Global Finance Lecture Notes PDF

Correct answer: 8,000 8. Which plane, introduced in the 1930s changed commercial aviation? Correct answer: The Douglas DC-3 9. Which cruise line took 38 ships out of service during the pandemic shutdown? Correct answer: Carnival 10. Larger ships have many benefits but also problems. One problem...

Correct answer: 8,000 8. Which plane, introduced in the 1930s changed commercial aviation? Correct answer: The Douglas DC-3 9. Which cruise line took 38 ships out of service during the pandemic shutdown? Correct answer: Carnival 10. Larger ships have many benefits but also problems. One problem is... Correct Answer: Too big to go to some destinations. LECTURE 8. GLOBAL FINANCE. “Money” is defined as any generally accepted medium of exchange which enables a society to trade goods without the need for barter; any objects or tokens regarded as a store of value and used as a medium of exchange. Coins and banknotes collectively as a medium of exchange. Later also more widely: any written, printed or electronic record of ownership of the values represented by coins and notes which is generally accepted as equivalent to or exchangeable for these. Coins: valued for metal content or as representative tokens. Paper money: Issued to represent value. From ancient China to modern societies. Digital currency: Exchanged as information, rather than physical money. All of these work only with a shared consensus of value. KINDS OF MONEY: Commodity money: Gold and silver coins but also things like shells, grain or other items of agreed value. The gold standard which is why major currencies tended to be on before the Great Depression. Token money: Coins or paper that can be exchanged for the face value of gold or silver. The “gold standard” is an example. Flat money: Money issued by a government that is not backed by gold or another commodity but rather by declaration of the issuing government. You had to have the value of gold in money. POTOSI AND SILVER “Potosi was the first city of capitalism, for it supplied the primary ingredient of capitalism – money”. It was conquered by Spain but when they arrived what they found was this great mountain with stones and minerals, the mountain was incredibly rich with silver. The local people mined silver and refined silver on a scale in which they found what they needed. The Spanish started an aggressive campaign and enslaved the local population, forcing them to work constantly mining and refining silver at this mountain. The colonial power of Spain increased dramatically. Impact: The influx of gold and especially silver from South and Central America changed the economies of the world. It made Spain one of the wealthiest countries in the world. The transition to cash in Europe helped facilitate the development of a capitalism based on the exchange of money rather than barter. Spanish silver changed the nature of trade with China and other parts of Asia. It also drove other European countries to seek their own colonial opportunities. Potosi in Bolivia and the surrounding area are now one of the world's leading sources of lithium, an essential part of modern batteries for use in electric cars and other devices. How, and for whom, that resource is developed will be the next chapter in Potosi’s influence on capitalism. The government of Bolivia is trying to figure out ways in order to maintain the benefits of extracting lithium within Bolivia. Image is a lithium rich salt pond. Lithium is vitally important for things like electric cars, and other kinds of stuff like phones, or whatever has a battery in there. What is a Bank? Banks and Central Banks The Bank of England, the model for most Central Banks, was formed in 1694. Central banks have enormous interests. Designed to raise money for the government to finance the English navy after a defeat. 1.2 million pounds raised, in return the Bank could issue notes against government bonds. BANK OF ENGLAND By the end of the 18th Century the bank issued currency, managed the public debt and had become “the bankers bank” holding enough gold to cover currency issued by itself and other banks in England. Other central banks: In the USA, the Federal Reserve (FED). Created in response to the 1907 financial crisis. Created December 23, 1913. Response to the financial crisis and a desire to ease ups and downs in the economy. Post American Civil war. The crisis of 1907. The banks in New York City found themselves in a critical situation, they entered into real estate transactions and that they didn’t go the way they wanted to. Many of them didn't have the money to cover the deposits that had been made in their banks. Similar to Silicon Valley a couple of years ago. That's why they created their central bank. They approached John Pierpoint (JP) Morgan to fix the New York System. He pledged significant amounts of his own money and coordinated other bankers to stabilize the financial system. As time went on The Federal Reserve had more power. Centralize control of money. Regulate banks. Lender of last resort for banks Set interest rates The Bank of Canada: The first Canadian governments were happy to let the Bank of Montreal control most of the things and they found themselves very much still under the British model. In 1913 when the Federal Reserve started, Canada didn't feel a particular need to copy them and have a Central Bank. The Great Depression changed that. Canada abandoned the gold standard officially in 1931 and Canada moved to a currency system that allowed the government to reinflate the Canadian economy. Royal Commission established