Global Markets and Finance in Today's Economy

Mark S. LeClair

Fairfield University

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Description

: Globalization has dramatically altered the economies of

both industrialized and developing nations. This course will examine

the impacts of the internationalization of the world economy,

focusing both on trade and global finance. The 2016 election

highlights some of the resistance to the impacts of globalization

within the U.S. The stalled World Trade Organization talks are another

indicator of pushback against the rapid march towards free and open

trade. Global trade imbalances (trade deficits) have now created

circumstances in which the global financial structure is under stress,

which may lead to significant changes in how trade is financed, which

currencies are used, and which countries dominate the world trading

system.

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Go to 

www.faculty.fairfield.edu/mleclair

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Look for link marked Lifelong Learning at top

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History of Trade Relations – From Protectionism to Globalism

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-Regionalism (Free Trade Areas) – From the EU to NAFTA

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-The Free Trade Debate – Why is Free Trade now

Controversial

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-International Finance – The Bretton Woods System and

Post-War Economic Relations

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The “Currency Problem” – The Role of the dollar, euro, and

other reserve currencies

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-The Developing Nations in the World Financial System

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Concept of Free Trade is Recent (Post – WW2)

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Initially, Tariffs were a source of revenue – funded the

Federal Government

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Fought War of 1812 on tariff revenues

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Tariffs began slow drift downwards from 70% average to less

than 60% by time of Civil War

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Major issue between North and South – North wanted

high tariffs, South wanted cheap goods

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True tariff reductions finally occur in the 1920s

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Average tariff rate drops to 15%

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U.S. pursued Beggar Thy Neighbor policy

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Smoot-Hawley Tariffs raised average tariff to 60%

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Europe Responded in kind – international trade dried up

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Major cause of Great Depression

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As Depression is winding down (and war starting) U.S.

tentatively begins negotiating reduced tariffs

(bilateralism)

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Process is slow, destined to take decades

Instead, U.S. and Allies Move to

Multilateralism……………….

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1947 – General Agreement on Tariffs and Trade (GATT

System)

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Was supposed to become part of International Trade

Organization, but never supported in Congress

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Under GATT, tariff cuts become universal

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“Uniformity of Treatment”

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Even for nations that were not cutting their tariffs

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Result was rapid and universal unwinding of tariffs

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Most important notion of GATT was Most Favored

Nation (MFN) status

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Every country (except enemies) received MFN status and

therefor the lower tariffs

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At the moment, only Cuba and North Korea are w/out

MFN status

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Although invaluable, this aspect of the GATT will turn out

to be problematic later on

Work of GATT proceeded in “Rounds”

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Most important were: The 1947 Round, Kennedy

Round, Tokyo Round, Uruguay Round

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Currently in the Doha Round, but is moribund

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During each Round, negotiators representing all

members of the GATT would seek give and take on

tariffs and other barriers

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U.S. pushed for extensive tariff cuts

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Fear that the now-forming European Economic

Community (EEC) would destroy the GATT

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EEC was an open violation of the tenets of the GATT –

large tariff cuts would help undermine its advantages

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Kennedy Round secured very large cuts by all participants,

and also clarified how nations deal with “dumping”

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From U.S. perspective, undercut EEC enough to prevent it

from destroying the GATT

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Worked on:

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Nontariff barriers

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Industrial Standards

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Hot plate story

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Sanitary standards

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Intellectual Property Rights protection

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A major “fail” – U.S. innovations routinely stolen

Uruguay Round (1994)

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Addressed major problem with structure of GATT

system

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MFN status allowed developing nations to sit back and

take tariff cuts without cutting their own trade barriers

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Uruguay Round forced their involvement

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Although tariff rates remain high in developing world, at

least they were cut somewhat

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Uruguay Round also created the WTO

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Much more powerful than GATT

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Particularly trade dispute powers

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U.S. was immediately sued over “dolphin-safe tuna” and

lost the case

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Environmentalists have been unhappy with the

GATT/WTO for some time, as have labor organizations

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Helped produce the riots in 1999 in Seattle

