International Financial System Essay

There atomic number 18 some assumptions that the unify States faces different scotch heartyity than the rest of the world. The rescue given by regulator R. S. Kroszner given on September 1, 2008 is more or less the unite States in the International financial System. He argued against the decoupling hypothesis and talked about the two puzzles in the international pecuniary accounts of the United States. The situation with the accommodate slowdown in the United States in the summer of 2007 affected in like manner European currency markets. It became harder to sell the houses for their original prices.Then turmoil emerged in financial dodgings around the world in the late summer of 2007. The mortgages taken in the United States were backed with another loans like car loans or student loans and then reinvested again. A lot of impertinent investors bought those securities that created difficulties in m oney markets in Europe. At the beginning of 2008, the financial syste m in the United States weakened the growth of gross domestic product and affected galore(postnominal) emerging markets economies, reducing their growth and prospects for growth. Stock market declined sharply. The food and cleverness prices increased, and it created a concern of inflation.In other words, G everywherenor wants to show that thither is a connection between economies of different countries. It appears that a shock of one demesne is affecting the miserliness of mevery others. According to him, the global miserliness remains closely connected by both trade and financial linkages. He summed up in short that one countrys imports be anothers exports. The weakness in one economy affects the demand for the imported products that are the stimulus for the economy of the other country which exports these products. Financial account which consists of purchases and sales of assets is a major(ip) account.Global Financial linkages include not only the wampum international co ronation positions only also the sizes of gross cross-border claims and liabilities positions. There are enormous enthronements made by US residents and by foreigners. According to Kroszner, US liabilities to foreigners add up more than $20 trillion, exceeding $140 percent of US GDP. US claims on foreigners totaled $17. 5 trillion, roughly 130 percent of US GDP. This statistics reveled by the supply stuff, indicates that there is a financial linkage between the countries around the world.As a result, more than two-third of U. S. liabilities are in the form of debt instruments, bandage half of U. S. claims are in integrity securities and direct investment. In other words, foreign investors find attractive U. S. markets because of many incidentors like the Rule of Law, social and political st susceptibility, the respect for private property, the uniform commercial code with the court system that can help to resolve disputes, the reliable open market, the safety and firmness of banking system, and finally the transparency in pricing of securities.The next point of the Governors speech is about two puzzles. There is an assumption that the United States has the unknown ways to have the higher returns on its investments. The U. S. residents have income of $90 billions more than the foreign investors on their investments in the United States. According to the governor, the suffice lies in the returns, composition, and size of U. S. claims and liabilities. The return received on U. S. direct investment claims on the rest of the world is much larger than paid by U. S.on its direct investment liabilities to the rest of the world or any other assets. In short, direct investment appears to be a great share of U. S. claims than it is of U. S. liabilities. Moreover, the United States is not the only country that has a domineering net investment income. United Kingdom has also a larger variation in the rate of return on direct investment claims and liabiliti es comparing to other countries. This fact proves that the U. S. residents allocate their investments with a greater jeopardy premium and make more physical investments in other countries.Kroszner suggested that difference of $90 billion can be partially explained also by favorable tax laws that reduce their overall tax burden on their direct investments in other countries. Another puzzle was about the U. S. ability to borrow on better terms than the other countries do in order to finance their external deficit. The United States has huge account deficits over $3. 8 trillion. To finance the deficit U. S. needs to borrow abroad. According to the governor, U. S.net liabilities increased by only $600 billion, which is $3. 2 trillion less than the cumulated sure account deficits. About $2. 4 trillion of this amount is because of valuation adjustments (capital gains) favoring us claims. The adjustments constantly occur because of the changes in asset prices and the U. S. currency whi ch is considered to be the major medium of exchange on the market, about 66%. Besides the fact that the United States has the deficit since 1980s, the foreigners are still willing to invest in U. S. market.They can find it more attractive if the United States has the higher real interest. They observe such relative facts like the real sustainable economic growth, the relative inflation rates, and Purchasing Power Parity in the semipermanent exchange rates. They might also choose to invest in certain(a) securities because of personal preferences and tastes. All these facts influence their decision making to invest in the U. S. market, but the key to resolve the second puzzle lies in differences in portfolio returns, composition, and size.Most U. S. liabilities are debt securities, which realize small capital gains, while a large fraction of U. S. claims on the rest of the world are equity securities, which realize much larger capital gains. In other words, the U. S. residents are taking more attempt when invest in the new emerged markets while the foreign investors make safe decisions to invest in the U. S. securities with lower risk and lower return like U. S. bond and bills. Because of global trading and financial linkages, all the countries are bounded together.