Fannie Mae & Freddie Mac

May 29, 2017 | Barcelona, ​​Spain

Fannie Mae and Freddie Mac are two initiatives created by United States Congress that attempt to ensure reliable and affordable supply of mortgages to all US citizens throughout the nation. It’s important to note that the two are different entities that work together.

Fannie Mae, also known as the Federal National Mortgage Association (FNMA), is government-sponsored and publicly traded company that first came about after the Great Depression as a part of the New Deal. Its goal is to expand the secondary mortgage market by securitizing mortgages in the form of mortgage backed securities. This allows the lenders in the market to reinvest their assets into even more lending and increasing the overall amount of lenders in the market. Freddie Mac, or the Federal Home Loan Mortgage Corporation, was created in 1970 to expand the secondary market for mortgages in the US. Freddie Mac buys mortgages from the secondary market, then sells them back to investors on the open market as mortgage-backed securities.

For years, the two worked together and seemingly helped the housing market as it allowed for more people to buy homes in the US. Financial institutions no longer had to bear the burden of holding onto the mortgages they originated, but could sell them into the secondary market shortly after. This worked well for years, until eventually the housing bubble burst in 2008. As government sponsored entities, Fannie and Freddie created a false perception and sense of trust among investors, allowing Fannie and Freddie borrow money in the bond market at lower rates than other financial institutions. Rivals of F&F on Wall Street began heavily investing in the portion of the mortgage market that the federal government had reserved for the organization. Eventually, the housing market crashed as home prices began to stagnate and fall, drastically increasing risk of mortgage defaults among homeowners. All the homeowners with large amounts of equity could just refinance out of their mortgages into another with low initial payments. When the housing bubble finally burst, so did all the risk models and F&F’s portfolios.

In my opinion, the failures of Fannie and Freddie fall mostly on U.S. Congress. As a government sponsored entity, these institutions should be the most stable and heavily regulated. They were supposed to serve as solutions to the housing market by allowing more Americans to purchase homes at affordable mortgage rates. Instead, driven by greed and what could even be considered corruption, Fannie and Freddie screened American investors from overly confident debt and credit guarantees that carried way too much systematic risk. Ultimately, it was the U.S. taxpayers that took the burden and had to pay for the mistakes of a government-sponsored entity.

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Figures above shows the immense debt issued by companies and the large percentage retained in their portfolio.

Sources:

  1. https://www.fhfa.gov/SupervisionRegulation/FannieMaeandFreddieMac/Pages/About-Fannie-Mae—Freddie-Mac.aspx
  2. http://www.cnbc.com/2017/05/25/trump-budget-could-have-big-news-for-fannie-and-freddie.html
  3. http://www.npr.org/2017/05/23/529730705/us-looks-to-get-mortgage-giants-fannie-and-freddie-out-of-conservatorship
  4. http://www.breitbart.com/economics/2017/05/23/trump-budget-includes-142-4-billion-revenue-fannie-mae-freddie-mac/
  5. https://www.benzinga.com/analyst-ratings/analyst-color/17/05/9463634/will-the-fhfa-suspend-fannie-freddies-dividend-payments-
  6. https://www.nytimes.com/2017/05/23/business/dealbook/after-complaints-fannie-mae-will-stop-selling-homes-to-vision-property.html
  7. https://www.bloomberg.com/policies/articles/2017-05-05/blackrock-says-don-t-recap-and-release-fannie-and-freddie
  8. http://www.washingtonexaminer.com/fixing-fannie-and-freddie-wont-be-any-easier-for-the-trump-team/article/2622304
  9. https://www.americanbanker.com/news/fhfa-on-collision-course-with-congress-over-gses
  10. Https://seekingalpha.com/article/4072102-freddie-mac-paid-back-fannie-mae-way

Credit Default Swaps

May 29, 2017 | Barcelona, ​​Spain

I believe credit default swaps to be one of the more challenging concepts to understand from this course. Essentially, they are insurance contracts to cover losses on certain securities should they default. They can apply to municipal bonds, corporate debt and mortgage securities and can be sold by financial institutions such as banks and hedge funds. In a swap, the buyer of the insurance pays premiums over a period of time and in turn is secured should they need to default. I think of it as being similar to buying home insurance to protect against unexpected events such as fire and theft.