in 1933 to study the issue. Bank of Canada established in 1935. Central control of Canada’s monetary supply. Including tasks like moderating inflation. Initially controlled by private interests but transferred to federal government control in 1938. Control of currency. Standardized currency established in 1950 (CAD). Chartered Banks in Canada: Chartered banks are the sort of banks most of us are familiar with. They take deposits and make loans. The banks operate under charters issued by the federal government. Originally banks issued their own bills, supported by their holding of gold or other assets. Why are banks so important in capitalist economies? Banks collect money and all of the people in the area put their money in the bank. The bank bundles it up and issues loans, sometimes eventually mortgages to individuals and businesses giving them access to pools of capital they might otherwise not be able to find. It was essential in the development of the English Industrial Revolution that those expensive early stages of industrial development were funded in large part by the ability of banks to pool money and lend them to the new industries. They used to print their own money backing it up with gold and sometimes other assets. As a capitalist economy grows the role of the bank is increasingly important. Chartered Banks in British North America: First Canadian Bank was the Bank of Montreal, established in 1817, followed by others including the Bank of Nova Scotia in 1832. Which they call the big five now. The big five control everything, but they open branches in different parts of Canada which allows the pools of capital to become even bigger. Limits on the amount of debt in relation to deposits General conservative nature of chartered banking in British North America resulted in a branch banking system Different approach from banking in the United States, where a fear of centralized authority and monopoly resulted in a loose system of many banks. Evolution of Banking in Canada: Bank failures were more common before 1923. Home Bank Failure in 1923 led to much stronger regulation. Important when the Depression hit in 1929. Home Bank was a bank in Toronto. Sir Henry Pellet built Casa Loma, he was one of the major investors in the Home Bank. He made a very poor number of investments and suddenly didn't have the resources to cover the deposits. In 1964 the Royal Commission on banking and finance (Porter Commission) recommended 'a more open and competitive banking system,' and its suggestions led to major reforms and changes.  The 1967 Bank Act revision lifted the six per cent annual interest-rate ceiling banks could charge on personal loans and allowed banks to enter the mortgage field. The Canadian Bank Act passed shortly after Confederation governed the way the Canadian banking system worked. Every 10 years the Bank Act will be re-examined to see if it needs to be changed, updated or whatever. Although the Canadian banking system was impacted by the Great Depression in 1929, they were never really in Danger. Whereas in the U.S. they had to close the banking system temporarily. When Franklin Roosevelt took power in 1933, 50% of the American banks had already closed their doors. In the 1950s banks for the first time were allowed to issue mortgages, but only in very narrow circumstances. That and more revisions really opened up the Canadian banking system. In 1967 and 68 the Canadian government created the Canadian deposit insurance company. It is not a government institution. Banks have to pay premiums to insure the money but you as a customer are secure in the knowledge that the first $100,000 you put in the bank. If the bank goes under this, the insurance company will compensate you. New Tech, same questions: New innovations like Bitcoin and even Apple Pay still work only if we have faith in them. If we question whether our “money” is safe, they cannot work. From paper money to digital files, trust makes currency work. The Euro shaking up Global Finance Trans European Policy Studios video: Although the Euro is a common policy of the EU, not all Member States are part of it. It is an example of “differentiated integration”. However all of the European countries are legally bound to adopt the euro one day, except for one, Denmark who formally opted out. The Euro has the same name in all EU languages. The Werner Plan and the Currency Snake: Although the euro started being used around 20 years ago, it started much earlier. In 1957 the Treaty of Rome outlined the Creation of the European Economic Community (EEC) to promote coordination in economic and monetary matters. However, until the mid 1960s the need for European monetary cooperation was not very pressing, because the stability of the international monetary system was ensured by the so-called Bretton Woods arrangement. Only when the Bretton Woods system begins to show some cracks, the Europeans realize the urgency for monetary cooperation among themselves. At the Hague Summit in 1969 the Member States entrusted Luxembourg’s Prime Minister and Minister of Finance Pierre Werner with the task to lay down a plan for the creation of an economic and monetary union as a solution to the growing instability of the Bretton Woods system. The plan elaborated by Werner (Werner Report - 1970) envisions the gradual replacement of national currencies with a common European currency. This rests on a number of conditions: 1. The Member States should strengthen the coordination of their budgetary and fiscal policies. 2. All restrictions to the movement of capital should be removed. 