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Apr
20

Forgo dollar dominance and seignorage

Post By gaia1 in Tierra Currency

FORGO DOLLAR DOMINANCE AND SEIGNORAGE

On Saturday April 16, 2011 Brazilian Finance Minister Guido Mantega told the IMF policy committee that the wealthy nations were attempting “to export their way out of difficult economic situations”  by printing  money and keeping their interest rates low. The effect of these policies is driving up prices of food and oil causing hardships, particularly for the developing world. These policies also lead to the strengthening of their currencies, so that their exports are at a disadvantage and bring in less revenue. On top of these effects developing countries are forced to defend against hot financial flows and currency speculators by adding to their reserves billions of dollars bought at very low interest rates. In the face of this situation US Treasury Secretary Geithner insists that emerging economies should have the value of their economies be determined by those market forces.

The main reason for this unjust international monetary system, which is called criminal by Nobel Prize winning economist Robert Mundell, is the fact that this non-system is based upon a national currency functioning as an international reserve and transaction currency. Several proposals have been made, particularly by China and the UN Stiglitz Commission in 2009, and particularly the Sanya meeting of the BRICS countries in April 2011 to have the IMF’s synthetic currency of Special Drawing Rights (SDRs) given wider use, so that dollar dominance is removed and the international community moves towards a more equitable, sustainable, and, therefore, stable international monetary system.

There is also a strong domestic reason for the U.S. government to forgo dollar dominance. A large part of the federal debt is due to the ease for the U.S. government to get low-cost financing by its sale of US Securities. Like Britain in the 19th century the USA in the 21st century is able to garner the dubious benefits of this seignorage of the dollar. No lasting debt solution can be found for the USA without considering the impact of seignorage of the U.S. dollar. Examiner’s financial writer Kenneth Shortgin Jr. wrote on April 17 that the above BRICS meeting had as its aim the “elimination of the dollar and the creation of new currency” based upon gold. “This is why oil nations, along with the relatively strong BRIC countries, are putting their backing to a gold based currency which will help curb much of the inflation that the dollar is forcing onto the world.”

What is needed on a temporary basis is a gradual and planned transition of U.S. dollar reserves into substitution accounts of SDRs. The worst thing that can happen to the US, China and other reserve currency holders is an unplanned and sudden collapse of the dollar. So, in forgoing dollar dominance the U.S. government would be able to produce an equitable, sustainable, and, therefore, stable debt reduction program, would avoid a possible and even worse financial crisis than the one of 2007-8 and, probably most importantly, would assume monetary leadership in shaping an equitable, sustainable, and, therefore, stable international monetary system.

While the SDR substitution route is the route to follow for the short term, the long-term route does not only include forgoing dollar dominance and but seignorage all together. Euro dominance or yuan dominance are to be forgone in the same way as the U.S. government and the international monetary community have the forgo dollar dominance at this time.

Having forgone the fallacy of monetary dominance of one nation’s currency and even a basket of several nations’ currencies within or without SDRs the next step for the U.S. government and the international monetary community is to engage in collective monetary sovereignty. Monetary rules of the game have to be established so that a monetary level playing field can lead to an equitable, sustainable, and, therefore, stable international monetary system. In such transformed system a monetary standard has to be found on which all currencies or a world currency can be pegged The most prosperous period during the last hundred years was the one of the 1950s and 1960s when the international monetary system was based upon the dollar/gold standard, when rising wealth was distributed equitably and the emerging international corporations were still regulated.

The standard for this transformed international monetary system with its collective monetary sovereignty is to be a standard that would contribute not only to monetary stability, but also to the reduction of this century’s most pressing and cross-sectoral problem of climate change. Thus, a carbon-based monetary standard is suggested to become the center-piece of a new monetary paradigm. Its unit of account would be the Tierra, Spanish for Earth. The standard would consist of a specific amount of tonnage of CO2e per person determined in negotiations following the findings of climate science as presented in the IPCC reports. The proximity of a nation’s economy to the standard would determine the value of its currency or its amount in Tierras in the case of the Tierra world currency. In the latter case the Tierra is would not only be a unit of account, but also a medium of exchange and a bankable store of value. Thus, the higher the decarbonization level in a nation’s economy, i.e. the more sustainable its energy system and its citizens’ life styles, the stronger its currency. Such carbon-based international monetary system would combat the climate crisis and advance low carbon and climate-resilient development, the real challenge of any model of sustainable development.

