Hospitals & Asylums






Devaluating United Nations Currency Enforcement CAP = US$ -7%, € -5.5%:

Price of Bailouts under Rule of Law HA-13-11-08


By Tony J. Sanders


Table of Contents


A.    Bailing out the Bailout…1

B.     Economic Outlook of the United States…9

C.    Root of Bailout…16

D.    Global Economic Outlook…27

E.     Principles of the International Monetary System…46

F.     Countervailing Duty to Devaluate the US Dollar…55


Fig. A-1 American Dollar to 1 Euro: 120 Day

Fig. B-1 Dow Jones Industrial Average 2008

Fig. B-2 Monthly Unemployment Rate 2003-2008

Fig. C-1 Dow Jones Industrial Average 2000-2008  

Fig. D-1 GDP at Constant Market Prices % Change 2004-2008

            Fig. E-1 Exchange Rate Arrangement of a Few Nations

            Fig. F-1 Balance of US International Trade in Goods and Service 1970-2006

            Fig. F-2 Cost of Bailout 2008


About the Author.  I have been writing Hospitals & Asylums since 2001.  I wrote the original reparation treaty for Iraq that was bombed on the Spring Equinox 2003, when I send out my newsletter, and enforced it with the first draft of the New Iraq Constitutional Elections (NICE) that led to the largest reparation in the history of international law – you bomb it you buy it – to coin a phrase.  After four years of federally financed pain (torture) instead of pay I terminated service to the federal government and United Nations, a little early.  A few days later on the Fall Equinox 2008 Secretary Paulson introduced his plan to subsidize the financial sector.  John Maynard Keynes once said that “practical men, who believe themselves to be quite exempt from any intellectual influence (Governors of the Federal Reserve haven’t cited an author in nearly half a year), are usually the slaves of some defunct economist”.  The Federal Reserve explains their action is primarily the result of “overcoming information that prevents credit for worthy borrowers”.  Without the ethical reflex to disdain market subsidies and loans, in general, the Chairman of the Federal Reserve forced the degrading plan through Congress.  As a result, money fled private markets to purchase government bonds, interfering with commerce, causing lay-offs, corporate insolvency and falls on Wall St. when the government wasn’t illegally investing their money there, much like the way the highest foreclosure rate on record occurred in the month after the bailout of the government sponsored mortgage lenders, earlier this year.  This essay is written to apologize for the errors of the USA and their colonial buddies made in response to flight of their moral conscious, Hospitals & Asylums, to bailout the bailout, to enforce the existing international economic rule of law that devaluates the currencies of nations that print unearned money, to spare the EU and USA a recession by devaluating the dollar to promote international trade, to arrange for developing nations to multi-laterally appreciate their currencies against the US dollar and Euro to independently take the biggest leap forward toward global equality since the Millennium Development Goals began fostering global welfare dependency.  


A.    Bailing out the Bailout


                Fig. A-1 American Dollar to 1 Euro: 120 Day     

1. When a nation prints money that they didn’t earn, and they don’t have sufficient reserves of foreign currency to cover the expense, that currency is devaluated.  This law has been enforced many times against developing nations and in recent years against the United States by the European Union when the USA could not justify their deficit or as in September of 2007 when the USA announced the incredibly inflated economic growth rate of 4% on counterfeit traveler’s checks from European internet companies.  However as the result of short term market manipulation, and dire threats to rewrite the international financial system, the exact opposite has occurred during this bailout.  After the bailout was passed the dollar at first devaluated against the Euro, but when the EU, the only enforcer of this economic law with the USA, announced an even bigger, Euro bailout, then instead of depreciating the dollar appreciated 18% and is predicted to increase another 5% in the near term (Zieminski 2008).  The EU is however a far more rule based society and the euro weakened 20 percent since climbing to a record $1.6038 on July 15. The bailout is however counter-intuitive, much like the increase in value of the dollar, causing diverse private investments to be consolidated into huge insured government bailout bonds that are to be dispersed to bolster the lending of a few elite financial institutions, causing the increase in unemployment and slump in retail, manufacturing, and trade we have witnessed on the stock markets.  As the result, the International Monetary Fund (IMF) expects all Group of Seven economies except Canada to contract in 2009 (McGee & Mnyanda 2008; White & Kruger 2008). 


2. The purpose of this essay is to bailout the bailout by convincing the USA to devaluate the dollar by means of the multi-lateral appreciation of the currencies of developing nations, who are so far unaffected by the crisis.  This financial crisis of the first world does not need to impede global economic growth and development.  Developing nations are hereby counseled to take advantage of the financial crisis of the colonial powers, to appreciate their currencies.  The developing countries will thus bolster their financial systems and prices of natural resources that recently crashed, at the expense of their export markets, which are expected to grow nevertheless.  At the same time developing nations would use their increased purchasing power to buy first world technology needed for social progress and development that will in turn bolster economic growth and employment in industrial and developing nations alike.  Properly governed by the rules of the international financial system this rare turn of events, colonial financial crisis, can be a great leap forward for global economic equality - prosperity for everyone.  


3. To address these issues and convince the USA and EU to devaluate the dollar and euro with developing nations, upcoming conferences promise to establish a new international financial order as grand as the Bretton Woods conference at the end of WWII.  The world's richest nations and biggest emerging economies are set to gather in Washington on November 15 within the framework of the Group of 20 to address the worldwide financial turmoil.  The President of the European Commission expressed hope to arrive at concrete and important decisions about overhauling the international financial system (Barosso 2008).  Of the existing Bretton Woods institutions, the World Bank and the IMF, the IMF is clearly the leader of the debate, however having discredited loans and moved currency exchange to the center of their study of international economics, is also under fire by the corrupt interests of the bailout.  Will the protective interests of the colonial powers attending the conference ignore or intimidate the IMF into incoherence, to continue on the self-destructive path of economic strife for all mankind, or will a new balance, offsetting the cost of the bailout, be achieved by valuing the currencies of developing nations? 


4. The first set of talks was a summit between Asian and European leaders, in Beijing.  The attitude is that the U.S. dollar is losing people's confidence. The world, acting democratically and lawfully through a global financial organization, urgently needs to change the international monetary system based on U.S. global economic leadership and U.S. dollar dominance (Jianxun 2008).  Investors are turning to the yen for stability, tumbling stock markets and falling currencies are causing global concern, but the Japanese yen is generating high anxiety for rising too much. The yen quickly surged more than 10 percent against the dollar and an astounding 34 percent against the euro (Fackler 2008).  Economic officials from 20 leading nations meeting in Sao Paolo, Brazil called for increased government spending to boost the troubled global economy and said developing countries deserve a prominent role in talks to overhaul the world financial system.  EU officials have given 100 days for the drafting of new international financial rules (Clendenning 2008). For the Washington conference to succeed a great deal of honesty and integrity will be required of the USA, EU and China to admit that currency market manipulation to overvalue the dollar, undervalue the yuan rinminbi, deficit spending, market subsidies and corporate spying rather than regulation are the unsustainable strategies that are hurting the economy.  The question is, will the Washington conference enable global currency exchange to take center stage and appreciate the currencies of developing nations? 


5. Political energy for greater global financial regulation, which some have called the building of a new Bretton Woods consensus, may already be here.   Trade is the low-hanging fruit in a complex set of issues requiring collective action now. Governance today is and is likely to remain mostly local, within the nation-states, given legitimacy considerations. However, global issues stemming from increasing interdependence need to be tackled more efficiently to ensure world peace and stability. As we have seen with the financial crisis, purely national solutions are not enough.  Global governance in today's key economic areas — trade, finance and the environment — is mostly about global regulations. Building these rules require four elements: a collective political will to go global; a consensus on the concept or on the agenda of how to regulate globally; a place to negotiate binding commitments, and to administrate and enforce them; and finally a capacity to compromise, which means bringing on board domestic constituencies. In the area of finance, the problem starts with the absence of the first element: no collective political will to go global because of the division between proponents of traditional regulation and proponents of self regulation (Lamy 2008).


6. The embryo of regulation stemming from the constellation around the Bank for International Settlements in Basel has proven largely insufficient to address the shortcomings leading to today's financial crisis.  Trade is not the cause of financial turmoil but good trade policies may be but part of the solution.  Trade allows unused resources linked to the fall in domestic markets to be exported. Trade opening can also be useful, by increasing the efficiency of affected economies, bringing fresh capital inflows — in financial services for example — and by providing new export opportunities. The resort to protectionism is made much more difficult for countries that wish, in a non-cooperative mode, to shield themselves from the exports of crisis-stricken countries, or in the case of the overvalued US dollar to shield against inflation.  Director-General of the WTO Pascal Lamy reported to the General Council on 14 October 2008 that he had “constituted a Task Force within the Secretariat to follow up the effects of the financial crisis”. He suggested that WTO members “keep the situation under review, and be ready to act as necessary”.  The question is posed to the WTO, “do the USA and EU have a countervailing duty to devaluate their currencies under the Agreement on Subsidies and Countervailing Measures?”


7. After the Washington conference, the UN General Assembly or IMF should host a follow up conference, in December or January, so developing nations could negotiate the permanent appreciation of their currencies.  However, the colonial powers will have to call the shots; they will have to get over their protectionist instincts and short sighted greed, to achieve their real self-interest, which is global equality.  The UN Secretary General Ban Ki Moon from South Korea, a nation that recently bailed out its proportionally enormous financial sector, has allied himself with the propaganda of the USA and totally eschews currency exchange theories of the IMF, in favor of propaganda regarding keeping Official Development Assistance (ODA) levels up.  Currency exchange enforcement is a trade off between sinking values, of ODA, international trade and foreign direct investment with the greater sovereign wealth and purchasing power of developing nations that would result from currency appreciation.  Currency exchange must therefore take center stage in the debate whereas it is the single hottest topic at this time – it is the only way to offset the enormous government debts incurred by the bailout.  Ban’s offer to host a G-8 style conference on the financial crisis in December has not been endorsed by any nation but colonial Great Britain, that is the nation hardest hit by the financial crisis and countervailing duties pertaining to the bailout (Petesch 2008). 


8. Another G-8 style conference on the global financial crisis is simply redundant and only likely to strengthen the resolve of developed nations to continue their protectionism.  What is really needed is for the Washington conference to result in the EU and USA to agree to the unilateral and proportional devaluation of their money with all nations that did not print out money to redress the financial crisis so that the UN General Assembly of IMF could convene to host currency negotiations in behalf of the developing nations who have been prepared through legislation and research, to benefit from the appreciation of their currency, while protecting the poorest and people likely to be impoverished by a strengthening of developing nation currencies.  By devaluating their currencies developed nations should enjoy improved employment from the international trade that constitutes two thirds of economic growth.  If the USA would obey this international financial rule to devaluate they would be likely to forestall an official recession, otherwise the damage caused by the cost of the bailout will probably stimulate a recession in the USA.  The rest of this essay is intended to convince the elite nations attending the Washington conference and drafting the rules of the international financial system of the wisdom of scheduling a meeting of the UN General Assembly or IMF to negotiate the multi-lateral appreciation of developing nation currencies.


