Allen financial crisis and recession in the global economy (1999)

Cover title: author: publisher: isbn10 | asin: print isbn13: ebook isbn13: language: subject publication date: lcc: ddc: subject: Financial Crises and Recession in the Global Economy Allen, Roy E Edward Elgar Publishing, Inc 1840640871 9781840640878 9781840647648 English Financial crises, Recessions, Economic history 1990, International finance 1999 HB3722.A36 1999eb 338.5/42 Financial crises, Recessions, Economic history 1990, International finance Page i Financial Crises and Recession in the Global Economy Second Edition Page ii This book is dedicated to the students of St Mary's College of California Page iii Financial Crises and Recession in the Global Economy Second Edition Roy E Allen Professor of Economics St Mary's College of California, USA Page iv © Roy E Allen 1994, 1999 All rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher Published by Edward Elgar Publishing Limited Glensanda House Montpellier Parade Cheltenham Glos GL50 1UA UK Edward Elgar Publishing, Inc 136 West Street Suite 202 Northampton Massachusetts 01060 USA First published 1994 Second edition 1999 A catalogue record for this book is available from the British Library Library of Congress Cataloguing in Publication Data Allen, Roy E., 1957Financial crises and recession in the global economy / Roy E Allen.-2nd ed Includes index Financial crises Recessions Economic history-19904 International finance I Title HB3722.A36 1999 338.5'42 — dc21 99-21908 CIP ISBN 84064 087 2nd edition (1 85278 997 1st edition) Printed and bound in Great Britain by MPG Books Ltd, Bodmin, Cornwall Page v Contents Figures Tables Preface to the Second Edition Introduction The Expansion and Globalization of Financial Markets I The Rapid Expansion of International Finance II The Global Information Revolution and Global Finance III Governmental Deregulation and International Finance IV Financial Market Globalization and Interest Rate Parity V Financial Strategy Parities Financial Market Globalization and New Trade Patterns I Saver and Dissaver Countries II Case Study of US-Foreign Trade, 1981– III New Definitions of Trade and the Folly of Protectionism New Uses and Forms of Money, Monetary Velocity, and Wealth Transfers I Transactions and Asset Demands for Money, and Monetary Velocity II Financial Globalization and Monetary Velocity III The Decline of (ml) Income Velocity in the US IV The Decline of (ml) Income Velocity in the UK and Germany V The Recent History of Money and Wealth VI Policy Implications Appendix Regressions of US (ml) Income Velocity and Related Variables Financial Crises and Recession I Common Patterns II The 1982 Recessionary Period III The Stock Market Crash of 1987 IV The World Debt Crisis, 1982– V The Early 1990s Recessionary Period VI The 1994–95 Mexican Crisis vii viii ix xi 1 12 17 25 26 34 42 57 58 63 66 73 77 90 97 99 99 102 111 116 123 130 Page vi VII Japan's Crisis, 1989– VIII Asia's Crisis, 1997– International Adjustments and Political Responses I A New Political Economy of Money II The Role of the G7 III The Role of the World Bank and the IMF IV National Strategies in the Global Economy V Conclusions References Index 133 136 145 147 159 169 176 191 199 205 Page vii Figures 2.1The trade-weighted exchange value of the US dollar, 1978–97 Changes in the direction of merchandise and services trade between the world's three largest 2.2 economies, 1980–97 (current account balances, $billion) 3.1Worldwide instability and weakness in the growth of the income velocity of money after 1980 Expanding volumes of money-absorbing financial transactions in the US ($trillion/year), and 3.2 the US (ml) income velocity of money, 1975–1997 The relation between financial market growth (£ million) and (ml) velocity in the UK during 3.3 the Big Bang deregulation period The relation between financial market growth (marks billion) and (ml) velocity in Germany 3.4 during the chaotic 1989–90 period 4.1Capital flight from Latin America (1977–87, $billion) Explaining the 1990–91 US recession: the decline in net identified capital inflows (by 4.2 category, $billion) 4.3Negative consequences of restrictive Japanese monetary policy after 1989 4.4Negative consequences of restrictive US monetary policy after 1993 35 39 59 68 75 77 119 128 135 139 Page viii Tables 1.1Purchasing power parity exchange rate levels of one US dollar (versus actual exchange rates) 2.1The turnaround in the US Capital Account, 1980–85 ($billion) 3.1Sources and uses of foreign savings in dollars ($billion) 4.1US monetary and fiscal policy and the 1982 recession 4.2US GDP components and the 1982 recession (real GDP, 1981–84 in billions of 1972 dollars) Actual versus predicted declines in the growth rates of US GDP and inflation, 1981:Q3 