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governments might act together to stem the dollar’s decline.
Many businessmen are holding their breath as well.
This is understandable. Any shift in currencies produces winners
and losers. And yet the real problem facing the world economy is
not a suddenly weak dollar, but a dollar which remains, even after
its recent decline, too strong. The drop in the greenback was
inevitable and should benefit both America and other countries,
because it will help to reduce America’s vast current-account
deficit, which is arguably one of the biggest threats to the global
recovery. For the same reason the dollar should, and almost
certainly will, fall further. But some countries are not prepared
to allow the dollar to fall by enough to complete the necessary
adjustment to America’s finances.
America’s current-account deficit stands at 5% of GDP, and
most economists reckon that this percentage needs to be reduced
by at least half. That would stabilize the ratio of America’s foreign
liabilities to GDP, which has surged in recent years. So far the
dollar has fallen by 15% against a broad basket of currencies.
Nevertheless, after adjusting for inf lation, its value is still close
to its 30-year average. It may need to fall by another 20% over
the next few years if the current-account deficit is to be halved.
American policymakers seem happy to let the dollar slide.
Europeans, however, complain that the burden of adjustment has
fallen disproportionately on their currency, the euro. As the euro
has soared against the dollar, central banks in Japan, China and
other Asian countries have bought dollars to hold down the value
of their own currencies. By doing so, they financed over half of
America’s current-account deficit in 2003. Without that money
the dollar would have fallen further.
Unit Five
***
In the short term, Asia might thus be seen as America’s
saviour. But in the longer term Asian governments are delaying a
necessary adjustment by allowing America’s deficit to loom large
for longer. This is likely to lead to an even bigger and more
dangerous build-up of American foreign debt.
The behaviour of Asia’s central banks has also blunted the
necessary market signals to which even America must, eventually,
pay heed. The current-account deficit is a direct, arithmetical
reflection of insufficient domestic saving. In particular, America
MONEY AND BANKING
needs to prune its government budget deficit. However, it feels
even less reason than usual to do so. Normally, when a government’s
budget deficit swells so fast (to 4.6% of GDP in 2004, from
a surplus of 2.4% of GDP in 2000) and its currency is falling,
investors would demand higher bond yields to compensate them
for the increased risk. That penalty gives governments both a
warning and an incentive to borrow less. But Asian governments
are devouring American Treasury bonds with little regard for the
usual risk-return characteristics. As a result, bond yields are being
held artificially low, subsidizing America’s borrowing spree.
This has allowed the U.S. administration to point misleadingly
to low bond yields as evidence that its budget deficit is not
harming the economy, and to think that cutting the deficit is less
urgent. The U.S. plan, set out in 2004 to halve the budget deficit
over five years is based on unrealistic assumptions and fantasy
accounting. A fiscal stimulus was justified when the American
economy was on the brink of a deep recession in 2001, but now
that the economy is booming again, borrowing needs to be cut.
***
In essence, Asian governments are buying American Treasury
bonds in order to ensure that Americans can afford to keep spending
money on Asian goods. This cannot go on forever. Despite their
mercantilist instincts, sooner or later Asia’s central banks will
have to face the fact that they are holding far too many risky,
low-yielding dollars. If they stop buying, it could trigger a sharp
fall in the dollar and a jump in bond yields. Delaying the natural
adjustment in the dollar and bond yields is likely to mean that,
when the inevitable correction comes, it will be much more painful.
If financial markets do turn nasty, then everybody will carry
some of the blame. Japan and China will be guilty of trying to
block market forces and hence an earlier adjustment in America’s
trade deficit. With Japan’s economy now growing faster than the
euro area and its firms’ profits surging, Japan can probably afford
a stronger yen. Its continuing worry about deflation can be
better addressed by printing more money. And China needs to
allow its currency to move upwards, not just to help the rest of
the world, but also to rebalance its own overheating economy.
Without such a rebalancing, inf lation or a property boom and
bust could destroy growth. The Chinese might find it easier to
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accept such advice if they are given a seat at the G8 table, where
they clearly belong.
The euro area is also far from blameless. Policymakers wring
their hands about the “brutal” rise in the euro, yet the euro is
still close to fair value against a basket of currencies. If Europeans
are worried that a stronger euro will hurt their economies, then
the solution is simple: the European Central Bank should cut
interest rates to boost demand.
However, America must bear much of the blame for its failure
to do anything to curb household and government borrowing and
so boost saving. Its easy monetary and fiscal policies are now
beginning to look reckless. The dollar’s slide has rightly shifted
some of the burden of economic adjustment on to other economies.
