RE AN INTERNATIONAL ECONOMY AND CURRENCY

RE AN INTERNATIONAL CURRENCY

As long as the present system persists, the economies of the world will be plagued by volatile exchange rates, and the consequent need for defensive measures such as trade protectionism that result therefrom.  These burdens have convinced a number of economists that return to a fixed rate system would be the best solution.  Even when the present system is functioning "properly," the fact that said system is but one more expression of our mixed up world of numerous nation-states is reflected in the circumstance that such "proper" functioning requires strong leadership by several economically and/or militarily powerful nations who desire, and therefore strive to maintain and preserve, the integrity of the system.  Parenthetically, such leadership generally results, as well, in the rules of the system being tilted advantageously toward the interests of these stronger leading nations.

"Seigniorage" is the term used to denote the privilege possessed by a particular nation as a result of its being in the position of providing the world's primary currency during that period.  Seigniorage is a key factor in the determination of economic freedoms as well as economic restraints among nations.  It is necessary for a nation having seigniorage (i.e., the nation whose currency is considered the world's key currency) to instill confidence in the rest of the world that it will not resort to inflationary policies in regard to its own economy--policies which would lead to devaluation of its own currency and its reserves thereof.  This position of seigniorage used to belong to the United States.  But, unfortunately, we have permitted the Dollar's position as the world's key currency to enable us to become the world's foremost debtor state.

As a nation, the United States has in fact lived excessively beyond its means.  A result has been the growth of its international debt to an astronomical One Trillion Dollars  (Its public debt has reached Fifteen Trillion Dollars).  A result has been a weakening of confidence in the Dollar as a reserve currency--which has led to a situation wherein the world's economic stage is no longer dominated by said Dollar; but has instead been shared of late with the Euro and the Yen.

Chins has in fact lately called for the creation of an international reserve currency, "anchored to a stable benchmark," and not connected in any way to economic conditions within, nor the national interests of, any single nation.  According to this proposal, such a currency would be expressed via "Special Drawing Rights" as issued by the International Monetary Fund.  The concept has met with suspicion in the United States, however, as a potential means for countries such as China to mainly improve their positions and consequent stability regarding their investments in items that are connected with the U.S. Dollar's status as a world reserve currency--such as U.S. Treasury Bonds.

The plain and simple rationale regarding this seems to lie in the fact that, just like it exists among people and families, so too are there countries that live beyond their means (and others that do so beneath their means).  When a country lives beyond its means, it becomes a "deficit country," and is said to be pursuing inflationary policy.  The medication for such a condition, as prescribed by economists, is currency devaluation, as well as a deflation of that nation's basic economy, or standard of living.  Such measures are called "adjustments."  They cause considerable economic pain to the residents of such places; as the reduction in income caused by the first remedy (devaluation), and the rise in unemployment brought about by the latter (deflation), take their toll.  These forms of remediation likewise impose terrible costs upon countries to whom monetary debt is owed by the aforesaid spendthrift nation--because the unpaid balance, defined in the newly established reduced monetary terms, has thereby become a debt of a relatively lesser sum.

Avoidance of economic pain likewise causes "surplus countries" (i.e., those that live within or below their means) to attempt to avoid the steps that would constitute "adjustment" on their own part.  Such opposite measures, such as currency appreciation, produce detriment to such nations' export industries--as the prices that their products will command abroad consequently drop.

It is the "deficit nations" that are thus traditionally expected to bear the pangs of adjustment.  For, since the problems implicit in such adjustments touch and affect the political interests of the particular nation-state involved, the adjustment mechanisms, or "medications," are frequently modified, or "tilted," in favor of the interests of the stronger leading nations as referred to earlier.

                                                                    * * * * *