THE IMF GLOBAL CURRENCY AND THE IIMT GLOBAL CURRENCY
The April 13, 2010 discussion paper—mostly for in-house consumption?—shows how the IMF is angling to elevate its SDRs into a global currency that would be administered by an expanded IMF.
Since John Stuart Mill proposed a global currency in the 19th century many others, well-known and not so well-known observers, have made proposals for a global currency with more or less details on a world central bank. Of course, libertarians and their institutes such as the Von Mises Institute are ideologically opposed to such global monetary system. Like in most of these controversies the perception of the role of government is often a or the crucial factor in determining the differences.
The IMF and those earlier promoters are right in pointing to the need of an international monetary authority to accomplish an equitable and sustainable, and therefore, stable international monetary system.
The International Institute for Monetary Transformation www.timun.net agrees with that need, but disagrees with the IMF’s approach. The Institute proposes carbon-based monetary standard which would transform the international monetary system’s exchange rates, its national currencies and its costly global reserve system. It would remove the global reserve system because national currencies would become convertible because they would be based upon the Tierra, the new monetary system’s unit of account or numeraire. Once nations decide to make to adopt a global currency the Tierra becomes also a store of value and means of exchange.
The reason that this transformed international monetary system is based upon a carbon standard is humanity’s predicament of climate change, its greatest challenge in the 21st century. By making the international monetary system’s standard a carbon standard this important and underestimated international system becomes a systemic support in avoiding dangerous levels of global heating. This transformed international monetary system uses the fee and dividend carbon reduction method rather than the cap and trade method which is considered not to be fast, formidable and fair enough. Thus, the new system is known as the Tierra Fee and Dividend system. It will be presented in book form by Cosimo Publishing at the end of this year. It will be presented at the UNITAR/Yale University conference of 17-19 September as part as their global environmental governance program.
Part of this IIMT’s transformed international monetary system is the introduction of carbon accounts in a nation’s balance of payments. Like its financial imbalances, a nation has to balance its ecological imbalances of being carbon debtors and carbon creditors.
Finally, the IIMT’s carbon-based global currency of the Tierra and its earlier carbon-based national currencies are administered by a decentralized UN World Central Bank that is part of an emerging global political entity.
The beginning of this month of July was spent at the 2010 Conference of the International Peace Research Association or IPRA where I coordinated the program of its Ecology and Peace Commission. I also presented a PowerPoint on Monetary Peace which is based upon my research for a transformed international monetary system. The PowerPoint can be viewed in the Documents section in the category of IIMT documents. Googling monetary peace will also lead to the PowerPoint.
On July 1 he UN Institute for Training and Research (UNITAR) has selected my abstract on the TFD and invited me to prepare a paper for its second conference on environmental governance and democracy with its theme "Strengthening Institutions to address climate change and the green economy" at Yale University from 17-9 September. By August 15 I will know whether I will be part of a panel. However, the most important part of this invitation is that the TFD will be seriously considered by the 150 selected participants who are specialists from governments and academe.
The following scenario is placed at the beginning of the 2010 COSIMO book entitled The Tierra Fee & Dividend System: A Monetary Approach to Low Carbon and Climate-resilient Development by Frans C. Verhagen, M.Div., M.I.A., Ph.D., sustainability sociologist. He is the founding president of International Institute of Monetary Transformation. www.timun.net; gaia1@rcn.com
C IIMT, June 2010
Tierra Land 2025
It is the year 2025. So much has changed since 2010, affecting in a very fundamental manner the lives of individuals, families, businesses and the States and the institutions that govern them both on a national and global level. Indeed, it was well-nigh impossible to have predicted these changes around 2010, let alone at the beginning of the new century ten years earlier.
To help you understand what happened, you are invited to take a trip into the future—to TierraLand to look at/learn about some of those changes—brought about by the introduction of a carbon-based monetary standard and its unit of account, the Tierra, thus transforming the international monetary system of 2010..
Our energy system is no longer carbon-based. Coal and oil companies now operate a low carbon system and are leading in the promotion of the many renewable energy technologies that we now have. Wind turbines dot our landscape and offshore installations have replaced those hundreds of oil rigs. We read in our textbooks how the 2010 BP oil disaster in the Gulf of Mexico and the many years long cleanup was a major precipitant for energy change in the USA and other parts of the world. The oceans are now used for converting wave action and ocean thermal differences into energy. Almost every building produces a part of its own electricity. We in the industrialized countries are proud to have developed a decentralized solar energy system that is far more secure than the highly centralized power stations of the past.
One of the reasons for this efficient and secure decentralized energy system is the role that national governments have played. In the face of the economic and climate crises of 2007 – 2009 and the ongoing food, fuel and water crises they realized how necessary it was to cooperate in transforming the monetary, financial and economic systems. The pressure of emerging economies, which wanted a more equitable world order, also contributed to this change from a competitive multipolarity to a cooperative multilaterism.
As a result, the world’s financial system is no longer controlled by the Bank of International
Settlements and its Financial Stability Forum, the International Monetary Fund and the World Trade Organization. Nor is it influenced by large financial services corporation. These corporations, many of which had signed on to the World Corporate Charter Organization established a few years after the Rio Summit, are now monitored and regulated by the UN World Central Bank. It is encouraging to observe that under the financial system in TierraLand 80% of all financial resources are invested in the real economy of goods and services. Fifteen years ago only 20% of those resources were invested in the real economy and 80% was “invested” in the shadow economy.
Commercial banks and privately owned banking systems no longer have the privilege of fractional reserve banking. Governments have withdrawn this privilege. Nor is the economy debt-based with governments borrowing money from privately-owned banking systems. Now banks make careful loans to prospective homeowners and enterprising business women.and men. When an individual makes a loan from a bank, he/she pays a very low interest.
The international monetary system in 2025, i.e. the Tierra Fee and Dividend (TFD) system, is no longer without a monetary standard which is carbon based using the Tierra as its unit of account. It aims to address itself to the century’s greatest challenge—reducing GHG emissions to non dangerous levels.With its fixed exchange rates, the TFD system has reduced currency manipulation and speculation drastically. Anchored in the Tierra, the TFD’s unit of account, the nations’ currencies are convertible thus removing the need for a costly global reserve system. We are now looking forward to instituting a single carbon-based world currency using the Tierra as the unit of account, making it, at the same time, a nation’s or individual’s store of value and means of exchange. The method of computing a nation’s balance of payments have also changed. The account lines will include both its financial and ecological credits and debits
But how did these changes come about? Looking back to 2010 we envision the steps the world community needed to have followed to propel these changes forward.
