“How to create a more symmetrical system that provides a... control of international liquidities” Christian Ghymers

Transcription

European League for Economic Cooperation
Monetary Commission, session 30 September 2011
"How can the reform of the international monetary system counter
the global economic and financial crisis"
“How to create a more symmetrical system that provides a better
control of international liquidities”
Christian Ghymers
Adviser DG ECFIN
European Commission
September 2011
"…a [foreign] credit system… when the debts under it go on increasing indefinitely and yet are
always liquid for the present (because all the creditors are not expected to cash their claims at
once), is a dangerous money power. This arrangement…constitutes in fact, a treasure for the
carrying on of war…and it can only be exhausted by the forth coming deficit of the exchequer –
which may be long delayed by the animation of the national commerce and its expansionist
impact upon production and profits. The facility given by this system for engaging in war…is
therefore a great obstacle in the way of a perpetual peace. The prohibition of it must be laid
down as a preliminary article in the conditions for such a peace, even more strongly on the
further ground that the national bankruptcy, which it inevitably brings at last, would necessarily
involves in the disaster many other States without any fault of their own…Consequently, the other
States are justified in allying themselves against such a State and its pretensions."( E. Kant, 17951 )
1.
Introduction: purpose of this paper
In the aftermath of the world financial crisis most of the attention has shifted towards financial
sector reforms and a large number of economists is considering the lack of adequate regulations
as the mayor cause of this crisis. Although it is clear that micro-regulation failures played indeed
a significant role in the world crisis, these fundamental weaknesses cannot hide the macromonetary framework in which the financial activities develop their products and shape their
behaviors. This macro-framework presents itself a peculiar deep defect which is not yet tackled
in spite of having been detected since more than half-century ago by Robert Triffin (and some
others economists more recently): the asymmetric nature of the International Monetary System
which is mainly based upon the US$ i.e. a national currency, and which inevitably leads to global
imbalances and destabilizing international monetary waves. It is time to wonder why the
question of the possible links between such an asymmetry in the global macro-framework, the
resulting global imbalances and the persistent global crisis has not yet been focused or tackled.
Economics does not escape paradigms and intellectual biases, but in the future History will judge
with severity the strong responsibility our economists' community bears in this amazing failure of
rationality. This is a paradox for a profession which pretends to advocate for rationality but
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Immanuel Kant, Perpetual Peace: A Philosophical Essay
1
continues to be unable to adopt a more rational approach of the International Monetary System
in the sake of global welfare.
While it is true that financial deregulation and leveraged speculation are an intrinsic part of the
chain of causes of the crisis – as acknowledged by all the economists now – this contribution
advocates for extending the analysis to what could be the most important causal mechanism of
this crisis and which relies upon deeper macroeconomic roots: the International Monetary
System (IMS), in fact an “International Monetary Scandal” - as coined by Robert Triffin more than
three decades ago in this same European League tribune.
Extrapolating the Triffin's dilemma, in our view, only the inability of the present international
macro-monetary level to manage rationally the global monetary liquidities can explain the
endogenous nature of the world credit-boom which led to the global crisis and which is
continuing to feed frightening global imbalances. The persistent imbalances continue to expose
the world economy to financial instability and at any moment could spark a confidence crisis in
the US $ which has the potential to trigger a sharp adjustment with severe consequences upon
international trade and economic growth. The financial deregulation that allowed for the overleverage, over-indebtedness and excess of risks is only a transmission/ amplification mechanism
but it is not by itself the origin of the crisis. Therefore, any action for improving the functioning of
the financial sector would not get its full efficiency and impact without dealing also in parallel
with the macro-defects of the system and its fundamental instability resulting from its inner
asymmetry.
The specifically monetary factors upon which the crisis relies have not yet been afforded the
attention they deserve, especially the so-called International Monetary System (IMS) in which
monetary policies have been working since more than six decades. Although some politicians
had issued some early declarations for reforming the IMS and the financial architecture, these
easy-words do not seem to be followed neither by structured ideas nor by effective attempts to
tackle the IMS problems. Except for the initiative taken by the President of the UN General
Assembly in 2008 to charge the Stiglitz commission to issue a special report in 2009 on Reforms of
the International Monetary and Financial System2 , among policymakers and official institutions
there is no significant effort (beyond political discourses) to make other proposals than mere
financial regulations and traditional monitoring. It is amazing that neither the EU nor the IMF and
G-20 economists are looking seriously towards these monetary factors and their specific roles
before, during and after the crisis. To overlook these monetary factors upon which precisely the
G-20 (and EMU) authorities have a say prevents from understanding exactly what has not been
working well and even more worryingly, it would prevent policy makers from being able to
escape a new disaster which would be already in preparation by their fault.
Indeed, the present IMS continues to work with and to rely mainly upon the US $ - a national
currency - as the key international currency, whic h makes incoherent and unstable the world
economy by creating big monetary spillovers. The only rational and democratic solution is to
build an institutional world reserve currency from the existing SDRs and IMF by upgrading the SDR
unit-of-account to a genuine Multilateral currency issued by a more representative IMF
empowered to regulate the global liquidity with technical rules. This Keynes/Triffin proposal is not
original but amazingly it is not yet sufficiently present in the debates about how to improve the
IMS in order to tackle the causes of the global crisis by making it more symmetric.
Therefore this paper - as some other parallel academic attempts - proposes to bring to the
official agenda of concerns and actions the fundamental logical mistake in which the present
system is trapped in order to contribute to build a practicable path for escaping the
unacceptable asymmetry of the $-system which reflects a lack of rationality of the dominant
2
The final report was adopted by c onsensus by the 192 Member States of the General Assambly of the UN. See link
http://www.un.org/ga/econcrisissummit/docs/FinalReport_CoE.pdf
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policymakers, IFIs and most of the economist corporation. Although the basic principles for
evolving towards more symmetry are not new (but have to be repeated again), the operational
method - which is proposed in this paper for implementing progressively a new IMS able to
provide the tools for stabilizing the global economy - is more original (although very Triffinian) and
relies on some pragmatic experiments made in Latin America and other regions. It consists in
developing regional monetary arrangements in LDCs able to provide the cooperative basis for
building regional consensus giving an effective say to LDCs regions - or a lever for involving
better the EU and the biggest emerging economies - in the multilateral order. This method based
upon an effective inclusion of those who are the most affected by the present global instability,
offers an orderly way to break the irrational status quo of the $ standard at the lowest costs and
in a global win-win game in the best interests of all and especially of the US economy.
2.
The key-issue of the IMS
It is worth to start by going back to the most basic elements which characterize any IMS.
Benjamin Friedman in August 2009 3 said “What is sorely missing is any real discussion of what
function our financial system is supposed to perform and how well it is doing that job – and, just
as important, at what cost”. This sentence is right but it would be even more opportune and
strategic to strengthen it by merely adding the single world "international" to “financial system” in
order to include explicitly the international monetary system in the scope of the debates!
This is the most pertinent question which has to be raised now: in fact the answer is that an IMS is
a way to solve the coordination problem arising from the existence of n currencies and policy
authorities in presence of clear spillovers between them which reduce their autonomy and make
“the total not equivalent to merely adding-up its components”: there is either a positive sum
game or negative welfare effects. Rational attitude implies that the n actors have a common
interest in organizing their relationships in order to maximize the net result of their separated
actions. Since it is a typical “Prisoner's dilemma” situation (due to uncertainties about the “real
model” combined to lack of communication and reliability between players), the only solution is
to agree upon a central new actor as a substitute for the Hegemon who traditionally uses to run
the system in an asymmetric way.
This discussion becomes clearer when addressing first the main functions of the IMS which need
to be coordinated and which inner issue it is supposed to tackle.
1) What is an IMS?
“System” means an agreed and structured way for organizing international payments across n
different currencies. This means there is a need for organizing the way to fulfil simultaneously two
main functions:
1.
providing adequate liquidity for meeting fluctuating levels of trade, economic and
financial activities at global level (i.e. preventing international waves of excess or scarcity
of international currency)
2.
providing means or tools for correcting smoothly global imbalances i.e. in a symmetric
way or at least without creating a net contraction in the global demand and preventing
national aggressive measures that could create conflicts/unfair practices damaging for
trade and capital movements
3 3
“Overmighty finance levies a ti the on growth”, in The Financial Times, 28 August 2009,
http://www.ft.com/cms/s/0/2de2b29a-9271-11de-b63b-00144feabdc0.html
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It is important to realize what Keynes formulated clearly in the thirties (under the clear influence
of the global depression): adjusting external imbalances is inherently asymmetric and
deflationary as it tends to depress world demand because the constraint upon deficit countries
to balance their account is stronger that the disposition of surplus economy to adjust voluntarily
by deciding to save less (especially when uncertainty is high). This basic feature of the working of
the international economy makes crucial to identify the mutual links between the play of these
two above functions, the first one conditioning the second one while the second one cannot put
at risk the first one.
Therefore, fulfilling efficiently these 2 functions means to provide this essential Public good which
is world macroeconomic stability, a precondition for ensuring a sustainable growth. This requires
in turn the collective construction of a set of coherent international rules, tools and institutions i.e.
a genuine structure of public intermediary goods agreed legitimately upon at multilateral level.
The fact is that the existence of a plurality of national currencies under sovereign authorities
makes these two functions especially complex to be fulfilled efficiently. The IMS is indeed
characterized by a specific issue.
2) The specificity of the IMS issue: the redundancy issue or the “n-1 degrees of freedom”
The very basic issue any IMS is supposed to tackle is the automatic - and specific interdependency that is created by the existence of “n” national currencies mutually traded. In
order to make clearer the existence of a specific need for an IMS for dealing with the specific
adjustment mechanism resulting from the national currency segmentation, let's consider first the
case of single currency in a federal state like the US economy. Indeed, inside the United States of
America, the Fed controls the $ supply while the balances of payment adjustments across the 50
local states are automatically made by the transfer of domestic liquidities from one state to the
others corresponding to the respective imbalance this state registers against the others. In a
political genuine Federation this automatism does not create problem and is supported by the
full freedom of circulation for production factors (labor, capital and firms) while the federal
government transfers could cushion part of the activity consequences of these internal liquidity
changes. On the contrary, in a world with “n” sovereign independent powers, the existence of
“n” national monies provides for alternatives since each sovereign monetary policy introduce s at
state level another tool which could interfere with and oppose to the adjustment process.
However, these individual rooms for maneuver (at state level) introduces a specific problem at
the collective world level which requires an explicit treatment: with n different currencies there
exist only n-1 “degrees of freedom” i.e. "n-1" independent national policies, n-1 exchange rates
and n-1 current-account balances. This introduces a redundancy for national policymakers at
world level: they can only decide freely the content of "n-1" domestic policies i.e. the autonomy
of individual monetary policies is relative and limited by the existence of the autonomy of the
others. Therefore, in the case of different currencies, the adjustment of imbalances is not
automatic and could lead to additional collective costs with respect to a single world currency
(instability and losses of welfare worldwide). Indeed when the US spends more than it earns, the
Rest of the World becomes a net saver making automatically loans to the US economy,
alternatively when China wants to save (much) more than it invests, the Rest of the World
becomes (quickly) the automatic debtor of China. With a single reserve currency for the world –
like the gold standard or a new multilateral reserve currency – the n monetary policies are
constraint by this "n+1th international currency: an automatic adjustment would automatically
counteract these savings differences through the macroeconomic effects of the monetary
transfers resulting from the US deficits and Chinese surpluses. However, the gold standard was
(rightly) rejected for making the issuance of international reserve dependent upon
mining/geographical factors and in Bretton Woods 1944, the Keynes' plan for a multilateral
currency was also rejected, choosing the US $ - a national currency - for playing the role of the
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main international currency. The move from a system with "n+1" currencies to a system with only
"n" currencies implies two options: (i) either the US economy validates (passively or trying to
stabilize international price levels and not domestic ones) the n-1 choices made in the rest of the
world – abandoning any domestic policy objective for responding to the demand for reserves of
the rest of the world by expanding endless its liquid liabilities – or (ii) the US maintains its own
domestic policy choice creating inevitable conflicts and global waves of monetary expansion or
contraction.
