Sunday, May 27, 2012

Making a dollar valuable after 2008 crisis


The Estates’ monetary policy shows an increasing trend since 2008. This policy is according to economic theory to go out of 2008 financial crisis. Nevertheless, there can have a cost in short run other countries’ exports due to cut down of dollar’s price. Although local monetary authorities are fighting against it through increasing monetary reserves and interest rates, the final effect will be a dollar devaluation as most economies start to face. The main economic channels to bring a dollar devaluation are factors payments abroad and transfers payments from the Estates’ citizens, therefor there is a real economic movement behind this policy. An interesting relation between the Estates’ monetary policy (dollar’s price devaluation) and other countries’ FDI inflows is a positive correlation, this means that foreign assets get value due to well directed monetary policy. The second issue on this note is the coming crisis in 2012 which is just a sequel of 2008 financial crisis, which has not been well sorted in European countries due to monetary austerity.


Author: Humberto Bernal,
Economist,
e-mail: zhumber@gmail.com

It can be download at:

2008  was the beginning of the last world financial crisis, it was close to a global economic depression. This crisis started in the Estates (the United States of America) financial system with complicity of other financial systems around world. After this mad fact, the Estates began to give monetary liquidity to whole world economy. Figure 1 shows the increase of the Estates’ money supply (M1) as share of its GDP since 1960 to 2011. This share pointed 9.8% in 2007 and increased to reach 14.4% in 2011. Fortunately the Estates’ monetary authorities realized the importance of increasing money supply, the other way around world economy would have faced a deep crisis as 30’s crisis or worst. According to media, this monetary policy will be carried until 2014 at least. This information brings a fact to deal if we want a better society after this mad. This liquidity will bring a decline in dollar's price, in other words dollar devaluation, therefore the question is: what are the main channels through this liquidity will cut down dollar’s price around world?. The answer is straight through econometrics’ tools: productive factors payments and monetary transfers from the Estates’s citizens to foreigners. 




Figure 1. M1 as share of GDP for USA 1960-2011(%)

Source: Bureau of Economic Analysis and Board of Governors of the Federal Reserve System.



From 106 economies and span data from 2000 to 2010, the result is: through transfers such as income from the Estates’ residents to foreigns will bring a cut down of dollar’s price about 6.3%; from Estates’s factor payments such as fees for researching with abroad labor and payments due foreign capital used inside Estates will bring a cut down of dollar’s price about 18.8% as table 1 shows. There is an important point to highlight, Foreign Direct Investment inflows (FDI) into other countries does not cut down dollar’s pice as public servants some times broadcast through media. FDI inflows makes an increase in dollar price about 3.9%. This result is important due to the Estates’ foreign assets (FDI) bring power of purchasing to their citizens around the word, therefore they will take advantage when they go for truism and import merchandise. This fact can be explained by each local monetary and fiscal policy, for instance an increase of monetary reserves lets dollar’s price faces an increase about 12.4%. There are other factors that make dollar’s price fluctuate, for instance speculative attacks through interest rates, it means brokers take advantages when interest rates goes up or down due to monetary policy decisions, in this case an increase of 1.0% ( in one percentage point) in deposit interest rate lets an increase of dollar’s price about 0.6%. I made several econometrics runs and the results are same in most of cases. 



Table 1. Exchange rate Random Effects model 

2000 to 2010

(Local currency per one dollar, all variables in logarithms but not deposit interest rate)


Exogenous variables*
Coefficient
Private current transfers (payments)
-0.063****
(0.039)
Income payments
-0.188**
(0.036)
FDI inflows
0.039***
(0.020)
Total reserves
0.124**
(0.038)
Deposit interest rate
0.006****
(0.004)
Constant
4.913**
(0.662)


Hausman test: Chi2 = 0.055

 


*106 countries. 995 observations. Period from 2000 to 2010.
** P-Value less than 0.01.
*** P-Value less than 0.05.
**** P-Value less than 0.11
Source: Data from World Bank Indicators. Own calculation through Stata 12.1.



Although nowadays the Estates’ economic policy is to cut down its currency to pull up its demand through its exports, they can payback this cut down to other countries’ export through increasing the Estates’ FDI outflows. This FDI outflows will bring more foreign employment and development in these countries. Nevertheless countries are looking for manufacture FDI instead of mining, crude oil extraction or natural resources extraction FDI. It is right to carry with natural resources extraction but it must be under country development criteria instead of misery and poverty criteria as we realize in Colombia where the majority illiterate people live where crude oil extraction take place (regions such as Putumayo, Casanare and others). 
Fortunately the Estates realized this fact and its FDI outflow through countries are increasing as figure 2 shows. Since 2008 its FDI outflows increasing from 2.2% of its GDP to 2.7% in 2011, moreover the long run trend is positive passing from 0.6%  in 1960 to 2.7% in 2011.



Figure 2. FDI outflow as share of GDP for USA 1960-2011(%) 


Source: Bureau of Economic Analysis.

The second issue to deal is the aware of a slow down of world economic through 2012. This  slow down is just a sequel from 2008 crisis. Markets are watching Europe countries and they realize that European economic policy is bringing austerity to their citizens, this means lack of money to spent, therefore short run foreign assent start to fly to best places such as the Estates. Figure 3 shows the effect on these short run assets in 2008, they went to the Estates in about 8.4% as share of its GDP. Now, by 2011 this assets share 0.8%, it means a yellow light but not red light as Colombian treasury minister broadcast by media. This yellow light can be sorted out through flexible monetary polices in Europe which pulls up spending and more valued added FDI in developing countries such Colombia. World economic policies must be focused on finishing speculative short run assets movements, it can be reached through Basel III agreement, high taxes and fines for those who do not bring added value to economies. 


Figure 3. Other private american assets outflow as share of GDP for USA 1960-2011(%)



Source: Bureau of Economic Analysis.

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