thus this article is still a working paper.
Comments are welcome !
Out of the currency mess
Building a global monetary bridge
A reminder: what is money nowadays
tool of exchange, valuation and value storage,
is less and less made of banknotes and coins.
It is more and more an electronic blip.
Money is nowadays mostly created and managed by the banking system,
in the form of bank deposits, which support various, nowadays mostly
electronic, tools of payments and transfers.
Central banks still have a role in money issuing, but chiefly as supervision
institutions and "last resort" lenders.
But what is backing that creation?
What gives money its value?
Money is essentially a chain of legal commitments:
Borrowers committed to banks, themselves committed to depositors,
as detailed in the what is money article.
But as moneys are diverse, and diversely controlled, is the chain
always and everywhere fully safe?
A World monetary collapse in the making
Currently, there is some doubt, even some anguish, about how - at the
World level - the chain of commitments stated above is reliable.
We see a nascent distrust towards the major currencies,
not to talk about the volatility that makes smaller ones
out of control.
The high volatility in Forex (foreign exchange) quotations is a symptom,
the price rise (and setback) of precious metals is another, the sovereign
debt turmoil adds to the picture. The absurdly low interest rates seem
to signal an oversupply of money, a cheap commodity without much
value and a recipe for bubbles.
There is a double problem of trust:
- 1) One linked to the World financial and economic environment
It suffered a long chain of turmoils and dramatic crises, under the virus
of overleverage (excessive debt), whether public or private,
one of the worst enemies of money (and economy).
To take only a few examples of the unsolved issues, affecting notably
some monetary zones (roughly related to what was called up to now
the developed countries that ceded (except a few wiser countries) to
the belief that "growth" can be bought with debts instead of deep
trade imbalances persist
a factor. But structural evolutions play a part too.
- Most Western governments (but also businesses and private
- Some central bank portfolios are filled with dubious assets
rescue banks or to buy sovereign debts and other risky assets.
They are also keeping low interest rates, in other words their
activity, although highly risky, is unprofitable, which makes worry
on their own safety and on the value of the money they control
(central banks are supposed to be the supreme masters of good
money creation and management).
=> Some of those central banks, currently praised as "lenders of
last resort" that could do wonders at times, could have one
day a crisis of trust, as the money / currency they issue is
backed by perilous assets.
- Of course, commercial banks are also weakened
and also they use some refinancing from central banks, thus
depend on the health of those exalted institutions.
Also insurance companies and investment / hedge funds
which portfolio run similar risk.
The streak of solvency rating downgrades led to "recapitalize"
various key banks. But the stricter equity and liquidity rules for
banks give an incentive to "shadow banking" to take over dubious
types of lending and fund it via overleverage.
- 2) The other one linked to a more permanent and intrinsic issue :
as the international monetary system is not a system
but an unorganized / erratic blob.
Those genetic flaws have been plaguing it for decades and this article
details them extensively below.
The Bretton Wood agreement after WWII was flawed as based on a
national currency, the US dollar, as a universal reference and official
reserve. This agreement logically collapsed in the 70s although the US
dollar kept a quasi-preeminence in practice, but which is progressively
and of a global monetary governance that would allow the
system to resist a major storm.
=> A flight from cash towards any other "exchangeable"
While monies would themselves become toxic assets?
=> And as a result a major economic tsunami ?
* Or will an alternative system be implemented before
It supposes that the heads of governments accept NOW to
share their beloved sovereignty, something we can be
The issue is strongly linked to another, the sovereign debt
We have twin menaces here !
a path towards a more consistent World monetary system.
Lack # 1: no monetary pivot, reference, standard
We live in a "multilateral monetary system" based on floating currency
Why not, it can help those currencies to find their own position in the
galaxy of moneys.
|But there is no universal standard of value
see clearly their coordinates in the celestial map.
As if we had a metric system without meter.
currencies are pitted directly against one another.
The old monetary pivot, the US dollar, is now in some respects a lame
It has also the disadvantage, as seen below, to be managed so as to fit
a sole country's policy, not the overall global interests.
Also, none of the other major currencies is up to the task of becoming
such a central reference
Some think about gold as the default reference. The gold price has
been raising for years (presently this bubble is losing its resilience).