In a world segmented in national currencies and with no n+1 currency it is not a surprise that
decentralized choices are potentially conflictive. There is therefore a case for (at least trying to)
channelling these conflicts through a set of global rules i.e. a genuine system either for
coordinating "n" different monetary policies and reciprocal external adjustments (i.e. for
restricting national sovereignty through an unrealistic supranational power) or for creating again
the missing "n+1" currency for restoring symmetric forces able to constraint automatically the set
of "n" monetary policy stances (i.e. for limiting also national sovereignty but through an
automatic constraint which needs less supranational power). Indeed, in both cases (agreeing
upon global rules or upon creating an "n+1th" currency) there exists a logical possibility to make
individual choices compatible and optimal through world governance or through the creation of
an additional specific adjusting agent - the "n+1th" one issuing the international currency. This
alternative is à-priori the more realistic one (or the less difficult to agree upon). It consists in
charging this " n+1th" agent to validate the net result of "n" policies upon world liquidity demand
from the "n" autonomous choices under only the global constraint of a nominal anchor for
ensuring world price stability. This nominal anchor - or global constraint - represents the need for
a global monetary policy stance compatible with international price stability and stable
macroeconomic growth.
In fact the entire above macro-monetary aspects and mechanisms share exactly the very same
logics observed at national level (into any single economy) between the potentially conflicting
choices of its “n” different economic agents (or local banks) with respect to liquidity (demand for
money): the n agents have different positions with liquidity, some are spending more than they
earn (deficits accumulating liquid debt), others spend less (surpluses accumulating liquid assets).
If the deficit agent 1 is big and credible and uses to pay by issuing merely its own checks (liability
at sight, perceived as perfectly liquid) because the "n-1" other agents accept to use these
checks as payment mean in the economy and as a result find convenient to hold more of these
universally accepted liquid assets as "reserves" by piling-up more and more checks issued by
"agent 1", the mere demand for money by "n-1" agents makes "agent 1" to become a growing
debtor with respect to the "n-1" others. In this system, since the liabilities of one agent are used as
the main payment and reserve currency, spending behaviours become asymmetric: "agent 1" is
the only one which does not face any liquidity constraint contrary to the "n-1" agents, but both
groups find converging interests for maintaining the system running (i.e. to accept overspending
in "1" as far as "n-1" want to pill up more reserves by under spending) but creating more polarizing
imbalances without adjustment incentives and an excess of money creation.
At national level, in the past currencies were generally issued by private banks circulating their
own paper monies in competition. Recurrent confidence crisis made this pro-cyclical system
unstable and costly. Liquidity is potentially conflicting at collective level, especially with cyclical
fluctuations changing endogenously the degree of available liquidity based upon confidence.
This is why the National Central Bank emerged as the “lender of last resort” or as the
institutionalization of an additional neutral agent (the n+1th) with respect to its availability to issue
its own liquid liabilities as the institutional mean of payment. Its specific function is to “validate”
the net result of the "n" different demands for money (in fact assessing the opportunity to validate
or not these choices for ensuring stability i.e. preserving the public good function through its
stability-oriented monetary policy) by issuing or destroying passively its own liquid debt in function
of the stability objective i.e. public interest and not its own interest. In counterpart, this perfectly
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liquid liability is used precisely as the only vehicle asset by "n" agents in the domestic economy
because the Central Bank is different from any other agent solving so the redundancy problem
at national level: it is conventionally agreed to use the liquid debt of this "n+1" agent as the
universally accepted means of payments by the "n" other agents. Contrary to the use of the
liability of one of the "n" agents, this new "n+1th" asset/liability cannot issue net debt with respect
to the existing "n" agents since these agents hold it as an asset upon the "n+1th" one (their central
bank) which in turn holds in counterpart an equivalent amount of assets upon the "n" agents of
the economy.
Reminding so elementary aspects of money could seem useless or too elementary to economic
analysts but we are obliged to realize it is not at all. Indeed, for understanding what Triffin
qualified as "the incomprehensible lack of awareness of [asymmetric] defect by virtually all
economic analysts"4 of the IMS, it is essential to capture from the beginning that as money is first
of all a liquid debt of an agent (or an economy) it must be issued by an additional agent which
is "multilateral" with respect to the "n" agents (economies) and not by one of the "n" competing
ones (economies) the debts of which would increase with the need for (international) monetary
reserves, creating an inner asymmetry between this "nth" agent and the "n -1" others. This is true
both at national as international level and allows for managing rationally the monetary creation
process. At national level, the monetary base may expand without creating asymmetry as far as
this liquid liability is issued against corresponding assets: the apparently tautological balancesheet equilibrium means that a central bank cannot incur into net debt position. Transposing it at
the international level, it means that by definition there is no net foreign asset (or liability) for the
multilateral issuer of the international currency. The global monetary base may expand as far as
necessary without creating any net debt and without worsening any international asymmetry or
sovereign imbalance since it is issued along the same balance-sheet equilibrium principle: by
definition there is no net liability or asset worldwide, liabilities being pilled-up not against an
individual economy but against the global system itself and as the counterpart of equivalent
assets held on the asset side of this system. The "n" participants to the system face all the same
liquidity constraint. It looks tautology but it is the attractive principle of a clearing union that
backs the Keynes/Triffin proposals for a symmetric IMS that most economists do not actually
realize.
It is especially amazing that on one side contemporaneous economists 5 do fully agreed at
national level upon the need to create a “(n+1) th agent above all the others banks” for ensuring
this Public good that the markets were unable to organize spontaneously, while on the other,
most of them are still unable to agree upon the need for the same kind of solution at world level
in spite of being confronted to exactly the same redundancy issue (the issue of “n-1 degree s of
freedom”) and to the same need for a systemic supplementary agent - the (n+ 1) th - which
could only be public and multilateral for being above all the countries in order to pursue global
stability goal and symmetric adjustment. The conflicting logics of the "n-1" degrees of freedom
makes fully natural and rational to look for establishing an institutionalized consensus at
multilateral level (i.e. worldwide neutral) for fixing a nominal anchor combined with an issuance
rule for optimizing the issuance of liquid liabilities which are needed for supporting both real
growth and smooth adjustments.
This systematic inability of economists and policymakers - observed during the last six decades means they refuse to acknowledge there is a need to tackle the very basic issue of the
mechanical spillover of any national macroeconomic development which implies an opposite
4
Triffin, Robert, "The IMS (International Monetary System…or Scandal?) and the EMS (European Monetary System…or Success?)",
Jean Monnet lecture, European University Institute, Florence, Banca Nazionale del Lavoro, Quarterly Review, n°179, December
1991
5
One exception in the recent past was Friedrich von Hayek (1899-1992) who was advocating (at the end of his career) for a purely
private banking system in which customers could choose from among private competing currencies for ensuring the more stable
purchasing power. See Denationalization of Money. London: Institute of Economic Affairs, 1976. It seems that no successor develop
this extreme position.
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changes in the Rest of the World. This implies the strong conclusion that apparently rational
economists at national level become – at least the huge majority of them – dangerously blind
and irrational at international level. In a world engaged in an accelerating process of
globalization this sounds as a worrying contradiction and a non-scientific attitude.
This is all the more a shame for a profession well known for its pretentious rationality, that the inner
logics and purpose of any IMS is precisely to try to solve the “n-1 issue” as they all affirm to know.
For example the famous “Gold standard” which ensured price stability during the 19th century
was based upon the acceptance of a (n+1) th currency (Gold) for establishing “n” degrees of
freedom making coherent a system of relative prices (or exchange rates) without losing global
stability. Also, the failure of the Bretton Woods system which tried to by-passed the n th agent by
using a national currency as the international standard is universally acknowledged, as well as
should now be admitted the failure of the generalized pure floating regime for restoring the nth
room for manoeuvre.
Such a kind of irrational situation amongst economists leads to question deeper the present
conventional ideas.
3) The Triffin's dilemma is still fully valid for identifying the "built-in destabiliser" of the US $
regime for the global economy
The present world financial and economic crisis is one of the expressions of the systemic defects
and inconsistencies of the world economy, based on an asymmetric monetary system which
lacks an objective monetary anchor and so creates big monetary waves feeding growing
imbalances.
More than half a century ago, the Belgian economist Robert Triffin – one of the fathers of
European Integration, and of the Euro6 – was the first (and almost the only one, for many years)
to identify in explicit terms, a major characteristic of the post-war international monetary system:
the intrinsic instability produced by the use of a national currency – the U.S. dollar – as the main
international monetary standard, and the resulting asymmetry for the world economy, with the
risk of creating an inadequate degree of global monetary liquidity. We must remember his
arguments, given the present crisis and the phenomena that have occurred since the collapse
of the Bretton Woods system in 1971/73, which he had clearly announced in tempore non
suspecto (already in the fifties) and was consecrated in the so called "Triffin dilemma" (BOX 1).
This dilemma is still alive because it is broader than the only defects of the disappeared Bretton
Woods peg regime. Indeed, the Triffin's dilemma has survived the Bretton Woods regime and
remains fully valid for analyzing the present IMS failures, as Robert Triffin himself claimed in his
post-Bretton Woods publications, denouncing "the logical absurdity and disastrous results of the
use of a few national currencies as the major, or sole, instrument of international monetary
reserves". In the floating-rate regime succeeding to Bretton Woods, Triffin announced twenty
years ago in crystal clear terms the present "scandal" of the IMS:
"The first shortcoming…is the basic asymmetry it creates…[since] the deficits of a reserve -centre
country may be financed mostly – or even overfinanced – by an increase of world foreign
exchange reserves…[with] no imperative pressure for the readjustment of inflationary policies.
The second shortcoming is that this process may easily degenerate into a self-feeding spiral of
inflationary reserve increases, since these are reinvested in the reserve centres and increase the
ability of their leaders to pursue inflationary policies for any purposes they may wish…
6
Robert Triffin, (1911-1993), professor at Yale University and at Louvain Catholic University, was both Belgian and American, he
was a member of the economic team of John F. Kennedy (who called him the "first transatlantic citizen"), and later became adviser
to the President of the European Commission Sir Roy Jenkins (1977-1981). In this position, he inspired the creation of the European
Monetary System, which set the basis of the present Economic and Monetary Union of the EU (Maastricht Treaty, 1992).
7
The third shortcoming is the stimulation of lending by poorer and less adequately capitalized
countries to richer countries far less dependent on foreign capital for their economic
development.
The initial version of the Triffin's dilemma (from the 1950s and 1960s) has to be viewed as a mere
application to the Bretton Woods peg of the global asymmetry produced by the use of a
national currency as the main reserve currency. Indeed, the outside demand for the US$ as
international currency (for trade transactions as for precautionary and financial needs) means
that reserve holders are extending automatic "unrequited" loans to the US economy, whatever
the exchange-rate regime is. This confers to the US economy the "exorbitant privilege" (as coined
by General De Gaulle and Giscard d'Estaing in 1965) not to be submitted to the same external
financial constraint as are the "n-1" other economies. Indeed the "nth" currency is held abroad as
reserve by the "n-1" other central banks, whatever a parity-grid exists or not. In any exchangerate regimes (except for the textbook-case of pure floating, but in the real world central banks
tend to accumulate a foreign "national' currency as reserves in counterpart for their monetary
base issuance) this is much more than a privilege, it is also a major monetary spillover abroad
since the other "n-1" central banks use the US$ to create a domestic liquidity expansion (except
for some fractional degree of sterilization7) by investing their $ assets into US liquid financial paper
(US T-bills and US Bank CD). This means that the liquidity expansion abroad (in "n-1" monetary
bases) is not made up for a parallel contraction in the US monetary base since the excess of US$
issued by the FED are not brought back to this nth central bank (by depositing them on their
accounts to the FED (so on the liability side of the FED balance-sheet) but are re-injected as
capital inflows to the US economy. It is thus clear that the asymmetry of the US$-regime is also
the source of global monetary waves i.e. the contrary of a rational and stable system of creation
of international liquidity. Furthermore, in combination with this policy spillover, the exorbitant
privilege of the $ regime tends to act as a saving-disincentive in the US economy, creating or
worsening global macroeconomic imbalances.