Sooner or later, though, America will have to face up to its own
responsibilities, too
to plunge опускаться, падать; to stem удерживать; basket of currencies
корзина валют (группа валют, отобранных для определения средневзвешенной величины стоимости валюты, и на е¸ основе определения
стоимости единицы другой валюты); hold down удерживать; saviour
ə] спаситель; to blunt ослаблять; to pay heed обращать внимание;
[!seivj
to prune сокращать, урезывать; bond yield доходность облигации, процентный доход по облигациям; borrowing spree рост заимствования,
безудержное заимствование; current account deficit дефицит баланса по
текущим счетам.
8
.
Unit Five
Ex. 12. Read the following text and compare the way Western banks
work in the Middle East with the way they work in Europe and
America.
The rise in the price of oil has created a glut of wealth in
the Middle East that makes foreign bankers’ eyes spin. HSBC,
one of the world’s biggest banks, has launched three new ventures
in the region in the past two months and its rivals are likely
to unveil others in an attempt to tap into Middle Eastern riches.
HSBC’s newest joint-venture, an investment bank in Saudi
Arabia, should be operational by the end of the year, offering
everything from initial public offerings to private banking. It is
applying the same strategy in its Kuwaiti branch, which opened
on October 2nd. The Gulf state decided last year to end a 34-year
ban on foreign banks.
However HSBC’s boldest move is its purchase of a 70.1%
stake in Iraq’s Dar Es Salaam Investment Bank on October 28th
MONEY AND BANKING
for an undisclosed sum. Perhaps not surprisingly, HSBC cannot
yet outline its strategy in Iraq, despite negotiating for six months
to establish its joint-venture. Details on Dar Es Salaam are scant,
but by international standards it is tiny, with 14 branches and
assets in the tens of millions of dollars.
Banking in Kuwait is not easy either. BNP Paribas, the first
foreign bank to open a branch there, was granted a licence in August
last year. It still struggles for recognition among locals; sometimes
even government officials refuse to accept it as a signatory.
Licence conditions demand that foreign banks have minimum
capital of 15 million Kuwaiti dinars (roughly $50 million) and
that within three years half their employees are Kuwaitis. However,
new entrants believe their brands will attract locals active in
global business and that their economies of scale will let them
accept finer margins than the six domestic banks—astrategy
successfully employed elsewhere in the Gulf.
Saudi Arabia has the potential to be the most lucrative Middle
Eastern market for foreign banks. It has the region’s biggest
stock market, and the benchmark index has nearly doubled this
year. HSBC’s joint venture with The Saudi British Bank, HSBC
Saudi Arabia, will aim to profit, in particular, from a boom in
initial public offerings. It is also eyeing potential privatizations
and the developing domestic bond market. Foreigners cannot
invest directly in the Saudi Arabian stock market, so most of the
money raised will come from locals.
However, for all the fanfare, these are still emerging markets.
Many of the businesses that will be targeted by foreign banks are
family-owned and local stock markets are concentrated. The top
20 stocks in Saudi Arabia, for instance, account for two-thirds
of the market’s capitalization. Middle Eastern ventures, despite
the region’s vast wealth, are not for the faint-hearted.
183
***
No one should have been surprised when the European Central
Bank (ECB) raised euro-area interest rates by a quarter of a
percentage point, to 2.25%. The rate increase may be controversial,
but it was scarcely unexpected: the ECB’s president had dropped
the heaviest of hints far in advance.
In fact, central banks everywhere are becoming easier to read:
look at the long, predictable series of rate rises by America’s
184
Federal Reserve. It wasn’t always so. In pre-euro days, Germany’s
Bundesbank almost enjoyed taking markets by surprise. And it
was only in 1994 that the Fed started saying publicly whether
it had changed rates at all. Until then, it was up to the markets
to work out what, if anything, had happened.
Now most central banks swear by “transparency”. This covers
more than just preparing the ground for interest-rate moves;
everything from setting out policy objectives to publishing economic
models and forecasts also falls under the term.
However, some are more transparent than others; and different
banks are open in different ways. The ECB, for example, does
not publish minutes of its rate-setting meetings; the Fed and the
Bank of England do. And whereas the British and the euro-zoners
have inf lation targets, the Fed so far does not.
A new study of Tilburg and Cambridge Universities presents
an index of the transparency of nine central banks — the eight
that matter most in foreign-exchange markets, plus New Zealand’s,
the pioneer of central-bank clarity. Banks can score up to
15 points, three for each of five types of openness: political (e.g.
whether a central bank has a formal target and whether it is
independent); economic (its data, models and forecasts); procedural
(strategy and the publication of minutes); policy (how decisions
are explained, and whether future changes are indicated); and
operational (how clearly banks explain missed targets, and how
well they explain economic surprises).
