Sunday, September 21, 2003


Listed below are three or four different sections of thought about IFI's{international financial institutions}. I am interested to know serious peoples' opinions/facts about reforming the world monetary system and depending on IFI's as a viable eco-political theme or not. What do you think? You can either "e-mail me or use my send comment site here or at the top side of my blog.{at bottom of links}

The first article is by Plato some 2500 years ago, so the idea is far from new. He recommended an exchange clearing house of international operations much like one of Keynes' and White's ideas in 1944. Of course it's never been instituted, although many other forms of currency management have been tried with varying success. The second article is by Jane D'Arista about the similar and yet expanded subject to fit the modern world. In fact it seems to be the most evolved set of ideas I can find on the subject. If I'm wrong, let me know. The third article is an e-mail of my own about related ideas to possibly circumvent the need of IFI's. I am writing a paper to show beyond the shadow of a doubt that credit productivity can be improved with conventional means enough to drastically improve the human eco-political-health-conditions of our sick warring planet. The fourth article is another e-mail about world politics, economics, institutions, deflation, and productivity, etc. The four of these together should be enough information to give some idea of what I am interested in being commented on.

{1}Plato & Exchange Clearing

"The citizen of the ideal state will require a currency for the purpose of every day expenses; This is practically indispensable for workers of all kinds and for such purposes as the payment of wages to wage earners. To meet these requirements, the citizen will possess a currency which will pass for value among themselves, but will not be accepted outside their own boundaries. But a stock of some currency common to the Hellenic world generally i.e., of international currency, will at all times be kept by the state for military expenditures or official missions abroad such as embassies and for any other necessary purposes of state. If a private citizen has occasion to go abroad, he will make his application to the government and go; and upon his return if he has any foreign currency left over in his possession, he will hand it over to the state receiving in exchange the equivalent in local currency." Plato

If you have time let me know what you think of external exchange clearing as listed below, and also known since the time of Plato, yet never implemented. Jane D'Arista has done the defining work for a modern form of what White and Keynes also had on their plate in 1944, at Bretton Woods.{sort of repeated as was in original e-mail}

complete text of Jane D'Arista



By Jane D'Arista*

Criticisms of the International Monetary Fund (IMF) by progressives and nongovernmental organizations (NGOs) currently focus on six issues: (I) the need for debt relief; (ii) the need to democratize the Fund's governance; (iii) the need to increase transparency; (iv) issues related to bailing-out and/or bailing-in private investors; (v) the Fund's future mission; and (vi) the need to reform the policy paradigm that countries must accept to qualify for borrowing. First I will provide a brief overview of progressive critiques on these issues. Then I will discuss other areas that also should be a focus of concern and criticism. I will conclude with some proposals for alternatives.

Alternative Proposals

In addition to the reorientation of IMF and World Bank loans as a means to achieve social and environmental goals, progressives support a variety of ideas, both old and new, for reforming the international financial and monetary architecture. They argue for using capital controls to moderate pro-cyclical private flows seeking short-term profits.

Many support instituting some form of the securities transaction tax proposed by Tobin, that would discourage short-term turnover of investments in source countries (Pollin and Baker, 2000). Palley (2000) proposes extending asset-based reserve requirements to all financial sectors and assets, so as to reestablish monetary control over the supply of credit in national markets. Eatwell and Taylor (2000) propose the establishment of a World Financial Authority (WFA) to provide global oversight of international financial institutions, on the grounds that the monitoring of global markets via national regulation is inadequate. They argue that the IMF should not be involved in financial regulation, and that a WFA is needed both to reestablish the primacy of stability and soundness as regulatory objectives and to reverse the current push for deregulation.

Elsewhere (D'Arista, 1999), I have offered three proposals to reform the international financial and monetary systems. The first is a proposal for a closed-end international investment fund for emerging markets, with investment decisions based on development goals rather than short-term profit opportunities. The fund would be financed through private institutional investors' purchases of marketable World Bank securities. As a closed-end fund, investors could sell shares without triggering sales of underlying assets.

This structure would serve to insulate underdeveloped markets from volatile flows of foreign portfolio investment, while providing a highly-rated, guaranteed investment asset for institutional investors.