Therefore the Triffin's dilemma should rather be renamed the Triffin's asymmetry in order to
encompass the more general macroeconomic "built-in destabilizer" identified first by Robert Triffin
in the 1950s.
The asymmetry - or the destabilizing spillover for the world resulting from this US$-regime (under
both a peg and a managed float) - acts trough two intertwined mechanical channels:
1.
Global imbalances do result automatically from the monetary asymmetry through the
relief of the external constraint for the US economy, which pushes down the saving rate
(automatic external financing at lower interest rate and overvaluation of the $)
transforming the US in the "consumer and borrower of last resort" (see details below on
page 8), impeding thus the IMS to fulfil its second main role to reduce imbalances and to
smooth adjustments
2.
Global monetary waves do result automatically from the asymmetric bias introduced in
monetary policies by the international status of the $; this bias acts as a multiplier abroad
of the US monetary and fiscal policy stances, impeding thus the IMS to fulfil its main role to
issue an adequate degree of global liquidity.
Drawing upon Triffin's three shortcomings cited above, our thesis is that these two channels are interrelated, forming a mutually supportive process of systemic imbalances creating additional excess of
international liquidity which in turn worsens the imbalances in a destabilizing and costly cycle. This
cumulative process is the “built-in de-stabilizer” of the global economy identified by Triffin as due to the
contradiction of using a national currency as the international one. As explained in the next section 4,
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Sterilization occurs when the central bank impedes the effects of its exchange -rate interventions to affect the monetary base by
selling domestic assets for an amount corresponding to the increase in its $ reserves. However, sterilization is generally very costly
for a non-key currency (interest rate differentials with the US $) and are not significant in the longer-run.
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the US official version (Greenspan/Bernanke) of a "World Saving Glut" provoked by an exogenous shift in
the savings supply of some emerging economies represents a typical myopic analysis which denies to
take on board the spillovers created by the international status of the $ and makes the US economy a
passive actor powerless in front of some emerging economies. The 2 channels explain that the Chinese
saving surpluses cannot be exogenous but are closely link to the international role of the $.
The first channel (lack of external constraint) explains that the asymmetric role given to the US $ tends to
exacerbate macroeconomic imbalances and US indebtedness, the second one (multiplier effect on global
monetary policy) explains the strong spillover issued by the US monetary policy upon global liquidity
conditions, and the combination of both explains the crazy run of the world economy towards a process
of crisis amplification and lost of global welfare.
Indeed, the cumulative circular causation process is the following:
 At the beginning, the US $ international role implies growing US liquid indebtedness as the
counterpart of the accumulation of reserves in $ assets abroad, but the US is not necessarily a
net debtor as far as US capital outflow makes the counterpart of the $ liquid liabilities (banker's
role of the US).
 But the US $ asymmetric role implies also escaping from the external constraint, which means a
bias towards “easy money” => cheaper interest rates => fiscal deficits easier to finance =>
eventually growing excess of absorption over production i.e. growing macroeconomic
imbalances which means the US economy becoming increasingly a net debtor (channel 1).
 Facing such a disequilibrium which drags down activities and jobs in the US, the FED tries to keep
interest rates as low as possible, stimulating even more the US over-consumption and the
imbalances
 But the monetary spillover (channel 2) amplifies abroad the US monetary expansion as Foreign
central banks needs reserves and/or resist dollar depreciation, and re-inject the excess of US $ in
US liquid assets, lowering further the US yields
 Therefore, the channel 2 amplifies also the effects of channel 1, by creating a vicious circle by
which the financing of the growing global imbalances is made possible;
 This frightening vicious circle of imbalances tends to persist as it is in mutual interests of both the
US debtor and its creditors from some emerging economies; the US domestic objectives calls for
more external financing that the FED is able to feed through the spillover of its own stances
which allows for more net imports and therefore more accumulation of reserves by its creditors.
Although irrational and destabilizing from a systemic point of view, it is fair to acknowledge that
these two channels have also fuelled the global economy and contributed to spread economic
development, first in Europe and Japan in the 50s and 60s, and later to the benefit of an
expanding number of successfully emerging economies, in particular for getting out of the Asian
crisis of the end of the 90s. Indeed, the US $ regime "solved" transitorily some deep conflicting
issues, although at the costs of instability and worsening crisis with growing financial risks. For
example, while it is true that the Asian crisis was partially solved by the asymmetric process
described above, it should be taken on board that this crisis was probably the result of the FED
policy and the asymmetric process itself as well the "solution to the Asian crisis" led to the next
global crisis of 2007/2009. If the exact balance is impossible to draw, it is clear that $ regime has
not led to a stable world and there is no argument for accepting mismanagement of world
liquidity and monetary policy mistakes. Since economics is supposed to promote rational
9
policies, there is no excuse for postponing actions that could improve a system which feeds
instability and remains dangerously dysfunctional with respect to its official purposes.
Going back to the channel 1, it is interesting to identify the complex combination of biases which
characterizes the asymmetric nature of the $ regime given by its international monetary role:
1.
An asymmetry in the degree of external constraint, the US economy being exempted of it
as far as US $ assets are demanded abroad for reserve purpose, allowing it for sustaining
permanent increase in the US external debt;
2.
A subsequent asymmetry in the macroeconomic policy stances allowing the US to be the
only economy able to embark on expansionist policies without suffering balance-ofpayments crises; this gives to the US economy the peculiar capacity to absorb durably
both excesses of output and savings coming from the n-1 economies
3.
An asymmetry in the costs of financing both US current account deficits and US fiscal
debts (automatic capital inflows due to the demand for reserves in US$ lower the interest
rate on the US markets); so the US is able to finance its public debt at a lower cost than if
the $ would not be the key-reserve currency
4.
An asymmetry in the exchange-rate risks since the US is able to invoice more than others
in its own currency as well as to borrow from abroad by issuing liabilities in its own
currency, shifting entirely the risk upon the lenders
5.
An asymmetry in yields and valuation effects which reflects one aspect of the exorbitant
privilege: the excess return on US assets over US liabilities implies an enormous transfer of
resources which allows for stabilizing its net international liability position (lowering the
increase in the US external debt with respect to the cumulative current account deficits)
and therefore prolonging even more the disequilibrium; US assets invested abroad have
higher returns than US Foreign liabilities; this is due to the asymmetry in the composition of
the US international portfolio (mismatch in the composition of assets with respect to
liabilities) which results also from the international monetary role of the US$: foreign
holders of US $ assets are generally looking for liquid assets and collateral well accepted
by international lenders but with low yield while US holders of Foreign assets are getting
much higher yields. Furthermore, the U.S. reaps a capital gain when the dollar
depreciates, since U.S. assets abroad are foreign currency denominated (the declining
trend in the external value of the US $ is automatically increasing the returns on the US
assets abroad with respect to Foreign assets held in US $).
These combined asymmetries result from the international role of the US $ and represent indeed
an "exorbitant privilege" which implies significant transfer of real resources from the n-1
economies at the benefit of the US. According to mere book-keeping calculations, these net
transfers amount to around US $ 1 thousand billions from 2001 to 2007 (Alessandrini & Fratianni8 ).
Richard Clarida9 also shows that between 2002 and 2007, the US net international liability position
was almost unchanged even though the US ran cumulative current account deficits for $ 3.3
trillion in those five years. Gourinchas and Rey 10 explained the mechanism of leveraged financial
intermediary which is permits by the international role of the $.
8
Alessandrini, Pietro and Fratianni, Michele, Resurrecting Keynes to Sstabilize the International Monetary System, Money & Finance
Research Group, working paper n°1, Università delle Marche, Ancona, October 2008
9
Clarida, Richard, "With privilege comes…?", Global Perspective, PIMCO, Sydney, October 2009
10
Gourinchas, Pierre-Olivier, and Rey, Helène, From World Banker to World Venture Capitalist: US External Adjustment and the
Exorbitant Privilege, NBER Working Paper, n°11563, August 2005
10
BOX 1: The Triffin dilemma, its persistence after Bretton Woods and the remaining “exorbitant
privilege” given to the US economy
In an international monetary system which uses a national currency as a standard for payment
and reserves, the creation of international liquidity to meet the global demand for reserves is
done through a permanent increase in indebtedness of the country that issues said currency. The
dilemma thus translates into the basic contradiction that exists between ensuring the credibility
of the currency, and allowing it to fulfil its role as international currency, which inevitable leads to
the destruction of the intrinsic qualities (that justified its selection as international standard) since
it is forced to accumulate endless foreign liabilities. Therefore, the alternatives for this dilemma in
the economy issuing this key-currency are either to opt for sustainability, which causes a global
deflation due to a lack of liquidity vis-à-vis its foreign demand, or to meet a global need, which
dooms the issuing economy to destroy its own credibility (however necessary for backing its role
as an international standard).There is an irremediable incompatibility between the global
objectives (and needs) of the US$ as the key-currency, and the national objectives (and needs)
of the fiscal and monetary policies of the country issuing the currency.
This incompatibility explains the downfall of the Bretton Woods fixed-exchange-rate system (19441971/73). However, the flexible-parity system that replaced fixed parity has not solved the
dilemma either: the dollar is still the main international payment instrument, which means a
permanent demand for reserves in $ allowing the US to benefit from a resource transfer by issuing
more liquid liabilities i.e. an asymmetry making easier or automatic external financing for the US
economy thus perpetuating the dilemma and the “exorbitant privilege” granted to the U.S.
economy. This privilege consists in having a macroeconomic autonomy unparalleled in the other
economies; i.e. it doesn’t face true external constraint and enjoy easier financing conditions,
since it can become indebted at a lower cost, with neither exchange risks nor increasing spreads
with the size of its debt, by issuing its own currency or paying with its Treasury Bonds . This peculiar
asymmetry biases the macroeconomic conditions as it freezes the global re-balancing
mechanism. This bias consists in facilitating foreign financing of fiscal and balance of payment
imbalances, discouraging both public and private savings. Thus, global macroeconomic
imbalances tend to perpetuate, creating the risk of global inflation due to a lack of an effective
nominal anchor. (See Box No. 2). Thus, the Triffin dilemma characterizes, although with different
modalities, both the extinct fixed exchange-rate system of Bretton Woods, as well as the antisaving bias in the present floating system. Both systems are based on the demand for reserves by
the Central Banks of the world, from public liabilities of the U.S., which leads to too low US interest
rates and an excessive indebtedness of this economy. At some day this will destroy the trust in
the dollar, which precisely lies on its condition as international currency. In any event, in such a
system, the creation of international liquidity cannot be optimal, but rather due in the best cases
to momentary chance.
Despite moving away from fixed parities between the main international currencies, and a
general evolution towards more flexible exchange rates, the asymmetry of the dollar, and its
ensuing privilege (resource transfer by issuing liquid liabilities) remained, despite the
development of substitution between financial assets in dollars, and other secondary
international currencies (the other four compounding the SDR at that time plus the Swiss Franc),
first, because none of these secondary currencies was capable of offering a complete
11
alternative to the $ (none got the same degree of characteristics in their financial markets as
those prevailing in the US ones in terms of “breadth, deepness and resiliency”), and second, due
to the world macroeconomic instability that resulted from the substitution between international
financial assets (non monetary) which increased the demand for dollars in monetary reserves.
This can be explained due to the inertia of the decisive economies of scale and the network that
characterizes the international monetary market (factors very important in the very short term
segment of this market but the influence of which diminishes progressively in the longer-term
segments of the financial markets).