3. The exchange rates between the European currencies should be fixed irrevocably. “Economist” approach - Germany and the Netherlands: Economic convergence before monetary integration. “Monetarist approach - Belgium, Luxembourg, France: Leads to economic convergence. In 1971 the U.S. administration announced the end of the Bretton Woods system. As a response, in the attempt to restore some stability in the international monetary system in 1972 the Member States came up with the creation of the “currency snake”. The currencies of the Member States are allowed to fluctuate against each other within a margin limited to 2.25%: in other words, the Member States’ currencies are now pegged to one another. Pegged Currency: A currency whose value is controlled so that it stays at a particular level in relation to another. The Oil Crisis in 1973 led some countries to depreciate their currencies and to the failure of the “currency snake”. These years were also marked by a severe economic crisis throughout Europe and by a high volatility of exchange rates due to the US refusal to keep the value of the dollar stable. 1973: Denmark, Ireland and the United Kingdom join the EU. The European monetary system and the Delors committee: In this phase, however, not all Member States see eye to eye: while France is in favor of deepening monetary cooperation, Germany fears that inflation, which is rampant in the other countries, might spread to its economy. These disagreements are overcome thanks to a gradual convergence between the German Chancellor Helmut Schmidt and the French President Valéry Giscard d’Estaing, who in 1978 proposed the creation of a new European Monetary System. Two key elements: Virtual “European Currency Unit” (ECU) – replaces the dollar as the pivot of the system. It is virtual because no coins or banknotes are issued. Exchange rate mechanism, based on “fixed but adjustable exchange rates”, means that the Member States agree on a central exchange rate and on a fluctuation band around this central rate, around 2.25% above and below. However, the central rate can be readjusted periodically upon unanimous agreement. In 1968 the Member States confirmed their objective to establish a fully-fledged monetary union. Building on the conditions identified by the Werner report, in 1989 (Delors Report), a committee led by the President of the European Commission Jacques Delors proposes the implementation of the Economic and Monetary Union in three stages: 1. Stage one (1990) - Coordination of economic & monetary policies. - Free movement of capital. 2. Stage two: - Monetary policy gradually transferred to EC - Establishment of a European system of central banks (ESCB). - Narrower fluctuation bands. 3. Stage three: - Monetary competence transferred to EC. - Fixed exchange rates. - European currency. The Maastricht Treaty and the EMU: The situation changed with the fall of the Berlin Wall in 1989, according to some, in this new context, Germany’s consent for the launch of the monetary union became a bargaining chip for Germany to win its European partner’s support for the countries reunification. In 1990, Stage one starts and at the same time an intergovernmental conference is convened to discuss the treaty revisions that are necessary to move to stage two. At the conference, the two old dividing lines re-emerge. These discussions lead to the signature of the Maastricht Treaty in 1992, that establishes a European Union with a common monetary policy. A compromise is decided, the introduction of the common currency will begin automatically on 1 January 1999. But at the same time, convergence criteria that the Member States have to fulfill in order to participate in Stage Three are also defined. The U.K does not agree to moving to stage three and negotiates an opt-out that allows the country to remain outside of the monetary union. The Maastricht convergence criteria set out a number of requirements that Member States have to meet in order to participate in the monetary union. These requirements include: - Exchange rate stability - Limits to public deficit and debt - Durable convergence - Price stability Just when the monetary union seems irreversible, a massive crisis puts the whole project at risk. The crisis began in 1992, when a referendum in Denmark rejected the Maastricht Treaty, putting the monetary union in question. This is followed by a wave of speculations against the weaker currencies – the Italian lira and the British pound – forcing both currencies to leave the European Monetary System, and forcing the remaining countries to widen the fluctuation bands to 15% above and below the central rate, de facto making the system a flexible rate system. Denmark is granted an opt-out from the monetary union, and Stage Two begins in 1994 when the European Monetary Institute is created as a precursor to today’s European Central Bank. In 1998, 11 countries were deemed eligible to join the monetary union on the basis of the convergence criteria: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, The Netherlands, Portugal and Spain. Besides these, the UK and Denmark have obtained opt-outs, while Greece and Sweden don’t fulfill the conditions to join. Stage three finally begins in 1999 when the euro is formally introduced as a virtual single currency, and the exchange rates between national currencies are fixed irrevocably. On 1st of January 2002, Euro coins and banknotes officially started to circulate. Since then, new Member states have joined, and today the Euro is used in 19 out of the 27 countries of the European Union and by more than 300 