saleforecast-as-cash-balances-climb.html
•
"Reuters." Republicans to Bernanke: QE2 may imperil dollar. Thomson Reuters, 11/17/2010. Web.
26 Nov 2010. http://www.msnbc.msn.com/id/40237304/ns/business-stocks_and_economy
•
http://www.fxcm.co.uk/forex-system-selector.jsp -Charts from Forex Trading system.
•
http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)
•
Kajimoto, Tetsushi . "UPDATE 1-Japan export fall casts doubt on trade recovery." Reuters.
Thomson Reuters, Tue Mar 23, 201. Web. 26 Nov 2010.
http://www.reuters.com/article/idUSTOE61E03A20100324
•
Runningen Faler, Roger Brian. "Obama Raises 2010 Deficit Estimate to $1.5 Trillion." Bloomberg.
BLOOMBERG L.P., August 25, 2009. Web. 26 Nov 2010.
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aNaqecavD9ek
•
Palmer, Doug. "Trade gap narrows more than expected in Sept." Reuters. Thomson Reuters, Nov
10, 2010. Web. 26 Nov 2010. http://www.reuters.com/article/idUSTRE6A92V420101110
•
“Forex Revolution” by Peter Rosenstreich, Prentice Hall, July 206, New Jersey.