One might have expected that the crisis years 2008-9 to bring forth new thinking and institutions. They did not. Rather, the economic crisis resulted in a near collapse of not only the global financial system, but also the global economic system. Besides, human survival was threatened by the climate crisis. The Copenhagen conference of 2009 and its successor in Cancun the following year only minimally dealt with the perils of global warming. However, the two working groups in the UN Framework Convention on Climate Change (UNFCCC) continued working on the Bali Plan of Action including the weak and undemocratic Copenhagen Accord into their discussions. They also looked at various ways of improving long-term cooperative action among the nations. Progress was made when the climate crisis gained the top spot on the agenda of the 2012 UN Earth Summit in Brazil, the 20th anniversary of the 1992 UN Earth Summit held in Rio de Janeiro.
During the years 2010 – 2015 new global policies were developed. People started to understand the serious drawbacks of the financialization process that had taken place around the 1990s and wanted to definancialize their societies. They remembered that the hegemonic empires of Spain, Holland and Britain lost their power when their societies were financialized at the cost of manufacturing and agriculture. The financialization of the US society was considered to be one of the main causes of the Great Recession of 2007-9. Following the Recession legislation was passed to curtail the excesses of the financial sector and decrease its overbearing nature on the economy as a whole. Thus, greater space became available in national economies to engage in manufacturing and agriculture. The restoration of ecologically benign farming and high tech manufacturing by the US had a beneficial impact world wide. We are the present beneficiaries of this restoration, which also took place in other industrialized countries. This definancialization process also created greater financial policy space in developing nations because of the unfettering of their financial ties with large expatriate corporations in finance, insurance and real estate (FIRE).
People also started to understand the larger scope of the definancialization processby connecting it to deglobalization process and started emphasizing the benefits of living well within the Earth’s limits in their own bioregions.
The link between definancialization and deglobalization became clearer to most people in government, business and civil society. Individuals, local communities and their national governments started emphasizing the benefits of living well within the Earth’s limits in their own bioregions. People were encouraged to become ‘locavores’ eating food grown in their region. The concept of frugal trade which included the environmental costs of the aviation and shipping industries in providing goods and services was introduced and guided business practice. .
Some of this thinking passed into the international community’s effort to implement the Millennium Development Goals (MDG), particularly in 2010, when high level sessions took place in March and September in a last ditch effort to ensure basic human services promised by the MDGs to all by 2015. It took about ten years to have this new thinking and its related policies implemented both globally, regionally, nationally. We have to thank those valiant persons and institutions who did not give up during the last 15 years but rather kept battling a world order that enriched the few, impoverished the many and imperiled species and planet
At the same time, the idea of a carbon-based monetary standard (CBMS) was introduced to deal with the serious shortcomings of the existing international monetary system. Fluctuating exchange rates, currency manipulation and speculation and an expensive global reserve system that costs developing countries some $100 billion annually had to be brought under control. It was finally recognized that the international monetary system, the glue which binds the monetary, financial, economic and commercial systems, had to change if those other systems were to function properly. In other words, the economy, trade and financial institutions had to be based on an equitable, sustainable, and, therefore, stable monetary system if they were to provide resources for low carbon and climate-resilient development in both the global North and South.
A carbon standard was, therefore, proposed to be the new monetary standard. It was developed to put the international monetary system into the service of combating the climate crisis. Its accounting unit was the Tierra, Spanish for Earth. By basing the new international monetary standard on carbon rather than upon a basket of major currencies, commodities or an adapted SDR as the reformist authors in the important Chatham House report were proposing, the international monetary system was transformed leading to changes in the financial, economic and commercial systems, which now had to operate within the limits set by the carbon monetary standard internationally, regionally and nationally. All nations had to express their national currencies in terms of the Tierra, the unit of account of the new monetary system. Pegged or anchored on the Tierra, their currencies became carbon-based and thus convertible with each other.
The way history develops is a wondrous thing. Serendipity and planning often go together, and then the truth of the saying “opportunity favors the prepared mind” becomes clear. One of the outcomes of the minimally effective Copenhagen conference of 2009 was the emphasis on climate justice by a substantial number of members of Civil Society. They stressed the ecological indebtedness of the countries in the global North. It was the emissions of their greenhouse gases over the last 200 years that had brought on the climate crisis. The president of Bolivia, Evo Morales, gave leadership to organizing peoples from around the world to redress ecological indebtedness. The recommendations of his conference, held in Cochabamba from 19-22 April 2010, with its many internet working groups were submitted to various venues at the UN in early May of the same year and submitted to the UNFCCC in Cancun in November 2010. Several member states, particularly from South America, took leadership in having the UN General Assembly pass a resolution to establish a UN Commission of Experts on Monetary Transformation and Low Carbon, Climate-Resilient Development in fall 2010. It was mandated to present its recommendations, including a Monetary Plan of Climate Action to the UNFCCC either in Cancun or South Africa, with its recommendation and Monetary Plan for Climate Action, to the Second Rio Earth Summit in 2012. This summit initiated thousands of meetings and consultations in all continents and by all kinds of groups of government, business and civil society which continued for three years and led to the Tierra Treaty of 2015. Initially it was thought that the process would take longer and that the Treaty could only be signed around 2020, but Mother Nature spoke up in her own way. Such catastrophic droughts and floods took place between 2010-15 that her human inhabitants were pushed as a matter of high urgency to expedite the Tierra Treaty.
It is also worth mentioning that the second Obama Administration finally developed a global monetary vision based upon its New Foundation philosophy that enabled the USA to assume global monetary leadership within the framework of the United Nations together with China and other emerging economies. That vision also prevailed on the US Senate, the historic graveyard of international treaties, to accept co-leadership in forging the Treaty forward after its Treasury Department had gradually moved away from having the US dollar remain an international reserve currency. It had already noted this trend of nations moving away from the US dollar in its 2010 National Intelligence Council Project, entitled “Global Trends 2025: A Transformed World”.
This imaginary trip is offered as a prelude and introductionto a proposal for a monetary approach to a low carbon and climate resilient development, i.e. the Tierra Fee and Dividend System (TFD), the various dimensions of which will be elaborated in the chapters that follow.
“Can we move nations and people in the direction of sustainability? Such a move would be a modification of society comparable in scale to only two other changes: the Agricultural Revolution of the late Neolithic, and the Industrial Revolution of the past two centuries. These revolutions were gradual, spontaneous, and largely unconscious. This one will have to be a fully conscious operation, guided by the foresight that science can provide. If we actually do it, the undertaking will be absolutely unique in humanity’s stay on Earth.”
William D. Ruckleshaus,
Head of the U.S. Environmental Protection Agency 1970-73.
The new carbon standard has several features in common with the historical gold standard. Both monetary systems have standards that fix exchange rates among nations based upon those standards. This leads to relative stability and predictability because the value of the unit of account stays the same and thus currency fluctuations need not to be taken into account when planning a business transaction or a leisure trip. Of course, prices for goods and services may go up or down based upon many economic and fiscal factors, but they are always expressed in the value of the currency that remains the same.
