By William Pfaff
British Prime Minister Gordon Brown’s 50 percent tax on bankers’ bonuses has staggered the city of London, with other European governments following his lead. The alibi for the presentation by bankers of bonuses to themselves, despite the international financial crisis they brought upon the rest of us, has until now been that without bonuses all the financial talent would fly to foreign competition. But where do the European bankers migrate to now? Wall Street is oversupplied.
There is room for still more common sense in the crisis, in which the orthodoxies of an obsolescent era continue to contradict one another. The canonical IMF-style remedy for nations with the kind of difficulties that prevail from London to Madrid and on to Athens is national austerity, budget cuts and reduced social spending.
Equally orthodox is for governments at the same time to do everything possible to encourage people to spend, so as to fuel demand for industrial goods, and the widest possible consumer consumption. To spend, consumers need the same money that austerity is taking away from them, or preventing them from earning.
Economists and officials obviously are aware of this dilemma but see no orthodox way out, other than by deepening budget deficits, which not every country can afford. The European Central Bank has just given Athens a year to master its deficit, which may not be possible.
The unorthodox way, taken in the past by the Greeks, Italians and the French before the Fifth Republic, among others, has been devaluation of the national currency. You pay a cost in inflation and reputation for that, but eventually the inflation runs its course, while leaving the country less attractive to investors.
Although Washington is the home of fiscal orthodoxy, in theory, in practice it has been playing the deficit game for a considerable time, in what the economist Joseph Stiglitz calls a kind of bizarre reverse foreign aid, by which poor countries loan the United States trillions at zero interest rates by buying U.S. Treasury bills.
Trust in the soundness of their investment will undoubtedly have weakened a little more in December, as Barack Obama laid down what might eventually prove an unsecured trillion-dollar bet by expanding America’s futile war against the Taliban (while Pakistan already reels under the collateral damage).
Stiglitz observes (in the current issue of the Washington journal The National Interest) that the dollar is finding it very difficult to bear up as the world’s reserve currency, and argues that prudent governments should begin considering another reserve currency.
This is not too hard a problem to solve. You create it. Stiglitz is calling for a new issue by the International Monetary Fund of what has been called Special Drawing Rights (or “Bancor,” which is what John Maynard Keynes, who first thought of it, called the fresh creation of imaginary money). The leading nations, assembled at the IMF headquarters in Washington, in their sovereign splendor, wave a wand and declare that a new sum of money henceforth exists.
Stiglitz says that it would be rather like declaring that a massive gold mine has been discovered under the IMF building, yielding perhaps $600 billion a year. In accordance with a particular formula based on income, the IMF would send out letters to its members telling them how much of this gold they own and that they should begin augmenting their currency supply, to be backed by this gold, in full confidence that the new money will be honored. “All that matters is trust, the willingness of governments to exchange the paper gold.” World liquidity would be vastly increased, demand would be multiplied, industry would resume production.
It is not magic. It obviously presents problems of transition in moving to an international reserve currency from the dollar reserve.
However, the Commission of Experts of the President of the U.N. General Assembly on Reforms of the International Monetary and Financial System has concluded, writes Stiglitz (who chaired that committee), that it “is perhaps the most important medium-term reform that can be undertaken if we want to have a robust and stable recovery.”
Visit William Pfaff’s Web site at www.williampfaff.com.
© 2009 Tribune Media Services Inc.