million Europeans. The Economist Article: WHEN THE European Union launched the euro two decades ago, economists wondered if the new currency might pull off a feat no other had managed in the post-war period: to challenge the mighty American dollar. However, reserve managers at the world's central banks, as well as businesses around the world, largely stuck with the greenback. Now Europe is having another go at establishing the bona fides of the euro beyond its borders. A significant step was taken on June 15th when [euro]20bn-worth ($24.3bn) of bonds was issued as part of the Next Generation EU (NGEU) scheme to boost European economies. Those bonds could yet rival American Treasury bonds as a safe asset of choice. Currencies exist mainly to facilitate the transactions of people and businesses within the borders of the places that issue them. But having an international presence helps in many ways. For firms, having imports and exports denominated in their local currency rather than, say, the dollar, means less disruption when exchange rates inevitably see-saw. Issuing a currency that foreigners want to hold can make it easier for governments to raise money from them at cheap rates. That in turn drives down the cost of borrowing for firms and banks. The euro is widely available outside the 19 countries that formally use it. About two dozen countries link their own currencies to it in some way, albeit mainly former European colonies and close neighbors. Nevertheless, by the normal measures used to gauge international usage, it is a distant runner-up to the dollar. Around a fifth of all foreign-exchange reserves owned by central banks, and a similar percentage of cross-border loans and bonds, are denominated in euros--the share for the dollar is about 60%. The euro's share of payments for transactions is much closer to that of the dollar, unsurprisingly given that the EU is the world's biggest trader of goods and services. In its first few years the single currency looked as if it might rival the post-war champion. By 2007 the euro even became the most popular currency in which to issue foreign-currency-denominated debt (for example by multinationals). It was not to last. The financial crisis that started that year prompted skittish investors to fall back on the dollar as their currency of choice. Europe now wants to have another crack, if not at overtaking the dollar, then at least at reducing the latter's dominance. Two changes in circumstances mean there is a chance the euro could gain ground. The first is America's changing attitude to international economic policymaking--at least under the presidency of Donald Trump. His brand of jingoistic protectionism jarred with the obligations incumbent on the issuer of the world's reserve currency. Even under the more conciliatory Biden regime, Europe frets that its interests will not always be aligned with America's. Relying on the dollar is perceived as an even greater potential vulnerability than before. America has used the need of big banks to have access to dollars to police their behavior far beyond its shores. Those that have fallen foul of American edicts have incurred large fines. The second change came, unexpectedly, as a result of the pandemic. Whereas the last global recession brought the euro to the precipice, on this occasion the swift actions of the ECB and national governments to support their economies were well received. Such battle-hardening has boosted the credibility of the euro in a crisis--a key attribute of a global currency. A big step was the creation of the NGEU scheme and the subsequent bond issuance. The bonds are backed, in effect, by the balance-sheet of all EU member states, thus making them roughly similar to America's Treasury bonds. This is a relative novelty in Europe, where borrowing has mostly been done by national governments, whose creditworthiness varies. The new pan-EU bond creates a way for investors to save in euros without taking credit risk. The absence of such a "safe asset" had been one element hampering the use of the euro internationally. All manner of cross-border operations, from central-bank reserve management to companies borrowing money in a foreign currency, are underpinned by a liquid risk-free benchmark. Whether gaining share from the dollar helps insulate Europe from America's reach is questionable: banks will always need dollars, and thus a foothold in New York, even if the euro thrives. Few think the single currency can displace the greenback, but it could perhaps rebalance the international monetary system. That may help reduce the disruptions caused by American central bankers, for example when a slight tightening of monetary policy in 2013 caused a "taper tantrum" that reverberated globally. The euro is the obvious currency to provide diversification. In 2019 Mark Carney, then governor of the Bank of England, mused that technology might disrupt the kinds of network effects that anchor the dollar at the heart of international finance. The rise of digital currencies issued by central banks, which the ECB is considering, might result in a new equilibrium where many currencies share global reserve-currency status. That could provide space for China's yuan, which has its own global aspirations but is hampered now by its lack of convertibility. Europe has long bristled at the "exorbitant privilege" America enjoys thanks to the dollar's special status. It may find it less intolerable if it can seize a share of it. Exchange rate systems by Tutor2U: Main currency systems: Free floating currency: - Currency value is set purely by market forces. - Strength of currency supply and demand drives the external value of a currency in markets - Currency can either appreciate (rise) or depreciate (fail) - No intervention by central banks. There is no target for exchange rate. - The external value of a currency is not an explicit target of monetary policy (meaning that a country’s interest rates are not set to influence the value of the currency). - Examples: United States dollar, Euro,. Managed floating exchange rate (MOST POPULAR GLOBALLY): - Brazilian Reais - Indian Rupee - The Central Bank gives freedom for market exchange rates on a day-to-day basis, supply and demand factors drive the currency’s value. - Central bank may intervene occasionally. - Currency becomes a key target of domestic monetary policy.  - Semi/fully-fixed currency (crawling peg): - Central bank fixes the currency value - pegged to one or more currencies - The central bank must hold enough foreign exchange reserves to intervene in currency markets when needed to maintain the fixed currency peg - Pegged rate becomes the official rate - Trade in currencies when buying and selling products takes place day-to-day at this official exchange rate. - There might be unofficial trades in shadow currency markets. - Adjustable peg: Occasional realignments may be needed (must be officially sanctioned with the agreement of the IMF) leading to either a devaluation or revaluation. - Examples are: Hong Kong Dollar (pegged to U.S. dollar and Bulgarian Lev - pegged to the Euro). Currency board system (hard peg): - A currency board system is a type of exchange rate regime in which a country’s domestic currency is fully backed by a foreign reserve currency or a specific foreign asset, typically held in a fixed exchange rate relationship. - The central characteristic of a currency board system is that the domestic currency is issued only when there are corresponding foreign currency reserves to back it up, and the currency in circulation is fully convertible into the foreign reserve currency at the established fixed exchange rate. - For example: If the exchange rate is 1:1 (1 unit of domestic currency = 1 unit of foreign currency) the currency board must hold foreign currency reserves equal to the amount of domestic currency in circulation. Free floating exchange rate: Canada The Economist (Big-Mac Index): Hong Kong’s monetary officials stepped into the foreign-exchange markets after dusk to defend the city’s long-standing peg to the dollar. Given everything the financial hub has faced in recent months—protests, a pandemic and punitive American sanctions—you might assume it is battling to prop its currency up. You would be wrong. The city’s monetary authority has been forced to sell Hong Kong dollars repeatedly since April to stop the currency strengthening too much. The tongue-in-cheek guide to the fair value of currencies showed that the Hong Kong dollar was undervalued by almost 54% in July. That suggests no urgent need for it to fall. The Big Mac index is a simple illustration of purchasing-power parity (PPP), the notion that the fair value of a currency should reflect its power to buy goods and services. It took HK$20.50 to buy a Big Mac in Hong Kong in July and $5.71 to buy one in America. The exchange rate that would equalize their burger-buying power was therefore HK$3.59 to the dollar. That is substantially stronger than the actual exchange rate of HK$7.75. Although not great for an investor’s wealth, these results are not quite as damaging to the idea of PPP as they first appear. Deviations from PPP can narrow in two ways: through fluctuations in the exchange rate or via movements in prices. In India, for example, the price of a Maharaja Mac (which McDonald’s serves in place of a beefy Big Mac) rose much faster than that of an American Big Mac from January 2013 to January 2015. Believers in PPP also accept that rich countries tend to be more expensive than poor ones, because their wages are higher even in parts of the economy that are not terribly productive. So The Economist also calculates an adjusted Big Mac index, which shows whether a burger is cheaper or dearer than you would expect given a country's level of GDP per person. LexisNexis Article: The world is seeing how the dollar really works: If you export far more than you import and thus hold really large foreign exchange reserves—like Russia's $500 billion—there really is nowhere else to hold them other than dollars or euros. Russia has, so far, ridden out the storm, but to do so it has had to close its financial system to the outside world. Its imports have been squeezed to barely more than half their pre-crisis level Surely Russia, China, and India would look to build an alternative currency system. This might perhaps be denominated in China's renminbi and would be centered on the exchange of key commodities. One model might be the kind of deal recently brokered by a leading Indian cement producer, which paid for imports of Russian coal in Chinese currency. To secure funding, you could borrow in the so-called dim sum bond market in Hong Kong, where issuers from around the world issue offshore renminbi debts. From our current vantage, six months on from the start of the war, a future beyond the dollar seems more remote than ever. As the world economy slows down, commodity prices are far off their peaks. There is still excess demand for oil, gas, and coal, but other commodities such as iron ore are going cheap. China, rather than asserting its dominance as an alternative center of the world economy, is seeing a hemorrhage of foreign