Both international monetary systems have convertible currencies because they are anchored in a standard that determines the value of the currencies. The gold standard was defined in a precise amount of gold for a precise amount of value in the unit of account (Pound sterling in the 19th century and US dollar in the 20th century). The carbon standard is defined in a precise targeted tonnage amount of CO2e emissions per person expressed in the precise amount of value in the Tierra, the TFD’s unit of account. There are two ways that a carbon-based monetary standard is applied: national currencies become carbon-based or a carbon-based world currency is created. In both cases nations can trade with convertible national currencies or the single carbon-based global currency. In the latter case, the Tierra is not only a unit of account, but also an international means of exchange. It has become a vehicle currency, that can be banked and receive interest. As such it has become a store of value, the third major characteristic of money in modern societies.
Both systems have a more or less automatic mechanism of balancing their financial accounts. The balance of payments during the gold standard was accomplished by transferring gold from the debtor nation to the creditor nation. During the gold/dollar standard the U.S. government balances were settled in dollars which were convertible to gold at $35 per ounce. The balance of payments during the carbon standard would be accomplished when carbon-debtor nations transfer their carbon-based national currencies or their world currency of Tierras to carbon-creditor nations to balance their carbon and financial accounts.
Both systems agree that the present monetary system with its heavily fluctuating exchange rates, rampant currency manipulation and speculation and costly global reserve system has to be removed. There is no standard in the non-system which Nobel laureate Robert Mundell has called a ‘criminal’ system because of its instability, unpredictability, inequity and unsustainability.
Why should the carbon-based monetary standard be preferred over the gold standard? There are four main reasons: a monetary, a philosophical, an ecological and a fiscal reason.
The classical gold standard suffered from the following monetary shortcomings. It did not possess the capacity to create credit for a growing international economy. During the gold/period of 1945-71 credit flowed into the international economy through the use of the convertible US dollar which, by the way, gained interest unlike the sterile gold in central banks’ vaults. The drawback of the latter system’s credit infusion became clear in 1958 when the BW system under the IFM was most successfully implemented. The U.S. government was developing a huge balance of payments because its own currency was also the main world’s reserve currency (Cf. Volcker’s 1992 Changing Fortunes, p.20)
The classical gold standard had also the built-in rigidity of very narrow bands of its fixed exchange rates. The difficulty of adjusting exchange rates is a perennial problem from Florentine bankers, the British supported classical gold standard in the 19th century, to the U.S. government supported gold/dollar standard. It always a great systemic challenge to adjust fixed exchange rates to the changes in a nation’s economy that causes its balance of payments to go grossly in the surplus or deficit direction. Letting the exchange rates float or having “managed” floating exchange rates that China adheres to are monetary strategies that are wrought with problems, particularly systemically.
“Barbaric relic” is the epithet that John Maynard Keynes gave to the gold standard. Its limited availability even with new discoveries is unable to meet the demand of an expanding global economy.
The Tierra monetary architectures would not suffer from these three monetary shortcomings of the classical gold standard. Its UN World Central Bank has the global authority to create credit in amounts that it sees fit in the face of debt-laded nations that are trying to cope with both the economic and climate crises. Setting bands around its fixed exchange rates is part of its functions as the global institution of monetary governance. Like always, the Bank would be faced with the challenge to adjust a nation’s carbon-based currency by setting its par value with the Tierra, thus either devaluing or revaluing its currency. Obviously, CO2e is an ample standard because much reduction of CO2e has to take place before the standard has to be changed to another standard that is intrinsically valuable at the end of the 21st or the beginning of the 22nd century.
The philosophy of most gold standard proponents is libertarian: less government, freedom to individuals and markets. They are followers of the so-called Austrian school of economics of Friedrich von Hayek and Ludwig von Mises and its American adherents such as Milton Friedman, Murray Rothbard, Judy Shelton and others. Their main supporting organizations are the Von Mises Institute and the Cato Institute.For them the return to the gold standard means that politicians whether central bankers or finance ministers are not able to subject their citizens to their manipulation of the money supply and of price levels robbing them of the value of their assets. These monetarists would set a percentage of growth in the money supply and the system of efficient markets would automatically adjust to this monetary straightjacket.
The role of government under the TFD system, adhered to by economists with the Keynesian approach, is an active one. It is to regulate the financial sector and to direct the economy in a way that a level playing field is created, so that private enterprise can flourish within a clearly determined and fair economic framework. In this conception of the role of government the question is not less or more government, but the right level of government. It is this role of government that underlies the Tierra Fee & Dividend system where the international monetary system is being used to make the Fee & Dividend carbon reduction method more effective in reducing GHG emissions.
The ecological reason why the carbon-based international monetary system is to be preferred above the gold-based one is its ability to effectively deal with the climate crisis. By having nations anchor their currencies on the Tierra—the TFD’s unit of account—they are forced to engage in decarbonizing their societies by reducing coal-fired power plants, investing in renewable energy technologies, increasing energy efficiency and conservation, etc. The strength of their economies is mainly determined by their energy infrastructure which in turn is reflected in the strength of their currencies the value of which is expressed in the amount of Tierras their currencies can command.
In conclusion, the ability of providing extra liquidity to global economic system makes the carbon-based Tierra Fee & Dividend system superior to a gold-based international monetary system that does not deal with the century’s most important ecological challenge and that is prevented from having governments take an active role in determining a pathway to an equitable, sustainable, and, therefore, stable international monetary system. Through its UN World Central Bank, an anathema for libertarians, governments are able to provide liquidity by issuing extra allocations of Tierras based upon a per capita system rather than the quota system through which the IMF allocates its synthetic currency of Special Drawing Rights (SDRs). There is no equivalent international monetary institution for libertarian economists because they have rejected the IMF as an intrusive international institution that is not needed in a gold standard. They do not have a lender of last resort that is able to circulate credit into a global economic system where millions of people are unemployed, where sovereign debt burdens are severe, where currencies sometimes fluctuate by 50% in a decade’s time and where hundreds of billions of dollars (Tierras) are needed to finance low carbon and climate-resilient development.
The following chart presents a comparison of the classical gold standard with the carbon standard, summarizing most of the aboveinformation. Note that the balance of payments schedule in the classical gold standard was seemingly a rather rigid adjustment mechanism to balance financial accounts between nations. The balance of payments in the TFD system is less rigid because there is an international monetary institution the Board of Governors of which has a global authority to make the balance of payments work in a flexible way. However, its adjustment mechanism of balancing the carbon accounts of nations can only flexibly become in operation after a convergence period that would narrow the wide gap between carbon debtors in the global North and the carbon creditors in the global South. Both the flexibility and convergence issues arepart of the negotiations that precede the signing of the Tierra Treaty.
