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Economics no image

Published on March 27th, 2012 | by Daniel Furr
Image © [caption id="" align="alignnone" width="567" caption="© World Bank Photo Collection"][/caption]   Post market crash of 2008, governments are struggling with deficits; the banking system is broken and nervous, markets are paralysed and a minority of indebted European nations are on the verge of bankruptcy. The International Monetary Fund, a quasi-bank without the full authority, has a cash facility of $500 billion; majority of which has been depleted because of several large scale bailouts of eurozone countries. IMF intervention is much more common in the post-crash global economy, with its role become more or less that of a global central bank. Yet, it lacks the credible reforms to achieve such status; the transition towards a global central bank has begun. Globalisation requires a stronger, more robust and vibrant monetary system, which is independently financed and has the necessary administrative skills to stabilise global markets. A central bank is required to oversee the money supply, interest rates and the national currency; currently, the IMF does not control either of these areas – it only has a monitoring role. The Special Drawing Rights (SDR) are the quasi-currency of the IMF; it is neither official currency, money or credit, but a unique asset which countries can exchange for either pound sterling, dollar, euro and yen; better known as the 'basket of currencies'. Vince Cable, along with China and Russia, has commented on the possibility of the SDR system becoming the basis of a super-national currency for international trade and commodities because it would prevent the risk of exporting inflation and commodity price shocks. Currently, markets are unable to recalibrate and stabilise after the crash. The Dollar is currently the reserve currency of the world and it is vulnerable to the Triffin paradox; the conflict of having a national currency as the international reserve currency. Such a situation allows the global economy to succumb to bias and domestic economic policies of the United States; commodities markets would be much more stable and viable if aligned to a basket of currencies, under the guise of SDR, than a single currency. It would be much easier for trade because it would not require having to exchange goods and services, to buy dollars, and then purchase oil or any other commodity – all major currencies would have equal status and be unified under a super national currency. The neutrality would end currency wars and trade conflicts. Britons would not have to worry about abandoning the beloved Pound; it would have equal status -along with the Euro- in a super currency. Special Drawing Rights and their transition to a super national currency basket is the easiest part of the reform, and is already occurring. The money supply, or stock, is the most complex element and is significantly vital to ensure a new SDR system works. The IMF would require authority to arbitrarily control pounds, dollars, yens and euros on an international scale and must have the capability of supplying the associated debt. Politically, the most controversial dimension of a global central bank is it would require the national central banks succeeding control over to an international body, which would not answer directly to an individual country. Reorganising the IMF into a central bank, for the global economy, would require an international treaty. After all, during the present Euro crisis, the IMF was prevented from entering the bond market and purchasing debt of the periphery countries within southern Europe. New legal powers need to be drafted, and agreed, by nation states. Under the current remit, the IMF is prohibited from influencing the money supply; it can increase the supply of SDR's, but cannot 'bailout' national currencies. The financial ability of the IMF to bailout countries is not associated to the money supply of a currency; it is direct loan to a nation and related to the fiscal and not monetary situation. Nevertheless, who would ensure that a global central bank is accountable? There would be a natural tendency to give such a responsibility to one of the world economic powerhouses, but this poses the dilemma of the bank being influenced by their domestic attitudes and policies. An example of such a situation is the European Central Bank, which is predominately seen as being bias towards German economic factors and not the wider eurozone as a whole. It will need to be ensured the same scenario does not occur at an international level and there is equilibrium between all economies and markets. The United Nations is the only authority, on Earth, with the ability to do this. Currently, every April, the United Nations Economic and Social Council (ECOSOC) holds meetings with the World Bank and IMF. Transparency and accountability already occurs; significant reform of the United Nations would not be required, the Economic and Social Council is among one of the most competent functions of the UN. ECOSOC members are the finance ministers in each member state and this helps to ensure accountability to national governments. Quarterly meetings with the global central bank would be more sufficient to global markets than a once a year gathering; it would help to maintain confidence, and predict potential crisis and dangerous fluctuations, and could be done alongside the annual ECOSOC summits. To ensure the workability and financial security of globalisation, the risks need to be counter weighted with strong international bodies and regulation. This cannot be done without significant changes to current institutions, such as the IMF. The introduction of a global central bank is, as I stressed, inevitable. A UN report, in 2009, does analyse the question of replacing the dollar with a super national currency and makes reference to the “Bancor”, an international currency proposed by Keynes in the 1940s, which the Americans objected to and insisted on the dollar as the reserve currency of the global economy. If I'm being rather candid, this is advocating nothing new; even prior to the financial crisis, studies and reports were issued on the probability and requirement for a global central bank. The growth of globalisation seems beyond the control of national governments, after all, “global problems require global solutions” and only a global central bank can truly solve the current crisis.