B.     Economic Outlook for the United States


        Fig. B-1 Dow Jones Industrial Average 2008             9. The Federal Reserve has indicated for nearly a year that the United States may already be in a recession and has stressed that as the economy slows, strong export performance will be particularly important to the US economy. On an annualized basis, second quarter export growth and slowing imports were responsible for GDP growth of 2.9%.  The federal government then, however, embarked on a massive campaign of market subsidies to redress the sluggishness in the economy, and, we presume, accidently undermined trade and the economy in general, although it is very likely to be the parting sabotage of the most corrupt President in our lifetime (Gold 2007).  The first damaging subsidy was the Housing and Economic Recovery Act of 2008 of July 30, 2008, that put Fannie Mae and Freddie Mac into conservatorship, at an estimated cost of $200 billion, immediately led to the highest number of foreclosures in history.  In August the total number of U.S. properties that received foreclosure filings as well as the national foreclosure rate were the highest in any month since RealtyTrac began issuing reports in January 2005.  303,879 foreclosures in August 2008 was an increase of 12% from the previous month and 27% from August of the previous year.  However the annual increase is lower than the previous year when it was hovering around 50-65% (Realty Trac 2008). Also in August consumer credit is reported by the G-19 Federal Reserve Statistical Release to have decreased at a rate of -2.9% although it is nearly always positive.  It is this drop in consumer credit that caused official to panic and call for the even larger bailout that drove the US economic growth below zero. 


10. The three page $700 billion Legislative Proposal for Treasury Authority to Purchase Mortgage-Related Assets introduced on September 20, 2008 by Treasury Secretary, former Golman-Sachs CEO, Paulson quickly grew to a 109 page Emergency Economic Stabilization Act that failed to pass in the House by a vote of 205 to 228.  Following this defeat, the stock market lost $1.2 trillion in a single day, some of which was restored.  The Senate passed the measure on a bipartisan vote of 74-25.  On Friday October 3, 2008 the House passed a second version, titled A bill to provide authority for the Federal Government to purchase and insure certain types of troubled assets for the purposes of providing stability to and preventing disruption in the economy and financial system and protecting taxpayers, to amend the Internal Revenue Code of 1986 to provide incentives for energy production and conservation, to extend certain expiring provisions, to provide individual income tax relief, and for other purposes, by a vote of 263 to 171, it is 451 pages.  The President quickly signed it into law.    


11. The U.S. economy shrank at a -0.3 percent annual rate in the third quarter, its sharpest contraction in seven years as consumers cut spending and businesses reduced investment in the face of rising fears that recession was setting in.  The Commerce Department said the third-quarter contraction in gross domestic product was the steepest since the corresponding quarter in 2001 though it was slightly less than the 0.5 percent rate of reduction that Wall Street economists surveyed by Reuters had forecast.   Consumer spending, which fuels two-thirds of U.S. economic growth, fell at a 3.1 percent rate in the third quarter -- the first cut in quarterly spending since the closing quarter of 1991 and the biggest since the second quarter of 1980. Spending on nondurable goods -- items like food and paper products -- dropped at the sharpest rate since late 1950 (Willis 2008; Willis & Miller 2008).


Unemployment Rate Chart January 2003 - September 200712. The Labor Department reports the jobless rate in October rose to 6.5 percent and companies slashed 240,000 jobs, after 284,000 in September, for a total of 1.2 million losses so far this year. The 1.5 percentage point gain in unemployment over the prior six months was the fastest since the six months ending in Feb. 1982.  The total number of unemployed Americans jumped to 10.08 million in October, the highest level in a quarter-century.  U.S. factory payrolls fell 90,000, the biggest monthly loss since July 2003, after decreasing 56,000 in September.  Payrolls at builders dropped 49,000 after decreasing 35,000. Financial firms reduced payrolls by 24,000, after a 16,000 decline the prior month.  Service industries, which include banks, insurance companies, restaurants and retailers, subtracted 108,000 workers after dropping 201,000 in the previous month. Retail payrolls decreased by 38,100, led by a loss of 20,300 jobs at auto dealerships, after a decline of 44,800.  Government payrolls increased by 23,000 after a loss of 41,000. The surge in unemployment reflected an economic cave-in in October, when car sales plunged 32 percent, manufacturing contracted the most in 26 years and consumer confidence fell to a record low (Willis & Miller 2008).  The unemployment rate is predicted to increase to over 7% by second quarter 2009 (Financial Forecast Center 2008).


13. Continuing job losses coupled with declines in the value of stocks, other investments and housing prices have put consumers under severe stress. The GDP report showed that disposable personal income dropped at an 8.7 percent rate in the third quarter -- the steepest since quarterly records on this component were started in 1947 -- after rising 11.9 percent in the second quarter when most of economic stimulus payments still were flowing.  Consumers cut spending on durable goods like cars and furniture at a 14.1 percent annual rate in the third quarter, the biggest cut in this category of spending since the beginning of 1987. Car dealers have said that sales have virtually stalled, in part because tight credit makes it hard for even creditworthy buyers to get loans.  Businesses also were clearly wary about the future, cutting investments at a 1 percent rate after boosting them 2.5 percent in the second quarter. It was the first reduction in business investment since the end of 2006. Inventories of unsold goods backed up at a $38.5-billion rate in the third quarter after rising $50.6 billion in the second quarter.
































14. The third-quarter GDP number would have been worse except for a surge in federal government spending, which shot up at a 13.8 percent annual rate. That was more than double the second quarter's 6.6 percent rate of increase and was the strongest since the second quarter of 2003 when the war in Iraq began.  Prices were still rising relatively strongly in the third quarter, with the personal consumption expenditures index up at a 5.4 percent annual rate, the sharpest since early 1990. Even excluding volatile food and energy items, core prices grew at a 2.9 percent rate, up from the second quarter's 2.2 percent rise (Somerville 2008).  "We are being held up here by government spending, which added 1.1 percentage points to GDP growth," said Robert Brusca, chief economist with Fact And Opinion Economics in new York. "The GDP number doesn't reveal the weakness because (of) the impact of international trade, it's a warning how weak the economy is." 


15. The outlook is for a recession in the US economy during the coming winter. Real GDP growth is expected to fall to 1½% this year and to -½% in 2009. As the impact of the massive easing of monetary policy becomes stronger, together with an expected decline in inflation on the back of lower oil prices, economic activity should rebound gradually from the second half of 2009 onwards. The pronounced deterioration in the fiscal position implies an increase in the budget deficit to 9% of GDP by 2010.  The US economy performed better than expected in the first half of 2008, due to sharply improving net exports, against the background of dollar depreciation and softening domestic demand, reflecting inter alia the ongoing housing correction. Moreover, consumer spending held up reasonably well, as a result of the sizeable tax rebates. Thanks to the positive carry-over from 2007 and the performance in the first half of the year, real GDP growth in 2008 is projected to be 1.5%.  Real GDP is projected to decline from mid-2008 to mid-2009, resulting in a contraction of annual GDP by 0.5% in 2009. Already in the third quarter of 2008, private consumption is projected to contract (for the first time since the recession in 1990-91). Households are reining in their spending as employment falls, real wages are declining, credit conditions are tightening, and lower house and equity prices are reducing wealth. Importantly, the depression in the housing sector continues to deepen. Residential investment has already fallen by 40% since the peak of the housing boom (European Commission 2008).   In the Crash of 2008, 40 percent of stock value has vanished, almost $9 trillion. Some $5 trillion in real estate value has disappeared. A recession looms with sweeping layoffs, unemployment compensation surging, and social welfare benefits soaring.  America's first trillion-dollar deficit is at hand. In Fiscal Year 2008 the deficit was $438 billion (Buchanon 2008). 


C.    Root of Bailout


16. As in all past crises, at the root of the problem is a loss of confidence by investors and the public in the strength of key financial institutions and markets, which has had cascading and unwelcome effects on the availability of credit and the value of savings.  The financial systems in the United States and in much of the rest of the industrialized world are under extraordinary stress, particularly the credit and money markets. The losses suffered by many banks and nonbank financial firms have both constrained their ability to lend and reduced the willingness of other market participants to deal with them. Great uncertainty about the values of financial assets, particularly more complex and opaque assets, has made investors extremely reluctant to bear credit risk, resulting in further declines in asset prices and a drying up of liquidity in a number of funding markets.  On the heels of nearly a year of stress in credit markets, investors' and creditors' concerns about funding and credit risks at financial firms intensified over the summer as mortgage-related assets deteriorated further, economic growth slowed, and uncertainty about the economic outlook increased. As investors and creditors lost confidence in the ability of certain firms to meet their obligations, their access to capital markets as well as to short-term funding markets became increasingly impaired and their stock prices fell sharply. Among the companies that experienced this dynamic most forcefully were the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac; the investment bank Lehman Brothers; and the insurance company American International Group (AIG) (Bernanke 2008).


Fig. C-1 Dow Jones Industrial Average 2000-2008   In the Crash of 2008, 40 percent of stock value has vanished, almost $9 trillion. Some $5 trillion in real estate value has disappeared. A recession looms with sweeping layoffs, unemployment compensation surging, and social welfare benefits soaring.  America's first trillion-dollar deficit is at hand. In Fiscal Year 2008 the deficit was $438 billion (Buchanon 2008).  Japan, Germany, France, and Italy all recorded negative growth in Q2 2008. Annual UK GDP growth was 3.1% in 2007 compared with 2.0% in the US and 2.7% in the Euro-zone (House of Commons Library 2008).  It must be added that government intervention has a tendency to exacerbate rather than ameliorate financial crisis to such an extent that historians generally identify financial crisis by the market subsidies that threw scarce capital on the fire.  The Crash of 2008 is eerily similar to the Crash of 2003 that preceded the Iraq invasion and can be presumed to the result of the Bush Administration taking what they can and destroying the rest (Conyers 2008).  The two year time frame of the bailout is presumably the time in which Bush officials are to make off with their loot before a new administration balances the budget and has the wherewithal to begin looking for stolen assets and prosecuting kleptocrats.  The stock market collapse can be attributed to private capital being absorbed by insured government bonds, war bonds in 2003 and bailout bonds in 2008.      


18. The stock market crash of October 24 1929 began very similarly to this crash with thousands of investors losing their savings in the stock market crash after a five-day frenzy of heavy trading. Too much speculation with borrowed money, much like the hundreds of billions of dollars illegally invested by the Bush administration, had inflated stock market capitalization unrealistically.  The infamous Smoot-Hawley Tariff Act of the 1930s - which I am sure you are all too familiar with - raised US tariffs on over 20,000 imported goods to record levels, spread through other nations which also took their own protectionist measures (Lamy 2008).  Then, despite enormous subsidies poured into corporations and social welfare programs it took WWII to pull the world out of the Great Depression.  Then in another ominously similar crash in 1975, during the Oil shortage caused by OPEC refusing to sell oil to the west, New York and Washington, D.C. had to be bailed out.  On October 19, 1987 there was panic on the floor of the New York Stock Exchange as the Dow Jones dropped more than 500 points - the largest decline in modern times amid frenzied selling. On Black Monday, the Dow Jones Industrial Average stock barometer plunged 22.61% to 1,738.41 points.  Later that decade, Citibank, Chase-Manhattan and Bank of America were staring into the abyss, as Latin American regimes, to whom they had lent scores of billions, were balking at paying their debts. Uncle Sam stepped in.  Then came the Mexican and Asian financial crises and the U.S.-IMF bailouts of the 1990s.  For the countries bailed out, like Mexico, Thailand, Indonesia and South Korea, were forced to devalue. This radically reduced the wages of their workers relative to American workers and slashed the price of foreign goods relative to U.S. goods, cheap imports flooded in (Buchanon 2008).   


