House of Paine

PAPER GOLD II

UNDERCONSTRUCTION 


stig on paper gold:


"The problems 
of insufficient global
 aggregate demand 
were on the minds
 of John Maynard Keynes
 and others 
who conceived and founded the IMF.

 There is a framework
 for enhancing aggregate
 purchasing power, 
through the creation of SDR’s.
 One way of thinking about this 
is the following:
 assume that the nations 
of the world
wish to maintain reserves
 equal to a fixed percentage 
of their GDP.
 With global GP of around $40 trillion,
 and growth of around 2%, 
if reserves were equal to 5% of GWP, 
aggregate reserves would grow by $40 billion "

One idea receiving attention 
is a new form of global money 
akin to the IMF's Special Drawing Rights (SDRs).

 SDRs are a kind of global money,
 issued by the IMF, 
which countries agree 
to accept and exchange 
for dollars 
or other hard currencies.
 The underlying idea is simple:
 every year,
 countries around the world 
set aside reserves
 as insurance against contingencies
 such as an abrupt downturn 
in foreign lenders' sentiment 
or a collapse of export prices.

 As a result,
 some global income 
sits around 
rather than financing investments 
that poor countries need. 

The amounts held in reserves 
are huge - 

roughly $1.6 trillion worldwide.

 Countries like to keep 
their reserves growing 
in tandem with growth 
in imports
 and other foreign liabilities.

 If these liabilities 
grow by 10% annually,
 countries need to set aside 
an additional $160 billion. 

Countries hold these reserves 
in a variety of forms,
 including gold and US Treasury bills

. While America benefits 
from increased demand
 for its Treasury bills 
(which reduces borrowing costs),
 developing countries 
receive a return of just 2%
 - essentially zero in real terms.
 Investments at home
 may offer much higher returns,
 but forgoing them 
is the price developing countries pay
 for a safe hedge
 against the pitfalls
 of global capitalism. 

Instead of holding their reserves 
in dollars,
 a new form of global money 
- ``global greenbacks'' -
 could be issued
 which countries could hold in reserve. 

The money would be given
 to developing countries
 to finance their development programs 
as well as global public goods 
like environmental projects,
 health initiatives,
 humanitarian assistance,
 and so on. 

There are a variety 
of institutional arrangements
 by which these global greenbacks 
could be issued.

 The IMF (responsible for issuing SDRs)
 could issue them,
 or a new institution 
could be created 
to decide on quantity and allocations.

 A new institutional arrangement 
might entail the creation 
of a set of trust funds 

- say, for education 
or health,
 or the environment -
 with competition among countries
 for projects helping
 to promote these objectives. 

For countries 
that receive less than 
the amount that they need 
to put into reserves,
 the new ``global money''
 would go into the reserves,
 freeing dollars
 that these countries 
would otherwise set aside.

 Countries that receive
 more than they must put into reserves
 could exchange the new money
 for conventional currencies.

 Eventually, all the new money 
will wend its way into reserves,
 which in effect represent
 a commitment by countries 
to help each other
 in times of trouble.
 A country with reserves
 of the new global money
 could exchange it 
for hard currencies 
to sustain needed food imports
 or other goods. 

There is another major advantage. 
The arithmetic of global trade 
implies that the sum 
of all trade deficits 
equals
 the sum of all trade surpluses.

 If some countries,
 say, Japan and China, 
insist on running huge surpluses
 year after year,
 then other countries
 must run deficits.
 The deficits 
are as much the fault
 of the surplus countries
 as they are 
of the deficit countries. 

Now, trade deficits 
are like hot potatoes.
 Nobody wants them,
 so they get passed around.
 If one country gets rid
 of its deficit, 
it must show up elsewhere

. Uncertainty about whether
 these deficits can be financed
 is one reason
 why the world economy,
 under current arrangements, 
faced a succession 
of crises in recent years. 

Issuing the new global money 
would reduce this uncertainty. 
If a developing country's
 trade deficit
 is offset by assistance 
through a grant
 of the new global money, 
its overall financial position 
will be secure.
 Of course, 
even with this assistance, 
countries that mismanage 
their economies 
will face problems; 

the proposal is not
 a panacea to the world's problems. 

Nor would this scheme be inflationary.
 Global greenbacks would offset
 the deflationary bias 
in today's arrangements
 that results from the fact
 that part of the income 
set aside as reserves
 never gets translated 
into global aggregate demand.

 Relative to global income
 - some $40 trillion - 
the magnitude
of monetary growth 
would be minuscule.

 Relative to today's levels 
of spending on official development assistance
 and global public goods,

 however,
the amounts are enormous.
 The scheme also provides
 regular funding,
 not currently available,
 to finance global public goods.
 Commitment to participate
 in the program would,
 presumably, be long term. 

Implementing the scheme 
will not require the support
 of every major developed country.

 This is important
 because the US might oppose
 any plan that undermines
 demand for Treasury bills 
(and thus its guaranteed 
access to low-cost financing).

 But if most advanced countries
 were to recognize 
this new form of global money,
 they could put pressure
 on holdouts 
by limiting their holdings 
of non-participant currencies
 and treasury bills 
in their reserves. 

Innumerable details
 must be worked out
 before a global money scheme
 could be put into practice,
 and changes will not occur overnight.



This much is clear:
 addressing the plight 
of the world's poorest countries 
and providing the global public goods
 needed in this age 
of globalization requires
 us to explore innovative ways 
of raising the necessary financing.

 What makes the global greenback
 proposal attractive 
is that it provides the funds
 poor countries need 
while contributing 
to global economic growth, 
stability, and equity.