IMF Calls for A New Global Currency

   In a report titled "Reserve Accumulation and International Monetary Stability" the IMF makes the argument that the only way for the world economy to achieve financial stability is for the adoption of a new global currency. The IMF claims that with a global currency, the world economy will no longer have to suffer exchange rate volatility or be dependent on the monetary policies of a single nation (the US). This is no longer a conspiracy theory, it is currently being considered by the elite of the world.  Here is the IMF's line of reasoning:

A more ambitious reform option would be to build on the previous ideas and develop, over time, a global currency. Called, for example, bancor in honor of Keynes, such a currency could be used as a medium of exchange—an “outside money” in contrast to the SDR which remains an “inside money”.

One option is for bancor to be adopted by fiat as a common currency (like the euro was), an approach that would result immediately in widespread use and eliminate exchange rate volatility among adopters (comparable, for instance, to Cooper 1984, 2006 and the Economist, 1988). A somewhat less ambitious (and more realistic) option would be for bancor to circulate alongside national currencies, though it would need to be adopted by fiat by at least some (not necessarily systemic) countries in order for an exchange market to develop.

   The IMF goes on to lament that the fact that they would have to require the use of the new global currency in order for its implementation to be successful. The organization notes that it could be required for use in payment of taxes as a way of introduction. Another problem for the creation of a new global currency is that each country has would still have its own monetary policy. The IMF suggests that they would need to set up a system of global governance to make sure that they have some operational control over each countries monetary policy. Otherwise the new currency might not work. The report goes on to say:

Caveats and pre-conditions. Absent significant monetary instability or an injunction for use of bancor for the making of an important set of payments (e.g. payment of taxes), surmounting the barriers to wide acceptance would be a key and perhaps prohibitive challenge. Moreover, an independent monetary policy constitutes an important instrument for adjustment when economies do not form an optimal currency area with others. Adoption of a common currency could limit the scope for adjustment to shocks, and developing alternative adjustment mechanisms would be a pre-condition for adoption (e.g. greater flexibility of labor markets) as would mechanisms for fiscal discipline and cooperation. Since a system with a few currencies competing alongside one another has built in safety valves (in terms of checks on inflation, for instance; see Rogoff, 2001), it would be essential to construct governance arrangements that ensure accountability of the bancor-issuing institution while assuring its independence. These arrangements would also need to be sufficiently flexible and robust to accommodate differences among adopting members. These considerations and costs—important as they are—would need to be weighed against the benefits of using a currency like bancor.

Why bancor? A global currency, bancor, issued by a global central bank would be designed as a stable store of value that is not tied exclusively to the conditions of any particular economy. As trade and finance continue to grow rapidly and global integration increases, the importance of this broader perspective is expected to continue growing.

Risk-free asset. Once liquid markets for bancor-denominated instruments exist and bancor-denominated transactions are at a par with or exceed transactions in other currencies (i.e., in a bancor-based system), bancor-denominated debt of the sovereign with the highest credit rating could serve as the global risk-free asset, off of which all risky assets are priced. The risk-free asset would be less tied to the credit ratings and inflation outlook of the largest economies, and would therefore be subject to less volatility and dependence on their specific circumstances than the SDR-based system.

Lender of last resort. The global central bank could serve as a lender of last resort, providing needed systemic liquidity in the event of adverse shocks and more automatically than at present. Such liquidity was provided in the most recent crisis mainly by the U.S. Federal Reserve, which however may not always provide such liquidity.

Adjustment. If bancor were to circulate as a common currency, then current account imbalances among the adopting economies would reflect structural rather than monetary considerations. Instead, if bancor were to circulate as a parallel currency but in a dominant role in place of the U.S. dollar, then as in the SDR-based system described above, current account imbalances that reflect today’s situation—namely, surplus countries pegging to bancor (the dominant currency in place of the U.S. dollar) with deficit countries floating against it—would adjust more symmetrically, and perhaps more automatically, than the current or SDR-based systems since the deficit currencies would be expected to depreciate against bancor.

   Is this a serious plan? I hope not. While the IMF claims that a new global currency would promote stability, in reality it would intensify global imbalances. Just look at the EU. The European elite thought that a unified monetary policy for Europe was possible. All it did was allow countries like Greece, Spain, and Portugal to borrow at artificially low interest rates, spurring property and consumption bubbles which all ended in financial ruin for the participating countries. We have learned that a one size fits all monetary policy does not work because of structural differences within individual countries. The only way a new global currency could work is if the new global currency was backed by gold and competed against national currencies. I have always liked the idea of competing currencies because it creates competition and promotes stable currencies and monetary sanity. But you notice that the IMF has no intention of backing their new fiat currency with gold. This is simply a power grab by the IMF to impose their rule over individual countries. The loss of dollar supremacy would bring result in the absolute economic ruin of the US because the world would no longer accept the dollar for international trade.

Black Swan Insights          

IMF Calls for A New Global Currency