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International Financial Crisis& Single World Currency
Garry JacobsThe Mothers Service Society
W orld Academy of Art & ScienceHyderabad, October 19, 2008
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Indias Last 5 years
GDP growth ~9%Forex reserves $300B+
Sensex Jan 2003-Dec 2007 5 00%
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India 2008 ?
Inflation rose to double-digitsGrowth slowingSensex down 5 0%Foreign Institutional Investment 2007 up $19B 2008 down $9B
Rupee Down 10% against USD Down 17% against the Euro
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Critical External Factors
Spiraling oil prices 3x in 5 yearsRising food prices -- 2x since 200 5
International Financial Crisis
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Subprime Crisis
Worlds financial markets in tailspinDirect losses by global banks $ 5 00B+
Stock market losses $11 T in Jan-Jun 08Real estate values down $3.7 T in 2 yearsUSD lost 2 5 % vs. Euro
Financial institutions threatenedGlobal GDP grow to slow 5 0% in 2008
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A ccusations abound against
International bankersCommodity speculators
Multinational oil & food corporationsPetroleum exporters, hedge fundsDebt-ridden American public
Energy-hungry ChinaNone are sufficient to explain what ishappening
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R oot Cause: Globalization
Revolutionary changes transformingglobal society, the global economy &
global financial marketsIts speed & magnitude have reachedcritical stage after 1970
Energies exceed capacity of nationallevel institutions
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Globalization of Financial Markets
World trade 4 x since 1990FDI 7x since 1990
Intl bank loans 15
0x 1975
-08 = $4
0 TIntl fin assets 14 x 1980-2006 = $167 TForeign ownership of equities = 2 5 %
Foreign ownership of US T-bills = 60%Forex Reserves 10x from 1990 = $7. 5 T
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N ation-State System
Source of energy & instability in 20 th C.Inadequacy of global governance based
on sovereign nation statesBalance of power WWI & WWIIUN System
Cold War & Arms RaceCompetitive security systemInternational financial instability
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B eyond the N ation-State
Unification of EuropeUnified European Army
Calls for global military force &cooperative security systemEvolution of Intl Financial System
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P anic of 1907
Rapid industrial & commercial expansionFlooded capital markets with huge surplusof money seeking lucrative returnsAbsence of effective regulationHighly leveraged funds from banksSpiraling equity prices lured even smallinvestors seeking windfall profits
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U S Federal R eserve System
Established in 1913 to regulate thebanking industry & prevent speculativesquandering of the nations savingsDecentralized structureSupervisory Board in Washington12 Regional Banks chaired by bankers
Regions had almost completeindependence from Washington
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Great Crash & Great Depression
Problems of 1907 returned in 1929SEC established in 193 4
Fed restructured in 193 5 Concentrating power in Washington-based,
government-appointed board of governors
Modified structure was highly effective Stable basis for domestic economic growth
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B retton Woods & Its A ftermath
Nation-centric systemNational central banks + IMF
Parallel to original US FedDecentralized authorityChief function was coordination
Fixed exchange rate systemStable basis for intl financial for 2 5 yrs
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End of B retton Woods ~ 1970
Rapid growth of international financialactivities exposed inadequaciesExchange rate managementinadequate to meet the needs of arapidly expanding global economyGold Standard abandoned by USA
Fixed rate exchange systemabandonedEach country left to fend for itself
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R apid Deregulation & Globalization
1970s: Financial deregulation of banks &offshore banking
1980s: Globalization of the bond markets1990s: Globalization of banking & equitymarkets1995: Globalization of trade under WTO
Globalization of risks
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R ising Financial Instability
1979: Latin Americas southern cone1982: Developing country debt crisis1985: US Savings & Loan debacle1989: Japanese asset bubble burst1992: Europes ERM crisis1994: Mexican crisis1997: East Asian crisis1998: Russian crisis1999: Brazilian crisis
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H igh Cost System
Periodic catastrophic lossesGlobal financial transactions ~$ 4 00 b/yr Higher domestic interest ratesInterest differential on forex $100+ b/yr
High forex reserves for protection Developing countries > $ 4 .5 trillionLost investment opportunity cost India 3. 5 -4 % of GDP not investedNegative or low rates of GDP growth 24 emerging markets GDP 5 -8% in GDP following crisesReduce value of assets due to currency risks Absence of long term mortgages in Latin America Euro raised asset values by $ 5 -11 trillion 1993-2003 SWC raise asset values ~$36 trillion
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Life R epeats: 1907, 1929, 2008
Highly leveraged, speculative marketHigh volatility
Highly liquid capitalEver-expanding complexity of marketsRapid innovation of new financial
productsHigh susceptibility to contagionHigh systemic as well as individual risk
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Financial liberalization and innovationhave rendered national boundariesirrelevant. If regulation was necessarywithin national boundaries, then it is
now equally necessary in theinternational market.
