Download Current global imbalances and the Keynes Plan

Current global imbalances and
the Keynes Plan
by
Lilia Costabile
Università di Napoli Federico II
Current global
imbalances
(i) wide and persistent current account deficits run by
the US, with correspondingly high surpluses in
some emerging economies;
(ii) a US deteriorating net external position, reflected
in large accumulation of US financial assets in
international portfolios, particularly in the Central
Banks of emerging economies (China, India,
Brazil, Russia etc.);
(iii) low saving rates in the US and high saving rates in
the developing countries;
(iv) a tendency for emerging economies to peg their
currencies to the US dollar, etc.
1
Hard landing ?
• falling domestic demand in the US, reduced saving
inflows and rising interest rates, as foreign investors
and Central Banks diversify their holdings away
from US assets, etc.
• In turn, falling demand in the US may impose severe
worldwide recession, given the role of the US
economy as the world’s “engine of growth”
2
Balance of financial terror
• Summers (2004) depicts the current situation as one in
which “we (i.e., the US) rely on the costs to others of
not financing our current account deficit as assurance
that financing will continue”.
• Costs to others of continuing the policy of financing
US deficits include earning negative real interest rates
on US short-term securities (ibid.), and loosing control
on domestic monetary policy;
• Costs of discontinuing this policy may include
sharply rising interest rates and a shrinking US market,
with deflationary repercussions on the international
economy.
3
Purpose
- trace the origins of the “balance of financial terror” back
to the basic rules of the international monetary system;
-ask whether the “Keynes Plan”, i.e. the Clearing Union
scheme, may still provide useful remedies for this
“terrorist” type of international balance;
-present a “logical experiment”, illustrating how alternative
models of international financial organization may
produce opposite results in the global economy.
4
Structure
Part 1. ASYMMETRIES BUILT IN “KEY
CURRENCY” SYSTEMS
Part 2. REMEDIES IN THE KEYNES PLAN
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Part 1
ASYMMETRIES
6
Global imbalances and the international
monetary system
monetary vs barter economies
• Main advantages of international money:
efficiency gains, as a “double coincidence of wants”is not
needed;
multilateral, rather than bilateral, system of exchanges.
• Main disadvantage:
money may be a potential factor of disequilibrium and
asymmetry, depending on the nature of the
international currency.
“The problem of maintaining equilibrium in the balance
of payments between countries has never been solved,
since methods of barter gave way to the use of money
7
and bills of exchanges” (KCW, 25, p.21).
“Key currencies” vs.
a supra-national money
Crucial point where the current international monetary
system and Keynes’s Currency Union system part
company:
-in the current financial organization of international
transactions, the national currencies of some individual
countries (K countries) work as the international money
(“key currencies”)
- in the “Keynes Plan” international money is a supranational money, issued by a supra-national agency
8
ASYMMETRY 1
Key-currencies as international currencies
Because of their pivotal role in international
transactions (as “vehicle currencies”, in which
payments are made; and “quotation currencies”, in
which imports are quoted), key currencies (KC) also
become the medium in which international debtcredit relationships are established, and “reserve
currencies”, i.e. the currencies in which exchange
market support is operated by Central Banks.
.
9
Because of this lack of synchronisation, individual
countries need to accumulate international reserves
(“liquid” assets for transaction and precautionary
purposes). Thus, Central Banks “institutionally”
need to keep reserves in KC denominated assets (+
currently other motivations).
An international (private and institutional) demand for
the KC is thus generated.
By contrast, the logic of the Keynes Plan does not
contemplate this privileged position for any national
currency, or the holding, in Central Banks’
portfolios, of foreign countries’ currencies as
reserve.
10
ASYMMETRY 2.
Seignorage
The only thing country J can give in exchange for
the international currency are the goods that it
produces. Country K can be viewed as the provider
of either “the public good of international money, or
the private good for itself of seignorage”
(Kindleberger, 1981, p.248).
There is a built-in mechanism whereby goods are
transferred from J to K.
11
This mechanism is absent from the Keynes
Plan, since under its provisions no “foreign
currency” provides services as a key currency
and reserve asset. Consequently, the supranational nature of the international money
excludes seignorage accruing to any country.