The idea for CDS is simple enough and should benefit both parties, however as shown by the 2008 credit crisis, they can be too good to be true. Although the banks and insurance companies are regulated, the credit default swap market lacks real regulation. This mean that before 2008, many buyers and sellers were trading from investor to investor without anyone regulating the trades to ensure that the seller could cover the losses should they occur as a result of default. Investors were trading these swaps with each other without rules or regulations, so when the inevitable large defaults occurred, often times the resources necessary to cover them did not exist.

This made it incredible difficult for banks to value the insurance contracts and securities to add on to pre-existing struggles with valuing mortgage-related securities. Some of the top commercial banks including JP Morgan Chase, Citibank, Bank of America and Wachovia were four of the most active in this market. They heavily invested in CDS because they were seen as easy money with a booming economy and few CDS at the time, making them a low-risk way to collect premiums. This kept expanding till it grew out of control, entering the secondary market where investors and hedge funds would rely on speculation to buy and sell CDS instruments without regulation. This all came to a head when the economy tanked and the providers of the insurance did not have the financial resources necessary to cover the immense losses. Insurance companies were scrambling to find anything liquid to cover the losses, but there simply was not enough money. Without regulation, many of the CDS’s had gone through as many as 30 trades, so when the defaults occurred finding those responsible for covering the losses was increasingly difficult.

Much like burst of the housing bubble, the economic crisis of 2008 all seems to be traced back to a lack of regulation and accountability not only by the government, but by the large financial institutions trusted with people’s money. Investors hold some responsibility in knowing where they invest their money, but banks and other financial corporations hold majority of responsibility in understanding the risks they take on. It seems that with something as risky as the stock market, when things are too good to be true, they probably are. People are always looking for ways to win big in the market, but those large winnings investors seeks always come at a cost.

Sources:

  1. http://www.investopedia.com/terms/c/creditdefaultswap.asp
  2. https://www.oroyfinanzas.com/2013/05/que-cds-credit-default-swaps/
  3. https://www.elblogsalmon.com/conceptos-de-economia/que-son-los-credit-default-swaps
  4. http://www.nasdaq.com/article/dtcc-to-launch-blockchain-credit-default-swaps-reporting-in-early-2018-cm794771
  5. https://www.nytimes.com/2016/03/22/business/dealbook/credit-default-swaps-make-restructuring-more-difficult.html
  6. https://www.nytimes.com/interactive/2015/business/dealbook/credit-default-swaps.html
  7. http://www.economist.com/blogs/freeexchange/2013/01/credit-default-swaps?zid=300&ah=e7b9370e170850b88ef129fa625b13c4
  8. https://www.theguardian.com/business/2010/mar/09/question-answer-credit-default-swaps
  9. https://www.theguardian.com/business/2012/may/14/jp-morgan-loss-credit-default-swap
  10. https://www.theguardian.com/commentisfree/2017/apr/27/barack-obama-powerful-voice-paid-speeches

What is Securitization?

May 29, 2017 | Barcelona, ​​Spain

Image Result from securitization nytimes

The next topic I’m going to discuss that relates to the financial crisis is the process of securitization. In securitization, the issuer creates a financial instrument by mixing other financial resources they have and then selling the combination of assets to investors. It can include all types of financial assets and increases overall liquidity in the market. One example of such, discussed above, is mortgage-backed securities. By taking many different mortgages and putting them all together, the issuer of the security can separate the combined group of mortgages into smaller, individual segments based on the risk of default for each mortgage. This generates more liquidity, because more people are able to buy shares as they can afford the smaller segments of the total pool of shares.

Ideally, securitization provides creditors with a tool to lower their total risk by dividing the ownership of their debt obligations amongst many individual assets. They can effectively remove these assets with higher risk from their balance sheets because the investors are essentially acting lenders by buying the security. What differentiates this process is that these are backed by tangible goods, so if a debtor can make payments of their assets, it can be taken and liquidated to compensate the people who hold an interest in the debt.

