An article in the The Telegraph (UK) summarizes a the latest UNCTAD (UN Commission on Trade and Development) Trade and Development Report calling for:
… a new Bretton Woods-style system of managed international exchange rates, meaning central banks would be forced to intervene and either support or push down their currencies depending on how the rest of the world economy is behaving.
The proposals would also imply that surplus nations such as China and Germany should stimulate their economies further in order to cut their own imbalances, rather than, as in the present system, deficit nations such as the UK and US having to take the main burden of readjustment.
(The summary also ties in the financial crisis with global warming….).
Without having read the report, the explanation does not make a lot of sense to me. The article seems to suggest that imbalances between nations would be addressed by a central authority mandating the amount of inflation that must occur in each country.
In the present international monetary system, or “non-system” as James Grant refers to it, countries try to address, or more often, create, changes in purchasing power parity by inflating their own currency at a greater rate than that of their trading partners. The virtue of fixed exchange rates is that it imposes some discipline on the propensity of central banks to inflate. Imbalances in purchasing power parity between nations are corrected through trade in goods rather than money printing. Under the classical gold standard, the international price system coordinated the movement of gold and goods to accomplish this. It’s not clear how having a global authority mandate the amount of inflation in each nation would be an improvement over the current system, nor how that is compatible with fixed exchange rates.
Another problem with this proposal is the idea that surplus countries, e.g China, have surpluses because their economy is not sufficiently “stimulated” and that this could be fixed by more stimulus. The imbalances in China have been caused by their policy of pegging their currency below the market rate against the dollar. By doing this, they were in effect required to import the Fed’s inflation. Their capital structure became excessively mal-adjusted toward producing goods for export to American consumers. Domestic inflation, of which there has been plenty, could not move the exchange rate so it showed up entirely as asset bubbles. More stimulation (inflation) would only introduce more distortions in their domestic economy. What is needed is an exchange rate adjustment, something which would have been accomplished by an flow of gold from the US to China under the gold standard.
Some questions I have:
- What is the nature of the central authority that would mandate the amount of inflation in each country? A global central bank?
- The report talks about a single global currency but also about fixed exchange rates which only make sense if national currencies continued to exist. If national currencies still exist and trade at fixed exchange rates, then how does the global currency fit in? Would the national currencies have fixed parities against global currency?
- When the anchor currency was gold, redemption enforced the fixed ratios of national currencies against gold. Unless the global currency was a tradeable currency, what price mechanism would force the national currencies to maintain parity against the global currency?
- How would such a system avoid the problems that sunk the first Bretton Woods system, namely competing currency devaluations and excessive inflation of the anchor currency (which was the dollar)
- How is any of this an improvement over the classical gold standard with national currencies defined as fixed quantities of gold?
The report can be purchased from the United Nation’s Publications site. The price is, of course, in US$. Keeping with their socialist leanings, the price is variable depending on whether you live in the developed world ($55), a developing nation ($27.50), or a lesser-developed country ($13.75).
{ 26 comments }
Tricky, tricky. Far too tricky for the present generation, one raised in an education system that seems to do more to quell curiosity and imagination than encourage them. Perhaps we should pay more attention to fostering these qualities in our children so that they may better address the problems of the future. After all, they’ll have to live there.
BB
This is both so funny and sad that I don’t know if I should laugh or cry.
If there is hyperinflation coming, then the commission’s right, if for the wrong reasons(it’d probably be easier to adjust international accounting programs for a new currency than bernabuck amounts). However, unless inflation was under the direct control of the central central bank, it’d probably sink faster than Bretton Woods.
Keynes and the “Bancor” again? Beware of Greek Gods bearing gifts.
Money and Ethics
Saturday, September 19, 2009
The U.N. Perpetuates Economic Ignorance And Monetary Hegemony.
Why is there not a vehement opposition and rejection, specifically by China and Germany, of this criminal scheme?
