Учебно-методический комплекс по программе минимум Кандидатского экзамена по специальности

TEXT 8 The seasonal financial needs of a company may be covered by short term sources of funds. The company must pay them off within one year. Businesses spend these funds on salaries and for emergencies. The most popular outside sources of short term funds are trade credit, loans, factors, sales finance companies, and government sources. About 85 percent of all US business transactions involve some form of trade credit. When a business orders goods and services, it doesn't normally pay for them. The supplier provides them with an invoice requesting payment within a settled time period, say thirty days. During this time the buyer uses goods and services without paying for them. A company can use the trade credit as a source of savings. A typical trade arrangement is 2/10, net 30. If a buyer pays within 10 days instead of 30, he gets a 2 percent discount. The savings a buyer obtains can be used as a source of short term funds. Commercial banks lend money to their customers by direct loans or by setting up lines of credit. A line of credit is the amount a customer can borrow without making a new request, simply by notifying the bank. If the business doesn't pledge collateral when it borrows, the loan is an unsecured loan. Only customers with an excellent credit rating can get an unsecured loan. They usually repay it within a year's time. When a company wants to borrow a large amount of money it pledges collateral to back up the loan. Such a loan is a secured one. Sometimes a company might sell its accounts receivable to a special financial broker: a factoring company, a factor. The factor immediately pays the firm cash, usually 50 to 80 percent of the value of the accounts receivable. When customers make the payments on their accounts, the money goes directly to the factor. Some big firms obtain funds by selling commercial paper. Because commercial paper has no collateral behind it, only firms with a good financial reputation can sell it. In special cases, a business may obtain short term funds from the federal government. TEXT 9 When a business needs funds to construct a new assembly line or to do extensive research and development which may not begin to bring in revenues for several years, short term financing wouldn't work. In this case, business will need long term sources of funds. Firms may meet long term needs by increasing the company's debt either by getting loans or by selling bonds. A long term loan is a loan that has a maturity of from one to ten years. Within this period of time the firm pays interest on the debt. Sometimes the lender protects its financial position by requiring that the company obtain the lender's permission before taking on any additional long term debt. If the loan is particularly risky, the lender may even require the firm to limit or eliminate dividends to stockholders. If the firm wants to be free of lender's restrictions, it may issue bonds. These are long term debts with a maturity date of 20 to 30 years in the future. Governments issue government bonds. Corporations issue corporate bonds which may be secured or unsecured. If a company wants to sell bonds it can offer some collateral. It is difficult, if not impossible, to find investors who are willing to buy bonds which are not backed up by collateral. Only huge corporations such as AT&T can successfully issue unsecured bonds, which are called debentures. Most bonds carry a face value of $1000 and pay a predetermined interest rate (the coupon rate). The company pays this interest regularly according to the indenture agreement which specifies the terms of a bond issue. The company may retire bonds before they mature if the indenture agreement contains a call provision. In this case the firm pays the bondholders a redemption premium. Another flexible feature in some agreements is the conversion privilege. It allows bondholders to convert their investment into a stated number of shares of common stock. If the price of the company's common stock is going up, the investors can profit from conversion. Convertibility makes the bond issue more attractive to potential investors. TEXT 10 When a bank decides to make the loan, it must first select an interest rate, which is the price for renting the money to the borrower. In computing the interest the interest rate, the banker must consider the cost of the money to his bank. This includes the average interest rate the bank is paying its depositors, the bank's operating costs, and the normal return that the bank expects. The bank must be able to cover possible loan losses and provide dividends to the bank's shareholders. If the loan is a term loan, the risk is greater and must be compensated for in a higher interest rate. For normal commercial loans the maximum term is usually five years. If the borrower is foreign, the risk may be greater, and therefore the bank expects extra interest. The bank must determine the most appropriate credit instrument to use. A promissory note is most usual. Generally the bank wants partial payments at least semi-annually, but; promissory note can also be payable "on demand". Commercial banks extend credit by offering advances, discounting accounts receivable, and allowing overdrafts (not usually done in the United States). The credit officer also decides whether to make an unsecured loan or a secured loan (secured by collateral assigned to the bank, such as securities or precious metals), or whether the unsecured loan should be guaranteed. The banker makes an offer to