By definition, securitization seems to make a lot of sense, however it does come with a decent amount of risk. Just like other investment tools, higher risk means higher rate of returns, leading to higher interest rates that less qualified borrowers end up paying. So, even if the securities are backed by tangible assets, there is still no guarantee that the assets will hold stable in the case of a debtor not making payments.

In regards to the credit crisis, securitization is most commonly blamed for the mortgage-backed securities (mentioned above). The MBS were attractive to investors because of the high interest rates they offered. Mortgage lenders at the time took advantage of the system by pooling the subprime mortgages together and sold them securities to investors who did not know better. People were essentially blindly investing money because the lenders placed all these bad mortgages together into a deceivingly attractive package. As the real estate market boomed, more and more of these packages were sold. Eventually, when the bubble burst and people could not pay their loans and all those subprime mortgages began to default leading to the credit crisis we keep referring to.

In my opinion the idea of ​​securitization is a great one. It makes logical sense, to compiling many financial resources to diversify a portfolio. However, just as with all tools of the trade in investments, it needs to be closely monitored and regulated by everyone. The government, investors, and most importantly the banks and other financial institutions are most responsible for creating packages with legitimate chances to succeed in the long run.

Sources:

  1. http://www.investopedia.com/terms/s/securitization.asp
  2. https://www.imf.org/external/pubs/ft/fandd/2008/09/pdf/basics.pdf
  3. Http://economictimes.indiatimes.com/definition/securitization
  4. http://www.businesswire.com/news/home/20170525005863/en/Prosper-Closes-495-Million-Securitization-Transaction
  5. https://www.nytimes.com/2016/12/22/business/dealbook/after-the-crisis-this-wall-street-lawyer-turned-fanboy-toy-maker.html
  6. Https://dealbook.nytimes.com/2013/10/01/a-step-toward-peer-to-peer-lending-securitization/
  7. http://www.nytimes.com/2010/10/01/business/economy/01norris.html
  8. http://www.economist.com/news/leaders/21593457-once-cause-financial-worlds-problems-securitisation-now-part-solution-its
  9. http://www.economist.com/news/finance-and-economics/21717426-efforts-pep-it-up-are-looking-increasingly-lacklustre-europes-securitisation
  10. https://www.wsj.com/articles/ecbs-attempt-to-breathe-new-life-into-securitization-market-falls-flat-1454315616

European Sovereign Debt Crisis: Greece

May 29, 2017 | Barcelona, Spain

Before coming to study in Barcelona, I took an International Business course that covered introductory concepts regarding global trade and economics. A point of emphasis in that class was the European PIGS nations, specifically Greece for it’s immense financial issues in the past decade. In 2008, Greece became the center of Europe’s debt crisis after Wall Street crashed in 2008. Shortly after the crash, Greece announced in late 2009 that it had been understating its deficit status for years and had been accumulating immense debt without a plan to pay it off. A year later in 2010, Greece was unavoidably headed towards bankruptcy. In an attempt to save Greece, the IMF and European Central Bank tried on two separate occasions to provide international bail outs for Greece, together totaling over 240 billion euros. However, these bailouts failed, much due to the unachievable conditions set by the lenders, including harsh austerity terms, unrealistic budget cuts, and very high tax increases.

Despite the 240 billion in bailout funds, Greece’s economic status has shown little improvement. The economy of the nation has shrunk by a quarter in the previous five years and unemployment is at an all time high of 25 percent. Instead of stimulating the economy, the bail out funds have gone strictly towards paying off Greece’s international loans while the government still has staggering debt that it can’t begin to pay off until a recovery of the economy begins. This inability to pay off debts or show any signs of progress have made relations with the rest of the EU tense.

