Re: greider article

["Gunnar Tomasson" <gunnar.tomasson@xxxxxxxxxxx>]

Basil:

Sorry for the late response.

Let me insert comments as I re-read through your message.

> Gunnar
>
> Very interesting. I am afraid I no longer try to keep up with what Fischer
> and Co. are saying.
>
> I am now working on the final open economy section of my manuscript,
> MACROECONOMICS WITHOUT EQUILIBRIUM: COMPLEXITY, ENDOGENOUS MONEY AND
> EXOGENOUS INTEREST RATES.
>
> I wonder if I could I ask you to consider the following:
>
> The asset that is generally accepted as the means of payment, as "money",
is
> solely based on a social agreement or convention. As is well known, all
> governments possess the power to make their own non-interest-bearing debt
> legally acceptable in settlement of debt and in paymeny of taxes, i.e. as
> "money", within the geographical area of their jurisdiction. (Chartilism).
> But they cannot by fiat make it acceptable in foreign jurisdictions.

Yes.

> But all the problems of the world monetary system, the system of exchange
> rates as fixed or floating, the general shortages of  foreign exchange of
> most LDC's, the asymetric pressure and burden on debtor countries to
adjust
> (restrict and depress)their AD, the very high exchange rate risk premium
> incorporated in LDC interest rates, the lack of pressure on surplus
> countries to expand their AD, and so the substantial bias towards
> restriction of world AD and deflation in the international payments
> machinery, ULTIMATELY are ALL based on the existence of more than one
money
> in international exchange.

I am not sure I get this last point.

The Creditary View that 'Money' reduces to IOUs between Debtors and
Creditors suggests, inter alia,

(a) that the problems of the world monetary system are rooted in the de
facto 'legal' tender status of the U.S. Dollar as World Currency whereby
U.S. Monetary Inflation has been - and continues to be - 'exported' to the
rest of the world during the post-Bretton Woods era along a trend line that,
sooner or later, must translate into World Financial Crisis;

(b)  that the general shortages of foreign exchange of most LDCs is,
ultimately a reflection of domestic Monetary Inflation which cannot be
exported to the rest of the world;

(c)  that the principal asymmetry in current world monetary arrangements is
NOT so much that, absent access to Foreign Credit, LDCs must 'live within
their means', but that the World Currency status of the U.S. Dollar permits
the U.S. to live beyond its means while moving along the trend line towards
World Financial Crisis; and

(d)  that associated interest/exchange rate problems are by-products of the
pursuit by LDCs using monetary policies in attempts to live beyond their
means without the wherewithal which permits the U.S. to do so - for the time
being.

>
> Everyone accepts this. But everyone also recognizes that although a world
CB
> is logically necessary to act as the global lender of last resort, it is
not
> going to happen in our lifetime. This is primarily due to a host of
> insuperable political considerations. Even Keynes' or Davidson's
> International Clearing Union, which is a kind of second-best solution, is
> politically a non-starter. Even though the world is a closed economy, and
> one country's surpluses imply another country's deficits, it will never be
> possible without a world government to get ALL the surplus countries
> voluntarily to agree to spend their surpluses.

When push comes to shove, "insuperable political considerations" must yield
to adverse circumstance, as they did for the U.S. in Indochina in 1975 -
and, somewhere down the road, in the field of world monetary arrangements.

The collapse, actual or effective, of current world monetary arrangements
will have been brought about by the asymmetry with respect to the U.S. and
the rest of the world insofar as domestic monetary discipline is concerned.
And, while it is impossible to foresee the details of internationally agreed
successor arrangements, it is absolutely clear that the asymmetry at the
root of the problem must be addressed and resolved to the satisfaction of
the leading world economic powers.


> But note that these problem as all entirely man-made. It is nowhere
written
> that a country, any more than an individual economic unit, must live
within
> its means, and cannot spend (import) more than it earns (exports).
Nonsense!
> It can always borrow, and sell existing assets, providing it can persuade
> some bank to lend to it. It is also not written in granite, as the Euro
now
> shows, that a monetary area must be coterminous with a political area. A
> country is not also necessarily the optimum monetary area .