The emergence of the euro in 1999, with an economic and commercial base similar to that of
the U.S. didn’t change much the strictly monetary role of the dollar. Although the €became the
second international currency, by quickly offering a monetary and financial market with
apparently competitive technical characteristics compared with the dollar – thus providing a
quasi-alternative to the dollar, and generating an increased substitution in financial markets – the
euro did not replace the dollar in its basic function as main monetary standard. The reasons are:
1.
The fact that the €-area does not provide yet a genuine lender-of-last-resort since there is
not yet a mechanism for tackling financial crisis and the ECB is prohibited to bail-out.
2.
The $ role is still dominant on the monetary exchange market, since only one monetary
instrument fits technically as the effective vehicle for day to day transactions (dealers
cannot work simultaneously with 2 competing standards), and the Euro absorbs only
secondary currency papers: the dollar is still present in more than 90% of exchange
transactions, whereas the €is present in only 40% (and mostly as a counterpart of the
dollar).11
Therefore the asymmetry has persisted. The disappearance and abandonment of the Bretton
Woods system - the theoretical convertibility of the dollar into gold at a fixed price accentuated the lack of a nominal anchor for the issuance of currency in the world.
In the last three decades, a succession of at least six international waves of crises with increasing
amplitude – and with exchange rate instabilities that induced wide fluctuations in real
exchanges – have shaken the world economy, causing exponential socio-economic damages:
1.
The first oil shock and inflationary wave of the first half of the 1970s
2.
The second oil shock and debt crisis of developing countries in 1979-82 along with the
second global inflationary wave
3.
The financial crisis that affected particularly the stock exchange bubble in Japan in 1987
4.
The Asian crisis of 1997
5.
The "dot-com" bubble of 2000
6.
The 2007-08 global bubble and the great recession of 2009.
Although each of these crises have had their own characteristics, and can generally be
explained separately, all share the negative effects of the same asymmetry and lack of
objective anchoring that comes from the dollar standard the world economy relies on.
The U.S. monetary policy, unavoidably oriented towards the internal needs of the U.S. economy
according to its institutional mandate, has generated significant external effects on global
liquidity, which are incompatible with the preservation of world economic stability.
11
By definition, the exchange market always involves two currencies, which explains the fact that these percentages, 90 and 40, add
to more than 100% (part of the 40% is already included in the 90%).
12
In turn, the international status of the $ creates specific relationships between the international
demand for $ (as foreign-exchange reserves) and the behaviour of US interest rates. As far as US
monetary policy creates an excess of international liquidity which is in fact re-lent to the US
economy by buying US bonds, US interest rates should be maintained lower than otherwise as a
result of the international status of the $. So world economy develops also feedback effects on
the US monetary policy. Furthermore, as far as the Fed believes it has no control upon its longterm interest rates (as did Greenspan’s stance, see below) the reserve demand for US T-bonds
creates the illusion that low interest rates on these US long-term bonds reflects a “saving glut”
and not a excess of liquidity. This illusion plays an amplification role in the unstable monetary
conditions.
Amazingly, these important spillovers are acknowledged neither by academic textbooks nor by
most economists (and none textbook) who continue to consider - as most International Financial
Institutions - that in a floating-exchange-rate regime, national monetary policies keep their full
autonomy, the US one being supposed to act on the same foot as the Chilean one!
BOX 2: Monetary asymmetry of the dollar standard in three historic stages
1. Bretton Woods I System (1944-1973)
In that system, fixed parity with the dollar formally forced the n-1 world’s Central Banks to buy
excess dollars to respect that parity. However, the world demand for international money made
these Central Banks to save these liquid assets in dollars as external reserves, because at that
time, the dollar was the only complete international currency, i.e., its monetary market offered
the necessary technical characteristics (liquidity, depth, and resilience). The fact that these
dollars were accumulated on the asset side of the balance-sheet of n-1 Central Banks and paid
on the market by issuing their own liabilities, means that these dollars in excess generated also an
excess of issued monetary base in the n-1 other currencies. Had there not been an asymmetry
caused by the dollar in its role as reserve currency, that issuance abroad would have been
exactly compensated by a contraction in the U.S. monetary base, due to the fact that these
reserve dollars would have been deposited by foreign Central Banks in their respective accounts
opened at the U.S. Central Bank (The Fed). The reason is that, by definition of the monetary base,
dollars that are re-deposited at the Fed – i.e. appears in the liabilities of the Fed with official
foreign monetary institutions – constitute a destruction of liquidity in dollars. Thus, for any currency
of the world that is not used as international reserve, in the balance of the Central Bank issuing
that currency, an increase in liability with another Central Bank corresponds to a reduction (in
the same amount) of the monetary base issued by that Central Bank. For example, if the Central
Bank of Colombia acquires Venezuelan bolivars in the foreign currency market, so that the peso
does not appreciate against the bolivar, these bolivars are re-deposited immediately in the
account that the Central Bank of Colombia has in the Central Bank of Venezuela, thus
becoming a monetary liability for Venezuela, which, by definition (whether it is changed for
another currency or not) implies an equivalent contraction of the monetary base issued by the
Central Bank in Caracas. In this generic case, there is a total monetary symmetry: an increase in
the monetary base in Colombia is compensated exactly by the contraction of the Venezuelan
monetary base, and these types of interventions of Central Banks tend to restore the balance
between the two currencies.
13
In the case of the dollar, this monetary symmetry could not work, if a national currency is also the
main international reserve currency, because other Central Banks don’t want to keep it in its
monetary form as a simple deposit at the Fed, rather, they want to invest it in profitable financial
U.S. assets (as U.S. Treasury Bonds, Certificates of Deposit with commercial Banks in New York)
that is, they are immediately re-injected in the U.S. economy, preventing the symmetrical
reduction of the U.S. monetary base, despite the fact that it generated an issuance of the
counterpart, in the liability of these Central Banks, that is, in their respective national currencies:
the monetary base of the rest of the world increased, but the U.S. monetary base did not
decrease. This peculiar asymmetry is explained through the dollar’s function as official
international reserve standard. This function explains why the dollars acquired in the foreign
exchange market by the Central Banks of the rest of the world were kept in the form of profitable
financial assets – and not in the monetary form in a demand deposit at the Fed – to serve as
international reserves that could be immediately liquidated in the secondary market of these
financial assets in dollars. As the international demand for reserve dollars increases, the U.S. Fed
can issue excess dollars – that is, create liquid debt – that do not return as liquid deposits in the
Central Bank, but serve to buy mostly U.S. Treasury debts. To use a pedagogical analogy, the
dollar asymmetry can be seen as the case of a reputed consumer, whose checks, issued to pay
other agents for his many purchases, are not presented back to his bank to be collected by his
creditors, but rather, they consider more convenient to use them as reserve currency, since they
already have a guaranteed liquid market. This implies that this debtor can pay for his purchases
only by issuing his own new debts. Then, the condition of international reserve grants it an
“exorbitant privilege” (General De Gaulle, 1965) that waives it from the discipline of external
constraints and financial restrictions.
2. Bretton Woods II System (1973-1999) or the move from floating to managed floating
The move from a fixed exchange system to a floating (or more flexible) system has not translated
into a reduction of accumulated exchange reserves by the Central Banks of the World. In fact,
and contrary to the theoretical models that announced that floating regimes were going to
reduce the demand for international reserves, what happened was the opposite. The reasons
are complex, but rely in the fact that the floating regime was also asymmetric since the
currencies were not on the same foot, the dollar maintained its dominant role with the
consequent spillovers impeding a symmetrical float. Furthermore, the growing uncertainty over
exchange rates development was accompanied by the emergence of massive substitutions
between the dollar and its partial competitors (the German mark, Japanese yen, British Pound
and French franc). However, these currency substitutions were incomplete due to a lack of
liquidity and size of the possible alternative to the $ which was explained by the absence of a
single competitor on that time together with the operational need for polarization towards a
single monetary standard, which favoured the dollar on the monetary markets. In this situation, a
new kind of spillover affected the domestic demand for moneys making them more unstable.
Although it is true that the link between the U.S. monetary policy and the rest of the world
decreased somewhat on the supply side (segmentation of monetary supplies given the
disappearance of mandatory interventions to maintain fixed exchange rates), it was replaced
by another link (much less visible) on the side of instabilities in the respective domestic “demands
for money” due to massive substitutions, and self-fulfilling speculations. This new link modified the
effective liquidity: when the dollar fell against the D-mark, the internal demand for money in the
U.S. was reduced (thus increasing the effective liquidity of the dollar) while the currencies against
which it depreciated, suffered an increase in the internal demand (reducing the liquidity of the
D-mark) which was perverse and amplified the currency substitution. This explains the “fear for
floating” impeding flotation to be effective (only the U.S. practiced it), the Central Banks of the
14
rest of the world had to increase their interventions and their need for international reserves. As a
result the U.S. continued to generate “de -stabilizing monetary waves” on the rest of the world.
Thus, the asymmetry of the dollar was maintained. Furthermore, the Bretton Woods II had not
even the formal anchor to gold which was supposed to represent a constraint on the US in the
Bretton Woods I up to formal Nixon’s decision of 1971 (and de facto up to the end of the Gold
pool in 1968). Therefore global instability persisted and was even amplified. In early 1985 faced
with the challenging urgency to organize an orderly depreciation of the $, the US administration
(James Baker) changed its mind abandoning the doctrine of pure free-floating for a collegial
management of exchange rates with target-zones against the other international currencies. This
meant the recognition that domestic stability was not anymore sufficient to ensure exchangerate stability (the official doctrine after Bretton Woods I), and the fact that both domestic and
external (exchange-rate) stability were officially acknowledged as simultaneously necessary and
reachable by multilateral surveillance/coordination through a collegial G-5/G-7. This group
piloted the $ adjustment in three steps (1985 Plaza agreement, 1986 Tokyo Summit, 1987 Le
Louvre) by setting up a minimum degree of policy coordination in order to share the adjustment
burden. Although its collegiality and pragmatism represented already a systemic progress - very
useful in crisis time - and although it was successful as regards the objective of managing
smoothly the $ depreciation and its successive stabilization, the G-7 failed to reduce the
asymmetry and the externalities of the $. The inner asymmetry due to the US weight was
amplified by the intra-European divisions, cleverly exploited by the Baker administration for
forming – especially with the French administration - a “Keynesian coalition” against the only
independent Central Bank of the group at that time - the monetarist Bundesbank - for imposing
a new loose global monetary stance, through massive interventions of Central Bank selfcommitted inside the G-7 for stopping the $ fall in 1987. These agreed interventions reproduced
again the Bretton Woods 1 link through money supplies, the monetary stance of the US being
imposed and amplified outside, a financial bubble developed in Japan (with fatal
consequences for its economy) and a new inflationary wave occurred in 1989-90. The lack of a
solution to the Triffin dilemma maintained the systemic instability generating global monetary
waves created by the macroeconomic policy of the U.S. as a result of the $ asymmetry.
3. The Bretton Woods III system and the emerging economies (1999-2010)
The creation of the Euro in 1999 allowed for the progressive emergence of a second complete
international currency, with similar technical characteristic as the dollar. However, the fact that
there isn’t yet any prospect for single issuer of sovereign bonds for the euro zone, together to the
inner force prevailing on the Forex markets to stick to a single monetary standard for operational
reasons, maintain the predominance of the $ on the inter bank markets. Despite a clear progress
in the market shares of the euro in financial markets (it is the first currency for international bonds
issue, and the second reserve currency) in the day-to- day international monetary market 90% of
transactions involve the dollar as a direct instrument (dealers need to work with a single
operational standard).
The Triffin dilemma (see Box 1), with the same monetary asymmetry and the same
macroeconomic privilege for the US, is then perpetuated with a demand for reserves in dollars,
massively invested in U.S. Treasury Bonds. However, in the last ten years that was the case
essentially for emerging economies, which took advantage of the U.S. macroeconomic policy,
accumulating spectacular amounts of reserves they invested mainly in $.