On a much larger scale, Greece’s problems do not seem to be out of the ordinary for many Western countries. Like the crash of Wall Street in the US as previously mentioned, as well as the failure of other EU economics such as Portugal and Ireland, there seems to be a general lack of transparency among financial institutions as well as governments around the world. There is a pattern of things getting out of hand while those who should be managing and regulating the economy turn a blind eye to obvious issues such as insurmountable debt and false financial reporting. At a certain point there must have been a number of Greek government and financial officials who knew the true immensity of their acquired debt in the past couple decades that lead them to this point. Instead of doing their job and duty of accurately reporting this, they took the seemingly easier path of ignoring it till it could not longer be ignored.

Now, Greece faces a large number of consequences, even potentially having to leave the Eurozone that is already showing signs of faltering with other nations looking to follow the UK and Brexit.

Sources:

  1. http://www.investopedia.com/terms/e/european-sovereign-debt-crisis.asp
  2. http://www.sciencedirect.com/science/article/pii/S0261560612001830
  3. http://www.telegraph.co.uk/business/2017/05/24/eurozone-still-fragile-despite-growth-spurt-warns-european-central/
  4. http://www.silverseek.com:8080/article/decline-and-fall-eu-16473
  5. https://www.bloomberg.com/news/articles/2017-05-25/euro-quietly-overruns-eastern-holdout-tiptoeing-on-the-sidelines
  6. https://www.ft.com/content/72e1a694-3b01-11e7-ac89-b01cc67cfeec
  7. http://www.mintpressnews.com/whistleblower-greek-debt-crisis-manufactured-unscrupulous-accounting/228076/
  8. http://time.com/4785515/greece-debt-austerity-alexis-tsipras/
  9. http://www.politico.eu/article/greek-debt-drama-on-the-verge-of-a-happy-ending/
  10. http://www.ekathimerini.com/218798/article/ekathimerini/business/eurogroups-failed-compromise-leaves-greece-in-limbo

Brexit

May 29 2017 | Barcelona, ​​Spain

On June 23, 2016, the British shocked the world when they voted to withdraw from the European Union. Nearly a year later on March 29, 2017, the initial steps of the two-year process to withdraw began with Prime Minister Theresa May invoking the Article 50 of the Treaty on the EU to formally withdraw UK from the EU by April 2019.

The biggest concerns of UK government officials revolved around the economic ramifications of leaving the EU. They predicted that voting to leave the EU would result in an immediate and drastic economic recession, leading to a sudden boom in unemployment rates. However, post-Brexit has shown a much more mild decline in the economic state of UK as the pound only slumped 15% against the USD and 10% against the euro. The economy of the UK has actually grown 1.8% in the past year. Inflations has risen to 2.6%, still close the ideal inflation level of 2% and unemployment has actually fallen to it’s lowest level in the past decade of only 4.8% in the UK.

In the next two years, negotiations between the UK and the EU will continue however Article 50 is pretty straight forward, stating that any member state of the EU may do so as long as they notify the European Council and negotiate the terms of the withdrawal. Moving forward, the UK will have an election and then decide which laws and regulations of the EU to keep or repeal in the country. Current Prime Minister Theresa May has the goal of reaching a new customs union deal with the EU which will continue to allow for free trade among the UK and EU, disallowing tariffs on each other’s goods. If this falls through, the UK will have to operate under rules of the WTO, which could mean tariffs and customs checks.

All this said, the main concern of Brexit worldwide is that it may lead to the dissolution of the UK, as Scotland will most like leave the largest empire in history. Furthermore, the two Irelands will be divided, as one will be with the UK and the other still in the EU. For this reason, I believe Brexit was a rash and poor decision by British voters. Although many arguments can be made against the current state of the EU, and pressure is building for many other countries to withdraw as well, it seems that the British rushed into this decision to make a statement against the EU without considering all potential ramifications. Throughout history, the UK has been the most stable and consistent empires. Many global institutions rest on the assumption of its stability and continuity. In the next two years we will see how Brexit plays out, but as it stands now the likely outcomes are daunting for the world.