The integration of the challenges of climate change and sustainable development in this transformed international monetary system provides a model of a 21st century global governance system. This idea of basing the international monetary system on carbon has received favorable comments from Maurice Strong, the Secretary-General of both the Stockholm and Rio UN Conferences on the Environment. Using a carbon-based international monetary system as the basis for a global governance system was presented at the second Yale/UNITAR conference on Global Environmental Governance (September 17-9, 2010) and  is considered a “thinkpiece” for the Rio 2012 Earth Summit by the Stakeholder Forum in  http://www.earthsummit2012.org/index.php/institutional-framework-for-sd/sdg2012/sdg-thinkpieces.

Transforming the international monetary system which acts as glue, lubricant,  and as linchpin of the monetary, financial, economic and commercial systems means transforming those systems. Thus, this monetary transformation, which is fundamentally different from the reformist monetary proposals dealing with the global reserve system, is able to transform our present world (dis)order which enriches the few, impoverishes the many and imperils species and planet.

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Frans C. Verhagen, M.Div., M.I.A., Ph.D. is a sustainability sociologist with the International Institute for Monetary Transformation. His forthcoming book is entitled THE TFD GLOBAL GOVERNANCE SYSTEM: Using a transformed international monetary system to combat climate change and advance low carbon and climate resilient development

 

 

 

 

Apr
08

Response to the Beijing Group's statement on SDRs

Post By gaia1 in American Monetary Matters

The statement and its comments on the Financial Times can be found at http://www.ft.com/cms/s/0/c2215510-5bc4-11e0-b8e7-00144feab49a.html#axzz1Iw8SqAX4

The “Best Alternative to a Global Currency” by the Beijing Group of 18 economists is not an alternative to a global currency, let alone the best alternative.  Expanding the SDR facility as a transitional policy is a correct policy but it is not alternative to a global currency.

After having announced that the international monetary system is fundamentally flawed in the beginning of the statement an ending paragraph states:  All of this would make a contribution to enhancing global stability, without altering in any fundamental way existing monetary arrangements. And the dollar would continue as the main currency for private transactions, making this change more acceptable to the US.”  This constitutes an obvious contradiction. Are the American economists negotiating with the Chinese economists for the maintenance of the status-quo with the U.S. dollar still the main reserve and transaction currency?

However, my main question  to the Beijing Group of economists is “Why are these supposedly objective scientists not calling for fundamental reform and demand that the US and China governments not only use the SDR as a substitution facility away from any national or regional reserve and transaction currency and, more importantly, develop a standard-based international monetary system?”  Once the Obama Administration was willing to transition out of the dollar and the Beijing Group could exert powerful pressure in that direction the international monetary field could be open to fundamental change. Proposals for such fundamental change should  come from a wide variety of stakeholders of which the economics profession would be only one. Personally, I have been working on a carbon-based international monetary system that would result in national currencies or a world currency the values of which would be anchored in the Tierra carbon monetary standard. Such standard would not only respond to needs of an expanding trade, increased financial integration and digital fiat money, but also of low carbon and climate resilient development strategy to combat the climate crisis, this century’s main challenge. Such transformed international monetary system would become the mainstay of a global governance system that would integrate the three pillars of sustainable development, i.e. social, economic and environmental. For details, see www.timun.net.

 

Apr
02

To Reform or to Transform?

Post By gaia1 in Transformation versus reform

TO REFORM OR TO TRANSFORM?

April 2, 2011

This is the 10th post on this important question which shows the basic choice in approaching a change strategy to the international monetary system. Based upon the following six categories of shortcomings the strategy is to be one of transformation rather than reform. In order to deal with this century’s greatest challenge of controlling climate change the reformist route has also potential by having an international reserve asset be developed that is based upon environmental bonds. However, given the need for a global governance system that is organized around the climate change challenge, the transformational route is preferable. In such global governance system the international monetary system becomes its linchpin. The following pages are from the penultimate draft of the Tierra Solution book.

Summary of categories of shortcomings

 

Using contextual sustainability framework and its applications to economics, trade and development in the global North and South the first major shortcoming of the international monetary system is its adherence to a free market philosophy with its outdated economic and financial theories that influence monetary policies. It is this philosophy that stands in the way for an enlightened US monetary policy that is both beneficial both domestically and internationally.

A second category of shortcomings are the financial imbalances that are inherent in the system on account of the imbalances in the current and capital accounts in nations’ balance of payments. Related to these imbalances are the unregulated capital flows that can enter and leave economies with the hitting of a couple of computer buttons.

