Enlightened Economics

Economics for an Enlightened Age

Posts Tagged ‘IMF’

• A Global Central Bank and Currency?

Posted by Ron Robins on February 16, 2011

By Ron Robins. First published January 27, 2011, in his weekly economics and finance column at alrroya.com

There are many paths forward for the global monetary system, but the hitherto unthinkable is becoming debatable: a global central bank and currency. However, despite the recent financial distress and potential for further financial calamity, the creation of such a new institution or currency is far off. But would a global central bank with possibly its own currency help bring monetary solace, universal prosperity and humankind together? Or would such a bank and currency result in yet another calamitous monetary failure?

The 2008-2009 financial debacle showed just how unprepared the global financial system was to deal with a loss of faith in, and imploding of, the global banking system. To stave off a global financial meltdown, the central banks of the US, the EU, Japan and many others around the world advanced vast sums in loans and guarantees to banks and financial entities. And the US Federal Reserve (the Fed) in particular loaned out hundreds of billions of dollars to foreign-owned banks, in effect acting as a bank of last resort to the global banking system.

As big as the Fed is, it and other central banks, for many reasons, may not be able to address the demands of a future global financial maelstrom with possibly even larger calls for loans of last resort. For the Fed, this is due to 1) the declining relative importance of the US economy and the dollar in relation to the global economy, and 2) potential political interference in its activities.

The mounting problems and lessening importance of the US economy and its dollar globally are obviously why a new international currency regime is being considered. International Monetary Fund (IMF) data (published in The Economist magazine) shows that while the US now makes up about 24 per cent of global gross domestic product (GDP), its dollar accounts for 84 per cent of foreign exchange transactions. Furthermore, over 60 per cent of international central bank reserves and about 60 per cent of global bank deposits are denominated in US dollars.

The continuing use of the US dollar internationally is largely dependent on the performance of the US economy and its domestic fiscal and monetary policies. Domestically, the US government is growing massive unsustainable debts while the Fed is hugely expanding the creation of new money and the buying of US government bonds (its quantitative easing programs). These actions are likely to further devalue the US dollar globally. Thus, holders of US dollars and assets will increasingly be less interested in retaining them.

Rising to compete with the US dollar has principally been the euro. However, with its member countries’ debt problems, the attention is turning primarily to China’s yuan. It is probably no accident that on January 12 China made a significant step forward in yuan foreign exchange convertibility by allowing it to trade in the US. China has also recently made deals with Russia, Brazil and other countries to settle trade accounts in yuan.

Such gains in the international acceptance of the yuan make it likely to be included in the revised and re-invigorated Special Drawing Rights (SDR) issued by the IMF. The SDR is presently a type of currency used in a limited way among central banks and the IMF. However, its role could eventually be expanded and in the decades ahead might even form the basis of a global currency.

The SDR comprises a basket of currencies that include the US dollar, yen, euro and pound sterling. Besides including the yuan, a revised form of SDR might include additional currencies and even gold or other commodities as well. As gold has an inherent market value, proponents for its inclusion suggest it could help bring further stability to the SDR. Changes to the SDR are favoured by many countries such as Russia and France.

Hence, the IMF may well begin to act in the coming years as a quasi global central bank. However, Barry Eichengreen of the University of California in the US cautions—quoting the Economist magazine of November 4, 2010—that, “no global government… means no global central bank, which means no global currency. Full stop.” Economists like Mr Eichengreen have the weight of evidence on their side regarding the need for a global government before a true global central bank and currency could come about. One only needs to look at the European Central Bank’s problems to see how the lack of an overarching, integrated and authoritative governance structure greatly impeded its ability to deal with the recent crises.

Advocating against the concept of a global central bank and currency are some free market proponents such as Ron Paul, a US Republican and now chairman of the powerful US Congress’s Monetary Policy Sub-committee. He and many others believe currencies should be freely chosen and have intrinsic value, backed by commodities, most likely that of gold. They say without gold backing, any currency and central bank issuing such currency, is deemed to eventual failure due to the historical fact that governments inevitably print excessive amounts of money. This ‘printing’ thereby debases the currency’s value and essentially commits fraud against the holders of the affected currency.

It is possible that the world may proceed towards a global central bank and currency over time. In the near future, the IMF will probably revise, re-invigorate and expand its SDR program to assist in the transition from reserve dependence on the US dollar. But the dangers with the SDR are that it is still largely linked to the viability and variability of national economies and their domestic policies and currencies. Advocates of a completely free market approach such as that proposed by US Congressman Ron Paul might also hold sway. The idea of a global central bank and currency is still just an idea. But it is an idea arising out of the calamity of our present day reality. It deserves hot debate.