Sources:

  1. http://www.lavanguardia.com/economia/20170528/422984979955/effectos-economicos-brexit.html
  2. https://www.nytimes.com/2017/05/02/world/europe/london-tabloids-brexit.html
  3. https://www.nytimes.com/2017/05/01/world/europe/uk-eu-brexit-theresa-may-jean-claude-junker.html
  4. https://www.theguardian.com/politics/2017/may/09/new-york-times-offers-brexit-means-brexit-guided-tour-of-london
  5. https://www.nytimes.com/2017/05/11/business/dealbook/brexit-uk-london-banking.html
  6. http://www.abc.es/espana/abci-espana-y-portugal-buscan-alianza-frente-brexit-201705290259_noticia.html
  7. http://www.elmundo.es/internacional/2017/05/21/59217485268e3e39308b45b0.html
  8. https://www.nytimes.com/2017/05/05/world/europe/france-election-polls-macron-le-pen-frexit.html?rref=collection%2Fnewseventcollection%2Fbritain-brexit-european-union&action= Click & contentCollection = europe & region = stream & module = stream_unit & version = latest & contentPlacement = 18 & pgtype = collection & mtrref = http://www.nytimes.com & gwh = 4A5B7BABABB4BBCBF0D9A9CCB6653B14 & gwt = pay
  9. https://www.nytimes.com/2017/05/04/business/dealbook/eu-britain-brexit-derivatives.html?rref=collection%2Fnewseventcollection%2Fbritain-brexit-european-union&action=click&contentCollection=europe®ion=stream&module= Stream_unit & version = latest & contentPlacement = 23 & pgtype = collection & mtrref = http://www.nytimes.com & gwh = 90B53FBA69F063E91C1CAF2BE8D0296E & gwt = pay
  10. https://www.nytimes.com/2017/04/29/world/europe/european-union-brussels-brexit-theresa-may.html?rref=collection%2Fnewseventcollection%2Fbritain-brexit-european-union&action=click&contentCollection= Europe & region = stream & module = stream_unit & version = latest & contentPlacement = 29 & pgtype = collection & mtrref = http://www.nytimes.com & gwh = 7487F3B3752EE5EE61084BA83516C6F0 & gwt = pay

Role of Central Banks in Modern Society

May 29, 2017 | Barcelona, ​​Spain

Image result from the fed

The Federal Reserve (“Fed”) – Central Bank of the United States of America

With so many country’s experiencing struggling economies, central banks have begun to play an increasingly important role in society. Central banks can be best described as the “lender of last resort” (Investopedia), as their job is to provide the economy with funds when commercial banks can’t cover a supply shortage. It is the last defense for a country’s economy from failing or defaulting. To do this, the central bank’s goal is to provide their country with control over currency to stabilize price and maintain proper inflation levels. Furthermore, the central bank acts as the regulatory authority of the nation’s monetary policy and is the only one who is able to print cash and coins for that country.

In order to maintain an unbiased position in the economy and best serve it’s purpose, the central banks perform best when they are an independent entity from government fiscal policy and therefore are uninfluenced by any political regime. They also should be separate from any commercial banking interests. In almost every country today, the central bank operate on it’s own, separate from the government, even though it handles the buying and selling of government bonds and other instruments. This is largely due to problems caused by government influence in the past.

Today, central banks play a more pivotal role than ever because of problems developing in the commercial banking system globally. A century ago, the central banks job was much easier as they were primarily responsible just for converting gold into currency. Maintaining price stability was a lot easier because the amount of gold available in the global economy was limited. Due to a number of historical events, including the Great Depression and WWII, the role of the central banks became much larger again, although they were heavily dependent on government decision making then.

So, with it’s two primary functions of regulating inflation and price stability and being the last resort for lenders, central banks today are more important than ever. With what seems like country’s nearing or having already experience default in the past decade, more regulation is necessary to ensure economic stability. For example, a country like Greece would have tremendously benefited from a more accountable central bank to keep the country from taking on so much unaccounted for debt until it was too late. More awareness of the central bank and accountability of those that are a part of them are needed in the world. I am all for more emphasis on the development of central banks as they can help immensely with helping the financial and economic stability of a country.

