Re: Instead of DolLarization

["Gunnar Tomasson" <tomasson@xxxxxxxx>]

Henry:

I agree with the general thrust of your argument - it represents an
indictment of any approach to world monetary reform that makes-believe that
something short of radical restructuring of current world monetary
arrangements is called for.

Gunnar


----- Original Message -----
From: "Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>
To: <pkt@xxxxxxxxxxxxxxxx>
Sent: Saturday, April 21, 2001 8:02 PM
Subject: Instead of DolLarization


> The current international finance architecture is based on the dollar as
>
> the sole reserve currency.  The dollar is a monetary instrument that the
> US, and only the US, can produced by fiat.  The US has turned the dollar
> into a fiat currency ever since 1971 when Nixon took the dollar of the
> gold standard ($35/ounce) agreed to at the Bretton Woods Conference at
> the end of WWII.
>
> World trade is now a regime in which the US produces dollars and the
> rest of the world produce things that dollars can buy.  The world's
> interlinked economies no longer export to capture comparative
> advantage.  They are forced to export to capture needed dollar reserves
> to sustain the exchange value of their domestic
> currencies.  To prevent a fall in the exchange value of their
> currencies, the world's central banks must acquire and hold a
> corresponding amount of dollars, the higher the market pressure to
> devalue a particular currency, the more dollars its central bank must
> hold.  This creates a built-in support for a strong dollar which in turn
>
> forces the world's central banks to acquire and hold more dollars,
> making it stronger.
>
> By definition, dollar reserves must be invested in US assets, creating a
>
> capital accounts surplus for the US economy.  The US capital account
> surplus in turn finances the US trade deficit.  A strong dollar policy
> is in the US national interest because it keeps US inflation low through
>
> low cost imports and it makes US assets expensive for foreign
> investors.  This arrangement, which Greenspan calls US financial
> hegemony, has kept the US economy booming in the past decade in the face
> of recurrent financial crises in the rest of the world. It has distorted
> globalization into a race to the bottom process of exploiting lowest
> labor cost and environmental abuse worldwide to produce for export to US
> markets in quest for the almighty dollar.  The adverse effects of this
> type of globalization on the developing economies are obvious.  It robs
> them of the meager fruits of their exports and keep their domestic
> economy starved for needed capital, as all surplus dollars must be
> re-invested in US treasuries to prevent the collapse of their domestic
> currencies.  The adverse effects of this type of globalization on the US
> economy are also becoming clear.  In order to act as consumer of last
> resort for the whole world, the US economy has been pushed into a debt
> bubble that thrives on conspicuous consumption. The unsustainable and
> irrational rise of US equity prices, unsupported by corporate revenue or
> profit, had been merely a devaluation of the dollar. The current fall in
> equity prices merely reflects a return to a more rational value of the
> dollar.
>
> The world economy, through technological progress, has entered a stage
> of over-capacity in which management of aggregate demand is the obvious
> solution. Yet we have a situation in which the people producing the
> goods cannot afford to buy them and the people receiving the profit
> cannot consume more of these goods.  The size of the US market, large as
> it is, is insufficient to further absorb the continuous growth of the
> world's new productive power.  For the world economy to grow, the whole
> population of the world needs to be allowed to participate with its fair
> share of consumption.  Yet economic and monetary policy makers continue
> to view full employment and rising fair wages as the direct cause of
> inflation
> which is deemed a threat to sound money. The Keynesian starting point is
> that full employment is the basis of good economics.  It is through full
> employment at fair wages that all other economic inefficiencies can best
> be handled, through an accommodating monetary policy.  Say's Law (supply
> creates its own demand) turns this bias up side down with its bias
> toward supply/production.  Monetarists in support of Say's Law thus
> develop a bias against inflation, claiming unemployment to be a
> necessary tool for fighting inflation and that in the long run, sound
> money produces the highest possible employment level. It is hard to see
> how sound money can ever lead to full employment when unemployment is
> necessary to maintain sound money. Within limits and within reason,
> unemployment hurts people and inflation hurts money.  And if money
> exists to serve people, then the choice becomes obvious.  Without global
> full employment, the theory of comparative advantage in world trade is
> merely Say's Law internationalized.
>
> No single economy can profit for long at the expense of the rest of the
> world in this world of interdependence. There is an urgent need to
> restructure the global finance architecture to return to exchange rates
> based on purchasing power parity, and the world trading system to be
> based on true comparative advantage to ensure global full employment and
> rising wages and living standards.   The key starting point is to focus
> of the hegemony of the dollar.
>
> To save the world from impending disaster, we must:
>
> 1) promote an awareness among global policy makers that excessive
> dependence of export is self destructive to any economy;
> 2) promote an new global finance architecture away from the hegemony of
> the dollar;
> 3) promote the application of the State Theory of Money to provide
> domestic capital for domestic economic development and to free
> developing economies from the tyranny of dependence on foreign capital;
> 4) restructure international economic relations toward aggregate demand
> management;
> 5) restructure world trade towards true comparative advantage in the
> context of global full employment and a world wage standard.
>
> Henry C.K. Liu
>
>
>