19. During the past decade, one of the most prominent themes sounded by policymakers, observers, and analysts of international economic developments has been "globalization." Based on rapid advances in trade, finance, transportation, and communications, the world economy has become increasingly tightly knit. Large numbers of the world's population--including those in China, India, and the former Soviet Union--have emerged from their relative isolation to participate more fully in the global economic system. The impression has been that national borders and regional differences are becoming less and less relevant as businesses increasingly operate in a single global market.  In the past year or so, however, especially as the housing sector in the United States slowed sharply and turmoil erupted in many financial markets, a different theme has come to the foreground: "decoupling." This term refers to apparent divergences in economic performance among different regions of the world economy.  Part of the reason the hypothesis of decoupling has gained so much traction is that the economies of the world had appeared particularly "coupled" during the last major downturn in the United States, the high-tech slowdown in 2001 and 2002. Over the two years prior, during 1999 and 2000, quarterly real GDP growth in the United States averaged about 3-1/2 percent at an annual rate; U.S. growth then slowed sharply to about 1 percent during 2001 and 2002 before recovering over the subsequent two years. In other major industrialized countries, average growth slowed similarly, but the recovery was slower.  In the emerging market world, economic growth moved in tandem with U.S. growth, falling from more than 6 percent to about 3-1/2 percent, then recovering to more than 6-1/2 percent.  As financial markets of many industrial countries have been roiled by the turmoil that emerged August 2007, conditions in the traditionally volatile financial markets of emerging market economies, where the rule based international financial system has been most effective, have proved surprisingly resilient (Kohn 2008).


20. Moving into 2008, concerns about potential spillovers from slower U.S. growth and weaknesses in the financial system weighed increasingly on advanced economy equity markets. Throughout the world, the challenges posed by weakening economic activity were further complicated by mounting inflationary pressures as food and energy prices soared.  The initial assessment that the United States had decoupled from the rest of the world was incorrect, and that, in fact, the global economy remains closely connected by both trade and financial linkages. Investments made by U.S. residents abroad and by foreigners in the United States are enormous, both in absolute terms and as shares of GDP. Last year, for example, U.S. liabilities to foreigners totaled more than $20 trillion, exceeding 140 percent of U.S. GDP. At the same time, U.S. claims on foreigners totaled $17.5 trillion, roughly 130 percent of U.S. GDP. Even the net liability position of the United States is sizeable, $2.5 trillion or more than 17 percent of GDP (Kroszner 2008). At the beginning of the chain of causation for the financial crisis in industrial nations is the housing cycle in the United States.  The difference between this housing cycle and others over past decades is primarily the willingness of lenders to tolerate--or, in some cases, encourage--huge increases in loan-to-value ratios added to the demand for housing, especially by people who normally might not have had the savings to enter the market.  Expectations of house price appreciation facilitated and interacted with the increasing complexity of mortgage securities, including multiple securitizations of the same loan.  The absence of investor caution and due diligence was especially noticeable for the highest-rated tranches of securitized debt (Kohn 2008). Financial markets continue to show the ill effects of turmoil triggered by mortgage losses.  The real economy is underperforming in terms of growth and job creation, a result in part of financial strains.  And financial institutions themselves are affected by the generalized pullback in liquidity and deteriorating credit quality.  Nearly one year after the onset of financial market distress, many financial institutions have retreated from certain business lines, limited their participation in markets for some financial products, delevered their balance sheets, and taken other actions aimed at balance sheet repair (Warsh 2008).


21. The IMF World Economic Outlook of October 2008 reassures us that the global economic slowdown is real.  If it is just the bill for damages by corporate spies of the lame duck Bush administration, whose misbehavior cost them their clients, those damages to the labor market are real and as a consequence of the myopic and prohibitively expensive bailout of financial institutions, can be expected to extend into 2009 and to a lesser extent 2010.  The world economy is in fact entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s. Against an exceptionally uncertain background, global growth projections for 2009 have been marked down to 3 percent, the slowest pace since 2002, and the outlook is subject to considerable downside risks. The major advanced economies are already in or close to recession, and, although a recovery is projected to take hold progressively in 2009, the pickup is likely to be unusually gradual, held back by continued financial market deleveraging. In this context, elevated rates of headline inflation should recede quickly, provided oil prices stay at or below current levels.  Over the past year, the global economy has been buffeted by the deepening crisis in financial markets, by major corrections in housing markets in a number of advanced economies, and by surges in commodity prices. Indeed, the financial crisis that erupted in August 2007 after the collapse of the U.S. subprime mortgage market entered a tumultuous new phase in September 2008 that has badly shaken confidence in global financial institutions and markets. Most dramatically, intensifying solvency concerns have triggered a cascading series of bankruptcies, forced mergers, and public interventions. 


22. The economic cause of the financial crisis in the US and other colonial economic systems, namely the EU, are that the burst of the housing bubble spurred by defective lending products in an unregulated financial market abused for prosecution by government officials and discriminatory “rich” people, was aggravated by the inflation in the OPEC controlled price of oil, and countervailing increases in energy, distribution and food prices, to the point where there was a significant shortage of money to meet costs and banks had to curtail their lending, so people and corporations could not cheat their way through the hard times, resulting in insolvency, bankruptcy, lay-offs and more foreclosures.  The economic warfare of OPEC, that broke the camel’s back, was clearly in retaliation for the occupation of Iraq, a founding member of OPEC, and Afghanistan, and it was permitted to occur because the Bush administration and Congress and allied colonial leaders in the EU could benefit from the high cost of oil and energy, as the result of their own personal investments, ie. bribery.  This conflict of interest was too much for the free market dogma of these predictably self-interested, military controlled, domestic spying, colonial leaders who propaganda for war misunderstands the free market to mean deregulation to such a degree that any government intervention into the financial sector, other than that of the prosecutor whose torturers are immune from civil damages caused by unwarranted spying, must be purchased with illegal market distorting subsidies, graft.  However these energy interests made enough profit to seriously distort the market with their flight, now that regulators are clamping down, and as the result of the enormous size of the subsidies the damage to trade is severe.  Alan Greenspan himself admitted that he made a mistake by not regulating the markets more (Felsenthal 2008). 


23. Consumer prices rose by 4.1 percent for all of 2007, up sharply from a 2.5 percent increase in 2006.  The CPI report showed that the 4.1 percent increase in overall prices was the biggest since a 6.1 percent jump in prices in 1990.  Energy costs rose by 17.4 percent this past year while food costs rose by 4.9 percent. Both were the biggest increases since 1990. Gasoline prices were up 29.6 percent, the biggest increase since they soared by 30.1 percent in 1999.  The 2.4 percent rise in prices outside of food and energy was the smallest since a 2.2 percent rise in 2005. Clothing costs and the price of new cars actually fell for the year, both dropping by 0.3 percent, while airline fares, reflecting higher fuel costs, were up 10.6 percent and medical care, always one of the leading areas of price increases, rose by 5.2 percent for 2007.  Workers' wages failed to keep up with the higher inflation. Average weekly earnings, after adjusting for inflation, dropped by 0.9 percent in 2007, the biggest setback since a 1.5 percent fall in 2005 (Crutsinger 2008).  The best explanation for the current financial crisis that is affecting the stock market, mutual funds and credit markets, mostly in the US and EU but also in other nations that could be called colonial, is that OPEC reported speculation in the stock market as the major reason for the persistent spike in the price of a barrel of oil and the law of supply and demand would therefore not work to reduce the price of oil (Haylin 2008).  Government regulation seems to have eliminated this corrupt stock market speculation, at the unnecessary cost of trillions of dollars of illegal market subsidies, and the price of oil has tumbled to $63 in October after a high of $143 in July (Georgy 2008).  The housing correction however continues unabated whereas it is the result of incompetent government intervention, that failed to prohibit the extortionate ARM loans, and the expensive Wall St. bailout, is a Catch 22.  Investors are purchasing insured government bonds for the bailout rather than risky stocks resulting in a flight of capital from the private market, slightly greater than the slower moving government subsidies. 


 24. Now that the price of oil has gone down, the price of commodities, such as food, should also go down or stabilize and the truly impoverished people in developing countries, who cannot or can barely afford such necessities, will not be more endangered.  The damage has however been done to the stock markets of the first world.  The energy speculators have sold, or are selling their shares.  OPEC’s economic aggression succeeded in making beggars of the first world, civil by comparison to the war crimes of the first world in Islamic countries.  The first world nations have only their own people and lack of regulation to blame for the biological warfare that accompanied the economic warfare against colonial oppression.  To recover from this financial crisis the global economy must either swiftly devaluate the currencies of the first world nations in proportion to the amount that the currency’s financial sector bailout was unfunded or the financial crisis will spread, to a limited degree, to emerging economies, who will eventually themselves print out money and subsidize their markets, and economic recovery will take much longer, because of a general lack of respect for global financial rules.

25. Well-functioning financial markets are crucial to maximizing sustainable economic growth because they channel funds to the people with the most productive investment opportunities. However, financial 
markets can do their job well only when they solve information problems that would otherwise impede the efficient allocation of credit to worthy borrowers.  Financial liberalization and innovation bring many 
benefits but can also create information and incentive problems that lead to mistakes. When mistakes of this nature become evident, financial markets can seize up, with potentially significant adverse 
consequences for the economy (Mishkin 2008).  The first mistake was for the government to get in debt to save the ailing, and corrupt, credit industry.  Since the turn of the millennium deficit spending, loans 
and credit in general have largely been discredited by most international economists who are tired of trying to collect debts from impoverished developing nations, insolvent colonial tyrants and hapless individuals 
alike.  The Heavily Indebted Poor County (HIPC) initiative of the World Bank and IMF has become very successful at eliminating the debts of heavily indebted poor countries and the people are happy with this 
debt relief.  The thinking has been that loans and credit in general, are a relic of the past that have been replaced, nearly entirely, with public assistance in the absence of a satisfactory purchase of goods and 
services.  In 2004, the IMF’s loan portfolio was roughly $100 billion, and until 2008, it has fallen to around $10 billion annually (Engler 2008).  Second, the emphasis on deregulation for the past decade can 
be attributed with causing the current financial crisis.  In the absence of regulation the prosecutor has been poisoning the market in response to every complaint and since the founding of the International Criminal 
Court (ICC) in retaliation for every good deed.  Corporations have been frequently used in domestic spying operations devastating client confidence across all industries including the vital housing sector.  Now 
a local politician or corporate executive can change a person’s home into a torture chamber, and as the result of being victimized by such meritless and malicious prosecution the state, federal and international 
governments inevitably side with the wall breakers for whom the courts plead immunity.  This is where deregulation is fatally flawed because it is absolutely essential to a democracy and free market economy 
that people victimized by unlawful invasions and unwarranted searches and seizures are compensated for the damages caused by such arbitrary and lawless action, by the government in defense of civil liberties, 
so that the good and productive citizens are enriched while the immoral thieves, frauds, burglars and torturers are impoverished, thereby encouraging and empowering good behavior and discouraging misbehavior.  
Regulation is also needed to guarantee that defective products such as the Adjustable Rate Mortgage (ARM) and financial bailout are either never marketed or removed from the market when they are determined 
to have detrimental consequences in the long term.   

