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TOPIC: Exported and Imported Inflation: How the US
“exports” its inflation to the rest of the world

Instructor: Mr. Hoang Xuan Binh, PhD Group 2: Lê Quang Anh Đỗ Mạnh Duy Nguyễn Hồng Quân Nguyễn Trọng Toàn Trần Hoàng Định Nguyễn Lê Đức


......... 7 IV.... 5 III...... 12 VI.......... How China is dealing with imported inflation ............. II...............OUTLINE: I............ 14 VII........ 15 2 ........ gold and the next world reserve currency .................... A general view of inflation.. 4 1...... How the US exported its inflation ..... 10 2........................................ The currency war between the US and China ................................................................................... 6 2....................................................... Why can America export its inflation? ............ Questions ..... Definition of exported and imported inflation ............... 6 1.......................... Exported and imported inflation – How it works ................................. 4 2...... An overview of the World Financial Crisis ................................ 3 What is exported and imported Inflation?..... Reference ................................................. 8 V............................ How other countries imported inflation ....................... 10 1............... China..

Starting from then. Along with Europe. According to reports of the Department of Labor.7 million jobs were shed from February 2008 . An overview of the World Financial Crisis In December 2007. American household wealth has plunged to levels not seen since 1992. The National Bureau of Economic Research (NBER) dated June 2009 as the final month of the recession. however. with about 6. The crisis also took its toll on the system of governments of Europe countries.Exported and Imported Inflation: How the US “exports” its inflation to the rest of the world I. 2008 Denmark fell into recession. the recovery since 2009 has been weak and both GDP and job growth remain erratic and uneven. a banking crisis and a growth and competitiveness crisis) and the economy condition of its members are not too bright. the United States entered a new period of recession due to the results of the bursting of housing bubble in mid-2007. Eurozone has had to deal with the Euro crisis (a combined sovereign debt crisis. The global recession was first seen in Europe. roughly 8. as in July 1. 2012 Romania’s government was the sixth government that was disbanded after Greece. Ireland and Spain. Italy. up from 12. It also pointed out unemployment as of August 2013 was 7. which 3 . and GDP contracted by 5.8 million jobs created since February 2010. other continent also affected by the global crisis but in a much lighter scale. The recession along with the Chinese property bubble. the crisis quickly spread out to other countries in Europe. China.February 2010. But the Great Recession not only affected the US’s economy but also spread out globally. the world’s second largest economy was no exception. making the Great Recession the worst since the Great Depression dated back in 1929. Portugal.3%.1% in 2007. Nearly 50 million Americans (16%) are in poverty. Since late 2009. with incomes dropping to 1996 levels when adjusted for inflation. On February 6.1%.

so far at least 670. days. these type of inflation can destroy the whole economy. In fact. So you can’t say for sure that 9.had already existed in China from 2005. We believe that one of the primary causes is because America. Typically in hyperinflation thinks just gets progressively worse and worse. II. exported inflation to other countries. Inflation rate which is smaller than 10% is considered moderate inflation.1 The reason our group chose this subject was to answer the question why the Great Recession originally started in the States spread out to the whole world. What is exported and imported Inflation? 1.9% inflation is normal but 10% inflation is hyperinflation. there is no exact percentage where inflation turns from “moderate inflation” to “Hyperinflation”. A general view of Inflation: Inflation is an increase in the average level of prices of goods and services. It can has good impact on the economy by spuring the production of companies and enterprises because price increases leading to more profit. But how and by what means did the US can do that and how did the world import inflation? This research we conducted will help you have a clearer look behind the machinery of the world ’s financial systems and find the 4 . Inflation rate which is more than 10% is considered galloping inflation or hyperinflation.000 small and medium-size companies have been closed. or even by the hours. with its dollars being the world’s primary reserve money. As stated in latest reports. the inflation rate just gets higher and higher until the inflation curve goes hyperbolic like this figure: 1 All the data for world financial crisis taken from wikipedia. are the main causes lead to China’s declining economic growth in 2012. Every month. leaving mainly the large-size enterprises (which may or may not contain companies which have outsourced their workplaces away from the United States leaving at least five million people there unemployed.

