Monday, August 24, 2015

BdF - HH - The global financial cycle and how to tame it

International Symposium of the Banque de France “Central banking: the way forward?”
Paris, 7 November 2014

"...
Excessive elasticity of the international monetary system 
My second remark is related to the international monetary system. Since the end of the dollar’s link to gold, the de facto global anchor of the system is just the aggregate of the domestic monetary policies of the major reserve currencies. These policies may serve the domestic needs of each country or currency area. But this does not mean that they add up well for the world economy as a whole. The lack of a strong anchor is a key factor behind the excessive elasticity of the system. This means its inability to prevent the build-up of financial imbalances in the form of unsustainable credit and asset price booms.
The global policy interest rate needed for the entire world is very hard to achieve given the near-zero policy rate (negative in real terms) in the G7 countries (Graph 3). In particular, the IMF’s SDR interest rate in October was 3 basis points, with negative contributions from three-month eurepo and Japanese government bills.
 The nominal global policy rate is currently around 2% (Graph 4). In a world growing in nominal terms by 5–6%, the global policy rate should surely exceed its current 2% level. The influence of the 3 basis-point SDR rate on this 2% global policy rate is one of the world economy’s great asymmetries.
I commend the IMF for trying to integrate the global dimension in its spillover reports. But the monetary policy recommendations for reserve currencies in its Article IV or World Economic Outlook reports tend to take a purely national perspective. Indeed, over the past 15 years in my recollection the IMF’s recommendations on monetary policy have almost always been in the direction of more easing. This suggests to me that the global perspective of the build-up of financial imbalances has been missing. All this means that the lack of global anchor of the international monetary system, well described by Tommaso Padoa-Schioppa, remains. And so does the system’s excessive elasticity and inability to constrain effectively global liquidity. 
..."

Source: https://www.banque-france.fr/fileadmin/user_upload/banque_de_france/La_Banque_de_France/Speech-Herve-Hannoun-symposium-141107.pdf

Sunday, August 23, 2015

1973 - MOF VIEWS ON MONETARY REFORM

SUMMARY: FOLLOWING ARE VICE MINISTER INAMURA'S VIEWS ON MONETARY REFORM. THESE INDICATE DESIRE IS FOR ONLY SMALL MODIFICATION FROM PRESENT SYSTEM. EMPHASIS IS ON STABLE EXCHANGE RATES, TO BE CHANGED ONLY IN CASE OF FUNDAMENTAL DISEQUILIBRIUM. ELASTICITY FOR SYSTEM SHOULD CONTINUE TO BE THROUGH PROVISION OF CREDIT. AS CREDITOR COUNTRY JAPAN NOW IN FAVOR OF MANDATORY SETTLEMENT IN STRONG INTERNATIONAL ASSETS.

"...
6. IF THESE TECHNIQUES CAN BE EXPANDED SO THAT JAPAN CAN CONFIDENTLY GENERATE OUTFLOW OF YEN DENOMINATED LONG TERM CAPITAL TO FINANCE CURRENT ACCOUNT SURPLUS THEN PRESENT FL.."OAT SYSTEM MAY BECOME MORE ATTRACTIVE TO GOJ. THIS ESPECIALLY TRUE IN CONJUNCTION WITH FLEXIBLE USE OF CAPITAL CONTROLS WHEREBY FOREX SUPPLIES AND DEMAND CAN BE REGULATED UNILATERALLY TO INFLUENCE YEN/DOLLAR RATE. SUCH A SYSTEM, WHICH RESEMBLES PRESENT FLOAT, IF IT COULD BE CONTINUED, MIGHT OFFER JAPAN BETTER ALTERNATIVE THAN OPERATING UNDER REFORMED IMF RULES..."

Source: https://search.wikileaks.org/plusd/cables/1973TOKYO08319_b.html

THE HISTORY OF U.S.RELATIONS WITH OPEC: LESSONS TO POLICYMAKERS


By JAREER ELASS  and  AMY MYERS JAFFE

SEPTEMBER 2010


"...Nixon and Kissinger believed that if Israel was victorious in the war, the Arab countries would realize that the best way to achieve their objectives would be through cooperation with the United States and its diplomatic efforts rather than by seeking military backing from the Soviet Union..."

"...However, Saudi Arabia was recognizing the need to put an end to the embargo, particularly after  Shah Mohammed Reza Pahlavi of Iran proposed what  some referred to as the “Christmas Eve  massacre”—a more than doubling of the pric e of oil from $5.12 to $11.66 a barrel at a  December 1973 meeting in Tehran. King Faisal wa s aware that such a gigantic price jump,  coupled with a reduction of OP EC output, would prove disasterous to the West and undermine  Washington’s ability to thwart communism. Three  days later, Saudi Arabia led other Arab OPEC members in agreeing to increase their output, beginning the end of the embargo. However, Arab oil ministers only unconditionally lifted the embargo on March 18, 1974, after Kissinger had demonstrated movement on an Israeli-Egyptian resolution to the conflict, with the kingdom announcing a one million b/d boost in its oil production..."