2

What is the role of the IMF in the post-financial crisis world?

© World Bank Photo Collection

 

Post market crash of 2008, governments are struggling with deficits; the banking system is broken and nervous, markets are paralysed and a minority of indebted European nations are on the verge of bankruptcy. The International Monetary Fund, a quasi-bank without the full authority, has a cash facility of $500 billion; majority of which has been depleted because of several large scale bailouts of eurozone countries. IMF intervention is much more common in the post-crash global economy, with its role become more or less that of a global central bank. Yet, it lacks the credible reforms to achieve such status; the transition towards a global central bank has begun. Globalisation requires a stronger, more robust and vibrant monetary system, which is independently financed and has the necessary administrative skills to stabilise global markets.

A central bank is required to oversee the money supply, interest rates and the national currency; currently, the IMF does not control either of these areas – it only has a monitoring role. The Special Drawing Rights (SDR) are the quasi-currency of the IMF; it is neither official currency, money or credit, but a unique asset which countries can exchange for either pound sterling, dollar, euro and yen; better known as the ‘basket of currencies’. Vince Cable, along with China and Russia, has commented on the possibility of the SDR system becoming the basis of a super-national currency for international trade and commodities because it would prevent the risk of exporting inflation and commodity price shocks.

Currently, markets are unable to recalibrate and stabilise after the crash. The Dollar is currently the reserve currency of the world and it is vulnerable to the Triffin paradox; the conflict of having a national currency as the international reserve currency. Such a situation allows the global economy to succumb to bias and domestic economic policies of the United States; commodities markets would be much more stable and viable if aligned to a basket of currencies, under the guise of SDR, than a single currency. It would be much easier for trade because it would not require having to exchange goods and services, to buy dollars, and then purchase oil or any other commodity – all major currencies would have equal status and be unified under a super national currency. The neutrality would end currency wars and trade conflicts. Britons would not have to worry about abandoning the beloved Pound; it would have equal status -along with the Euro- in a super currency.

Special Drawing Rights and their transition to a super national currency basket is the easiest part of the reform, and is already occurring. The money supply, or stock, is the most complex element and is significantly vital to ensure a new SDR system works. The IMF would require authority to arbitrarily control pounds, dollars, yens and euros on an international scale and must have the capability of supplying the associated debt. Politically, the most controversial dimension of a global central bank is it would require the national central banks succeeding control over to an international body, which would not answer directly to an individual country. Reorganising the IMF into a central bank, for the global economy, would require an international treaty.

After all, during the present Euro crisis, the IMF was prevented from entering the bond market and purchasing debt of the periphery countries within southern Europe. New legal powers need to be drafted, and agreed, by nation states. Under the current remit, the IMF is prohibited from influencing the money supply; it can increase the supply of SDR’s, but cannot ‘bailout’ national currencies. The financial ability of the IMF to bailout countries is not associated to the money supply of a currency; it is direct loan to a nation and related to the fiscal and not monetary situation.

Nevertheless, who would ensure that a global central bank is accountable? There would be a natural tendency to give such a responsibility to one of the world economic powerhouses, but this poses the dilemma of the bank being influenced by their domestic attitudes and policies. An example of such a situation is the European Central Bank, which is predominately seen as being bias towards German economic factors and not the wider eurozone as a whole. It will need to be ensured the same scenario does not occur at an international level and there is equilibrium between all economies and markets. The United Nations is the only authority, on Earth, with the ability to do this. Currently, every April, the United Nations Economic and Social Council (ECOSOC) holds meetings with the World Bank and IMF. Transparency and accountability already occurs; significant reform of the United Nations would not be required, the Economic and Social Council is among one of the most competent functions of the UN. ECOSOC members are the finance ministers in each member state and this helps to ensure accountability to national governments.

Quarterly meetings with the global central bank would be more sufficient to global markets than a once a year gathering; it would help to maintain confidence, and predict potential crisis and dangerous fluctuations, and could be done alongside the annual ECOSOC summits.

To ensure the workability and financial security of globalisation, the risks need to be counter weighted with strong international bodies and regulation. This cannot be done without significant changes to current institutions, such as the IMF. The introduction of a global central bank is, as I stressed, inevitable. A UN report, in 2009, does analyse the question of replacing the dollar with a super national currency and makes reference to the “Bancor”, an international currency proposed by Keynes in the 1940s, which the Americans objected to and insisted on the dollar as the reserve currency of the global economy. If I’m being rather candid, this is advocating nothing new; even prior to the financial crisis, studies and reports were issued on the probability and requirement for a global central bank. The growth of globalisation seems beyond the control of national governments, after all, “global problems require global solutions” and only a global central bank can truly solve the current crisis.

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