to 4.3 1982:Q4 (percentage points) 4.4World stock markets decline, 1987 Money flows into the US financial markets in the 1980s and saves US banks from bad foreign 4.5 debts 4.6Foreign debt prices, before and after the stock market crash (in cents per dollar of face value) 5.1The economic costs of US trade quota protection in cars, steel, and sugar ($billion/year) The economic costs if a deficiency payment scheme replaced quotas in cars, steel, and sugar 5.2 ($billion/year) 16 37 85 104 105 107 114 121 122 189 190 Helpman, E 194 Hennessy, J.M 74 Hopkins, T 155 IMF see Internalional Monetary Fund imports growth, and protectionism 45–9, 50, 52, 187 United States 105–6 income velocity, of money see monetary velocity inflation 72, 92–3, 178 information technology development of 3–4, 5, 6–7, 63 and monetary velocity 73 and wealth-creation 88–9 innovation and transition crises 87–8 and wealth-creation 88–90 Inoue, K 94 interest rate parity 13–16, 17, 35, 43–4, 106, 164, 172 interest rates effects of G7 160 and the ERM 77 and financial markets 13–16, 61–2, 71, 89–90 and government borrowing 180, 181 and monetary velocity 61–2, 72 stabilization 164–5 United Kingdom 76 United States see United States, interest rates and the world debt crisis 117 International Banking Facilities see offshore financial markets international finance see financial markets international joint ventures, and protectionism 49–53, 187 international lending by banks 33, 121 effects of globalization 13, 89–90 taxation of 8–9 International Monetary Fund 170–71, 175, 176 and deregulation 156 international ownership, and protectionism 54–5, 187–8 international trade see trade IRP see interest rate parity Japan capital costs 18 current account 39 financial crisis 93–6, 123, 127, 133–6 financial markets, deregulation in 10–11, 14 foreign investment by 22, 51, 52–3, 94, 123–4, 134, 136 monetary policy 93–6, 115, 123, 134, 135 monetary velocity 59, 135 money supply 93–4, 134–6 savings 26–7, 28 securities trade 2, 9, 10 stock, price-earnings ratio 20–22 trade with United States 45, 46–7, 48–9, 184–5 joint ventures see international joint ventures Jones, D 197 Page 209 Judd, J P 62 Keohane, R 147 Keynesianism 194–5 Kindleberger, C.P 100, 149–50 Kochen, A 83 Krugman, P.R 25, 183, 186 Kuttner, K.N 61, 177 Laidler, D 62, 177 Latin America recession 101 tax havens 154–5 and the world debt crisis 118, 119–20, 121, 122 see also Brazil; Mexico Laurent, R.D 94–5, 177 lending see international lending less developed countries and capital flight 119, 122, 131–3, 169–70 debts see world debt effects of US policies 118–22, 153–4, 156, 169 foreign direct investment in 123 and the stock market crash 120, 121 see also Asia; Latin America Leu, G.-J 189 literalization see deregulation Lindgren, C.-J 100 Maxfield, S 136 Meltzer, A 92 mercantilism see money-mercantilism Mexico debt crisis 117, 118, 119, 146, 170–71 foreign investment in 130–31 recession (1994–95) 79, 80, 130–33, 139, 161–2 Milner, C 25 Mishkin, F.S 102 Modelski, G 87–8 Mogg, W Rees- see Rees-Mogg, W monetarism 146, 194, 195 monetary policies 146 and the 1982 recession 114–16 Asia 138–9 effects of G7 159–61 effects on Mexico 131 Germany 93, 115–16, 125 and interest rates, US 35–6, 103 Japan 93–6, 115, 123, 134, 135 and monetary velocity 176–8 recommendations 176–9 Thailand 137, 138 United Kingdom 108–9, 115 United States see United States, monetary policy and the world debt crisis 117–18 see also fiscal policies monetary unions see European Monetary System; regional currencies monetary velocity 60–63, 80–81, 192 and deregulation 73, 74 determining 78 and financial markets 66–73, 76 globalization 61–3, 73, 74 Germany 59, 76–7 and information technology 73 and interest rates 61–2, 72 Japan 59, 135 and monetary policies 176–8 prediction of 64–5 and recession 99–100 United Kingdom 59, 73–6 see also effective money; United States, monetary velocity monetary-wealth creation 86–90, 148–9, 184 as power 151, 152, 153, 154 transfers, and dollarization 153–4 money see currencies; effective money; virtual money systems money absorption see financial markets, money absorption money demand, prediction of 64–5 money-liquidity and financial market growth 111–12 maintenance of 166–9, 176 see also monetary velocity money-mercantilism 153–9, 181 see also offshore financial markets money supply and bad debts 81 deregulation, effects 86–7 expansion, effects 96 and foreign investment in the US 142–3 and the Great Depression 81, 82 history 77–8 Page 210 Japan 93–4, 134–6 policy implications 90–96, 177–8 and recession 99–100, 101, 102 United States 91–2, 103, 104, 114–15, 142–3 see also broad money supply; effective money money supply (m1) definition 73–4 and economic growth 59–60 and financial markets 64–5, 66 Mundell, R 25–6, 183, 186 narrow