26. Representative John Conyers, one of the few Congress people who voted against the $700 billion bailout, believes the tactics employed by the Treasury Secretary created an atmosphere of fear. The events of the last two weeks are reminiscent of the days leading up to the adoption of the Patriot Act, and to the invasion of Iraq, times where fear-mongering dampened the careful and deliberate consideration of alternative courses of action.  He proposes a real solution to the credit crunch needed to address the concerns of Main Street, not just Wall Street. It is my belief that this legislation should have included provisions 1) enacting a moratorium on foreclosures, 2) restructuring mortgages to make them more affordable, 3) prohibiting interest rate increases associated with sub-prime loans and 4) bankruptcy reform that would give judges the freedom to renegotiate home mortgages during court proceedings. These initiatives could have been achieved without spending one dollar of the taxpayer's money. In addition, empowering the Federal Deposit Insurance Corporation to guarantee all depositors and bond holders would have provided immediate liquidity to credit markets.  A plan, offered by Rep. Peter DeFazio, D-Ore., and other members of the so-called "Bailout Skeptics" Caucus, proposes some common-sense changes to Securities and Exchange Commission rules and Federal Deposit Insurance Corporation policies. Another plan, proposed by billionaire financier George Soros, mimics a successful model used in Norway and Sweden. The plan would inject credit into the markets in a direct and low-risk manner by empowering the Treasury Department to purchase preferred stock and discounted common stock from faltering lenders. I called for this type of direct capital deployment measure earlier this week, because it would provide the taxpayers with a tangible return on their investment and keep toxic mortgage-backed securities off the government's books. There are serious options for dealing with this crisis that don't involve giving away billions to the richest, most irresponsible businessmen (Conyers 2008).


D.    Outlook for the Global Economy


27. While the financial crisis was triggered by problems in the subprime segment of the US mortgage market, it has grown in scale over the past 16 months and has been transmitted around the global financial system via interconnected markets and complex investment instruments of the industrialized world.  Global real GDP growth is set to decelerate from the exceptionally strong 5% recorded on average in 2004-2007, to 3¾% this year and 2¼% in 2009 (European Commission 2008).  Japan, Germany, France, and Italy all recorded negative growth in Q2 2008 (House of Commons Library 2008). 


28. Economic inequality, discrimination, has been growing in the world's richest countries over the past 20 years, even as trade and technological advances have spurred rapid growth.  The Paris-based Organization for Economic Cooperation and Development said its 20-year study found inequality had increased in 27 of its 30 members as top earners' incomes soared while others' stagnated.  The U.S. has the highest inequality and poverty rates in the OECD after Mexico and Turkey, and the gap has increased rapidly since 2000, the report said. France saw inequalities fall as poorer workers are better paid.  In the U.S., the richest 10% earn an average of $93,000 -- the highest level in the OECD. The poorest 10% earn an average of $5,800 -- about 20% lower than the OECD average.  Wealthy households are not only widening the gap with the poor, but in countries such as the U.S., Canada and Germany they are leaving middle-income earners farther behind.  The two decades covered in the study, 1985-2005, saw a period of overall strong economic growth.  With several OECD countries facing recession, the "key question" raised is whether governments can prevent a possible drop in top earners' incomes from sparking "a second wave" hit to the lowest-income households, said Martin Hirsch, France's high commissioner for fighting poverty. 


29. OECD Secretary-General Angel Gurria said greater income inequality "polarizes societies" and "carves up the world between rich and poor" (OECD 2008).  The financial crisis drives home the fact that a Nation, in which the rich are continually getting richer, at the expense of the poor and middle class, is a poor nation indeed.  While it is too much to expect the industrialized nations to stop persecuting their own people, it is conceivable that, as the result of the success of the international trade and financial system under the Millennium Development Goals, the colonial powers will allow the independent developing nations, don’t forget it was OPEC who broke the camel’s back, to bail out the bailout.  On the upside the financial crisis in discriminatory, colonial, industrialized nations, has not yet seriously affected developing nations who have been enjoying high rates of economic growth in a rule based system.  The financial crisis has in fact reduced commodity prices mitigating hunger concerns amongst the poorest, giving rise to hope that developing nation currencies can appreciate significantly and permanently against the euro and US dollar and developing nations whereby they would earn greater voice from their membership in the international monetary system and more purchasing power. 


30. In the euro area, a net balance of 43% of banks (subtracting those easing standards from those banks tightening them) tightened lending standards vis-à-vis firms in Q2/2008, indicating the fourth consecutive broad-based tightening of bank lending standards in a row. Banks are expected to have tightened standards further in Q3/2008. In Q2/2008 a near-record net balance of 30% of all banks reported a tightening of standards as regards loans for house purchase and a record 24% of all banks, on balance, reported a tightening of standards on consumer loans.  As of June 2008, the year-on-year change in net issuance of non-financial corporate debt securities declined to 4.0%, down from the 7.8% recorded in March 2008 (European Commission 2008).  The situation is the same in Europe.  Falling gross domestic product (GDP) in the second quarter has been followed by alarming developments such as the temporary closure of major car plants throughout Europe and the collapse of a number of jobs in the temporary agency work sector. Moreover, leading business cycle indicators point to a severe downturn.  Plans to inject hundreds of billions of euros in the banking system are not securing the economy.  Given these developments and the seriousness of the credit squeeze, the European Trade Union Confederation (ETUC) expects growth in the euro area economy to turn negative in 2009 (Janssen 2008). 


31. When the multibillion European plan to recapitalize the banking system was pieced together at the beginning of October 2008, its basic aim was to break the vicious circle of: loss of banking capital because of write downs on ‘toxic’ assets and ‘firesale’ asset sales to respect Basel II solvency ratios.  Governments, by injecting massive amounts of new capital into banks, were trying to stop this downward spiral. This, however, has not been entirely successful.  The reason for this is that financial markets, after a first reaction of relief that governments had intervened in the sector, started to note that the banking rescue plan failed to save the real economy as well and that troubles in the real economy would spill back over into the financial sector, thereby adding to existing banking problems.  These are not ‘normal’ times. Financial markets are not operating as usual but are seriously distressed. Interbank lending rates are high above official interest rates, banks distrust each other and are reluctant to lend to each other. Liquidity is not transformed any longer into credits for investment but is put into safe-haven investment categories such as government bonds or is even returning back to the central bank in the form of central bank deposits (Janssen 2008).  Japan announced a $51 billion stimulus package last week for Asia's largest economy and Germany plans to provide a 50 billion euro ($64.2 billion) boost to Europe's biggest economy (Kim 2008).


32. The 10 New Member States of the European Union (EU10) are affected by the ongoing global financial crisis, and growth will be slower this year and next due to weak external demand and tight credit conditions, The World Bank is ready to provide one billion Euros as part of a program supported by the IMF and European Union.   The international financial crisis intensified since early October and resulted in an acute tightening of interbank markets, bank consolidation and takeovers in developed economies, and a sharp drop in global equity prices.  These developments have been accompanied by a dramatic increase in volatility for equities, commodities, and currencies.  The financial turmoil has spread quickly to reach to EU 10 countries and credit default swaps have widened. Also, some countries in the region are experiencing a shortage of liquidity reflected in sharp increases in interbank rates.  Weakness in external demand and tightening credit conditions will likely result in a decline in exports and investment growth. While further moderate slowdown appears likely in Bulgaria, the Czech Republic, Poland, and Slovenia, other countries are likely to face a larger slowdown, but also from higher rates of economic growth. The Baltic countries and Hungary may face a more prolonged downturn.  Inflation has peaked but remains elevated.  To respond to the international crisis, fiscal discipline must be enhanced through prudent budget management and improvements in the effectiveness and quality of public services to Romanian citizens across the board.  Whether in education, health or pensions, social assistance or transport, the agenda for the modernization of public administration and financial management remains long (World Bank 2008). The Australian currency has dropped 29 percent in the past six months against the dollar, from an average of 82 cents in September to an average of 68 cents in October (Kim 2008).


33. South Korea plans a 14 trillion won ($10.8 billion) boost to the economy next year as the nation tackles the biggest crisis since it needed an International Monetary Fund bailout a decade ago. The package includes spending an extra 4.6 trillion won on regional infrastructure and providing 3 trillion won in tax benefits, mainly extending tax breaks on investment in factories.  Relief measures announced this year now total 33 trillion won, according to the finance ministry.  The currency and stocks rose after the government said the measures will add 1 percentage point to economic growth and create an extra 200,000 jobs. Exports, the main engine of growth, rose by the least in 13 months in October because shipments to China fell for the first time since 2002.  The government will provide 1.3 trillion won to the state- run financial institutions, including Korea Development Bank, so the banks can lend more to smaller companies and exporters.  It will extend tax breaks for companies investing in factories by one year, out until the end of 2009. South Korea also said it will spend an extra 1.3 trillion, mainly on medical services for low-income earners and creating jobs for the elderly and internships for younger people. The Kospi stock index, which recorded the biggest monthly decline since 1997 in October, rebounded 2.9 percent to 1,144.78. South Korea's economic growth cooled to 0.6 percent in the third quarter, the weakest pace since 2004, as exports declined by the most in seven years and consumer spending stagnated.  Manufacturers and retailers have been firing workers this year as demand eases and Korean builders are reeling under the largest backlog of unsold homes in a decade. The government announced Oct. 21 it will spend as much as 8 trillion won to buy land and unsold homes.  Lawmakers last week approved the government's guarantee of $100 billion in bank debts to help lenders struggling to access foreign funds. South Korea cut interest rates and will also supply banks with $30 billion in U.S. currency from the Federal Reserve.  The government's total expenditure will increase to 283.8 trillion won in 2009 from a previous forecast of 273.8 trillion won. National debt will be 34.3 percent of gross domestic product next year, up from an earlier prediction 32.3 percent.  The won rose 0.5 percent to 1,284.30 against the dollar rebounding from an earlier decline. Korea's won has fallen 28 percent this year, Asia's worst performer, as investors dumped assets in emerging markets (Kim 2008).