Agree.

> What we must now do is simply persuade all countries to change the social
> convention of what they accept as money, the asset that they regard as
> generally acceptable in exchange, from their own existing domestic money,
to
> the money of their largest trading partner.
>
> This would in effect soon result in all countries volitionally
dollar-ising.
> The world would then have a single money, with no long drawn-out political
> agreement to be negotiated.
>
> It is of course true that such an arrangement would be monstrously unfair.
> The US would, initially at least, receive all the seignourage profits from
> money-creation. And the Fed would only consider the US interest in its
> decision to set interest rates.

This course of action would be predicated on continuation of the asymmetry
between the U.S. and the rest of the world which, in my view, is at the root
of past, current, and prospective world monetary instability - so long as
the root cause is operative, addressing secondary symptoms of the problem
may postpone, but not avert, the day of reckoning.

>
> But just think. Every country would then be in the position of a US state,
> where the current account balance is so unimportant that it is never even
> reported or ever considered or discussed. The world monetary system would
> then be like a single economy with a single gigantic branch bank.
Individual
> branches would run surpluses or deficits, structurally and even
permanently.
> But for the head office, they necessarily cancel out and sum to zero. If
> such a widespread movement to dollarisation were to occur, the US would
> sooner or later be morally complelled to share the seignourage.

As and when the force of circumstance obliges the U.S. to reconsider its
post-Bretton Woods approach to world monetary cooperation, it is fair
surmise that the technical details of a sustainable successor world monetary
regime must be tailored to address key aspects of the post-Bretton Woods
external "adjustment" process for many LDCs.

> If as Keynes maintained the world is demand constrained, the goal of
> monetary policy is to manage AD and so reduce the level interest rates
> (raise the level of asset prices)until AD is equal to the global full
> employment AS. The US level of rates is much lower than the average rate
set
> by individual CBs, and most countries could not reduce rates to the US
> levels.

A principal reason why the world economy is "demand constrained" is the
mal-distribution of world purchasing power that results from the First
World's exploitation of pennies-a-day labor in the Third World whereby
supply costs of exportable goods - and, hence, Third World purchasing
power - is kept at a minimum.

In this respect, U.S. Monetary Inflation has been an "engine of growth" of
mal-distribution of world purchasing power - and, while it is true that some
employment and income is better than none, some employment and higher income
is better still.


> It is true that countries must then renounce an autonomous monetary
policy.
> But CB's are now everywhere in LDC's forced to tighten policy and raise
> interest rates to protect their exchange rates. It is true they have also
> foolishly been persuaded to target their inflation rate. (Governments must
> accept that for price stability, wages cannot rise more rapidly than the
> increase in average labour productivity in the previous year.)

>From the view-point of Creditary Economics, the heavy reliance by world
central bankers on the interest rate mechanism is the single most telling
indicator of the utter incoherence of what passes for monetary "theory"
among both mainstream and monetarist scholars and their disciples among
world central bankers.

But that is a long story.

> Inflation targeting, although mindlessly endorsed by the New Keynesians,
is
> largely a clever ploy of international capital to maintain high interest
> rates. (In my current country of residence, South Africa, in the face of
> 40-50 percent unemployment, and truely massive poverty, the Reserve Bank
has
> been persuaded by the IMF to raise interest rates to 15 percent, even
though
> the black government is desperately trying to increase employment, before
it
> is faced with a revolt from the left. The RB currently has a target
> inflation rate of 3-6 percent, while the government, with its leftist
slant,
> and in order to keep the left on its side, has simultaneously granted
public
> sector unions an average wage increase of 9 percent. The current and
> expected inflation rate for next year is in double digits!)

This is madness - this is orthodox monetary "theory" at work.

Gunnar

>
> I would be curious to hear your comments??
>
> Basil
>
----- Original Message -----
From: "Moore B Prof" <bjm@xxxxxxxxx>
To: "'Gunnar Tomasson'" <gunnar.tomasson@xxxxxxxxxxx>
Cc: <pkt@xxxxxxxxxxxxxxxx>
Sent: Wednesday, August 21, 2002 11:47 AM
Subject: RE: greider article