COMPARING THE CLASSICAL GOLD AND THE CARBON STANDARD
Featuresgold standardcarbon standard
Usagemostly in 19th centurybeing proposed for 21st century
The Tellus Organization is launching a new program to regulate TNCs. It states in its draft proposal the need for their regulation. “Over the past half century, the reach and impact of TNCs have soared, with 75,000 firms now operating in all sectors of the world economy. The revenues of many companies exceed $100 billion per annum, with $300 billion no longer rare and $500 billion on the horizon. Of the largest economies in the world, approximately half are corporations rather than countries. The scale and influence of TNCs thus create a need to address the question of global governance. In the twenty-first century, the disjuncture between far-flung international impact and feeble international accountability has become a glaring incongruity that demands redress.” Thus, the draft proposal entitled When the World Rules Corporations: Pathway to a Global Charter presents the following abstract for its June 2010 discussion.
The ascent of transnational corporations poses fundamental questions of accountability, regulation and democratic process. Although their footprints cross continents, TNCs still operate under legal licenses granted by national or state authority. In order to rectify the incongruence between global impacts and state control, and to align corporate behavior with social and ecological purpose, we propose a World Corporate Charter Organization. By defining the obligations of TNCs, global charters would balance the current emphasis of international institutions, such as the World Trade Organization, on TNC rights. With public concern about corporate power on the rise, the moment is propitious for establishing transnational governance of transnational corporations, a precondition for attaining just and sustainable societies.
My response was the following:
A valiant and necessary effort! Process is fine.
The WCCO is to become part of a global interconnected governance regimen of monetary, financial, economic and commercial systems. This is the challenge that the UNDESA World Economic Situation and Prospects Report of 2010 spells out in this way: “sustainable rebalancing of the global economy will require close coordination with other areas of global governance, including those related to development financing and the multilateral trading system, as well as with the United Nations Framework Convention on Climate Change. No specific mechanism for such coordination exists at present, and the creation of such a mechanism would need
to be considered.” (p.13)
Transforming the international monetary system being themost basic international system that, like glue, binds together monetary, financial, economic and commercial systems entails substantial transformation of those dependent systems. Thus, WCCO which is to be part of global economic governance, would also be affected by this Great Monetary Transformation.
An international ad hoc planning group of UN officials, economists, and social scientists is working on a Declaration of Purpose to be presented to governments for them to sponsor a General Assembly Resolution to establish a UN Commission of Experts on Monetary Transformation and Low Carbon, Climate-resilient Development. A transformed international monetary system is based upon a carbon standard with its unit of account of the Tierra that forms the basis of carbon-based national currencies or, later on, the carbon-based world currency of the Tierra. It includes fixed exchange rates and debit and credit carbon accounts in the nations’ balance of payments. More information on www.timun.net.
Frans Verhagen, International Institute of Monetary Transformation
The new carbon standard has several features in common with the historical gold standard. Both monetary systems have standards that fix exchange rates among nations based upon those standards. This leads to stability and predictability because the value of the unit of account stays the same and thus currency fluctuations need not to be taken into account when planning a business transaction or a leisure trip. Of course, prices for goods and services may go up or down based upon many economic and fiscal factors, but they are always expressed in the value of the currency that remains the same.
Both international monetary systems have convertible currencies because they are anchored in a standard that determines the value of the currencies. The gold standard was defined in a precise amount of gold for a precise amount of value in the unit of account (Sterling in the 19th century and Dollar in the 20th century). The carbon standard is defined in a precise amount of CO2 emissions per person for a precise amount of value in the unit of account of the Tierra. There are two ways that a carbon-based monetary standard is applied: national currencies become carbon-based or a carbon-based world currency is created. In both cases nations can trade with convertibility of national currencies or the single global currency.
Both systems have a more or less automatic mechanism of balancing their financial accounts. The balance of payments during the gold standard was accomplished by transferring gold from the debtor nation to the creditor nation. The balance of payments during the carbon standard will be accomplished when carbon-debtor nations transfer Tierras to carbon-creditor nations.
Both systems agree that the present monetary system with its heavily fluctuating exchange rates, rampant currency manipulation and speculation and costly global reserve system has to be removed. There is no standard in the non-system which Nobel laureate Robert Mundell has called a ‘criminal’ system because of its unpredictability.
Why should the carbon-based monetary standard be preferred over the gold standard? There are three main reasons: a philosophical, an ecological and a fiscal reason.
The philosophy of most gold standard proponents is libertarian: less government, freedom to individuals and markets. They are followers of the so-called Austrian school of economics of Friedrich von Hayek and Ludwig von Mises and its American adherents such as Milton Friedman, Murray Rothbard, Judy Shelton and others. Their main supporting organizations are the Von Mises Institute and the Cato Institute.For them the return to the gold standard means that politicians whether central bankers or finance ministers are not able to subject their citizens to their manipulation of the money supply and price level. These monetarists would set a percentage of growth in the money supply and the system of efficient markets would adjust.
The role of government adhered to by economists of Keynesian approach is an active one. It is to regulate the financial sector and to direct the economy in a way that a level playing field is created, so that private enterprise can flourish within clearly determined and fair economic framework. In this conception of the role of government the question is not less or more government, but the right level of government. It is this role of government that underlies the Tierra Fee & Dividend system where the international monetary system is used to make the Fee & Dividend carbon reduction method more effective in reducing GHG emissions.
The ecological reason why the carbon-based international monetary system is to be preferred above the gold-based one is its ability to effectively deal with the climate crisis. By having nations anchor their currencies on the Tierra—its unit of account—they are forced to engage in decarbonizing their societies by reducing coal-fired power plants, investing in renewable energy technologies, increasing energy efficiency and conservation, etc. The strength of their economies is mainly determined by their energy infrastructure which in turn is reflected in the strength of their currencies as reflected in the amount of Tierras.
Finally, the ability of providing extra liquidity to global economic system makes the carbon-based Tierra Fee & Dividend system superior to a gold-based international monetary system that does not deal with the century’s most important ecological challenge and that is prevented from having governments take an active role in determining a pathway to an equitable, sustainable, and, therefore, stable international monetary system. Through its UN World Central Bank, an anathema for libertarians, governments are able to provide liquidity by issuing extra allocations of Tierras based upon a per capita system rather than the quota system through which the IMF allocates its synthetic currency of Special Drawing Rights (SDRs). There is no equivalent international monetary institution for libertarian economists because they have rejected the IMF as an intrusive international institution that is not needed in a gold standard. They do not have a lender of last resort that is able to circulate credit into a global economic system where millions of people are unemployed, where sovereign debt burdens are severe, where currencies sometimes fluctuate by 50% in a decade’s time and where hundreds of billions of dollars (Tierras) are needed to finance low carbon and climate-resilient development.