money supply see money supply (m1) nation-state models, of financial crises 148 Nitzan, J 152 Norton, R 84 O' Brien, R 12 offshore financial markets 83–6 dollar flows to 84–5, 132–3 effects 150, 154–5 reserve requirements 83, 86 overseas lending see international lending overseas production 49–53, 50–51, 184–7 Oye, K A 147 Palan, R 154–5 personal savings see savings Porter, R.D 62 Portes, R 157 poverty, alleviation of 174–5 price-earnings ratios, of stock 20–22, 31, 32, 134 protectionism 42–3, 187–91 costs 188, 189–90 in financial markets 191 and import growth 45–9, 50, 52, 187 and international joint ventures 49–53, 187 and international ownership 54–5, 187–8 and overseas production 49–53 and trade deficits 43–4, 187, 190 United States 8–9, 25–6, 30–31, 45–7 purchasing power parity 16, 182 quasi-money 77–8, 79, 80, 81, 101 Quijano, A.M 52 Radecki, L.J 64–5, 66 recession Asia 35, 136–43, 164, 172, 174–5 definition 100 and effective money 100, 101 Latin America 101 Mexico (1994–5) 79, 80, 130–33, 139, 161–2 models for 147–8 and monetary velocity 99–100 and money supply 99–100, 101, 102 patterns 99–102 see also financial crises; Great Depression recession (1982) 102–3, 117 effect on less developed countries 117–18 France 109–11 and monetary policies 114–16 United Kingdom 108–9 United States 62–3, 103–8 recession (1990–91) 123 Europe 123–5 United States 125–30, 160 Rees-Mogg, W 84 regional currencies 161–3 reserve currencies see currencies, reserve; US dollar, as reserve currency reunification, Germany, effects 76, 124–5, 127 Rey, H 157 Russia, financial crisis 79–80 Sachs, J 163 savings Japan 26–7, 28 United States 27–8, 29, 32, 69 savings-investment imbalances, and trade balances 183–4 Scadding, J.L 62 Schumpeter, J 57, 87 securities see government securities Smith, G.D 54 Snowden, N 25 social consensus belief systems Soddy, F 149 Page 211 Soesastro, M.H 164 Solomon, E.H 78 South America see Latin America Spindt, P.A 63, 65, 66, 67, 68, 70, 94, 113 stock ownership 54–5 price-earnings ratios 20–22, 31, 32, 134 prices 65–6, 82–3 stock market crash causes 75, 92–3, 111–16, 120 and less developed countries 120, 121 and the Great Depression 81–3 growth 2, 5–6, 68–9 United States 68–9, 90 Stone, C.C 62, 66, 68 subsidies 188, 190 tax havens see offshore financial markets taxation and foreign investment 29 of international lending 8–9 United States 103, 104, 105 Toylor, M 9, 14, 15, 74 telecommunications, development of 4–5, 63 Thailand financial crisis 79, 80, 139 foreign investment in 137 monetary policy 137, 138 third world see less developed countries; world debt Thompson, W.R 87–8 Thornton, D.L 62, 63, 66, 68 Tonks, I 9, 74 trade policies, recommendations 181–91 United States see United States, trade trade balances 191 and exchange rates 16, 25–6, 183–4, 185–6 and overseas production 184–7 and protectionism 43–4, 187, 190 United States 25–6, 38, 39–41, 52–3, 184–7 trade barriers see protectionism trade quotas 47, 188–9 transition crises, and innovation 87–8 Triffin, R 167 underdeveloped countries see less developed countries; world debt United Kingdom financial markets, deregulation in 9–10, 14, 74, 75 interest rates 76 monetary policy 108–9, 115 monetary velocity 59, 73–6 recession (1982) 108–9 United States banks, foreign lending 33 capital costs 18 capital returns 18–19, 31, 32 corporate debt, increase 17–20 current account 38, 39, 40, 157–8, 182–3, 186 economic policy, and the world debt crisis 118–20 exports 105–6, 107, 127–8 financial markets 8–9, 69–70, 70, 147–8 fiscal policy 180–81 foreign investment by 51, 52–3, 140–41 foreign investment in 22, 29–34, 36–7, 182 and the 1990s recession 127–9, 130 and the Asian recession 140–41 effects 27, 37–42, 120, 121, 153–4 and money supply 142–3 and trade balances 184–7 GDP 70, 103–8 government securities market 2, government spending 103, 104 Great Depression 80–83 imports 105–6 interest rates 69, 70, 93, 104, 107, 143 and the 1990–91 recession 129–30, 160 and the Asian recession 139, 140 and capital inflows 28, 33 and monetary policy 35–6, 103 and world debt 29, 117, 146 monetary policy 59, 91–3, 103, 104, 114–15, 157 and the 1990–91 recession 129 effects on Asia 138–9, 141–2 ... from the British Library Library of Congress Cataloguing in Publication Data Allen, Roy E., 195 7Financial crises and recession in the global economy / Roy E Allen. -2nd ed Includes index Financial. .. International Finance II The Global Information Revolution and Global Finance III Governmental Deregulation and International Finance IV Financial Market Globalization and Interest Rate Parity V Financial. .. banks UK financial deregulation in the 1980s paralleled that in the US, and due to the international dominance of New York and London as financial centers, these two countries influenced financial