with strong economy that have deep influence on others. 5 . As the price of imports – a website that provide business and investing glossary. You can basically refer it to the condition when a developed country.There are 3 main kinds of inflation: demand-pull inflation. In this group research. can make the prices of goods and services in other countries rise through it’s own currency manipulation. 2 Definition taken from investorwords. cost-push inflation and structural (demand-shift) inflation. Imported inflation may be caused by foreign price increases or depreciation of a country's exchange rate. we will talk about another kind of inflation that arose significantly important to many economys recently. Definition of exported and imported inflation: Imported inflation is: “Inflation due to an increase in the price of imports. it doesn’t have a precise definition. it is imported-exported inflation. 2.”2 About exported inflation. causing an increase in the general prices of all goods and services. and their currency is widely used and reserved by others. prices of domestic goods using imports as raw materials also increase.

Commonly. the Financial Crisis started in the US. At the end o f 2008. Subprime lending means making loans to people who have difficulty paying back the debt. following by money market and stock market. Insurance companies who joined capital with banks to benefit form housing market. drop uncontrollable. banks we nt bankruptcy. the price of some houses in america was only 2 dollars. For the U. the goverment had to pump out money by actually printing more of them. we will dig a little into how international trade works. this conventional agreement is not really appliable. who don’t qualified the lending standard. the demand for U. Consiquently. on account of the special status of its dollar being the world’s primary reserve currency. The price of real estate plunge down. so the money supply rise lead to dollar depreciation and inflation.S. died as well. its currency will depreciate as there is a greater supply of its currency flows to foreign markets. To drive the America out of crisis. with no other choices. Exported and imported inflation – How it works 1. creating the housing bubble until it reached the peak and collapsed in 2007. The result is that foreign imports are becoming relatively more expensive (in term of its currency) and its exports relatively cheaper to foreigners. everyone bought houses and make the housing price go up and up. Couldn’t recovering capital. which will invert the outflow of its currency.S dollars is much more than just an 6 . This is called Financial Crisis.III. Since every countries accumulate the U. derived from the Subprime lending by bankings system. especially in real estate. especially investment banks. from 2004 to 2006. First. when a country has a trade deficit with others.S dollars as a form of savings. increasing the demand of its currency. How the US exported its inflation: In 2007. So. This will continue until the equilibrium is reached. foreigners will then import more its goods and services.

Float the domestic currency. the saved U. If the government implements the first option and leave the market forces to balance themselves. they are out of circulation.S. Therefore. Since the exported flood of U. is not subjected to the same rules as the other countries.S dollars will bid up the price of domestic currency. countries has two options: 1. Through this convention.S dollars that foreign countries hold have to be saved somewhere by recycling them back to the U. the U. the price of all primary commodities (oil. mental…) will go up since there is a massive demand for input for firms’ production when the supply is nearly unchanged. an appreciation of the domestic currency is highly unfavorable to those 7 . causing a sharp appreciation.S Treasury Bonds. How others countries imported inflation: What about the case of other countries? In the context of FED pumping an enormous amount of money into the economy. Print more and force the local currency to fall alongside the dollar. gold. the flood of U. However. usually via the purchase of U. It can spend more than it earns simply by printing its own dollars to pay foreigners. being in the desirable position of having its money as the world’s premier reserve currency. The U.S. they do not remain within the U. 2. resulting in the rise in the local currency.S economy to cause domestic price inflation.S dollars has to return home through the foreign purchases of its Treasury Bonds.implicit demand for its exported goods and services. Facing this situation. 2.S can silently steal wealth and resources from foreign countries by buying their goods and services with its own printed money.