the customer, who may or may not agree to all of the terms and conditions. After the bank and the borrower reach an agreement, the banker arranges for the borrower to sign the necessary documents and then disburses the funds to him. For large loans, banks often form a syndicate, a consortium of banks, each of which disburses a portion of the loan. Usually, one bank puts the deal together - this is called the "lead bank". TEXT 11 If the company's managers want to avoid increasing the company's debt obligations, they turn to equity funding. In short, equity financing is the sale of ownership in a firm. The two basic instruments of equity financing are common stock and preferred stock. Most people who own stock in a corporation hold common stock. Common stockholders own shares in the company and elect a Board of Directors. Each stockholder receives a stock certificate that indicates the number of shares purchased. Each share entitles the stockholder to one vote. The average stockholder holds only a few shares, perhaps 100 to 200. Common stockholders have a right to sell their stock whenever they want, to buy newly issued stock before it is made available to the general public, to inspect the company records, to elect the Board of Directors, and so on. Common stockholders receive their share in the company's earning in the form of a dividend. Dividends are paid either quarterly or annually. Minimum dividends are 25 percent per year. If the corporation goes bankrupt, the common stockholders have a claim on its assets. But in reality, if the corporation dissolves the common stockholders seldom receive much because the claims of creditors, lenders, bondholders and preferred stockholders take priority over those of the common stockholders. Common stock may be issued on a par or no par basis. Par j value is the dollar amount printed on the face of each stock certificate. As this figure has little real value, most corporations either issue no par stock (stock with no given value) or give their stock an arbitrary value. Besides cash dividends, holders have one more source of return on their investment - the increase in the market value of each share. Common stock is riskier than debt investments. The corporation may not make a profit or be able to pay dividends. A holder always runs the risk of losing his entire investment should the company go bankrupt. There is also a market risk caused by fluctuation of the stock. Stocks that fluctuate widely in market value are the riskiest but also may have the highest return. TEXT 12 Each country has its own currency with names such as pound, mark, peso, lira, peseta, krona, dollar, franc, and so on. Each currency has a par value that is officially defined in terms of gold. The countries have adopted floating rates. The rates of exchange are determined by market trading based on demand for specific currencies. As demand fluctuates, the rate fluctuates too. The rate rises when demand is greater than supply and declines when supply exceeds demand. The participants in the foreign exchange market include the major international banks, brokers, central banks, large corporations and individuals (trading as speculators and investors). A trade occurs when a buyer and a seller agree on the price for exchanging two currencies. Participants can trade directly with each other, but it is often more convenient to use a broker. The broker brings both sides of the transaction quickly together and arrives at a mutually acceptable rate. The two sides pay the broker his commission. The broker is also a usual source of market information. Rates fluctuate constantly during a trading day. A foreign exchange trader must make quick decisions based on rapid mathematical calculations. The foreign exchange market traditionally deals in large quantities of a currency, such as 100,000 pounds or 1,000,000 Japanese yen. Trading for prompt delivery is called spot trading or spot, which means that settlement occurs in two business days. Trading may also occur for settlement on delivery at any future day. This transaction results in a futures or forward contract. The businessman who signs a contract for the future delivery of machinery may wish to settle his cost in his own currency immediately by signing a futures contract with his bank (he hedges his position). No matter what happens to the daily fluctuation in the foreign exchange rate between now and the settlement date, the businessman's rate of exchange is set. If the trader in the foreign exchange market has excess cash that he does not need until a forward contract matures in, say, thirty days, he can swap the surplus cash and buy it back for delivery in thirty days. The bank's trader must always be alert for opportunities to make a quick profit by arbitrage when the cross-rates are favourable. TEXT 13 Investors may be organizations or individuals. Organizations as institutional investors buy securities with their funds or funds held in trust for others. Major institutional investors are insurance companies, pension funds and universities. Insurance companies make their investments generate profits and funds for paying future insurance claims. A pension fund wants to make money on its investments so that it can pay off pensioners. The other types of investors are individuals who trade securities for their own accounts. The majority of personal investors have rather small stock portfolios usually valued at less than $50,000. They often use these funds for major purchases such as a home, retirement income, or as a source of cash in case of emergency. The objectives