But for various reasons, shown below, gold seems unfit to become a
monetary pivot or yardstick.
Is the floating exchange rate system the real problem?
Some accuse the floating exchange rate system (well, not a system, just
a free quasi-natural process in which several goods are offered on the
market stalls) for the instability.
This accusation does not address the real issue.
As long as there is no global currency, and as seen in this article,
it can only be a long term goal, the World lives obviously with a motley
and unstable monetary system.
This is not a flaw in itself: as long as there are several currencies, it would
be illusive to consider that any currency can have a fixed value relation
with others ...if we find a common yardstick (this is what is missing, a
point this article will detail) to have a clear view of that currency's own
With this only reservation, this lack of a common reference of value, in a
multi currency world, a floating exchange system is much more flexible
than a pseudo fixed rate system, something the world experienced
already several times and which could not work.
The fixed rates were a source of highly disruptive and speculative moves
with episodic dramatic "competitive" devaluations and reevaluations.
after WWII, and collapsed under its contradictions and inconsistencies
Moreover, the commercial distortions caused by the unjustified
persistence of some fixed rates, like for the Chinese yuan, do not
really makes palatable a general pullback to that old system.
So, what is the real problem?
but in the fact that there is no commonly recognized
general standard in which to make the quotations.
To have, as is now the case, only a matrix of multiple cross-rates
between all currencies, without a common yardstick (monetary
standard), is far from being transparent (*) as a tool to measure
what happens on the forex (foreign exchange market).
=> When the price of A goes up compared to the price of B,
does this shows a rise of A or a fall of B?
(*) Conjurers, who know all the tricks, would call it an optical
Lack #2: no global monetary governance
Also, and this is one of the paradoxes of our globalized economic and
communication era, and whatever the secret but episodic coordination
between central banks, no global institution really supervises
the world monetary situation, in order to:
Provide a common currency price reference as seen above,
Be the World central body that would play the role of
Guarantor / manager of that monetary standard,Universal reserve depository for central banks,Lender of last resortWorld monetary regulator and Court.
- Monitor the global volume of liquidity and credit,
factors still been driven by the US monetary policy, just
because the US dollar is seen as the world dominant currency.
|Is King dollar naked?
How can a currency issued unilaterally by a country on
its own interest be the world currency that drives most
A recipe for economic instabilities and distortions
(exchange rates, trade balances, speculations on
An excessive creation of dollars, bringing an overflow of
liquidities which value is doubtful, thus that circulates full
speed to get rid of it (Gresham law : bad money drives
out the good) is a source of bubbles and Mirach's
Also the sanctions on foreign banks that used the US
dollar in operations not accepted by the US policy is
another bullet in the dollar's own foot.
How foreign countries with huge dollar reserves will
react now that they know that it is a biased currency
that cannot be used freely ?
What currency will use now financial and commodity
markets as freely accepted in global transactions?
|A guerrilla against the dollar?
The pressure accumulates gradually against the US dollar
This currency's weaknesses (or at least volatility and other flaws
are more and more visible. But how to know when the "critical
threshold" will be reached that would make it turn into a
currency like the others.
Or better that would make the creation of a word monetary
seen as essential because of the above mentioned instabilities
and imbalances ?
But things are sticky, we suffer the well known anchoring bias,
unless only a disaster accelerates the process (cf. Bretton Woods).
We could talk about the system theory ...except that the current
global monetary system ..has nothing of a system and take little
by little the form of a battlefield , or at lest a guerrilla field.
From where the next attack will come ? Or the next triggering
Some expert of asymmetric wars in the room ?
The IMF is not up to the task, not only in financial firepower but also
in legitimacy, because it is not a real independent global entity, even
less a democratic body that would represent the world citizens, but a
bargaining place between nations with diverging agendas.
What are not up to the task either are all "inter-governmental" (instead
of "global") bodies, including the UN.
The "democratic globalization" article shows that a global democracy is
needed to face the global challenges.
A new example of the deficient, nation-driven world governance,
specifically in the monetary area, was seen in a Feb. 2011 decision
by the G20 members (85 percent of the world economy) to follow
OK, except that they were limited to countries' public debt and
fiscal deficits, private savings rate and private debt, trade balances
and net investment income flows.