Copyright alrroya.com

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• Debt/Bailout Bubbles May Burst. Brighter Future Beyond 2012!

Posted by Ron Robins on July 19, 2009

A stressed American consciousness focusing on material acquisition to the virtual exclusion of satisfying higher inner values has given rise to an unwieldy debt mountain. Now the U.S. government is borrowing and spending massively as it tries to pump-up the economy while backstopping much of the countries debt.

Consumers and companies have largely hit a ‘debt wall.’ And with a possible derivative meltdown and the recognition of enormous unfunded U.S. liabilities, we may see the U.S. government itself hit the debt wall in the not-so-distant future. The subsequent reaction would topple the debt mountain and pop the bailout bubble. But I believe a new higher consciousness will arise from these extraordinary events creating a truly enlightened economy mirroring our higher, inner human values.

Bailouts, guarantees, and write-offs galore
So far in this phase of the crisis the U.S. federal government and Federal Reserve have already guaranteed or spent around $13 trillion! And the current 2009 U.S. federal budget deficit will top $2 trillion, or about 14% of U.S. GDP. More stimulus packages are likely and massive deficits for years into the future are projected as it is unlikely that the economy will gain self-sustaining traction to stop unemployment from increasing. Economists such as 2008 Nobel Laureate Paul Krugman and others in the Obama administration are already discussing the possibility of another huge stimulus package.

Furthermore, the International Monetary Fund (IMF) on April 21, 2009, estimated global financial system write-offs to exceed $4,100 billion. The write-offs to-date are not anywhere close to that figure therefore, enormous additional financial system losses are yet to come.

A two-phased crisis
I see two phases to the U.S. financial crises. Each alone is capable of bursting the bailout bubble. Phase 1, which we are currently in, involves the write-offs of bad mortgages, loans, deleveraging, extraordinary U.S. government and Federal Reserve guarantees and financing, and a potential derivative implosion. Any sudden interest rate hikes and/or currency movements could trigger an implosion in the $450 trillion (ISDA April 22 press release) derivatives market and cause further financial chaos.

To enable U.S. government bond sales, it is probable that the U.S. federal government will, if it is not doing so already, pressure the banks with whom it has ‘invested in,’ to purchase considerable amounts of its bonds. The banks in turn will get substantial loans from the Federal Reserve for these purchases. In essence this is back-door ‘monetization’ (read ‘quantitative easing’) of U.S. government debt. Monetization simply means the printing of new money by central banks to purchase assets, in this case, U.S. government bonds.

Of course the U.S. Federal Reserve, the Bank of England, and other central banks have already engaged or have announced significant monetization efforts. The central banks claim that they will be able to drain this liquidity (excess money) out of the system as their economies recover. Unfortunately, historical examples do not give much reassurance that this can be done, especially in a global trading environment and where the major countries have amassed such extraordinary levels of debt.

Deeply indebted governments and societies have the choice of trying to reduce their debt levels—which can produce a potentially deflationary recession/depression—or they can encourage central bank monetization efforts that offer a ‘chance’ to get the economy rolling and create sufficient inflation, thus lessening the relative debt load. However, once started hefty monetization efforts often prove impossible to contain, leading to uncontrollable inflation—and even hyper-inflation. Subsequently, interest rates soar, the countries currency plunges in value, its debt mountain topples, and bailout bubbles burst.

Adding to the impetus for monetization will be when Phase 2 of this crisis kicks-in in 2010 as the U.S. begins to face its looming, huge, unfunded liabilities for medicare and social security. These are estimated by Shadowstats at $65.5 trillion. To properly fund this liability would require the U.S. government to put aside trillions of dollars yearly. Clearly, the U.S. government has no possibility or desire to put aside such funds. In addition, the current proposals for health care reform may add considerably to these numbers.

Taken together, these two phases of economic crisis make it unlikely that the U.S. can escape its fate of the bursting of its debt and bail-out bubbles.

Beyond 2012 a brighter future
I believe the underlying collective consciousness of U.S. society is moving toward higher values, and the more balanced approach to consumption and savings is evidence of this. However, in the course of these changes the likelihood of the debt mountain toppling, the bailout bubble bursting, and the onset of high or hyperinflation are real possibilities. By the end of this process, sometime around 2012, the American collective consciousness will have sufficiently evolved to begin the path of developing a truly sustainable economy mirroring the values of an economics based on our higher inner human values and consciousness—and that path is the realm of Enlightened Economics.

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© Ron Robins, 2009.

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