Monetary hegemony is almost complete but it is about to come to a crashing halt. Will economic and philosophical ignorance cause tragic consequences or will the liberty movement and access to economic truths (championed by the Mises Institute) ameliorate the consequences and bring peace and tranquility relatively quickly?
Hello? The answer is so simple: the G20 is focused on two things: 1. creating a new global exchange rate mechanism. 2. creating a global tax (cap and trade) to combat global warming.
The solution to both: base the new currency exchange rate on carbon credits. I sure hope that isn’t the plan. What an Orwellian nightmare that will be!
Chad,
Don’t give them ideas!
It shows what complete idiots the UN are. One can hardly take all their other pronouncements seriously – global warming, pig fever, etc. – when they gibber and drool about finance and economics.
The whole point of a fiat currency – its only reason for existing – is so that someone with supreme police and military power can force the people living under its guns to accept it as payment. From the dictionary definition of fiat: an authoritative decree, sanction, or order … an arbitrary decree or pronouncement, esp. by a person or group of persons having absolute authority to enforce it …
No police, no army, no aircraft carriers, no nuclear missiles, no unbacked currency. The police state and paper money are the reason for each others existence. Neither is possible (or necessary) without the other.
The UN doesn’t get it, but the people who pull Presinitz Camacho’s strings do … hence the current headline at Drudge:
OBAMA PUSH FOR ‘WORLD’ REGULATIONS
What about the other global currency – gold?
Gil:
You can’t inflate Gold.
Yes, you can – through gold mining. Besides I was saying it’s a global currency (of sorts).
Well I suppose I should have been more specific: You can’t artificially manipulate it to meet your political agenda as easily.
I was just asserting that gold coins could (should?) be considered a global currency. Inflation is for another article.
More than simply replacing the U.S. Dollar, the new global currency should be a Single Global Currency, managed by a Global Central Bank within a Global Monetary Union. Such a currency would surely incorporate the U.S. Dollar, just as the euro included the deutschmark.
Today, 16 European countries are using one currency. Why not the 192 U.N. members? The primary problem with the euro and currencies of other monetary unions is that they still must co-exist within the international multi-currency system itself where the value of those common currencies must still fluctuate in value against each other. With a Single Global Currency, there are no such fluctuations, by definition.
In addition to eliminating currency fluctuations, the use of a Single Global Currency would eliminate the current foreign exchange trading expense of $400 billion annually, eliminate currency risk, eliminate current account imbalances, and eliminate the need for foreign exchange reserves.
The world should begin researching and planning now for a Single Global Currency, which will save the world – literally: trillions. It is not a cure for the current recession, but will help lay the groundwork for a more stable future.
The Single Global Currency Assn. promotes the implementation of a Single Global Currency by 2024, the 80th anniversary of the 1944 Bretton Woods conference. We will reach that point through the creation, expansion and merger of currencies of nations and monetary unions.
That’s only 15 years away. The Assn’s website is http://www.singleglobalcurrency.org. See, also, the book, “The Single Global Currency – Common Cents for the World,” and the ICFAI University Press book, “A Single Global Currency – Perspectives and Challenges.”
Morrison Bonpasse
President
Single Global Currency Assn.
Newcastle, Maine, USA
Today, 16 European countries are using one currency. Why not the 192 U.N. members?
Because the Euro is not a stable currency and will probably not survive for many more years. The reason is that the member states have varying levels of welfare spending and other commitments which are also subject to various demographic pressures. The way out of these welfare commitments is of course the age-old solution of debasing the currency in order to rip off welfare beneficiaries, wage earners and savers in order to preserve the government’s control over the welfare (i.e. police) state.. However they need the currency debased at different rates, because of their different unique factors. Who will make them conform to a single rate of currency debasement? The answer, is nobody will, because the EU does not have a central army which can walk all over rebel states with its jackboots and force them to pay taxes and accept welfare payments in Euros. A fiat currency needs a large standing army (and vice versa). Please refer to “Degeneration of EMU” by Niall Ferguson and Laurence J. Kotlikoff for a detailed explanation and in order to estimate how long the Euro has to live (maybe only 1 more year according to the guess they made in 2001).
