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Krugman's Bits and Barbarism and my comment

Post By gaia1 in Exchange rates


December 22, 2013

Bits and Barbarism


This is a tale of three money pits. It’s also a tale of monetary regress — of the strange determination of many people to turn the clock back on centuries of progress.


The first money pit is an actual pit — the Porgera open-pit gold mine in Papua New Guinea, one of the world’s top producers. The mine has a terrible reputation for both human rights abuses (rapes, beatings and killings by security personnel) and environmental damage (vast quantities of potentially toxic tailings dumped into a nearby river). But gold prices, while down from their recent peak, are still three times what they were a decade ago, so dig they must.


The second money pit is a lot stranger: the Bitcoin mine in Reykjanesbaer, Iceland. Bitcoin is a digital currency that has value because ... well, it’s hard to say exactly why, but for the time being at least people are willing to buy it because they believe other people will be willing to buy it. It is, by design, a kind of virtual gold. And like gold, it can be mined: you can create new bitcoins, but only by solving very complex mathematical problems that require both a lot of computing power and a lot of electricity to run the computers.


Hence the location in Iceland, which has cheap electricity from hydropower and an abundance of cold air to cool those furiously churning machines. Even so, a lot of real resources are being used to create virtual objects with no clear use.


The third money pit is hypothetical. Back in 1936 the economist John Maynard Keynes argued that increased government spending was needed to restore full employment. But then, as now, there was strong political resistance to any such proposal. So Keynes whimsically suggested an alternative: have the government bury bottles full of cash in disused coal mines, and let the private sector spend its own money to dig the cash back up. It would be better, he agreed, to have the government build roads, ports and other useful things — but even perfectly useless spending would give the economy a much-needed boost.


Clever stuff — but Keynes wasn’t finished. He went on to point out that the real-life activity of gold mining was a lot like his thought experiment. Gold miners were, after all, going to great lengths to dig cash out of the ground, even though unlimited amounts of cash could be created at essentially no cost with the printing press. And no sooner was gold dug up than much of it was buried again, in places like the gold vault of the Federal Reserve Bank of New York, where hundreds of thousands of gold bars sit, doing nothing in particular.


Keynes would, I think, have been sardonically amused to learn how little has changed in the past three generations. Public spending to fight unemployment is still anathema; miners are still spoiling the landscape to add to idle hoards of gold. (Keynes dubbed the gold standard a “barbarous relic.”) Bitcoin just adds to the joke. Gold, after all, has at least some real uses, e.g., to fill cavities; but now we’re burning up resources to create “virtual gold” that consists of nothing but strings of digits.


I suspect, however, that Adam Smith would have been dismayed.


Smith is often treated as a conservative patron saint, and he did indeed make the original case for free markets. It’s less often mentioned, however, that he also argued strongly for bank regulation — and that he offered a classic paean to the virtues of paper currency. Money, he understood, was a way to facilitate commerce, not a source of national prosperity — and paper money, he argued, allowed commerce to proceed without tying up much of a nation’s wealth in a “dead stock” of silver and gold.


So why are we tearing up the highlands of Papua New Guinea to add to our dead stock of gold and, even more bizarrely, running powerful computers 24/7 to add to a dead stock of digits?


Talk to gold bugs and they’ll tell you that paper money comes from governments, which can’t be trusted not to debase their currencies. The odd thing, however, is that for all the talk of currency debasement, such debasement is getting very hard to find. It’s not just that after years of dire warnings about runaway inflation, inflation in advanced countries is clearly too low, not too high. Even if you take a global perspective, episodes of really high inflation have become rare. Still, hyperinflation hype springs eternal.


Bitcoin seems to derive its appeal from more or less the same sources, plus the added sense that it’s high-tech and algorithmic, so it must be the wave of the future.


But don’t let the fancy trappings fool you: What’s really happening is a determined march to the days when money meant stuff you could jingle in your purse. In tropics and tundra alike, we are for some reason digging our way back to the 17th century.


I agree that gold and bitcoin are out and that paper money is in. Inflation may be low, but currency swings are not. Why not develop a monetary standard that would keep those swings in check? Why not base that standard upon a very specific tonnage of CO2 per person so that societies not only keep their currencies in check but also contribute to the global commonweal by avoiding a looming climate catastrophe? The institutional, strategic and other dimensions of this proposal are presented in the Tierra Solution.



Exchange rates regimens and monetary standards

Post By gaia1 in Exchange rates


Tuesday, November 09, 2010


An author who has greatly impressed me recently is the deputy chief of the IMF Policy Development and Review, Rex Ghosh. His captivating novel “Nineteenth Street NW. A tale of terror in the world of financial markets” written in 2010 led me to his sophisticated 2003 MIT publication entitled “Exchange Rates Regimen: Choices and Consequences” written with a colleague at the IMF and a professor at Georgetown University. It is an empirical study of the great variety of exchange rates regimens that some 150 countries used during some thirty years after the demise of the Bretton Woods agreement.


Do I have to assume that he and other colleagues at the IMF have a blind spot of not thinking about possible monetary standards that could bring some order and stability to the exchange rates and avoid large currency swings and serious currency disputes such as the present US-China currency dispute? Of course, IMF officials are daily dealing with exchange rates and engage in research how best to devise them for countries rather than thinking about a system with pegged exchange rates that is based upon a monetary standard. Perhaps in Rex’s case he may also be influenced by his position on the general serendipity of monetary changes with the exception of Bretton Woods where reason and vision prevailed according to his short history of international monetary relations in chapter 1 of his 2003 book.