12
ASYMMETRY 3
Control of the world moneysupply
K’s reliance on J’s demand for its currency makes its
expansionary monetary policies relatively easy and
convenient, so that the country is able to finance its
demand flows towards the rest of the world, both for
consumption and for investment purposes.
As international trade grows, it is a good thing for both
countries if the international means of payment grow
correspondingly, thus avoiding liquidity constraints.
13
Country J may either benefit or lose as a result,
but is not in a position to do the same.
This asymmetry is absent from the Keynes Plan,
since, in its logic, monetary policy for the
international economy is the responsibility of
a supra-national authority, according to rules
which would be defined, and agreed upon in
advance, by all countries joining the system
14
ASYMMETRY 4
“Fiscal stances”
K may finance government deficits.
This is desirable,as be at a risk of paying its arguably
high propensity to import (or, high income elasticity
of imports) with a downward pressure on domestic
production. Risk reduced if other components of
aggregate demand are high enough. Built-in
mechanism making expansionary fiscal policy
“desirable” in K. By contrast, country J should adopt
more severe fiscal policies, as expansionary fiscal
policies may crowd out exports.
Keynes’s Currency Union does not stimulate these
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asymmetric fiscal propensities
ASYMMETRY 5
GROWING EXTERNAL DEBT, LOW INTEREST
RATES
(5.1) Reserve accumulation by country J (and, more
generally, its demand for K’s assets) is reflected into
K’s growing external debt.
(5.2) The correlation between interest rates and
country K’s financial liabilities may become
relatively weak.
From the point of view of national accounting, K can
only finance its current account deficit by borrowing
abroad.
From the point of view of the driving economic
mechanisms, the “essence of the regime” was
clarified by Rueff :
16
• “What is the essence of the regime, and what is its
difference from the gold standard? It is that when a
country with a key currency has a deficit in its balance
of payments – that is to say, the United States, for
example- it pays the creditor country dollars, which end
up in its central bank. But the dollars are of no use in
Bonn, or in Tokyo, or in Paris. The very same day, they
are re-lent to the New York money market, so that they
return to the place of origin. Thus the debtor country
does not loose what the creditor country has gained. So
the key-currency country never feels the effect of a
deficit in its balance of payments. And the main
consequences is that there is no reason whatever for the
deficit to disappear, because it does not appear. Let me
be more positive: if I had an agreement with my tailor
that whatever money I pay him he returns to me the very
same day as a loan, I would have no objection at all to17
ordering more suits from him”(Rueff and Hirsch, 1965,
Low correlation indebtedness/interest rate
(1) Institutional demand for $
(2) country J, as an emerging country, has strong incentives to
accumulate reserves in order to avoid appreciation of the
national currency (USD depreciation), for competitiveness
reasons.
(3) country J also has incentive to resist capital losses due to
USD depreciation (see below).
(4) country J’s Central Bank’s precautionary demand may rise in
periods of turbulence in financial markets, as it buys USDs
as an insurance device against speculative attacks.
Speculative attacks as a “discipline device”.
(5) J’s private investors will be encouraged to buy country K’s
assets by their Central Bank’s support for the external value
of the USD.
18
PARADOX
Paradox of poor or emerging countries lending to
“superpowers” (Roubini, 2005; Triffin, 1984 had
similar worries).
But, to some extent, this systematic borrower/debtor
position is conferred on K by the very “special
international status of the US dollar”: this happens
because country J’s reserves need to be kept in the
international currency, and because it does not pay
country J’s Central Bank to keep them idle and
barren in their vaults.
This disturbing paradox could not materialise under
the Keynes Plan, because no special status would be
bestowed on any national currency.
19
ASYMMETRY 6.
External adjustment
Is country K living “beyond its means”?
In the long run normal borrowers pay back their excess
“present consumption” with foregone “future
income”.
By contrast, country K may benefit from a depreciation
of its currency. Depreciation restores its
competitiveness but, above all, has the effect of
improving its net foreign position.
20
“Valuation effects” of USD depreciation
• Value of country K’s external assets rises when USD
depreciates
• - Value of external liabilities falls (although a dollar is still a
dollar when country K pays off the loan, foreigners bought
US assets when the dollar was expensive in terms of their own
currencies). Debasement
• “Valuation effects” can play a substantial role in international
adjustment. From the Seventies onwards contributed to 30%
of the US financial adjustment (Gourinchas and Rey, 2005).