of investors can be identified in terms of speculation, growth, and income. Some investors set an objective of achieving big payoffs. They engage in speculation, or assuming large risks in the hope of large returns. One of the ways to speculate is to buy "penny stock". It is highly speculative stock that sells at less than $5. A $1 stock that is in high demand may rapidly run up to $3 thus tripling the initial investment. "Penny stock" is typically a share in new ventures. More investors are interested in long term growth in the value of their investment. They tend to prefer the so called blue chip stocks of large, high quality companies such as IBM, General Motors, American Express. The dividend for blue chip stocks is rather low because these firms reinvest much of their profits in research in order to remain competitive. Some investors seek income. They are interested in a stock's yield which is the percentage return from stock dividends. The highest regular yields are provided by utility stocks because they have minimal risk. The investors take risk only within certain limits. Common stock is less safe than preferred stock because preferred stockholders receive dividends before they are paid to the common stockholders. In the case of common stock, utilities are safer than high tech stock. The safest type of securities are government bonds because they are backed by the government. TEXT 14 Securities are bought and sold at two types of securities markets: primary markets, which issue new securities, and secondary markets, where previously issued securities are bought and sold. If a company wants to sell a new issue of stock or bonds it usually negotiates with an investment bank, or underwriter, who sells the securities for it. The underwriter buys the securities from the corporation and resells then to individual investors through the secondary market. Organized security exchanges have developed to make the buying and selling of securities easier. The securities exchanges consist of the individual investors, brokers, and intermediaries who deal in the purchase and sale of securities. Security exchanges do not buy or sell securities; they simply provide the location and services for the brokers who buy and sell. Stock transactions are handled by a stockbroker. A stockbroker buys and sells securities for clients. Stockbrokers act on the clients' orders. Stockbrokers receive a fee and are associated with a brokerage house. To trade on the exchange, a "seat" must be purchased. A seat is a membership. The members represent stockbrokers. When a stockbroker calls in an order to sell, the member representing that broker looks for a buyer at the price requested. When a broker calls in an order to buy, the exchange member looks for a buyer at the price offered. The largest and best known exchange in the USA is the New York Stock Exchange (NYSE) also called the "Big Board". There are 1,300 seats on the NYSE and approximately 2,000 stocks and 3,400 bonds are traded daily. In order to be listed on the NYSE, a firm has to meet the following requirements: 1. Pretax earnings of at least $2.5 million in the previous year. 2. Tangible assets of at least $16 million 3. At least 1 million shares of stock publicly held, and others. The second largest stock exchange in the USA is the American Stock Exchange (AMEX). It is located in Manhattan and has about 500 full members and 400 associate members. AMEX operates in much the same way as NYSE, but smaller companies may qualify for listing. TEXT 15 The Stock Exchange of the United Kingdom and the Republic of Ireland was formed in 1973. The main trading operations are being performed in London, but the Stock Exchange also has centers in Birmingham, Liverpool, Belfast, Bristol, Leeds, Manchester, Newcastle, Glasgow and Dublin. The major functions of the Stock Exchange are: - it provides a market where investors can buy and sell securities; - it helps to ensure that the price of a deal is fair; - the companies and others who wish to raise capital can easily do so at the ready secondary markets; - the investors' short term savings are pooled to meet long term needs for finance from companies, the government and other organizations. The most important way of raising long term capital is by issuing shares. Shares often are referred to as shares, the whole procedure being called equity of finance. Companies may also issue debentures which make up long term debt. The issue of government stock which is taken up by the public, financial institutions and other firms provides for long term government finance. On 27 October 1986 the capital market underwent revolutionary changes known since then as the "Big Bang". It admitted "outsiders" to the Stock Exchange which had been limited to stockbrokers and stock jobbers. The "Big Bang" allowed banks and other institutions to acquire their own securities businesses. It also introduced the idea of "dual capacity". Before that a member firm could only be a broker acting as agent of clients and trading on a commission basis or a jobber buying and selling shares as a principal "on his own book". It could not be both. After the "Big Bang" a member can be: - a market maker who acts as a jobber; - an agency broker, who trades securities on commission; - a dealer/broker (one firm may combine the functions of market making and agency brokerage at the same time). The Big Bang led to bigger markets and higher profits in Great Britain's financial industry. TEXT 16 Trading stock begins with an investor placing an order, that is informing the stockbroker as to what stock