Re: Imposing the US Dollar on Canadacy

[Basil Moore <bjm@xxxxxxxxxxxxxxxx>]

Hi Barkley

Greeting and best wishes. I am here, in South Africa, fully occupied with
trying to finish my book. But my nose is occasionally pressed against the
PKT pane. You have tempted me to come out of retirement:

My central point on dollarization was a sudden insight that came to me
during a long and heated discussion with Paul D. I am not sure Paul whether
has yet accepted this argument? Paul?? We were talking about why regions of
a single country do not have balance of payment problems. Paul was arguing
the importance of centrasl government transfers of various sorts. Then it
came to me:

When a country dollarizes, it ceases completely to have balance of payment
problems vis-a-vis the US, irrespective of differences between the two
economies. i.e. it becomes like Connecticut and the rest of the States.

As the number of countries who dollarize increase, so their balance of
payment problems decrease. If all countries were to dollarize, we would
have a single currency, and current account imbalances would no longer be
of any significance. Keynes and many others have argued the case for a
world central bank and a world currency,,e.g. Bancor. But there is
absolutely no political possibility of countries agreeing to form a world
central bank and a world currency in this century, so dollarization is the
second best solution.

I believe most of us think, a la Mundell, that countries must have
reasonably similar  economies to be successful members of a single
currency, i.e. that we can define an "Optimum Currency Area". This is the
key point. There is no significance to an OCA.  We would all agree that
economies can differ widely, and still benefit from trade. This is all that
is necessary, it is the same principle.

1.) There is the fact that all areas using the same currency must have a
the same interest rate. This initially appears to be a huge problem for
stabilization policy. But on reflection, it is not insuperable. Providing
the US, as the leading country, keeps interest rates permanently low, all
regions would benefit. Monetary policy cannot be designed for a single
region. But this is the case within economies. Countries would have to use
countercyclical fiscal policy to stabilize their economies.

2.) There is also the question of seigniorage, which is absolutely huge
quantitatively, but relatively minor to eg. GDP,. It would be easy to
design schemes to share total seigniorage gains in proportion to an agreed
formula, e.g. GDP, or population.

The key insight is that balance of payment deficits or surpluses are SOLELY
a monetary problem. The easiest way to see this is to imagine a single
large branch bank. Its individual branches will have deficits or surpluses.
But this is of absolutely no significance or importance to the bank, since
for all its branches together, the total must balance.

Separate currencies make current account deficits important, so that a
deficit branch is forced somehow to achieve a current account balance. The
resulting restrictive policies undertaken give a deflationary bias to the
world economy.


I am putting this point of view into the open economy section of my book.
All criticisms are greatly appreciated.

All best

Basil



At 04:23 PM 4/22/01 -0400, you wrote:
>       Well, I have just looked at some of the
> speeches on this website and they are hardly
> uniform in support of dollarization.  Guillermo
> Calvo, who is now Chief Economist of the
> Inter-American Bank, I believe, or some such
> position, says that it is only viable if there is a
> "lender of last resort," bringing up indeed the
> spectre of a hemispheric equivalent of the
> European Central Bank.   It is exactly such
> concerns that lie behind the doubts and skepticism
> of Alan Greenspan.
>      Barry Eichengreen notes that it is only viable
> after "a long period of internal reform" beforehand.
> He cites positively Argentina as an example.  This
> conference was over a year ago, and of course
> Argentina has really fallen in the soup more recently,
> and as I have just noted to the list, has apparently
> now moved away from its link to the dollar.
>      BTW, although he has been laying low in this
> discussion, at last summer's Post Keynesian Workshop,
> the estimable Basil Moore was advocating rather
> vocally dollarization.  Are you out there, Basil?  As a
> non-American, would you like to defend it in the face of
> all these accusations of imperialism against Americans
> who say that it is not necessarily all the slime base of evil?
> Barkley Rosser
> ----- Original Message -----
> From: "Alan G. Isaac" <aisaac@xxxxxxxxxxxx>
> To: <pkt@xxxxxxxxxxxxxxxx>
> Sent: Friday, April 20, 2001 2:37 PM
> Subject: Re: Imposing the US Dollar on Canadacy
>
>
> > > "Alan G. Isaac" wrote:
> > >> You can be introduced to part
> > >> of the discussion by reading the free papers at
> > >>    http://www.dallasfed.org/htm/dallas/events/dollarspeech.html
> >
> > On Fri, 20 Apr 2001, John O'Donnell wrote:
> > > Thank you, I've read the speech by Connie Mack and I am
> > > underwhelmed by his arrogance. The rest will have to wait.
> >
> > But John,
> > Why on earth would you read a *Senator's speech* to
> > learn about *economics*??
> > Pick one or two of the economists, please.
> > Alan Isaac
> >
> >