Join together?

The phrase "The bigger they are, the harder they fall" may ring true often, but it depends upon how "big" is defined. If "big" means tall, then certainly a taller structure with more mass than a shorter structure is likely to crash harder. But if "big" means broad, then a wider structure with more mass than a smaller structure of the same height is more likely to survive.

A good, but sad, example of this is to compare the World Trade Center with the Pentagon. The World Trade Center had around 800,000 m2 of floor space while the Pentagon has about 616,000m2 of floor space. That's not entirely comparable, but the fact was that two airliners were able to completely demolish the WTC while one airliner was never able to demolish more than a small percentage of the Pentagon. The reason? The WTC was tall, while the Pentagon is wide.

So when it comes to examining the current economic crisis, what will happen? Is the US economy "tall" and thus prone to a systemic collapse, or is it "broad", and thus able to resist the current crisis more or less intact?

Yet the answers to those questions can quite often ignore other important facts - namely that the "small" structures will get hurt, no matter how comparatively tall or broad they are - and I am referring here to the world's smaller entities. Like poor Iceland for example, whose economy has collapsed and suffered capital flight despite the fact that the country was merely an innocent bystander.

The genesis of the Euro was, in part, to the effects of Black Wednesday in 1992, when the European Exchange Rate Mechanism was unable to withstand market pressure. While the Euro had been proposed for a long time, the effects of Black Wednesday spurred mainland Europe on towards the adoption of a single currency (while the opposite effect occurred in the UK). Since its complete adoption in 2002 by many European nations (now called the "Eurozone") the Euro is one of the three most important currencies on the planet with the US Dollar and the Japanese Yen. Moreover, the Eurozone itself has a higher GDP than the US, which means that the Euro is associated with a larger economic area than either the US Dollar or the Yen.

The creation of the Euro and the Eurozone is an example of smaller nations banding together to create a single economic unit. This obviously has advantages and disadvantages, but one advantage it does have is a better ability to withstand economic shocks. If the Euro and the Eurozone did not exist, and if European nations still used Francs, Lira, Marks and Punts then the current crisis would've hit Europe harder. As it is, the crisis Spain is in now is being distributed throughout the entire Eurozone rather than just hitting the Spanish. Conversely, the crisis Iceland is in now would have been avoided had icelanders adopted the Euro. Accession to the Eurozone and the adoption of the Euro is now very much on the Icelandic agenda, despite the horse having already bolted.

This joining together of national interests for the common good is an example of making the economy broader rather than taller. Spain's crisis is a crisis for the whole EU, but, because the crisis is smaller in comparison to the rest of the Eurozone, the crisis is far more manageable. Since Spanish households, individuals and businesses have got Euro bank accounts, their deposits and savings are safer than if they had remained as Lira. This has been to the detriment of other members of the Eurozone, of course, but the overall net result of a common currency is greater than if these countries retained their national currencies.

The current crisis will certainly cause many nations to reconsider their financial independence. Since international trade is so important to all economies of the world (with the exception of places like North Korea or Pitcairn Island), the importance of maintaining economic balance should eventually outstrip any desire to keep national currencies.

What is not debatable at the moment, nor once the crisis is over, is whether the supranational Eurozone is superior to America's US Dollar. Even though the crisis started in the US, the subsequent economic performance of the Eurozone or the US will not settle any questions over which one is superior. The reason is that the US does have a "broad" economy that will eventually recover, even though it is a single national entity.

One thing that will be proposed once the crisis is over is the adoption of a single international currency. While this may scare some Americans who would begin to babble about conspiracies and The United Nations and UFOs, the idea certainly has merit - the broader an economy gets, the more likely it is that economic shocks can be contained or prevented. In reality, though, such an event is unlikely to happen during my own lifetime, let alone during the 21st century - national identity is still going to be important to many people, and that includes financial sovereignty. The crisis will probably help spur some Eastern European nations, Iceland, Switzerland, Sweden, Norway, Denmark and maybe even the UK, Turkey or even some North African nations to join the Euro but that would be the extent of any supranational economic reactions to the current crisis.