My second proposal is to issue new special drawing rights (SDRs) that would augment the international reserves of developing countries and reduce their debt burdens. SDRs were originally intended to become a primary reserve asset and to give the IMF limited powers to act as a lender-of-last resort (IMF, 1987). The most recent allocation, however, was in 1981, and only $28 billion in SDRs are currently outstanding, compared to $1.6 trillion of foreign exchange reserves. Moreover, as of yet, none have been issued to Russia and other new member countries. Yet, SDRs represent an existing mechanism for relieving the liquidity squeeze that has affected developing countries since the Mexican crisis in 1995. A new allocation, targeted to highly indebted and crisis-affected countries, could be even more effective than debt relief in re-igniting global growth.

My third proposal calls for the creation of an international clearing agency to address the basic problem in the global economy: the unraveling of the international monetary system. Failures of exchange-rate regimes and the push for dollarization and other currency blocs are symptoms of international monetary fragility. Under the privatized, post-Bretton Woods system, the volatility of changes in the valuation of currencies has widened their impact and deepened the economic damage they cause. The fact that only a few countries issue currencies that can be used in international transactions greatly exacerbates this instability. The primary objectives of the proposed clearing agency would be to allow all currencies to be used in international transactions and to shift control of international payments from private to public institutions.

This system would replace the current system of foreign exchange that is based on oligarchy. Resources would be valued in terms of the entire basket of currencies of member countries. All international reserves would be held by the international clearing agency. Changes in exchange rates would be tied to changes in the reserves of member countries and adjusted at two-week to four-week intervals. The clearing agency would also have the means and authority (on the basis of a majority vote of its member countries) to create reserves by conducting open market operations in national markets.

This power would create a true lender-of-last resort for the global economy, responsive not only to balance-of-payments problems stemming from trade and investment flows, but also to the often greater problems that can result from natural disasters and the devastation of war.

Creating an international clearing system that reestablishes public control over crossborder payments is necessary to end the pro-cyclical rule of market forces and to restore sovereign control over policy determination. It would allow national central banks to reintroduce the use of credit allocation and countercyclical policies; it would also allow governments to pursue development and growth as objectives of economic policy. Furthermore, since it would allow developing countries to pay their transactions and service their debts with wealth created in their own national economies, such a system would end the export-led growth imperative of the current system and reinstate demandled growth as an alternative policy paradigm for developing countries.

The reform of the international financial and monetary architecture requires a democratic basis for governance. The clearinghouse proposal envisions a rotating council composed of member countries that would represent half the world's population and half the world's wealth at all times. The EU has taken steps in a similar direction by weighing both population and monetary contributions to determine voting shares within the European Central Bank. Similar criteria must be applied to shaping the governing structures of international institutions, old and new. Whatever the specifics, the issue of democratic governance must be addressed.

{3}Credit Productivity and Full Employment

One query. One of the problems I have when reading Keynes these days is the whole problem of 'full employment'. What the hell does this mean in today's world. Can you help me?

As far as Keynes `full employment'; this is one of the main points to be made in my future paper. In my humble opinion present classical economic opinion does not understand credit productivity nearly as clearly as did J.M. Keynes{and he lacked in some areas also, as Hayek pointed out}. There are five main points I will make in my paper and possibly a few more, as I also evolve. I will mention just a few, for now, to allow a clearer understanding of my view of full employment credit productivity. These will be very concise, as full explanation would take more time than I have at present.

I believe the mistakes all capitalist governments of recent years have made is not understanding the advantages of workfare public works over straight welfare and or unemployment compensation. The only way we are going to solve the world's dynamic problems is to solve the growing lack of decent paying jobs to improve national and global credit productivity. Keynes was well aware of this and suggested massive public works in recessionary/deflationary times.{got to be careful here, as Hayek pointed out} Now the point is, decent paying public works jobs have the benefit of access to real credit markets, whereas welfare and unemployment drawees usually do not. The bankers will extend credit to public works workers as they did in the `30's, but will not to most welfare and unemployed. Due to the multiplication factors of the banking system being able to create credit out of thin air, such credit will expand many times over as it does for the truly working classes. This state engineered credit expansion is able to repay itself as Henry Ford, in 1914, found out when he created the $5.00 day for his own employees to purchase his new assembly line cars, as no one else had the funds to buy. The multiplication factor in the banking system multiplied by the expansion of individual credit access will repay what is lent short term{as freshly spent funds circulate} in the long term cycle of repayment, thus enriching the individuals, the company as then, or the state as today. It's just the simple fact of what goes around comes around, as John Reed of CitiBank said years ago. Credit extended to reputable people will repay itself due to the true dynamics of real credit multiplication. This national dynamic, as verses the international, must be understood, and it is not. Old man Rothschild understood this well when he started his bond market out of an old trunk in his ghetto basement. I further believe the Egyptians, Greeks, and Romans, with their giant public works empires experienced the same by accident. War booty and slavery are very incomplete economic explanations. Forward letters of credit go clear back to even these ancient empires, as Paul Einzig pointed out in his `Ancient Money' book and others.

