Re: global chartalism and/or Stiglitz?

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

Stiglitz proposal is a non-starter.  The key monetary injustice facing the emerging economies is the tyranny
of an external currency, against which the currencies of these economies must measure their exchange value.
The IMF SDRs are a mere front for dollar hegemony.  It is not a replacement of the dollar.

The existence of a common currency in a society is what makes possible the rich and poor.  without a common
currency, people of different economic conditions merely live differently, not necessarily better or worse
than others. A common currency with universal purchasing power render some whose income or asset are priced
lower than others to become poor.  The same is true in a community of nations.  Less developed nation are
not necessarily poor except when measured with an international currency.  Currency exchange rates is what
make a plumber in Africa easrning 100 times less than a plumber in the US for the same work. The way to help
the "poor" economies is to teach them to operate without needing to submit to the tyranny of exchange
rates.  The world economy will operate fairer and better if all loans are denominated in local currencies.
Then there is no need for SDR's exchange rates and interest premiums, etc.  It is common sense.  What
business does anyone have to borrow foreign currency denominated
loans for local investment except to commit fraud and corruption?

In 1969 the IMF, two years before Nixon abandoned the gold standard for the dollar as agreed to in Bretton
Woods in 1945, created the SDR, an artificial currency unit defined as a basket of national currencies. The
SDR is used as an international reserve asset, to supplement members'
existing reserve assets (official holdings of gold, foreign exchange, and reserve positions in the IMF). The
purpose is to assign value to the world's currencies in relation to those of the rich nations. The SDR is
the  IMF's unit of account: IMF voting shares and loans are all denominated in SDRs. The SDR serves as the
unit of account for a number of other international organizations, including the WB. Four countries, US,
Britian,  Germany and Japan, maintain a currency peg against the SDR. Some private financial instruments are
also denominated in SDRs. The SDR's value is determined using a basket of currencies.  The basket is
reviewed every five years to ensure that the currencies included in the basket are representative of those
used in international transactions and that the weights assigned to the currencies reflect their relative
importance in the world's trading and financial systems. Following the completion of the most recent regular
review of SDR valuation on October 11, 2000, the IMF's Executive Board agreed on changes in the method of
valuation of the SDR and the determination of the SDR interest rate, effective January 1, 2001.

Before the Second Amendment of the Articles of Agreement of the IMF in April 1978, the role of gold in the
international monetary system was central and pervasive. The Second Amendment contained a number of
provisions that, in combination, were intended to achieve a gradual reduction of the role of gold in the
international monetary system and in the IMF.

The method of selecting the currencies in the basket and the weights assigned to each currency were revised
to take account of the introduction of the euro as the common currency for a number of European countries
and the growing role of international financial markets. The present criterion of selecting currencies of
those members with the largest exports of goods and services has been extended to include exports by a
monetary union that includes IMF members, with exports among the members of the union excluded. A second
selection criterion was also
introduced to ensure that the currencies included in the SDR basket are among the most widely used in
international transactions. Under this provision, the IMF must find that a currency is "freely usable",
meaning that it is, in fact, widely used to make payments for international transactions and is widely
traded in the principal foreign exchange markets.  This of course puts at a disadvantage economies that do
not export, but otherwise healthy.

The weights assigned to the currencies in the SDR basket are based on
(i) the value of the exports of goods and services of members or monetary unions and
(ii) the amount of reserves denominated in the respective currencies which are held by other members of the
IMF.

The IMF has determined that four currencies  (the U.S. dollar, euro, Japanese yen, and pound sterling) meet
both selection criteria for inclusion in the SDR valuation basket for the period 2001–2005. These
currencies have been assigned the weights based on their roles in international trade and finance. The value
of the SDR in U.S. dollar terms is calculated daily as the sum of the values in U.S. dollars of the specific
amounts of the four currencies, based on exchange rates quoted at noon at the London market. The value of
the SDR is posted on the IMF's website
(http://www.imf.org/external/np/tre/sdr/basket.htm).  Thus the SDR is merely a derivative of the dollar,
denominated in dollars.

 The SDR interest rate is determined weekly and is based on a weighted average  of representative interest
rates on short-term debt in the money markets of the countries whose currencies constitute the SDR valuation
basket. At present, the rates and instruments are the yields on three-month Treasury bills for the United
States and the United Kingdom, which continue to serve as the representative interest rates for the U.S.
dollar and pound sterling respectively. In keeping with the shift to a currency-based system of SDR
valuation, effective January 1, 2001, the representative rate for the euro area became the three-month
Euribor (Euro
Interbank Offered Rate), which replaced the national financial instruments of France and Germany. The
representative interest rate for the Japanese yen was changed from the three-month rate on certificates of
deposit to the yield on Japanese Government thirteen week financing bills.

