The World Recession - Comparison Between Different Proposals

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1 A Comparison of Different Proposals Department of Economics JKU Linz October, 2008

2 Contents Introduction 1 Introduction 2 3

3 Introduction The Global Reserve System A Brief History of Current Account Imbalances The Currency Asymmetry Understanding the Balance of Payment

4 John M. Keynes proposed the establishment of a an International Clearing Union, based on international bank money, called (let us say) bancor, fixed (but not unalterably) in terms of gold and accepted as the equivalent of gold by the British Commonwealth and the United States and all members of the Union for the purpose of settling international balances. (Keynes, 1980, p. 121)

5 John M. (cont.) All member countries are holding bank accounts with the ICU Each member gets a quota (average of imports plus exports of past 3 years) Countries in debit or surplus are charged by: 1 percent for imbalance over the first quarter of the quota additional 1 percent for imbalance over half of the quota But members can also borrow from other members to avoid payments to the ICU Charged funds can be used for global programs

6 John M. (cont.) If a country wants to extend debit position over a quarter of its quota, it must: have the permission of the Governing Board the country has to devalue its currency by no more than 5 % over half of its quota: reduce the value of its currency control outward capital transactions provide gold or other liquid reserves to reduce the debit balance over three-quarters of its quota can only draw on the ICU account with Governing Boards permission must take measures to improve its status provide gold or other liquid reserves to reduce the debit

7 John M. (cont.) Countries in Surplus also have to adjust by: measures to expand domestic credit and demand appreciation of its currency or increase in money wages reduce tariffs and barriers introducing loans for backward countries

8 John M. (cont.) Also non-member country can and should hold Clearing Accounts with the ICU, but are not allowed to draw debits on these. Each country can exit on one years notice and can be asked to exit by the Governing Board also on one years notice.

9 John M. (cont.) The Bancor-Plan would make a symmetric monetary system: (see Costabile, 2007, pp.20) international liquidity is not connected with any national country no national currency has an advantage above others, because there are no reserve currencies imbalances will be solved by the penalties mentioned above

10 Paul Davidson: International Money Clearing Unit Very Similar to Keynes Proposal, but reduced to a Monetary Union. Surplus countries can spend their excessive credit balance on: products of other member countries foreign direct investment unilateral transfer (foreign aid)

11 Paul Davidson: International Money Clearing Unit Exchange rates should only change with efficiency wages. Countries with permanent CA deficits are living beyond their means: A rich country should devalue its exchange rate A poor country should be supported by rich countries

12 Joseph E. Stiglitz and Bruce Greenwald: International Monetary Reform Three principals for a reform: 1 decoupling reserve accumulation from the deficit positions of any reserve currency countries, 2 providing some means of disciplining surplus countries and 3 providing a more stable store of international value than the dollar or any other reserve currency. (Greenwald and Stiglitz, 2006, p.11)

13 Joseph E. Stiglitz and Bruce Greenwald: International Monetary Reform (cont.) Use Global Greenbacks (similar to Special Drawing Rights (SDRs)) as global reserves Additional annual issuing of new assets in line with needs of global trade growth Establishing a GRF (global reserve fund) Substitute foreign exchange reserves with Global Greenbacks that can be used in times of an emergency. Introducing a tax on surplus country of 50 % per unit of CA surplus up to the countries full allocation

14 Joseph E. Stiglitz and Bruce Greenwald: International Monetary Reform (cont.) Advantages: relative simple to introduce because SDRs exist already solve the currency asymmetry Disadvantages Power relations in the IMF are not representing economic power beneficiaries might not willing to allow the creation of additional SDRs

15 Table: Comparison of Keynes, Davidson and Stiglitz proposal - The Adjustment Process Keynes Davidson Stiglitz measures by deficit main pressure on taxes on surplus and surplus countries to avoid pay- - support for poor ing up of CA surplus countries should avoid buildments or measures deficit countries surplus by the governing board

16 Dollarization Introduction The adoption of the currency of an other nation, most times Dollar or Euro. It is connected with three losses: Seigniorage National Symbol Sovereignty The main problem is, that the central bank can not fulfil a lender of last resort role, because it can not issue new money!

17 Currency Unions Introduction Theory of Optimal Currency Areas Important is the degree of Integration - maybe only ex post Stabilise internal balance Reduction of reserve needs Many plans around the world for CUs

18 Single Global Currency Association A common currency, managed by a Global Central Bank within a Global Monetary Union, that people can use within member countries as legal tender and for international transactions.(bonpasse, 2007, p. 150) A 3-G World: Global Central Bank (GCB), Global Monetary Union (GMU) and Single Global Currency (SGC)

19 Introduction There is something wrong in the Global Financial Architecture. Capital flows should not be from poor to rich countries! A new financial architecture, that solves the currency asymmetry and avoids that countries are living beyond there means is needed. Stiglitz and Greenwalds Proposal are probably easiest to introduce, while Davidsons and Keynes plan would provide more features. Dollarization and Currency Unions could pave the way for a SGC (among rich countries).

20 Thanks for your attention!