they still could not get away with importing inflation. prices go up. Russia. because that will follow by severe social and political consequences. In reality. The most common things bought and sold by foreign exchange reserves are oil and gold. But in July 1944.export-dependent countries. the cost of imported inputs and demand for US dollar to trade also increases and makes the firm sell their output for higher price. India. The rest majority of the world – developing countries like China or India. go up as a result of high demand for production. which are heavily reliant on export. etc… because that will weaken their export’s competitiveness in the US market. which means 8 . say. Since the prices of primary goods. especially oil and metal. Japan or Canada can let the dollar fall. 44 Allied nations gathered in 3 Definition taken from inflationdata. and allow their domestic currencies rise because these countries is already developed and rich. Why can America export its inflation? Why can America exports its inflation to other countries? To get to the main point. Another choice is printing more domestic money to purchase all the inflow of dollars in order to maintain the former exchange rate would result in high inflation. developed countries like Germany. the asset of choice was gold and it was used as the medium of exchange between countries. can’t allow a hit on their growth. China. Up to the time of 1944. IV. Inflation of currency results in price inflation. When the value of currency decreases. With those countries choosing freely floating exchange rate. we first define what is Foreign Exchange Reserves: “Foreign Exchange Reserves are foreign money held by International banks for use in international trade and in an effort to diversify their holdings and hedge against the inflation of their own currency”3.

At that time. the dollar was pegged at $35 per ounce of gold and therefore rather than exchanging gold.S. Like any other commodities. In 1973. countries were able to exchange dollars. the rest of the dollars in the world get devalued – whether they are in the United States or China. Nixon was forced to admit that the dollar was no longer worth $35 per ounce and the last link between the dollar and gold was closed.S Dollar as the world reserve currency because everyone needed oil and so they needed dollars as well..S’s economic power and influence is automatically spread globally. As a result. he negotiated a deal with Saudi Arabia requiring that all oil sales be denominated in 9 . dollar the reserve currency of the world.Bretton Woods. France called the United States bluff to demand gold at $35 per ounce of gold and in 1971.state.S was able to pretend that the dollar was still worth $35 per ounce while quietly printing more and inflating its currency. and made the U. Over the years. Eventually.4 But thanks to its currency’s reserve status that the U. But Nixon had another trick to maintain the power of Dollar. which at the time was considered “as good as gold”. New Hampshire. Every time the Federal Reserve prints a new dollar. silently stealing wealth from the world through currency creation. Being used as a foreign exchange reserve currency sharply increases the value and usefulness of that currency. 4 From article “The Bretton Woods Monetery and Financial Conference” – history. they went abroad and never returned home so they had no effect on domestic inflation. the United States has abused its role as issuer of the world’s reserve currency. the value of U.S. the FED was able to create more dollars without sparking significant inflation at home. When the Dollar is the reserve currency. U. dollars.S dollar is based on supply and demand. By artificially creating an high demand for its currency. therefore regain the status of U. the US was able to export its inflation to other countries because after those dollars was printed and spent.

the currency war between U. high 5 Definition taken from Wikipedia. As the price to buy a particular currency falls so too does the real price of exports from the country.V. is a condition in international affairs where countries compete against each other to achieve a relatively low exchange rate for their own currency.”5 When a country is suffering from economic downturn. we will dig deeper in one typical country that import inflation from America – the case of China. Imports become more expensive. How China is dealing with imported inflation In this part. So domestic industry. also known as competitive devaluation. receives a boost in demand from both domestic and foreign markets. The currency war between the US and China: For many years. “Currency war. also suffer the most severely from imported inflation as the largest foreign creditor of US. China – 2nd largest economy in the 1. and thus employment. How are they dealing with it? *the chart taken from inflationdata.S and China has been one of the hottest issue that affect the global 10 .