and how much he wants the broker to buy or sell. An order to buy or sell stock at the best possible price at the present time is called a market order. The broker conveys the order to an exchange member on the trading floor, who attempts to get a better price for the buyer by offering a little less. For example, the broker might offer 47 1/8 ($47.12.5) for the stock with a current price of 47 1/4 and see if someone will sell at this price. If the investor were selling, the broker would attempt to get a slightly higher price by offer say, 47 3/8. The final sale will then be electronically relayed to the broker who placed the order. The investor might also place a limit order which specifies the highest or lowest price at which the broker may buy or sell. If the investor can't be accommodated immediately, the broker places the order in a sales book and then tries again in order of priority. If an investor wants to keep the order on the books he can issue an open order which instructs the broker to leave the order on the books until it is executed or canceled. Sometimes the investor might give a discretionary order which allows the broker to exercise judgment in making money. The investor leaves it up to the broker to decide when and at what price to buy or sell. An odd lot is any number of shares less than 100. One hundred shares comprises a round lot. Brokers usually trade shares in lots, odd lots being combined with a series of other small orders to form a round lot. A purchase of 10,000 shares is sometimes called a block sale. In addition to the price of the stock, the investor pays the broker a commission for buying or selling the securities. Sometimes investors pay less than the full amount when they buy stock. This is called margin trading. The FRS determines the minimum margin required. In recent years the stock margin has been approximately 50 percent. TEXT 17 The financial news is broadcast over television, radio and is printed in the press. It shows how the stocks have moved up or down and what new developments are taking place in the stock market. Serious investors review forecasts about certain companies in such financial papers as The Wall Street Journal and Financial Times (Great Britain). Price quotations are of major importance. Prices of securities are published in most newspapers every business day. The information is important for both investors and companies because it shows how investments are performing and gives a basis for detailed analysis. Stock prices appear in the basic presentation of each financial paper. Investors buy stock for one simple reason: to make money. The surest way to earn money from investing is to create as diverse a portfolio as possible and hang on to it for a long time. To succeed at making money investors need good sources of information. Much information is supplied by stockbrokers. They study market reports and get information on the forecasted financial performance of companies. Brokers usually recommend opportunities or provide special services such as newsletters. For this brokers charge additional fees. Sometimes investors prefer to avoid high brokerage fees. They implement their own investment strategy. Serious investors subscribe to investment newsletters and carefully study the stock market. Best investors become an expert in a particular industry. A simpler investment strategy is to choose some reliable blue chip stocks and stick to them. This strategy is safe and can earn money over the long run. Investors should avoid making common mistakes which are: 1) failure to diversify, 2) paying too much for a stock which would not go up, 3) not knowing when to sell a stock going down, 4) paying too much attention to rumors and tips. TEXT 18 Managers are concerned with the following main resources: material resources, human resources, financial resources, informational resources. Material resources are the physical materials and the equipment used by an organization to make a product. For example, cars are made on assembly lines. These assembly lines and the buildings that house them are material resources. The most important resources of any organization are its human resources – people. Some firms believe that their employees are their most important assets. To keep employees content, a variety of incentives are used, including higher-than-average pay, flexible working hours, recreational facilities, lengthy paid vacations, cafeterias offering inexpensive meals, etc. Financial resources are the funds the organization uses to meet its obligations to various creditors. A grocery store obtains money from customers and uses a portion of that money to pay the wholesalers from which it buys food. A large bank, borrows and lends money. A college obtains money in the form of tuition, income from its endowments, and federal grants. It uses the money to pay utility bills, insurance premiums, and professors’ salaries. Each of these transactions involves financial resources. Finally, many organizations increasingly find they cannot ignore information. External environment – including the economy, consumer markets, technology, politics, and cultural forces – are all changing so rapidly that an organization that does not adapt will probably not survive. And, to adapt to change, the organization must know what is changing and how it is changing. Companies are finding it increasingly important to gather information about their competitors in today’s business environment. It is important to realize that these are only general categories of resources. Within each category are hundreds