Full text here.
The Vatican called on Monday for the establishment of a “global public authority” and a “central world bank” to rule over financial institutions that have become outdated and often ineffective in dealing fairly with crises.
Although it is not specific what they mean by a “central world bank” (for a similar thing already exists), we can assume that they mean something deeper and broader than the current IMF/World Bank/G20 structure, possibly a central bank in the traditional sense — the author of a new global currency, and a component of a new global government.
From the Vatican:
On the way to building a more fraternal and just human family and, even before that, a new humanism open to transcendence, Blessed John XXIII’s teaching seems especially timely. In the prophetic Encyclical Pacem in Terris of 1963, he observed that the world was heading towards ever greater unification. He then acknowledged the fact that a correspondence was lacking in the human community between the political organization “on a world level and the objective needs of the universal common good”. He also expressed the hope that one day “a true world political authority” would be created.
In view of the unification of the world engendered by the complex phenomenon of globalization, and of the importance of guaranteeing, in addition to other collective goods, the good of a free, stable world economic and financial system at the service of the real economy, today the teaching of Pacem in Terris appears to be even more vital and worthy of urgent implementation.
But a world central bank in the traditional sense would face exactly the same problem as the ECB: monetary union without fiscal union means that governments can very easily get into hot water by borrowing money that they don’t control, and on which they do not control the interest rates. This means that unless all nations are extremely fiscally cautious there will be defaults. The highly interconnected nature of the global financial system means that one set of defaults can trigger a global default cascade, as hyper-leveraged banks quickly become insolvent.
So a world central bank would either mean lots and lots of bailouts for both banks and governments (a problem that Europe is currently struggling with), or global fiscal union. If you thought Europe had a hard time balancing the interests of the free-spending Greeks with the dynamic Germans, multiply that problem by a hundred and add nuclear weapons and fervent nationalism to apply it to America and China. Global fiscal union, much like a “true world political authority” is as politically impossible as it has ever been.
Furthermore, a world central bank would homogenise the business cycle. Global growth didn’t stop in 2008 because China and the East kept growing while the West floundered. One currency, and one central bank would mean that recessions and depressions would (by definition) be more global — and therefore more devastating — in nature. This would seem to make the problems worse, not better.
A global central bank is a non-solution. The zombified and debt-ridden nature of the global financial system is a huge weight (I called it the argentinosaurus in the room) on the back of humanity — but a weight that politicians, economic managerialists and the establishment at large seem excessively keen to retain. The sad reality is that all of this soul-searching, and all of this economic turmoil could be averted if politicians (and “global authorities”) let ailing financial systems and financial infrastructure fail.
I don’t know what he meant by a “global bank”, but if it’s something like Keynes’ Bancor (a gold standard + a way to monitor and adjust the implementation) then I’m all for it.
Note that Bancor and a gold standard would have mechanisms built in by default to prevent trade imbalances and competitive imbalances from getting out of control. This is in stark contrast to the EMU, where these mechanisms were left to the markets (i.e. markets were supposed to shut Greece off many years ago before they ended up on the edge).
I agree with Zoellick on this (actually he agrees with me, but that’s another story for another day)
The problem is, it seems blatantly obvious that there is no way this is what the Vatican means. This is about centralisation and managerialism and gold-backed money is not easily manageable, nor particularly centralised.
I haven’t even read their text – because I doubt that they even have the competence to opine on such a thing, but I merely got the big picture idea (that some form of global governance institution should be created) with which I agree.
How do you see Zoellick’s idea implemented, however?
Zoellick’s idea can be implemented through the current structure, however I doubt they will be. Gold’s return will come via OPEC (and-or China) going the Qadaffi route and making a fixed unit of gold the de facto standard in purchasing oil.
I’m not sure here, but a gold standard might work better (today) in a centralized framework similar to the one proposed by Keynes. This is because individual states can manipulate it – similar to the sterilization done by the US circa ~1922. Inflation in the US (gold coming to the US) was supposed to orient consumers towards cheaper products from Europe.
Funny! I was now reading James G. Rickards’ “Currency Wars” (published on Nov 10) – and he sees the Bancor (in his grander plans of returning to a gold standard) as a way of preventing countries from cheating.
The basic principles of supply and demand apply in FX, and in the long range that prevents nations from cheating. The market assesses yuan as significantly undervalued, and no amount of pegging will stop a black market emerging to reflect the real fundamentals, just like a black market for gold at above $35 an ounce emerged previous to gold’s float in ’71.
About the Yuan: the problem was that US ever got to have such large trade imbalances with China (and many other nations). This is now a source of potential destruction on a world scale. FX did nothing to prevent this and can do nothing to prevent the ensuing currency wars. How is the Yuan undervalued? It is only undervalued with regards to the interests of the other countries involved in international trade. Bernanke printing and exporting inflation (because they can’t get the Yuan revalued) is just a first shot in potentially destructive currency wars.
Well the ultimate conclusion of these trade imbalances is that the system is unsustainable and is self-destructing.