34. Beijing began its astonishing rise by devaluing its currency 45 percent in 1994, slashing the prices of exports in half and making imports twice as expensive.  China's worldwide trade surplus in manufactures, $31 billion in 2001, hit $401 billion in 2007, a 1,300 percent increase, and may reach $500 billion in 2008. China has shoved Germany aside to become the world's greatest exporter and now leads the world in the export of manufactured goods to Japan and the European Union, as well as the United States.  Before 2004, China's manufacturing trade surplus with America was largely in textiles and apparel. But, since then, China's rocketing trade surplus in electronics, computers and parts has far exceeded her surplus in textiles and apparel. China's trade surplus in computers and components rose from $8.1 billion in 2001 to $73.5 billion in 2007. In cellular phones and parts, her worldwide trade surplus grew from $3 billion in 2003 to $50 billion in 2007, and may reach $60 billion by year's end. With her immense trade surpluses, China's reserves have surged from $200 billion in 2002 to $2 trillion.  As America plunges into recession and our industry hollows out, while China is still growing at 9 percent, the terrible danger we all face is from "protectionism" (Buchanan 2008).  In its communiqués of October 2004 and of February and April of 2005, G-7 Finance Ministers and Central Bank Governors stated: “… that more flexibility in exchange rates is desirable for major countries or economic areas that lack such flexibility to promote smooth and widespread adjustments in the international financial system, based on market mechanisms.” On April 6, 2005, sixty seven US senators voted to support an amendment, sponsored by senators Schumer (D- New York) and Graham (R-South Carolina), that called for imposing an across-the board tariff of 27.5 percent on China’s exports to the United States if negotiations between China and the United States on the value of the RMB proved unsuccessful. In its May 2005 “Report to Congress on International Economic and Exchange Rate Policies,” the US Treasury [2005, p. 2] summed-up its evaluation of China’s exchange rate policies as follows: “…current Chinese policies are highly distortionary and pose a risk to China’s economy, its trading partners, and global economic growth…. If current trends continue without substantial alteration, China’s policies will likely meet the statute’s technical requirements for designation” (as an economy that is manipulating its currency). On July 27, 2005 the US House of Representatives passed by a 255-168 margin a bill sponsored by Representative English (R-Pa) that would not only extend countervailing duty or anti-subsidy law to non-market economies (China among them) but would also place additional requirements on the US Treasury in its reporting to Congress on the practice of currency manipulation (Goldstein 2005).


35. Mongolia is in many ways a typical developing country, depending heavily on resource-based exports -- in this case, copper and other minerals. The copper price has boomed in recent years, which has helped Mongolia grow faster and expand public programs. Yet the end of the global boom means the end of the commodity boom. Within a short time the copper price has dropped from over $8,000 per metric ton to under $4,000 today.  Some see this as a good time to enact fiscal rules that require a larger share of future windfalls be saved. That way, the country can have stable expansion of development programs that are insulated from boom-bust commodity cycles.  The challenge for Mongolia is to use the country’s mineral wealth in a way that preserves and enriches the country’s unique natural and cultural heritage (World Bank 2008).


36. Developing nations had faced a sudden convergence of food, fuel and financial crises as development and finance ministers gathered for the Bank and IMF Annual Meetings. Countries already suffering 
food and fuel price inflation may now also see declines in exports, trade and investment as a result of financial turmoil that is becoming increasingly global.  A new Bank report says the number of malnourished 
people globally will grow by 44 million, to 967 million, in 2008, after several countries experienced double-digit food inflation. The Bank created a US$1.2 billion rapid financing facility and called for a New 
Deal for a Global Food Policy to promote agricultural development and food security in Africa. The Bank’s Global Food Response Program has approved and started disbursing $188 million in 19 countries as 
of October 2, with $663 million earmarked for another 13 countries.  Developing countries must prepare for a drop in trade, capital flows, remittances, and domestic investment, as well as a slowdown in growth 
(Zoellick 2008) High food and fuel prices that prevailed until recently will increase the number of malnourished people in the world by about 44 million to a total of 967 million. Young children who do not 
receive proper nutrition will suffer the health effects of early malnutrition well into adulthood. Also, many poor families have been forced to cut back on education costs in order to feed themselves. 
37. At a recent roundtable discussion, World Bank Chief Economist Justin Yifu Lin said the food crisis highlights the need to restore confidence in global grain markets,” said Lin, “The recent price fluctuations 
reflect a collapse in market confidence, not just a temporary imbalance in supply and demand.” Key grain prices have fallen in the past few months with Thai medium grade rice prices declining from a peak of 
$1100/ton in May 2008 to $730/ton in September. Nevertheless, rice prices remain double their average level in 2007, and prices for most major food crops are projected to remain well above 2004 levels through 
2015.  Median inflation in non- OECD countries rose from 5 percent in 2006 to 8.1 percent in 2008 in some nations inflation was even more - Kyrgyz Republic (32 percent), Vietnam (26 percent) and Chile 
(16 percent) (Human Development Network & Poverty Reduction and Economic Management Network 2008).
38. There is concern that the financial crisis will reduce foreign aid and remittances. The international movement of workers leads to macroeconomic consequences, particularly for smaller developing countries. 
In 2007, an estimated $240 billion in remittances went to developing countries, more than double the flow in 2001. These remittances represent a significant source of developing country income and broaden the 
scope for cyclical spillovers (Kohn 2008).  Two things need to happen for the crisis to lead to a significant reduction in foreign aid. First, the financial crisis has to lead to a major recession in donor countries. 
Second, the recession leads to such fiscal constraints that foreign aid is cut. Aid in the form of money, goods or technical assistance can develop infrastructure, strengthen institutions, or address humanitarian 
crises in recipient countries. Foreign aid can exceed 10% of a recipient country’s national income in many instances.  Support for foreign aid can be seen as part of a general orientation to foreign policy labeled 
“cooperative internationalism” as opposed to “militant internationalism”.  Citizens of colonial powers are likely to be better informed about events in the developing world, understand development issues facing 
other countries, and be aware of inequality between colonizers and the colonized. These citizens may also feel a greater sense of responsibility for the welfare of people in ex-colonies and the rest of the developing 
world.  Many Americans view their role as international policeman as a substitute for development aid.  The United States spent about 0.16 percent of gross national income (GNI) in 2007, compared to the average 
of 0.45% among the 22 DAC members.  Increasing U.S. aid is challenging however in the face of low public support. Only 55.5% of Americans favor aid to poorer countries and only 45% favor increasing aid.  
The United States channels only about one tenth of its aid through multilaterals. In contrast, in most years Italy channels over one half of its aid through multilaterals (Paxton & Knack 2008).
39. A seminar between African bankers and international investment analysts, held under the auspices of the World Bank-IMF Annual Meetings, discussed how the current global financial crisis might affect 
Africa and what countries can do to protect themselves. Sub-Saharan Africa already has seen some effect as a result of the crisis. Stock markets in Africa’s larger economies are mirroring those of developed 
markets, and international bond issues that were growing have slowed. The small size of African markets also means that even limited withdrawals could have significant impact and, although major capital 
withdrawal from foreign investors is unlikely, as the current crisis deepens, it could have an effect.  Participants noted that African markets are at varying levels of development, that debt in the public sector 
dominates, and that there is a focus on primary markets rather than secondary – leaving many investors with no capacity for emergency exits – and no bond markets exist outside of the West Africa Economic 
and Monetary Union (WAEMU), several countries do not have a market system (World Bank 2008).  African Ministers of Finance have urged developed countries to maintain pledged levels of aid to African 
countries despite the volatility of the international financial markets. At a press conference in Washington, ministers from three countries said their governments were still studying the possible implications of 
the financial markets meltdown in order to prepare to take steps to mitigate any potential fallout. They urged donors to offer flexible programs in support of Africa’s development efforts. 
40. The African Development Bank is expected to organize a seminar in November to explain how the crisis could affect Africa.  The problems global markets are experiencing could have been avoided had 
developed countries adhered to IMF financial management tenets.  The fallout on economies of such countries as Kenya would depend on the steps their major trading partners, Europe in particular, intend to take 
to contain the crisis. The ministers also raised the question of voice for African countries in international financial institutions. Gambia’s Bala-Gaye said his country is anticipating a decline in tourist traffic in light 
of the economic problems developed countries are likely to experience, and a drop in remittances by the Gambian Diaspora living in those countries. Cameroon’s minister explained how the delayed effects of the 
crisis are likely to affect the economy of his country as the prices of export commodities drop due to reduced demand in the traditional export markets. The ministers stressed that the crisis underscores the need for 
African countries to institute reforms to create favorable climates for investment, especially in agriculture, that will in turn lead to increased production and self reliance in food. They emphasized the importance of 
creating goods and services while pursuing south-south cooperation among their countries, especially on the sharing of technical skills and experiences. The ministers explained the steps that individual African 
countries have taken to deal with food and fuel crisis. They emphasized that investment in infrastructure and agriculture is crucial for realizing the envisaged growth and development of African economies, and they 
called on donors to focus on the two sectors as a matter of priority (World Bank 2008).

41. Modern currency crises often begin with a government immobilized by contending demands to sustain a fixed rate and to devalue.  Latin American emerging market countries demonstrate the tendency for overvaluation spells, in contrast to the experience of emerging Asian countries.  The perception that some Asian countries, and in particular, China, have pursued active exchange rate policies has renewed interest on a debate about the merits of the neo-mercantilist view that an undervalued currency should provide protection to domestic industries in order to stimulate the tradable sector.  Latin American countries have often allowed their currencies to appreciate, or maintained artificially appreciated official exchange rates in the presence of large black market premiums, and have achieved lower growth rates and been prone to periodic bouts of macroeconomic instability.  During 1980–2006, an overvaluation of 15 percent or more took place during 12 years in Argentina, 7 percent in Brazil, 8 percent in Colombia, 5 percent in Chile, and 4 percent in Mexico. Most of the overvaluation spells mentioned above were related to the presence of fixed exchange rate regimes. A large black market premium is perhaps a clear sign of an artificially appreciated currency.  This tendency for Latin American countries to seek to appreciate their currencies has often been attributed to political economy considerations.  Latin America’s large inequality is thought to provide the grounds for strong short-term political gains from policies that redistribute rents from the exporting sector, and exchange rate appreciation figures prominently among such policies (Filho & Chamon 2008). Unless properly overseen, liberalization can result in too rapid growth of bank assets, over-indebtedness and price-asset bubbles (Gil-Diaz 2008)


42. The financial crisis that followed the Mexican devaluation in December 1994 spilled over to the economies of other countries, mostly in Latin American.  The Mexican devaluation occurred in an environment that did not believe that the peso parity was sustainable and reserves fell until the government had no other choice but to devalue.  After a couple of days and US 5 billion of capital flight, the Mexican authorities were left with little choice but to adopt a floating exchange rate regime.  Far from calming the markets, the devaluation resulted in a financial crisis with significant spillover effects on other countries particularly in Latin America.  The policy based on a fixed exchange rate, designed to fight inflationary pressures, was implemented at the end of February, 1988. Beginning in 1989, the fixed exchange regime was replaced by a crawling peg. Originally, the crawl was fixed at one peso per day (equivalent to the annual depreciation rate of 16%), in 1990 this was reduced to 80 centavos daily (11% annual depreciation) and, in 1991, the crawl was fixed at 40 centavos daily (5% annual depreciation).  In November 1991, the crawling peg was replaced by a band within which the exchange rate was allowed to fluctuate. The ceiling of the band was adjusted daily by 0.0002 new pesos (or 20 cents of the old pesos). This adjustment was increased in October, 1992 to 0.0004 new pesos daily while the floor was maintained at 3.0512 new pesos per dollar. On December 20, 1994 the ceiling of the band was increased by 15% while its subsequent daily increase of 0.0004 new pesos was maintained. This policy proved to be unsustainable and was abandoned two days later when the Mexican authorities were forced to adopt a floating exchange rate regime because they had run out of international reserves (Lustig 1995). 