One of the many reasons that the euro is fragile is the fragility of the international monetary system. The latter system has no standard and is subject to wide currency manipulation and speculation and widely fluctuating exchange rates to mention its most important shortcomings. This external monetary pressure on the euro is not often considered in analyzing its weaknesses.
Other reasons for the fragility that are more locally caused are the great disparity in the economies of its 16 members. Its southern tier of countries, particularly Greece, Spain, Portugal and Italy, have for various reasons not kept their fiscal houses in order and have generated high sovereign debt loads. Thus, on May 25, 2010 the euro hit an 8 1/2-year low against the yen and neared a 4-year low versus the dollar. During the month of May alone the euro lost more than 7 percent versus the dollar, the biggest monthly fall since January 2009. The euro's downside targets stood at the recent low of $1.2143 and at $1.2133, a 50 percent retracement of a rally from its all-time low around $0.8225 in October 2000 to its record peak of $1.6040 touched in July 2008.
Note the enormous fluctuations of the euro—100% from October 2000 to July 2008 and 50% from October 2000 in May 2010. Think of the havoc these fluctuations inflict on local residents and business and international trade. The euro system being one of the world’s major currency areas has become so unstable, that markets i.e. investors and gamblers are hesitant to invest in those countries’ economies. They pull backed from their riskier assets, followed by citizens of those southern countries who also pulled back their assets out of their own banks and deposited them in German banks or invested them in US Treasuries. States Kenneth Broux, senior market economist at Lloyds TSB: "Fears are growing that a collapse in confidence could undo the positive growth impulses that are still present, with tensions in money markets resulting in dollar liquidity drying up."[1]
Under the TFD system the euro would be carbon based and convertible with the other carbon-based national currencies in its first phase. In its second phase the euro would be replaced by the Tierra, the carbon-based single global currency. The monetary architecture in both phases would consist of fixed exchange rates within a monetary governance structure of the UN World Central Bank which by exercising its four main functions would provide monetary stability for the benefit of all. This stability is made possible on account of the equity and sustainability of its Articles of Agreement. Given that there will always economic changes locally, regionally and internationally, the Tierra monetary architecture’s exchange rates will fluctuate, but these fluctuations are kept within a short band around its monetary standard. Unlike the ECB, the World Central Bank has the political power to keep its members’ monetary and fiscal policies in check after having achieved a monetary union under the auspices of the United Nations.
We live in not only unstable, but precarious times. One of the best articulations of that fact is the statement of veteran investor quoted by Thomas Friedman in his column on Sunday May 23, 2010. Mohamed El-Erian, who runs Pimco and has lived through many a financial crisis, recently described it like this: “The world is on a journey to an unstable destination, through unfamiliar territory, on an uneven road and, critically, having already used its spare tire.”
What is needed in such precarious times is leadership, not only of government and business, as Friedman believes, but also of civil society. Societies are to be guided by leaders who are able to articulate a clear vision of the future, based upon a coherent set of values and upon the political wisdom of building practical solutions. It is their intense desire to work together that such leadership can be effective.
A first requirement of such common leadership is the recognition of the need of agreement of the past and present social and ecological problems. Facts have to be established upon which to build a new edifice. These facts have to be established within as wide and diverse ways of participatory decision-making as possible.
A second requirement is boldness in choosing the proper policies and in carrying them out. International systems do not work and no national policies will work without functioning of international systems of which they are an integral part. Again these policies have to chosen within as wide and diverse ways of participatory decision-making as possible.
A third requirement for leadership in these precarious times is to deal with the most basic system in international relations, i.e. the monetary system. Its overhaul is to be wedded with the most pressing challenge of these precarious times, i.e. the climate crisis. Thus, a UN Commission on Monetary Transformation and the Climate Crisis seems to be a good start to restructure the international machinery, so that it serves humanity rather than humanity serving it. What humans make, human can unmake. The precarious times demand that a creative destruction of present systems take place.
This post is the Comment sent to the Economist blogger Charlemagne on May 10th:
This $1 trillion bazooka measure shows the lack of an operating international monetary system that would prevent currency manipulation and speculation that makes fiscal irresponsibility worse.
There is an alternative international monetary system which would also remove the costly global reserve system that costs developing countries some $100 billion annually. It is called the Tierra Fee & Dividend system which would use a transformed international monetary system to combat the climate crisis within a political context where the public sector has reclaimed its role of regulator and driver. It is based upon a carbon-based monetary standard with the accounting unit of the Tierra. It would create carbon-based national currencies with fixed exchange rates anchored on the Tierra. At the appropriate time nations can decide to move to a carbon-based world currency. In both applications of thecarbon-based monetary standard the UN World Central Bank will administer, monitor, regulate and engage in money creation without going through the privately-owned banking systems because they will have become utilities without the privilege of fractional reserve banking. Details of this new transformational system can be found at www.timun.net and the forthcoming book THE TIERRA Fee & Dividend System: A Monetary Approach to Low Carbon and Climate-resilient Development.
THE MONETARY NON-SYSTEM MADE VISIBLE IN THE GREEK DEBT CRISIS
Almost all nations and almost all states in the USA are burdened by huge amounts of debts. These fiscal burdens have different social causes in different countries and regional monetary unions. Thus, the Greek debt crisis is mostly a matter of domestic political, cultural and economic causes and its resolution is mostly a matter of domestic and regional monetary policy by the European Central Bank (ECB).
The term mostly used twice in the above paragraph covers the reality of the international dimension and its monetary, financial, economic and commercial systems. All of these systems impact on the Greek debt crisis and on the solutions that the ECB is trying to find, because in this globalizing world these systems increase in importance.
One international system the effect of which on the Greek debt crisis and the debt situations in other countries is hugely underestimated is the international monetary system. It is this system that does not work properly and has been called by many observers a non-system. Nobel laureate Robert Mundell call this non-system a “criminal” system because its lack of acting like glue of the other systems deprives the world from the means to procure a decent quality of life, particularly for the most vulnerable groups of humans and other species.
I see two main reasons why the international monetary system or non-system is not working properly: the presence of nation-based global reserve system and a money creation function that is under the control of privately-owned banking systems.
