PKT message, Stiglitz' Global Greenbacks Idea

On reading through the following part of Stiglitz' piece, it occurred to me
that - in principle - his Global Greenbacks Reserve Idea is a variation of
the Gore Social Security Lockbox Idea.

In other words, it makes no technical sense.

And what might be an appropriate technical alternative?

Briefly - and here I draw on ideas outlined in my 1988 (very, very
technical!) paper on 'Monetary Theory Revisited' - in the context of a
restructured international monetary system, all official "reserves" except
for normal working balances would be held on deposit with a World Clearing
Union, successor agency to the International Monetary Fund.

Thus, when there arise "contingencies such as an abrupt downturn in foreign
lenders' sentiment or a collapse of export prices", the affected country or
countries would draw on their deposits with the World Clearing Union
together with whatever lines of credit the WCU might extend in support of
their payments position.

Of course, once such WCU facilities were in place, there would be no point
for speculators to launch attacks on currencies as they did in the Asian
region in 1997.

Gunnar

> > 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.

> > 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.