Finally, the Doha Round (Qatar)

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The “Development” Round

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Focus was on expanding the trade of the developing

nations

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Key to success – reduction of agricultural tariffs in the

U.S. and Europe

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But, tariffs are a result of agricultural subsidies – cannot

remove them without removing price manipulation in

markets

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For U.S., peanuts, cotton, milk, sugar are major problems

(with cotton with have a quota)

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Failure to solve this issue has stalled round (nations

are in the 16

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Other problem is “diminishing returns”

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Average tariffs rates for the U.S., the EU and Japan are

about 2%

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Hard to gather 150 nations together to argue about such

low tariff barriers

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Is the WTO permanently stalled?

Remaining Issues may be Politically

Unsolvable

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U.S. tariffs on cotton, sugar, etc. are politically

embedded

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No way to eliminate

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Yet, these are exactly the places developing nations in

Africa could compete (Mali is a major producer of cotton)

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U.S. uses its “trade preference program” to help out some

developing nations

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But, protection of industry still primary goal

WTO Will Continue to Act as Trade

Dispute Body

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Rules on complaints by nations about unfair trade

practices

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e.g. President Bush’s imposition of protective tariffs on

steel

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European imposition of tariffs on U.S. agriculture in the 1980s

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WTO found both practices “illegal” and enabled the

offended nations to impose retaliatory tariffs

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As in most cases, original tariffs removed before sanctions

imposed

Questions?

Week 2 - Regionalism

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In the news during campaign with discussion of Trans-

Pacific Partnership (TPP)

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Regionalism refers to agreements that produce free

trade between member states, sometimes at the

expense of non-members

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Began with Treaty of Rome in 1957

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Regionalism a major threat to the GATT at the time

Expansion of Free Trade Agreements

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Central American Common Market (1960)

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Latin American Free Trade Area (later Latin American

Integration Association)

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Argentina-Brazil FTA

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NAFTA (1994)

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Mercosur (1994)

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Association of Southeast Asian Nations (ASEAN)

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Caricom (Caribbean Community)

Problem – FTA’s are at Odds with GATT

System

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GATT/WTO promise that all nations get equal treatment

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Not possible when some nations are members of an FTA

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Had to rewrite GATT rules to allow for E.E.C.

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Article XXIV permits free trade areas as long as they are

“trade- creating”, not trade-diverting

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That is, they increase overall trade rather than simply

transferring it from a nation that is outside the FTA to

one inside

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Would argue that the EU has been trade-diverting at

times, but it has been ignored

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Particularly true of the later entrants to the Union

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Piecemeal formation has made measurement difficult:

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1964-8 original five members

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1973 UK, Ireland and Denmark

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1981 Greece

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1986 Spain and Portugal

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Etc.

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Now 28 members (soon to be 27) with deep economic

ties, although some deeper than others

Stages of Integration

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Can identify 5 distinct steps in formation of a union

such as the EU

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Free Trade Area – All barriers to trade dropped

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Customs Union – Adoption of common external tariffs

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Common Market – Add labor and capital mobility to the

above (labor mobility may be a key sticking point)

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Common Currency (euro) – adopted by 17 countries

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Political Union – European Parliament, European Central

Bank, etc.

EU has proceeded far beyond all other Unions

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But, at each stage, there is a loss of autonomy

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Fractures are now appearing in rush to create a

“United States of Europe”

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Failure of 9 countries to adopt the euro

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Upcoming exit of the UK

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Failure of the French to pass EU Constitution in 2005

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Reversal of rule on labor mobility after admission of

Eastern European nations

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Central American Common Market

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Caribbean Community (CARICOM)

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Latin American Integration Association (LAIA)

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Mercosur (Southern Market)

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Association of Southeast Asian Nations (ASEAN)

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North American Free Trade Agreement (NAFTA)

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Now expanded in Latin America, sort of

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Going back to five stages of integration

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Second stage is Customs Union (common external tariffs)

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NAFTA never got to this stage