Economic Report to US President ClintonSeptember 1998
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P artial Measures
1969: IMF SDRs as international reserve asset1974: Basel Committee to coordinate policies for banking regulation.1987: International Organization of SecuritiesCommissions to set minimum standards for securitiesfirms.1987: Tripartite Committee of banking, securities &insurance regulators.1999: Financial Stability Forum to establish consistentinternational rules
National level financial management is inadequateMore radical steps are needed
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Idea of a World Currency
Bretton Woods 19 44 : Britain & the USAproposals for world currency
IMF created a fixed pool of nationalcurrencies to maintain price stability,not a world central bank capable of creating money.
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R ichard Cooper (1985)
National level monetary systeminsufficient in an age of globalization of communication, transport, technology,
trade, corporate strategy, banking andinvestment.Common currency for all the industrial
democraciesCommon monetary policyJoint Bank of Issue
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R obert Mundell (2002)
Proposed a global central bank to issue aglobal currency backed by reserves of dollars,yen, euros, and gold. The benefits from a world currency would beenormous. Prices all over the world would bedenominated in the same unit and would bekept equal in different parts of the world to theextent that the law of one price was allowed towork itself out. Apart from tariffs and controls,trade between countries would be as easy asit is between states of the United States. Itwould lead to an enormous increase in thegains from trade and real incomes of allcountries including the United States.
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J oseph Stiglitz (2006)
Nation-centric financial system is partial andflawed, because it concentrates power at thenational level and leaves even the strongestcurrencies subject to external impacts beyondthe control or power of national central banks
to regulate. It supports a competitive system of global trade that necessitates the generationof deficits in some countries to offset thesurpluses in others. Stiglitz Adoption of SDRs as a reserve currency bythe national central banks could pave the wayfor the eventual creation of a single worldcurrency .
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P aul Volcker
If we are to have a truly globalizedeconomy, with free movement of goods,
services and capital, a world currencymakes sense. That would be a world inwhich the objectives of growth,economic efficiency, and stability canbest be reconciled."
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Global Social Evolution
Defect of partial systemspolitical, military,economic or financialOnly a comprehensive and inclusive systemthat embraces the whole can be immune fromthreats and instability.Trade & Finance are only parts of societyTo achieve the goals of maximum stability &
maximum growth, a global financial systemmust be fashioned as an integral part of agreater whole which is global governance.
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Money is Social Energy
Social energy grows by movement.The more rapidly it moves, the faster it
grows.Organization transforms energy intopower
Insufficient organization short circuit or explosion
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Money
Influences every field of human existence,not merely production and living standards.Integrated with politics, security, education,environment, science, health, etc.A truly global financial system can advancethe entire agenda of human progressInstrument for harnessing the unlimitedpotentials of society
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T he First Step
A single world currency is not the laststep in global financial management. It
is the first logical step in the evolution of a truly democratic system of globalgovernance, peace and security for allnations, and universal prosperity.