The USD was the reserve currency until now because the US controlled a vast military which could blockade or invade and occupy any state which refused to accept dollars – most famously Saddam Hussein in the runup to the 2003 invasion. The reason why the UN is casting around for a new way of covering welfare commitments with paper money is that the USD is obviously becoming far too weak to sustain the vast military needed to enforce the authority (or fiat) of the US rulers (I mean the real rulers, the ones on Wall Street, not the elected stooges).
Arguably, the only reason why the Euro has lasted this long is that NATO is hanging over the head of Europe, that is, US military power is only a phone call away. Observe how so many world events in the last 20 years seem to “coincidentally” require a beefed up and aggressive US military presence in Europe. Yugoslav war – direct US intervention. War on Terror – establishment of secret US bases and prisons throughout the eastern bloc and large buildup of supply and logistics presence in places like Germany. Iranian “threat” and the “need” to deploy missiles in Europe allegedly to counter the “threat”. The evolution of the EU into having its own paper money and its expansion into Europe has coincided with the expansion of NATO, that is with the extension of US hegemony. From the geopolitical perspective, the Euro looks like USD Junior.
The problem of getting 192 countries to agree to a common rate of currency debasement is naturally much more difficult than keeping only 16 countries on the ranch. I’m pretty sure that there are not enough aircraft carriers and nuclear missiles on earth to enforce that kind of fiat, nor will there be anytime soon.
Mr. Bonpasse,
You say “More than simply replacing the U.S. Dollar, the new global currency should be a Single Global Currency, managed by a Global Central Bank within a Global Monetary Union. Such a currency would surely incorporate the U.S. Dollar, just as the euro included the deutschmark.
Today, 16 European countries are using one currency. Why not the 192 U.N. members?”
Why not? Because doing so would be both economically and morally calamitous. It doesn’t matter which philosopher kings are put in what positions of power. Such a system is doomed. In fact, there is so much wrong with the idea of a global currency managed by a super central bank that I am now having a visceral reaction and can no longer type.
Mr. Bonpasse,
I agree that there are numerous benefits to having a single global currency – the elimination of currency exchange transaction costs, chronic current account deficits/surpluses — to name a few. A single monetary system with gold as money would achieve all of these ends and eliminate speculative bubbles and crashes. However, once you introduce a global central bank, all bets are off. The global central bank would potentially be even more destabilizing than the myriad national central banks are now. A global central bank would create a global boom and bust cycle and open up the possibility to a world-wide inflation with the peoples of individual nations having no opportunity to escape their depreciating national currency by exchanging into a another more sound currency.
This is a scary proposal and one that if it eventuates will leap mankind into an Orwellian age.
The idea of a global central bank and currency is a criminal one. It is well known that whoever controls the supply of money holds the real power in society, not the ‘elected’ politicians we have running our nations.
The only thing a global currency will achieve will be to put the finishing touches on a fast becoming totalitarian style world governance.
very interesting but as everyone has already pointed out – completely flawed…. i think the downfall can be easily summarised in a single sentence.
There is no incentive for any signficant country (and by significant i mean the larger economies) to agree to pegging their current currencies against a centrally controlled pegged rate.
It simply represents a shift in power to a ‘world central bank’. what incentive is there to do that..
“The primary problem with the euro and currencies of other monetary unions is that they still must co-exist within the international multi-currency system itself where the value of those common currencies must still fluctuate in value against each other.”
No Sir. The primary problem is that the present currencies have no standard unit of measure that is stable over time.
Consider for a moment the meaning of currency. It is a medium of exchange of Human value. Not the Ordinal value of the number on the bill, but of Human value, the value given to it by those involved in the exchange and the time and effort they spent creating the actual monetary value represented by the medium of exchange.