Devaluation is a potential solution for developing nations that are consistently spending more on imports than they earn on exports.S Treasuries. Chinese goverment prefer to peg the yuan to the dollar as it used to. which raises employment and GDP. A lower value for domestic currency will raise the import prices while making exports cheaper.S pressure toward yuan’s appreciation. Since China manages a state-controlled economy. The U. Secondly. China has also recently inked agreements with 6 Excerpt from article “China’s response to US pressure to revalue the RMB” – chinacenter. This method keeps the yuan low compared with U. It's doing this through increasing goverment spending. the euro area (30%) and the rest of Asia (35%). according to one IMF reports: “Fixed investment related to tradable goods plus net exports together accounted for over 60% of China’s GDP growth from 2001 to 2008 (up from 40% from 1990 to 2000).”6 Therefore. is allowing its dollar to devalue by expansionary fiscal and monetary policy.unemployment rate or wishes to follow a policy of export led growth. the action of creating an excess of currency spikes up inflation and creates social unrest. China continue it’s currency devaluation and export-lead strategy despite inflationary thread and 11 . China is keeping its currency low by pegging the yuan to the dollar. This tends to encourage more domestic production. Thirdly. increasing credit and the money supply. which was significantly higher than in the G-7 countries (16%). along with other currencies. thereby increasing the debt. they control inflation through other means such as fuel-price subsidies and price controls on essential commodities. by that strengthening it. yuan’s develuation is the vital key to the stability and growth of China’s economy overall. and by maintaining the FED funds rate at nearly zero together with applying Quantitative Easing.S.S Dollar. So. which limits the supply of dollars. a lower exchange rate can be considered advantageous. for a developing country heavily reliant on exporting. Why would China chosed to follow this option? Firstly. It keeps the peg by buying U.

its people traditionally save and display their wealth in gold.S. etc. In reality. in the late 1980s Japan was forced by the US to stop adopting a similar tactic. thereby making the 7 Data retrieved from mining. prefer to hang it around their neck instead of trusting banks. Dollar and trade Gold for Oil. China is strong enough to withstand the pressure. China is also known as the largest producer of gold with an amount bigger than Australia or South Africa or Canada. which equals to 50% more gold than Australia. China produces more than 300 tons of gold a year. India had always been the world’s leading gold buyer. 12 . “ Depending on how bad a crisis gets. where is all that gold going??? Here is the answer: China wants the yuan to be backed with a huge percentage of gold. Only investors knowing well what things cost and their true value might be able to achieve success in investing. In 2011.7 But they don’t export it! Gold can come into China but not one ounce of gold is allowed to leave the country. China understood that in the end fiat currency would become worthless and gold would always valuable so the country silently start stocking. Therefore. had been known as the world’s biggest buyer of gold. For instance. had to pass its title to China. China. 2. Last but not least. gold ranges from being between the best answer and the only answer” said a famous economist. central banks are distorting possession and commodity worth.Iran to bypass the U. the political pressure from importing nations can be serious. However. thus reduce the impact of imported inflation. by using gold to evaluate prices. According to history. India. the world’s oldest and most stable form of medium. Gold and the next World Reserve Currency: By controlling fiat currencies in the world. gold’s price began to go sky-high. one can gain access to that knowledge. the world’s second biggest producer.

The Chinese government actually encourage its citizens to buy gold.yuan the world’s most trusted currency. 13 . dollar it would automatically become the primarily sought form of reserve currency. they are preparing their citizens for a major shift in the world economy – the shift that lift China to be the strongest economy in the world. with gold. the nation may soon be able to back its currency.S. the yuan. If China’s yuan were to become more valuable than the U. thus skyrocketing the value of that currency. By hoarding vast amounts of gold.

is there any other way for US dollars to return home? 10.How many countries have gone bankrupt since the Great Recession spread out globally? 12. What are the negative effects of inflation on economy and social? 3.Is there any country which avoided recession? If yes. Questions: 1.VI. how? 13. Are there any good sides of inflation? 4. As the world reserve currency. What is the current state of Vietnam’s economy since the global recession? 6. does it mean the more you accumulate it the better? If not. Aside from purchasing goods and services. Why do you chose China as a study case for a country that imported inflation? 9.Are we out of the global recession yet? 14 . why? 5.Where is the place that received severest damage due to the crisis? Why? 11. Can you talk more about currency war? What is advantages for a country to devalue its currency? 8. What is the reason for you to chose this topic? 2. What did Vietnamese goverment do to face imported inflation? 7.

com    Wikipedia. Hoang Xuan Binh Online sources:   (Financial Times)    Bloomberg. Reference:   Macroeconomics I powerpoint slides by  15 .