15
This is explained by two main reasons: the growing instability of the world economy (due itself at
least partially to the $ asymmetry) motivating emerging economies to accumulate excess
reserves (counter-cyclical self-insurance motivation due to the lack of collective insurance and
to the pro-cyclical pattern of capital inflows and trade flows for LDCs), and the efforts of nonrenewable resources exporters and of China to limit the appreciation of their exchange rates
against the $. In the first case, the emerging economies try to reinforce their credibility and
protect themselves from new external shocks, whether real (terms of trade) or financial (suddenstop in capital inflows), which are more pro-cyclical and affect them proportionally more than
the more advanced economies.
Such a huge demand for reserves in $ fed by the US monetary policy creates feedback effects
on this US monetary policy by contributing to lower US long-term interest rates. This spillover resulting from the US international status – uses to be mis-interpreted by the FED which does not
see in it a monetary connection between short-term rates to longer ones, but a “saving glut”
without relationship with the excess of liquidity conditions provoked by the FED policy.
The result was a global wave of excessive monetary creation, and its inflationary effects were not
evident in the prices of manufactured goods, except for some commodities and intermediate
goods such as steel, due to the spectacular demand from emerging economies (particularly
China), but through an unprecedented "credit-boom" which translated into a correlated series of
bubbles in the asset prices on real estate and financial markets worldwide.
The persistent validity of the Triffin dilemma is thus tangible through inappropriate liquidity
instability worldwide resulting from the de facto international status of the US $.
4) The Triffin's asymmetry in the global crisis 2007/2009
In the recent episode of the global bubble, an especially perverse combination of factors acted
in a mutually supportive process: the four-decade expansive monetary policy of the FED,
combined in the last two decades with the explosive leveraging caused by the simultaneous
financial deregulation, the moderating effects on prices and salaries generated by the massive
supply of goods and services from the emerging economies, the consequent self-confidence of
central bankers making them to believe in their own credibility lowering long-run interest rates as
well as in the financial-market self-regulation. All these interconnected factors acted together for
sustaining the growing macro-financial imbalances, but only postponing unavoidable
adjustments through an unprecedented global "credit-boom", spurring unsustainable
consumption and indebtedness in many countries.
Although these connections deserve empirical works, a mere factual observation allows for
establishing clearly the existence of imbalanced development and recurrent instability.
Nevertheless, the Greenspan/Bernanke’s argument for explaining the bubble as a result of an
exogenous "world saving glut” (responsible for too low long run interest rates) continues to be
invoked as an excuse 12 because this would be beyond the control of Fed. However, there is no
12
See for example
http://www.brookings.edu/~/media/Files/Programs/ES/BPEA/2010_spring_bpea_papers/spring2010_greenspan.pdf
16
serious empirical support and the existence and persistence of high Chinese savings are not
enough for giving a causation sense to an identity. This very high saving rate in a single economy
does not help to explain too low world interest rates since this “excess of savings” mirrors the
opposite excess of negative savings in the US economy. This would be just a "chicken-and-egg"
question if the spillovers of the $ are not taken into account. In particular, the 2 channels
identified in section 3 above make the link between the US macroeconomic policy stance and
the growing international imbalances, namely by feeding with global monetary policy the
emerging economies purchases of long-term US bonds, explaining so the too low interest rates
also at the long-term end of the US market.
In addition to this explanation, it is amazing and irrational to see the US authorities arguing that
their economy is now totally dependent from parameters fixed by smaller economies.
Furthermore, it sounds strange to speak seriously about a global excess in savings when the world
rate of saving and investment is on a persistent downward trend (from 24% of GDP in the 1970s to
22 in the 1980s and less than 22% in those early 2000s when the interest rates were so low). It is
really worrying to see a central banker ignoring that present saving rates are all the more
insufficient for meeting the ageing impacts, the environment challenges and the underdevelopment constraints.
Although Central bankers use to believe they can only control short-term interest rates, it is really
difficult to admit that maintaining voluntarily and persistently negative interest rates (considered
however as a typical gross mistake by the Central banking doctrine) and diverging so strongly
from the conventional wisdom of the Taylor rule would not be translated into an excess of
liquidity leading to a boom-bust development. As John Taylor’s chart shows13, modelling an
alternative monetary stance respecting a Taylor’s rule would have meant no bubble in the US
home market. The first chart shows what should have been the interest rates according to the
Taylor rule and on the second one the “counterfactual” curve indicates the alternative
development of the housing starts in case US interest rates would have followed the Taylor rule.
the recent Greenspan’s report “The Crisis” second draft March 9 2010, fully supported by a lot of economists like Greg Mankiw
http://gregmankiw.blogspot.com/2010/03/comments-on-alan-greenspans-crisis.html
who considers that central bankers could not have prevented the bubble or the crisis: “ this is wishful thinking in the extreme. It
indeed would be nice if somehow those individuals guiding our national economy had superhuman powers to see into the future
(Nouriel Roubini, for example)”. Implicitly this sentence makes this Professor telling that monetary policy would have no impact and
so that Central Bankers would be useless for the cycle...
13
John Taylor, The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong” November 2008
17
In industrialized economies, in spite of the easy-money stance of central banks14, the production
growth was moderate, whereas the emerging economies accelerated their growth,
accumulating a massive external surplus which these economies transformed into foreign
financial assets, mainly in dollars and U.S. Treasury liabilities, that is, in international reserves and
not in real assets, maintaining the downward pressure upon long -run rates. Thus, these
economies participate directly in the multiplication of liquidity created originally by the U.S.,
reproducing de facto the greatest defect of the Bretton Woods II system (or even Bretton Woods
III, see Box 2) created by a spontaneous demand for reserve in dollars by emerging economies.
This excessive demand for reserves is mostly explained as a reaction of precaution from these
emerging economies given their higher exposition to global instability, through either their terms
of trade sensitivity to the world cycle or their dependency upon foreign capital movements.
The recent global bubble of the last few years illustrates clearly that the principle of a global
monetary wave invaded the world, and not even the euro and its European Central Bank, which
is immune against political interferences, could prevent it, and its resistance resulted in an
overvaluation of the euro against the dollar. This risk clearly shows the lack of a nominal anchor
worldwide: if the FED issues too many dollars, the drop in its exchange rate with respect to the
euro becomes excessive, which implie s a restrictive stance in the monetary policy of the
European Central Bank (ECB) with respect to its internal inflation goals (in terms of real goods and
services), forcing the ECB to partially follow the FED in its monetary laxity, which reinforces foreign
surpluses in emerging markets and their demand for reserves, thus worsening the global
monetary wave. Therefore, it is a mistake to believe that a nominal anchor could exist only
through “inflation targeting” by the FED and the ECB, unless this inflation is measured
beforehand, including financial assets and using a (not-yet-existing) model that perfectly reflects
the world economy. As shown also by John Taylor 15, the ECB did not respect either the
elementary Taylor rule and this gap (the blue line on the chart below) is mainly explained by the
Fed influence (the red line) upon ECB monetary policy.
14
As indicated by a Taylor rule, the interest rates in the US and the euro area were significantly well below what historical experience
would suggest policy should be. See John Taylor, The Financial Crisis and the Policy Responses: An Empirical Analysis of What
Went Wrong” November 2008
15
John Taylor, The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong” November 2008
18
The dominating macroeconomic policy schemes (like those represented in the currently used
models – the “Dynamic Stochastic General Equilibrium Models”) are based on the double
paradigm of symmetric economies (the illusion that the world economy is just the addition of
similar economies) combined with the presence of efficient markets, rational anticipation, and
self-stabilized financial markets. These models, used by all policy makers, proved incapable of
explaining the “global credit-boom” and its bubble effect in macroeconomic schemes.
Specifically, this ruling double paradigm explains the belief of macroeconomic policy makers
where world macroeconomic stability results from a successful “inflation targeting” by all national
monetary policies simultaneously.
The greatest error lies in the inadequate incorporation of spillovers from the dollar standard,
which creates wide monetary waves as a consequence of the Triffin dilemma, and an
inadequate management of international liquidity creation, in an IMS based on a national
currency. Specifically, a lack of anchor in the present IMS leads inevitably to conflicting national
policies, producing costly uncertainties for future exchange rates development between the
main currencies, and therefore threatening eventually the access to foreign markets. The present
“non-monetary system” to regulate the issue of international reserves and global liquidity is a
threat to the well-being of the world.
BOX 3: The failure of the free floating-rates as a global regime
The theoretical prediction that free-floating would reduce the need for reserves illustrates the
intellectual failure of the pro-floating partisans for internalizing the $ spillovers. The need for a
common operational tool for conducting international transactions creates centripetal forces for
using a main one or a single one. This generates important spillovers across the economies . For
small-and-medium economies, there is a clear argument for not abandoning passively their
crucial exchange-rate determination to free markets exposed to wild globalized capital flows
(fear of floating). But also for more important currencies a key-spillover is the impact of currency
substitutions upon the respective domestic demands for moneys which complicates the Central
banker mission (Mackinnon argument developed before the existence of the €). These spillovers
19
explain the absence of a genuine free-floating since most economies maintained some
exchange-rate objectives while the US almost did not intervene on the exchange-market.
With the emergence of the €in 1999, the situation changes and a genuine free-float appear
across the Atlantic, maintaining a current account equilibrium for the €area. However, the
international role of the $ was only marginally reduced.
Furthermore for emerging economies, the global instability condemns them to pro-cyclical
policies and exchange-rate shocks (through capital inflows, terms of trade effects and trade
volumes) which amplify the macro-instability. Drawing lessons from the Asian crisis of 1997 they
are tempted to oppose to free-floating for preventing domestic financial crashes, and for not
becoming dependent from the IMF and international financial markets. Therefore, they focus
their strategy upon an export-led growth for accumulating $ reserves with their saving surpluses.
Such a self-insurance option by pilling-up huge reserves (more than 25% of their GDP !) implies
enormous exchange-rate interventions and strong capital controls. This very inefficient solution
for making-up for global instability is due to the lack of trust into a collective-insurance
mechanisms (with IMF intervention), but expressed also the failure of floating-regime to become
a global one able to solve the asymmetry by internalizing – as in the textbook case – the
spillovers from the $ regime.
5) What are the main axes for building a global solution to the IMS issue?
For the sake of clarity, let’s refer first to the core-theory (developed above in section 2) which
would solve the logical issue, of a stable IMS without considering the practicalities or the political
aspects. So it should be easier to deal with the operational aspects once the final target and its
potential benefits are clearly perceived.
In theory, the solution for improving the stability of global monetary conditions is indeed very
simple (and eliminates by definition a high number of existing ideas for correcting the present
system while maintaining the $ use as international standard): let’s return to something close to
the basic Keynes’ proposal at Bretton Woods for implementing an International Clearing Union
allowed to issue a new multilateral currency for ensuring an adjustment without contractionary
bias by fixing the burden-sharing between deficit and surplus countries in a symmetric way. We
do not refer to the full Keynes's plan (1943) but to its major feature, in the spirit of the Triffin's Plan
made in 1960 to the Bellagio group: the establishment of a payment-clearing-union across
central banks ensuring a symmetrical external constraint and adjustment with a limited credit
facility for deficit countries. The Keynes/Triffin's' idea is very simple as it meant to do at the world
level exactly what was historically done at each national level by creating national central
banks as a lender of last resort entrusted to issue a national “symmetric liability” used by any
national deposit bank for clearing its final payments to the others and acceding to an overdraft
facility. As we explained at the beginning (see section 2), only a clearing-union above all
participants has the property to balance all the liabilities by equivalent assets since by balancesheet definition its debts are issued against its assets with no possibility of net foreign position.
Furthermore, this apparently tautological principle allows for creating a radical symmetry since
the international money is a liability issued by the global system and not anymore the liquid debt
of a dominant economy. All the participants face the same need to acquire international
reserves as claims upon the system and not upon a single economy. Although such a reform
seems à-priori radical, it must be observed that it is in fact more realistic than to preach for
implementing global governance able to coordinate from the centre "n" sovereign policies and
20
to enforce decisions. Indeed, it is clear that creating a multilateral reserve currency does not
need neither institutional lost of sovereignty nor significant institutional changes since it is
essentially based upon an automatic mechanism which is furthermore manageable collegially
for making it acceptable progressively by all participants.
