Outside the box: Dollarization is to money as english is to words?

["John Gelles" <johng@xxxxxxxxxx>]

I must say I love Basil's thought. It is post-pkt. It may
be outside the box--but inside the field of possibilities.
Or not?

Say, South Africa begins with dollars as common there
as they are in Moscow.

Then government allows dollar banks to compete with
other banks. The dollar bank would generally lend
dollars against contracts calling for payment in dollars
-- no matter where contract operations were located.

Suppose SA, also, exempted dollar deposit balances
from all taxes whatsoever. Might it not become a
good location for banks that catered to depositers
seeking shelter from taxation?

Suppose, to end unemployment forever, SA made
microloans a civil right for the unemployed. The bank
or banks that made these microloans in dollars
would soon run out of money if the loans were never
repaid--or not?

So, Basil, by what mechanism do the microloans
become self-sustaining or sustainable by subsidy
injections of dollars ?

No doubt I'm outside the box. But am I caught in
the cold rain without an heavy raincoat, hat and rubbers ?

John Gelles


----- Original Message -----
From: <bjm@xxxxxxxxx>
Sent: Monday, November 04, 2002 12:48 AM
Subject: Re: Brazil and the IMF


Henry and Matias

I would like to interject a positive note on Brazil, and other countries in
a similar painful situation. Like most economists, you are both
unquestioningly accepting the proposition that a current account balance is
necessary as a long-run condition. As a result you are the forced to pose
the question - how it can be achieved?

Instead let us try to think outside the box. Allow me please, to let us just
suppose, that Brazil, and perhaps while we are at it the rest of South and
Central America, were to dollarize. In this case these countries would no
longer have an exchange rate. All would use dollars. They then no longer
have the necessity to run a current account balance, or to think that they
must pay for their imports with their exports. This X=M condition is not an
economic law, as we tend to unthinkingly accept.

The western US was never asked to run a balanced current account in the 19th
century. Today the question is never even raised. By dollarizing other
countries can be like the western US.

My key insight is that a current account balance is imposed, not by economic
fundamentals, but rather by each country choosing to use its own unit of
account as money. We are often told that money is like a language. Everyone
now wants their kids to learn English, because it is becoming the world
language of business. For similar reasons countries in their self interest
should decide to use as money the asset that most other rich countries use.
Dollarization has similar benefits to learning English, only it is much
easier to achieve.

In a branch banking system, it is of no importance whether individual
branches, or even individual regions, have a current account balance.
Suppose there is a region comprised primarily of economic units with
attractive high expected return investment projects, who all wish to deficit
spend. Fine. Let them. Individual borrowers with attractive investment
prospects should not be penalized because they happen to live in a region
with many other prospective defict spenders. For the system as a whole
deficits must equal surpluses as an accounting identity.

Economists would generally accept that for many well-known reasons, in the
long run it would be desirable to work towards a single world money and a
single world CB, with no exchange rates.(for a nice example see eg Richard
Cooper, 1984) But on many equally well-known noneconomic grounds, a world
bank and a world currency is a nonstarter over any foreseeable future
period, and is probably also not desirable in the present for these same
non-strictly economic reasons.

Dollarization is a way of finessing all these difficulties, and dumping them
into the lap of the US. If dollarization were to come about on a large
scale, sharing of the seignourage would soon be on the Fed's agenda. I
predict that first Canada and Mexico will dollarize, and then other
economies of the Americas will gradually see the light and follow. The
benefits are cumulative, since the more countries who dollarize, the more
the necessity of maintaining external balance disappears.

In the future I predict the world will look back with curiousity on this
difficult period, when each country still used its own currency as its
money, and in so doing forced itself into the caldron of maintaining
external balance, implying a current account balance to preserve the
relative value of its currency.

I am now living in SA, a country with 40 percent unemployment, huge natural
resources, and a 15 percent inflation rate due to a 35 percent depreciation
of the Rand last year. SA is currently forced by the IMF to keep raising its
interest rate to high double digit levels, to keep inflationary pressures at
bay, and so be able to preserve the value of its exchange rate, which is
already absurdly undervalued on purchasing power terms. Countries who
unquestionally use the noninterest bearing debt their own government as
their money are putting themselves into this painful situation, from which
there is no attractive escape.

In their own self interest countries should select as their money asset the
asset that is used by most other rich economies with whom they would like to
trade. Only in this way can they escape the demons of the current
international trading system.

Basil Moore