Currency Weights in SDR Basket  (In Percent)

U.S. dollar           45
Euro                    29
Japanese yen       15
Pound sterling     11

On August 14, 2001
US$1 = SDR 0.787792
SDR 1 = US$ 1.269390

SDRs are created through a process of allocation. There are two kinds of allocations:

General allocation of SDRs: Participants are allocated SDRs in proportion to their quotas in the IMF to meet
the long-term global need, as and when it arises, for a supplement to existing reserve assets. Decisions to
allocate SDRs are made for basic periods of up to five years. A decision to allocate SDRs is made by the
Board of Governors on the basis of a proposal by the
Managing Director with the concurrence of the Executive Board, and requires an 85 percent majority of the
total voting power. SDRs were first allocated to members participating in the SDR Department in 1970. The
most recent allocation, made on January 1, 1981, brought the cumulative total of SDR allocations to SDR 21.4
billion.

Special one-time allocation: In September 1997, the IMF's Board of Governors approved the proposed Fourth
Amendment of the Articles of Agreement of the IMF to allow for a special one-time allocation of SDRs that
would double cumulative SDR allocations to SDR 42.87 billion. The special allocation would enable all
members of the IMF to participate in the
SDR system on an equitable basis and correct for the fact that more than one fifth of the IMF membership has
never received an SDR allocation. The proposed amendment would not affect the IMF's existing power to
allocate SDRs on the basis of a finding of a long-term global need to
supplement reserves. The proposal will become effective when three fifths of the IMF membership (110
members) having 85 percent of the total voting power have accepted it. As of mid-August, 2001, 109 members
having 72.18 percent of the total voting power had accepted the proposed amendment. Thus, approval by the
United States, which holds 17.16 percent of the voting power, would put the amendment into effect.

The value of the U.S. dollar in terms of the SDR is the reciprocal of the sum of the dollar values, based on
market exchange rates, of specified quantities of the first four currencies shown. See SDR Valuation. The
value in terms of the SDR of each of the other currencies shown above is derived from that currency's
representative exchange rate against the U.S. dollar as reported by
the issuing central bank and the SDR value of the U.S. dollar, except for the Iranian rial and the Libyan
dinar, the values of which are officially expressed directly in terms of domestic currency units per SDR.

UNITED STATES  Last Updated: April 10, 2002
International Reserves and Foreign Currency Liquidity
http://www.imf.org/external/np/sta/ir/usa/eng/curusa.htm#I
Other countries
http://www.imf.org/external/np/sta/ir/colist.htm



g kohler wrote:

> Dear list,
> could a recent proposal by Joseph Stiglitz (below) be interpreted as a
> kind of "global chartalism"? The proposal seems to imply the view that
> the world system (and its institutions) can be a useful (responsible,
> valid, legitimate) source of money just like the national system (as in
> the chartalist approach of Davidson, Mosler, Liu, et al). From a
> relative layman's perspective I find the idea attractive that one could
> have a chartalism writ large to the world level.
> Gert Kohler
>
> with greetings to Harkness, Gelles and other old e-friends
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> The Stiglitz article --
> ________________________________________
> The Economic Times  Friday, March 22, 2002 [circulated on pen-l, 26
> March 2002, by Ulhas Joglekar]
>
> Global greenbacks
> JOSEPH E STIGLITZ
>
> If wars, as Clemenceau famously said, are too important to be left to
> generals, development is too important to be left to finance ministers,
> central bankers, the IMF and World Bank. This week's gathering on
> "Finance for Development" in Monterrey, Mexico is a perfect opportunity
> for other concerned players, including Presidents and prime ministers,
> to assert their interests.
>
> The international community has agreed on a set of modest goals for
> global development - reducing poverty and illiteracy and improving
> health. But this requires a substantial increase in assistance at a time
> when the paltry levels of aid provided by rich countries continue to
> fall. The US, the world's richest country, is the stingiest. As long as
> the world's advanced countries maintain this attitude, innovative
> approaches to financing economic development need to be tested.
>
> One idea receiving attention is a new form of global money akin to the
> IMF's Special Drawing Rights (SDRs). SDRs are a kind of global money,
> issued by the IMF, which countries agree to accept and exchange for
> dollars or other hard currencies.
>
> The underlying idea is simple: every year, countries around the world
> set aside reserves as insurance against contingencies such as an abrupt
> downturn in foreign lenders' sentiment or a collapse of export prices.
> As a result, some global income sits around rather than financing
> investments that poor countries need. The amounts held in reserves are
> huge - roughly $1.6 trillion world-wide. Countries like to keep their
> reserves growing in tandem with growth in imports and other foreign
> liabilities. If these liabilities grow by 10 per cent annually,
> countries need to set aside an additional $160 billion.
>
> Countries hold these reserves in a variety of forms, including gold and
> US Treasury bills. While America benefits from increased demand for its
> Treasury bills (which reduces borrowing costs), developing countries
> receive a return of just 2 per cent - essentially zero in real terms.
> Investments at home may offer much higher returns, but foregoing them is
> the price developing countries pay for a safe hedge against the pitfalls
> of global capitalism.
>
> Instead of holding their reserves in dollars, a new form of global money
> - "global greenbacks" - could be issued which countries could hold in
> reserve. The money would be given to developing countries to finance
> their development programmes as well as global public goods like
> environmental projects, health initiatives, humanitarian assistance, and
> so on.
>
> There are a variety of institutional arrangements by which these global
> greenbacks could be issued. The IMF (responsible for issuing SDRs) could
> issue them, or a new institution could be created to decide on quantity
> and allocations. A new institutional arrangement might entail the
> creation of a set of trust
> funds - say, for education or health, or the environment - with
> competition among countries for projects helping to promote these
> objectives. For countries that receive less than the amount that they
> need to put into reserves, the new "global money" would go into the
> reserves, freeing dollars that these countries would otherwise set
> aside. Countries that receive more than they must put into reserves
> could exchange
> the new money for conventional currencies. Eventually, all the new money
> will wend its way into reserves, which in effect represent a commitment
> by countries to help each other in times of trouble. A country with
> reserves of the new global money could exchange it for hard currencies
> to sustain needed imports.
>
> There is another major advantage. The arithmetic of global trade implies
> that the sum of all trade deficits equals the sum of all trade
> surpluses. If some countries, say, Japan and China, insist on running
> huge surpluses year after year, then other countries must run deficits.
> The deficits are as much the fault of the surplus countries as they are
> of the deficit countries. Now, trade deficits are like hot potatoes.
> Nobody wants them, so they get passed around. If one country gets rid of
> its deficit, it must show up elsewhere. Uncertainty about whether these
> deficits can be financed is one reason why the world economy, under
> current arrangements, faced a succession of crises in recent years.
> Issuing the new global money would reduce this uncertainty. If a
> developing country's trade deficit is offset by assistance through a
> grant of the new global money, its overall financial position will be
> secure. Of course, even with this assistance, countries that mismanage
> their economies will face problems; the proposal is not a panacea to the
> world's problems. Nor would this scheme be inflationary. Global
> greenbacks would offset the deflationary bias in today's arrangements
> that result from the fact that part of the income set aside as reserves
> never gets translated into global aggregate demand.
>
> Relative to global income - some $40 trillion - the magnitude of
> monetary growth would be minuscule. Relative to today's levels of
> spending on official development assistance and global public goods,
> however, the amounts are enormous. The scheme also provides regular
> funding, not currently available, to finance global public goods.
> Commitment to participate in the programme would, presumably, be long
> term.
>
> The scheme will not require the support of every major developed
> country. This is important because the US might oppose any plan that
> undermines demand for Treasury bills (and thus its guaranteed access to
> low-cost financing). But if most advanced countries were to recognise
> this new form of global
> money, they could put pressure on holdouts by limiting their holdings of
> non-participant currencies and treasury bills in their reserves.
>
> Innumerable details must be worked out before a global money scheme
> could be put into practice, and changes will not occur overnight. But
> the Monterrey meeting provides an opportunity for such ideas to be
> discussed and vetted. This much is clear: addressing the plight of the
> world's poorest countries
> and providing the global public goods needed in this age of
> globalisation requires us to explore innovative ways of raising the
> necessary financing.
>
> What makes the global greenback proposal attractive is that it provides
> the funds poor countries need while contributing to global economic
> growth, stability, and equity.
>
> (The author is Professor of Economics at Columbia University)
> Project Syndicate, March 2002
>
> Copyright ?2002 Times Internet Limited. All rights reserved.
>
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