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Certainly no interest in free labor mobility (stage 3)

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Most integration movements have done little except

eliminate tariffs

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Mercosur in particular – was supposed to be the EU of Latin

America

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Fell apart in recession of 2001

Problem….Regional Integration is the only game in

town at moment – hasn’t worked well

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Reinvigorating the GATT/WTO would take a major

breakthrough

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Unlikely at present

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So stuck with regional trading agreements, which are

becoming unpopular (TPP)

History of NAFTA

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Signed in 1994 under President Bill Clinton

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Expanded U.S.-Canada Free Trade Agreement to Mexico

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Eliminated all trade barriers (with some exceptions)

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Included environmental standards to prevent all industry

from moving to Mexico

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Allowed for transnational shipping (a sticking point)

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DID NOT seek common external tariffs

Trade between U.S. and Mexico

Somewhat Misleading…………………

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1994 is both NAFTA’s first year and the year of the Tequila

Crisis

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Mexican government went into technical default

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U.S. helped bail out through Brady Plan (Debt for Equity

Swaps)

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At start of crisis, 6 pesos to the dollar

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Quickly dropped to 9 to the dollar

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Mexican goods became much cheaper

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(Now 18 to the dollar) – this might be an important factor in

trade deficit

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However, one can see why anti-trade sentiment

resonated in last election

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Jobs heading south, with products re-exported to U.S.

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Some remaining tariffs (Canada tariffs U.S. dairy

products) are maddening

Other Nations that have Free Trade

Agreements with U.S.

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Chile

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Colombia

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Peru

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Was supposed to be part of FTAA – 34 nations

stretching from Argentina to Canada

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Politics went left in Brazil, Argentina, Venezuela and deal

fell apart

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Repeated story of FTAs – always seem to disappoint

Trans-Pacific Partnership

Proposed Membership

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Australia

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Canada

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Japan

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Malaysia

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Mexico

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Peru

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United States

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Vietnam

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Chile

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Brunei

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Singapore

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New Zealand

Why Controversial………….

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Experience with NAFTA (ballooning trade deficit)

made some leery

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Incorporation of developing nations (e.g. Vietnam and

Malaysia) unsettling to opponents

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Although U.S. tariffs are very low, some labor-intensive

goods still face significant tariffs

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Would have been dropped under TPP

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Probably little impact on entry of developed nations –

(tariffs already low, as noted)

Innovations in TPP that were Supposed to

Matter

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Tight control on intellectual property theft

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But, had failed in the past

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Would have cut 18,000 tariffs

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Treated government entities with “neutrality”

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An issue for U.S. – Hard to compete with government entities

that have no downside risk

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Large number of environmental provisions (e.g.

overfishing)

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NAFTA also contained these – never fully enforced

Problem with FTAs in general for the U.S.

mirrors that with the GATT/WTO

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The U.S. is the dominant producer of intellectual

goods

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Abandoned much of our production of physical goods

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Theft is impossible to control

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Movies, software, drugs, etc. all get “borrowed”

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GATT/WTO rules on intellectual property are strident, but

frequently unenforceable

In end, Regional Integration and the

GATT/WTO Process are not Consistent

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With both stalled at present, hard to see how trade

picture changes further

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Maybe hard work is done, and not much more can be

achieved

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WTO remains active as a dispute body

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Only means of preventing re-imposition of trade barriers

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Recent very important ruling against Airbus

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Europe has illegally subsidized Airbus in its fight against Boeing

Week 3 – Free Trade Debate

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Why is Free Trade now Controversial

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U.S. appears to be the international patsy in terms of free

trade

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Have run trade deficits since 1983

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Appear large and unsustainable, yet they continue

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Has led to loss of jobs in manufacturing

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Most Americans don’t feel rise in jobs in other sectors

has been dramatic enough to compensate

U.S. Trade Deficit – Monthly Figures

Major Cause – Abandonment of Dollar

Standard in 1973

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When dollar was only reserve currency, could not run

deficits

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Would flood the world with dollars and collapse the

fixed rate system

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Economists had no experience with floating rates and

free capital flows

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Misread impact

Presumed Versus Actual Outcomes

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Presumed:

Trade deficit →Outflow of dollars → Drop in value of

dollar → U.S. Exports up and Imports down

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Actual:

Trade deficit → Outflow of Dollars → Inflow of Capital

from abroad → No change in value of dollar

Strong Dollar Policy of Clinton Era

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Intended partly to encourage purchase of U.S.

treasuries

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Also meant to help developing nations

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Ended up institutionalizing U.S. trade deficits

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Some hoped that strong euro would push down deficits,

at least with Europe

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But, continuing euro-crises have devalued euro

Individual Sectors in U.S. Hit Very Hard

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Textiles, Clothing, Appliances, Electronics

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Chinese entry into WTO (1994) accelerated process

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Current deficit with China is $350 billion per year

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Other major problem used to be energy (oil)

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Fracking has ended that issue

Textile jobs in U.S.

Tariffs Removed in Phases, with Certain Parts

of Sector Affected in Each Phase

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Long-term downward trend

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Unlikely to change

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Pure free-traders would argue that is good

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U.S. should not be producing textiles

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But, communities in southeast built around textiles suffer

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Kansas City Fed: Costs $160,000 to save a single job in

the luggage industry that pays about $30,000

Industries under Pressure

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Clothing, steel, low-end manufacturing (handicrafts,

home goods)

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Question then becomes…….

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Even if everything is now vastly cheaper, does it matter if

a large segment of the population is structurally

unemployed

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Can’t afford the lower price on the big-screen tv if

unemployed

Standard Theory behind Free Trade (Ricardo)

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Nation with lower opportunity cost should produce good

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Example: It takes 2 laborers in Canada to produce 100 bf of

lumber, while it takes 3 laborers in the U.S.

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Those three laborers could produce 100 bushels of wheat

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Opportunity cost of 100 bf of lumber is 100 bushels of wheat

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If it takes 5 laborers in Canada to produce 100 bushels of

wheat (20 bushels/worker), Canada only sacrifices 40 bushels

of wheat to produce the lumber – lower O.C. indicates Canada

should produce timber

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Conversely, O.C. of wheat in Canada is much higher

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100 bushels of wheat ties up 5 workers, which could

have produced 250 bf of timber

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U.S. should produce wheat

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Two nations will then trade timber for wheat

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Result is unemployed Canadian farmers and

unemployed workers in U.S. timber industry

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If they can reasonably switch jobs, things are still OK

Since China’s Entry…

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Seems like U.S. has a comparative advantage in

nothing that is manufactured

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Yet China imports little from the U.S. in return for what we

import

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Political pressure on Chinese officials works against any

change in practices

On Positive Side

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Despite size of U.S. trade deficit ($500 billion per

year), U.S. economy is not particularly open

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Still produce our food, energy, housing, etc.

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The majority of expenses of the average household

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Imports are about 15% of GDP

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In Europe, 50% is not uncommon

Imports as a Percentage of GDP

Numbers at End Indicate a Decline in U.S.

Openness

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Deficits are smaller now, but still represent a major

problem (as noted earlier)

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Deficit appears to be structural – its not going away

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Major Exports ($1.45 trillion in total) in 2016

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Machinery including computers: US$190.5 billion (13.1% of total exports)

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Electrical machinery, equipment: $167.2 billion (11.5%)

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Aircraft, spacecraft: $134.6 billion (9.3%)

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Agriculture: $129.7 billion (soybeans is key product)

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Vehicles : $124.3 billion (8.5%)

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Mineral fuels including oil: $94.7 billion (6.5%)

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Optical, technical, medical apparatus: $82.0 billion (5.6%)

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Plastics, plastic articles: $58.4 billion (4.0%)

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Much of it advanced manufacturing, although news

reports would have us believe we don’t produce much

in the industrial sector

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Accounted for another $700 in exports

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U.S. does better in services than in goods

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Comprised of banking, insurance, travel services, etc.

