Papers – Ideas towards a new international financial architecture?

Re-Engineering the Economic Processes

ITNIFA Conference Leaders — Thu, 14 May 2015 21:26:55 +0000

Perhaps the least-coherent aspect of Keynes’s ‘habitual modes of thought and expression’ in macro-economics is the all-pervasive and ill-considered use of the expression ‘money’. This paper starts from first macro-economic principles, and uses process re-engineering techniques in an attempt to define a more coherent paradigm for the concepts currently ‘enclosed’ by that expression. This paper argues that there are two radically-distinct concepts currently ‘enclosed’ by the single expression ‘money’ – wealth and currency- , and that, if we wish to facilitate integrity of thought and expression, we must reserve two radically-distinct expressions for those two radically-distinct concepts, and we must consider those two radically-distinct concepts in isolation before considering policy options (potentially to try to link them). Finally, this paper argues that the central banking system already in effect acts as implicit guarantor for every Non-Equity Owed-Wealth liability of every financial institution and state (‘money’ and non-‘money’ without distinction), and that that role should be made explicit. The central banking system (including the global and state banks and regulators from the IMF downwards) should act as borrower/lender of first/default recourse for banks and states (i.e. rather than borrower/lender of last recourse as currently). This would eliminate (the need for) lower-level inter-bank Owed-Wealth, and would eliminate bank liquidity as a macro-economic factor. In order to moderate the risk implicit in such a facility (i.e. the risk currently already carried by the central banking system), the central banking system should itself commission all valuation and auditing standards and processes conservatively on behalf of creditors (rather than allowing politicians, bankers, corporate executives, and financial professionals free reign in their own self-serving interests). Again, in doing so, they should follow the precautionary principle in regulating financial innovation. Indeed, the vast majority of financial innovation (including the securitisation of Owed-Wealth such as with GB Gilts, US Treasuries, and other state, commercial and mortgage-backed securities) should be outlawed in favour of simple inflation-linked current-accounting.

Tim Knight, Principle Consultant of T J Knight and Associates Limited (Consulting Process Engineers).

World Currencies for Sustainability

ITNIFA Conference Leaders — Thu, 14 May 2015 21:26:55 +0000

The 2007-9 global financial crisis, the post-2009 Eurozone debt crisis, and growing inequality are reasons to critique the world financial system. More disconcerting are scientific findings that civilisation’s impacts on the environment are approaching ‘planetary boundaries’ (Steffen et al., 2015) such as catastrophic climate change and ocean acidification. This paper presents a proposal for Complementary Currencies for Climate Change (4C) and it’s associated mitigation policy, called Global 4C Mitigation (G4CM), with the specific aim of achieving strong mitigation of climate change and improved economic conditions (Chen & Cloud, 2014). 4C is a market-and-monetary instrument that will complement the international financial architecture to help correct the existing market failure in environmental externalities associated with greenhouse gases (Stern, 2007). The unit of account of 4C is 100 kg CO2-e verifiably mitigated, and this unit of account is unique in terms of official money because it is based on services rather than commodities or fiat banking. 4C issuance will be administratively coupled to mitigation services, and 4C issuance will be delivered globally as proportional subsidies for the de-carbonisation of industrial and power installations, and as proportional rewards for carbon sequestration. We call this incentive mechanism Globalised Payments for Ecosystem Services (GPES) and it will be implemented under the Beneficiary Pays Principle (BPP). The G4CM policy prescribes multi-decade 4C floor price schedules. To establish these floor prices, an international monetary protocol will be used to transfer purchasing power from a comprehensive basket of fiat currencies into 4C. This monetary approach will create a concomitant rate of inflation in the fiat basket, and it is hypothesised that this cost spreading will minimise political delay over the long run. Co-benefits will include new currencies for international trade, price signals that complement carbon taxes, stimulus for sustainable projects and employment, ecosystem protection, and improved social cohesion. The proposed 4C world currency is a new type of official money that creates a price benchmark for climate stability. We give 4C a new monetary classification: the World Service Currency (WSC). The 4C world service currency is advocated on the basis that it can mitigate greenhouse gas emissions to the maximum amount using market forces and a new political pathway. Nations are invited to participate in a 4C system for mutual protection by ceding some fiscal sovereignty and monetary autonomy to the G4CM protocol. The political pathway to an agreement may begin with field trials using digital currencies, followed by contingency planning and negotiations.

