I’m going out on a limb here. Monetary policy is certainly not my field. But it seems to me that UNCTAD (UN Conference on Trade and Development) has dropped a bombshell. A report released in Geneva last night calls for the creation of a new monetary system that is based on multilaterally agreed principles and rules in order to create needed macroeconomic stability for the globalized economy and for a level playing field for international trade.
In other words – to create a new international reserve currency!
The actual report is a hefty document of some 200 pages – Trade and Development Report 2009 (pdf) – the relevant section starts at page 121.
Another issue that has received renewed attention in the discussion about necessary reforms of the international monetary and financial system is the role of the United States dollar as the main international reserve currency. The current international monetary system, with flexible exchange rates between the major currencies, the dollar as the main international reserve currency, and free international capital flows, has failed to achieve the smooth adjustment of payments imbalances. This is the conclusion reached by the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System (also known as the Stiglitz Commission) (UNPGA, 2009).
[…]
However, an international reserve system in which a national currency is used as a reserve asset and as
an international means of payment has the disadvantage that monetary policy in other countries cannot be designed independently from the monetary policy decisions of the issuing central bank. These decisions are not taken in consideration of the needs of the international payments system and the world economy, but in response to domestic policy needs and preferences in the country of the reserve currency. This problem also exists in a multiple reserve currency system. Moreover, an economy whose currency is used as a reserve currency is not under the same compulsion as others to undertake the necessary macroeconomic or exchange-rate adjustments to avoid continuing current-account deficits. Thus, the role of the dollar as the main means of international payments has also played an important role in the build-up of the global imbalances in the run-up to the financial crisis.
While several blogs have made references to it, I have been unable to find MSM coverage of the issue, except Bloomberg:
The dollar’s role in international trade should be reduced by establishing a new currency to protect emerging markets from the “confidence game” of financial speculation, the United Nations said.
UN countries should agree on the creation of a global reserve bank to issue the currency and to monitor the national exchange rates of its members, the Geneva-based UN Conference on Trade and Development said today in a report.
China, India, Brazil and Russia this year called for a replacement to the dollar as the main reserve currency after the financial crisis sparked by the collapse of the U.S. mortgage market led to the worst global recession since World War II. China, the world’s largest holder of dollar reserves, said a supranational currency such as the International Monetary Fund’s special drawing rights, or SDRs, may add stability.
“There’s a much better chance of achieving a stable pattern of exchange rates in a multilaterally-agreed framework for exchange-rate management,” Heiner Flassbeck, co-author of the report and a UNCTAD director, said in an interview from Geneva. “An initiative equivalent to Bretton Woods or the European Monetary System is needed.”
Behind the bureaucratic language of the report there seems to be a very blunt message to the US and the Fed. What will the official US reaction be? It appears to me that this is a paradigm shift if ever there was one. I’d warmly welcome comments and discussion from users with relevant background on the topic.
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I’m afraid the UN does not have a voice in matters of humanity, poverty or financial matters in this world. It’s been used for politics by world powers, not human kind.
See results of the G20, discussions but no conviction to change.
"But I will not let myself be reduced to silence."Well, for right wingers it will be a clear sign of the impending End Times….(eye roll)
The next sentence of the press release is just as interesting:
Also of interest; the commission responsible for the report is Joseph Stiglitz:
A bit quick there…
…the commission responsible for the report is named after Joseph Stiglitz
I love your stuff so let me clear up a few points.
One, yes the “MSM” isn’t covering this but that’s hardly unusual. Just about all international agreements and policy decisions are barely reported and left to only those truly interested in the topic to notice it.
Even the “big media” events like G8 and Davros are rarely covered in depth and only a few superficial remarks and events are discussed.
As for the topic of money itself, I highly recommend digging further into what’s loosely called “Bretton Woods 2”, the hodgepodge agreement between Big Finance as to currency equilibrium measures (exchange rate stability) cobbled together literally overnight after Nixon destroyed BW1 (the official agreement on paper) in a single day by closing the gold window in what, 1972? I forget.
Long story short, there’s been a rather patchwork system in place since then to manage long-term currency fluctuations, a topic of extreme importance to certain very large institutions (including central banks). This deals not just with strategic reserves but all of the functions that the SDR (XDR) touch upon as well.
This discussion here (from the news clip) is simply some of the lesser players giving their input on future modifications of the way currencies are valued. It’s important but then ALL of these decisions are important.
To sum it up even further, not a single major currency is tied to anything of tangible value (ie gold) and therefore what all of these currencies are currently worth is now measured (literally LOL) by what’s called a “basket” aka a combined percentage of OTHER currencies.
It’s the equivalent of saying one kind of special paper (dollars) are worth X percentage of other kind of special papers (Swiss franc, British pound, Euro etc). The SDR itself is the same thing. That’s going on right NOW. All this meeting (from the clip) was about was fiddling with the percentages of what each currency is worth compared to another.
