الجمعة، سبتمبر 02، 2011

Global Debt Crisis


Global Debt Crisis: Can a Collective Currency Devaluation Do the Trick?





Every country in the world, except for perhaps a handful, severely suffers from a growing debt crisis. Collectively, this is crippling the world economy and threatening the world with global instability following an imminent collapse of the international financial and economic systems. But if virtually all countries are in debt, who is lending? In fact, since almost all countries, or states, are in debt, that might be the solution to the problem.
Some brave economists and even politicians such as Brown and Sarkozy have made it clear that we need a new International Monetary System, a "New Bretton Woods" sort of agreement. That would probably solve things in the long-term. But still, what do we do with the existing debt crisis?
Let us assume that a country like the United States, with GDP of about $14 Trillion and a Public Debt roughly the same amount, "creates" or "prints" 12.5 percent of that amount annually for the next eight years, as to totally pay off its public debt problem. This generates some "fake" $1.75 Trillion a year, slightly more than the current US annual budget deficit. Usually, printing money this way would lead to significant inflation, U.S. consumer suffering and a severe devaluation of the American currency in addition to dissipation of the investors' trust into U.S. currency and economy, things which could probably spark off a global financial meltdown. But what if every other country agreed to more or less do the same process, and that newly created money does not find its way into the money markets in terms of additional liquidity or government spending, but instead is solely used to pay off the staggering debts?
The result may be that all major currencies would be devalued, but because they are all devalued, their relative value or exchange rate will be more or less the same, give or take a few points. If you think about it from a collective perspective, this idea may not be as crazy as it sounds at first.
So, if the G20 States, which together make up a sizeable portion of the global economy, and also where most of debtors and creditors come from; lending and borrowing institutions exist, signed up to such an arrangement within a larger effort to reinvent the international monetary and financial systems, followed by the rest of the world's states approving and repeating the same arrangement, could that solve the problem? Would that work as a global debt relief for everybody? A giant Paris Club to relieve the entire world from a deadly debt problem?
Of course the global economic and financial systems need to be totally redesigned. Yes, governments should stop spending beyond their means creating these monumental deficits. Yes, we need to shrink the speculative portion and reduce reliance on instruments creating virtual money, things which are poisoning existing systems.
We eventually have to even create a new accounting currency, be it ICU (International Currency Unit, or simply ECO), Bancor or SDR, which will work as an international bench mark currency to reduce the risks of relying on any one currency for reserves. But for now, the debt crisis seems urgently threatening yet highly ridiculous. After all, when everyone stands on their tiptoes, no one will ever seem taller.


First Published on HuffPost


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