The second example I would give is the giant public works project called WWII. America pulled itself and the rest of the world out of the last major depression by almost nothing other than credit extended in massive amounts. We went in debt 100% of gdp, and at present we are only about 70% of gdp. We have plenty of room to maneuver. This massive and even partially wasteful credit extension repaid itself in a very short amount of time through almost nothing other than the multiplication dynamics of credit mechanics and double entry fractional reserve banking.{I am discounting all the other trade and market realities to be concise, because the main dynamic at work was and is credit mechanics, even other nations credit mechanics, as they also multiply the same} If I am correct at guessing, I believe we had paid the national debt down by 1960. Now, if this isn't an example of full employment credit productivity, I don't know what is.{sorry, carried away a bit} America even employed many of her female workers in the war effort, in public works jobs building the war machinery along with many other fields of public service. Now, I admit we may have taxed heavily, but the taxes also were contributed greatly by the original massive credit expansion, not only in America, but Europe and elsewhere through the Marshall Plan and other government loans. All was repaid mainly by the original credit extension productivity resulting, and the banking system dynamics involved. We didn't rob anyone after WWII. We got rich from the original massive public works project called WWII.

This can still be done in today's world, and without war. Money and real credit productivity work the same in peace as war. "The higher the production and credit productivity of the pariffery over the center, or the further from speculation credit is, the higher real aggregate credit and production productivity will be." I hope I have helped some to understand this profound deeply esoteric subject. My paper will explain much more of national and global aggregate credit productivity and full employment possibilities, of conventional classical economics, in much deeper detail. You may disagree for now, that is fine, but when my paper is finished, I feel I will be able to persuade. As you said; "Dialogue is often fruitful. Anyway being disagreed-with is preferable to being ignored."

{4}The World Financial Crisis

Thought you may be interested in this link of global labor statistics{many graphs and charts}: Link
It reveals a great deal about demographics, labor, and eco-geo-politicism.

Rudiger Dornbush Link - The World Financial Crises

As far as Rudi Dornbusch's link I sent you, I didn't mean I agreed with currency boards, either. My main vision of that particular piece was about the major economic problems being most political in nature, as verses, other, economic views. I don't believe Rudi meant to convey the message of currency boards for all nations either. He simply mentioned it about Argentina and the point of being discussed for nations with completely incompetent political systems.

As far as demographics being 90% and IMF 10%, I can not agree. In my view next to China and Japan exporting deflation, is much of the third world also exporting deflation, due to the IMF destructive bulldozer of hyper-deflation after many of their hyper-inflations, and I am discounting exchange rates exporting deflation, which of course would be even more. As many of the charts and graphs above show, there has been a massive destruction of unions, labor, wages, i.e., the middle classes and poor of many of the entire world's nations, over the last 10 years or so. Some grew, but few. This means there has been upwards of a 10% real reduction in consumption capacity in the nations hardest hit. In my view this reveals a very sizable over-production capacity for the entire world, as these nations hardest hit over the last 10 or so years must now export their excess productive capacity wherever they can at whatever deflated price they can attain, since they have smaller home markets. This, in my view, is as big a dynamic of deflation as China and Japan combined. Now you may call this a demographic problem, but I call it a global aggregate credit productivity problem, in the old Keynesian fashion.{full credit productivity is attained at full employment} We can't keep decreasing jobs and increasing production. We are going to have very big deflationary egg on our face if this continues. So in my final analysis, eco-politically, national and global aggregate credit productivity are the real world problems. This is just as true here in the U.S. We are presently still losing close to 100,000 jobs a month as the market bubble builds. This may be a false asset bubble? Many here think both the dow and the nasdaq are still quite overvalued, as do I.

I am presently working on a paper about national and global aggregate credit productivity. "The higher the productivity of the pariffery over the center, or the further from speculation, the higher the productivity is." It will take some time to finish as I am slimming down some 200 pages to 20 or 30. It should be completed later this winter, as I am quite busy now with many projects. I plan to send all the macroeconomic economists copies when finished, and I will then send you one also.