"...In this post-embargo period, the United States began to work on diplomatic strategies to reduce the power of OPEC. As Henry Kissinger notes in his memoir, Years of Renewal, “For the power of OPEC to be broken, solidarity among the industrial democracies had to be established across a wide front, both political and economic.” Nixon called a Washington Energy Conference in February 1974 and that led to the establishment of the Energy Coordinating Group (ECG). As President Ford took office, this ECG was being institutionalized into the International Energy Agency (IEA), with a substantive program in “emergency sharing; energy conservation; active development of alternative energy sources; creation of a financial safety net.” The United States also appealed to key countries like Saudi Arabia to consider the benefits of consumer-producer cooperation. U.S. bilateral economic development commissions were created with Saudi Arabia and Iran, with an eye to encourage the use of oil surpluses for nation building and development projects. The U.S. aim was to “reduce the producers’ free funds for waging economic warfare or blackmail against the industrial democracies, and to return some of the extorted funds to our economy.”    ..."

"... As student protests against the Shah Pahlavi began in Iran in early 1978, Iran and Saudi Arabia came together that following June to thwart efforts by price hawks within OPEC to fix the price of OPEC oil in a currency other than the U.S. dollar. At the very least, these hawkish producers were pushing to raise the price of OPEC oil to mitigate the declining purchase value of their oil revenues resulting from world inflation and the diminishing worth of the U.S. dollar, the currency in which OPEC was being paid for its oil...."

"By the summer of 1984, Saudi Arabia surprised its OPEC colleagues and the oil markets by exceeding its voluntary quota of 4.5 million b/d by one million b/d, causing oil prices to slide further. The Saudi move was ostensibly the result of the kingdom’s decision to exchange some 34 billion barrels of oil for 10 new Boeing 747 jetliners in a massive oil for goods barter arrangement—a deal brokered by the Reagan administration. Significantly, the Boeing planes oil barter deal involved a hidden discount for the Saudi oil at below official prices and as such destabilized the oil market even more.

By the summer of 1985, Saudi Arabia’s production had fallen to just 25 percent of its capacity, and the kingdom made the decision to start an oil price war to claw back its market share. The result was a price collapse, with oil hitting a low of $8.76/bbl (OPEC basket equivalent) in July 1986. It is unclear how much influence, if any at all, that the Reagan administration had on the Saudi decision to flood the markets with its oil in 1986. But the United States was certainly grateful for lower oil prices that perhaps, not coincidentally, also helped bankrupt and disable the Soviet Union, which was dependent upon oil for its hard currency.

The improvement in U.S.-Saudi relations and a unified worldview about the Soviet Union was accompanied by similarly friendly oil relations. Saudi Arabia sought oil refining and downstream investments in the United States and, in 1981, Saudi Oil Minister Hisham Nazer made an important policy pronouncement during a visit to Harvard University. Nazer called for a system of “reciprocal energy security” and implied that, in return for demonstration of security of demand on the part of the United States, America could gain guaranteed access to a “fairly priced ocean of oil...

...Oil markets were generally oversupplied and oil prices remained relatively low during the late 1980s, despite the continuation of the Iraq-Iran war through 1988. From 1987 to 1990, Kuwait and other GCC members of OPEC “helped keep oil prices down by exceeding OPEC-assigned production quotas.” The low prices not only helped the U.S. and global economy, adding to demand for GCC oil, but also were thought to hurt the pocketbooks of Iran and Iraq, thereby containing their potential military threat within the greater Gulf region. However, this reprieve ended quickly when Iraq invaded Kuwait on August 2, 1990.  Within days, President George H.W. Bush had authorized the dispatch of American troops to Saudi Arabia as part of Operation Desert Shield. On August 6, the U.N. Security Council established strict economic sanctions on Iraq, effectively outlawing all Iraqi and Kuwaiti oil exports. Supplementing a request made in person by then-U.S. Defense Secretary Richard Cheney to allow U.S. troops in Saudi Arabia to ensure that Iraq did not continue to Saudi borders and to position the United States to repel the Iraqi invasion, the U.S. president sent a letter to King Fahd requesting that the kingdom increase its oil production to a maximum level to assure that the impact of the loss of Iraqi and Kuwaiti crude oil would be ameliorated. King Fahd granted the request, and Saudi Arabia began investigating how much oil was needed in the market—and how quickly it could expand its output potential to meet this demand..."

"...OPEC disarray in the early years of the Clinton White House took oil prices off the front burner in the United States again for several years. Ironically, the Clinton administration’s first tangle with OPEC came not from concerns that the cartel would restrict oil output and hurt the U.S. economy, but from fears that sharply falling oil prices might harm important U.S. allies such as Mexico. As oil prices fell to under $10/bbl in the wake of the Asian financial crisis of 1998, Energy Secretary Bill Richardson during a visit to Riyadh—which was ostensibly scheduled to discuss American oil firms participating in the potential upstream opening in Saudi Arabia that had been broached to U.S. oil firms by then-Crown Prince Abdullah in late 1998—reportedly raised the administration’s concerns about market oversupply and extreme price volatility with Saudi leadership. At a joint news conference with Richardson, Saudi Oil Minister Naimi said oil markets were oversupplied and that the kingdom promised to take steps to avoid harming the global economy. Former Saudi Oil Minister Yamani, speaking in Houston in the fall of 1999, told an audience that Richardson had “saved the oil industry” through his discussions with Naimi and the Saudi leadership, as the secretary had “persuaded” the kingdom into changing policy to help lift prices. The Saudis did not appear to require much of a push to want to restore prices, with the kingdom reportedly set on re-capturing a WTI price of $18-20/bbl as quickly as possible. .."