Fiat monies have no intrinsic value the moment they are printed or signed for. They represent future possibilities of actual Human value endeavours, either as goods produced or services to be rendered. As future possibilities, they are non-physical and hold no intrinsic value that can be measured now. They are therefore unknown, and their value holding capability is limited to the risk one is willing to assume as an assessment of their future actual value.
Gold and other physical monies have intrinsic value that can be compared to a physical property, NOW.
That physical property is largely invariable over time. So, any Human value placed in it is also largely invariable over time. The Human value meaning of the measure of gold may vary somewhat, but the actual measure, the weight, will not. This creates stability in value exchange that requires no other authority besides a standards body to define the weight.
Trying to “fix” the problems of undefined currencies by creating a new one completely misses the cause of the problems, the definition of the currency value!
I’m not suggesting that we all hold gold itself. What I’m suggesting is that the use of gold as a standard of Human value exchange provides a stable basis for currency exchange. Back a currency issuance with 100% monetary commodity reserves, and the currency will remain stable and useful over time.
The reason we no longer “save” money is that the currency we are saving is unstable over time. So we are told we must “invest” for our future, keep the money gaining in quantity over time in order to keep up with it’s own loss of value over time.
This excessive need to invest fuels the investment bubbles that eventually collapse. The collapse occurs because the monies are based on future value, future human creativity, and are unknown until experienced directly.
Who does the experiencing? We all do. But our futures are unknown and will remain so until we get there, if we get there.
So to base the actual value of a medium of exchange on a phenomenon that can not be directly experienced at the time of exchange is Gambling, not rational monetary policy.
“The virtue of fixed exchange rates is that it imposes some discipline on the propensity of central banks to inflate.”
Not necessarily. We had fixed exchange rates at one time. They failed, which is why we’ve been trying floating rates for a few decades. I would like to see countries return to fixed exchange rates because it’s easier to make money in currency speculation when the guv keeps trying to defend his profligacy by purchasing his own rapidly inflating currency. That’s how Soros made his big bucks during the previous fixed exchange rate regimes.
“the price is variable depending on whether you live in the developed world ($55), a developing nation ($27.50), or a lesser-developed country ($13.75).”
Actually, that may be just simple price discrimination based on elasticities of demand. Quite harmless, really.
PS, if there were any real demand for the books, you would see people buying them in the poorest countries and reselling them in the US. But I doubt there is any demand in any country.
It doesn’t matter what the world chooses as its once currency. Even if they choose gold, the result will be hyperinflation. If we didn’t have fractional reserve banking, gold would stop inflation in its tracks, but as the history of gold money proves, you can still have massive inflation even with gold as your only money. That’s because credit expansion causes inflation even with a gold standard. And I can guarantee that no government at any time will ever give up on fractional banking.
I have been reading Chester Phillips’s “Banking and the Business Cycle” about the Great D. I was surprised that he wrote that no one understood that credit expansion causes price inflation just as much as expansion of paper money. He quotes some prominent economists exclaiming their surprise and confusion over the fact that they were experiencing price inflation on a gold standard after WWI. I know that Mises wrote in 1912 that the currency school of England didn’t understand that either.
What’s so sad is the the Church Scholastics understood the consequences of fractional banking in the 16th century and actively debated its morality. Apparently that knowledge was forgotten until Mises?
more than the gold standard it is the centralization of money that is the problem. frb is not necessarily the bane of money,it is the fact that money is controlled by one single entity -the all powerful govt- that is the problem. frb can exist in a free market just like electricity on a grid is supplied without “100% reserves”.
if nobody finds electric companies to be in violation of property laws,neither is private money frb (free banking)
Pravin,
I don’t think it’s a very good analogy. After all, energy customers do not contract to receive a specified allowance of energy. Instead, they agree to pay a certain rate for the quantity consumed. It really isn’t analogous.
Insane.
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