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Key trading partners:

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Canada, Mexico, China, Japan, UK, Germany

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Nice to see China on the list, but the number is actually

small ($115 billion)

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Approximately 11.5 million jobs “supported” by

exports

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$2.25 Trillion in total

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Electrical machinery, equipment: US$336 billion (14.9% of total

imports)

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Machinery including computers: $315.4 billion (14%)

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Vehicles: $285 billion (12.7%)

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Mineral fuels including oil: $163.4 billion (7.3%)

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Pharmaceuticals: $92.5 billion (4.1%)

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Optical, technical, medical apparatus: $80.8 billion (3.6%)

Odd in some Ways….Sectors that are both

Major Export and Import Sectors

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Violates (sort of) notion of comparative advantage

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In many cases, represents intermediate components

in an industry

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e.g. automobiles and machinery

Summary…………………..

Week 4 – International Finance

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International Finance – The Bretton Woods System

and Post-War Economic Relations

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International Finance refers (mostly) to currency

arrangements, financial flows and international

investing

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Start with currency arrangements

Historically, World on Gold Standard

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Physical coinage the norm, but in early 1800s began

issuing paper currency backed by gold

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No treasury or central bank, so all private banks issued

their own currency (1000s of different bills)

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Each currency worth a different amount – very awkward

system

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Not until 1860 that the U.S. establishes a treasury and adopts a

formal currency

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U.S. uses bi-metallism to increase the amount of money in

circulation

Volume of International Trade very Small

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Payment in “coinage” not a problem

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Could not conduct the $15 trillion in international

trade that occurs today with money that has intrinsic

value

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Demonstrated in 1973 when the Bretton-Woods system

became destabilized as world trade grew (and deficits

grew)

Gold Standard Abandoned in Lead up to

Great Depression

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Britain uncouples £ in 1931

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Result: No formalized system of exchange rates and

payments

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Bretton-Woods System (1944) established U.S. Dollar as

the reserve currency

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System held together until 1973, then collapsed due to

speculative pressure on the dollar

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World Trade Requires “Reserve” Currencies

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Hard currencies against which other currencies are valued

& are part of a nation’s international reserves

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In absence, cannot answer the question, “what is the Mexican

peso worth?”

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Traditional Reserve Currencies are:

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U.S. $, Canadian $, British £. The €, Japanese ¥, Swiss Franc

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Have now (strangely) added Chinese Yuan

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Unlike other reserve currencies, it is not freely floating, but is

pegged to other reserve currencies

Dollar Remains Dominant as a % of Reserve

Holdings

In Addition to Being Part of Reserves…..

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Trade between nations is “billed” in dollars, euros, etc.

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When Thailand trades with Malaysia, it is in dollars,

not Thai Bhat or Malaysian Ringgits.

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Once again, Yuan is absent from this part of being a

reserve currency

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No one (outside China) is billing in Yuan

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Capital Flows

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Movement of financial funds from one nation to another

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In the case of the U.S., largely due to our trade deficit

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Dollars are “recycled” back to U.S. through Direct Foreign

Investment (DFI) or short-term capital flows (purchase of

financial assets)

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Potential danger in this – U.S. has been selling itself off to pay

for its trade deficits for many years

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Recently, large increase in U.S. debt held by foreigners

Major Holders of U.S. Official Debt

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Japan, China, Ireland (?), Brazil, Cayman Islands,

Switzerland, UK

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By Numbers:

Japan: $1.10 trillion

China: $1.06 trillion

Ireland: $308 billion

Brazil: $258 billion

Cayman Islands: $258 billion

For Three of the Five (Japan, China, Brazil)

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Holdings are part of policy to manipulate value of

currency

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Mechanism:

U.S. trade deficit → Downward pressure on $→ Nation

(Japan) gets rid of excess dollars by buying treasuries→

U.S. dollar remains over-valued→Japanese goods

competitive

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Explains holdings of Japan, China and Brazil

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Cayman Islands is a result of its role as a “financial center”