The central banks of New Zealand and Sweden top the table
in 2002, with 14 points, followed by the Bank of England, with
the ECB and the Fed in the middle of the pack. Almost all
central banks became more open after 1998. Sweden’s Riksbank
saw the biggest change, adopting an explicit indication of where
policy might head next and an annual review of inf lation (which
it targets) over the past three years. Even ten or fifteen years
ago, few banks would have scored double figures.
Since 2002, central banks have become more transparent still.
The Fed, for instance, has been publishing minutes of its meetings
more speedily since the start of this year and the trend will
continue. The ECB is also expected to start publishing minutes,
something that it has so far resisted
9
.
Unit Five
initial public offerings первоначальное публичное предложение акций
(корпорацией); scant скудный, недостаточный; dinar [!di:n
ɑ:] динар;
MONEY AND BANKING
éntrant новичок (новая фирма, новый банк); margin (банковская) маржа;
fanfare [!f
index базовый индекс, базовая процентная ставка; minutes pl прото
êîë; foreign-exchange market валютный рынок; procedural [pr
процедурный; to designate определять, устанавливать; expli´cit ясный,
÷¸òêèé.
Ex. 13. Read and translate the following text. Outline main points
nfεə] ôàíôáðà; stock market фондовый рынок; benchmark
ə!si:dərəl]
and discuss them.
Technical improvements in the media of exchange have been
made more than a millennium. Mostly they have been of a minor
nature, but exceptionally there have been two major changes,
the first at the end of the Middle Ages when the printing of
money began to supplement the minting of coins, and the second
in our own time when electronic money transfer was invented.
The first stimulated the rise of banking, while the second is
opening the way towards universal and instantaneous money
transfer in the global world of the twenty-first century.
One of the most significant but insufficiently noted results
of these two major kinds of invention is the fundamental
reduction they bring about in the degree of governmental monopoly
power over money. When coins were dominant form of money,
monarchs were jealous of their sovereign power over their royal
mints. Paper money allowed banks to become increasingly
competitive sources of money, a development which led not
only to significant macro-economic changes but also facilitated
contemporary revolutionary constitutional changes.
Similarly in the era of electronic banking, “national” moneys
are becoming increasingly anachronistic as millions of customers,
irrespective of their country of domicile, are eagerly offered a
variety of competing financial institutions in a variety of competing
currencies. They are spoiled for choice — and national money
monopolies are thereby also being “spoilt”, in the sense of being
reduced in effectiveness.
The fact that more than half of the total money supply was
now being created not by the mint under the dictate of the
monarch, but rather by the London money market and provincial
bankers, gave rise to the most profound constitutional consequences.
First, in order to carry out his more burdensome civil and military
duties, the monarch, after a painful but vain struggle, had been
forced to call parliaments annually. Secondly because of the
state’s need to supplement taxes regularly and substantially with
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various forms of short-, medium-, and long-term borrowing, the
state had been forced to take into account the views and interests
of the moneyed classes and the nature of the institutions which
its borrowing had very largely brought into being. The national
debt not only created the Bank of England but also virtually
created the London money and capital markets in recognizably
modern form long before an equity market in industrial shares
became of importance.
For the first time in history money was being substantially
created not by the sovereign power but by market forces. Some
economists advocate the “de-nationalization” of money, i.e. the
removal of all legal obstacles preventing individuals using whatever
form of money they wanted. In this way, they claim, the market
would produce the best forms of currency. But no government
has been willing to go far in giving up the state’s control of
money. However the advent of electronic cash could lead to
privately issued currencies competing with official state currencies
and then to a global cashless society.
Another trend which some people have argued could weaken
government control over currencies is securitization, or the issuance
of bonds backed by some asset. In principle almost any kind of
asset could be securitized. One of the most publicized innovations
in this area was the bond issue by the rock star David Bowie
in 1997, using his copyrights as the security. Since then there
have been quite a few similar cases in the music business.
Paper money was originally simply a proxy for the real thing.
British banknotes still carry the phrase “I promise to pay the
bearer on demand the sum of x pounds” (where “x” is the
denomination of the note) with the signature of the chief cashier
of the Bank of England underneath. However, one unintended
effect of the adoption of paper money was to make hyperinflation
possible. China which invented paper money had abandoned it,
before its widespread adoption in the West, for that very reason.
