Contents List of Tables viii List of Figures ix Preface x Part I Introduction 1 1 The Purpose and Three Propositions 3 Part II How a Hegemonic System Works 33 2 Background Concepts and Relationships in a Globalized World 35 3 A Theory of Balance-of-Payments Adjustment for the Hegemon 52 4 A Model of Instability in Asset Markets 73 Part III Exhaustion: Soft, Hard or Very Hard Landing 87 5 The Data 89 6 Assessing Propositions One and Two 111 7 The Efficiency of Adjustment 127 Part IV Confronting the Future 141 8 Policy Options and Constraints 143 9 The Transition Problem 157 10 A Proposed Agenda for Redesign 162 Part V Concluding Assessment 173 11 The Grim Prospect Ahead 175 Notes 182 References 205 Index 211 vii.
List of Tables 1.1 US net international investment position (1983–2002) 5 3.1 The effectiveness of a 10 percent depreciation of the dollar 64 3.2 The US balance on income from international assets (1983–2002) 70 5.1 The changing mix of foreign-owned liabilities of the United States (1983–2002) 93 5.2 The mix of private foreign-owned financial liabilities of the United States (1983–2002) 93 5.3 US INW(1983–2002) 96 5.4 The relativesize of international dissaving and the INW(1983–2002) 98 5.5 Index numbers of the dollar’s annual effective rate of exchange (1992–2002) 99 5.6 Cumulative current balances, 1983–2001 for 24 countries 100 5.7 Ratios of private foreign-owned financial assets to US official reserves (1981–2002) 101 5.8 US bankruptcy filings (1980–2002) 104 5.9 A Pro-forma estimate of the US INW at the end of 2010 105 5.10 US ratios of current credits to current debits (1990–2003) 106 7.1 Balance-of-payments adjustment in the early 1980s in the United States 137 8.1 Current surpluses of some major nations 1990 through 2002 146 viii.
List of Figures 1.1a The deficits on current account of the United States (1992–2003) 10 1.1b End-of-year US INW (1992–2002) 10 1.2 The inverted pyramid of the international financial system 23 A1.1 Real effective exchange rates of the dollar 1991–2000 29 2.1 Capital flows and the exchange rate 37 2.2 The relationship between the current balance and INW 39 4.1 Downward instability in an asset market 74 ix.
Preface When a person has been working in an area of economics for over thirtyyears, he will have acquired intellectual debts. It is important then that I acknowledge some friends and colleagues whose wisdom and lore have helped me get some understanding of balance-of-payments adjust- ment and the international financial system. Many of these colleagues are people who are dissatisfied with some aspects, frequently the irrele- vance,of mainstream economics.
1 The Purpose and Three Propositions I The focus of the monograph To function efficiently, the global economy must both ensure the absence of major financial crisis and maintain adequate aggregate demand at the global level. There is substantial evidence that the existing system is vulnerable in both the financial and the “real” sectors. This systemic vulnerability and its potentially very large adverse consequences for global macrofinancial efficiency are the foci of this monograph.
2 Background Concepts and Relationships in a Globalized World The United States has, historically, enjoyed a large degree of self-sufficiency in international economic affairs so that the ratio of exports and imports to gross domestic product is extremely low in com- parison with smaller countries such as those in western Europe and in East Asia. There is, therefore, a tendency for US-trained economists and economic policymakers to downplay international phenomena in much of their thinking and to focus on closed-economy models. The ratio of exports and imports to gross domestic product in the United States has increased in recent years and the value of international financial transactions has also grown. There are many reasons. They include the liberalization of international trade, the greater freedom of international transfers of funds, the growth of foreign direct investments by multina- tional corporations and the end of approximate self-sufficiency in petroleum and other sources of energy. The word “globalization” has come to signify the greater interdependenceof national economies. Some relationships must be spelled out. In addition, some of the issues of major concern to the subject matter of this volume are not a part of the mainstream of modern economic thought. Because the apparatus to be used will rely on little-used concepts and relationships that are not generally emphasized, it is useful, at this juncture, to provide some con- ceptual and definitional background before beginning to consider the subject of balance-of-payments adjustment by a hegemon under modern conditions in Chapter 3. Clearly, readers will only read those topic sec- tions with which they are not familiar. A list of the topics is as follows: 1. Capital flows, the rate of exchange and the current balance.
3 A Theory of Balance-of-Payments Adjustment for the Hegemon I Introduction The absorption theory (Alexander, 1952) (Johnson, 1958) is the basic theoretical analysis of the elimination of a balance-of-payments deficit.