43. The Asian financial crisis was initiated by two rounds of currency depreciation that have been occurring since early summer 1997. The first round was a precipitous drop in the value of the Thai baht, Malaysian ringgit, Philippine peso, and Indonesian rupiah. As these currencies stabilized, the second round began with downward pressures hitting the Taiwan dollar, South Korean won, Brazilian real, Singaporean dollar, and Hong Kong dollar. Governments have countered the weakness in their currencies by selling foreign exchange reserves and raising interest rates (Nanto 1998).  On the brink of hyperinflation and immersed in a deep financial crisis, Ecuador abandoned its currency in January 2000 and adopted the U.S. dollar as its legal tender (Filho & Chamon 2008).


44. Latin American countries have experienced cycles of expansionary policies, currency appreciation, and devaluation crises. The popularity of appreciations, through their effect on consumers’ purchasing power, has been an accepted assumption in the literature despite a dearth of studies on the distributional impact of exchange rate movements. There is indeed evidence that politicians in Latin America have a bias toward appreciating their currencies and distributive goals that have often generated real appreciation and periodic crisis known as “macroeconomic populism”. Appreciation is politically popular, in a large cross-section of Latin American countries, they show that the currency tends to appreciate before and depreciate after elections.  For a given level of income, changes in exchange rates that are passed through to domestic prices affect the purchasing power of households differentially, depending on how the prices of their consumption baskets respond to exchange rates. For instance, to the extent that poorer households spend a larger share of their consumption on tradable goods (food, a tradable good, tends to have a large weight on the poor’s budget) than richer households, the pass-through or consumption effect of an appreciation tends to be pro-poor.  As exchange rate movements affect the relative profitability of different sectors of the economy (for example, manufacturing relative to services), it also shifts the relative demand for labor of different skills, locations, and sector of employment, among other characteristics.  The short-term effect of currency appreciation through the consumption channel benefits poorer households more than proportionately as expected. For Brazil, the consumption or pass-through effect of a 10 percent appreciation is equivalent in welfare terms to an increase in income of 1½ percent for the poorest households and only 1 percent for the richest ones. In Mexico, where the exchange rate pass-through is higher, the average of that effect is 4½ percent, and the difference between poorer and richer households is more muted (only about¼percent), with the effects peaking at middle income levels (but varying by less than ½ percent across the distribution) (Filho & Chamon 2008).


45. Households whose heads have been employed in agriculture in the last 12 months are the ones whose total income is more negatively related to appreciations. A 10 percent appreciation in the REER is associated to a reduction in the relative income of those households by about 2.1 percent, and that was statistically significant for all specifications. On the other hand, the finance and business services and the construction sectors showed positive coefficients for all specifications, albeit less precisely estimated. That is also expected, as those two sectors are eminently non-tradable.  Somewhat surprisingly, the relative incomes of households whose heads are in the public administration, health, and education sector are negatively related to appreciations.  Again, the income of poorer households fares worse following an appreciation. The distributional effects peak at the middle of the distribution, and then decline. All else equal, the effect of a 10 percent appreciation on the income of households will be about ½ percent lower for the poorest and ¼ lower for the richest households vis-a` -vis those in the middle of the distribution.  All else equal, households working in the tradable sector (agriculture, mining, and manufacturing) experience a 1.1 percent decline in their income relative to those in the non-tradable sector following a 10 percent NEER appreciation (or a 2.8 percent decline for a 10 percent currency appreciation). 30–50-year-old age group tend to do better during periods of more appreciation than the more educated and older households. In the case of Mexico, the largest gains from appreciation remain in the lower middle classes, with a 10 percent appreciation improving their welfare relative to the very poor or very rich households by about ½ percent of expenditure.  In summary, the evidence for Brazil and Mexico does not favor the view that Latin America’s large inequality is the main culprit for these countries’ propensity to let their currencies appreciate, because the distribution of relative welfare gains and losses of appreciations across the expenditure distribution is fairly flat. In contrast, the paper found significant differences in the welfare effects of appreciations across economic sectors and regions. (Filho & Chamon 2008).



E.     Principles of the International Monetary System


46. Under Article IV of the IMF Articles of Agreement the essential purpose of the international monetary system is to provide a framework that facilitates the exchange of goods, services, and capital among countries, and that sustains sound economic growth, and that a principal objective is the continuing development of the orderly underlying conditions that are necessary for financial and economic stability, each member undertakes to collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates. In Section I, paragraph iii each member country shall: “Avoid manipulating exchange rates or the international monetary system in order to prevent effective balance-of-payments adjustment or to gain unfair competitive advantage over other member countries.”  Under the 1977 Decision, one of the “developments” that “might indicate the need for discussion with a member” regarding the observance of the principle relating to exchange rate manipulation includes the introduction of or substantial modification for balance of payments purposes of restrictions on, or incentives for, the inflow or outflow of capital. 


47. The trillions of dollars demanded by the EU and US, who raised their debt ceiling from $10.6 trillion to $11.315 trillion for FY 2009, clearly qualifies as a substantial modification for the purpose of providing incentive for the inflow of capital.  The issue that the IMF must take up with the US and EU is that by avoiding to manipulate the exchange rate, or by doing what they seem to be doing, engaging in currency swaps with other central banks in order that the US dollar appreciates in a large scale, protracted one way intervention contrary to the rules.  The rules dictate that the US and EU have printed an inordinate amount of money to bail out their financial sectors, the US and EU are therefore manipulating the international monetary system to gain what seems to be a competitive advantage over other member countries, but will in fact theoretically prolong the erratic disruptions to the monetary system, as the result of the market subsidies that create perverse incentives to leave the stock market to invest government bonds. 


48. IMF members are free to pick fixed rates, floating rates, or practically any currency regime in between. They are also permitted to intervene in exchange markets and indeed, are expected to do so when they encounter disorderly market conditions. But what is not permitted under IMF rules is to engage in a particular kind of intervention—namely, large-scale, protracted, one-way intervention. That type of intervention is prohibited because it is typically symptomatic of a disequilibrium real exchange rate and as such a disequilibrium rate can impose serious costs on both the home country and its trading partners.  There are four circumstances under which countries intervene in the foreign exchange market (1) to correct misalignments or to stabilize the exchange rate at a predetermined level—in other words, to try to set the exchange rate at a desired level, for example, one that will encourage exports; (2) to calm disorderly markets; (3) to accumulate reserves; and (4) to supply foreign exchange to the market—this occurs when the government is a major recipient of foreign exchange (for example, through royalty payments for mineral extraction). The stabilization of disorderly markets: in extremis, the central bank may have to intervene to stabilize a disorderly market, but it needs to be aware that the more frequently and easily it intervenes, the more it will impede the development of a deep and robust market, in which it is possible to hedge against exchange rate changes (Fischer 2008).  The Federal Reserve believes that, whenever possible, such difficulties should be addressed through private-sector arrangements--for example, by raising new equity capital, as many firms have done, by negotiations leading to a merger or acquisition, or by an orderly wind-down. Government assistance should be provided with the greatest reluctance and only when the stability of the financial system, and thus the health of the broader economy, is at risk. In those cases when financial stability is threatened, however, intervention to protect the public interest may well be justified (Bernanke 2008).


49. Having the wrong real exchange rate has long been known to impose costs on both the home country and its trading partners: when this important relative price gets far out of line, it distorts resource allocation within the country as well as the pattern of international trade among countries. Significantly over-valued exchange rates have also been linked to currency crises in emerging economies, with large attendant costs in terms of real economic growth; and large under-valuations typically generate excessive accumulation of international reserves that, in turn, can threaten financial instability at home and protectionist responses abroad. The term “currency manipulation” describes socially inappropriate exchange rate policy.  If there were a widespread protectionist response to currency manipulation, employment could fall in the export industries of the county doing the manipulating.  There has been growing concern, at least in some quarters, that large-scale, prolonged, one-way intervention in exchange markets to limit or to preclude currency appreciation will result in increasing unemployment, and international trade imbalances.  A 20 percent appreciation of all Asian currencies would likely reduce the US current-account deficit by about $80 billion.  Not to mention the poetic justice of paying for the bailout of the rich nations by increasing the relative purchasing power of the poor nations. Since the adoption of the Second Amendment and the 1977 Decision, the Fund has refrained from elucidating the meaning of members’ obligations under Article IV for purposes of its bilateral surveillance activities, thereby allowing the EU to join the US in the bailout, allowing for the unilateral surveillance of the colonial currencies and devaluation by the all the member nations.


50. The IMF Executive Board’s adoption on June 15, 2007, of the new Decision on Bilateral Surveillance over Members’ Policies puts exchange rate policies at the center of the surveillance process.  Although widely criticized by the proponents of unilateral surveillance the bipolar view is fundamentally correct for both emerging market and industrialized countries open to international capital flows.  Developed nations exert much stronger capital control over their currency and economy whereas emerging market nations are much more reliant upon intermediaries such as the US dollar upon which their value is pegged.  The de facto exchange rate classification consists of three categories – hard peg, with a currency board and no separate legal tender; intermediate, softly pegged to other currency or basket of currencies; and float, either managed or independent (Fischer 2008).  Many emerging market countries that claim to float, sometimes under an official monetary rule of inflation targeting, in fact have intervened heavily in recent years to dampen the appreciation of their currencies.  Intermediate exchange rate regimes remain alive and well. Some countries have announced basket regimes, often with an intermediate degree of flexibility that can be captured by some combination of a crawl, a band, or leaning-against-the-wind intervention. Most basket peggers keep the weights in the basket secret, which usually means they want to preserve a degree of freedom from prying eyes (whether to pursue a lower degree of de facto exchange rate flexibility, as with China, or a higher degree, as with others).  Known floaters tend to score much higher flexibility parameters than known peggers,. In some cases, the inferred behavior differs in some way from the de jure regime. For example China’s ‘‘basket’’ puts more weight on the dollar than the impression given by the government, but other declared basket peggers are not as firmly tied to the basket as they claim. Meanwhile, declared floaters often intervene heavily to dampen exchange rate fluctuations (fear of floating), but sometimes with reference to an anchor that is not a simple dollar parity as other authors may have assumed (Frankel & Wei 2008).


Fig. E-1 Exchange Rate Arrangement of a Few Nations Grouped (a) Advanced Countries and (b) Emerging Market Countries


Exchange Rate Regime No. Countries


a.       No separate legal tender/ currency board (13)

Austria, Belgium, Finland, France, Germany, Hong Kong SAR, Ireland, Italy, Luxembourg, Netherlands, Portugal, San Marino, Spain

           Pegged rate in horizontal band (1)


           Managed Float (1)


           Independent Float (10)

Australia, Canada, Iceland, Japan, New Zealand, Norway, Sweden, Switzerland, United Kingdom, United States

b.      No separate legal tender / currency board (34) 

Bulgaria, Ecuador, Estonia, Greece*, Lithuania, Panama, Antigua and Barbuda, Benin, Bosnia, Brunei Darussalam, Burkina Faso, Cameroon, Central African Republic, Chad, Rep. of Congo, Cote d’Ivoire, Djibouti, Dominica, El Salvador, Equatorial Guinea, Gabon, Grenada, Guinea-Bissau, Kiribati, Mali, Marshall Islands, Fed.