Irish Holdings are Larger than its Entire

Economy

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Ireland has become haven for off-shore investments

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Much like the Cayman Islands

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Produces odd result

Chinese Holdings are Worrisome

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Over 5% of total U.S. official debt

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Cannot assure that holdings will not be used as a

weapon at some point in the future

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Geopolitical conflict could lead to dumping of treasuries

and destabilization of U.S. financial markets

Other Forms of Financial Flows

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“Hot Money”

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Short-term financial holdings that rapidly shift to nation

with highest returns

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Sometimes used as term for illicit flows – not the meaning

here

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 Short-term financial flows that focus on bond and

stock purchases

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Long-term flows (Direct Foreign Investment)

DFI is Important Source of Economic Growth

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Particularly for developing nations

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Provides capital that is not available domestically

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Some risk in terms of loss of autonomy

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Large, important investments become politically

important

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For U.S., LT investments totaled $112 Billion in 2014, and

was spread out over multiple nations

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Risk lower

Week #5 –The Currency Problem

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International currency system is in state of flux

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Dollar’s role is declining – to a degree – Other

currencies (Yuan) are rising in importance

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Can be somewhat destabilizing

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Problems in the Eurozone have reversed a trend

towards greater use of the €

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Until the Greek (and other crises) are resolved, the

euro is unlikely to rise in importance

How does one Create a Currency out of

Nothing?

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As part of the continued push for integration, the EU

moved towards a common currency in 1991

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Under the Maastricht Treaty

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Would assist Union in two ways

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Make prices transparent

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Reduce transaction costs

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More importantly, became a symbol of “deep” integration

World Skeptical at First

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Dramatic decline in Value right after introduction in

2001

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Introduced at $1.23, declined to 88 cents before

recovering

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Then jumped to $1.60/euro

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Which then made goods produced in the Eurozone

noncompetitive

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Recently, sustained downward pressure due to PIIGS crisis

Multiple Problems with Introduction

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Criteria for joining ignored (government deficit less

than 3% of GDP, government debt less than 60% of

GDP)

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Routinely brushed aside, particularly in 2008-09

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Cannot have a common currency when governments

are free to borrow whatever they want

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Led to crisis and now permanent problem with Greece

(not solvable in the next century)

Inclination is Towards Further Controls on

Spending

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Pushes up against problem of autonomy versus

cooperation

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Greece has no autonomy left – its government is run

from Brussels

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Although its social programs were absurdly generous,

they were the will of the Greek people

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No way to fund 30 years of retirement at 55 anymore

The Vanishing Greek Economy

Overall Assessment for the euro not

Particularly Positive

•

Other regions have suggested moving towards a

common currency (CARICOM)

•

Euro provides some guidance on the major issues that will

arise

Fundamental Problem with Reserve

Currencies

•

If they move too much, those nations that peg their

currencies against them are along for the ride

•

Pegged to the $:

•

When dollar rises in value, exports of nation become more

expensive – may create a problem with deficits

•

When dollar falls in value, imports become more expensive

•

Odd example – OPEC has always billed for oil in dollars. Falling

dollar means OPEC gets less purchasing power for oil

Recent Innovation – Pegging Against a Basket

of Currencies (China)

•

Significantly reduces variability

•

One currency may be going up when the other goes down

•

Can adjust composition of basket to achieve desired

stability and valuation

•

Example (made up): 1 Yuan = 1/4 of a dollar, 1/6 of a euro,

etc.

•

Unless dollar and euro move exactly together in value,

variability will be reduced

Suggestion has also been raised to create a

world currency

•

Would reduce transactions costs by trillions of dollars

•

Eliminates currency variability and risk

•

Creates as many problems as it solves

•

Who would be responsible for integrity of currency?

•

Who would decide how much new currency to issue?

•

What is it worth? Nothing to peg it against.