Or to sum it up extremely briefly – modern currencies today are like Magic: The Gathering cards. They’re only worth what they can trade for other cards but have no “real” value outside the game itself. Voila!
Pax
Thanks, soj.
So all these currencies have value just by pure fiat and the $ is/was the choice currency simply because the US economy was the dominant one…
At least, an expansion of the basket will limit somewhat the ability of the US to dump all its problems onto others, did I get that right?
Shhh you’re not allowed to say “pure fiat” without spontaneously combusting into Ron Paul LOL
The whole history of credit is extremely short and is about ten thousand times shorter than say the history of monarchies or slavery. It goes a little like this.
First, people lending money for real property (you don’t pay me, I get your stuff).
Secondly, people lending money to rulers because they’re “good for it” and if they don’t pay you back, you just stop financing the next war.
Third, governments get into the act and borrow money with their subjects on the hook to repay if the gov’t doesn’t. This is roughly equivalent to how “bonds” work in the USA today.
Fourth, central banks “removed from political pressure” begin lending themselves money simply by printing it aka “fiat money” aka what we have here right today even in jolly old Switzerland (for the most part).
The problem is that steps 1-3 were always that somewhere, in some way, no matter how many steps in between the entity giving the loan to the one repaying the loan, there was something tangible involved. Up until 1971 the dollar was actually worth a net weight of gold.
Now what we have is a group of players saying “yo brother, I’m good for it” on all of these inter-connected debt structures (aka currencies) with very tenuous ties to tangible goods of “real value”.
All that’s fine and dandy until the one roommate keeps saying he’ll chip in on the keg and kick in on the gas but then almost never does aka the USA. So the other players (in this case, Russia and China) are trying to figure out a way to pressure this roommate to start being a little more responsible when it’s his turn to buy a round, so to speak 😛
As for why the US was (and still is) such a major currency, you’ve got to look at Bretton Woods (1), the actual contract signed on paper. It was sheer genius in those days, let me tell ya.
First, the US economy was revved up and zooming because of WW2. Secondly, the main competitors (Britain, Germany, France, etc) were pounded to pieces. Third, and here’s the TACTICAL MASTERSTROKE – the Marshall Plan.
Did it rebuild Europe? Heck yes. Were untold millions of dollars loaned to be repaid in US dollars? Why yes they were. Surprise 😛
Once debts get enumerated in your currency, you essentially transfer all of the debtor’s real property (gold, minerals, etc) into your currency. It’s genius! It’s also exactly how the IMF/World Bank works as well btw. That was also set up with BW1 so that the U.S. has permanent control.
And the current form of that genius is that just about all of the petroleum contracted for sale is enumerated in dollars. That means every gallon is essentially “backing” up the dollar in a long and sometimes indirect chain.
Essentially imagine if you found an old printing press in your basement and began printing AskBucks and to your everlasting surprise, people accepted this as money. Why then you could buy anything! And that’s just what the U.S. did. And then you said “nobody can buy apples except with my money” and then everybody says “uh ok George” and goes along with it. Brilliant!
What’s interesting is how this all ties into the TREMENDOUS amount of hostile military actions the US has been involved with SINCE ww2, a list so long even I can’t remember it all. Why?
Long story short is all that “force projection” (lovely word LOL) keeps making people “respect” your currency, which keeps letting you crank up that press in the basement and keep buying things.
Just think of the sheer poundage (weight) of goods mined out of the ground in China, assembled and shipped over to the US. Literally thousands of tons of physical property shipped across the sea in exchange for what? For printing press receipts and not a whole lot else. I think the #1 export from the USA to China is scrap iron.
Anyway, it’s a long and interesting story of which I hope you enjoy as much as I do.
Pax
Oh that reminds me, another TACTICAL MASTERSTROKE was in 1956 during the “Suez Crisis” when the U.S. forever more blasted Britain’s international influence to pieces, esp in the Middle East (aka Palestine/Israel fun) by threatening to pound the British sterling into bits.
Essentially all Middle East policy has been driven by the Americans in the driver’s seat because they shut down the British with currency manipulation. Fun times!
Pax
Nicely put and a fun read. Thanks!
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Must have been August 14/15 1971, we just left on our honeymoon for Germany with safe traveler’s cheques … in dollars. We never recovered. LOL
Of course the drop in value of the dollar was due to the military spending and Vietnam war. High inflation resulted throughout the western world, thus other nations paid the price for the U.S. adventure. Similar scenario today with Iraq war spending.
"But I will not let myself be reduced to silence."Absolutely right! As Will Rogers said, the best way to prevent a war is to insist that the gov’t finish paying for the last one 🙂
Pax