States of Micronesia, Niger, Palau, Senegal, St Kitts and Nevis, St Lucia, St Vincent and the Grenadines, Togo

Fixed pegs (54)

Argentina, Egypt, Jordan, Latvia, Morocco, Nigeria, Pakistan, Qatar, Slovenia, Venezuela, Islamic Rep. of Afghanistan, Angola, Aruba, The Bahamas, Bahrain, Barbados, Belarus, Belize, Bhutan, Bolivia Cape Verde, Comoros, Costa Rica, Eritrea, Ethiopia, Fiji, Ghana, Guyana, Honduras, Islamic Rep. of Iran, Kuwait, Lebanon, Lesotho, Libya, FYR Macedonia, Maldives, Malta, Mauritania, Mongolia, Namibia, Nepal Netherlands Antilles, Oman, Rwanda, Samoa, Saudi Arabia, Sierra Leone, Solomon Islands, Suriname, Swaziland, Syrian Arab Republic, Trinidad and Tobago, Tunisia, Turkmenistan, Ukraine, United Arab

Emirates Uzbekistan, Vanuatu, Vietnam, Rep. of Yemen, Zimbabwe

Pegged rate in horizontal band (4)

Cyprus, Hungary, Slovak Republic, Tonga

Crawling peg (5)

Azerbaijan, Botswana, China,, Iraq, Nicaragua

Managed float within crawling band (43)

Colombia, Czech Republic, India, Malaysia, Peru, Philippines, Romania, Russia, Sri Lanka, Thailand, Algeria, Armenia, Bangladesh*, Burundi, Cambodia, Croatia, Dominican Republic, The Gambia, Georgia, Guatemala, Guinea, Haiti*, Jamaica, Kazakhstan, Kenya,

Kyrgyz Republic, Lao PDR, Liberia, Madagascar, Malawi, Mauritius, Moldova, Mozambique, Myanmar, Papua New Guinea,  Paraguay, So Tom and Prncipe, Serbia, Seychelles, Sudan, Tajikistan, Uruguay,


Independent float (9)

Brazil, Chile, Indonesia, Israel, Korea, Mexico, Poland, South Africa, Turkey, Albania, Dem Rep. of Congo, Somalia, Tanzania, Uganda

Source; Fischer, Stanley. Mundell-Fleming Lecture Series: Exchange Rate Systems, Surveillance and Advice. IMF Staff Papers. Vol. 55 No. 3. July 1, 2008. Pp 367-383


51. Although the IMF, in conjunction with its member countries, produces a taxonomy of exchange rate regimes since 1944, many researchers began to suspect that this official, or de jure, classification scheme did not always adequately represent what countries did in practice. Thus emerged attempts in the literature to use measurable information to produce de facto classifications that would more closely reflect the actual exchange rate policies of different countries.  Theory and evidence suggest that fixing the exchange rate to the currency of a low-inflation country both promotes international trade and investment and disciplines monetary policy by providing an observable nominal anchor.  But fixing the exchange rate requires that the government sacrifice its capacity to run an independent monetary policy. A floating exchange rate, on the other hand, has the great advantage of allowing a government to pursue an independent monetary policy. This independence provides flexibility to accommodate foreign and domestic shocks, including changes in the terms of trade and world financial conditions, and to affect the competitiveness of (relative prices faced by) the tradable goods sector (Broz, Frieden & Weymouth 2008). 


52. There has been growing recognition of a disconnect between what emerging economies say they do in exchange rate policy (words), and what they do in practice (deeds). More specifically, a ‘‘fear of floating’’ behavior has been identified, whereby countries that classify themselves as floating exchange rate regimes intervene quite vigorously over time.  While many persuasive arguments have been offered as to why countries intervene, the question remains as to why intervening countries continue to classify their regimes as floating. Thus, concurrently with fear of floating, there seems to be a ‘‘fear of declaring.’’  There is evidence that de jure floating regimes may fare better in crisis situations. Specifically, the public debt ratio tends to be sensitive to the exchange rate, particularly so in times of turbulence. De jure floating may be advantageous in times of crisis. It might be conceivable that countries opt for declaring flexibility even though it may entail costs during normal times in order to reap the benefits of lower spreads in turbulent times. Thus, flexibility may act as an insurance policy. Furthermore, once this ‘‘flexibility’’ is announced, there appears to be no punishment for fear of floating (Baracas, Erickson & Steiner 2008).


53. The currency exchange market is free, under Art. IV Section 2 iii of the IMF Articles of Agreement members who do not adhere to special drawing rights or collective arrangements are allowed to enter into exchange arrangements of their choice.  As in other areas of public policy, governments’ choices of exchange rate policies are conditioned by the preferences of their constituents. The nominal exchange rate regime and the level of the real exchange rate can have powerful effects on the private sector, and economic agents want government policies that favor them.  Hypothetically internationally exposed firms prefer more stable currencies and that producers of trade goods prefer a relatively depreciated real exchange rate.  With respect to the level of the exchange rate, tradables producers particularly manufacturers and export producers are more likely to be unhappy following an appreciation of the real exchange rate, and have written so much that devaluation is the text book law for trade promotion, than are firms in non-trade sectors (services and construction).  The exchange rate is centrally important to economic activity, and government policy has a powerful impact on the currency. 


54. Where manufacturing composes a large share of GDP, governments may be particularly responsive to manufacturers when setting exchange rate policy however if manufacturers obtain the exchange rate policies they want, there is not likely to be a difference in the responses of manufacturing and nonmanufacturing firms. A strong currency provides a powerful tool against inflation, and boosts national purchasing power; a weak currency gives national producers great incentives to sell into world markets.  The real exchange rate affects the relative price of traded goods in both local and foreign markets. There is no clear economic efficiency argument for or against any particular level. A strong (appreciated) currency gives residents greater purchasing power, but also entails a loss of competitiveness for trade producers. A real appreciation benefits consumers of imports and harms producers of goods that compete with imports (and exporters). So tradable (import-competing and exporting) industries lose from a currency appreciation, but domestically oriented (nontradable) industries and domestic consumers gain. Of course, a real depreciation has the opposite effects, stimulating demand for locally produced tradable products, but raising the prices that consumers pay for foreign goods and services. Currency depreciations help exporting and import-competing industries at the expense of domestic consumers and producers of nontraded goods and services. Thus the level of the exchange rate, too, involves two competing goals—stimulating local tradables producers and raising local purchasing power. The benefit of increasing the competitiveness of national producers comes at the cost of reducing the real income of national consumers and vice versa (Broz, Frieden & Weymouth 2008).


F.      Countervailing Duty to Devaluate the US Dollar


55. For 60 years governments have been making rules — regulating — international trade and finance. During those 60 years, this system of global regulations for trade has done what it was intended to do — save governments from employing the sort of policies that brought about economic ruin in the last century. The WTO is founded on basic rules and principles, including non-discrimination between countries, transparency, and national treatment.  The multilateral trading system has not only opened world commerce but just as important it has brought transparency and predictability to international trade.  Amidst the chaos that we are witnessing today, what we need is greater regulation. What we need is better global governance. While there is no doubt that global financial regulation must be crafted, there is no doubt either that global trade regulation must be reinforced. What is desperately needed at a time like this is to restore trust in markets by reassuring investors that they are still operating within a rules-based international trade and financial system.  The debate is no longer about the merits of global regulation; it is about putting in place the right sort of global regulation for the problems of today.  The WTO’s failure to negotiate reasonable oil prices while the bailout has been successful in lowering gas prices vindicates the financial sector subsidies, in a way.  Both the inflation caused by the high oil prices of international trade and the subprime loans in the financial sector are to blame for the slow economic growth.  The negative economic growth however is the result of the illegal market subsidies.  It would be wrong to think that the bailout is the solution.  While there are no success stories regarding the bailout in the financial sector, the bailout immediately caused widespread and deep damage to trade and manufacturing sectors, including the stock market.  International trade regulations have foreseen such predicaments and provide for countervailing measures to redress the damage.    


56. The WTO Agreement on Subsidies and Countervailing Measures sets forth the regime for discouraging and analyzing subsidies and redressing the damages through the enactment of countervailing measures.  It was unwise for the USA to embark on an extensive market subsidy of the financial sector without fully analyzing its ramification upon the free market and fully expressing reluctance to get involved in “illegal” market subsidies.  It is true, the Agreement exempts from prohibition Subsidies to cover operating losses sustained by an enterprise, other than one-time measures which are non-recurrent and cannot be repeated for that enterprise and which are given merely to provide time for the development of long-term solutions and to avoid acute social problems at 6.1(c).  Technically, the USA did not breech the Agreement.  However, at 6.3(d), if the effect of the subsidy is an increase in the world market share of the subsidizing Member in a particular subsidized primary product or commodity, as compared to the average share it had during the previous period of three years and this increase follows a consistent trend over a period when subsidies have been granted; countervailing measures may be sought.  That is exactly what the partners in colonialism did, after a short winning streak against the US dollar on the currency exchange, the EU and some other wealthier nations, embarked on their own massive countervailing financial sector subsidies, albeit on their own, without the counsel of the WTO.  Now we are left to account for the damages to trade, so important for labour and the economy, caused by these subsidies in the industrialized nations, and advocate for the bilateral devaluation of the US dollar and Euro against the currencies of developing nations, to come to the quick assistance of the trade and manufacturing sectors of industrialized nations affected by the financial crisis and subsidies and be a great leap forward for the purchasing power of developing nations. 


57. World trade is forecast to slow markedly, from about 7% in 2007 to 5¼% this year and further down to just below 2½% in 2009, before reaccelerating to 4% in 2010 (European Commission 2008).   Just a few months ago, the world was talking about a food crisis. Incidentally, it was also talking about an oil crisis. A world in which food prices had risen, and would continue to rise, with a detrimental impact on the world's poor. We had seen bread riots in various parts of the world, serious rice shortages in others, and tens of thousands of demonstrators marching through Mexico's capital to protest against the rising price of tortillas. And yet, from September to October this year, we find that food prices have fallen by 20%! 10% below last year's prices.  And the same story goes for many other commodities, not just food. Metals which have seen their prices tumble by 26%, also in a single month, and oil by 38%!   The Baltic Dry Index, a benchmark for global freight cost, has tumbled to its lowest level in six years. It has fallen by 50% since the end of September amidst fears of weakening global demand, fears of an impending recession, and difficulty in obtaining trade finance. This will impact on the shipment of bulk commodities, such as iron ore, coal and grains (Lamy 2008).  With two thirds of economic growth reliant upon international trade it behooves nations in financial crisis, particularly those who have embarked upon bailouts of their financial sector, to depreciate their currency against the currencies of the developing world where economic growth is expected to remain above 5% for the most part.  By obeying the principles of international trade to devaluate their currencies, industrialized nations in crisis will enjoy the purchasing power of these developing nations and their trade and manufacturing sectors will sustain economic growth and weather the crisis, otherwise the iron fist will seize up the economy and recession will be inevitable.  The industrialized nations will have to obey the law or suffer recession.  


