The Worldbank’s president’s speech yesterday at the JohnHopkinsUniversity’s School of Advanced International Studies shows that this former US trade representative understands the political nature of global change. In his “After the Crisis?” he challenges the international community not to give in to complacency, but go for real change in the global monetary, financial, economic systems. He particularly singles out the G20 to start acting as a “Steering Group” “across a network of countries and international institutions” which would UN bodies. He did not mention the need for a UN Global Economic Coordinating Council, proposed by the UN Stiglitz Commission.
After posing the question “Will the U.S. dollar remain the predominant reserve currency?” he dissected its chances realistically and came out with a diminished role for it. He mentioned the euro and Renminbi as real competitors. “Countries and markets may also experiment with financings denominated in Special Drawing Rights—or SDRs--which reflect a portfolio of major currencies.”
Having listed a good number of issues which included climate change, he states that “Each topic is important on its own. But each interconnects with the others.” It is the main strength of a carbon-based international reserve currency like the Tierra that integrates the two major crises and challenges of our times, i.e. the economic and climate crises or the financial and ecological indebtedness of nations in the global North and South.
Its two main pillars of the cap-and-share approach and debt-free banking systems are able to bring about the integration of the climate and financial challenges. In its cap-and-share approach it would allocate carbon emissions permits to each person 15 years and over, using the Domestic Tradeable Quotas system as proposed by the Tyndall Centre, one of the top climate research organizations in the world. The cap-and-share approach is also based upon the Greenhouse Rights Development movement where the Responsibility and Capacity Index of countries is measured for equitable sharing.
The main difference of the Tierra international reserve currency approach with those and other alternative approaches to the climate crisis which take a “whole world” approach rather than the “party by party” one currently in use is that it institutionalizes this sharing based upon responsibility and capacity within the world’s monetary system. As part of such carbon-based international reserve currency and its associated balance of payments which includes both financial accounts and an ecological account it is considered necessary, or at least very highly recommended, that the function of money creation and control be reclaimed by the public sector.
It is obvious that both pillars of this Tierra Monetary Paradigm present a transformational monetary change rather than a reformist change on the fringes of the international monetary, financial, economic systems.
All through history one of the main determinants of a society’s economic and social system is the shape of its energy structure. Over 95% of human history muscle power by humans and animals determine that structure.
The industrial revolution was made possible by the introduction of coal. The use of oil and natural gas starting at the end of the 19th century propelled societies in the global North towards ever greater industrialization and increase in the standard of living which is not to be equated with quality of life. This carbon period of human history is coming to an end, starting a significant decline in some ten years, which is estimated to be around 8%.More reserves may be found and oil from tar sands and natural gas from shale formations, but the fact is that since May 2005 the world’s supply of oil has been on a plateau.
Though taking into account the emergence of renewable energy sources, we all, particularly governments, have to start planning for a shrinking economy. This is the more so, given the climate constraints that are placed on the remaining fossil fuel supply. Humanity has to reduce its GHG emissions at least 80% by 2050, while cuts of 95% would be more prudent.
The world’s monetary, financial, economic systems are still geared towards growth for many reasons. A turnaround because of energetic and climatic requirements is to be made to a steady-state economy where social, economic and ecological sustainability are the operating principles. Not planning for such shrinking economy leads to chaos in the monetary, financial, economic systems with disastrous social consequences.
How can these systems be made to work? By basing them not on the principle of quantitative growth and competition—GDP is a poor indicator of social performance—but on qualitative growth and cooperation.
Given that the monetary system is the glue that binds the financial and economic systems together, let’s look at the outlines of a transformed—not a reformed—monetary system that would address the challenges of both the present economic and climate crises.
All persons of 15 years and older are given an equal amount of carbon emissions permits, resulting in carbon credits for nations in the global South and carbon debits in the nations in the global North. Nations in the South become carbon creditors while being financial debtors, while nations in the North become carbon debtors and remain financial creditors. By turning these carbon emissions permits into an equivalent amount of the proposed carbon-based international reserve currency of the Tierra nations can now settle their international transactions by using a non-national reserve currency, thus not being forced to buy other reserve currencies anymore.
Using this cap-and-share approach of dealing with the climate crisis nations and the declining fossil fuel supplies and using a carbon-based international reserve currency exchange rates will be fixed on the carbon standard, thus preventing currency speculation. Capital flows will be actively managed, so that investment flows can be promoted. Notice how these monetary changes starting with a carbon-based international reserve currency are going to determine the financial architecture where public authorities reclaim their sovereign right of money creation and setting of interest rates and where banks becomes utilities that can compete with another and other industry—on a level playing field without the exorbitant privilege of creating money. Notice also how the economic system is being transformed by having the direction set by elected and accountable representatives who create a level playing field where private enterprise and innovation can flourish.