Central banks image result

Sources:

  1. http://www.investopedia.com/articles/03/050703.asp
  2. http://www.dailyreckoning.co.uk/economy/how-central-banks-have-distorted-the-world/
  3. https://www.ethnews.com/singapores-central-bank-concludes-distributed-ledger-trial
  4. https://uk.investing.com/news/economy-news/bulgaria-central-bank-working-to-reduce-banking-bad-loans:-governor-176811
  5. https://www.rte.ie/news/business/2017/0529/878793-bank-of-ireland-fine/
  6. http://www.bankingtech.com/850201/swedens-central-bank-goes-live-on-intellect-quantum-system/
  7. https://www.ecb.europa.eu/press/pr/date/2017/html/ecb.pr170525.en.html
  8. https://www.ft.com/content/b606023a-468c-11e7-8519-9f94ee97d996
  9. http://www.the-star.co.ke/news/2017/05/30/central-bank-keeps-benchmark-rate-at-10-in-bid-to-tame-inflation_c1570900
  10. https://www.ft.com/content/9a99cdae-4210-11e7-9d56-25f963e998b2

Occupy Wall Street

May 29, 2017 | Barcelona, ​​Spain

Image results for occupy wall street

I had the opportunity of seeing Zuccotti Park in Lower Manhattan, NYC, USA first hand a few months ago when visiting my sister in New York. It has become a place of interest for people visiting New York due to the large protest action that has been going on there since September of 2011 known as Occupy Wall Street. Anyone who has been following the new in the US knows that in simple terms, the purpose of the protest is against the large corporations in the world, or the richest 1%. Those protesting hold strong beliefs against the systematic tax invasions they believe this small demographic to be guilty of.

This movement all started largely as a result of the economic crisis worldwide starting in 2008. A small Canadian group, the Adbusters Foundation, known for ads free of anti-consumerism proposed the idea to protest against the US government policies they believed to be guilty of causing the global financial crisis. It’s aim is just as the name would suggest, to occupy the financial district of New York to make a statement against the perceived greed and social inequality that exists in the financial world. Everyday, these protestors occupy Wall Street in an attempt to make a statement against the government and what they view as corruption that allows big businesses and the 1% leading them to influence the government. One of its main arguments is against the disparity of salary earned by company executives and the average worker. In 1960, the salary of the CEO of a company and it’s average worker was 50 times larger and between the years of 2005 and 2010, the difference has grown up to 350 times as much.

Resultado de imagen de occupy wall street

Protestors of the movement on Wall Street, NYC, U.S.A

Based off my knowledge of the Occupy Wall Street movement it is tough for me to completely agree with their initiative. I’m all for more government regulation in the economy, as there is a global trend towards a lack of accountability and trust of large financial institutions in the world but the movement seems to lack specificity. From doing my research, it seems it lacks a clear vision of what they actually want to see and their argument is much too broad. It is clear that they want to see change and more equality between the 99% and the wealthiest 1% in the world, but the movement is strongly criticized for it’s lack of specific agenda or demands. It seems more like an easy idea to rally around for people who are looking for someone to blame for their financial woes, rather than actually seeking a specific change. It’s almost become a norm for those protestors to be in Wall Street, making it’s influence much weaker and less likely to really create any change.

Image of occupy wall street graph

Sources:

  1. http://occupywallst.org/
  2. https://www.theguardian.com/us-news/2016/sep/18/occupy-wall-street-reunites-five-years-later-it-never-ended-for-most-of-us
  3. https://www.nytimes.com/2017/02/14/us/politics/protesters-resist-trump.html?rref=collection%2Ftimestopic%2FOccupy%20Wall%20Street&action=click&contentCollection=timestopics&region=stream&module=stream_unit&version=latest&contentPlacement=5&pgtype=collection
  4. https://www.nytimes.com/2017/01/20/nyregion/trump-presidency-new-york-city.html?rref=collection%2Ftimestopic%2FOccupy%20Wall%20Street&action=click&contentCollection=timestopics&region=stream&module=stream_unit&version=latest&contentPlacement=9&pgtype=collection
  5. https://www.nytimes.com/interactive/2016/09/17/opinion/Occupy-Wall-Street.html?rref=collection%2Ftimestopic%2FOccupy%20Wall%20Street&action=click&contentCollection=timestopics&region=stream&module=stream_unit&version=latest&contentPlacement=2&pgtype=collection
  6. https://www.theguardian.com/business/ng-interactive/2016/oct/08/great-recession-financial-crisis-recovery
  7. https://www.theguardian.com/commentisfree/2016/apr/14/breaking-up-banks-public-bailouts-ownership
  8. https://www.usnews.com/news/national-news/articles/2017-05-31/supreme-court-reviews-mass-arrests-without-warning
  9. http://www.sfchronicle.com/business/networth/article/Will-Occupy-Silicon-Valley-be-the-sequel-to-11165058.php
  10. https://www.theguardian.com/world/ng-interactive/2015/sep/16/occupy-wall-street-four-years-later-timeline