58. The Multilateral Trading System is first and foremost an “insurance policy” against protectionism. By investing in the Multilateral Trading System, strengthening it and increasing its robustness, what the international community is in fact investing in is an insurance policy against the deterioration of market conditions. An insurance policy against our worst instincts; the instinct to shut-out the foreigner at a time of crisis, and build higher and higher tariff walls to hide our inefficiency.  Amidst the current turmoil, protectionist forces are rearing their heads, demanding governmental assistance, and demanding that domestic markets be shut to foreigners. In other words, we are hearing calls for less competition.  What we need is greater regulation. What we need is better global governance. While there is no doubt that global financial regulation must be crafted, there is no doubt either that global trade regulation must be reinforced. What is desperately needed at a time like this is to restore trust in markets by reassuring investors that they are still operating within a rules-based international trade and financial system.  Nassim Taleb sums up human psychology quite well when he writes that: “As a derivatives trader I noticed that people do not like to insure against something abstract; the risk that merits their attention is always something vivid.”  This is the biggest problem facing the Multilateral Trading System right now. The risk of a return to protectionism is “too abstract” and too remote to deal with.


59. If decided timely, the 2009 recession can be headed off.  If a fiscal policy stimulus is accompanied by an expansionary monetary policy to facilitate trade, the normal fiscal multipliers double or even triple whereas low interest rates and cheap currency make it affordable for the public balance sheet to finance such a stimulus package, so that concerns over the sustainability of public debt are ruled out (Janssen 2008).  Subsidizing the financial sector takes a toll on trade.  The bonds issued by governments to finance the bank bailout secretly siphoned money directly from the stock markets and diverse private investments with the promise of government insured investment, damaging trade and manufacturing.   Nations that bailed out their banks are going to need to open their markets to international trade by devaluating their currency, the textbook method for stimulating international trade.  Depreciation is not only punishment for printing unearned money but also is good for the trade and manufacturing industries that are even more vital to economic growth and labor than the financial sector.  Jeffrey Frankel of Harvard and David Romer determined that every percentage point rise in the ratio of trade to GDP, increases income per person by between one half and 2%.  Furthermore, two-thirds of economic growth can be attributed to international trade (Lamy 2008).  The US economy performed better than expected in the first half of 2008, due to sharply improving net exports, against the background of dollar depreciation and softening domestic demand, reflecting inter alia the ongoing housing correction. Moreover, consumer spending held up reasonably well, as a result of the sizeable tax rebates (European Commission 2008). 


Fig. F-1 Balance of US International Trade in Goods and Service 1970-2006















Total Balance













Goods Balance













Services Balance













Total Exports













Exports Goods













Exports Services













Total Imports













Imports Goods













Imports Services













Source: BEA Foreign Transactions in the National Income and Product Accounts 1970-2006


60. The United States’ chronic current account deficit will inevitably reverse, and the reversal could be quite sudden. A currency that is overvalued, or a balance of payments deficit that is so large as to be unsustainable, can give rise to rapid exchange rate movements. One example is the current account deficit of the United States in recent years. There was no exchange rate manipulation; nonetheless, by most measures the currency was and is overvalued.  Possibly the overvaluation could be offset—though not fully, so long as other countries maintained their dollar pegs—through fiscal policy, thereby reducing the underlying threat to stability of the global exchange rate system (Fischer 2008).  The current financial crisis however serves to reinforce the basic assumption, that has guided US trade policy since December 2006, when the balance of trade began improving, the USA needs to prioritize its export products and to do so must devaluate its currency.  The current account balance is unsustainable.  In 2004 the United States ran a current account deficit of $650 billion, nearly 6 percent of its GDP.  The Bureau of Economics Analysis reports the U.S. current account deficit in 2006 as $857 billion, 6.1 percent of GDP.  This number is not only very large absolutely, it is also large relative to U.S. GDP.  Some smaller countries like Australia, Greece, and Portugal have larger deficit-to-GDP ratios run current account surpluses that are much larger fractions of their GDP.  Aggregating the surpluses of the three largest surplus countries, Japan, Germany, and China, gets us to only $370 billion, little more than half the U.S. deficit. China runs the largest bilateral surplus with the United States, while running substantial deficits with some of its Asian neighbors, Japan in particular. 


61. To estimate the amount of devaluation that would be needed to harmonize US balance of payments a symmetric two-country model in which adjustment can occur across both the intensive and extensive margins was analyzed. They examine the long-run consequences of the effects of improving net export deficits of 6.5 percent of GDP in one country to a balanced position. In the version of the model in which all adjustment takes place at the intensive margin, the authors find that closing the external imbalance requires a fall in long-run consumption (of the country undergoing the adjustment) by around 6 percent and a depreciation of the real exchange rate and the terms of trade by 17 and 22 percent respectively. When adjustment can also occur at the extensive margin, as the result of being able to choose a new trading partner should prices adjust, there is a much smaller depreciation in the real exchange rate and in the terms of trade, of 1.1 percent and 6.4, respectively. The changes in consumption and welfare under the two versions of the model, however, are similar.  In this model the cost of balancing international trade depends upon the ability of the US to either find another, cheaper, supplier of oil, or develop new green technology (Corsetti, Martin & Pesenti 2007).


62. The implications of eliminating current account imbalances for relative wages, relative GDPs, real wages, and real absorption impose severe constraints upon the relative influence of the US GDP. How much relative GDPs need to change depends on flexibility of two forms: factor mobility and adjustment in sourcing of imports, with more flexibility requiring less change.  At the extreme, U.S. GDP falls by 30 percent relative to the world’s. Because of the pervasiveness of nontraded goods, however, most domestic prices move in parallel with relative GDP, so that changes in real GDP are small. The implications for relative wages, relative GDPs, real wages, and real absorption in the major countries of the world should the current transfers implied by existing current account deficits come to a halt. How much relative GDPs need to change depends on flexibility of two forms, factor mobility between manufacturing and nonmanufacturing, and the ability of trade to adjust at the extensive margin. With perfect mobility and an active extensive margin, the GDP of the United States (running the largest deficit) must fall about 8 percent relative to that of Japan (running the largest surplus).  Without mobility, however, the decline is 22 percent. If there is no adjustment in supplier sourcing (the extensive margin) either, the decline is 44 percent.  Because of the pervasiveness of nontraded goods, however, prices move largely in sync with relative GDPs so that aggregate real changes are much more muted. Regardless of the degree of labor mobility, the decline in U.S. real GDP is only 0.4 percent if the extensive margin is operative. Without an extensive margin, the drop rises to 2 percent of GDP. So only with extreme inflexibility does a secondary burden of eliminating the transfer inherent in the U.S. current account deficit show up.  Regardless of whether the extensive margin is operative, eliminating current account deficits leads to a rise in the U.S. wage in manufactures relative to nonmanufactures of around 30 percent, reflecting a 24 percent real increase for manufacturing workers and a decline of around 5 percent for nonmanufacturing workers. In the long run in which labor is mobile, this wage difference induces an increase in the manufacturing share of employment of 23 percent (Dekle, Eaton & Kortum 2008).


63. The reality is that over the past 50 years trade has grown consistently as a component of overall US economic activity. In 1947, before the GATT began operations, average tariffs in the industrial world were between 20%-30% and trade was constrained by a myriad of quantitative and exchange restrictions. Eight successive rounds of trade negotiations succeeded in reducing average MFN tariffs on imports of manufactures to 4% in industrial countries.  Taken together, exports and imports were in 1970 the equivalent of just over 11% of GDP.  In 2007 international trade was the equivalent of nearly 30% of domestic output, a record.  Economists agree that some of the 4 million manufacturing jobs lost in the United States disappeared due to overseas competition. They concede that trade has also had a hand in cutting the non-agricultural civilian workforce employed in manufacturing from 33% six decades ago to less than 10% today.  The United States, the driving force in the creation of the global trading system, has been among its principal beneficiaries. US merchandise exports have risen from $13 billion in 1948 to more than $1 trillion in 2007 (Lamy 2008).


64. U.S. imports of goods and services have risen relative to the U.S. gross domestic product (GDP), from 10 percent in the second half of the 1980s to nearly 18 percent today. U.S. trade with other industrialized countries has more than doubled over this same period. Industrialized country trade with emerging market economies has experienced a far more dramatic increase (Kohn 2008). In services trade the growth in trade is equally impressive. US exports have grown from $408 billion in 1980 to nearly $500 billion last year.  The United States of America was founded on the rule of law. This principle is so deeply ingrained in the American system of values (Lamy 2008).  Now the world faces different sets of problems - the EU wishes to protect themselves by depreciating against the US dollar, while the US keeps the dollar strong to protect against off inflation already defeated by regulation and to appease their client financial institutions of the bailout.  A different and larger array of countries, insist that they take part in drafting the solutions to those problems.   The EU, US and bailout nations are going to have to devaluate their currencies against those of the developing world whose markets are expected to expand. 


65. The EU cannot continue to follow the US in their unwise deficit spending financial policy, nor can the US continue to allow the EU to dictate a colonial currency policy whereby the euro-area nominal effective exchange rate (NEER) appreciates or depreciates against the US but not against the rest of the world.  For instance the euro NEER appreciated by more than 7% in the first half of 2008, implying a considerable deterioration of euro-area price and cost competitiveness, but greater purchasing power and influence.  In response to the financial crisis the technical assumption was adjusted to protect European interests, for an implied average USD/EUR rates of 1.48 in 2008 and 1.36 in 2009 and in 2010, and average JPY/EUR rates of 155.0 in 2008 and 137.4 in 2009 and in 2010 (European Commission 2008).  Both the euro and US dollar are going to have to devaluate against the currencies of developing nations who are so far unaffected by the financial crisis and more importantly, did not participate in the bailouts of their financial sectors.  Industrialized nations are going to have to compensate for their bailouts by devaluating their currencies.  There are several reasons for this.  First, two thirds of economic growth results from trade and an overvalued currency hinders the sale of goods on the international market.  Second, a depreciated currency will create jobs in the trade and manufacturing sectors to produce and market more low priced goods and services.  Third, the cost of the bailout of the financial sector was spread throughout the private economy draining a significant amount of capital from the trade and manufacturing sectors that are more vital to economic growth than the financial sector.  Fourth, the EU and USA have been the most rebellious of all members of the IMF and the international financial system would be more democratic and law abiding and therefore more resilient, if developing nations had more voice. 


66. The equation for devaluating is quite simple.  The currency is devaluated by the proportion of the size of the bailout less value of foreign currency reserves, divided by the size of the GDP.  This will ensure that the GDPs of the nations who engaged in the bailout do not overvalue their currency and stifle trade, nor do nations, like China, who has accumulated significant foreign reserves, undervalue their currency and glut the market.  This same formula can be used by the international financial system to penalize nations for excessive deficit spending.  Whereas the United States has defied currency law and national best interest by appreciating their currency in the interest of their client financial institutions the devaluation of the US dollar should be from September 20, 2008.  Therefore;








Fig. F-2 Cost of Bailout 2008 (billions US Dollars)






United States of America





European Union





United Kingdom










South Korea





Source: CIA World Fact Book December 31, 2007 last updated November 6, 2008

Total US reserves were $47 billion on Sept. 10, $180 billion on Oct. 8 and $329 billion on Oct. 22 (Lucas 2008).


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