Delton B. Chen Ph.D, deltonchen@engineer.com, Lead Author, Global 4C Project, Center for Regenerative Community Solutions, NJ, USA
Joel van der Beek M.E.,jb@econovision.nl, Principal Economist, EconoVision, The Netherlands, Board of Economists for Peace and Security.
Jonathan Cloud, jcloud@crcsolutions.org, Executive Director, Center for Regenerative Community Solutions, NJ, USA
Hailong Jin Ph.D., cigijin@hotmail.com,Research Consultant, Centre for International Governance Innovation, Canada
Armonia Borrego Ph.D.,armoniab@gmail.com,Lecturer of Economics, National Autonomous University of Mexico, Mexico

Public Debt Is Economic Nonsense

ITNIFA Conference Leaders — Thu, 14 May 2015 21:26:55 +0000

Public debt has been a widespread problem for mainstream economists have no effective procedure to deal with it and prevent its financial, economic and social negative consequences. This paper argues that the public debt is a macroeconomic phenomenon and not the simple company’s accounting situation mainstream economists imagine and suggests a new approach to the public debt trend based on the difference equation method. The main hypothesis is that public debt has a negative effect on the GDP and tax receipts while its interest expenses expand private credit supply and thus GDP and tax receipts thus providing extra revenue enough to pay the interest on the public debt. However, public debt, interest expenses and credit supply attained so high levels while consumer’s income expanded slowly that the positive effect through private credit is disappearing and no longer can compensate the negative effect of the public debt itself on the tax receipts. Consequently, the public debt may be causing more deficits and more public debt. It may have been thus created a positive feedback process that could lead the public debt to follow an explosive trend. The time trend of the public debt is given by the interest rate on Treasury bonds and the coefficient that measures the negative effect of public debt on tax revenue; the public debt time trend does not depend on the primary surplus. Therefore, austerity programs do not lead the public debt to the desired stability. An experiment applied to the United States in the period 1960-2007 does not allow for the rejection of this hypothesis. The conclusion is that insisting on austerity will lead to more financial crises; a new theoretical approach is required.

Gerson P. Lima, Macroambiente, Doctor in economic theory by the University of Paris (1992), Professor emeritus of macroeconomics at the Federal University of Paraná, Brazil, retired

The Great Global Financial Crises: official investigations, past and present, 1929-2011

ITNIFA Conference Leaders — Thu, 14 May 2015 21:26:55 +0000

In the present essay we review a set of enquiries and reports that were realized and published as a result of the major financial crises of the past and of the contemporary era. These documents generally address the issue of the causes of collapse of bank and capital markets but also shed light on regulations proposed at different points in time to improve financial stability. We begin with reference to official investigations on the crisis of 1929 and the subsequent bank crises in the Great Depression which we compare with those on spawned by the Global Financial Collapse of 2008, which has produced the greatest outpouring of these types of investigations and publications It is our hypothesis that one important avenue for a historical understanding of the great financial debacles of the past consists in a careful evaluation of official literature and documents that can complement the theoretical approaches of economists in search of explanations for these events.

Carlos Marichal, El Colegio de México

Globalization and an International Monetary Clearing Union

ITNIFA Conference Leaders — Thu, 14 May 2015 21:26:55 +0000

What is required today is a modern day variant of the “Keynes Plan” that was presented at Bretton Woods– but was vetoed by Harry Dexter White , the leader of the US delegation to Bretton Woods. This paper provides the economic explanation of why the principles behind the “Keynes Plan” are essential to improve the international payment and financial system and then describes how a 21 century International monetary Clearing Union would operate.

Paul Davidson, pdavidson@utk.edu, Holly Chair of Excellence Emeritus, University of Tennessee

The influence of the global economic crisis on the international investment position of European Union member states

ITNIFA Conference Leaders — Thu, 14 May 2015 21:26:55 +0000

In the last decades, the international flow of investments considerably grew. They increased dynamically until 2008, when the sudden decline occurred, being caused by the global economic crisis. It had a direct bearing on the structure and the proportions of the internal investment position of many countries. The present paper conducts the analysis of the changes in international investment position rating of European Union member states. With that purpose in mind, the statistical method of linear regression by Hellwig was used.

Piotr Siemiatkowski, piotrs@umk.pl, Nicolaus Copernicus University (Poland)

A New Financial Governance Model for the New Global Economy of the 21st Century

ITNIFA Conference Leaders — Thu, 14 May 2015 21:26:55 +0000

The mission and mandate of economic governance and its accompanying institutional architecture requires a realignment in order to conform to the realities of the new global economy of the 21st century. Two recent economic events, one foundational and the other cataclysmic, have precipitated the need for a new vision and a new direction for financial governance. These two defining milestones are: 1.the emergence of the new economy and 2.the aftermath of the financial crisis of 2008.

The new global economy of the 21st century is composed of a trilogy of interactive forces that include globalization, trade liberalization and the information technology and communications revolution. Globalization has melted national borders and redefined economic policy. Free trade has enhanced economic integration and extended the economic architecture. The information and communications revolution has made geography and time irrelevant and enhanced the reach of economic parameters.