The US dollar which amounts to over 60% of the reserves in the global reserve system is a and probably the main cause of the global financial imbalances where you have large surplus countries such as China and large deficit countries such as the USA. It was exactly the purpose of Keynes proposal of an International Clearing Union and its synthetic currency of the bancor that contained the right elements to keep that balance reflected in nations’ balance of payments. When the IMF was created by an overbearing role of US negotiators, its main function still was one of surveillance. Obviously, it failed miserably in this function given today’s global financial imbalances. Today, particularly proposals by the 2009 UN Stiglitz Commission for a non-national reserve currency and, less so, some technical reforms of the global reserve system by the UN Department ofEconomic and Social Affairs (UNDESA) and the UN Conference on Trade and Development (UNCTAD) are good reformist proposals which are not able to do the required job. What is needed is a transformed international monetary system based upon a monetary standard that would remove the global reserve system and put into place an international monetary system where national currencies are pegged to that standard or where the international community decides to go for a common international currency.
The second reason for the global financial imbalances is the abdication of the public sector of being the sole creator of the money supply in their nations. Presently, over 90% of all the debt-created money is brought into the world economy by privately-owned banking systems which are competing with one another, often in very irresponsible ways as we have seen in the recent financial crisis. The time has come to subject this 400 year anachronism to profound scrutiny. One of British most accomplished monetary diplomats and cofounder of the New Economics Foundation, James Robertson, had suggested to Prime Minister Brown at the occasion of the London Summit on April 1, 2009 that Britain presents this reclaiming of the money creation function. We all know that that Summit and the ones following it together with the meetings of theG7/8/20 finance ministers upon have opted for recovery rather than transformation. The once moribund IMF was raised like a phoenix out of the ashes by having received the billions of dollars in that recovery effort.
So what can be done to find solutions to the Greek debt crisis, the fragility of the euro, the incompatibility of having one nation’s currency become the world’s reserve currency, to reduce the global financial imbalances of a surplus China and deficit USA?
Thinking through the many alternatives that being offered in all these cases there is onemonetary alternative that, at the same time, addresses the even more challenging problem of a changing climate. I have called it the Tierra Alternative.
The alternative consists of a transformed international monetary system based upon de-carbonization monetary standard with its Tierra as unit of account together with a carbon reduction method of Fee & Dividend which is to replace the cap-and-trade. The latter is not fast, formidable and fair enough to do the job of reducing the GHG to non-dangerous levels in a timely, comprehensive and equitable fashion.
The Tierra Fee & Dividend system is predicated upon the notion that governments are to be regulators and drivers, particularly in these carbon-constrained times which, at the same time, are afflicted by monetary, financial, economic and commercial systems that enrich the few, impoverish the many and imperil the planet. One major plank of this role of governments is to reclaim the function of money creation from privately-owned banking systems, so that the Tierra Fee & Dividend system becomes possible. In that waymonetary, financial, economic and commercial systems can be developed for low carbon and climate-resilient development in the global North and South.
A next step towards the establishment of the Tierra Fee & Dividend system or a similar system is the need for the UN General Assembly to pass a resolution like the one in October 2008 when it established the UN Commission of Experts on the Monetary and Financial Crisis and its Impact on the Development. This time the new Commission of Experts on Monetary Transformation and the Climate Crisis would build upon the latter commission’s recommendations but would expand them for focusing on the international monetary system which California State University history Barry Eichengreen considers the glue of the other international systems.
I want to conclude with part of a US Congressional testimony that places the Tierra Alternative in the needed and possible monetary evolution that this economist presents and that asks the USA to develop its international monetary vision. That vision is still lacking, for many identifiable reasons, and which President Obama should include in its New Foundation philosophy as soon as possible.
“The continued expansion of free trade, the increased integration of financial markets and the advent of electronic commerce are all working to bring about the need for an international monetary standard---a global unit of account….An important question is whether this process of monetary evolution will be intelligently directed or whether it will simply be driven by events….In any event, it is imperative that the United States begin to develop and put forward its own global monetary vision for the future.
Here is the draft statement which will not substantially change.
This is the first public statement without a carbon-based international reserve currency, because during last weekend it become clear that no reserve system is needed in the Tierra Fee and Dividend system, a major decision in the development of the system.
TRANSFORMING THE INTERNATIONAL MONETARY SYSTEM
TO SERVE LOW CARBON AND CLIMATE-RESILIENT DEVELOPMENT:
The Case for the Tierra Fee & Dividend System
A Statement at the 18th UN Commission for Sustainable Development
By
The International Institute of Monetary Transformation
Frans C. Verhagen, M.Div., M.I.A., Ph.D., sustainability sociologist, president
Development or living well in global North and South has to be low carbon and climate resilient within the ethical context of Article 3 of the UNFCCC and the demands of climate justice as proposed at the December 2009 Copenhagen conference and the April 2010 Cochabamba peoples’ conference.
Domestic, regional and especially international monetary policies can be used to work towards low carbon and climate-resilient development in the global North and South. Fundamental change in the often underemphasized international monetary system leads to fundamental change in the financial, fiscal, economic and commercial systems given that it is like glue which binds them together.
THE PRESENT MONETARY NON-SYSTEM AND THE DIRECTIONS OF THE MONETARY FORK IN THE ROAD
Many observers have pointed to the need of having a second Bretton Woods monetary system since the early one of 1944 expired on 15 August when the USA unilaterally disconnected the convertibility the dollar with gold. This action lead to emergence of floating exchange rates and of reserve currencies, the major one is the US dollar. It also led to the creation of SDRs which have been hardly used during the last 40 years. Basically, the international monetary system is a non-system which has been judged to be immoral by the notable monetary economist Mundell.
IMF, the fund to balance the global financial imbalances, has failed its surveillance function because of the continuing global financial imbalances and because of its double standard for developing and developed countries.
The present non-system is a muddling at considerable transaction and reserve currency maintenance costs amidst humanity’s greatest challenge of restoring the degraded Earth’s processes of the cycling of matter (particularly the carbon cycle), the flowing of energy and the webbing of life. There is a choice between the present muddling through and using a transformed international monetary system for working towards low carbon and climate-resilient development. We have reached a fork in the monetary road: one direction is to continue with reformist proposals for IMF and reserve currencies keeping an international order in place that enrich the few, impoverish the many and imperil species and planet; the other direction is to embark on a transformed international monetary system based upon a de-carbonization monetary standard and the new currency of the Tierra with the new institutional arrangements of a carbon account in a nation’s balance of payments and anUN Monetary Board which would have greater authority than the 1944 Keynesian International Clearing Union.
Reasons that governments, CSOs and business are to take the transformational route are the following:
We have to go beyond the reformist proposals of the 2009 UN Stiglitz Commission and the BRIC countries for a non-national or supranational reserve currency and the sophisticated interpretations of the UNDESA and UNCTAD proposals for international reserve currencies and move toward a transformed international monetary system that does not need reserve currencies which costs the developing world some $100 billion annually;
A transformed international monetary system is able to dealing with the integrated financing of development and climate measures by the issuance of a carbon-based international currency within an equitable system, thus providing liquidity without causing inflation by spending credit into circulation without becoming indebted to the privately-owned banking systems;
Only a transformed international monetary system is able toprovide the necessary monetary stability for international finance, trade and economics to flourish
The IMF and its SDRs are unable to lead in this transformation because of its limitations in distributional justice and of its inability to deal with the climate crisis in a fair, formidable and fast way.