Transposing these principles to the international monetary system leads to the key-guidelines for
transforming the IMS into an efficient system16:
1) In order to eradicate the asymmetric features of the present $ regime, there is no alternative
to introduce a genuine multilateral currency i.e. a new currency different from any national
currency and used for the settlements between central banks .
2) This multilateral currency is issued by a multilateral institution (like the IMF) or by a mere
"clearing union" formed by a significant group of economies (like the G-20) based upon an
explicit institutional commitment; we name this new international currency the Multilateral
Drawing Right (MDR) which is a closed basket made up with fixed amounts of participating
national currencies, and the issuing institution is named Multilateral Central Bank (MCB).
3) The issuance of this MDR occurs first against deposits made to the MCB by the participating
national central banks of the same fraction of their domestic assets backing their monetary
bases; contrary to the Keynes' plan and the Triffin's Plan, there is here no deposit of gold or
foreign reserves, only domestic assets yielding interest rates; as each central bank receives the
counter value in MDR at the current exchange rates, debits and credits cancel out permanently,
there is no open position in the MCB therefore it bears no exchange-rate risks; as the issuance of
MDR is made against domestic assets held by the national central banks, the received amount
of MDR substitutes for the value of these assets in the monetary base in each economy so that
there is no monetary creation: the global monetary base is not affected by these swap between
national central banks and the MCB.
4) On top of this first quantity of MDR, the MCB is allowed to issue a limited net amount of
monetary base for easing the adjustment of imbalances according to objective rules under
collegial monitoring. MCB opens to deficit economies a credit line in MDR (increasing the asset
side of MBC balance-sheet) proportional to the total deposit of the deficit economies (i.e. to
their economic and financial weight), and depositing them in their corresponding account at
the MDR (increasing the liability side i.e. increasing the world monetary base). This pure monetary
creation operates as it uses to do in any national central bank. The room for this creation of world
monetary base is voted by the board of the MBC in function of objective rules for smoothing
external adjustments while taking into account the balance of inflation risks: in case of clear
negative output gap (unemployment risk) the burden of adjustment falls on surplus countries, in
case of clear positive output gap (inflation risks) the deficit economies have to adjust first, with
intermediate, graduated options for case in-between.
5) The symmetry principle means that each economy should face the same external financing
constraint in monetary terms i.e. a case without any privilege for key-currencies. This is feasible in
the Keynes/Triffin formula by using the conventional need to pass through regulated MDR for
making final settlements between central banks. This convention imposes a symmetric constraint
wile opening a global room for manoeuvre with the net issuance of MDR through the
multilaterally regulated overdraft facility (credit lines by steps according to objective quotas).
However, in addition to agreeing across central banks the settlement between them only in MDR
and the faculty to substitute MDR for any foreign assets held by a central bank, it is necessary to
rule also (restrictively) the possibility of sterilization of interventions (as in Keynes' Plan). In this case,
when China wants to substitute MDR for $ held in US T-Bills, the Central Bank of China sells these
US T-Bills on the interbank market, shifts the product of this sale from its US banking correspondent
to its account at the FED (= a decrease in the US monetary base and an increase in the Chinese
16
This is also what Alessandrini and Fratianni propose in their Resurrecting Keynes… op. cit.
21
monetary base), then exchanges these $ liquid assets for liquid MDR at the MCB. The needed
MDR are debited on the FED account with the MCB (which could borrow them in the limit of its
credit line) and credited on the Chinese account with the MCB. The global monetary base is
unchanged and the adjustment is perfectly symmetric with a burden -sharing across both
economies, and the same exchange-rate risks for both the debtor and the creditor (the US
increases its debt in more stable MDR and China its assets in these stable MDR).
Along these guidelines, the IMS is radically stabilized into a win-win game. These guidelines mean
that international currency could not be anymore a commodity like gold, nor a national
currency, neither a group of competing key-currencies in order to be “above any national
currency” allowing for a global (multilateral) lender of last resort issuing its own liabilities as the
only symmetrical (“outside” or “n+1” or supranational) mean of international payments between
central banks. This multilateral currency (our MDR) i.e. a new form of the existing Special Drawing
Right) provides the tool the world economy very much needs for solving not only the present $
asymmetry but also the burden sharing between deficit and surplus economies in order to
prevent the risk of external adjustment being realized at the expense of internal equilibrium i.e.
without higher under-employment and without deep recession.
Indeed, a liquid asset held upon this multilateral institution is symmetrical in terms of exchangerate risks and impact upon external financing of the “n” different economies of the world. Any
economy must buy it and needs to acquire the other currency components for getting it, thus
introducing an external constraint for all with an exchange-rate risk for any debtor. But it is not
sufficient to eradicate the inner $ asymmetry because this $ asymmetry - although presently
unstable, costly and unfair – uses to solve in fact (not efficiently and not fairly) another global risk
of opposite asymmetry which could be even worse that the costs of the present $ standard: if
the US would become immediately a “normal” deficit economy (exposed to exchange-rate risk
and financial external constraint as the n-1 others) a big deflationary bias would substitute the
present inflationary risk since the FED would not be anymore able to feed the US role of “worldconsumer-of-last-resort” which has been using to play for being the motor of the world demand
since World-War-II. There is a clear case for a burden sharing between surplus and deficit
countries.
As Keynes explained clearly 70 years ago in the first version of its reform plan in September 1941,
the international financial system contained a contractionary bias in the way it imposed most of
the burden of balance-of payments adjustment on the deficit countries, rather than the surplus
countries. The external constraint is inherently asymmetric and deflationary as it tends to depress
world demand because the constraint upon deficit countries to balance their account is
stronger that the disposition of surplus economy to adjust by saving less:
“It is characteristic of a freely convertible international standard that it throws the main
burden of adjustment on the country which is in the debtor position on the international balance
of payments – that is, on the country which is (in this context) by hypothesis the weaker and
above all the smaller in comparison with the other side of the scale which (for this purpose) is the
rest of the world.”17
Therefore any spontaneous equilibrium (whatever the exchange-rate regime would be fixed or
flexible) would result in a sub-optimal level for global demand and activity. Inevitably, reserve
accumulation plays a negative impact on global aggregate demand as far as a global lenderof-last-resort is not established. The imperfect solution provided by the $ standard leading to
make the US the “deficit-economy-of-last-resort” through too expansionist fiscal and monetary
17
Keynes, John Maynard, Post-War Currency Policy (1941) reprinted in The Collected Writings of John Maynard Keynes, vol 25, ed.
D. Moggridge (Macmillan, London, 1980, p. 27)
22
policies led to an inacceptable global instability. The logical simplest solution is to introduce in
the IMS a specific mechanism that would limit and prevent (or compensate) excess hoarding of
liquid assets (foreign exchange reserves) by the surplus countries, and which would instead
encourage those countries to “spend any excessive trade surplus earnings by buying producible
from deficit nations, thereby permitting the deficit nations to work their way out of debt” 18
These possible mechanisms are only two: either the national authorities accept to coordinate
strictly their policy mixes for obliging surplus economies to spend (what we know to be totally
unrealistic or anti-democratic) or they preserve their respective legitimate sovereignty by
accepting to decide together a multilateral rule-based-world-monetary regime which would
decide in advance a burden-sharing system with incentives for preventing any bias combined
with a transparent issuance rule for the "Multilateral Drawing Rights".
To move to such a Keynes/Triffin's rational monetary order requires three innovations with respect
to the present IMS:
 first to impose merely the MDR as the only universal liquidity for international payments
across central banks; this implies to upgrade the present SDR in a genuine currency, to
transform the present IMF into a representative Multilateral Central Bank with deposit
accounts from the n central banks, managing a substitution account for converting
excess $ balance in an orderly way and organizing conditional loans with the deposits
from the surplus countries for providing liquidity to the deficit ones along some common
guidelines (conditionality).
 Second, the net issuance of MDR is decided on technical criteria by this new
Independent Multilateral Central Bank, controlled by a board of representatives of
central bankers according to objective criteria (reflecting the recent changes in world
economy) and reporting permanently to the IMF Board, and annually to the IMF general
assembly.
 Third, an adjustment incentive mechanism for making symmetrical the rebalancing efforts
and enacting some basic objective rules for preventing continual over saving by surplus
nations and disciplining the economies running excessive deficits and debts, surplus
economies would get incentives for making up for macroeconomic effects of deficitreduction measures in order to minimize the global activity costs of any trade adjustment.
In practical terms the difficulty for implementing theses first best principles in the present world
concentrates upon two questions: first how to organize the changeover from the existing $
standard to a new multilateral standard, second how to agree upon the governance scheme
and rules in charge of managing this n+1 currency.
Is really true that “the devil would remain in the details” and that such a plan would look
utopian? Not necessarily as the institutional aspects mainly already exist and the presently
growing risks for all the participants should make them more incline to cooperate in their own
interests.
Indeed, all the necessary components are already at hands but just needs to be activated in the
right direction, what should result from the common fears rising with the already-coming next
phase of the global crisis:
 The institutional basis of such a potential and ideal new standard already exists in the
present IMF status with its account-currency - the forty-years-old “Special Drawing Right”,
alias SDR, and the institutional decision-making mechanism provided by the IMF itself
which are sufficient for transforming the existing SDR into the MDR.
18
Davidson, Paul, The Keynes Solution, Palgrave-Macmillan, New York, 2009
23
 Furthermore the Article VIII of IMF status sets explicitly the objective of making the SDR the
principle reserve asset in the IMS, giving the full legitimacy to upgrading the SDR into the
MDR and making the IMF more representative, technical and endowed with adequate
tools
 The precedent of the move from the ECU basket to a fully-fledged currency shows that
upgrading the SDR into a genuine currency - the MDR - issued by a new Central Bank of
central banks is not a technical problem. The same European experience with the private
use of the ECU basket shows how to easily extend the market operations in a
supranational basket currency
 The emerging economies supported by the other LDCs are pressing the advanced ones
for rebalancing the IMF offering them an opportune win-win deal for getting a global
consensus which would allow for a safer and more rational IMS: more rebalancing efforts
from the surplus countries in exchange for more weight to them in the IMF and more
transparent rules in the issuance of the world liquidity
6) What are the operational steps able to open the way to a global IMS Reform?
It is clear that political authorities bear the full responsibility of the risky status quo and it is a
shame that the crisis has not yet led to more concrete steps towards a global reform. In order to
bring concrete positive ideas rather than blaming others, the following proposals are made.
There are two concrete experiments which could open interesting path able to ease the move
towards a more stable IMS or even to create a favourable momentum.
The first one consists – in the absence of a straight change in the SDR/IMF rules for creating a
genuine currency - in developing the use of the existing SDR both for public and private sectors
along the same kind of lines as those implemented in the framework of the European Monetary
System, when the ECU basket was adopted by the private sectors for issuing debts and making
private payments in addition to its official role in the ERM. This “parallel currency” option could –
along the same lines as the Triffin's proposal endorsed by the European League for Economic
Cooperation in May 1978 - allow for creating the momentum showing the interests and effective
demand for such a composite monetary unit which offers more stability due to the automatic
diversification away from national currencies. This would be attractive both for issuing debts,
holding reserves, billing trade flows, or managing exchange-rate policies. Significant changes
are required however as to pay an attractive interest rate on asset in SDR.
In parallel, official negotiations must be opened between those countries or Groups dealing with
IMS issues, and this could open the complementary path leading to the global reform.