or thousands of more specific resources, from which management must choose those that can best accomplish its goals. Managers must coordinate this complex group of specific resources to produce goods and services. TEXT 19 ON MARCH 10th 2005, Ben Bernanke—a former Princeton professor who at the time was a governor of America's central bank—addressed a gathering of economists in Richmond, Virginia, on America's gaping current-account deficit. Its causes, he argued, were to be found abroad rather than in American profligacy. In particular, Mr Bernanke mused, the world might be suffering from a “global saving glut”. The phrase immediately caught on. Like the famous remark about “irrational exuberance” by Alan Greenspan, the chairman of the Federal Reserve, it has since helped to shape the global economic debate. The idea's appeal lies in the way it ties together two of the most vexing questions about today's economic landscape: why are interest rates so low? And why can America borrow eye-popping amounts from foreigners with seeming impunity? According to the IMF's latest World Economic Outlook, the global economy will grow by 4.3% this year, slower than in 2004 but still a healthy clip. Strong economic growth is normally accompanied by higher interest rates, but long-term interest rates are at their lowest levels since the 1960s. At the same time Americans are spending over $700 billion a year more than their economy produces, the equivalent of more than 6% of annual output. As a share of America's economy, this external deficit has more than doubled since 1999. Yet it has had none of the dire consequences for the dollar that Cassandras have been predicting. For the first six months of 2005, the greenback was rising. Although it has slid in recent weeks, the drop has hardly been dramatic. A “global saving glut” could explain both oddities. If savings are somehow super-abundant, the usual relationship between a strong economy and higher interest rates may no longer hold. And if the spare cash is mainly abroad, that should allow America to finance its deficit with ease. Rather than signalling American profligacy, the current-account deficit might simply be the counterpart to foreign thrift. TEXT 20 This idea turns much conventional economic wisdom on its head. Policymakers usually worry about too little rather than too much thrift. With populations ageing, the broad consensus has been that people need to build up nest eggs to finance their retirement. Economists reckoned that globalisation would lead to a shortage of capital and hence higher interest rates as millions of Indian and Chinese workers were absorbed into the world economy. If Mr Bernanke is right, all this will need re-examining. His suggestion that the causes of global imbalances lie elsewhere conveniently deflects attention from monetary and fiscal decisions made by American policymakers. It suggests that Mr Greenspan's loose monetary policy and George Bush's tax cuts are not responsible for the imbalances in the world economy. That may seem a little self-serving, coming from a man who has subsequently moved from the Federal Reserve to become chairman of Mr Bush's Council of Economic Advisers. Taken at face value, the notion of a global saving glut is not borne out by the facts. “Glut” suggests an unusually large amount, as in a summer glut of strawberries. In fact, figures published in the IMF's latest World Economic Outlook show that the rate of global saving as a proportion of global output, measured at market exchange rates, has mostly been heading downhill over the past 30 years, with a particularly steep plunge between 2000 and 2002 (see chart 1). Although it has since risen slightly, the global saving rate is now close to its average for the past two decades, rather than unusually high. But Mr Bernanke's argument is more subtle. He is saying that low interest rates imply too much saving relative to the amount people want to invest, and that the rising imbalance between America and the rest of the world suggests the discrepancy is concentrated outside America. TEXT 21 A falling global saving rate could mask substantial divergence between regions. And even with the saving rate falling, there could be a glut of thrift if the demand for the use of those savings, ie, the demand for investment, was falling even faster. The important factors in the equation, therefore, are shifts in the appetite for investment as well as in the geography of thrift. On both counts the world has seen big changes. Traditionally, most of the saving in an economy is done by households, whereas most of the investing tends to be done by firms. But in the past few years firms have become net savers as their profits have exceeded their investments. That change has been most pronounced and long-lasting in Japan, where corporate saving soared after the bubble economy collapsed in the early 1990s. Burdened with bad debts after a period of massive overinvestment, Japanese firms have been net savers for a decade. The late 1990s saw a similar shift in many emerging Asian economies, where corporate investment plunged after the Asian financial crisis. After the stockmarket bubble burst in 2000, American and European firms' investment also fell. Although American firms began investing again a couple of years ago, the level of corporate investment is still relatively low, given how strongly the economy—and profits—have been growing. Firms in industrial countries as a whole are still saving more than they invest, despite record profits (see chart 2). The only significant country bucking