PKT message, Re: on Stiglitz - "idle reserves" etc.

Paul:

Re. the following:

> Accordingly in my book, Financial Markets, Money and the Real World, I
have
> embedded Keyness essential suggestions in a proposal for a new
international
> financial architecture that is designed [1] to prevent a lack of global
> effective demand due to any nation(s) either holding excessive idle
reserves
> or draining reserves from the system, [2] to provide an automatic
mechanism
> for placing a major burden of payments adjustments on the surplus nations,
[3]
> to prevent financial crises while providing each nation with the ability
to
> monitor and, if desired, to control movements of flight capital, [4] to
> expand the liquidity of the international financial system as global
capacity
> warrants, and [5] to induce the debtor nations to work their way out of
debt
> rather than await handouts.

Comment:

I don't get your point # 1.

While China's Central Bank is "building up idle reserves" of $100 billion
per annum insofar as the US economy is concerned, the US Fed tolerates "new
reserves" creation commensurate with an overall US external deficit of about
$500 billlion per annum.

So long as this remains the case, accumulation of "idle reserves" by the
rest of the world will continue on a matching one-to-one basis, with the NET
effect on total world demand being ZERO.

As for "draining reserves from the system," I take this to be shorthand for
the US running a surplus on external current account, thereby "draining" the
amount of dollars held by the rest of the world, including China.

This has not happened for the past 30 years and, given the hands-off policy
of the Fed towards US domestic credit creation, any such "draining of
reserves from the system" by the US may not become a "problem" in the
foreseeable future.

However, IF it were to happen, THEN the rest of the world need only step in
with new credit creation in the amount of such "draining of reserves from
the system" and all would be "well".

As for Keynes, his views on related issues were predicated on technical
monetary considerations which do not relate in any manner, shape or form to
post-Bretton Woods world monetary arrangements.

Gunnar

----- Original Message -----
From: "pdavidso" <pdavidso@xxxxxxx>
To: "Ric Holt" <rholt@xxxxxxx>
Cc: <pkt@xxxxxxxxxxxxxxxx>
Sent: Monday, September 01, 2003 10:34 PM
Subject: Re: on stiglitz
>