I’m convinced that global trade is critical for economic development.
In the timeframe of the whole sweep of human existence, it has only been since very recently that we didn’t all live off the local land as hunter gathers (with astonishing levels of violence). We were then living sustainably. We don’t now have the option of sustained existence in a 20thC style using 20thC technology; we would simply foul our nest and perish in a few generations. To live well, we need to keep ahead of things. From what I can see, that is a big challenge and it will take the combined ingenuity of all of the world’s population to meet it. I’m convinced that our best hope is if ideas and tools, goods and services are exchanged freely across the whole world and no one is economically excluded.
I also think it is critical that different cultures flourish in their own way. I think it is critical that we don’t develop a pan-global group think. Different cultures make breakthroughs at different times and everyone else benefits. Early Islamic mathematicians drew upon knowledge established in India along with a separate body of knowledge running from Ancient Egypt through Ancient Greece. That work was then built upon further in northern Europe. Iron working was invented in India and much later perfected in Japan then brought into mass production in England. Possibly, at each step, the particular cultural and political scenario at each place at each time was critical -it wasn’t a case of one culture continuously leading. History seems to repeat the pattern where political, economic and cultural unification initially leads to a flourishing followed by stultification and decline. Previously such unification was only relatively local. Qin Shi Huang’s China was a huge civilization as was the early Islamic world but in each case most of the world was not included. Today we face the prospect (danger) of having all of our eggs in one basket.
There is a difficult balancing act between facilitating global exchange and yet not trying to mould each other into doing things “our way”. We benefit tremendously from being able to buy and sell specialist equipment and services pretty much anywhere in the world. The same is true for bulk commodities. What is scarce in one place is plentiful in others. Global trade needs some level of common currency and legal framework and yet I believe it is imperative that we don’t go overboard with political integration.
“Pieces of eight” from Latin America provided the first global currency. Then as now severe trade imbalances meant that money failed to recirculate. China sold more goods to Europe than were sold in return. Immense amounts of silver were mined (with enormous human suffering) in Boliva and Mexico to perpetuate the imbalance for centuries. When the Spanish Empire lost its Naval power and so the supply of silver dried up, silver stopped being the global standard of money and the Chinese hoard lost most of its purchasing value. It is now mostly in waste dumps across the world in the form of photographic emulsion.
Today the USD is the global currency; and consists of electronic ledger entries. This is a legacy of the Bretton Woods agreement in the aftermath of WWII. At that time gold provided the global unit of account but WWII had left the USA with the bulk of the global stock of gold and the USA was also the only country with the capacity to supply the world with much needed equipment and goods for post war reconstruction. Keynes argued that the world needed a stable currency for global trade and proposed the bancor concept. That bancor currency would have been pegged to a basket of commodities and any country running a trade surplus would pay a tax to deficit countries. However the USA was in a position to dictate terms and chose for the USD to become the global currency.
There are issues with the current USD based global system. If China buys iron ore from Australia or Japan buys oil from the UAE; that requires USD. A lot of USD are required for such global trade. All of that has to be obtained by selling real goods and services to the USA. Across much of the world it is resented as a free lunch for the USA and yet for the average Joe in the USA it becomes manifest as loss of jobs. US military spending consumes much of the “exorbitant privilege” and that leads to an unpleasant perception that much military focus is on perpetuating global USD hegemony simply so as to maintain the ability to do so. Furthermore any long term trade contracts can be “gamed” by expansion of the stock of USD bank reserves and treasury bonds. US trading partners such as China and Japan have endeavoured to stabilize currency exchange rates so as to avoid trade disruption. That has entailed vast state accumulations of US treasury bonds in both China and Japan. There is much finger pointing and squabbling. On the one hand if the USA limited military spending to the level of tax revenue, there would be no need for the Chinese government to accumulate US treasuries in order to stabilize the exchange rate. On the other hand China could leave the Chinese currency to appreciate against the USD and leave the private sector to sort out contracts that accommodated shifting exchange rates.
Efforts to ameliorate the system have included piecemeal bilateral currency swap agreements between China and twenty other countries. China has also made vast accumulations of Euro zone government debt. I guess the reality is that what is sort-after are jobs, trade and accumulation of expertise and productive capacity (not to mention maintaining control for the Chinese government). Perhaps the trillions of dollars in US treasuries accumulated by the Peoples Bank of China and Bank of Japan could almost be thought of as a waste product of efforts to that end.
Greenwald and Stiglitz have argued that global trade would be better served if a basket of all of the major currencies were used as the unit of global trade instead of using the USD. Zhou Xiaochuan expressed support for the concept and called the original Bancor argument made by Keynes at Bretton woods “far-sighted”. I wonder whether the same overall argument couldn’t be taken further. The limited composition of a currency basket would still provide a distorting privilege. The weighting between the various currencies depends on a politically negotiated formula and so could be an endless source of bickering and instability. Smaller, poorer, countries would be excluded. I think a better solution would be to view the “exorbitant privilege” of seigniorage of the global currency as being directly due to all seven billion individual people in the world.
