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2J03 - February 15, 2012.docx

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Political Science
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O' Briem

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Global Political Economy Wednesday February 15 2012 2J03thContd from Feb 8Floating Rates Floating RatesAugust 1971 Nixon ShockFluctuating Rates created trade tensions o 1980s US overvalued because of high interest rates trade deficits Power of Financial Flows1992 UK committed to keeping its currency in ERM o His personal experienceBritain had committed itself to the Exchange Rate Mechanism Keep currency in band so they wouldnt vary in strength with each other more than 6Forced to keep interest rates high to keep currency at right level o People were losing faith in the value of the poundthis made foreigners would buy British pounds or deposit any money this means more people will invest Higher Interest RateInvest value of currency goes up Economy slowed down growth Interest goes up domestic activity goes down population wanted lower rates Speculators sold UK pounds Bank of England ran out of foreign currency to buy pounds forcing devaluation o They have so much money theyre flooding the British Market International Investors had more money than bankers had to publicly admit they couldnt support the poundcan no longer get into single currency o Demonstrates that even advances industrialized states like Britain dont have as much money as INVESTORS do SpeculationExampleTrading of currencyMonday am Susan sells 1 dollar for 1 Euro Monday pm Euro appreciates by 10Susans 1 Euro is now 110 making 10 centsIf deal for 100 000 Euros Susans profit is 10 000Multiply by millions billions minus small cost for exchanging currency4 Trillion dollars in a single day is done in the international transactions Foreign exchange market turnover 19882007 in billions for daily turnovers 2007tremendous explosionPolitical importancestates are more vulnerable to financial transactionsFinancial InnovationEuro currency markets offshore o Markets that are unregulatednot just dealing with Euroso Dealt and traded with all currency except for British pounds
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