the trend is China, where investment has been rising sharply. But saving has been growing faster still. A weak appetite for investment might help explain low interest rates, but not the rising imbalances between America and the rest of the world. To understand those, two other factors have to be considered: differences in countries' economic structures, and differences in policymakers' reactions to the investment bust. TEXT 22 America is at one extreme. Its corporate thrift shift was smaller than that of Japan or other Asian economies, but policymakers in Washington reacted far more dramatically. Between 2001 and 2003, America enjoyed its biggest fiscal stimulus of the post-war period, and short-term interest rates were slashed. Declining interest rates fuelled a boom in house prices, encouraging people to borrow against their properties. Economic growth remained strong and the current-account deficit soared. Asia's emerging markets faced a much bigger bust, and had fewer policy tools to deal with it. After the 1997-98 financial crisis, investment fell by ten percentage points of GDP. Unable to slash interest rates for fear of further capital flight, they suffered serious recessions. That left exports as their main source of growth. To protect exports and to build up vast war chests of reserves, many East Asian governments kept their currencies cheap for years after the financial crises. Firms stayed reluctant to invest, the saving surpluses remained large and the foreign-exchange reserves piled up. Japan and Europe lie between those two extremes. Politicians in Tokyo tried stimulative policies and talked of structural reform, but proved notoriously ineffective at dealing with their investment bust. The economy fell into deflation and Japan, already the world's biggest exporter of savings, became an even bigger one. Its current-account surplus rose from 1.4% of GDP in 1996 to 3.7% last year. In Europe, the record has been mixed. Some countries, such as Germany, resemble Japan, with rising saving surpluses and weak domestic demand. Others look more like America. In Britain, fiscal and monetary policy became looser. Spain's current-account deficit is almost as big as America's. Broadly, the countries that saw the biggest rises in house prices also saw the biggest drops in saving. In short, a good part of the rising imbalances of the past few years can be explained by a series of investment busts—after periods of overinvestment—and sharp differences in the way policymakers responded to them. TEXT 23 China's investment rate, at 46% of GDP, is the world's highest by far and has been rising fast, but its saving rate has been rising even faster. Between 2000 and 2004, China's national saving rate rose by an extraordinary 12 percentage points of GDP to 50% of GDP. The country has kept its currency cheap and exported ever more capital to the rest of the world. At the same time, high oil prices have brought a financial windfall to the world's oil exporters which so far they seem to have chosen to save rather than spend. As a group, the oil-exporting countries are now the biggest counterparts to America's current-account deficit (see chart 3). These shifts have been large and complicated, and they have had important and unusual consequences. The first is that capital now flows primarily from poor countries to rich countries. In 2004, emerging economies, including the newly industrialised economies of East Asia, sent almost $350 billion to rich countries. Yet according to the economic textbooks, capital seeking the highest returns should flow from rich (and capital-intensive) countries to poorer ones that have less of it. The second consequence is that outside China, less saving by households rather than investment by firms has become the engine of global economic growth. The world economy continues to hum because consumers, particularly American ones, are content to become ever more indebted. That willingness appears closely related to the rapid rise in house prices across much of the globe. These patterns are a long way from historical norms. Can they last? In the long term, the answer is clearly no. Household saving cannot keep on falling, and America's foreign borrowing cannot keep on rising. The question is when and how the tide might turn. TEXT 24 One camp argues that the saving glut Mr Bernanke has identified is a temporary and largely cyclical phenomenon. As investment recovers in Japan and Europe and strengthens further in America, interest rates will rise. If the investment recovery is concentrated outside America, the surplus savings sloshing in its direction may quickly dwindle. If foreign investors then start fretting about America's dependence on foreign funds, those savings could drain away even more rapidly, sending the dollar down sharply and interest rates up. That would be the classic “hard landing” commentators worry about. But a growing group of analysts now suggests that the “saving glut” is the result of long-term structural shifts and is likely to last for years, perhaps decades. Some argue that ageing populations in rich countries will mean lower interest rates, because older economies with mature workforces will need less capital and their citizens will save more in preparation for retirement. Others reckon that the Asian economies will continue to export their savings for many years, for mercantilist reasons (keeping their currencies cheap to create jobs in export industries) as well as demographic ones (China, for instance, is ageing faster than America). If the “saving glut” really is here to stay, there