Friday, October 14, 2022

The Two Families of Global Reserve Proposals & Swap Lines — Clint Ballinger

The main plans that I discuss in these posts constitute two “families,” each with some antecedents and many subsequent related newer proposals. I think of them as Goudriaan/Graham/Hart-Kaldor-Tinbergen-type plans and Keynes/bancor/SDR-type plans....
The world appears to be moving toward a set of conditions in which scarcity of real resources dominate for a variety of reason not the least of which is natural limitations on the use of carbon-based fuels owing to pollution and climate change. In addition, there also appears to be widespread dissatisfaction with the monetary regime is known as Bretton Woods I and II. 

In addition to that, there is also a widespread perception that the US as the issuer of the primary global reserve currency abused its "privilège exorbitant," as French foreign minister Valéry Giscard d'Estaing famously. This criticism increased of late after the US "weaponized" the dollar in order to preserve and extend its global hegemony through the global economy using the dollar dependent o financial system. 

So the present discussion is taking place on this platform. 

In short, the floating rate system itself is under attack and will only last as long as US (Western) hegemony lasts. This is major geopolitical contention at present as decolonization takes hold more firmly.


Ahmed Fares said...

Exorbitant burden.

An Exorbitant Burden

Are We Starting to See Why It’s Really the Exorbitant “Burden”

Triffin dilemma

The Triffin dilemma or Triffin paradox is the conflict of economic interests that arises between short-term domestic and long-term international objectives for countries whose currencies serve as global reserve currencies. This dilemma was identified in the 1960s by Belgian-American economist Robert Triffin, who pointed out that the country whose currency, being the global reserve currency, foreign nations wish to hold, must be willing to supply the world with an extra supply of its currency to fulfil world demand for these foreign exchange reserves, leading to a trade deficit.

A country that runs trade deficits has to then run budget deficits to avoid unemployment. Eventually, this leads to debt trap dynamics.

Clint Ballinger said...

Before writing more I'm trying to come at these questions from the opposite direction (simple dynamics to more complex). I really think the international aspect of trade, finance needs a rethink, from post keynesians/MMT as well as the mainstream

Clint Ballinger said...

The thread I mention thread on int'l currencies, trade

Matt Franko said...

You set the currencies all to parity then either export to the nation or not..

Euro system is close.,,

NeilW said...

"I really think the international aspect of trade, finance needs a rethink"

Not sure there is much to rethink. Any attempt to construct a central operation will fail for the same reason the ECB is failing. It does not have the legitimate power to push a loss onto anybody. For it to work for everybody its got to be distributed.

For me the interesting discussion is why there needs to be a floating rate currency between government and non-government within a currency area with tax collected in the notionally non-government denomination. For example Gilts/Bills and Sterling, Treasury Bonds/Bills and USD.

The MMT view is that the float should be pushed out from the government sector to encompass the entire non-government sector within that jurisdiction. ZIRP and no bonds means there is a fixed exchange rate between government and non-government. The mainstream view is that the float should encompass only the government sector - which is what the 'money changing in the temple' game with bonds is all about. That creates a floating exchange rate between the money government can issue (bonds) and what it needs to buy things.

In terms of your picture, what mainstream and the Post Keynesians are trying to do is create a world with silver coins again, where everybody uses the same currency, and the Chartal currencies are restricted to the government sector.

More powerful than all this is the stories people want to believe - which is what ultimately drives these debates internationally. Hence the pull of gold and bitcoin even though the damaging effects of those are well known.

NeilW said...

"Eventually, this leads to debt trap dynamics."

Not if you don't pay interest, which is why cash has no interest on it.

Savings can be accommodated, or confiscated. As we've seen with Russia.

Matt Franko said...

“ZIRP and no bonds”

Tether is doing that… they buy USTs $4$ then maintain a fixed exchange rate of 1 USDT to 1 USD…

USDT is USDTether…

They use the interest paid on the bonds to pay for the operation of their block…

More or less are competing with the Fed…

Clint Ballinger said...

Neil: "where everybody uses the same currency, and the Chartal currencies are restricted to the government sector."

Not sure where you get this. An international trade currency would not replace national currencies for non-gov domestic purposes.

NeilW said...

"Not sure where you get this. An international trade currency would not replace national currencies for non-gov domestic purposes."

It doesn't replace them, but they end up fixed or in a trading range. So they become just a derivative of 'silver' again, which is what the commodity fans are trying to recreate - the underlying 'specie' that has long since disappeared.

The currency government uses are Bills. Those are issued at a discount to obtain domestic currency. Domestic currency is then pegged or traded for the international currency.

Government is then at the bottom of the hierarchy with a floating rate currency rather than at the top of the money hierarchy with a fixed rate to the domestic currency and the international sphere has the floating rate.

Clint Ballinger said...

The domestic currency remains a tax-credit, completely untethered from any commodity or other currency

Tom Hickey said...

"The domestic currency remains a tax-credit, completely untethered from any commodity or other currency" is a key reason that many countries want a real tether to the global economy for settlement of international trade balances.

As MMT notes, need of domestic users to obtain the national currency to satisfy obligations to the state that only accepts in payment currency it issues is the driver of demand for the currency. Exporting countries do not need to obtain foreign currency to settle tax obligations with the issuing state, although foreign firms and residents may if they fall under the jurisdiction of the currency issuer in this regard. But this is rather incidental in comparison with nationals.

Historically, empires were able to import financial obligations in the currency or a selected real good like gold or silver by imposing tribute on vassals and colonies. This enabled the empire to extract wealth from the periphery for use by the center, e.g., in part to support the imperial force that enabled it to impose tribute. This is no longer the case.

Settlement in terms of global reserve currencies is based on the choice of holders to save in the reserve currency rather than to convert it either to another currency or to a real good like gold. The USD has been the chief global reserve currency since WWII because it has been the preferred saving vehicle, the US having emerged from WWII as dominant economically.

This preference only holds as long as the currency meets the requirements of those saving in it. For this it must be reliable. Reliability is affected by volatility, for example, and also institutional arrangements that provide safety.

Weaponizing one's currency or canceling obligations regarding it like freezing assets creates the perception that the currency is not a reliable saving vehicle. As result there is a push to reform the current monetary system away from dollar dominance, which is part of US hegemony and is being used to impose it.

This push is toward adoption of a real anchor for the means of international settlement. The obvious candidates are either energy or a basket of economically vital commodities. This would be a fixed rate system that would require a complete revision of the MMT analysis of the institutional arrangements governing the operations of the new system.

IN the meantime, other measures are being brought into play for de-dollorization, such as settlement in the trading partners' currencies or a digital currency.

This development is provoking thought on how monetary systems are organized and what would be suitable for the conditions of the contemporary world given that the post-WWII order is now under pressure.

My suggestion as been to start with the world system as the foundation of the global economy, which is a subsystem that provides the life-support system and thus is part of the ecological system. The global financial system has to accommodate the global economic system, which in turn must accommodate the ecological system of the planet.

This means revisiting a lot more than the monetary system.