Global debt imbalances- Negative interest on reserves

#### **JM: (1 Oct FB)**

Perhaps the IMF will rejig the SDR deficit nation system a little bit more along the lines of Keynes' scheme then? Where credit is seen as a two way transaction where the debt issuing nation assumes as much risk as the debtor nation?

Fast forward past the IMF's realization (after it was applied to European nations) that the profligate spender narrative was not particularly descriptive of all debtor situations. Where was the empathy when the narrative was being applied to South America and Africa? Let's look at a country with a deep sensitivity towards such "Tough love". What do the Chinese think about the IMF? Perhaps surprising to some, China's central banker wants SDR's to be the global artificial gold- the basket of currencies approach to transitioning away from the dollar. Some in China preferred the BRICS approach of splitting off into a trading block with its own settlement system independent of the global system.

My view is that China's approach would be good fo China if they are ok with the dominance of petrodollars in that currency basket.

Most Greens are not ok with it. That's why a Green BRICS approach deserves more discussion. There are large Green market segments in all countries, and already global alternative currencies like BitCoin, so it is not so fantastic to imagine that a separate Global Green economy with its own international trade settlements system would be possible.

Link to Epoch Times article on Zhou's SDR proposal

#### **JM: (2 Oct FB)**

**RI Q:**Can you point me to a reference on Keynes advocating mutual debt responsibility? I've been working on his 'multiplier' theory, which is what we now call economic growth. I think its very problematic obviously...

JM: This was inregards to the debates about the new international monetary system to be established at the end of WWII. The cost of debt being carried by both parties was explicit in Keynes' proposed settlements system where debt issuing countries had a cost imposed from accumulating too many debt assets. Debt imbalances he viewed as dangerously destabilizing. He was not alone in that view- Mundell also shares a monetary system view of the importance of flexibility in promoting general global social welfare, stating that with the (now dated) flexible alternatives he describes as being considered but erroneously discarded from the post WWI period, "there would have been no Great Depression, no Nazi revolution, and no World War II.”

That's a pretty bold assertion.

Keynes' similarly discarded Bancor idea imposed discipline on debt issuance- that exporting nations would be penalized for building up vast reserve surpluses. The US did not like it because at the end of WWII, they were the surplus nation, and they didn't much like the idea of paying negative interest on their surplus accounts denominated in Bancor. For obvious reasons, they much better liked the scheme where via the IMF system, USD became the new artificial gold.

Zhou likes the path of transitioning SDRs to Bancor for the anti colonial motivations I intimated, but I hardly think he will be promoting a negative interest on Chinese reserve supluses. And so for nearly identical reasons that the US rejected it, China will also reject the Bancor formula for mutual responsibility for debt imbalances.

So I don't see this train going to a happy place, but I am intrigued by the BRICS sort of idea that China earlier appeared to be pursuing in the aftermath of 2008. This would be different because they would be Green banks not integrated into each country's central bank oriented systems, but into a parallel transnational system more independent of shifting domestic political winds. The goal is a parallel Green settlement system independent of the global fossil fuel economy. In regards to this topic, it would establish this principle of mutual responsibility of debt before any net debtor or net surplus nations are established. If omitted, Green banks from surplus nations will themselves express the same political deadlock and discard insertion of such a debt discipline constraint after the fact.

It is not so utopian if you consider the numbers of hard core Greens who are voting Green globally. As a global population do we have the numbers and the technology to sustain an autarkic relationship to the fossil fuel economy? On the face of it, it is plausible.
.
It's also quite radical.

Not that this ever stopped me going off in some odd direction.

#### JM post 2

See this youtube (2:30 minutes in) for a 90 second overview of Pettifor describing the Keynes approach to debt in Bancor. She does not mention the interest mechanism that Keynes argued for, or why it politically went down in flames. In typical Keynes fashion, the price of money (interest) was relied on to do the bulk of the work. There are other approaches of course. Keynes is greeted with much skepticism by some Post Keynesians who feel he deserves to be unmasked as an antiquarian believer in neoclassical principles. But the actual mechanism disciplining debt issuing surplus nations in the Monetary system is a secondary issue. The opportunity to put that discipline quickly fades when substantial surpluses or debts are already in place.

## References

1. ↑ 1.0 1.1  To contextualize, the rigidity Robert Mundell addressed in his historical account was an inflexibility associated with the then current gold system, which the particular alternatives purported to address. This social view of monetary systems by economists like Mundell and Keynes is said by some detractors to overstate the case, since the screws being turned on Germany post WWI, and the speculative greed in financial markets were driven by deep emotions. From this skeptical view, the monetary system will always be used as instrument of them expressed by myriad players, and that for the same reasons people could not politically agree to those alternatives were the same political reasons that made them unable to prevent a second world war. Counter to this skeptical point is that players in the monetary system serve as public trustees and that government players can and should impose discipline over such excessive expression of our more destructive impulses.