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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