The second experiment – also very Triffinian - consists indeed in acting in parallel for strengthening
monetary cooperation across emerging and LDCs economies regrouped by geographical
regions., This supporting option exploits the “regional integration” cohesion force or argument for
building regional consensus and tools, making easier a participation of LDCs in the global reform
or giving them more weight. For example, by creating themselves an alternative option of
“regional insurance” by pooling their reserves, they could move alone on their own initiative and
speed, creating so a positive break in the present status quo they cannot change by themselves
otherwise. There is an urgent need to rebalance the voices and powers in those multilateral
institutions in charge of systemic global issues, increasing the participation and responsibility of
LDCs. The main reason for giving them more weight is to restore and strengthen the legitimacy
and relevance of the multilateral institutions on which global reforms and governance will be
based. Precisely their interests to participate to and benefit from a global solution to IMS
asymmetries are higher and their potential impacts are also higher when the future is taken on
board. LDCs are more affected by the asymmetries and the world monetary waves, they suffer
24
more from global crisis since they depend more upon financial markets, have less resilience and
resources to cushion the negative spillovers which push them to amplify instability by pursuing
pro-cyclical policies.
Therefore, a global reform must involve LDCs and seize the opportunity the growing weight of
some emerging economies is offering for changing the status quo. If there is no fast agreement in
this direction, LDCs could opt for competing by creating their own provisional solution. Let’s focus
on this second kind of experiment.
7) Is there any realistic chance for LDCs to contribute with an efficient reaction?
Given the systemic and multilateral characteristics of the problem the solution can only be
systemic and multilateral, which for emerging and other LDCs requires a leap in regional, as well
as inter-regional and multilateral cooperation. Therefore, the answer to the question, what can
LDCs do is simple: they will only have a voice as long as they agree on common proposals, and
the realistic way is to start at the regional (and sub-regional) level: ASEAN+3, LAC, Sub-Saharan
(with ECOWAS, WAEMU, EMCCA), MENA... The idea is not so much to believe that a small LDCs
regional bloc would be able to impose reforms by itself, but to draw the attention of third regions
or countries, especially the EU or powerful emerging economies like China and India for forming
coalition at multilateral level. This could result in different ways but even in the realistic case some
regional proposals would not result in effective coalition for multilateral reforms, the fact to get a
common position and proposal should open the possibility to create monetary regional tools and
arrangements that would lead to a progressive alternative to the $ standard. Indeed, creating a
pool of reserves or a set of swaps could offer some advantages – a regional insurance - with
respect to the individual insurance of merely accumulating $ reserves. By creating mutual trust
and cooperation across national authorities, such a regional arrangement could lead – under
strict conditions - to a regional monetary system able to issue its own reserve currency and to
monitor national macroeconomic policies at the regional level. After demonstrating its usefulness
and efficiency, such a regional scheme could serve as a basis for a global reform, for example
by being an intermediary of the IMF operations. As this formula would extend to other regions, a
partial decentralization of the IMF could be implemented, or rather a federalization of the
regional arrangements under a new IMF becoming a central hub with a more representative
decision-making process and a better ownership.
The double hypothesis of this experiment is to believe in the capacity of conceiving a collegiate
response per sub-region or regional bloc, starting with those where institutional structure and
political motivation allow for regional debates.
Although the method is valid for any region and that all should be interested, it seems à-priori
easier to start with two regions already engaged in some regional monetary projects or involved
to some degree in monetary cooperation : Latin America and the Caribbean (LAC) and
ASEAN+3 (China, Japan and South Korea). However, in the following analysis we deal only with
the LAC region, because it is benefitting from the bi-Annual EU/LAC Summits, which could
provided a strategic catalyst for launching a general movement, attracting first the ASEAN+3
which would have a lot of interests in joining or influencing an EU/LAC common position. The
remaining blocs/regions should be attracted too once proposals addressing the IMS at
multilateral level will emerge.
So we adopt the hypothesis that LAC could start to work on common position by implementing
this strategy through the Summits with the EU. Obviously, this belief faces some potential
arguments, and we include the most obvious counter arguments in brackets [ ]:
 First, there could be the belief that it would be more realistic for sovereign LAC countries
to react on their own, [but this would mean that it wouldn’t make any sense to
25
participate in the Summit or in regional or subregional mechanisms, and abandon the
commitment to regional or subregional integration].
 Second, given that not even the EU could resist with a single currency, it would be very
pretentious for LAC, which lacks a comparable institutional structure, to have an effective
impact, [but this would imply precisely to forget the effects of the recent crisis, the risk of it
repeating, and above all, to deny that the EU+LAC would have a greater strategic
weight, which could attract other regions and re-balance multilateral organizations].
 Third, in general, pessimists could always argue that it is a Utopia to devote time to this
topic, in which LAC has no a-priori comparative advantage, and it would be better to
use this time to pursue a better integration, forcing its members to adopt the same
policies [but this would mean forgetting the effective dynamics of regional and biregional collegiate work, and the automatic advantages it would have for national
authorities that participate in regional and bi-regional cooperation for their own national
objectives and policies, even if the desired global systemic changes are not achieved].
Although at more general level it may seem naive to believe in cooperation between LAC
countries, it is not so after making lucid analysis of the mistakes made in the LAC region. Anyway,
this assumption is less simplistic and illusory than requiring all to think the same way, or for all to
adopt the same policies or ideologies.
According to previous analysis19, one first error that was made and continues to be made in the
region is not creating the conditions for a permanent effective dialogue on monetary and
financial issues, since national experts do not work together systematically, but through irregular
narrow mandates that fluctuate according to the political situation of other agendas. A second
error (combined with the first) is to act in isolation (country by country) vis-à-vis creditors (whether
IFIs such as the IMF, WB, IDB, or through globalized financial markets) and not value the regional
dimension as an instrument for emancipation. This individualistic attitude seems rational in a
context of national sovereignty, given a lack of effective integration (the prisoner dilemma20);
however, at the root of the crisis, the region cannot wait for a full integration to recover
manoeuvring space before globalized financial markets. On the contrary, it is possible and
necessary to create either a regional public asset, through sovereign regional cooperation in
order to improve the credibility and "rating" of each country, by agreeing to an objective and
serious monitoring method according to the best technical standards. Improving transparency
allows for the creation of a valuable regional public asset, an added value that no country can
create alone, given “externalities”; that is, if the neighbours are in a bad situation, the country will
also be affected, whereas if there is a proper and serious regional mechanism, a concrete
incentive is generated to ensure a minimum convergence that improves all levels of credibility.
Based on this methodology, a sequential proposal could be presented as a regional plan of
action, which could be adapted to submit it to the Heads of State and Government in order to
maximize the probabilities of having the interest of the EU in the process of preparing for the
Summits.
19
See Christian Ghymers, contribution to the XX Meeting of Economists on Globalization. Havana, March 2008, as well as UN, book
N° 82, 2005.
20
See C. Ghymers, Redima, op. cit.
26
8) A prior regional reaction in LAC to reinforce macroeconomic convergence of the
economies and gain credibility vis-à-vis the EU and globalized markets
Thus, the proposal to be developed by regional institutions - like SELA a regional consultation and
coordination organization21 and CEPAL/ECLAC 22 the UN regional think-tank – lies in the available
pragmatic formulae (without significant costs) partially inspired on the REDIMA method23
(approved at the time by the Finance Ministries and Central Banks of Latin America) which was
already introduced at a previous SELA regional meeting on LAC-EU relations, and whose
efficiency was proved by ECLAC. To this known experiment, a financial and monetary
cooperation proposal is added, in sequential stages that the corresponding national authorities
of each SELA Member State could agree on, leaving clear that their implementation could be
progressive or fast, according to political will:
 First, to implement a permanent collegiate monitoring mechanism (at the regional level)
of exchange rates of national currencies.
 Second, to build consensus-based regional positions regarding the ideal adjustments to
preserve common interests and reputation, while creating the progressive foundations for
regional public asset, that is, to produce a collective added value in terms of credibility
(a "win-win game").
 Third (although it could be launched simultaneously with the previous stage, provided
there is sufficient consensus) to structure the regional public asset as a true "Regional
Monetary System" (RMS) institutionalizing the macroeconomic monitoring role to
accelerate the "win-win game" by influencing on foreign currency markets in the region,
national policies, and financial markets. Specifically, this regional system could –
obviously, if it is coherent and managed by serious technicians, with the explicit mandate
of national and regional authorities to protect common interests – compensate the lack
of credibility due to less experience and lower institutional development in many of the
countries of the region. This RMS would thus become the privileged intermediary of
creditors and IFIs (IMF, WB, IDB) benefitting all, even the creditors, since it would be much
more legitimate, credible and efficient than the staff at the IFIs in Washington. This stage
would allow the intermediary to show interest, which would lead to the next stage.
 Fourth, to decide that the RMS will be the mandatory channel for the IMF in the future,
acting with a single voice and on behalf of the whole region, negotiating the possibility
that IMF stocks and resources for countries in the region go first through the RMS,
transforming the IMF into a Central Hub ("federalization of the IMF"). This could be copied
by other regions like Asia and Africa, since in Europe, the MEU already has this role with
the 16 members of the euro zone.
In fact, the purpose is to adapt some elements of the European method to the Latin American
and Caribbean situation, by using universal principles to arrive to an economic convergence
and a regional monetary and financial integration.
For this reason, the interests of the EU and LAC are directly convergent and tangible, fostering
the strategic association that the diplomacy of bi-regional Summits intends to achieve. In
concrete, the RMS for Latin America and the Caribbean must first be created, to then use it in
the bi-regional dialogue of the Summits, so as to find common positions with a view to reform the
IFIs and the IMS in multilateral forums.
21
According to the Articles of the Panama Convention establishing SELA, one of the two main objectives of the organization is “To
provide a permanent system of consultation and coordination for the adoption of common positions and strategies on economic and
social matters in international bodies and forums as well as before third countries and groups of countries”.
22
United Nation Economic Commission for Latin America and the Caribbean , based in Santiago, Chile
23
See C. Ghymers, Redima, op. cit.
27
9) Operational modalities to create the LAC Regional Monetary System
The strategy proposed is to undertake a regional macroeconomic dialogue in LAC, based on
already existing mechanisms at the subregional level. To this end, it is advisable, first, to separate
the technical level (macroeconomists) from the political level (Foreign Affairs Offices, Ministries of
Finance, and Heads of Government), by having two different cooperation mechanisms:
 The first one is an informal dialogue that places national experts in a closed (confidential)
network for a prior technical talks; the network is moved and organized by a small
Permanent Secretariat formed by high-level independent economists, hired by
competition; the national network of experts together with its Permanent Secretariat
would form a “Macro Monitoring Committee” (MMC), to coordinate equivalent groups if
they exist at the subregional level, such as the Macro Monitoring Group (MMG) in
MERCOSUR, the Permanent Technical Group at the CAN (PTG), etc. The purpose is to
prepare the grounds for decisions, and launch a closed door, non-binding cooperation
dynamics (that is, at this level no national authority would be subordinated), which looks
for convergences in analyses and interests, and discusses possible concrete proposals of
common interest.
 The second one is to use already existing regional consultation, meeting and decisionmaking mechanisms that formally involve national authorities (Finance Ministers Council,
and Central Bank Presidents Committee), but exploiting the technical results of the
informal dialog (MMC) as the basis for discussion.
Second, the macroeconomic cooperation thus established, by jointly monitoring the evolution of
exchange rates, will quickly and inevitably lead to become more aware at all levels of the
interdependences and mutual effects of national policy sovereign decisions. This will provide
opportunities for common actions when they produce positive effects for all, and improve the
manoeuvring space of the region, quickly leading to envisage a third stage of cooperation.
Third, based on a collegiate dynamic, start building progressively a true formal " Regional
Monetary System" (RMS), structured on the Macro Monitoring Committee (CMM) as the body
that makes proposals, which are decided upon by a High-Level Macroeconomic Authority
(HMA), made up by the meeting of Finance Ministers Council, and the Committee of Central
Bank Presidents of LAC. The important idea of this High Authority is to group (or gather in a
collegiate manner, whose forms of decision-making are yet to be defined) already existing
authorities, whether at the subregional level, or in the context of the different alternative
mechanisms for monetary and financial cooperation in the region. The idea is not to replace
existing mechanisms, but to up open new opportunities to strengthen and expand them, through
a structured channel to take advantage of their own merits and experiences.
