Re: global chartalism and/or Stiglitz?

["Leigh Harkness" <Leigh@xxxxxxxxxxxxxxxxxxxx>]

Gernot

Good to hear from you again.

I had a read of the Stiglitz proposal you quoted.

To me it appears to misunderstand a large part of  the role of money.  Money
is more of a means of measurement than a commodity that can be created.  It
measures our entitlements and obligations.  Creating more entitlements to
for poor countries to demand products without creating obligations somewhere
else to supply products is not beneficial for anybody's monetary system.


> 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.

These so called reserves are very important as far as the monetary system is
concerned (and I am refering here to a country with fixed exchange rates as
a country with a pure floating exchange rate system cannot raise its foreign
reserves - that is foreign assets in its monetary system).  We can concerive
of these reserves as being created as a result of the county's national
production (for domestic sale and for export) is greater that its national
expenditure (on domestic products and imports.  By that I mean that its
exports are greater than its imports and the country has saved.  It can only
be achieved by sound monetary management.  To achieve it, the country must
ensure that the money created by the banking system (that increases current
entitlements/demand without increasing current obligations/supply) does not
exceed the money that would otherwise have been created by the growth in
foreign reserves generated by exports being greater than imports.
Essentially we are saying that new money created in the banking system
should not exceed national savings.

Also, this residual in foreign reserves should not be considered as some
static amount.  To spend it would be akin to spending all your money as soon
as you earn it.  A nation earns its income and it spends it.  The reserves
that it has in place is just like our personal cash balances.


> 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.

When a country invests its foreign reserves overseas, that does not mean
that it has reduced the money available to spend in its own country.  The
opposite is the truth.  When a country's banking/monetary system buys
foreign assets/reseves, it does so in exchange for domestic currency.  That
is, the bank's domestic liabilities (bank deposits or bank notes) increase
and its foreign assets increase.  If the economy absorbs this money in
transactions demand for money, the country may be able to lend a little bit
more to finance investment but it must be extremely careful that it does not
lend excessively to the point where the country depletes its foreign reseves
and when people go to spend their money on imports - there is no foreign
exchange left to for their domestic currency to be converted to.  For
example, as in Argentina recently.


> 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.

Foreign reserves in terms of US dollars tells the foreign country that they
have entitlements from the US of that value and it also means to the US that
it has obligations to that country of that value.  With these glogal
greenbacks, what entitlements would they be entitled to and who would have
obligations to supply?

To me it appears like so scheme to print money again on a global scale.  We
already have enough of such institutions and enough of this idea that you
can liberate the financial system to create entitlements/money without any
available current obligations (savings) to supply the demand created by
those entitlemets.

Regards

Leigh