This was a half-measure as - because of China opposition - those
indicators do not include monetary / foreign exchange
ones i.e. real exchange rates (also a truly global currency reserves
pool is missing).
Also nothing was decided about if and how those indicators would
be used at the global policy level!
* A private monetary "coup"
By not tackling the issue with a global vision, national politicians run the
risk that their monetary power be overtaken, not by a common sovereign
monetary body, but by large economic and financial groups.
Those private business entities, fearing the instability and fragility of the
present situation, that entails the risk of a general monetary meltdown,
and tired to see governments dithering on the issue, could get tempted
to create in an emergency their own common currency that would become
a universal monetary reference.
=> Those groups would as a result make their own money.With their own rules, in their own interest,
in an undemocratic way.
* Regional monetary zones?
Regional monetary zones are in the making, as a palliative for the lack
of a stable and trustworthy currency to deal with the bulk of international
trade. Maybe also as a political reaction against the US dollar supremcy
In Asia, such attempts - inspired by the Euro, which was a first dent
on the US dollar hegemony - can be detected, as based on the reciprocal
acceptance of their currencies in trade operations and on currency swaps
between central banks.
There is no reason that the inter-Asiatic trade, in full growth, be done in
This does not means that the Chinese yuan, a non convertible currency
up to now, will become soon a new world monetary standard. But it is
gaining ground through monetary swaps with other emergent currencies.
Maybe a similar zone will also emerge soon in Latin America.
Or one among other emergent countries
Also some alliances between large zones can be initiated.
For example the largest and most advanced emerging countries, which
have some distrust towards the US dollar and the US debt in which a
big portion of their monetary reserves are invested, could decide to
participate to a support fund of the Eurozone.
But how stable and permanent can be such alliances ?
Anyway, such a limited monetary multilateralism under the hand of
regional blocks can bring some more trust and facilitates various
But it does not solve the global issue, it even creates new divisions,
and it does not cancel the menace of a worldwide storm.
* A World money?
There are few chances that a unique and fully legal World currency
can be launched and can work in a foreseeable future as:
It adapts poorly to territories with highly different statesof economic development.
ones might be imagined.
The opposition of nation-states, would be too strong.
measure and store riches, as something "sovereign", a symbol of state
power and a (hazardous) way to manipulate their economy,
Those two reasons are not fully convincing.
* The notion of "optimal monetary areas" is reductive.
It is often used only as a brilliant academic pretense.
* Nations might not stay blind eternally, opthalmic technologies are
But unless we make some minimal progresses toward a World
federation, a full-fledged world money seems out of sight.
=> Global democracy would need one day an all-
purpose legal World currency that all Earthlings
But this is a long term goal.
A transition step is needed.
and monetary standard?
The transition step mentioned above would be based on
An official world monetary standard,
as an universal reference of value.
It has to be implemented urgently,
before the global monetary tsunami strike!
Because of its defects (see below), it would not be up to the task.
Instead, a "virtual gold", as the seed for a WOMO (World Money), would be
more appropriate nowadays.
It would start as:
Such a virtual being would seem to be made out of nothing (of course,
this is not true, as seen below) but only at the time of its creation (like
the numbers, or like our languages in general).
As soon as important transactions, contracts, quotations and financial
commitments and instruments are written with it, it will be a
tangible reference of value.
- To be effective and have a full consistency the WOMOST:
Thus it will need to be backed by economic commitments,
just as all monies are made nowadays as seen above, but with
a global supervision that is presently lacking.
Should be managed in a cooperative way,
have public legitimacy and to avoid any national hegemony
to take over.
=>Here we have the other leg of the biped :
A World monetary institution (the WOMOI).
reasonable minimum step to face the present situation, which is
getting more and more chaotic and disastrous without common global
reference and governance.
This first step, still far from a full fledge universal money, would be
At the governance / supervision level,
(the WOMOI, World monetary institution)
As a section of it, at the operating level,
It would have some of the attributes of a central bank (a central bank
of central banks ?)