A third category of shortcomings deals with the volatility of exchange rates and disputes about managed and flexible exchange rates. The volatility led to widespread currency speculation, while quite a few countries engaged in currency manipulation to promote their exports. The inability of the G20 to resolve these exchange problems has led to have foreign exchange companies construct their own world currency such as the Wocu. It also has led to a steady increase in the gold price, starting with some $300 per troy ounce in the 1970s to some $1440 in spring 2011 with a prediction that it may go up to some $5000 within the next five years.

A fourth category of shortcomings deals with the presence and the operation of a costly global reserve system that is needed on account of the lack of a monetary standard which would make national currencies convertible or lead to a world currency. Such standard would replace the need for the various proposals of non-national reserve currencies such as the SDR or other currencies based upon a basket containing a greater number of currencies or some sort of global purchasing power parity.

 

A fifth category of shortcomings deals with the liquidity problems in the present system. There is no global lender of last resort that is able to infuse credit and liquidity when financial crises occur. Thus, it is a significant event that during the financial crisis the big French-Belgian bank Dexia borrowed some $30 billion from the discount window at the US Federal Reserve during 2008 and 2009 and smaller amounts at the end of 2009.[i]

A sixth category of shortcomings deals with the moral shortcomings of the monetary system on account of the unfairness of its seignorage system, the payment of very low interest rates for funds from non-reserve currency countries, weakness of procedural justice in voice and representation at the IMF and other IFIs, and last but not last lack of consideration of climate justice.

Given these various serious and systemic shortcomings the question has to be raised whether the system is to be reformed or transformed, i.e. changing the present form or changing to a new form that transcends the present form.

To reform or to transform?

 

The answer to this question depends upon one’s criteria to assess the present international monetary system: low criteria lead to the reformist option, strong criteria lead to a search for the transformational option.

Perhaps one of the best presentations of present day reformist thinking took place in early March 2011 at the IMF 2011 research conference. Notwithstanding its name of New Ideas for a New World, a series of interviews of participants by the external relations division of the IMF [ii] the new monetary ideas were not matched with the requirements of a new world that, once and for all, would abandon the tenets and practices of free market capitalism. [iii]

While the above UNDESA and UNCTAD reform proposals deal with the shortcomings of the global reserve system in an attempt to make the system more workable, they do not address most of the systemic shortcomings of the international monetary system itself. As long as the international community remains unable to establish an intrinsically valuable monetary standard, the reserve system problem will be with us.

In response to my question “Should and could the international community devise a monetary standard that would make reserves such as the US Dollar and SDRs unnecessary and thus remove the costly global reserve system?” economist Erturk wrote  that “getting rid of reserves as such does not strike me as viable even as an abstract possibility”. On the other hand investigating how environmental objectives can guide the fashioning of alternative reserve assets is potentially a very fruitful way of improving the global reserve system. He thinks the real policy challenge is “to figure out how to use international development bonds as reserve assets. In principle, I suppose, that could also be green bonds, provided that the political will is there.”[iv] This clear answer shows the differences between a reformist and a transformational approach: an environmentally based reserve system versus an environmentally based international monetary system that would function as the linchpin for a global governance system that aims to control climate change. The choice made in this book is the latter approach.

……

In last instance such transformation will depend on the question whether this process of monetary evolution will be intelligently directed or whether it will simply be driven by events. Economist Judy Shelton answered that question in her 1999 testimony before the US House or Representatives Committee on Banking and Financial Services. In her opinion, political leadership can play a decisive role in helping to build a more orderly, rational monetary system than the current free-for-all approach to exchange relations. She concluded by stating: “Ideally, every nation should stand willing to convert its currency at a fixed rate into a universal reserve asset. That would automatically create a global monetary union based on a common unit of account. The alternative path to a stable monetary order is to forge a common currency anchored to an asset of intrinsic value.”[v] Her “universal reserve asset” could be an environmentally based asset—a reformist route—or her “asset of intrinsic value” could be a carbon standard—a transformational route.

 



[i] The New York Times, April 1, 2011

[iii] If the IMF participants would have spent a session on discussing  Ha-Joon Chang’s views of the world economic system, some genuinely new and important  ideas could have been accepted as building blocks of their vision of a new world. More promising than the IMF conference would probably be the Soros Bretton Woods conference in April 2011 where Cambridge professor Chang is a speaker.

[iv] Email of January 24, 2011

[v] Marshall, o.c. p. 11