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Strategies & Market Trends : 2026 TeoTwawKi ... 2032 Darkest Interregnum -- Ignore unavailable to you. Want to Upgrade?

To: elmatador who wrote (109337)	12/30/2014 4:22:15 AM
From: Elroy Jetson	4 Recommendations Recommended By bull_dozer elmatador Haim R. Branisteanu Metacomet Read Replies (3) \| Respond to of 218030

The Bretton-Woods agreement in 1944 created a basis of confidence for international-trade immediately following WW-II. But using the Mundell-Fleming model as a basis for understanding the mechanics of foreign exchange value, it's relatively easy to see that a regime of fixed-exchange rate for currencies leaves far too few options to correct imbalances in trade. West Germany was faced with an undervalued currency but was unwilling to revalue their currency upward to eliminate their trade surplus - so they withdrew from the Bretton-Woods agreement in May 1971 and immediately saw the value of their now floating currency rise 10% in value. This was exactly what they wanted to avoid, but also exactly what needed to happen. West Germany's withdrawal effectively ended the Bretton-Woods regime but no one else was willing to admit it for the next 3 months. The convertibility of Bretton-Woods currencies into gold at $35 per ounce was always a complete fiction. Total global stores of gold were worth only $27 billion at the official price - an insignificant fraction of the total currency value issued by each of the nations which were party to Bretton-Woods. As an example, in 1971 the U.S. government collected $780 billion in taxes from a $1.17 trillion economy. these taxes alone represented a number 29 times larger than the total amount of gold in global reserves. Once West Germany left Bretton-Woods and saw their currency rise 10%, France and Switzerland were faced with the same decision. They chose the fictional option of exchanging their foreign currency for gold, and after a small initial exchange Nixon suspended the convertibility of Dollars into gold at the fictional price of $35 per ounce and both West Germany and the United States were not participating in Bretton-Woods, so the game of fixed exchange rates was effectively over. Since there had never been enough gold to finance international trade, the IMF needed to lend ever large quantities of foreign currencies. Given the flow of trade immediately following WW-II, the IMF needed to lend an enormous number of U.S. Dollars. Belgian economist Robert Triffin, who worked for the Fed during the WW-II until 1946 when he left for the IMF, gave testimony before Congress in 1960 in an attempt to highlight this basic flaw in Bretton-Woods. He pointed out that IMF lending of U.S. Dollars had already created more international U.S. Dollar reserves than could be backed by gold, so the gold convertibility feature of Bretton-Woods was already moot in 1960 - yet international trade could continue to expand only if: A.) the IMF continued to provide additional U.S. Dollar loans, or B.) the United States began to run consistent current-account trade deficits. This later became known as the Triffen Paradox. In spite of having run into the wall by 1960, the member nations continued to adhere to the Bretton-Woods regime for another 11 years until maintaining a fixed currency exchange had created imbalances so large that they could only be addressed with a change in relative exchange rates. If currency exchange rates had fluctuated during Bretton-Woods, there would have been few imbalances, but fixed-exchange rates were the only layer of confidence Bretton-Woods created. Triffen later returned to Begium and helped create the European Union and the European Central Bank. In spite of his insight, Germany today faces the same problem the United States did in 1960. As Germany continues to run a trade surplus with the rest of Europe, within their European Bretton-Woods system, they can continue European trade only through ever larger loans from German banks to other EU members, or Germany can instead start running a trade deficit.