WOMOST / World
WOMOI / World
* The reference and pivot for
It would be thus compatible
with floating exchange rates
* With a self standing value,
as an independent standard
based neither on precious
metals nor currency
* Also an optional quotation
tool for bonds, stocks,
* Democratic federal cooperative
* Supervisor of the world financial
and banking system, including
* Legal power to put in check any
(blatant) monetary and financial
distortion / excess (in goods / asset
prices, interest and exchange rates,
money creation, debt (overleverage),
public budgets, financial market
* Central bank of central banks
(reserve pool and liquidity supply
bank for a smooth money flow
between the various monetary zones).
Nation-states stay anchored to independent national currencies (or at
best continental currencies as in Europe), whatever the problems they
entail and the crises they tend to lead to.
Another thing is that money holders believe that a traditional nation is a
better warranty than a world institution, because the nation's taxpayers
are going to ...pay if the nation's central bank defaults.
This is based on the dubious belief that nations are really and fully
accountable towards the rest of the world when they collapse financially.
=> This is this first crucial step this article proposes below
But then, what World monetary standard?
No, not gold, but economic commitments (credits)
Some see a come back of gold as a monetary standard.
New cooking in an old pot!
Gold use as a reference of value has spanned several millenaries
of human economic History.
It has often been glorified as the absolute, even transcendental
Gold came back into fashion and its price has been raising
for years, although there is now a backlash
This might have given the impression that this mythic metal was on the
way to become the absolute trusted value.
Actually this dramatic (now interrupted) rise have shown, precisely, that
the gold value is highly unstable, making it unfit to become a monetary
pivot in our modern times.
Is really a rare and glistening metal extracted from the Earth adapted
to this new era?
A highly evolutionary globalization era in which the reference of value
should be the whole World economy.
A dynamic environment in which the mass of available money should
evolve as far as possible in direct relation to the growth of economic
activities and exchanges.
The available monetary instruments give an universal right on all riches
and their value does not have to be correlated to the value of a specific
Here, let us look at some of the gold shortcomings:
- Physical gold is not practical to
this scarce and expensive asset which, frankly, does not have much
direct economic use.
Gold does not have a stable value (high volatility).
value fluctuate largely and rapidly because of erratic offers and
The gold value is not linked to economic activities and trade
Actually it would bring a deflationist bias because of its limited and feebly
growing available quantity on a long period.
The same defects affect other assets, whether
* hard ones such as commodities
* or softer ones such as corporate shares.
As for some even "softer" social or individual assets, notably human
knowledge (it is often said that we live more and more in a "information
and knowledge society"), not only their value is less determinable, but
there is no way to transform it into an exchange tool.
Ask an alchemist!
Thus it is not just by chance that modern money, as said above in this
article, is based instead on credits, as assets that represent human
commitments related to the economy.
authority acting as a global reserve bank
A world monetary pilot and a World monetary pool
A monetary globalisation could lead to:
1) A World financial authority that would act:
As the authority and Court
as well financial institutions (as was the case of the subprime crisis)
as countries (sovereign debt crisis)
It will have a direct (supranational) legal authority, and an adequate
staff and technical equipment to put in check blatant:
Monetary and financial unbalances / excesses
and exchange rates (commercial dumping via undervalued
currency), public budget and public debt levels.
Abusive financial practices under cover of "innovation"
withlarge investigation technical and human resources
Including paid informers and undercover agents, as
financial crime is as high a menace as terrorism or drug
A good overseeing system is more important than an hyper
regulation which is so cumbersome that it cannot really be
applied, and which cannot foresee what funny businesses
will be imagined in the future.
That investigating body should not limit itself to banks but
should also have an eye on "non-banks'. Its area should
cover any financial entity of some importance.
Other imbalances, by a narrow coordination
is to harmonizes commercial and social practices to avoid
- As the supervisor of the world monetary agency / bank
include monetary aspects (bizarrely not covered by the IMF
As the supervisor also of a global bank guarantee fund,
institutions that could entail a global systemic financial risk.
2) A World monetary reserve bank
(a kind of super central bank at the global level)
a true world standard currency.
The full 1) + 2) system, a totally different
"IMF - International Monetary Fund", that would be
* democratically governed (see "the piloting authority" chapter),
could be called, as already seen above:
the WOMOI (World Monetary Institution)
Floating exchange rates would not disappear
OK, a new standard is to be found.
But not like the old "bancor" project, sorry Keynes.
