1. The case for a global monetary standard

 Introduction

To be in the trap means two things:

The international monetary anti-system: Governments are in the trap when they act in the belief that if they get monetary, regulatory and fiscal policy “just right” for their own economies,  they can achieve their aims – full employment, growth, stability – without paying attention to the global system. That illusion leads them to endless errors and confusion. Like mice, they see the bait tantalisingly in  front of them, but when  they go for it, the trap snaps shut.  What they have to realise is that  international monetary stability is a pre-condition for achieving domestic monetary stability – even for the largest economies such as the United States, China and the euro area. That is the result of financial and economic globalisation – and the main aas yet unlearnt lesson of the global financial crisis.

Yet governments are not paying attention to the (mal) functioning of the international monetary system as a system – they are all just trying to use (or abuse) it for their own  ends. Governments may benefit, but the people suffer. In the end everybody loses.

Also, economists and governments are in the money trap when they insist that the banking problem can be fixed by regulation, or QE, or some other policy twak. Both monetary policy and the (nominally) private sector global financial system have lost touch with reality. Central bank monetary policies have little traction on the real economy; their main effect is to boost financial assets – witness yesterday’s all-time peaks in stock markets – at the cost of piling up more risks. Banks do not support the economy but float in mid-air on the cushion of huge public subsidies – put at $590 bn by the IMF. Money itself has lost much of its proper function. Proper money – money that circulates to all parts of an economy – rests on social behaviour and observance of contracts – especially people keeping promises to repay debts; but who trusts banks or governments to do that except in  coin of uncertain quality or by taking out further IOUs on the taxpayer? It is not so much a Ponzi scheme as a dream world where bets of trillions of dollars are being taken in our name by people who really do not know what they are doing.

Thus the first order of business is to stop pretending! Governments and central bankers must openly recognise the full scale and horror of what has happened – and the wide scope of the remedies needed. Most proposals even of so-called heterodox economists fall woefully short. Most amount to little more than fiddling with monetary policies. How is that going to measure up to the enormity of the collapse?

What we need is a global currency standard that will discipline all the major actors involved. It can happen – the gold standard evolved naturally out of the pressure of events. It became “respectable” and “modern” even though it inhibited the freedom of member governments. And with it must go a new model for global financial intermediation.

In this three-part article I describe briefly the monetary standard proposed in my book – the Ikon.

The case is presented in three parts:

1. The case for a global currency
2. Forces favouring reform – and those obstructing it
3. The Ikon – reconnecting money to the real world

1. The case for a global currency

The global currency is the only way to reap the full benefits of financial and economic globalisation. Present fractured monetary areas and financial systems threaten monetary anarchy.  Fluctuating exchange rates at a time of high capital mobility is a dysfunctional system as speculation can carry exchange rates far from equilibrium values, producing severe real economic effects.  The absence of a real international monetary order was a contributing cause of the great financial crisis. There was nothing in the system to discipline the policies of the major actors – either the US or China. Private banks took advantage of the lack of rules to privatise gains and socialise losses.  Current absence of a system creates unnecessary risks for all countries. Flows of funds from the US and euro areas to other parts of the world can swamp local markets, causing huge difficulties for monetary management.

The foundations of the current set of arrangements are crumbling. The past 100 years  witnessed an era of monetary nationalism; each state had its own currency, and used it as an instrument of domestic and foreign policy. The foundations of this system are weakening; many former states have separatist movements – provinces and/or areas that wish to break away from the centre, yet do not have the desire or often the capacity to set up their own independent currency.  Another foundation of the national money era was the provision of “risk-free” assets by the national governments bond issues; yet lack of fiscal discipline has led to over-borrowing in many states and progressive reduction in the quality of the government paper on offer.  Finally, most countries have pegged to a large currency bloc, such as the dollar area, or entered formed monetary union, as in the euro area. In reality, the so called “flexible exchange rate system” is far from universal.

A common currency is needed to exploit economies of scale, and allow buyers and consumers to compare prices of rival producers, and allow investors to calculate the true value of new capital investment and seek out the most profitable opportunities globally.  This was the key to the great period of global growth in the late 19th and early 20th centuries.

See following posts…..