In general, the more regimented and “planned” that society
is, the smaller is the role played by money. An example of this
was the nations of eastern Europe and the Soviet Union before
its collapse. A much older, more extreme example was the Inca
empire. The Incas were unique in their achieving a high degree
of civilization without the use of money, though they possessed a
superabundance of what has generally been regarded as the best
material for money — gold and silver. Consequently, if experiments
Unit Five
MONEY AND BANKING
with digital cash prove successful the ramifications may ultimately
extend to all forms of economic activity and have profound
implications for the development of society in every country of
10
the globe, just as the development of paper money did
.
187
money tránsfer перевод денег, денежный перевод; domicile постоян
ное место жительства; an equity market рынок обыкновенных акций;
advent появление; securitization секьюритизация: 1. трансформация не
ликвидных активов в ликвидные ценные бумаги 2. процесс увели
чения роли ценных бумаг на финансовых рынках в ущерб кредитам;
à proxy представитель; regimented регламентированный, единообраз
ный; ramifications pl результат, последствия.
Ex. 14. Debate on the following topics. Keep the conversation going in
a round table framework.
1. Money and its value.
2. Different forms of money that existed and still exist in various
parts of the world.
3. Banking, its past and future.
4. The Federal Reserve System of the USA. Its structure.
5. Electronic money and banking.
-
-
-
-
Unit Six
MULTINATIONAL CORPORATIONS
I. The typical multinational corporation (MNC) is a large-size
predominantly oligopolistic f irm with sales running into hundreds
of millions of dollars, with more than 25,000 foreign affiliates
scattered around the globe, employing some 25 million people. Most
parent companies of multinationals are located in the developed
countries. The United States, together with the United Kingdom,
France and Germany, account for 80 per cent of foreign activities
by multinational corporations.
The United States is the largest home country for MNCs and
the second largest host country for foreign direct investment. As
the world’s largest developed market economy, the United States
therefore continues to play a leading role in the internationalization
of the economic activity. Approximately three out of every
10 foreign affiliates in developed market economies (mainly
concentrated in the European industrial market and the Near East
oil market) are associated with United States-based multinationals.
All the multinational corporations are in fact national companies
that have extended their operations abroad. By its multinational
operations and intra-firm transactions, the MNC transcends
the national barriers to commodity trade and impediments to
international factor movement. It is a unit of integration in the
world economy. The population of multinational corporations has
increased remarkably, and many more large firms operate an
expanding number of foreign subsidiaries in a number of countries.
II. Companies become multinational in many different ways and
for many different reasons. Their impact on the global economy
is far from simple to determine. The most common explanation
for multinationals’ growth is economies of scale. In certain
industries firms can become more efficient by becoming bigger
and producing more. Upon further inspection, however, the notion
that economies of scale force companies to become multinationals
does not hold up. Consider aircraft manufacturing, an industry
MULTINATIONAL CORPORATIONS
in which a big producer has enormous cost advantages over a
small one. This industry is dominated by two firms, Boeing and
Airbus Industrie. Boeing assembles almost all of its aircraft in the
United States, although it buys components from subcontractors
around the world. Airbus, which is made up of four separate firms
in four different European countries, manufactures only in those
countries and relies on exports to sell its aircraft elsewhere.
The mere existence of significant scale economies has not forced
either to become a true multinational.
But scale is not a huge advantage on the manufacturing side
of Coca-Cola’s business, which involves blending water, gas and
a special syrup. Scale economies come into play in other areas,
such as reinforcing its brand by making a global marketing effort
and helping its bottlers, most of whom are independent, learn from
the experience of their counterparts in other countries. These scale
effects have driven Coca-Cola to become a highly multinational
company.
Another explanation for the growth in multinationalism is vertical
integration. In some industries, the interdependence of suppliers
and users of a particular resource makes it difficult for such firms
to co-operate at arm’s length, since there is always the risk that
one will try to undermine the other. This is the reason many firms
integrate vertically, buying up their suppliers or their customers.
Sometimes, those suppliers or customers will be abroad, turning
the acquiring firms into a multinational.
A third reason for the spread of multinationals is that they tend
to be successful. In any business, inefficient firms will eventually
fold, giving way to those that can earn higher profits. As the
world economy becomes more integrated, it is to be expected that
the companies most adept at crossing borders are those that prosper.
It should come as no surprise that firms from richer countries do
this best. As a rule, they have been exposed to more competition in
their home markets and are therefore well equipped for international
competitive battles.
There is yet one other reason for firms to operate as
multinationals: because everyone else is doing it. Many companies
exist to serve other companies, rather than household consumers.
If multinational car manufacturers want to use the same headlights
in cars assembled in different countries, then headlight manufacturers
must become multinational, too. This is why consulting firms and
accountancies have been falling over one another to build seamless
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