(Domestic cost: changes in the “terms of trade”, i.e. rising
prices of imports, impose a real income loss on “fixedincomists”).
21
By contrast, depreciation of domestic currency is
not good news for country J’s external debt.
This asymmetry could not materialise in the Currency
Union scheme, where countries would all stand on a
par in their international status. Moreover, they
could only become debtors and creditors towards the
International Bank, not towards each other:
consequently, changes in exchange rates would not
result in international redistributions of wealth.
(Virtual discipline exerted by gold in “Bretton Woods
I” but not in “Bretton Woods II”. “Fiat money”,
inconvertibility)
22
SUMMARY
•
• Thanks to the international status of the USD, country K
enjoys a certain flexibility concerning its monetary policy, and
both its external and public deficits.
• (i) K’s reliance on continued demand for USD as the
international currency makes expansionary monetary policies
relatively easy because, as Rueff explained, whatever amount
of money is created, it comes back straight away to K’s Central
Bank.
• (ii) Capital inflows buy the country’s financial liabilities, and
may help finance country K’s investment, consumption, or
public deficits, in the latter case allowing the country to adopt
a relatively relaxed fiscal stance.
• (iii) Thanks to these macroeconomic policies, country K
experiences a model of growth led by domestic demand.
Symmetrically, country J’s growth is export-led.
23
LOGIC
• The relationship which binds the two countries together is
rooted in the very nature of the monetary system: in a
monetary economy country J needs K’s money, and hence
K’s demand for goods “made in J”, in order to stimulate
its growth. K, in turn, becomes dependent on the goods
made in J for satisfying the needs of its population.
• Because country K specialises as the locomotive of the world
economy, the rest of the world needs the expansion of K’s
demand for foreign goods, and –in return- is willing, or
compelled, to accept K’s liabilities.
• When the net financial position of country K becomes risky
or unsustainable, external adjustment may be restored through
exchange rate adjustment, which are helpful on both sides of
the balance of payments… And the process is ready to start
again.
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NEXT QUESTIONS
Thus, the next questions are:
• Are there alternative monetary arrangements that may
be substituted for the current “key currency” system?
• Specifically: would the world look different under the
Keynes Plan?
• What kind of international balance would be
established under its rules, and would such a
“Keynesian international balance” be desirable?
25
PART II
REMEDIES IN THE KEYNES PLAN
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Keynes’s Clearing Union Plan
Why is Keynes’s Clearing Union (CU) Plan relevant?
• First best solution: pure credit system without the
asymmetries.
• CU plan can only be understood with reference to the specific
circumstances of post WWII international disequilibrium, but
its logic goes well beyond them. (This logic has to be
“disentangled” from the specific circumstances of post-war
circumstances.)
27
Post WW2 facts
(i) specific roles played by different countries
• British economy was a debtor country, US was the
creditor country.
• USA was pushing for free trade, in order to break
the protective belt around the British Empire
• UK’s objective was to shift part of the burden of the
adjustment on the creditor country.
(ii) specific problems faced by the world at the end
of World War II (wartime destruction of
productive potential in UK and generally in Europe;
need for “financial disarmament”) (KCW, v.25,
p.57);
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• (iii) lesson from the Great Depression. Keynes,
worried about deflation, wanted to substitute “an
expansionist, in place of contractionist, pressure on
world trade” (KCW, vol.25, p.46, 2nd Draft, 18
November 1941). In the Twenties and Thirties,
surplus countries (the US and France) had imparted
such a “contractionist pressure” on the world by
sterilising their gold inflows, thus preventing the
increase in their international reserves from initiating
a monetary expansion.
• (iv) Post-war financial architecture seen as the
product of Anglo-American wartime alliance,
although with conflicts between national interests.
29
THE KEYNES PLAN
I. OBJECTIVES.
• Objective: “devising a system by which a state of
international balance may be maintained once it has
been reached” (KCW, v.25, p.24, 1st draft).
• External surpluses and deficits would be reduced to a
minimum, as economies, or groups of economies,
would live on virtually balanced accounts.
• Although it might be impossible in practice to eradicate
international imbalances completely, the international
monetary system would work, under the provisions of
the Plan, so as to curb, rather than amplify, their
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emergence.