Economics: China as a Currency Manipulator

By ALEXANDER WU | May 2, 2017 | Barcelona, ​​Spain

From his first day in office, US President Donald Trump mandated for his Secretary of the Treasury to label China as a currency manipulator, just as his republican candidate predecessor Mitt Romney had done before him. This would lead to Trump trying to negotiate with the Chinese to reduce their large trade surplus by threatening to limit imports into the US, thereby reducing the US trade deficit and stimulating economic growth. However, the truth is that China has barely manipulated it’s currency at all in the past couple of years, making the president’s accusations difficult to prove.

From 2003 to 2014, China had actually been the greatest currency manipulator of all time, bringing in more than $ 300 billion annually to protect its currency from upward growth by artificially keeping the exchange rate of the dollar strong and the renminbi’s exchange rate weak. This manipulation is the leading factor of China’s large trade surpluses, which at one point reached 10 percent of its entire GDP in 2007.

Arguments to Trump’s claims of Chinese currency manipulation include that many governments try to influence their exchange rates and China is only one of many countries that attempts to gain an advantage through undervaluing its currency. Further arguments include that China has actually been rather cooperative in previous years, allowing yuan to appreciate by a third, leading many economists, even at the IMF, to say that it is actually no longer even undervalued.

In reality, there are actually only a few major currencies, including the dollar and euro, which the government allows to “free floating” currency based on global market forces of supply and demand. Generally, countries are only criticized for currency manipulation when the government is keeping it undervalued for the sole purpose of giving an artificial boost to exports while keeping out imports.

Based on the facts stated above, I believe both parties, the US and China are somewhat at fault here. Although China has made progress and shown willingness to cooperate in the past few years by allowing currency to appreciate, numbers still seem to indicate that it is artificially undervalued, resulting in China’s continued dominance in trade with so much exports. On the other hand, I also believe that Trump is out of place to make such strong accusations, when China has clearly made an effort to amend this by appreciating it’s currency in past years. There seems to be an overall lack of communication between the countries, as it is more of an accusation battle rather than diplomatic negotiation regarding international trade.

Sources:

  1. Https://www.usnews.com/news/best-countries/articles/2016-06-22/does-china-manipulate-its-currency-like-donald-trump-says
  2. Https://piie.com/blogs/trade-investment-policy-watch/china-no-longer-manipulating-its-currency
  3. Https://www.nytimes.com/2017/04/11/business/economy/trump-china-currency-manipulation-trade.html?_r=0
  4. Https://www.forbes.com/sites/phillevy/2017/04/14/china-currency-manipulation-alls-well-that-ends-well/#229b14211492
  5. Http://www.cnbc.com/2017/03/15/china-currency-manipulator-claims-are-false-sp-global-ratings.html
  6. Https://www.bloomberg.com/news/articles/2017-03-06/china-currency-manipulation-could-be-just-what-trump-team-needs
  7. Http://www.economist.com/news/finance-and-economics/21717997-government-has-been-pushing-price-yuan-up-not-down-china-and
  8. Https://www.usatoday.com/story/money/2017/04/16/trump-defends-u-turn-china-currencys-practices/100548546/
  9. Http://fortune.com/2017/04/05/donald-trump-xi-china-currency-manipulator/
  10. IMAGE: https://pmpaspeakingofprecision.com/tag/china-currency-manipulation/