capital at a rate faster than that during the crisis period of 2015-2016. With talk of rivals to the dollar system on the wane, what dominates the global economic news cycle in mid-2022 is another face of U.S. financial power: the tightening of Federal Reserve policy in response to inflation and a surging U.S. dollar. This changes the conditions under which the entire world economy operates, not through legal or geopolitical interventions but through currency values, interest rates, and the demand and supply of credit. Political and military power plays a part in anchoring the global dominance of the dollar. It is hard to imagine U.S. Treasury debt having the status that it does in the world economy if it were not ultimately backed by the world's preeminent military power. But the more prosaic motive for the dollar's adoption as the main currency of trade and finance is that dollar liquidity is abundant and cheap, and the currency is universally accepted. That is the reason that close to 90 percent of all currency trades—a daily turnover of $6 trillion before the COVID-19 pandemic—involve the dollar as one of the currencies in the pair. Of course, a rising dollar creates both winners and losers. It means that other currencies are falling in relative terms. One might expect that the effects of a rising dollar would be offset by the effects of the falling value of other currencies. If the dollar rises, anyone who has borrowed in dollars—and there are trillions of dollar debts outstanding all around the world—faces more painful debt service charges. A surging dollar also raises the global cost of exports priced in dollars, making them less competitive. Overall, a 1 percent rise in the dollar is thought to knock around 0.7 percent off global trade within a year. Since the middle of 2021, as the FED has pushed up rates, the dollar surged by 15% against a basket of currencies. The euro and yen have both been reduced to record lows. So too have the currencies of emerging markets ranging from Chile to Turkey to Egypt. As in the case of financial sanctions, there is always a risk that as credit conditions tighten, the links that make up the dollar-based financial system will snap. For those economies in the worst shape, this risk is very immediate. Sri Lanka has tipped over the edge into default and political crisis. Argentina faces surging inflation and crushing energy import bills. In both cases, their economies were already weak and their debt unsustainable before the current surge in commodity prices, interest rates, and the dollar. But the new conditions contributed to making their situation evidently unsustainable, helping to trigger an open crisis. All told, the World Bank estimates that nearly 60 percent of low-income borrowers are at danger of debt distress or already in it. Economic and financial hardship is already afflicting tens of millions of people and will in due course likely affect hundreds of millions. A half-dozen debtor countries or more may find themselves navigating the uncertainties of debt restructuring and sovereign default. In all likelihood, however, we will avoid a systemic crisis of the dollar-based global financial system. Big emerging-market economies like Brazil and Thailand have learned that it is better, if you are going to take money from foreign lenders, to borrow from them only in your own currency. In a crisis, that may still leave the value of your currency in danger—as foreign investors sell out their stakes, you will likely suffer a devaluation—but at least part of the risk is then borne by the lender, and you can at least ensure you have enough local funds to service the debts The United States, United Kingdom, and European Union agreed at last year's United Nations climate conference to provide financial support to South Africa in the financial restructuring of Eskom, its ailing power utility. This was both an energy transition strategy and a way of relieving the pressure on the South African government account arising from its implicit responsibility for Eskom's debts. What 2022 has revealed is that the dollar system has the resilience and strength that it does because it is deeply entrenched and buttressed by both commercial and geopolitical interests Wall Street Consensus (Daniela Gabor): Highlights the role of investment bankers, fund managers, and their client borrowers in maintaining the dollar-based global financial network. In major crises this system becomes an overt public-private partnership secured from the top down by the liquidity swap lines extended by the Fed to the major central banks of Europe, Latin America, and Asia. In general, a strong U.S. economy promotes growth and secures the prosperity of American capital and the centrality of U.S. equity markets to global capital accumulation. It also, however, requires a tighter stance from U.S. monetary policy. Right now, it is the latter point that is critical. How severe the tension in the global economy becomes over the coming months will depend above all on how far the Fed's tightening goes, and that depends on how rapidly American inflation cools down. LECTURE 9. THE TEXTILE INDUSTRY. “The cotton business chases cheap”. The T-shirt represents many aspects of cotton’s history. It is universal, almost all of us own one. They are usually inexpensive and the ethics of its manufacture can be controversial. Early Cotton: Archeology and early history show cotton has grown and been used by people in both South and Central America since perhaps as early as 5000 B.C.E. 3000 B.C.E. It is grown and spun in both the Indus river valleys.