In fact, the idea of the progressive creation of a regional monetary system corresponds to the
converging trend among all countries, given the world crisis and its causes, to agree on the need
to direct efforts towards the regional arena, while making efforts to achieve a global reform in
parallel. It implies to reduce as much as possible the vulnerability of the region before the defects
of the present international order, and generate a greater degree of autonomy. At the same
time, we recall here the arguments presented in previous works, supporting a re-launching of
regional integration through the macro-monetary axis, based on the virtuous circle it would
provide through mutual and complementary progress through monetary, financial, and real links
(trade, social, and citizenry).
Therefore, it is essential to structure already existing foundations to take advantage of the
accumulated experiences and institutions in the area of regional monetary and financial
28
cooperation. This implies opening up the possibility of achieving a simplification or even an
eventual unification, in order to have a greater effect, so that the region benefits from the
economies of scale if that is the case. To this, the agreements adopted within the framework of
the High Macroeconomic Authority will contribute in a decisive manner.
Regarding the essential components to be incorporated to the creation of said Regional
Monetary System (RMS), recent studies by the Permanent Secretariat of SELA identify three basic
elements:24
a)
A Regional Development Bank (RDB)
This development bank can have many forms, and is still to be agreed upon. However, we
propose the simple idea of starting with already existing subregional Banks and extend them, as
a new political federation, to non-Member States, using new modalities yet to be agreed upon.
This does not imply imposing what already exists on new members, or competing with them, but
rather opening up a space for cooperation in areas defined by mutual agreement.
This Federal RDB would be characterized, among possible modalities, by the following:
- A collegiate decision making mechanism at the level of the High-Level Macroeconomic
Authority (HMA) of the Latin American and Caribbean RMS, upon a proposal made by the
Macro Monitoring Committee (MMC)
- A capital contributed by the countries and with State guarantees
- Issues AAA debts and loans them to members under the strict condition that Member States
participate actively in the regional macro monitoring of the RMS (with the MMC and the HMA)
- Organizes national bond swaps for debt towards the RDB, creating two categories of national
debts: (i) the prize debt, which receives the federal guarantee of the RDB, when the national
economy respects the macroeconomic criteria set by the HMA proposed by the technical
MMC; this debt has priority over the non-prize debt, and has a better rating; that is, it offers a
lower "spread" (a lower interest) than normal sovereign bonds, which is a powerful incentive for
each participant that complies with the regional collegiate discipline; the rest of the national
foreign debt has a lower rating (a higher "spread") and serves to measure the credibility of the
policies implemented by that economy, according to market measurements.
b)
A Regional Contingency Fund (RCF)
This fund, first created through reserve contributions from LAC countries, would serve as mutual
support and defence of its members during transitory liquidity crises, or with predefined transitory
effects (specific terms of exchange). The idea is to have more stability in the regional integration
space, and reduce dependence on external and multilateral sources, when the national or
regional circumstances and interests grant it. Obviously, this mechanism would allow a greater
autonomy in defining criteria and conditions to use these common regional funds.
c)
A formal Regional Monetary Area with a true Regional Monetary Fund (the RMF)
Based on the implementation of the RCF, there would be a connection between this regional
management of common resources with existing monetary compensation schemes and with
payment in national currencies, to achieve a true regional monetary fund. This RMF would be the
objective of the regional monetary area.
To create this RMF, it is essential to take advantage of prior experiences in that sense, both in
Europe as well as in other areas and regions. Also, the various monetary cooperation
24
See SELA (2009). Latin American and Caribbean experiences with Monetary and Financial Cooperation. Critical Balance and
proposals for actions with a regional scope (SP/Di No. 10-09). This document is the basis for discussions that are taking place at the
Regional Meeting “Reform of the International Financial Architecture and Monetary and Financial Cooperation in Latin America and
the Caribbean”, held recently at SELA headquarters, Caracas, 8 and 9 April 2010.
29
mechanisms that have been fostered at different levels in the region are an essential reference
when designing and formulating the essential components that must be incorporated in the
construction of said area. Among these mechanisms, the Agreement on Reciprocal Payments
and Credits of ALADI, the Eastern Caribbean Currency Union, and the Local Currency Payment
System between Argentina and Brazil, such as the Regional Compensation Unitary System, once
formally in operation, show a wide range of contributions that can be used from a different
perspective and with differentiated levels of complexity.
From this experience, it is necessary to start by creating a Regional Compensation Chamber in
local currencies, saving the use of foreign currencies, and complemented with the creation of a
Common Account Unit, based on a basket, but with mechanisms to guarantee their external
value. A possible advantageous way would be to issue Regional Drawing Rights (RDRs) in a
common monetary unit, a true regional monetary creation that allows for mutually facing
payment crises risks, making short term loans with conditions, and enjoying a regional domain to
be shared among its members.
The RMF has the same technical role as the IMF. It has a technical team at the Permanent
Secretariat, submits its analysis to the MMC, and the decisions are made by the High Macro
Authority of the RMS for LAC, based on the proposals presented by the MMC.
When the HMA so decides, or by sovereign initiative of a Member State, this RMF helps the
authorities of a country needing adjustment negotiate the letters of intention and the conditions
with the IMF staff and its Board. In time, the seriousness and efficacy of the RMS will show the IMF
that it is more convenient to decentralize its conditional loans in favour of the RMS, using
modalities to be defined along the way. Along this way, the Board constituencies can also be
modified,25 and negotiate a collegiate representation of LAC countries through its RMS
representatives.
10) Open a permanent macro-financial sector dialogue with the EU, in the context of the
preparation of the Santiago Summit, on the reform of the IMS and the IMF
For the aforementioned reasons, the Santiago Summit could have been a historic opportunity to
strengthen cooperation, so that LAC is understood not only in Santiago and Brussels, but also in
multilateral institutions, and to be in a better position to face the debates on the reforms to the
IMS and IMF.
In the context of the follow-up to Madrid and the preparation of the Santiago one, the Chair of
the next Summit should use the possibility of adding sector dialogues to introduce a strategic
topic of common interest: the reform of the world monetary and financial system. The stages for
this initiative would be the following: The Chair of LAC would take the initiative – upon request of
the Heads of State and Government of LAC – to call upon regional economic organizations
(SELA, ECLAC, and experts from subregional organizations) to create a permanent LAC workshop
(with work groups formed by experts from all LAC countries) on systemic reforms. This technical
workshop will examine SELA’s proposal to organize a Regional Monetary System, as its Permanent
Secretariat is planning to do on 8 and 9 April 2010, complemented by the suggestions of the
countries, as well as by the ideas presented above. This technical workshop will make proposals
to policymakers to coordinate their positions and prepare regional proposals that once agreed
upon, will be presented at the bi-regional sectoral dialogue with the EU.
The mandate of the LAC Chair at the Summit would include making all arrangements to prepare
the opening of a LAC-EU macroeconomic sector dialogue, and the permanent LAC workshop
25
Generally, LAC countries belong to geographical “constituencies”, along with countries from other regions. Since a deep change
must be made to reflect the growing importance of emerging economies, and to unify the representation of the euro zone, LAC must
be ready with its own formula for regional representation.
30
would make all the technical contacts in this sense to attract the interest of experts in charge at
the EU (European Commission, European Central Bank, Economic and Financial Committee, and
Member States). Informally, the workshop with the European peers would find possible areas
where common positions between LAC-EU could already be created.
Due to the impact of the crisis, and the commitments already made by policymakers at various
levels in Europe, there is consensus on the need to have this type of systemic dialogue. Based on
this strategic topic, it would be easier to make a proposal for a bi-regional macroeconomic
dialogue, with direct implications on the quality of cooperation between LAC-EU. In this
perspective, consideration could be given to the possibility of orienting part of the European
cooperation to strengthen the regional financial architecture in Latin America and the
Caribbean.
The idea of a new bi-regional cooperation in the macro-financial arena could stir many interests
on both sides. For LAC, as has been explained, it would be a great opportunity to gain credibility,
not only vis-à-vis its European partners, but also in financial markets and before institutional
creditors. For the EU, it would mean great progress in terms of coherence in its foreign strategies,
by creating a channel for structured and transparent access for those responsible of
macroeconomics. For both parties, instead of getting dispersed in bilateral relations, this type of
sectoral dialogue would generate important synergies, due to the double collegiate dimension
that the bi-regional nature grants:
 First, as has already been stated, to take exchanges to the bi-regional level, it is
necessary to achieve prior coordination at the regional level (and also subregional in
LAC). For LAC, this is a very significant institutional and practical leap, which would allow
for a detailed implementation of the above-mentioned plan of action. Its materialization
– even a partial one – would have immediate and important effects on the quality and
credibility of the national policies of the region. The REDIMA experiment at ECLAC
already showed the usefulness of cooperation through dialogue among peers, but it is still
necessary to have a generalized and permanent implementation; and the Summit offers
that, almost at no cost and even without making institutional changes. At the EU, since
there are already coordination mechanisms, progress is apparently lower; however it is
real since it allows for an expansion to the outside, where the EU has not been able to
speak with a single voice.
 Second, the perspective of reaching common positions on the issue of the IMS and the
reform of the world financial architecture, would give both regions an incentive to
deepen cooperation, to achieve an attractive weight that cannot be compared to the
present status-quo. Other regions could also enter the game, modifying the world
balance in multilateral organizations.
 Third, by placing the peers of every region in an effective dialogue with tangible
challenges for their current policies, both parties gain added value by reducing
uncertainties as regards national policies and unilateral actions, by identifying more easily
common interests, increasing their weight vis-à-vis third parties and the IFIs, and gaining a
space for the support of their citizens; and thus they will be able to prove that a strategic
partnership makes sense and has tangible effects. The bi-regional dimension in turn would
stimulate intra-regional dialogue, which would become a crucial necessity, thus
improving the quality of prior coordination, and creating a powerful emulation that will
systemically bring together all macroeconomic decision-makers, as can be proven in the
experiences available in Europe and other regions.
As can be perceived, this type of sectoral dialogue is not only about organizing oneself in order
to participate in institutional reforms (IMS, IMF, etc,) but also about obtaining tangible and
31
immediate advantages in the macro-financial arena. One of the attractive perspectives that this
type of collegiate work would open up in two simultaneous dimensions (intra- and inter-regional)
is the recovery of margins of freedom in capital markets. The possibility of achieving a
simultaneous regional and bi-regional consensus on sensitive issues for capital flows and
exchange rates opens up the possibility for common positive actions for both regions, with visible
impact for citizens. Moreover, this type of sectoral dialogue channelled toward common actions
is a powerful incentive for LAC countries to strengthen their institutions and governance, while EU
countries would improve the coherence of their own policies, particularly towards LAC.
There is a lot of potential along these lines. Specifically, once an effective macro dialog is
achieved, and there is mutual trust between the peers in charge, there could be a common
monitoring of the macroeconomic evolution of both regions, from which an exercise of
convergence of each region could be mutually discussed. These technical exchanges could
open up opportunities for bi-regional support for national policies of countries requesting it. In the
case of countries with acute difficulties or crisis, the bi-regional macro monitoring group would
become a credible arbitrator – if there is consensus – to issue information for financial markets,
other creditors and economic actors. Such communications can generate a great added value
in terms of credibility, because they would attract the attention of the markets. This is a
considerable help for healthy policies in countries that are on the path towards adjustment. The
effectiveness of these common actions would lead to the creation of regional mechanisms for
financial assistance, conditioned to the backing of the LAC monitoring group, initially, and as the
EU or its countries provide funds, it would also be subject to the critical backing of the bi -regional
monitoring group. Obviously, the work of these monitoring groups would have a direct impact on
the analysis of the IFIs, and on the agreements with the IMF; and in this way, they could be
considered in the above-mentioned sense, to transform the IMF into an entity that would
federalize regional monetary systems.
*-*
32

“How to create a more symmetrical system that provides a... control of international liquidities” Christian Ghymers

Transcription

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