The high-level climate crisis meeting in New York yesterday and the forthcoming G20 Summit in Pittsburg on Thursday and Friday are not going to be the momentous pivots that they should be. Au contraire, they can lead an optimist to start despairing.
The one point of light that is being lit during this pivotal week is the realization, on a government level, that the GDP is not a good indicator of a nation’s well-being according to an article in today’s New York Times. Ever present economist Stiglitz advises the world, in a report commissioned by Mr. Sarkozy, not to equate market performance with social performance.
After this critique on accounting/measuring of a nation’s or the world’s economy, the question now becomes one of finding the determinants of this new social performance accounting or of a realistic quality of life index.
Two main scourges that prevent quality of life of people and well-being of the planet are the present economic and climate crises.
Though stock markets are going up, the economic crisis is not over. Complacency has set in based on the old GDP standard, but the quality of life standard does not give us any reason to be complacent given the deplorable economic and social situation of tens of millions of people in the global North and South. G20 Summiteers will mostly engage in platitudes rather dealing with the real causes and solutions of the world’s economic predicament and they will not make fundamental connections with the climate crisis.
The climate negotiations are stalled with a 200 page working document with hundreds of bracketed spaces that demand decisions. In the meantime GHG emissions, though a little bit down on account of the recession, will continue to go up instead of being brought down. In the meantime, millions of people suffer droughts, floods, more hunger and ill health. They are anxious about the future.
In order to overcome the economic and climate crises the international community--not only governments-- has to engage in a paradigmatic shift in thinking, followed by a paradigmatic shift in action. Given that the climate crisis is the more severe crisis of the two because of its long-term challenge and its impact on the economic crisis, the international community, i.e. each of us is asked to make a major climate decision that goes beyond present cap-and-trade thinking.We have to decide that the environmental space that is still available is going to be shared equitably: equal amounts of carbon emissions permits to all persons over 15 years of age. Obviously, people in the North become ecological debtors and those in the South ecological creditors. Now an ecological balance of payments has to be worked out over a certain period of time and payments have to be made somewhat in the same way as payments for a financial mortgage are being made.
One important way of working out that ecological balance of payments is the introduction of carbon-based international reserve currency that would replace the present reserve currencies. This currency, like a SDR that would be carbon-based, would become part of a nation’s balance of payments and function as a means of payment of both financial and ecological debts. Its adjustment mechanism would be an International Clearing Agency, probably not within the IMF, that would clear both a nation’s ecological (CO2) and financial credits and debits. Nations and regions would keep their own vehicle currencies, the exchange rate of which is based upon the value of the carbon-based international reserve currency. These fixed exchange rates would diminish currency trades and particularly currency speculation.
Making the world economy grow within this equitable distribution of environmental space with its accompanying redistribution of financial resources that would provide funds for development and mitigation and adaptation measures is a necessity. It would consist of the steady-state development of local communities into sustainable communities in global North and South, leading to the development of the real economy rather than the shadow economy of an overpowering financial sector.
It is from this financial sector that public authorities have to reclaim monetary sovereignty and management. The G20 will propose stronger regulation in the various asset markets, but, given present trends of complacency and return to business as usual in compensation and derivatives trading, this is not enough. Public authorities have to reclaim their responsibility of a nation’s money creation. The privately owned banking industry which has again lost the citizen’s confidence cannot drive the world economy into another recession which will be of an even greater magnitude next time because those Too Big To Fail (TBTFs) have become bigger. The privilege of creating a nation’s money, of determining its money supply, the direction of its economy and of setting its interest rates has to be withdrawn. Banks are to become utilities which can compete, on a level playing field, with one another and other industries without gambling with a nation’s monetary system.
In his 2007 article in Foreign Affairs Benn Steil, Senior Fellow and Director of International Economics of the politically powerful Council of Foreign Relations, raises the question whether nations should have their own currencies. He argues that the time of monetary nationalism is past in these times of globalization and that nations should adopt the dollar, the euro or an Asian common counterpart. That would be the best way to withstand currency crises which are caused by capital flows. They “have become globalization’s Achilles’ heel. Over the last 25 years, devastating currency crises have hit countries” in many parts of the world. He quotes Frederic Mishkin who acknowledged that “opening up the financial system to foreign capital flows has led to some disastrous financial crises causing great pain, suffering, and even violence.” His solution: “Governments must let go of the fatal notion that nationhood requires them to make and control the money used in their territory. National currencies and global markets simply do not mix; together they make a deadly brew of currency crises and geopolitical tension and create ready pretexts for damaging protectionism.” Under the heading “Common Currencies” he concludes: “Since economic development outside the process of globalization is no longer possible, countries should abandon monetary nationalism…” They should collaborate to “produce new multinational currency over a comparably large and economically diversified area.”
