Thursday, August 26, 2010

Global Reserve Currency

Joseph Stiglitz in his excellent latest book, "Freefall," advocates the creation of a new global reserve currency (ICCs) with "annual emissions." "This would thereby increase global aggregate demand and strengthen the global economy." He acknowledges that the world is able to produce much more, but many have no money to buy it. So why not create more? (He also argues that such a reserve currency would reduce the need for countries to run trade surpluses to accumulate reserves.)
The IMF could create the new reserve currency. Stiglitz cleverly calls it an "emission" and not a loan that would create the obligation to pay interest, much as I have been advocating to solve the problem of inadequate demand currently in the US.
The following is from a 1999 report to the UN from a special commission that Stiglitz chaired.
"the international agency in charge of creating global reserves would simply issue the global currency, allocating ICCs to member countries, much as IMF Special Drawing Rights are issued today. There would be no “backing” for the global currency, except the commitment of central banks to accept it in exchange for their own currencies. This is what would give the ICCs (or SDRs) the character of an international reserve currency, the same way that acceptance by citizens of payments in a national currency gives it the character of domestic money. However, if the issues of global currency received by countries are considered deposits in the IMF or the Global Reserve Bank, and the institution in charge of managing the system is allowed to buy the government bonds of member countries or to lend to them, then these investments would be the “backing” of the global currency, just as domestic moneys are “backed” today by the assets of national central banks (the government bonds in their hands and their lending to private sector financial institutions).

1 comment:

The Arthurian said...

Allan --

I linked to your post.