Source:  http://bakerinstitute.org/media/files/Research/e3ef09d6/Amy_Jareer_U.S._Relations_with_cover_secured.pdf

Saturday, August 22, 2015

U.S. Foreign Economic Policy and Relations with Japan, 1969-1976

Thomas W. Zeiler

The University of Colorado

Working Paper No. 1

U.S.-Japan Project


Source: http://nsarchive.gwu.edu/japan/schaller.htm


U.S.-JAPAN PROJECT WORKING PAPER SERIES


Source:  http://nsarchive.gwu.edu/japan/usjwp..htm

OIL - Euro Pricing of Crude Oil: An OPEC's Perspective


Euro Pricing of Crude Oil: An OPEC's Perspective
Samii, V. Massood
Thirunavukkarasu, Arul
Rajamanickam, Mohana
Southern New Hampshire University

Abstract:  In the late 1970s and the early part of th e 1980s, a debate emerged within the Long Term Strategy Committee of the Organization of Petroleum Exporting Countries (OPEC) whether to continue the prici ng of crude oil in United States dollars or to shift to an alternative currency. This debate was rooted in the persistent decline in the value of the United States dollar relative to other global cu rrencies. The choice of currencies available to price crude oil was limited for OPEC because of the inadequate liquidity of most other currencies. With the recent emergence of th e euro, the issue of choice of currency for pricing crude oil has emerge d once again for policy discus sion. The current paper is focused on the implications of a shift in the pr icing of crude oil from United States dollar to euro on OPEC members. Winners and lose rs are identified based on economic gains and losses. It is concluded that while such a policy would incrementally benefit OPEC en bloc, it would result in a disadvantage for th e countries whose major trading partner is the United States and, therefore, would not be a Pareto optimal solution.











Source: http://www.luc.edu/orgs/meea/volume6/massood.pdfhttp://www.luc.edu/orgs/meea/volume6/massood.pdf

OIL - The cartel in retreat

1993 M. A. Adelman 
Abstract:
In 1981, the price of oil was $34 in current dollars ($50 at 1992 price levels). The consensus was that it would keep rising toward the cost of synthetic crude oil or some such long-run ceiling. In fact, the cartel had fixed the price far above the point of maximum profit. OPEC members did not lose their power, they regained their wits, and saw their limits. The drop in consumption in belated response to the two price explosions was borne entirely by OPEC as price guardian. Non-OPEC production rose. OPEC market share fell to less than 30 percent. OPEC members kept a remarkable cohesion. During 1982-1985 Saudi Arabia absorbed most of the loss, and prices declined moderately. But when Saudi exports went to near-zero, they ceased to be the restrictor of last resort. The price fell below $10, until OPEC could patch up a market sharing deal and bring it back to the neighborhood of $18, where it has remained.Consumption revived, and OPEC exports have approached but not equaled the old peak. The once-massive excess capacity dwindled, but in theory and in fact this had little effect on the price. Each increase in exports meant a fresh contention over sharing it among members. OPEC meetings and disputes became almost continuous. Each member did its best to push the burden of restriction on to others. This limited OPEC cohesion and power over price. The oil market became "commoditized," with many re-sellers probing for even a slight gain. Adherence to a fixed price became much more difficult to monitor. Increasing reliance had to be placed on production restraint. Low prices caused Iraq to be hailed as savior for threatening Kuwait and Abu Dhabi, but this in turn provoked invasion and war. Despite the shutdown of two major producers, then one, prices have not revived. The cartel mission is to trade off market share against a higher price.But their market share remains too low to bear the losses a higher price would bring. Until it increases, the cartel stays in a trap. Whether revenues were higher or lower, OPEC members overspent them and ran current-account and budget deficits. They had difficulty raising money for oil capital expenditures, which were only a small fraction of total government expenditures. The Iraqi aggression was an extreme example of this tension, and of thetemptation of a rich neighbor. The world oil industry is an oddity. Socialism is repudiated everywhere, yet most oil is produced by bumbling state companies. The travail in the Former Soviet Union is the extreme example. Taxes on crude oil production in non-OPEC countries is usually regressive and hinders development. But past mistakes are present opportunities, and make likely continued long-time growth of non-OPEC oil, with the OPEC price stuck in the market share trap.
Quotes:
Some samples:


Yamani and barter deal:


Nineties: 

Joint decision of not using strategic reserves to support high oil price:


Source: 35718454.pdf