In any event I believe given the monetary turmoil of the last 40 years with its large rate swings and the increasing currency manipulation tendencies that makes one think of the interwar period the need for basic rethinking of the international monetary system is necessary. Reason and vision are needed as much as in 1944, perhaps even more given that humankind is engaged in gargantuan experiment with life on the planet given its unwillingness to face the present climate crisis predicament.


Including the dangerous climate predicament in devising a new monetary standard seems a wise strategy. Thus, a carbon-based international monetary system would make sense as it aims to combat the climate crisis through advancing low carbon and climate-resilient development. At least, the G20 Summit in Seoul should decide to start the basic rethinking process by incorporating in its communiqué its decision to set up a UN Commission to that effect, a request that I made about a  week ago to the dozen U.S. government officials who are to take part in the Summit.



Loose money, currency conflicts, capital controls and monetary governance

Post By gaia1 in Exchange rates


With interest rates extremely low in the US and other developed countries investors scour the globe for higher interests. They can be found in emerging and developing countries’ markets and thus large, mostly short-term capital flows enter their financial systems. These flows make these economies grow at an uncontrolled pace, unless their governments put capital controls to work in the many ways that can be done. Geithner and the IMF have indicated that they do not oppose capital controls in emerging nations as they try to defend themselves from excessive liquidity caused by the dollar and other currencies as long as they don’t touch the exchange rate and result in currency conflicts.


In order to resolve these currency conflicts the Gyeongju and Seoul meetings are considered to be part of a broader discussion on global policy coordination, which is called the “Framework for strong, sustainable, balanced growth” or for short the “Framework.” This Framework is supposedly to become the global monetary governance framework that will guide the monetary, financial, economic and commercial relations between nations.


One crucial adjective that is missing in that Framework is equitable. The present international monetary system is not equitable and therefore not sustainable, let alone stable. This fact is realized by Secretary Geithner when he recently told the Wall Street Journal: “Right now, there is no established sense of what’s fair.”


Because fairness and justice is not discussed, let alone determined the present international monetary system hobbles along incapacitating the emergence of strong financial, economic and commercial systems. It also leads to the absence of a global monetary institution with enforcing power which, in the words of an October 10 article, is called “Nobody at the helm”.


Equitable, sustainable, and, therefore, stable monetary governance means that the new global monetary governance system is based upon social and ecological/climate justice as proposed in the IIMT’s Tierra Fee & Dividend system. Its framework of equity and sustainability can stand the test of time because it addresses itself to this century’s two most important challenges: combating climate change and advancing low carbon and climate-resilient development.





Currency conundrum, economic imbalances and monetary transformation

Post By gaia1 in Exchange rates


If nations continue to intervene in their exchange rates in order to keep them low to bolster their exports and engage in trade restrictions to counter the other nations’ currency policies, the winners will be the hundreds of currency gamblers or arbitrageurs and the losers will be the millions of people whose national economies will suffer. Not cooperatively dealing with both the currency conundrum and the global financial imbalances will lead to economic disaster and may bring back the Great Depression of the 1930s.


The IMF’s 183 financial ministers and central bankers meeting in early October did not resolve anything, though some consensus seemed to grow that the IMF should have stronger powers to deal with both surplus and deficit countries. The weekend of October 22-3 brought the financial ministers and central bankers of the G20 together in SeoulBrazil did not want to send its representatives—in preparation for their “leaders” on November 11-2. The prospects are dim for both meetings. In the meantime, investors take their funds to high-yielding bonds in the emerging and developing markets, ready to withdraw them when the more lucrative investments can be made elsewhere. Currency traders play with the $40 trillion market, almost all of which is strictly for speculation. At the same time national governments are putting severe austerity budgets in place and raise taxes in these insecure economic times with great hardships for people and unheeded environmental damage.


Reuters  recently proposed four scenarios to deal with this wholly unacceptable currency and economic situation and assessed them in terms of their probability of acceptance. They were all reformist monetary proposals and have some merit. However, they do not go far enough. What is needed is to transform the international monetary system which  is the basic international system that binds the monetary, financial, economic and commercial systems together.  Given their insoluble integration, changing the basic system changes the other systems that are built upon it.


President Sarkozy wants to review the international monetary system during his presidency of the G20 during 2011-2. He thinks that the G20 is the only venue for reviewing it. I contacted the France’s UN Ambassador some two weeks ago to ask him how best to bring to his notice the TFD proposal in that review. A few days I also wrote a letter to a dozen U.S. government officials who are going to be part of the Seoul summit and suggested that the U.S. government take the bold step “that the G20 nations sponsor a UN General Assembly resolution that would establish the UN Commission of Experts on Monetary Transformation and Low Carbon, Climate-resilient Development. Thus, the resolution of the currency disputes and the development of carbon-based monetary standard would be dealt with at the proper level of international congress for further investigation.”






The US-China Currency Dispute

Post By gaia1 in Exchange rates

          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 journalists  that China is defending against “finger pointing” and charged developed countries in forcing unfair  changes by “just for the purposes  of 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.