Could Transition the “Currency” of the

International Monetary Fund into a Peg

•

The SDR (Special Drawing Rights) acts as a pseudo-

currency

•

Financial instruments (bonds) can be written in SDR

•

Has an official value against other currencies

•

$1.3832 = 1 SDR (May)

•

IMF could act as a sort of “world bank”

•

Does not eliminate problems about magnitude of world

money supply – a complicated concept

Week #6 – Developing Nations in the World

Financial System

•

History of significant issues with currency

arrangements/financial flows

•

Developing nations avoided freely-floating their currencies

•

Too much instability

•

So chose some form of pegging:

•

Hard peg, soft peg, crawling peg, dollarization

•

African nations pegged to Franc (and then euro)

•

Rest of world used dollars

•

Some “regimes” abandoned – soft pegs are dangerous

Significant Problems….

•

As noted earlier, once pegged, currency is along for

the ride

•

May get unintentional over- or under-valuation

•

Also, cannot have independent monetary policy

•

Efforts go into supporting peg, not domestic policy

•

Because of these issues, more small countries now

freely-float and put up with the uncertainty

Capital Flows

•

Back in 1970s, very controversial

•

At least for Direct Foreign Investment

•

DFI viewed with suspicion

•

Particularly loss of control over economy

•

Typical scenario – Large firm puts manufacturing plant in

developing nation (labor cheaper)

•

e.g. Nike in Indonesia

•

Company then “extracts” profits (viewed as theft by

some)

•

Firm may acquire political influence

•

“Too big to offend”

•

Government may bend to prevent alienating business

•

Movie 

Gung Ho

 portrays how this might play out

when the 

US

 was the target of DFI in the auto industry

•

This is legitimate concern, but also a reflection of poor

institutional structure that allows inappropriate influence

to occur

Some Nations Restrict DFI

•

Result is generally lower growth, although may avoid

some instability due to capital flows

•

East Asian Financial Crisis (1999) provides illustration

on how NOT to engage with world

What Happened?

•

In 1999, the currencies of the Asian Tigers (S. Korea,

Malaysia, Indonesia, Thailand) came under speculative

attack

•

Had “soft-pegged” their currencies – pegged, but not

credibly, against the dollar

•

When speculators attacked, pegs collapsed

•

Currencies were interdependent – Thai Bhat went first, then

the Ringgit, Rupiah, Won……

•

Crisis threatened to bring down banking system

•

Even caused Russia to go into default

Strangest Part of Arrangements in Region

•

Direct Foreign Investment huge

•

Obtained through selling 

dollar-denominated bonds

•

When crisis started, money yanked

•

No cost to investors, since bonds not in local currency

•

Caused mass exodus

•

Crisis took year to resolve (near bankruptcy of S. Korea)

•

Soft pegging no longer considered a rational currency

arrangement

Venezuela – When it all Goes Wrong

•

Largest oil reserves in the world, although Oil is hard

to process

•

A decade ago, money pouring into country to develop

petroleum industry

•

Output recently peaked (2014) at about 3 million barrels

per day

•

Is now on a straight downward path

•

As country is falling apart economically, cost of declining

revenue very high

Result of Political Instability

•

Foreign investment has completely dried up

•

Petroleum industry infrastructure is crumbling

•

Using what is left of foreign reserves (hard currency) to try

to prevent the 

Bolivar

 from collapsing

•

Country will be insolvent in three years

•

Attempt to shore up currency system

•

Multi-tier currency rates (4 different rates)

•

Rate 1: 6.5 Bolivars/dollar (importation of food and

medicine)

•

Rate 2: 12/$ and 50/$ for importation of other goods – rate

available only sporadically through an auction process

•

Newest rate: 200/$ -> for purchase and sale of foreign

currency to individuals and businesses

•

System impossible to navigate – in the presence of 800%

inflation, value of Bolivar will continue to deteriorate

Resolution……

•

In absence of political reform, probably will have to

adopt a foreign currency as legal tender to end crisis

•

Civil War seems almost inevitable at this point

•

Ironically, the U.S. $ makes the most sense (the

international oil market functions in dollars)

•

Given attitude of President Maduro, likely will end in

political upheaval, and not reform