are two main possibilities. The first is that America's consumers will continue to barrel along and the imbalances between America and the rest of the world will increase further. The second is that Americans themselves will start saving again, perhaps because the housing market falters or because high petrol prices begin to bite. With the rest of the world still determined to save too, that would send the global economy into a tailspin. This survey will try to determine whether the shifts that have caused the “saving glut” are likely to be temporary or more long-lasting. It will conclude that the recent shifts in global saving and investment patterns are not permanent, but nor are they likely to be reversed overnight. Although Japan's economy is looking perkier, and China adjusted its currency regime in July, the surplus of saving from Asia, and from the oil-exporters, is unlikely to fall sharply in the near future. TEXT 25 All the same, these imbalances are weakening America's economy. They cannot increase indefinitely and will be hard to unwind without sending the world economy into recession. Nudging global saving and investment patterns into a healthier balance will require new thinking, both inside and outside America. Policymakers bear more responsibility for the thrift shifts, and the global imbalances, than Mr Bernanke cares to admit. TWO events in the past week highlight the huge divide in monetary policy thinking between Europe and America. On March 16th and 17th, a conference was held in Frankfurt to honour Otmar Issing, chief economist of the European Central Bank (ECB), who retires in May. Most participants agreed that central banks still need to watch the growth of the money supply. A week later, America's Federal Reserve stopped publishing M3, its broadest measure of money, claiming that it provided no useful information. Who is right? Mr Issing was the architect of the ECB's monetary-policy strategy. He built it using a design taken from Germany's Bundesbank, where he was previously the chief economist. He holds two controversial beliefs that challenge prevailing monetary orthodoxy. First, he thinks that central banks must always keep a close eye on money-supply growth. Second, central banks sometimes need to lean against asset-price bubbles. Consider the role of money first. Ask non-economists, “What is economics?” and they will often reply that it is “all about money”. Yet the odd thing is that the standard academic models used by most economists ignore money altogether. Inflation instead depends simply on the amount of spare capacity in the economy. Nor does the money supply play any role in monetary policy in most countries, notably America. Alan Greenspan's last ten speeches as chairman of the Federal Reserve contained not a single use of the word “money”. TEXT 26 Yet Milton Friedman's dictum that “inflation is always and everywhere a monetary phenomenon” is still borne out by the facts. The chart plots the rate of inflation and broad money-supply growth in 40 economies over the past 30 years. In the long run, countries with faster monetary growth have experienced higher inflation. So why are central banks (except the ECB) paying so little attention to money? The problem is that over short periods the link between the money supply and inflation is fickle, because the demand for money moves unpredictably. The Bank of England's early days provide a good example. Uncertainty over exactly when ships laden with valuable commodities would arrive in London could cause unexpected shifts in the demand for money and credit. The uncertainty was caused by many factors, notably changes in the direction and the speed of the wind as ships came up the river Thames. The bank's Court Room therefore had a weather vane (still there today) to provide a surprisingly accurate prediction of shifts in the demand for money. Sadly, no such gauge exists today. Financial liberalisation and innovation have also distorted measures of money, making monetary targeting—all the rage in the early 1980s—unworkable. But it would be foolish to conclude that money does not matter. Throughout history, rapid money growth has almost always been followed by rising inflation or asset-price bubbles. This is why Mr Issing, virtually alone among central bankers, has continued to fly the monetarist flag. The ECB's monetary-policy strategy has two pillars: an economic pillar, which uses a wide range of indicators to gauge short-term inflation risks, and a monetary pillar as a check on medium- to long-run risks. The monetary pillar has attracted much criticism from outside the ECB; it is often dismissed as redundant, if not confusing. It was originally intended to guard against medium-term inflation risks. More recently, Mr Issing has justified the pillar as a defence against asset bubbles, which are always accompanied by monetary excess. TEXT 27 Mr Issing's model is at last starting to win friends abroad. Julian Callow, an economist at Barclays Capital, sees strong parallels between the Bank of Japan's (BoJ) new monetary policy framework and that of the ECB. The BoJ has said that it will track the economy from two perspectives: price stability and growth one to two years into the future; and a broader assessment of medium- and longer-term risks, which is likely to include the growth of asset prices and credit. In his time at the podium at last week's conference, Kazumasa Iwata, deputy governor of the BoJ, seemed to confirm that the bank's new framework owed much to Mr Issing's legacy.

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