A “Keynesian international balance” is
desirable because:
(1) First reason: every country (or group of countries)
would live within the limits set by its own resources.
Relevant welfare and, possibly, political implications:
Countries, freed from the need to run systematic external
surpluses, would not pursue aggressive (“Mercantilist”)
commercial policies. Hence, domestic resources could
be devoted to the satisfaction of citizens’ needs, and
Governments would be free to pursue the domestic
objectives of “providing continuous good employment
at a high standard of living” (KCW, 25, p.27, 1st draft).
31
- Symmetrically, no country could run systematic
deficits, which would allow them to live
“profiglately beyond their means” (KCW, 25,
p.30). Internal resources would constrain
alternative domestic goals.
- This may eventually help nations to perceive
more clearly the trade-offs between alternatives
(consumption, investment, and governments
expenditures, the latter either for welfare
purposes or for the financing of wars).
- Possibly, the clear perception of these trade-offs
would enable countries to make democratically
accountable choices.
32
(2) Second reason: external surpluses and deficits tend to
destabilise the world economy, whether in a contractionist or an
inflationist direction, by facilitating the international
transmission of imbalances.
Keynes was mostly concerned with deflations, because he had
lived the experience of the Twenties and Thirties (sterilizasion
of gold inflows in France and the US).
Contrary to Keynes’s expectations, after World War II deflation
failed to materialize. Ever after the initial period of post-war
reconstruction in Europe, the world witnessed an expansion of
international liquidity, which has been interpreted by many
scholars as the means for running US payments deficits (e.g.
Eichengreen, 1996, pp. 115-116). This imposed an
expansionary impulse on the international economy, both in the
Bretton Woods and in the post-Bretton Woods periods.
33
Although Keynes conceived of his Clearing
Union system as a remedy for contractionist
pressures, the logic of his plan would curb the
international transmission of both contractions
and excessive expansions, because its
foundational principles and basic provisions
were such as to make both surpluses and
deficits (i.e. the very roots of destabilizing
pressures) difficult to run.
34
II . MEANS.
KEYNES PLAN BASED ON TWO BASIC
PRINCIPLES:
(1) BANKING PRINCIPLE
(2) ONE-WAY GOLD CONVERTIBILITY
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PRINCIPLES:
(1) THE BANKING PRINCIPLE
IMPLICATIONS of the BANKING PRINCIPLE
(i) BANK MONEY.
•International liquidity was to be bank-money. The issuing
institution should be a supra-national Bank, the International
Clearing Bank (ICB), whose establishment would be the task of
the International Clearing Union, itself a supra-national agency.
•International money would be the liability of a supranational Bank, not of any individual nation. Consequently,
there would be no demand for any “key currency” as the
means for international payments and, consequently, as a
reserve in Central Banks’ portfolios.
36
(ii) OVERDRAFT FACILITIES
• International liquidity would be created as overdrafts to
member banks, according to their quotas. Quotas would:
• represent a claim to borrow at the ICB
• be proportional to (specifically, one half of) the average of each
country’s total trade for the previous five years (the most remote
year in the average being replaced each year by the latest year
available).
• NO link between quotas and gold reserves/ capital subscriptions,
ecc.
• Rules would be agreed upon by all countries entering the Union,
and equally apply to all of them. No country would be favoured
or discriminated against, each falling under these quota
regulations. Also, these regulations would determine the creation
of international liquidity.
Rules, rather than national discretion, would be the norm for the
creation of international liquidity (regulation of international
money supply).
37
(iii) NO CREDIT CREATION WHEN TRANSACTIONS
BALANCE
• Credit money would be created when an agent entered a
debit relation with the bank. Under the Plan’s
provisions, this could only happen when a deficit
country borrowed from the ICB in order to finance its
excess demand for a foreign currency.
• Implication of the Plan is that balancing transactions
between any two countries would not result in the
creation of international liquidity (they would simply be
cleared between the Central Banks concerned, operating
on their accounts with the ICB).
• Thus, in the hypothetical case that all member countries
were in external equilibrium at the end of the accounting
period, the sum of bancor balances would be equal to
zero (as duly noticed by Skidelsky, 2003, p.677).