That reference of value would have been at the same time highly volatile /
speculative (as based on the price of commodities) and over-rigid (with
fixed currency rates linked to the standard).
The new standard, in this first step, would just be a common and
independent pivot of value to measure the value of the
other currencies on international foreign exchange markets (Forex).
Presently, if there is a big change in the Euro - Dollar rate, how do you
know which one rises and which one falls if there is no global pivot /
price reference ?
The exchange rates would still be floating, as flexibility is needed
in this step (by the way, pressure should be applied to China to make its
money convertible and fully tradable).
And the global unit of accounts, this common meter or kilogram, the
WOMOST issued by the WOMOI, would allow to gauge better the
general state of currency fluctuations.
Also, the policy of the WOMOI, as a global monetary pilot, would
allow to control any wild rate skidding..
An independent standard
As a universal near-currency, used as national / continental central
bank reserves (*) or for asset / commodity market quotations and
contract quotations, as seen below, the WOMOST, World monetary
standard, should be independent of national / continental currencies.
(*) those central bank accounts would be the counterpart of the WOMOI
It should be self-standing to avoid a "circularity" that would contaminate
its value with the vagaries of national / continental currencies.
The value of those currencies should refer to that standard, but the
standard should not be enslaved to the value of those currencies.
Practically, its value should not reflect a "basket" of national /
continental currencies as is the case for the IMF's Special
drawing Rights (SDR).
It has anyway to be noted that the IMF did not went far enough in
issuing bonds denominated in SDRs, that would have accustomed
the financial circles to the idea that a World monetary unit is
feasible, and to the need of a market to use it.
issuing process, securities, governance?
The piloting authority
Only a central body, the WOMOI, which attributes are described above,
and that would be - a decisive improvement - totally autonomous
and democratically appointed (*), can organize and monitor the
creation of a credit commitment money adapted as well to the economic
activity as to the general need of the economic players.
This global institution, a kind of "super central bank", would issue the
It would also control in some way the national / continental
central banks that issue their own ones, as that institution would be
in charge of the cash-register of last resort.
(*) It should one day become a
"one man one vote" World citizen cooperative,
even if the road towards that goal is long and hard so as to avoid it to
become dominated by businesses, nations and politicians with their
agendas. Maybe the issue of local sections would arise, but for crucial
questions the vote should be worldwide.
This is a condition of legitimacy and of independence for the
WOMOI and of reliability and sustainability for the WOMOST (**).
The WOMOI should be independent like the magistrates and jurors of a
Court, with a full separation of powers. Montesquieu-style monetary
Also, the WOMOI should not just be a producer of arcane but self-
defeating hyper regulation but a legal body with a highly competent
staff, extensive, sophisticated and adaptive means and full authority to
anticipate, investigate, stop and sanction any serious deviation from
sound fundamental principles
(**) if not it would just be another international treaty that a country
could quit or consider not binding, or more probably condemned
to inertia as the partners would spend their time squabbling,
like in existing inter-national institutions, instead of taking
decisions and reacting to situations.
The two sides of the balance sheet.
The balance sheet of the WOMOI, should not be too large.
Its goal is not to compete with the overall commercial banking system.
That system will create (of course under the supervision of the WOMOI)
its own interbank monetary market in WOMOST for cross-financing
operations between banks.
The WOMOI should stay mostly a regulator, a lender of last resort and
holder of a universal monetary reference, but not the everyday refinancing
Also the commercial banks would create by themselves accounts, traveler
cheques and other instruments in WOMOST.
The WOMOI balance sheet would include
* As Assets (credits and investments / reserves)
Some, mostly exceptional, short term credits to central banks,
according to the monetary risk situation of the related zone.
Also accounts written in those other central banks currencies
A limited amount of Treasury bonds,
preferably written in WOMOST.
Can they be called "credits" or "reserves"?
Let us say that they are credits that are supposed to be liquid
enough to act as "exchange reserves", enabling the WOMOI
to intervene on foreign exchange markets by buying, selling
and swapping other currencies.
- As a "cushion" ("reserves") some other assets and investments,
Commodities, stocks, corporate bonds and other liquid enough assets
would not be totally excluded but also in small doses as too volatile.