We have emerging technologies that potentially enable electronic currencies to be extremely decentralised and yet secure and protected from counterfeit (the best known are bitcoins). Freicoin is such a “crypto-currency” that has the important property of demurrage; it decays at a rate of 5% per year. The intention is to ensure that it is not held as a store of value but instead remains in circulation. That helps to ensure that it provides a unit of account with stable value. The demurrage is constantly replaced by fresh freicoins so as to maintain the overall stock. Freicoins seem more of a proof of concept than anything else. That is probably just as well because if freicoins became significant, the seigniorage privilege would confer inordinate financial power to the unaccountable “freicoin foundation” –it would create an utter monster –perhaps like the Heritage Lottery Fund on a super power scale.
I think however that the freicoin concept suggests a possibility for an equitable global currency in a way that would minimize any need for political or legal integration across countries. Trade within each country need not be affected. Each country could continue to use whatever monetary system they chose. However international trade could use such a universal demurrage crypto-currency (let’s call it X). There could be say $1Tn full units of X in existence with it all suffering an extremely rapid rate of demurrage (say 0.05% per hour). Every person in the world would be equally eligible to receive seigniorage profits. Companies could compete to administer each person’s seigniorage rights much as companies today compete for business in supplying mobile phone network for people even in poor regions. People would choose a seigniorage provider on the basis of how much money it paid them (paid in their own local currency). Perhaps such administration would often involve the mobile phone network companies and people might automatically receive payment over the phone network. Presumably commercial pressures would cause an effective system to evolve. The companies providing the service would need to immediately exchange the X for local currency so as to provide importers with the X required to pay for foreign goods and services and to get local currency to pay everyone and to pay for costs. Speculators could intermediate but obviously there would be an imperative to clear the market extremely fast so as to minimize the considerable demurrage cost. Consequently, currency exchange rates would be set by trade flows rather than by speculative hoarding. The imperative to have extremely rapid exchange out of X and into local currencies would ensure that the value of X was minimized. So despite the rapid demurrage and replacement; the “unearned”seigniorage benefits would be modest and would be equally distributed to all seven billion of us.
I suppose some countries would allow multinational companies to operate the system; elsewhere local companies might do it and statist countries might insist on state monopolies. Presumably North Korea would keep all of the benefits for the state. I still think globally it could be much more equitable and harmonious than what we currently do.
Inevitably some level of international co-ordination would be required but I think it might be less than currently required for the USD system. The current bitcoin network has demonstrated the potential simple robustness of crypto-currency networks. I think the most important international agreement needed would be to end the holding of foreign exchange by anyone – people and institutions would only hold a countries currency in that country for use in that country. There is the critical issue of what to do with the current stocks of foreign exchange reserves. Perhaps a write down of those stocks could be negotiated as a deal to secure an end to the current system. Countries that currently issue reserve currencies (largely the USA) would see an end to the “exorbitant privilege” but also the worrisome foreign owned US treasury debt would disappear. Presumably China and Japan never intend to draw down and spend their stock of US treasuries. If they are simply a by-product of efforts to stabilize exchange rates, then their job is done; and no harm would come from writing them down.
Foreign government holdings of US treasuries could never anyway be drawn down to pay for anything that the USA did not consent to since they are entries in the ledger on the computer that is part of the US administration. Gold perhaps has the potential to be exchanged in a less constrained manner in the event of a war or crisis and so is held as a type of reserve for such “just in case” situations. Hopefully an end to our current system would provide a stable global financial system such that worldwide currency devaluation no longer caused appreciation of the gold price and it would stabilize just below the extraction cost. Critically I think the most important reserve asset any country can accumulate is the capability of its population. Hopefully we all realise that.
Related stuff on the web:
wiki Triffin dilemma
A Modest Proposal for International Monetary Reform – Greenwald and Stiglitz
Why the Fed is more likely to adopt bitcoin technology than kill it off -JP Koning
31% of Kenya’s GDP is spent through mobile phones -Christopher Mims
Freicoin: a peer to peer digital currency delivering freedom from usery – official web site
Freicoin: Occupy’s online currency for the 99 per cent – New Scientist
de-dollarization-dismantling-americas-financial-military-empire – Michael Hudson
Reinventing Bretton Woods: Global Finance in Transition- Jesse Cafe Americain has links to other related posts too
America’s growing trade deficit is selling the nation out from under us. Here’s a way to fix it -and we need to do it now -Warren E. Buffett see also wiki Import Certificates
China is not the problem -Bill Mitchell
www.freicion.org discussion / rebuttal of this blog post (I added this link on 10May2013)
Wary of Bitcoin? A guide to some other cryptocurrencies– Wired (I added this link on 10May2013)
Beyond Money.net – Devoted to the liberation of money and credit (I added this link on 11May2013)
The hidden hand of American hegemony- David E Spiro (I added this link on 12May2013)
More on M-pesa and e-money -FT (I added this link on 16May2013)
Reserve Accumulation and International Monetary Stability -IMF (I added this link on 29May2013)
A Proposal for International Monetary Reform – James Tobin 1978 (link added 01June2013 ht Ramanan)