38
Only residual transactions, i.e. those which
would not spontaneously balance, would be
settled by Member Banks by buying or selling
their own currencies from the I.C.B. For
instance, a deficit country would settle its
balance by withdrawing parts of its overdraft
facilities, up to the maximum limit set by its
index quota. Correspondigly, surplus countries
would accumulate unused overdrafts in their
clearing accounts.
Logic of the Banking Principle implies that the
creation of international liquidity would be
limited to unbalancing transactions.
39
(iv) CURBING BOTH CONTRACTIONIST AND
INFLATIONARY PRESSURES
Because deposits of bank money (credits and debits)
would be created by external deficits and surpluses,
and extinguished by their liquidation, international
liquidity would be absolutely elastic, i.e.
automatically adjusted to the needs of trade.
Logic of the Banking Principle responds to Keynes’s
desideratum that contractionist pressures on the
international economy, arising from liquidity
constraints, should be avoided.
40
But the Plan also included measures apt to curb the
opposite type pressure, i.e. inflationary pressures.
C.U. Plan combined the confinement of liquidity
creation to the financing of unbalancing transactions
with a strong pressure on countries to avoid these
unbalances (penalties):
debtors could only borrow within the maximum limit set
by their index quotas, and only at rising interest rates;
creditors would be required to transfer to the Union any
surplus above their quota, and also to pay charges to
the Union if their credits exceeded one quarter of
these quotas.
41
PRINCIPLES:
2. ONE-WAY GOLD CONVERTIBILITY
Central Banks, while allowed to pay gold into the ICB
in order to replenish their accounts, would not be
allowed to withdraw it. Hence, gold would in fact
gradually exit the international circulation and
Member Banks’ reserves.
Anti-contractionist interpretation (Skidelsky, James):
make “liquidity preference”of creditor countries
vacuous, by removing the object of their desires,
gold, form the international circulation. In this sense,
gold was to be demonetised by fiat.
42
“ANTI-ASYMMETRIES”
INTERPRETATION.
DOUBLE DEMONETISATION: what had to exit the
international circulation and reserves was not just
gold, but also any national currency which may
otherwise come to assume the role of the
international money.
National currencies demonetised (from the point of
view of international circulation), because the
demand for these currencies as international
currencies was to be abolished by fiat.
Logic: “Key currencies” a logical impossibility;
international monetary system absolutely symmetric.
43
Asymmetries would be cut at their roots: not
only would international imbalances (as their
normally arise between symmetric countries)
be discouraged by means of “penalties”; most
importantly, what would be disempowered is
the basic source of international imbalances,
i.e. the basic asymmetry between countries
issuing the international money and countries
deprived of this privilege.
44
Combination of measures gives rise to
international symmetry
(i) link between the gold and international liquidity
severed: distribution of international liquidity becomes
independent from the distribution of gold reserves
among countries;
(ii) national currencies stand on a par: none of them
allowed to work as the international currency;
(iii) any remaining imbalances between countries (now
made symmetric by the operation of the system), would
be kept under control via the penalties envisaged by the
Plan.
45
IMPLICATIONS
illustrated via “conjectural history”
- because ICB the only issuer of international currency,
collective control over liquidity creation
- no “key country” imposing seignorage on the rest of the
world. In other words, countries would not need to buy
-with goods- the currency of one particular country
- vanishing role of international reserves (change in credit
availability instead)
46
- no country enabled to renege on its own debt.
Thus, while in the system we live in, “key countries”
have an incentive to run external deficits (because
they are aware that the corresponding external debts
can be wiped out through depreciations of their
national currency), in the Keynes Plan this
adjustment mechanism is non-existent.
47
CONCLUSIONS
Keynes Plan “perhaps Utopian, in the sense not that it is
impracticable, but that it assumes a higher degree of
understanding, of the spirit of bold innovation, and of
international co-operation and trust than it is safe or
reasonable to assume”. But “a good schematism by means of
which the essence of the problem can be analysed”(KCW, 25,
p.33).
In the same vein, main objective here has been to present a
“logical experiment”, illustrating how alternative models of
international financial organization produce opposite results
in the global economy.
48
FINANCIAL TERROR vs.
FINANCIAL DISARMAMENT
Because the world currently lives in what has
been defined a “balance of financial terror”,
the need for “financial disarmament” that
motivated Keynes’s proposal (KCW, 25,
p.57) is now felt more than ever.
49