What will occur in light of the current crisis will be a series of international economic agreements - especially ones that set up common policy requirements for how central banks operate. If the US Federal Reserve, the European Central Bank and the Bank of Japan (US Dollar, Euro, Yen) all had common policies (ie common inflation targets and common responses to monetary conditions) then the international marketplace would be a much safer and more predictable place to invest money. If other nations joined this agreement, then conditions would become safer still - and that is what the world really, really wants at the moment doesn't it?


John M said...

Doom has re-posted your article here. Thanks!

morrisonbonpasse said...

Yes, the current global financial crisis should lead to renewed interest in implmementing a Single Global Currency. What is needed now is a commitment to that goal and then research and planning. The challenge for the world is to make a smooth and safe transition to a Single Global Currency as soon as possible.
The success of the euro has shown the world that monetary union is a solid foundation for monetary stability and the optimal monetary union will be a Global Monetary Union. The euro is likely to be the core of the Single Global Currency in such a monetary union, not because it's superior to the U.S. dollar, but because it's managed for many countries rather than for one country.
The Single Global Currency Association promotes the implementation of a Single Global Currency, within a Global Monetary Union and managed by a Global Central bank, by the year 2024. With the successful use of the euro and other common currencies, more and more people and organizations and nations are seeing the advantages of monetary unions. Our website is at www.singleglobalcurrency.org.
The Association recently published the 2008 Edition of my book, The Single Global Currency - Common Cents for the World. A copy of the 2007 edition is available at the Munchen personal archive at http://mpra.ub.uni-muenchen.de/5879/ and on the Association's website.
The goal of 2024 is only 16 years away. If one looks at the world before the 2002 distribution of the euro to the people of the EMU, you would have seen in 1986 a Europe with a Soviet Union, an East Germany and a Berlin Wall. At that time, most Europeans would have scoffed at the idea of a new monetary union.
The benefits of a Single Global Currency include:
- Zero transaction costs to exchange currencies. Presently, $3.2 trillion is traded every trading day and all this trading and its associated costs, approximately $400 billion annually, can be eliminated.
- The end of currency fluctuations and currency speculation.
- The end of "Balance of Payments", "Current Account" and "global imbalances" problems for currency areas. There will, of course, still be trade and wealth inequalities, and more visibly; but they will not be compounded by the problem of foreign exchange transactions and reserve requirements. There would be no need for countries to maintain international reserves of other currencies.
- Zero manipulation by countries of their currencies, and thus no more need to cajole and jawbone any particular country or currency area about the value of its currency.
- Zero risk of national and regional currency crises such as occurred in the 1990's in Mexico, Argentina, Malaysia, South Korea and Russia.
- Minimal inflation, assuming that the future global central bank sets and achieves a low inflation rate, just as the European Central Bank has done. It's not clear that a zero inflation rate can be secured, as that would bring an economy perilously close to deflation and a deflation spiral, but certainly a low rate of inflation would be better for the world than the current rates.
- Worldwide asset values will increase by about $36 trillion due to the elimination of currency risk. Such an increase in asset values will cause annual worldwide GDP to increase by about $9 trillion.
- With no currency risk, worldwide interest rates would be lower.
- With zero risk of currency failure and zero manipulation and minimal inflation, the Single Global Currency would satisfy the moral obligation that a stable currency should be considered as a fundamental human right, as is the right to own property. A Single Global Currency would be far more stable than the currencies presently used by billions of human beings
The single global currency might be an enlarged transformation of one of the current major currencies (dollar, euro, yen), perhaps with a new name such as "dey", "eartha", "geo","globo" or "worldo" or it might be a new currency with such a name. How we get to that point is, of course, a major challenge, but there are several possible routes. One is to continue the trend of creating and expanding regional monetary unions, and then combine those monetary unions into one. Another is for smaller countries to continue to "ize" their nations' legal tender, as in "dollarize" and "euroize", as has been done in El Salvador and Monaco. Compatible with all these and other routes is the need to convene an international monetary conference of nations, monetary unions and related organizations, and begin planning for the implementation of a single global currency.
Organizations such as the IMF and the Bank for International Settlements, and individual economists should begin to carefully research and write about the benefits claimed above for the Single Global Currency, and about the costs, too. When the vast benefits become better known, the people of the world will demand a Single Global Currency and ask why we have been burdened so long with the existing multicurrency system, which Nobel Laureate Robert Mundell describes as "absurd."