TIERRA FEE & DIVIDEND SYSTEM
Integrates the transformed international monetary system with a carbon reduction approach that produces faster, fairer and more formidable results than the presently dominant approach of cap-and-trade;
Its monetary architecture is based upon the de-carbonization monetary standard, a most appropriate standard in these carbon-constrained times.
It also includes the principle of government as regulator and driver based upon the contextual sustainability framework of a sustainability economics that includes a bioregional focus with the novel concept of frugal trade
NEED FOR THE ESTABLISMENT OF THE UN COMMISSION ON MONETARY TRANSFORMATION AND THE CLIMATE CRISIS
·Looking for bold delegations that take leadership in having the GA pass a resolution in the same way that GA in October 2008 instituted the UN The UN Commission of Experts on the Monetary and Financial Crisis and its Impact on Development
·To be followed by prompt intensified cooperation between the UN agencies such UNFCC, INCTAD, UNDESA and UNEP, CSOs, business and academe.
·For additional information, see forthcoming Cosimo Publication THE TIERRA FEE & DIVIDEND SYSTEM: A Monetary Approach to Low Carbon and Climate-resilient Development by Frans C. Verhagen, M.Div., M.I.A., Ph.D.
This is one of the few post during the month of April. The main reason is that I was called to serve on a grand jury for 4 weeks daily from 9.30 to 4-5 pm. The following is my comment to a newsletter story of April 15 by the Cochabamba Conference on http://pwccc.wordpress.com/2010/04/15/news-bulletin-the-world-comes-to-cochabamba/#comment-566. I added to my comment the abstract that I submitted to the UNITAR/Yale conference to show how each conference in its own way is able to contribute to the emergence of Tierra Fee and Dividend approach for low carbon and climate-resilient development.
"The Bonn recognition of the CMPCC is encouraging, in no small measure due to the intervention of Ambassador Solon as reported in the Guardian story a few days ago. More important is its willingness to consider the recommendations coming out of the CMPCC. Having made the case for the practical proposal of a UN Commission on Monetary Transformation and the Climate Crisis both in the CMPCC Working Groups and in a one hour meeting with Ambassador Solon on March 19, I hope the Conference recommends the establishment of such Commission, so that the UNFCCC can recommend that the GA passes a resolution to establish the Commission in a similar way it did with the UN Stiglitz Commission in September 2008 under the leadership of H.E. Miguel D'Escoto Brockmann, MM. One of the main agenda items of such Commission would be the consideration of the Tierra Fee & Dividend system which uses a transformed international monetary system for low carbon and climate-resilient development by adopting a de-carbonization monetary standard with the accounting unit of the Tierra. It would lead nations to deal with global ecological/carbon imbalances via their carbon accounts in the adjustment mechanism of a modified balance of payments.I am appending here an abstract that I submitted for a presentation at the UNITAR/Yale Conference in medio September emphasizing the position that the international community has to go beyond simply reforming present institutions by transforming them in order to make real progress for the climate and development. It is a position that seems to be close to the purpose of the Cochabamba Conference.
Abstract
The Tierra Fee & Dividend System:
A Monetary Approach to Low Carbon and Climate-Resilient Development
For
2nd UNITAR/Yale Conference on Environmental Governance and Democracy: Strengthening Institutions to Address Climate Change and Advance a Green Economy Event Application
By
Frans C. Verhagen, M.Div., M.I.A., Ph.D., sustainability sociologist
President, International Institute of Monetary Transformation
New York City
April 15, 2010
This research builds on reformist efforts in the international monetary system or rather non-system to achieve a transformed international monetary system that is to be used for low carbon and climate-resilient development in both the global North and South. As such it does not strengthen present institutions dealing with climate change and the Green Economy, but transcends them by transforming them into a higher level of unification.
The Tierra Fee & Dividend (TFD) system consists of the carbon reduction methodology of the Fee & Dividend approach as suggested by climatologist James Hansen in opposition to the cap-and-trade approach and of Tierra Monetary Paradigm which is based upon the de-carbonization monetary standard with its accounting unit of the Tierra. In the first phase of the TFD the Tierra will be a carbon-based international reserve currency that is part of the carbon account of a nation’s balance of payments. Replacing the present hard currency reserves, the TFD would free up $100 billion annually for the developing world which can be used for domestic investment and consumption. Like global financial imbalances global ecological or carbon balances have to be balanced via the adjustment mechanism of this modified balance of payments.
One of the main effects of and the rationale for the TFD is the creation of joint financing of the MDGs and climate mitigation and adaptation measures. As such it has been presented at the ECOSOC and GA debates in March 2010 at the UN Headquarters. The full impact of this bold, transformational Tierra Fee & Dividend system is expressed in the attached draft Tierra Scenario of 2025 which resembles Edward Bellamy’s Looking Backward, 2000-1887.
Given the complexity of integrating monetary transformation, carbon fees or taxes within a political context where governments are regulators and drivers the forthcoming book length publication on the TFD discusses the need and feasibility of having the UNFCCC in COP 16 or 17 and other UN organizations recommend to the General Assembly passing a resolution to establish the UN Commission on Monetary Transformation and the Climate Crisis."
The Chatham Houset is probably one of the most comprehensive projects assessing the present international monetary system and ways to move forward. Its editors provided an informative table on page 8 synthesizing the findings of the 11 articles and the many meetings, workshops that preceded them.
The report reflects the thinking in the UK given the predominance of the British authors/academicians with some participants from Canada, US and China. There were no authors from the global South or from the UN system where monetary expertise exists specifically in its Department of Economic and Social Affairs and UNCTAD. Its focus reflects G20 and BWIs thinking. Most incisive dialogues took place on March 19 and 19 when ECOSOC conducted its meetings with the BWIs, WTO and UNCTAD about financing for development. A summary of which can be found at http://www.un.org/news/press/docs/2010/ecosoc6418.doc.html A Statement by the International Institute of Monetary Transformation about the need to integrate financing for development and climate justice can be found
I can agree with most of the recommendations as reform proposals. They can function was a way station to the real transformation that is needed to have the international monetary system deal with not only the financial and economic crises, but also the climate crisis. My main objection to the CH report is that it is not bold enough in looking at the international monetary system as a pivot to effect transformational change, particularly in respect to the climate crisis.