Apart from the fact that US dollar is a national currency besides being an international reserve and vehicle currency, his policy description can be considered to be part of the financial crisis the world is in today. The neo-conservative ideology of opening up national financial systems under the umbrella of free trade and free capital flows has led not only the currency crises at the end of 1990s, but contributed to the deepening of the global financial crisis. Rather than leaving this neo-liberalist world view in place with its concomitant policy of removing or reducing monetary nationalism, political leaders in the global North and South are to consider a reconfigured monetary nationalism. It would consist of a pro-active capital management policy in each nation under an umbrella of an internationally agreed financial framework that would prevent such crises. This was and is the main message of the UNCTAD Trade and Development Report 09 report, one of the more incisive analyses in both the economics and climate areas. His notion of development is one that binds nations in the South or the majority world to the rules of the game that are still set by the G7 or the minority world, of which his organization together with the Trilateral Commission and the Bilderbergers is one of the pillars. Imagine a world that would develop an international monetary system that would bring both worlds together in their pursuit of balancing their financial and ecological indebtedness by the adoption of a transformative monetary system such as proposed in the Tierra Monetary Paradigm!
On September 7 UNCTAD released its Trade and Development Report 2009 with its major emphasis on the financial and monetary system and a minor emphasis on the climate change challenge. On September 10 Dr Stiglitz and UN General Assembly President Father Miguel D'Escoto Brockmann held a news conference at UN Headquarters about the forthcoming report of their Commission of Experts to be released on September 22, the day of the Ban Ki-moon’s high level conference on climate change.
Both reports agree that more effective regulation and supervision of financial market activity is indispensable to prevent a repeat of the current global financial and economic crisis and that, equally important, reform of the international monetary and financial system is needed aimed at reducing the scope for gains from currency speculation, and at avoiding large trade imbalances. Both reports strongly advocate the need for a global reserve currency that is not nationally or regionally based.
The UNCTAD report, more than the Commission report, focuses on the bane of speculation. The authors, Detlof Kotte and Heiner Flassbeck both of whom are very outspoken in their interviews about the scourge of speculation and its minimal contribution to the real economy, point to the large majority of financial market participants who react to the same set of "news" with very similar patterns of risk taking. This is why financial speculation leads to upward and downward overshooting of prices, or even to price movements in a direction that is not justified by fundamentals. In particular, speculation has increased price volatility in commodity markets and has caused instability and misalignment of exchange rates. These can cause lasting damage to the real economy and to the international trading system. They strongly argue for a mutually agreed framework of a new managed exchange rate system. Such system would well-nigh cut out speculation on currencies.
Edward Conway, the economics editor of the UK Telegraph newspaper and website, recognizing the major punch of the UNCTAD report, headlines his blog with “UN plans for new world monetary system have come too late.”He and others believe that the “green shoots” discourse may have taken the wind out of the sails of monetary reform. On the other hand, the recession is not over and the “green shoots” may dry up in our shriveled global economic system, thus prompting the G20 to start thinking about real reforms, and perhaps a transformational change.
Where does this situation of two outstanding reports that may be too late leave the Tierra Monetary Paradigm with its carbon-based global reserve currency, its fixed or managed exchange rate mechanism, its integrated balance of payments that keeps account of the financial and ecological indebtedness of nations in the global North and South?
Both reports present an agreement on the fundamental analysis of the past and present global economic system and offer challenging, but realistic proposals to reform the system. The Tierra Monetary Paradigm goes one step further and asks for monetary transformation to simultaneously deal with both the economic and climate crises of our times or, put into a longer time frame, of the financial and ecological indebtedness of nations in the global North and South. Though the UNCTAD Report made some good suggestions in dealing with the climate crisis, it did not make the connection of monetarily connecting it with the excellent proposals to counter unproductive speculation. The UN Commission’s report only mentions the climate crisis without going into detail, let alone connecting both crises in one overall perspective. However, one of its commissioners, head of the UN Department of Social and Economic Affairs, told me at the end of a panel discussion in June to “keep at it”, i.e. keep pushing the transformational route for international monetary change. I am resolved to do this by finishing the writing of the Tierra book this fall and by continuing to connect the Tierra Monetary Paradigm to important events such as the two reports this week. I still firmly believe that this transformational route is the best roadmap, not a blueprint, to dealing with an international economic and social system that still enriches the few, impoverishes the many and imperils the planet.
THE INTERNATIONAL INSTITUTE OF MONETARY TRANSFORMATION