The global financial crisis of 2008 took everybody by surprise. Furthermore, the financial crisis had a more devastating effect than simply creating the most significant global economic crisis since the Great Depression of the 1930’s. It revealed the structural fault lines on the contemporary economic landscape.

In consequence, the institutional architecture of economic governance requires modernization as well as transitional and transformational change. This is particularly true since the existing economic governance architecture was designed for the old economy and has proved ineffective and inadequate for the new economy.

The aftermath of the financial crisis has precipitated a more interventionist role for government and has laid the foundations for new institutional and regulatory structures that will impact on the financial landscape of the 21st century. This paper explores the future architectural governance landscape for the financial industry and the scope and substance of regulatory initiatives and mechanisms that should be designed in order to avert a future financial crisis.

Constantine E. Passaris, passaris@unb.ca, Professor of Economics & Onassis Foundation Fellow
University of New Brunswick, Canada.

Money, Trade Openness and Growth in India: A Co-Integration Approach

ITNIFA Conference Leaders — Thu, 14 May 2015 21:26:55 +0000

The purpose of this study was to examine the causal relationship among Financial Development, Trade Openness and Economic Growth in India for the period 1971-2013. The econometric methodology employed was the Cointegration and Granger Causality test. The stationarity properties of the data and the order of integration of the data were tested using both the Augmented Dickey-Fuller (ADF) test and the Phillip-Perron (PP) test. The variables tested stationary at first differences. The Johansen multivariate approach to cointegration was applied to test for the long-run relationship among the variables and found strong relations between Growth, trade openness and financial development. The Granger-causality empirical findings suggest that trade openness and economic growth does have causal impact on financial development; conversely trade has causal impact on growth and financial development, implying support for trade-led growth and finance-led-growth. However, two important policy implications of the analysis presented in this paper deserve attention. First, although financial deepening has emerged as an important aspect of the economic growth strategy in the Indian context, since the sources of such a deepening may be both domestic as well as external; the importance of a judicious policy mix cannot be neglected, especially in the wake of the current global financial meltdown. Second, as documented in the econometric analysis, the complementarities between trade openness and financial deepening appear to be good. Broad money as percentages of GDP showed causal impact on economic growth and economic growth was seen to necessitate the increasing trend in domestic supply of money. Also, Money supply was the only instrument of financial development that was seen to cause Trade openness and growth.

Sachin Kumar, lohia.sachin@gmail.com, Research Student, Department of Economics, Indira Gandhi National Open University

Argentina’s debt affair: far beyond vulture funds

ITNIFA Conference Leaders — Thu, 14 May 2015 21:26:54 +0000

In December 2001 Argentina shocked the world when it declared the largest external debt default in history following its catastrophic economic and political crisis. After a decade of debt negotiations, President Fernandez de Kirchner’s government recently boasted of having converted the country into a “serial payer” highlighting its “dis-indebtedness” policy. Yet when the US Supreme Court upheld a successful lawsuit by US “vulture funds” in June 2014, approval of their exorbitant bond repayment demands sent shockwaves through the global financial system and condemned Argentina to a new, „selective‟ debt default. This paper analyzes the origins and chronology of Argentina’s debt. It proposes that the absence of a comprehensive audit of its legitimacy explains why the country has remained trapped in a cycle of debt-dependency since the 1980s. Further, it provides critical lessons for those countries that face the potential impossibility of debt restructurings as a consequence of the case.

Francisco J Cantamutto, FLACSO México/ ONACYT,francisco.cantamutto@flacso.edu.mx
Daniel Ozarow, Middlesex University Business School, D.Ozarow@mdx.ac.uk

A new international financial architecture: The regional versus the global view?

ITNIFA Conference Leaders — Thu, 14 May 2015 21:26:54 +0000

This paper is geared to show the limitations of the existing financial architecture and the emergence of what appears to be a new financial architecture with regional financial frameworks. It starts by making a brief history of the existing international financial system and its role in international financial regulations in order to show lack of proper global organisations by arguing the changes in the governance issues of existing international financial institutions given the massive shift in world economic power and follows with the problem of a country based reserve currency, proposing a new reserve currency that will have more stability than current highly indebted country based reserve currencies, and thus serve better as a store of value. It explores direct exchange rates versus indirect exchange rates and weighs its costs and benefits and revises the existing experiences, to finally suggest ways forward in the strengthening of international financial regulations through regional mechanisms. The proposal concerns complicating the existing international institutional set up by including the new strong regional elements that are already evolving while redesigning global instruments such as the SDR while downscaling the role of the IMF.

Oscar Ugarteche, Instituto de Investigaciones Económicas, UNAM, México, ougarteche@gmail.com.