When Goldman-Sachs author O’Neill presents two scenarios for the future international monetary system I would like to add scenario 3 that is based upon a high level of international cooperation in forging an international monetary system that is based upon the Tierra de-carbonization monetary standard. It would depart from his scenario 2 where a flexible SDR is the basis.
It is time that academicians and banking researchers become emboldened to start thinking of reserve and vehicle currencies that are not only nationally or multicurrency based, but go beyond the currency, that look for the development of standards that are emissions based. China and the other BRIC countries may gain strength in their economies and their currencies, but if the world as a whole is unable to effectively deal with the climate crisis, their accomplishment is a Pyrrhic victory.
While the Chinese currency policy caused tensions in the early 1990s, it became highly contentious in March 2010 when the world’s economy was still reeling from the devastation of the financial crisis of 2008. It reached fever pitch when Chinese premier Wen Jiaboa declared on March 13 after the closing of the annual legislation session of the National People’s Congress that the yuan was not undervalued and that Chinese currency policy was based upon a “managed market-oriented” approach of floating exchange rates. The only linguistic difference with his terminology and that one President Obama was the term “managed”.
Within days, particularly in the USA, a bevy of dramatis personae got involved: President Obama, US Treasury, 5 Senators, 130 House members, the New York Times columnist Paul Krugman and its editorial board. Probably, so many more newspapers, magazines, talk shows, blogs will get involved, all either declaring the Chinese currency policy currency to be manipulation or demanding to have the U.S. government declare it currency manipulation, so that import duties can be levied against this flagrant violation of free trade.
Is this currency conflict to be considered a minor spat or a major issue that deserves all this attention in both the US, Europe and elsewhere? What can be done about it if it is considered a major international issue?
It first of all shows how important the international monetary system is, because floating, market oriented exchange rates are an essential component of the present “non-system” of international monetary relations and “managing” them violates even this “non-system”. During these hard economic times when each nation is desperately trying to create opportunities for restoring economic well-being and placing (inordinate) confidence in the job-creating function of their international trade policies, the undervalued yuan creates an unfair advantage for China that reduces the chances of global recovery and adversely affects the importing country. Thus, this out-of-balance international monetary system not only affects international trade, but also the world economy. It shows how the international monetary system is the glue of the other systems and, if it does not work properly, the whole system becomes unglued.
Secondly, China’s reserves stood at $2.4 trillion at the end of 2009 of which $900 billion are in dollar-denominated US Treasuries—a large pool of assets the sudden changes of which could be disruptive in many ways, both for China and the US. Columnist Krugman believes that the US has China over the barrel rather than the other way round. The US could withstand sudden shifts away from the dollar while China would be holding devalued dollars. The system as a whole would be unstable for some time.
Thirdly, the currency dispute can become a protectionist tool during these times of recession and unemployment. It ties in with world wide stimulus plans. (China has started to describe its currency interventions as stimulus.) But unlike extra stimulus spending Chinese currency interventions do not expand global demand, but shift it from other countries to China. Moreover, it was decided in Pittsburgh that the G20 economies would share their economic plans, so that the world would not lurch from recession into protectionism and inflation.
The vehemence of most of the responses, present ones and future ones, shows that the issue is considered a major issue that could test the fragile cooperative mode among the G20 and could lead to sanctions not only in the US, but also Britain and the EU. It could even result in having the WTO adjudicate (behind close doors) the issue at considerable financial costs because of its expensive procedures. At the same time, Rome is burning and the millions of unemployed persons are not helped by this fracas.
Is the Ex EU president and ex Italian premier Podi correct in advising the world to stop nagging China and to get accustomed to the assertive policies of an emerging nation? I think he is underplaying the severity of the impact of its currency policies, perhaps also due to the fact that is guest teaching in a Chinese university.
Premier Wen made clear during this over 2 hours news conference for Chinese and foreign journaliststhat China is defending against “finger pointing” and charged developed countries in forcing unfairchanges by “just for the purposesof increasing their own exports”. “I understand that some economies want too increase their exports, but what I don’t understand is the practice of depreciating one’s own currency and attempting to force other countries to appreciate their own currencies, just for the purpose increasing their own exports.” Wen believes that such policies are cause for alarm because it amounts to trade protectionism. He also believes that it is matter of “national credibility” for the US to protect its dollar. “With regard to monetary policy, it is important for us to maintain appropriate and sufficient money supply, keep interest rates at a reasonable level and manage inflationary expectations." He also pointed to the feasibility of working together. "China's total trade is high, but 50 percent is processing trade, and 60 percent of China's exports are made by foreign enterprises or joint ventures. If you restrict trade with China, you are hurting your own countries' firms."
What has to happen, first, is to establish for a fact whether the yuan policies are manipulative or not. The IMF was called upon to investigate. As a matter of fact it already did investigate the issue and concluded that the currency is “substantially undervalued.” However, this investigation is not made public by China who has the right to suppress it. Having acquired a recent seat at the IMF that is appropriate according to its economic status it used its power as other nations would have done. According to the US based Peterson Institute of International Economics’ executive director Bergsten the yuan is undervalued by 20-40%.
What has to happen next is to question the international monetary system which is unable to deal with an important nation’s unfair currency policies in an effective way. Probably, some accommodation will be found and the stage is set for another fracas where the accommodation is less likely to be forthcoming. In other words, what is needed is thorough reevaluation of the international monetary system, particularly its global reserve system.
Nobody among the loud American voices on this currency dispute has pointed out that part of the problem is the US dollar being the world’s major reserve currency that contributes to global financial imbalances, particularly the surplus of about $1 trillion in Chinese coffers. By having a non-national reserve currency, the U.S. government would not be able to sell its Treasuries for .5% and fund its huge deficits and China would not have those surplus dollars.
Under the TFD system scenario an enormous, i.e. transformational step would be taken, far surpassing, but including the currency problem of manipulation and, also, of currency speculation. As a matter of fact, the TFD system goes beyond the monetary challenges and combines them with the climate challenges, which are even more demanding.
Under the TFD system, in phase 1, the global reserve system would be based a carbon-based international reserve currency of the Tierra, removing dollars, euros and yens into a nation’s economic activity. The reserve Tierras are convertible only with its own currency, not with other currencies. So in this phase greater financial independence is created, since a nation’s reserve system is not bound to another nation’s currency. Moreover, given that the UN Tierra International Clearing Union monitors financial flows, nations have a better idea of how to cope with financial flows.
In phase 2 the international monetary system as a whole would operate on the carbon-based international vehicle currency of the Tierra and regulate financial flows under the control of the UN World Central Bank. In this phase its transparent and democratic Board of Governors is able to discipline a nation if necessary. However, that would be an exceptional case, because the monetary and fiscal procedures that were established by the Articles of Agreement of the Tierra Treaty are fair and stable.
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