Frankly though, it is in China’s interest to maintain the system for as long as possible by letting the yuan rise in value so they can gradually offload their dollar hoard into productive assets. Bernanke exporting inflation will help China get a move on in doing this, which ironically is bad for the US, because the US is very much reliant on China “buying in” to the American currency system.
An article I wrote about this:
Yes, it’s self-destructing. The current situation is so that China revaluing its Yuan would be destructive for their manufacturers/economy/social cohesion just like not revaluing it is bad for the US. And anyway, what’s bad for any one of them is bad for both and for the global economy (due to its interlinked nature). That’s why I don’t like the idea of just waiting for everything to crash and then hope for the best the next time – and instead I want to see a system in place that would ensure sustainable global growth/prosperity/peace/etc.
James G. Rickards says that we’re on the verge of the abyss and ultimately we’ll end up with undemocratically printed SDRs or some form of a new gold standard. Either way, he advocates a proactive position because he feels these measures will only be taken when things will actually explode. Anyway, his book is very well written and non-partisan (whatever insults Nouriel Roubini may have reserved for gold-bugs – maybe you’re aware of the recent Twitter war between him and Rickards which actually got me to read his book).
My mother actually recommended Rickards’ book. I haven’t read it yet. I will order it from Amazon.
The main reason why I am happy with waiting for the end to come is simply that I don’t see any other way out. Now the collapse will be painful and dangerous, and may well precipitate war, and I think we should try everything possible to solve the problem and avoid systemic collapse, but at the same time I am extremely dubious this is possible. Nothing else is politically feasible — creditors have all the power, and there is no way they will take haircuts unless they are forced to. People say the “debt” is too high, but they don’t realise that every “debt” that has to be written off is also an asset that has to be written off. As Reinhart and Rogoff show, the debt is the main problem, but that “problem” is spread across balance sheets around the world as assets and wealth.
Funny again: http://www.zerohedge.com/news/ron-paul-explains-his-plan-monetary-freedom-and-returning-gold-standard
This is exactly what Ron Paul says “The question is are they going to move toward a constitutional form of money. or are we going to go another step further into international money – instead of having an international gold standard based on the market, are we going to go toward a UN, IMF standard where they are going to control with the use of force another fiat standard.”
I agree, a political impossibility. The last cries from the vestiges of the Roman empire. The Time of Pisces ends.(The old system)
The dawning of Aquarius, The new Age is the East.
As the Bible foretold, a new Messiah will arrive. (A new system)
Interesting thought from the Mises Institute
Exactly, this is one of the kinds of “austerity” I was talking about in the comment section of the previous post: dismantle hundreds of government agencies, fire hundreds of thousands of zombie state employees, dismantle a good chunk of the military-industrial complex etc. You can’t just default (especially when the markets give you no reason to) without actually taking steps to put your fiscal house in order. Defaulting on your debt (when the markets give you no reason to) while doing nothing from the above would be just crass.
Of course, I agree with firing zombie employees, dismantling useless agencies and cutting military-industrial complex spending. The key difference between “austerity” and my approach is that austerity is by-definition contractionary, whereas I recognise that the spending rate needs to be maintained (albeit on more productive things — i.e. grants for unemployed people (and laid-off zombie employees) to start businesses, tax cuts for the middle class, infrastructure spending) until you get an organic recovery.
I think that even my “austerity” (as in a zombie firing spree) can’t be anything but contractionary in the short term at least. But the markets have shown they have a high degree of tolerance for increases in US’ debt, as long as they at least have a plan to get back on track (and they currently don’t have one – hence the rating downgrade).
I now Google translator is quite a BS; to summarize, the S. Korean government decided to adjust the compensation to its Korean War casualties according to the rise of gold price from that time to now. (They first tried to give 5,000 won, which was an amount that could buy a decent house at 1950 but now can’t even buy a sixpack of beer.) Are governments finally admitting that gold is the only measurement unit that can maintain its purchasing power over a substantial period of time?
” One currency, and one central bank would mean that recessions and depressions would (by definition) be more global — and therefore more devastating — in nature. This would seem to make the problems worse, not better”.
That reminds me of the invention to make ships counter the sideways movement from ocean swells by having the deck tilt in the opposite direction. Of course, the ocean swells made the deck tilt in the same direction, amplifying the swell two-fold! Yeah, let’s just invent something to make things worse!
When Australia floated its currency, we were told (rightly) that it would enable a release valve for our economy. If everyone uses the same currency, it’s even worse than separate centrally controlled currencies as there would be no exchange rate whatsoever.
I wonder if the pope has ever been told not to give up his day job before? Someone’s gotta tell him!
“When Australia floated its currency, we were told (rightly) that it would enable a release valve for our economy. If everyone uses the same currency, it’s even worse than separate centrally controlled currencies as there would be no exchange rate whatsoever.”
Depends on how you do it. Men used just gold as money for hundreds of years just fine. Then there are problems with multiple currencies as well. The Germans are laudable for trying to fight the debasement of the Euro, but… even if they go back to their DM, they’ll ultimately have to debase it in the global race to the bottom simply because others will debase their currencies.