* As Liabilities (resources)
A equity: world citizen shares.
section of the WOMOI.
|The proportion between
equity A and equity B would evolve
The A section would be given more vote than the B section, at
proportion to its equity contribution, for example 5/1.
As the equity capital should be sizable from the start,
the A section could at the origin represent over 99% of the
subscribed capital and given 95% of the votes, a ratio to be
Deposits (monetary reserves)
(including compulsory interest-free stable ones), used
as a reserve instrument for them.
Some national central banks that are swimming in dollar-
denominated reserves could find some relief in transferring a part
of them to the WOMOI so as to have them written in WOMOST.
Traditional reserve instruments (in other currencies, in gold...) used
by central banks will coexist, but the "super-reserve" currency, the
WOMOST might gradually build up to reach a key proportion of
their reserves in their own balance sheet.
- Also WOMOST- denominated bonds,
They would be here also subscribed by central banks and governments,
but should be offered after a while to the general public, and traded in
The IMF decision to issue 5 year SDR notes in 2011 will give some
experience on how central banks and financial markets react to z test
in that direction.
Maybe a first batch of banknotes,
What the WOMOST would be used forThe three blades:
* Standard of currencies value,
* International quotation tool
This triangle means that its two "primary" double role of
* A common currency exchange standard (for forex quotes)
To give a consistent economic value to the WOMOST, it would be
necessary to enlarge from the start its role by making it a reference
in key international economic and financial transactions.
tool to measure economic values and a tool of exchange.
Thus, could be progressively quoted in WOMOST:
The international commodity markets and major asset market,
The large international contracts,
The issuance of sovereign bonds (and other bonds).
Some saving deposits offered by banks worldwide.
price volatility for commodities, currencies and financial assets, that
are caused not only by natural economic factors (years of fat cows vs.
years of skinny ones, to take a known allegory) but also to a lack of
coordination and harmonization of economic and fiscal policies between
the countries involved.
But the WOMOST would anyway bring some buffer to global asset
pricesas they would not be linked to the situation of a national / continental
currency used to quote them and which could itself have a high volatility
To give an example, who can say in the current system, when the price of oil
quoted in US dollars rises, if the cause is a shortage of oil or a glut of dollars?
Making it a largely used / sustainable system
general collapse that is menacing but also if it has all the traits of a sustainable
system, therefore if it is
Legitimate: as seen above,
nations squabble, but a global federal democratic institution with its
- Highly trusted:
an independent governance and a strong political weight. But it
should also have sizable stable resources (see above also on what
its balance sheet would rest).
Even if the WOMOST would not be a full fledged money, it should
offer at least the same guaranty, and preferably a higher one, than
- Largely used,
equity and bonds issuing, contract and markets reference...) so as
to obtain a huge market volume that guarantees full liquidity
for any transaction whatever its size)
Largely accessible and usable:
alternative to those currencies.
Side currenciesThere are private currencies used locally - or more universally in small
circles - with their value either self referenced or linked to an official
Well, another thing, more general: every person could be declared to be
a bank which can create a limited sum of its own money...
The only difference with official money is that nobody that is not a
member of such closed system has to accept those "club tokens" as
They can be seen only as additional monetary tools.
But beware, the "bitcoin" experience is far from convincing
Can we go further
(hypothesis of a World money)?
To be strong and trusted, a unique full-fledged World money
would rest on institutions on the World scale with enough political and
economic and political integration.
What prior steps?
At least a well advanced World organization towards that goal,
Or, at best, isolated federal bodies that would deal with
Only after that first step towards some World wide organization,
a full-fledged World money would be in sight.
It is hard to imagine it implemented fast, whatever the urgency.
Nations still prefer to bite at each other.
They shun the idea of a real counter power that would make the 21st
century World emerge as a civilized one.
There is still the idea that money is a sovereign attribute, not just an
economic tool (of course to be issued within a legal framework and a legal
supervision, to protect
the users) . Also nations are tempted to manipulate their money according
to their trade and fiscal situations, an expedient to compensate their
economic weaknesses instead of tackling them.
How would it work?
controlling a network of official territorial banks (the nodes of the
This would be rather similar to the European Central Bank or the Federal
But in a more democratic way, as it would be based (as said before for its
embryo, the A section of the WOMOI) on a cooperative statute.
as it would depend on a real World political integration
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